<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 26, 1998
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
FIRSTWORLD COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
CALIFORNIA 4813 33-0521976
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification
incorporation or organization) No.)
</TABLE>
9333 GENESEE AVENUE, SUITE 200
SAN DIEGO, CALIFORNIA 92121
(619) 552-8010
(Address, including zip code, and telephone number, including area code, of
registrants principal executive offices)
--------------------------
ROBERT E. RANDALL
EXECUTIVE VICE PRESIDENT
9333 GENESEE AVENUE, SUITE 200
SAN DIEGO, CALIFORNIA 92121
(619) 552-8010
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
COPIES TO:
DAVID A. HAHN, ESQ.
LATHAM & WATKINS
701 B STREET , SUITE 2100
SAN DIEGO, CALIFORNIA 92101
(619) 236-1234
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
- --------
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
- --------
--------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE PROPOSED AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED PER NOTE(1) OFFERING PRICE REGISTRATION FEE
<S> <C> <C> <C> <C>
13% Senior Discount Notes due 2008............ $470,000,000 54.64% $241,797,600(1) $71,330.29(2)
</TABLE>
(1) The 13% Senior Discount Notes will be offered in exchange for the 13% Senior
Discount Notes due 2008 which were issued on April 13, 1998 at a price of
53.235% of their principal amount and accrete in value until April 15, 2003
at the rate of 13% per annum at which time the fully accreted amount
outstanding will be $470.0 million.
(2) Calculated pursuant to Rule 457(f)(2), the filing fee has been based on the
present discounted book value of the 13% Senior Discount Notes to be
received by the Registrant in the exchange.
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
CROSS REFERENCE SHEET
PURSUANT TO RULE 404(A) AND ITEM 501(B) OF REGULATION S-K
SHOWING LOCATION IN PROSPECTUS OF THE INFORMATION
REQUIRED BY PART I OF FORM S-4
<TABLE>
<CAPTION>
<C> <S> <C>
1. Forepart of Registration Statement and Outside Front
Cover Page of Prospectus........................... Outside Front Cover Page; Cross Reference Sheet;
Inside Front Cover Page
2. Inside Front and Outside Back Cover Pages of
Prospectus......................................... Inside Front Cover Page; Outside Back Cover Page
3. Risk Factors, Ratio of Earnings to Fixed Charges and
Other Information.................................. Prospectus Summary; Risk Factors; Selected
Consolidated Financial Data
4. Terms of the Transaction............................. The Exchange Offer; Certain United States Federal
Income Tax Considerations; Description of Exchange
Notes
5. Pro Forma Financial Information...................... Prospectus Summary; Selected Consolidated Financial
Data
6. Material Contacts with the Company Being Acquired.... Not Applicable
7. Additional Information Required for Reoffering by
Persons and Parties Deemed to be Underwriters...... Not Applicable
8. Interests of Named Experts and Counsel............... Legal Matters
9. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities..................... Management
10. Information with Respect to S-3 Registrants.......... Not Applicable
11. Incorporation of Certain Information by Reference.... Not Applicable
12. Information with Respect to S-2 or S-3 Registrant.... Not Applicable
13. Incorporation of Certain Information by Reference.... Not Applicable
14. Information with Respect to Registrants Other than
S-3 or S-2 Registrants............................. Prospectus Summary; Capitalization; Selected
Consolidated Financial Data; Management's
Discussion and Analysis of Financial Condition and
Results of Operations; Business; Management;
Certain Transactions; Principal Stockholders;
Description of Exchange Notes; Book Entry; Delivery
and Form; Plan of Distribution; Legal Matters;
Experts; Available Information; Consolidated
Financial Statements
15. Information with Respect to S-3 Companies............ Not Applicable
16. Information with Respect to S-2 or S-3 Companies..... Not Applicable
17. Information with Respect to Companies Other Than S-2
or S-3 Companies................................... Not Applicable
18. Information if Proxies, Consents or Authorizations
are to be Solicited................................ Not Applicable
19. Information if Proxies, Consents or Authorizations
are not to be Solicited or in an Exchange Offer.... Management; The Exchange Offer; Certain Transactions
</TABLE>
<PAGE>
SUBJECT TO COMPLETION DATED JUNE 26, 1998
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
PROSPECTUS
, 1998
OFFER TO EXCHANGE
13% SENIOR DISCOUNT NOTES DUE 2008
FOR ALL OUTSTANDING 13% SENIOR DISCOUNT NOTES DUE 2008
OF
FIRSTWORLD COMMUNICATIONS, INC.
---------------------
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M. NEW YORK CITY TIME ON
, 1998 UNLESS EXTENDED.
FirstWorld Communications, Inc., a Delaware corporation ("FirstWorld" or the
"Company"), is hereby offering (the "Exchange Offer"), upon the terms and
subject to the conditions set forth in this Prospectus (as the same may be
amended or supplemented from time to time, the "Prospectus") and the
accompanying Letter of Transmittal (the "Letter of Transmittal"), to exchange
$1,000 in principal amount at maturity of its new 13% Senior Discount Notes due
2008 (the "Exchange Notes"), which exchange has been registered under the
Securities Act of 1933, as amended (the "Securities Act"), pursuant to a
registration statement of which this Prospectus is a part (the "Registration
Statement"), for each $1,000 in principal amount at maturity of its outstanding
13% Senior Discount Notes due 2008 (the "Private Notes"), of which $470,000,000
in aggregate principal amount at maturity was issued on April 13, 1998 (the
"Private Note Offering") and is outstanding as of the date hereof. The form and
terms of the Exchange Notes are the same as the form and terms of the Private
Notes except that (i) the exchange will have been registered under the
Securities Act, and, therefore, the Exchange Notes will not bear legends
restricting the transfer thereof and (ii) holders of the Exchange Notes will not
be entitled to certain rights of holders of the Private Notes under the
Registration Rights Agreement (as defined), which rights will terminate upon the
consummation of the Exchange Offer. The Exchange Notes will evidence the same
indebtedness as the Private Notes (which they replace) and will be entitled to
the benefits of an indenture dated as of April 13, 1998 governing the Private
Notes and the Exchange Notes (the "Indenture"). The Private Notes and the
Exchange Notes are sometimes referred to herein collectively as the "Notes." See
"The Exchange Offer" and "Description of Exchange Notes."
The Exchange Notes will bear interest at the same rate and on the same terms
as the Private Notes. Consequently, the Exchange Notes will be issued at a
substantial discount to their principal amount at maturity. The Exchange Notes
will accrete in value from and including the date of issuance of the Private
Notes (April 13, 1998) until April 15, 2003 at which time they will have an
aggregate principal amount of $470.0 million. Thereafter, cash interest will
accrue on the Exchange Notes and will be payable semiannually in arrears on
April 15 and October 15, commencing October 15, 2003, at a rate of 13% per
annum. Holders whose Private Notes are accepted for exchange will be deemed to
have waived the right to receive any interest accrued on the Private Notes.
SEE "RISK FACTORS" BEGINNING ON PAGE 13 FOR A DISCUSSION OF CERTAIN FACTORS
THAT INVESTORS SHOULD CONSIDER IN CONNECTION WITH THE EXCHANGE OFFER AND AN
INVESTMENT IN THE EXCHANGE NOTES.
(CONTINUED ON NEXT PAGE)
ii
<PAGE>
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
------------------------
iii
<PAGE>
(CONTINUED FROM PREVIOUS PAGE)
The Exchange Notes will be senior obligations of the Company, will rank PARI
PASSU in right of payment with all existing and future senior Indebtedness of
the Company and will rank senior in right of payment to any future Subordinated
Indebtedness of the Company, but will be effectively subordinated to any secured
Indebtedness of the Company and future Indebtedness and other liabilities
(including Subordinated Indebtedness and trade payables) of the Company's
Subsidiaries. The Indenture will permit the incurrence of substantial additional
Indebtedness, including secured Indebtedness, by the Company and its
Subsidiaries, subject to certain restrictions. See "Risk Factors--Effective
Subordination of Notes; Holding Company Structure." On an as adjusted basis
after giving effect to the Private Note Offering and the Additional Equity
Investment (as defined), as if the Notes had been issued and such proceeds had
been received on March 31, 1998, the Company would have had no Subordinated
Indebtedness and $7.2 million in outstanding Indebtedness that would rank PARI
PASSU with the Notes.
No cash interest will accrue or be payable in respect of the Exchange Notes
prior to April 15, 2003. Thereafter, interest will accrue at the rate of 13% per
annum, payable semiannually in arrears on each April 15 and October 15,
commencing on April 15, 2003. The Private Notes accepted for exchange will
continue to accrete in principal amount at the rate of 13% per annum to, but
excluding, the issuance date of the Exchange Notes and will cease to accrete in
principal amount upon cancellation of the Private Notes and issuance of the
Exchange Notes. Any Private Notes not tendered or accepted for exchange will
continue to accrete in principal amount at the rate of 13% per annum in
accordance with its terms. The Accreted Value of the Exchange Notes will equal
the Accreted Value of the Private Notes accepted for exchange immediately prior
to issuance of the Exchange Notes.
The Notes will be redeemable at the option of the Company, in whole or in
part, on or after April 15, 2003, at the redemption prices set forth herein,
plus accrued and unpaid interest thereon, if any, to the date of redemption. If
less than all of the Exchange Notes are to be redeemed at any time, selection of
Exchange Notes for redemption will be made by the Trustee in compliance with the
requirements of the principal national securities exchange, if any, on which the
Exchange Notes are listed or, if the Exchange Notes are not so listed, on a pro
rata basis, by lot or by such method as the Trustee shall deem fair and
appropriate; PROVIDED that no Exchange Notes of $1,000 or less shall be redeemed
in part. Upon the occurrence of a Change of Control (as defined), holders of the
Exchange Notes will have the right to require the Company to repurchase their
Exchange Notes, in whole or in part, at a purchase price equal to 101% of the
aggregate principal amount thereof, plus accrued and unpaid interest and Special
Interest (as defined), if any, thereon to the date of repurchase. The Company's
ability to pay cash to the holders of Exchange Notes upon a repurchase may be
limited by the Company's then existing financial resources. See "Description of
Notes--Repurchase at the Option of Holders--Change of Control."
The Company will accept for exchange any and all validly tendered Private
Notes not withdrawn prior to 5:00 p.m. New York City time, on , 1998,
unless the Exchange Offer is extended by the Company in its sole discretion (the
"Expiration Date"). Tenders of Private Notes may be withdrawn at any time prior
to the Expiration Date. Private Notes may be tendered only in integral multiples
of $1,000. The Exchange Offer is not conditioned upon any minimum amount of
Private Notes being tendered for exchange. However, the Exchange Offer is
subject to certain customary conditions. See "The Exchange Offer--Conditions."
In the event the Company terminates the Exchange Offer and does not accept for
exchange any Private Notes, the Company will promptly return the Private Notes
to the holders thereof. The Company will not receive any proceeds from the
Exchange Offer. See "The Exchange Offer."
Based on an interpretation by the staff of the Securities and Exchange
Commission (the "Commission") set forth in no-action letters issued to third
parties (See e.g. EXXON CAPITAL HOLDINGS CORP., SEC No-Action Letter (available
April 13, 1989) and MORGAN STANLEY & CO. INC., SEC No-Action Letter (available
June 5, 1991) collectively, the "No-Action Letters"), the Company believes that
the Exchange Notes issued
(CONTINUED ON NEXT PAGE)
iv
<PAGE>
(CONTINUED FROM PREVIOUS PAGE)
pursuant to the Exchange Offer in exchange for Private Notes may be offered for
resale, resold and otherwise transferred by a holder thereof (other than (i) a
broker-dealer who purchases such Exchange Notes directly from the Company to
resell pursuant to Rule 144A or any other available exemption under the
Securities Act or (ii) a person that is an affiliate of the Company within the
meaning of Rule 405 under the Securities Act), without compliance with the
registration and prospectus delivery provisions of the Securities Act; PROVIDED
that the holder is acquiring the Exchange Notes in the ordinary course of its
business and is not participating, and had no arrangement or understanding with
any person to participate, in the distribution of the Exchange Notes. Holders
who tender their Private Notes in the Exchange Offer with the intention of
participating in a distribution of the Exchange Notes will not be able to rely
on the No-Action Letters or similar no-action letters. Holders of Private Notes
wishing to accept the Exchange Offer must represent to the Company, as required
by the Registration Rights Agreement, that such conditions have been met. Each
broker-dealer that receives Exchange Notes for its own account in exchange for
Private Notes, where such Private Notes were acquired by such broker-dealer as a
result of market-making activities or other trading activities, must acknowledge
that it will deliver a prospectus in connection with any resale of such Exchange
Notes. The Company believes that none of the registered holders of the Private
Notes is an affiliate (as such term is defined in Rule 405 under the Securities
Act) of the Company.
Prior to the Exchange Offer, there has been no public market for the Notes.
The Company does not intend to list the Exchange Notes on any securities
exchange, but the Private Notes are eligible for trading in the National
Association of Securities Dealers, Inc.'s Private Offerings, Resales and Trading
through Automatic Linkages (PORTAL) market. There can be no assurance that an
active market for the Notes will develop. To the extent that a market for the
Notes does develop, the market value of the Notes will depend on market
conditions (such as yields on alternative investments), general economic
conditions, the Company's financial condition and certain other factors. Such
conditions might cause the Notes, to the extent that they are traded, to trade
at a significant discount from face value. See "Risk Factors--Absence of Public
Market; Restrictions on Transfer."
Each broker-dealer that receives Exchange Notes for its own account pursuant
to the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such Exchange Notes. The Letter of Transmittal
states that by so acknowledging and by delivering a prospectus, a broker-dealer
will not be deemed to admit that it is an "underwriter" within the meaning of
the Securities Act. This Prospectus, as it may be amended or supplemented from
time to time, may be used by a broker-dealer in connection with resales of
Exchange Notes received in exchange for Private Notes where such Private Notes
were acquired by such broker-dealer as a result of market-making activities or
other trading activities. The Company has agreed that, starting on the
Expiration Date and ending on the close of business one year after the
Expiration Date, it will make this Prospectus available to any broker-dealer for
use in connection with any such resale. See "The Exchange Offer--Resale of the
Exchange Notes" and "Plan of Distribution."
The Company will not receive any proceeds from, and has agreed to bear the
expenses of, the Exchange Offer. No underwriter is being used in connection with
this Exchange Offer. See "The Exchange Offer--Resale of the Exchange Notes."
THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL THE COMPANY ACCEPT
SURRENDERS FOR EXCHANGE FROM, HOLDERS OF PRIVATE NOTES IN ANY JURISDICTION IN
WHICH THE EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE
WITH THE SECURITIES OR BLUE SKY LAWS OF SUCH JURISDICTION.
NO PERSON IS AUTHORIZED IN CONNECTION WITH THE EXCHANGE OFFER TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS OR
THE ACCOMPANYING LETTER OF TRANSMITTAL, AND, IF GIVEN OR
(CONTINUED ON NEXT PAGE)
v
<PAGE>
(CONTINUED FROM PREVIOUS PAGE)
MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY. NEITHER THE DELIVERY OF THIS PROSPECTUS OR THE
ACCOMPANYING LETTER OF TRANSMITTAL, NOR ANY EXCHANGE MADE HEREUNDER SHALL UNDER
ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN
IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
UNTIL , 1998 (90 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE EXCHANGE NOTES, WHETHER OR NOT PARTICIPATING IN
THE EXCHANGE OFFER, MAY BE REQUIRED TO DELIVER A PROSPECTUS IN CONNECTION
THEREWITH. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
The Exchange Notes will be available initially only in book-entry form. The
Company expects that the Exchange Notes issued pursuant to the Exchange Offer
will be issued in the form of one or more fully registered global notes that
will be deposited with, or on behalf of, The Depository Trust Company ("DTC" or
the "Depositary") and registered in its name or in the name of a nominee of the
DTC. Beneficial interests in the global note representing the Exchange Notes
will be shown on, and transfers thereof will be effected only through, records
maintained by the Depositary and its participants. After the initial issuance of
such global note, Exchange Notes in certificated form will be issued in exchange
for the global note only in accordance with the terms and conditions set forth
in the Indenture. See "The Exchange Offer--Book-Entry Transfer" and "Book Entry;
Delivery and Form."
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
THIS PROSPECTUS INCLUDES "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT AND SECTION 21E OF THE SECURITIES EXCHANGE ACT
OF 1934, AS AMENDED (THE "EXCHANGE ACT"). ALL STATEMENTS OTHER THAN STATEMENTS
OF HISTORICAL FACTS INCLUDED IN THIS PROSPECTUS, INCLUDING WITHOUT LIMITATION,
CERTAIN STATEMENTS UNDER THE CAPTIONS "PROSPECTUS SUMMARY," "THE COMPANY,"
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" AND "BUSINESS" AND LOCATED ELSEWHERE HEREIN REGARDING THE COMPANY'S
FINANCIAL POSITION AND OPERATING STRATEGY, 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."
vi
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY, THE NOTES
THERETO AND THE OTHER FINANCIAL DATA CONTAINED ELSEWHERE IN THIS PROSPECTUS.
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE FACTORS SET FORTH HEREIN
UNDER THE CAPTION "RISK FACTORS" AND ARE URGED TO READ THIS PROSPECTUS IN ITS
ENTIRETY. UNLESS OTHERWISE INDICATED, REFERENCES HEREIN TO THE "COMPANY" INCLUDE
THE COMPANY AND THE COMPANY'S WHOLLY OWNED SUBSIDIARIES. SEE THE "GLOSSARY" FOR
DEFINITIONS OF CERTAIN TERMS USED IN THIS PROSPECTUS.
THE COMPANY
FirstWorld Communications, Inc. ("FirstWorld" or the "Company") is a
facilities-based integrated communications provider ("ICP") which is deploying
networks to provide telecommunications solutions to business customers in
clustered, demographically attractive second tier markets. The Company offers
"one-stop shopping" for a broad array of telecommunications services, including
local and long distance telephone service, high speed Internet access, data
connectivity, local area network ("LAN") connectivity, web hosting, video
communications and system integration services. Within its target markets, the
Company has segmented the potential business customer base and tailors its
service offerings, sales and marketing approach and network development to
provide service in a cost-effective manner to each segment. The Company believes
its regional approach allows it to best leverage its network facilities, sales
force, customer support staff and brand identity. The Company's first network
clusters will serve second tier markets surrounding metropolitan Los Angeles,
including Orange County and the San Gabriel Valley and South Bay areas of Los
Angeles County. The Company intends to selectively expand its reach into other
regional markets, both within and outside of California.
The Company's largest stockholders are entities controlled by Donald L.
Sturm, former Vice Chairman of Peter Kiewit Sons' Inc., the founder of MFS
Communications Company, Inc. ("MFS Communications"), and Enron Capital & Trade
Resources Corp. ("Enron"), a subsidiary of Enron Corp., one of the world's
leading integrated natural gas and electricity companies. To date, these
stockholders have provided $55 million of the $67 million in equity capital
received by the Company. The Company and Enron have an informal collaborative
relationship to jointly market telecommunications and utility services which the
Company believes can provide it with access to new markets, sales synergies and
product development opportunities.
The Company began network operations in July 1997 and began providing
services to commercial customers in November 1997. As of May 31, 1998, the
Company had 66 commercial customers under contract. The City of Anaheim, the
Company's most significant customer, relies on the Company to supply local
dialtone, long distance, dedicated facilities and Internet service to
substantially all of its municipal facilities.
FirstWorld has designed and implemented an advanced and reliable fiber-based
network. Central to the Company's network design is its state-of-the-art
integrated voice and data central office service platform, which allows the
Company to integrate third-party systems and the Company's operational support
systems into a unified network. The Company believes its networks also are
capable of providing server-based applications, such as virtual LANs and
e-commerce, and will be compatible with voice over Internet technologies as such
technologies are refined in the industry. The Company has designed business
processes to simplify provisioning, billing, network management and customer
service and has incorporated operational support systems that implement such
processes into its networks. Among other things, the Company has designed its
systems to allow the Company to provide single-point-of-contact customer service
and to facilitate electronic exchanges of information with the incumbent local
exchange carrier ("ILEC") when possible.
The Company employs a demand-driven approach to network construction. This
approach is intended to minimize deployment of capital not associated with
customer revenues and maximize flexibility to serve
1
<PAGE>
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 line ("DSL") technology 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.
The Company generally requires customers that are connected by fiber to sign
long-term contracts to offset the cost of capital deployed.
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. 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 Voice, data, Internet, Consultative sales approach Fiber, DSL and unbundled
video and systems by account team loops
integration
Basic Commercial Voice and Internet Direct mail and DSL and unbundled loops
telemarketing
Wholesale Transport Dedicated access (DS-1, Direct sales to other Fiber
DS-3, OC-1 and OC-3) service providers
Wholesale Functionality Switch and server based Direct sales to Central office and product
applications applications providers servers
</TABLE>
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 capabilities on a wholesale basis to
other local exchange carriers, including competitive local exchange carriers
("CLECs"), interexchange carriers ("IXCs"), Internet service providers ("ISPs")
and other communications providers.
The Company uses strategic relationships with municipalities, 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
the City of Anaheim, The Irvine Company and Enron provide the Company with
significant advantages in marketing and network deployment.
The Company intends to generate near-term revenue from basic services
currently provided by ILECs and IXCs, 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's strategy and network architecture are designed to exploit a
number of trends reshaping the $190 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 server-based applications and (vi) the migration of existing
business processes to electronic formats.
2
<PAGE>
MANAGEMENT
The Company has assembled a management team with extensive experience in
telecommunications network engineering and operations, customer care, sales and
marketing, project development and finance. Donald L. Sturm, the Company's
Chairman, President and Chief Executive Officer, has extensive experience in the
telecommunications industry. Many of the other members of the management team
have prior telecommunications industry experience, including prior positions at
Pacific Bell, WorldCom, Inc. ("WorldCom"), Sprint Communications Company, L.P.
("Sprint") and other major telecommunications providers. Drawing on management's
skills and experience, the Company has developed and implemented streamlined
business processes and operational support systems for customer service,
billing, provisioning and network management that it believes are superior to
the legacy systems used by most of its competitors. The Company believes the
skill and experience of its management team will continue to provide significant
benefits as the Company continues to enhance and expand its networks.
BUSINESS STRATEGY
The Company's goal is to become the premier ICP in the markets that it
serves. The Company also is seeking to achieve a high degree of market
penetration, form long-term customer relationships and establish 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, wholesale transport and
wholesale functionality 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 fiber-based networks capable of providing integrated
voice, data, 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 and e-commerce, and voice over Internet.
PURSUE DEMAND-DRIVEN NETWORK DEPLOYMENT. The Company utilizes a
demand-driven approach to network construction. In the deployment of
infrastructure, the Company markets its services to a geographically targeted
cluster of businesses before committing to build a complete fiber-to-the-curb
ring. In addition, the Company connects customers to its networks through direct
fiber connections, DSL or unbundled loops, depending on the product set and
anticipated revenue and margin from such customers.
GAIN EFFICIENCY THROUGH REGIONAL CONCENTRATION. The Company has adopted a
targeted geographic approach to network deployment. The Company believes the
benefits of building networks in second tier cities clustered within geographic
regions 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 construction costs, achieve
a high degree of scalability, reduce operating costs, increase reliability and
facilitate migration to new technologies over time.
3
<PAGE>
DEVELOP STRATEGIC RELATIONSHIPS. The Company intends to continue to develop
strategic relationships with municipalities, 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. To date, the Company has established such relationships with the City
of Anaheim, The Irvine Company, Enron and others. The Company's agreements with
the City of Anaheim give the Company exclusive commercial rights to a 50-mile
fiber loop that serves as the backbone for the Company's Anaheim network. The
Irvine Company agreements give the Company rights to install fiber in existing
conduit within a commercial development known as the "Irvine Spectrum." While
the Company intends to establish additional strategic relationships, it also
intends to enter otherwise attractive markets without such relationships.
FINANCING PLAN
The Company believes that the proceeds of the Private Note Offering and the
concurrent equity investment by Colorado Spectra 3, LLC, a Colorado limited
liability company controlled by Donald L. Sturm ("Spectra 3"), and Enron of
additional funds in the aggregate amount of $20 million (the "Additional Equity
Investment"), together with cash on hand, will be sufficient to finance
substantial completion by the end of 1999 of its Orange County, San Gabriel
Valley and South Bay networks. The Company believes that these initial networks,
when completed, will allow it to provide services to a market that includes
approximately one million commercial access lines. The Company expects that its
plan to expand beyond Orange County and the San Gabriel Valley and South Bay
areas of Los Angeles County will require it to obtain additional financing,
which may include commercial bank borrowings, additional 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. Actual capital requirements may
vary based upon the timing and success of the Company's network deployment. If
demand for the Company's services is lower than expected, the Company expects to
be able to reduce demand-driven capital expenditures such as fiber installation,
customer located equipment ("CLE") and switch electronics. There can be no
assurance that the Company will be successful in raising sufficient additional
capital at all or on terms acceptable to the Company. See "Risk
Factors--Significant Capital Requirements" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources."
The Company's principal executive offices are located at 9333 Genesee
Avenue, Suite 200, San Diego, California 92121, and its phone number is (619)
552-8010.
In January 1998, the Company changed its name from SpectraNet International
to FirstWorld Communications, Inc. The Company anticipates that, prior to the
effectiveness of the Prospectus, it will change its state of incorporation from
California to Delaware.
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
The statements contained in this Prospectus which are not historical facts
are forward-looking statements 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 expand its network coverage to most of
Orange County and the San Gabriel Valley and South Bay areas of Los Angeles
County, and beyond, and to add voice over Internet services, managed desk-top
services and other advanced broadband services to its integrated package of
services are only predictions; 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,
design and construct fiber-optic networks, install fiber-optic 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.
Regulatory, legislative and judicial developments may also cause actual results
to differ materially from the future results indicated, expressed or implied, in
such forward-looking statements. See "Risk Factors."
4
<PAGE>
THE EXCHANGE OFFER
<TABLE>
<CAPTION>
<S> <C>
THE EXCHANGE OFFER........................ The Company is offering to exchange $1,000 principal amount of
Exchange Notes for each $1,000 principal amount of Private Notes that
are properly tendered and accepted. The Company will issue Exchange
Notes on or promptly after the Expiration Date (as defined). As of
May 31, 1998, $470,000,000 in aggregate principal amount at maturity
of Private Notes were outstanding. See "The Exchange Offer--Purpose
of the Exchange Offer."
Based on an interpretation by the staff of the Commission set forth
in no-action letters issued to third parties, the Company believes
that the Exchange Notes issued pursuant to the Exchange Offer in
exchange for Private Notes may be offered for resale, resold and
otherwise transferred by a holder thereof (other than (i) a
broker-dealer who purchases such Exchange Notes directly from the
Company to resell pursuant to Rule 144A or any other available
exemption under the Securities Act or (ii) a person that is an
affiliate of the Company within the meaning of Rule 405 under the
Securities Act), without compliance with the registration and
prospectus delivery provisions of the Securities Act; PROVIDED that
the holder is acquiring Exchange Notes in the ordinary course of its
business and is not participating, and had no arrangement or
understanding with any person to participate, in the distribution of
the Exchange Notes. Each broker-dealer that receives Exchange Notes
for its own account in exchange for Private Notes, where such Private
Notes were acquired by such broker-dealer as a result of
market-making activities or other trading activities, must
acknowledge that it will deliver a prospectus in connection with any
resale of such Exchange Notes. See "The Exchange Offer--Resale of the
Exchange Notes" and "Plan of Distribution."
REGISTRATION RIGHTS AGREEMENT............. The Private Notes were sold by the Company on April 13, 1998 to Bear,
Stearns & Co. Inc., ING Baring (U.S.) Securities, Inc., J.P. Morgan
Securities Inc. and Merrill Lynch, Pierce, Fenner & Smith
Incorporated (collectively, the "Initial Purchasers") pursuant to a
Purchase Agreement, dated April 6, 1998, by and among the Company and
the Initial Purchasers (the "Purchase Agreement"). Pursuant to the
Purchase Agreement, the Company and the Initial Purchasers entered
into a Registration Rights Agreement, dated as of April 13, 1998 (the
"Registration Rights Agreement"), which grants the holders of the
Private Notes certain exchange and registration rights. The Exchange
Offer is intended to satisfy such rights, which will terminate upon
the consummation of the Exchange Offer. See "The Exchange
Offer--Termination of Certain Rights."
EXPIRATION DATE........................... The Exchange Offer will expire at 5:00 p.m. New York City time, on
, 1998, unless the Exchange Offer is
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5
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<S> <C>
extended by the Company in its sole discretion, in which case the
term "Expiration Date" shall mean the latest date and time to which
the Exchange Offer is extended. See "The Exchange Offer--Expiration
Date; Extensions; Amendments."
ACCRETION OF THE EXCHANGE NOTES AND THE
PRIVATE NOTES........................... No cash interest will accrue or be payable in respect of the Exchange
Notes prior to April 15, 2003. Thereafter, interest will accrue at
the rate of 13% per annum, payable semiannually in arrears on each
April 15 and October 15, commencing on October 15, 2003. The Private
Notes accepted for exchange will continue to accrete in principal
amount at the rate of 13% per annum to, but excluding, the issuance
date of the Exchange Notes and will cease to accrete in principal
amount upon cancellation of the Private Notes and issuance of the
Exchange Notes. Any Private Notes not tendered or accepted for
exchange will continue to accrete in principal amount at the rate of
13% per annum in accordance with its terms. The Accreted Value of the
Exchange Notes will equal the Accreted Value of the Private Notes
accepted for exchange immediately prior to issuance of the Exchange
Notes.
CONDITIONS TO THE EXCHANGE OFFER.......... The Exchange Offer is subject to certain customary conditions that
may be waived by the Company. The Exchange Offer is not conditioned
upon any minimum aggregate principal amount at maturity of Private
Notes being tendered for exchange. See "The Exchange
Offer--Conditions."
PROCEDURES FOR TENDERING PRIVATE NOTES.... Each holder of Private Notes wishing to accept the Exchange Offer
must complete, sign and date the Letter of Transmittal, or a
facsimile thereof, in accordance with the instructions contained
herein and therein, and mail or otherwise deliver such Letter of
Transmittal, or such facsimile, together with such Private Notes and
any other required documentation to The Bank of New York, as exchange
agent (the "Exchange Agent"), at the address set forth herein. By
executing the Letter of Transmittal, the holder will represent to and
agree with the Company that, among other things, (i) the Exchange
Notes to be acquired by such holder of Private Notes in connection
with the Exchange Offer are being acquired by such holder in the
ordinary course of its business, (ii) if such holder is not a broker-
dealer, such holder is not currently participating in, does not
intend to participate in, and has no arrangement or understanding
with any person to participate in a distribution of the Exchange
Notes, (iii) if such holder is a broker-dealer registered under the
Exchange Act or is participating in the Exchange Offer for the
purposes of distributing the Exchange Notes, such holder will comply
with the registration and prospectus delivery requirements of the
Securities Act in connection with a secondary resale transaction of
the Exchange Notes acquired by such person and cannot rely on the
position
</TABLE>
6
<PAGE>
<TABLE>
<S> <C>
of the staff of the Commission set forth in no-action letters (see
"The Exchange Offer--Resale of Exchange Notes"), (iv) such holder
understands that a secondary resale transaction described in clause
(iii) above and any resales of Exchange Notes obtained by such holder
in exchange for Private Notes acquired by such holder directly from
the Company should be covered by an effective registration statement
containing the selling securityholder information required by Item
507 or Item 508, as applicable, of Regulation S-K of the Commission
and (v) such holder is not an "affiliate," as defined in Rule 405
under the Securities Act, of the Company. If the holder is a
broker-dealer that will receive Exchange Notes for its own account in
exchange for Private Notes that were acquired as a result of market-
making activities or other trading activities, such holder will be
required to acknowledge in the Letter of Transmittal that such holder
will deliver a prospectus in connection with any resale of such
Exchange Notes; however, by so acknowledging and by delivering a
prospectus, such holder will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act. See "The
Exchange Offer--Procedures for Tendering."
SPECIAL PROCEDURES FOR BENEFICIAL
OWNERS.................................. Any beneficial owner whose Private Notes are registered in the name
of a broker, dealer, commercial bank, trust company or other nominee
and who wishes to tender such Private Notes in the Exchange Offer
should contact such registered holder promptly and instruct such
registered holder to tender on such beneficial owner's behalf. If
such beneficial owner wishes to tender on such owner's own behalf,
such owner must, prior to completing and executing the Letter of
Transmittal and delivering such owner's Private Notes, either make
appropriate arrangements to register ownership of the Private Notes
in such owner's name or obtain a properly completed bond power from
the registered holder. The transfer of registered ownership may take
considerable time and may not be able to be completed prior to the
Expiration Date. See "The Exchange Offer-- Procedures for Tendering."
GUARANTEED DELIVERY PROCEDURES............ Holders of Private Notes who wish to tender their Private Notes and
whose Private Notes are not immediately available or who cannot
deliver their Private Notes, the Letter of Transmittal or any other
documentation required by the Letter of Transmittal to the Exchange
Agent prior to the Expiration Date must tender their Private Notes
according to the guaranteed delivery procedures set forth under "The
Exchange Offer--Guaranteed Delivery Procedures."
ACCEPTANCE OF THE PRIVATE NOTES AND
DELIVERY OF THE EXCHANGE NOTES.......... Subject to the satisfaction or waiver of the conditions to the
Exchange Offer, the Company will accept for exchange any and all
Private Notes that are properly tendered in the Exchange Offer prior
to the Expiration Date. The Exchange Notes issued
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7
<PAGE>
<TABLE>
<S> <C>
pursuant to the Exchange Offer will be delivered on the earliest
practicable date following the Expiration Date. See "The Exchange
Offer--Terms of the Exchange Offer."
WITHDRAWAL RIGHTS......................... Tenders of Private Notes may be withdrawn at any time prior to the
Expiration Date. See "The Exchange Offer--Withdrawal of Tenders."
CERTAIN UNITED STATES FEDERAL INCOME TAX
CONSIDERATIONS.......................... For a discussion of certain material federal income tax
considerations relating to the exchange of the Exchange Notes for the
Private Notes, see "Certain United States Federal Income Tax
Considerations."
EXCHANGE AGENT............................ The Bank of New York is serving as the Exchange Agent in connection
with the Exchange Offer.
</TABLE>
THE EXCHANGE NOTES
The Exchange Offer applies to up to $470,000,000 in aggregate principal
amount at maturity of the Private Notes. The form and terms of the Exchange
Notes are the same as the form and terms of the Private Notes except that (i)
the exchange will have been registered under the Securities Act and, therefore,
the Exchange Notes will not bear legends restricting the transfer thereof and
(ii) holders of the Exchange Notes will not be entitled to certain rights of
holders of the Private Notes under the Registration Rights Agreement, which
rights will terminate upon consummation of the Exchange Offer. The Exchange
Notes will evidence the same debt as the Private Notes (which they replace) and
will be issued under, and be entitled to the benefits of, the Indenture. For
further information and for definitions of certain capitalized terms used below,
see "Description of Exchange Notes."
<TABLE>
<CAPTION>
<S> <C>
SECURITIES OFFERED........................ $470,000,000 in aggregate principal amount at maturity of 13% Senior
Discount Notes due 2008.
MATURITY.................................. April 15, 2008.
INTEREST.................................. The Exchange Notes will be issued at a substantial discount to their
principal amount at maturity, and will accrete in value through April
15, 2003 (the "Full Accretion Date") at a rate of 13% per annum,
compounded semi-annually. Cash interest will neither accrue nor be
payable on the Exchange Notes prior to the Full Accretion Date.
Thereafter, the Exchange Notes will bear interest at the rate of 13%
per annum, payable in cash semi-annually in arrears on April 15 and
October 15 commencing October 15, 2003.
ORIGINAL ISSUE DISCOUNT................... For United States federal income tax purposes, an Exchange Note
received pursuant to the Exchange Offer will be treated as a
continuation of the Private Note in the hands of a holder. As a
result, such holder will have the same adjusted tax basis, holding
period and original issue discount in the Exchange Note as it had in
the Private Note immediately before the exchange. See "Certain United
States Federal Income Tax Considerations."
RANKING................................... The Exchange Notes will be senior obligations of the Company, will
rank PARI PASSU in right of payment with all existing and future
senior Indebtedness of the Company and will rank senior
</TABLE>
8
<PAGE>
<TABLE>
<S> <C>
in right of payment to any future Subordinated Indebtedness of the
Company, but will be effectively subordinated to any secured
Indebtedness of the Company and future Indebtedness and other
liabilities (including Subordinated Indebtedness and trade payables)
of the Company's Subsidiaries. The Indenture will permit the
incurrence of substantial additional Indebtedness, including secured
Indebtedness, by the Company and its Subsidiaries, subject to certain
restrictions. See "Risk Factors-- Effective Subordination of Notes;
Holding Company Structure." On an as adjusted basis after giving
effect to the Private Note Offering and the Additional Equity
Investment, as if the Notes had been issued and such proceeds had
been received on March 31, 1998, the Company would have had no
Subordinated Indebtedness and $7.2 million in outstanding
Indebtedness that would rank PARI PASSU with the Notes.
SINKING FUND.............................. None.
OPTIONAL REDEMPTION....................... The Exchange Notes may be redeemed 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 redemption date.
In addition, at any time prior to or on April 15, 2001, the Company
may redeem up to 35% of the Accreted Value of the Notes at a
redemption price of 113% of the Accreted Value thereof at the time of
redemption, with the net cash proceeds of one or more Public Equity
Offerings (as defined) or the sale of Capital Stock (as defined) to
one or more Strategic Investors (as defined); PROVIDED, HOWEVER, that
Notes representing at least 65% of the Accreted Value of the Notes
originally issued remain outstanding immediately after the occurrence
of such redemption.
CHANGE OF CONTROL......................... In the event of a Change of Control, the holders of the Exchange
Notes will have the right to require the Company to purchase the
Exchange Notes at a price equal to 101% of the aggregate principal
amount or Accreted Value thereof, as applicable, plus accrued and
unpaid interest to the date of purchase. There can be no assurance
that the Company will have the financial resources necessary to
repurchase the Exchange Notes upon a Change of Control.
CERTAIN COVENANTS......................... The Indenture contains certain covenants that, among other things,
limit the ability of the Company and its Restricted Subsidiaries (as
defined) to make certain restricted payments, incur additional
Indebtedness (as defined), pay dividends or make other distributions,
repurchase equity interests or subordinated indebtedness, engage in
sale or leaseback transactions, create certain liens, enter into
certain transactions with affiliates, sell assets of the Company or
its Restricted Subsidiaries, change their lines of business, issue or
sell equity interests of the Company's Restricted Subsidiaries or
enter into
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9
<PAGE>
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<S> <C>
mergers and consolidations. In addition, under certain circumstances,
the Company will be required to offer to purchase the Notes at a
price equal to 100% of the principal amount or Accreted Value
thereof, as applicable, plus accrued and unpaid interest to the date
of purchase, with the proceeds of certain asset sales. See
"Description of Exchange Notes-- Certain Covenants."
</TABLE>
For additional information regarding the Exchange Notes, see "Description of
Exchange Notes."
RISK FACTORS
Prospective investors should carefully consider all of the information set
forth in this Prospectus and, in particular, should evaluate the specific risk
factors set forth under the caption "Risk Factors," beginning on page 13, for a
discussion of certain risks involved with an investment in the Exchange Notes.
10
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
The summary consolidated financial data presented below for the years ended
September 30, 1994, 1995, 1996 and 1997, for the period from September 1, 1993
(inception) to September 30, 1997, and as of September 30, 1997 have been
derived from the audited consolidated financial statements of the Company. The
summary consolidated financial data presented below as of March 31, 1998 and for
the six month periods ended March 31, 1997 and 1998 and the period from
September 1, 1993 (inception) to March 31, 1998 have been derived from the
unaudited consolidated financial statements of the Company. In the opinion of
management, the unaudited financial statements have been prepared on the same
basis as the audited financial statements and include all adjustments, which
consist only of normal recurring adjustments, necessary for a fair presentation
of the financial position and the results of operations for these periods. These
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States which may differ in certain aspects from
accounting principles generally accepted in certain of the jurisdictions in
which the Exchange Notes are being offered. Operating results for the six month
period ended March 31, 1998 are not necessarily indicative of the results that
may be expected for the full year ending September 30, 1998. The data below
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Consolidated Financial
Statements of the Company and notes thereto.
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<CAPTION>
SIX MONTHS
YEAR ENDED PERIOD FROM ENDED MARCH 31,
SEPTEMBER 30, SEPTEMBER 1, 1993
------------------------------------------ (INCEPTION) TO --------------------
1994 1995 1996 1997 SEPTEMBER 30, 1997 1997 1998
--------- --------- --------- --------- ------------------ --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Service revenue.................. $ 85 $ 57 $ 279 $ 75 $ 496 $ -- $ 234
Other revenue.................... -- 40 75 96 211 69 10
Costs and expenses:
Network development and
operations................... -- 188 1,708 3,170 5,067 1,610 3,549
Selling, general and
administrative............... 429 740 2,409 4,725 8,325 1,522 1,561
Depreciation and
amortization................. 21 39 75 501 637 186 1,029
--------- --------- --------- --------- -------- --------- ---------
Loss from operations............. (365) (870) (3,838) (8,225) (13,322) (3,249) (5,895)
Other income (expense):
Interest expense............... (53) (38) (27) (1,372) (1,489) (127) (2,480)
Interest income................ -- -- 9 149 158 50 57
--------- --------- --------- --------- -------- --------- ---------
Loss before extraordinary item... (418) (908) (3,856) (9,448) (14,653) (3,326) (8,318)
Extraordinary
item--extinguishment of debt... -- -- -- (105) (105) -- --
--------- --------- --------- --------- -------- --------- ---------
Net loss......................... $ (418) $ (908) $ (3,856) $ (9,553) $ (14,758) $ (3,326) $ (8,318)
--------- --------- --------- --------- -------- --------- ---------
--------- --------- --------- --------- -------- --------- ---------
OTHER DATA:
EBITDA(1)........................ $ (344) $ (831) $ (3,763) $ (7,829) $ (12,790) $ (3,063) $ (4,866)
Capital expenditures............. 6 25 908 12,637 13,576 1,109 6,569
Ratio of earnings to fixed
charges(2)..................... -- -- -- -- -- -- --
<CAPTION>
PERIOD FROM
SEPTEMBER 1, 1993
(INCEPTION) TO
MARCH 31, 1998
-----------------
<S> <C>
STATEMENT OF OPERATIONS DATA:
Service revenue.................. $ 730
Other revenue.................... 221
Costs and expenses:
Network development and
operations................... 8,615
Selling, general and
administrative............... 9,886
Depreciation and
amortization................. 1,667
--------
Loss from operations............. (19,217)
Other income (expense):
Interest expense............... (3,969)
Interest income................ 215
--------
Loss before extraordinary item... (22,971)
Extraordinary
item--extinguishment of debt... (105)
--------
Net loss......................... $ (23,076)
--------
--------
OTHER DATA:
EBITDA(1)........................ $ (17,655)
Capital expenditures............. 20,145
Ratio of earnings to fixed
charges(2)..................... --
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1998
-------------------------
SEPTEMBER 30, 1997 ACTUAL AS ADJUSTED(3)
------------------- --------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................................ $ 536 $ 1,750 $ 261,450
Working capital (deficit)............................................ (3,319) (3,105) 256,595
Total assets......................................................... 25,321 32,650 297,106
Long-term debt....................................................... 18,964 6,941 242,145
Total stockholders' equity........................................... 2,265 20,532 49,784
</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
11
<PAGE>
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. EBITDA is not necessarily comparable with
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 years ended September 30, 1994, 1995, 1996 and 1997, the
period from September 1, 1993 (inception) to September 30, 1997, the six
month periods ended March 31, 1997 and 1998 and the period from September 1,
1993 (inception) to March 31, 1998, earnings were insufficient to cover
fixed charges by $418,000, $908,000, $3,856,000, $9,500,000, $14,705,000,
$3,326,000, $8,318,000 and $23,023,000, respectively.
(3) The as adjusted column reflects the receipt and application of net proceeds
from the Private Note Offering ($241,900,000) and the Additional Equity
Investment ($18,800,000) and the termination of the Company's revolving
credit facility (the "Credit Facility"). As of March 31, 1998, costs
associated with the termination of the Credit Facility include payment of a
$1,000,000 termination fee and the write-off of unamortized debt discount
and deferred financing costs totaling approximately $3,500,000. The column
reflects the aggregate value ascribed to the warrants issued in connection
with the Private Note Offering (the "Private Note Warrants") as a component
of stockholders' equity, which value has been estimated by the Company to
approximate $15,001,000. The value ascribed to the Private Note Warrants has
been reflected as a debt discount and will be amortized to interest expense
using the effective interest method over the period that the Notes are
outstanding.
12
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RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS,
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER ALL OF THE INFORMATION CONTAINED
IN THIS PROSPECTUS AND, IN PARTICULAR, SHOULD EVALUATE THE FOLLOWING RISK
FACTORS. CERTAIN STATEMENTS IN THIS PROSPECTUS THAT ARE NOT HISTORICAL FACT
CONSTITUTE "FORWARD-LOOKING STATEMENTS." SUCH FORWARD-LOOKING STATEMENTS INVOLVE
KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS THAT MAY CAUSE THE
ACTUAL RESULTS OF THE COMPANY TO BE MATERIALLY DIFFERENT FROM RESULTS EXPRESSED
OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. SUCH RISKS, UNCERTAINTIES AND
OTHER FACTORS INCLUDE, BUT ARE NOT LIMITED TO, THE FOLLOWING FACTORS.
FAILURE TO EXCHANGE PRIVATE NOTES
The Exchange Notes will be issued in exchange for Private Notes only after
timely receipt by the Exchange Agent of such Private Notes, a properly completed
and duly executed Letter of Transmittal and all other required documentation.
Therefore, holders of Private Notes desiring to tender such Private Notes in
exchange for Exchange Notes should allow sufficient time to ensure timely
delivery. Neither the Exchange Agent nor the Company is under any duty to give
notification of defects or irregularities with respect to tenders of Private
Notes for exchange. Private Notes that are not tendered or are tendered but not
accepted will, following consummation of the Exchange Offer, continue to be
subject to the existing restrictions upon transfer thereof. In addition, any
holder of Private Notes who tenders in the Exchange Offer for the purpose of
participating in a distribution of the Exchange Notes will be required to comply
with the registration and prospectus delivery requirements of the Securities Act
in connection with any resale transaction. Each broker-dealer that receives
Exchange Notes for its own account in exchange for Private Notes, where such
Private Notes were acquired by such broker-dealer as a result of market-making
activities or any other trading activities, must acknowledge that it will
deliver a prospectus in connection with any resale of such Exchange Notes. To
the extent that Private Notes are tendered and accepted in the Exchange Offer,
the trading market for untendered and tendered but unaccepted Private Notes
could be adversely affected due to the limited amount, or "float," of the
Private Notes that are expected to remain outstanding following the Exchange
Offer. Generally, a lower "float" of a security could result in less demand to
purchase such security and could, therefore, result in lower prices for such
security. For the same reason, to the extent that a large amount of Private
Notes are not tendered or are tendered and not accepted in the Exchange Offer,
the trading market for the Exchange Notes could be adversely affected. See "Plan
of Distribution" and "The Exchange Offer."
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 less than
eight months, and as of May 31, 1998 had 66 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.
Accordingly, potential investors have limited operating and financial data about
the Company upon which to base an evaluation of the Company's performance and an
investment in the Exchange Notes offered hereby. 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
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achieve its goals, generate sufficient positive cash flows to make principal and
interest payments on its indebtedness, including the Notes, 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 and the Company's ability to make principal
and interest payments on its indebtedness, including the Notes. 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. The prices the Company
charges for its services are in some cases 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 and the
Company's ability to make principal and interest payments on its indebtedness,
including the Notes. 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 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 $23.1 million through March
31, 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 or make
principal and interest payments on its indebtedness, including the Notes. See
"--Substantial Leverage; Ability to Service Indebtedness."
SUBSTANTIAL LEVERAGE; ABILITY TO SERVICE INDEBTEDNESS
The Company will be highly leveraged following the Exchange Offer. On an as
adjusted basis after giving effect to the Private Note Offering and the
Additional Equity Investment, as if the Notes had been issued and such proceeds
had been received on October 1, 1997, the Company would have had approximately
$242.4 million of outstanding indebtedness as of March 31, 1998, the Company's
total debt as a
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percentage of capitalization would have been approximately 83% as of March 31,
1998 and the Company would have had a deficiency of earnings to fixed charges of
$25.2 million for the six months ended March 31, 1998. See "Capitalization,"
"Selected Financial and Operating Data" and "Certain Transactions." 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, the
Indenture permits the incurrence of additional indebtedness under certain
conditions, and the Company expects that as it expands its networks beyond the
Orange County, San Gabriel Valley and South Bay areas, 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 the Notes
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 (including the Notes), 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 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. Such defaults could result
in a default under the Indenture and could delay or preclude payment of interest
or principal on the Notes.
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 and the ability of
the Company to make principal and interest payments on its indebtedness,
including the Notes.
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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 and the Company's ability to make principal and interest
payments on its indebtedness, including the Notes.
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 and the ability of the Company to make principal and
interest payments on its indebtedness, including the Notes.
The backbone of the Company's network within Anaheim, California is a
50-mile fiber loop owned by the City of Anaheim and leased and operated by the
Company. Under an Agreement For Use of Operating Property between the City of
Anaheim and FirstWorld Anaheim, a wholly owned subsidiary of the Company
("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 Universal Telecommunications System Participation Agreement (as
amended, the "UTS Agreement") among the City of Anaheim, the Company and FWA
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 fails to
meet the 90% deadline, then the City may elect to terminate the Agreement for
Use of Operating Property and the UTS Agreement, or, in the alternative,
exercise its right to purchase all of FWA's outstanding stock. See
"Business--Agreements with the City of Anaheim and The Irvine Company--The City
of Anaheim." Any termination of the Agreement for Use of Operating Property or
the UTS Agreement, or the exercise by the City of Anaheim's 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 and the
Company's ability to make principal and interest payments on its indebtedness,
including the Notes.
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 Corporation ("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
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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 will be 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 is required to purchase beginning in August 1998 nor can it be
certain when or if it will purchase such minimum amounts.
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 below under the caption "Business--Network Construction
Status and Proposed Expansion." There can be no assurance the Company will be
able to complete construction in Orange County or the San Gabriel Valley and
South Bay areas of Los Angeles County 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 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.
Pacific Bell has engaged in lobbying at the state and local levels and through
the media aimed at discouraging telecommunications cooperation agreements
between municipalities and private companies such as the Company. Such actions
on the part of Pacific Bell, if successful, could prevent the Company from
entering into future contracts similar to its agreement with the City of
Anaheim. These factors and others could adversely affect the expansion of the
Company's customer base and commencement of operations in new markets. 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 and the Company's ability to make principal
and interest payments on its indebtedness, including the Notes.
COMPETITION
The telecommunications services industry is 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
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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 Decisions
of the Federal Communications Commission ("FCC") (as defined herein) and the
Telecommunications Act of 1996 (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.
In late December 1997, the U.S. District Court for the Northern District of
Texas ruled that the Telecommunications Act unconstitutionally singled out the
RBOCs for punishment by prohibiting them from offering long distance services
within their service areas. The district court's decision has been stayed
pending appellate review by the United States Court of Appeals for the Fifth
Circuit, as to which briefing has now been completed. In addition, in May 1998
the United States Court of Appeals for the District of Columbia Circuit, ruling
in another case addressing whether RBOCs may provide "electronic publishing"
services, held that the Telecommunications Act does not violate constitutional
provisions relied on by the Texas district court in December 1997. However, if
upheld by the United States Court of Appeals for the Fifth Circuit (and by any
subsequent United States Supreme Court review), or if the stay is lifted, the
December 1997 Texas district court decision could present significant
opportunities for RBOCs, such as SBC Communications, Inc. ("SBC") and Pacific
Bell, to offer long distance services and to bundle their service offerings.
Although these companies would still require state public utilities commission
("PUC") approval to enter long distance markets prior to beginning service, the
ruling, if upheld, would provide them relief from significant federal regulatory
restrictions and allow them to become more formidable competitors of the
Company.
The Company also competes for telephony services with various CLECs in its
target markets, including MFS Communications, NEXTLINK Communications, Inc.
("NEXTLINK"), ICG Telecommunications, Inc. ("ICG"), GST Telecommunications, Inc.
("GST") and Teleport Communications Group, Inc. ("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
Corp. ("AT&T"), MCI Communications Corporation ("MCI"), Sprint, 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. In January 1998 AT&T announced a plan
to acquire Teleport, one of the Company's CLEC competitors. That acquisition, if
consummated, would allow AT&T to sell integrated local, long-distance and data
communications services to businesses in the areas served by Teleport, some of
which overlap areas targeted or served by the Company. Sprint recently 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.
WorldCom already has acquired MFS Communications (one of the Company's CLEC
competitors) and Brooks Fiber Properties, Inc., both major CLECs, and WorldCom
has agreed to acquire MCI, subject to regulatory approvals. Recently Ameritech
Corp. ("Ameritech") and US West Inc. ("US West") have announced plans to enter
the long distance market by forming joint sales ventures with Qwest
Communications International Corp.
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("Qwest"), a growing provider of fiber optic-based telecommunications services.
Although the legality of these particular deals have been challenged as a result
of actions brought by AT&T and MCI and remain subject to judicial and FCC
review, 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
new competitors for the Company. The Company also expects increased competition
from ILECs operating outside of their current local service areas, cable
television companies, electric utilities, microwave and other wireless carriers
and satellite licensees.
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, recently announced that it intends to offer DSL services over its
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. 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 cash flow available to the Company to make principal and interest
payments on its indebtedness, including the Notes. 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.
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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 and the Company's
ability to make principal and interest payments on its outstanding indebtedness,
including the Notes.
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, installation
and construction of network operations centers, other network infrastructure and
CLE. The Company believes that the proceeds from the Private Note Offering and
the Additional Equity Investment will be sufficient to fund the Company's
aggregate capital expenditures and working capital requirements, including
operating losses, associated with its roll-out into the Orange County, San
Gabriel and South Bay areas. 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. If demand for the
Company's services is materially different than expected, the Company may
require additional financing at an earlier date, although the Company believes
that it would be able to reduce certain costs that are, to a large extent,
demand-driven. 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. The Company terminated the Credit Facility
in connection with the Private Note Offering, and there can be no assurance that
the Company will be able to enter into a new facility on terms acceptable to the
Company. 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 and the Company's ability to make principal
and interest payments on its indebtedness, including the Notes. 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. See "Description of the
Notes." 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.
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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 does not have employment agreements with any of its
officers or employees, nor does it 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 and the
Company's ability to make principal and interest payments on its indebtedness,
including the Notes. 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. See
"Management."
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 and its ability to repay
its indebtedness, including the Notes, particularly if those policies make it
more difficult to obtain unbundled network elements from ILECs or other
telecommunications providers 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 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,
including the Notes. See "Business--Regulation."
POTENTIAL LIABILITY FOR INFORMATION DISSEMINATED THROUGH NETWORK
The law relating to the liability of on-line service providers, private
network operators and Internet service providers 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
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liability for any services provided by the Company should the content of
information transmitted be subject to the statute.
EFFECTIVE SUBORDINATION OF NOTES; HOLDING COMPANY STRUCTURE
The Company is a holding company that will derive substantially all of its
operating income, if any, from its subsidiaries. The holders of the Notes will
have no direct claim against the subsidiaries for payment under the Notes. The
Company's subsidiaries are separate and distinct legal entities and will have no
obligation, contingent or otherwise, to pay any dividend or make any other
distribution to the Company, or otherwise to pay amounts due with respect to the
Notes or to make funds available for such payments. The Company must rely on
dividends and other payments from its subsidiaries or must raise funds in a
public or private equity or debt offering or sell assets to generate the funds
necessary to meet its obligations, including the payment of principal and
interest on the Notes. There can be no assurance that the Company would be able
to obtain such funds on acceptable terms or at all. The Indenture contains
covenants that restrict the ability of the Company's subsidiaries to enter into
any agreement limiting certain distributions and transfers, including dividends,
to the Company.
The Notes will be effectively subordinated in right of payment to all
existing and future indebtedness and liabilities of the Company's subsidiaries.
The total liabilities of the Company's subsidiaries as of March 31, 1998 were
approximately $21.3 million. In addition, the Indenture will permit the Company
and its subsidiaries to incur additional indebtedness, subject to the
restrictions set forth in the Indenture. See "Description of the Notes--Certain
Covenants--Limitation on Consolidated Indebtedness." Consequently, in the event
of a bankruptcy, liquidation, dissolution, reorganization or similar proceeding
with respect to the Company's subsidiaries, the holders of any indebtedness of
the Company's subsidiaries will be entitled to payment thereof from the assets
of such subsidiaries prior to the holders of any general unsecured obligations
of the Company, including the Notes.
The Notes also are unsecured and will be effectively subordinated to any
secured indebtedness of the Company to the extent of the value of the assets
securing such indebtedness. The Indenture will permit the Company and its
subsidiaries to incur additional secured indebtedness, including purchase money
indebtedness in unlimited amounts, and indebtedness of up to $75 million
pursuant to one or more credit facilities. In the event of a bankruptcy,
liquidation, dissolution, reorganization or similar proceeding with respect to
the Company, the holders of any secured indebtedness will be entitled to proceed
against the collateral that secures such secured indebtedness and such
collateral will not be available for satisfaction of any amounts owed under the
Notes. See "Description of the Notes--Certain Covenants--Limitation on
Consolidated Indebtedness."
GEOGRAPHICAL CONCENTRATION OF THE COMPANY'S CURRENT OPERATIONS
The Company's first network clusters will serve markets surrounding
metropolitan Los Angeles. Unless and until the Company expands beyond Southern
California, the Company's geographic focus may make it more vulnerable than its
competitors to economic downturns and market changes in the region or cities in
which it operates. A downturn in the economies of the region or cities in which
the Company operates or a substantial increase in competition within this region
or these cities, could have a material adverse effect on the Company's business,
financial condition and results of operations and the Company's ability to make
principal and interest payments on its indebtedness, including the Notes.
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CONTROL BY PRINCIPAL STOCKHOLDERS; POTENTIAL CONFLICTS OF INTEREST
As of May 31, 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
Spectra 3 (together with Spectra 1 and Spectra 2, the "Sturm Entities")
beneficially owned approximately 37.4% 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 46.7% of the
voting power of the Company's outstanding common stock. As of May 31, 1998,
Enron beneficially owned approximately 32.1% 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
45.5% 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 and Chief Executive Officer. 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 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. The Sturm Entities and Enron may have an interest in pursuing
acquisitions, divestitures, financings or other transactions that, in their
judgment, could enhance their equity investment, even though such transactions
might involve risk to the holders of the Notes. See "Principal Stockholders" and
"Certain Transactions."
ABSENCE OF A PUBLIC MARKET FOR THE NOTES; RESTRICTIONS ON TRANSFER
As of the date hereof, the only registered holder of Private Notes is Cede &
Co., as the nominee of DTC. The Company believes that, as of the date hereof,
such holder is not an "affiliate" (as such term is defined in Rule 405 under the
Securities Act) of the Company. Prior to the Private Note Offering there had
been no market for the Notes, and there can be no assurance that such a market
will develop or, if such a market develops, as to the liquidity of such market.
The Exchange Notes will not be listed on any securities exchange, but the
Private Notes are eligible for trading in the PORTAL market. The Exchange Notes
are new securities for which there is currently no market. The Initial
Purchasers have advised the Company that they intend to make a market in the
Exchange Notes, as well as the Private Notes, as permitted by applicable laws
and regulations; however, the Initial Purchasers are not obligated to do so, and
may discontinue any such market making activities at any time without notice. In
addition, such market making activity may be limited during the Exchange Offer
and the pendency of the Shelf Registration Statement (as defined in the
Registration Rights Agreement). Therefore, there can be no assurance that an
active market for the Exchange Notes will develop. If a trading market develops
for the Exchange Notes future trading prices of such securities will depend on
many factors, including, among other things, prevailing interest rates, the
market for similar securities, the performance of the Company and other factors.
In addition, based on such factors, the Exchange Notes may trade at a discount
from their initial offering price. See "The Exchange Offer" and "Plan of
Distribution."
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ORIGINAL ISSUE DISCOUNT; POSSIBLE UNFAVORABLE TAX AND OTHER LEGAL CONSEQUENCES
FOR HOLDERS OF NOTES AND THE COMPANY
The Private Notes were, and the Exchange Notes will be, issued at a
substantial discount from their stated principal amount at maturity.
Consequently, purchasers of Exchange Notes should be aware that, although there
will be no periodic payments of cash interest on the Exchange Notes prior to
October 15, 2003, original issue discount (that is, the difference between the
stated redemption price at maturity and the issue price of the Exchange Notes)
will accrete from the issue date of the Exchange Notes and will be includable as
interest income periodically (for periods ending on or prior to April 15, 2003)
in a holder's gross income for U.S. federal income tax purposes in advance of
receipt of the cash payments to which the income is attributable. See "Certain
United States Federal Income Tax Considerations" for a more detailed discussion
of the federal income tax consequences to the holders of the Exchange Notes
regarding the purchase, ownership and disposition of the Exchange Notes.
If a bankruptcy case is commenced by or against the Company under U.S.
bankruptcy laws after the issuance of the Notes, the claim of a holder of Notes
with respect to the principal amount thereof may be limited to an amount equal
to the sum of (i) the initial offering price and (ii) that portion of the
original issue discount that is not deemed to constitute "unmatured interest"
for purposes of the U.S. bankruptcy laws. Any original issue discount that was
not amortized as of any such bankruptcy filing would constitute "unmatured
interest."
The Notes may be subject to the high yield discount obligation rates, which
will defer and may, in part, eliminate the Company's ability to deduct for U.S.
federal income tax purposes the original issue discount attributable to the
Notes. Accordingly, the Company's after tax cash flow might be less than if the
original issue discount on the Notes were deductible when it accrued.
YEAR 2000 ISSUES
The Company has determined that its systems do not require updating to
continue to function properly beyond 1999 and accordingly does not expect to
incur significant expenditures to upgrade its systems to address Year 2000
problems. However, 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 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, financial condition and
its ability to service and pay its indebtedness, including the Notes.
RISKS REGARDING FORWARD LOOKING STATEMENTS
The statements contained in this Prospectus that are not historical facts
are "forward-looking statements" (as such term is defined in the Private
Securities Litigation Reform Act of 1995), 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
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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, design and construct
fiber optic networks, 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,
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.
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THE EXCHANGE OFFER
PURPOSE OF THE EXCHANGE OFFER
The Private Notes were sold by the Company on April 13, 1998 (the "Closing
Date") to the Initial Purchasers pursuant to the Purchase Agreement. The Initial
Purchasers subsequently sold the Private Notes to "qualified institutional
buyers" ("QIBs"), as defined in Rule 144A under the Securities Act ("Rule
144A"), in reliance on Rule 144A. As a condition to the sale of the Private
Notes, the Company and the Initial Purchasers entered into the Registration
Rights Agreement on April 13, 1998. Pursuant to the Registration Rights
Agreement, the Company agreed that, unless the Exchange Offer is not permitted
by applicable law or Commission policy, it would (i) file with the Commission a
Registration Statement under the Securities Act with respect to the Exchange
Notes within 90 days after the Closing Date, (ii) use its best efforts to cause
such Registration Statement to become effective under the Securities Act within
150 days after the Closing Date and (iii) commence the Exchange Offer and use
its best efforts to issue, on or prior to 30 days after the date on which the
Registration Statement was declared effective by the Commission, Exchange Notes
in exchange for all Private Notes tendered prior thereto in the Exchange Offer.
A copy of the Registration Rights Agreement has been filed as an exhibit to the
Registration Statement. The Registration Statement is intended to satisfy
certain of the Company's obligations under the Registration Rights Agreement and
the Purchase Agreement.
RESALE OF THE EXCHANGE NOTES
With respect to the Exchange Notes, based upon an interpretation by the
staff of the Commission set forth in certain no-action letters issued to third
parties, the Company believes that a holder (other than (i) a broker-dealer who
purchases such Exchange Notes directly from the Company to resell pursuant to
Rule 144A or any other available exemption under the Securities Act or (ii) any
such holder that is an "affiliate" of the Company within the meaning of Rule 405
under the Securities Act) who exchanges Private Notes for Exchange Notes in the
ordinary course of business and who is not participating, does not intend to
participate, and has no arrangement with any person to participate, in a
distribution of the Exchange Notes, will be allowed to resell Exchange Notes to
the public without further registration under the Securities Act and without
delivering to the purchasers of the Exchange Notes a prospectus that satisfies
the requirements of Section 10 of the Securities Act. However, if any holder
acquires Exchange Notes in the Exchange Offer for the purpose of distributing or
participating in the distribution of the Exchange Notes or is a broker-dealer,
such holder cannot rely on the position of the staff of the Commission
enumerated in certain no-action letters issued to third parties and must comply
with the registration and prospectus delivery requirements of the Securities Act
in connection with any resale transaction, unless an exemption from registration
is otherwise available. Each broker-dealer that receives Exchange Notes for its
own account in exchange for Private Notes, where such Private Notes were
acquired by such broker-dealer as a result of market-making activities or other
trading activities, must acknowledge that it will deliver a prospectus in
connection with any resale of such Exchange Notes. The Letter of Transmittal
states that by so acknowledging and by delivering a prospectus, a broker-dealer
will not be deemed to admit that it is an "underwriter" within the meaning of
the Securities Act. This Prospectus, as it may be amended or supplemented from
time to time, may be used by a broker-dealer in connection with resales of
Exchange Notes received in exchange for Private Notes where such Private Notes
were acquired by such broker-dealer as a result of market-making or other
trading activities. Pursuant to the Registration Rights Agreement, the Company
has agreed to make this Prospectus, as it may be amended or supplemented from
time to time, available to broker-dealers for use in connection with any resale
for one full year after the Expiration Date. See "Plan of Distribution."
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, the Company will accept any and all Private
Notes validly tendered and not withdrawn prior to
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the Expiration Date. The Company will issue $1,000 in principal amount at
maturity of Exchange Notes in exchange for each $1,000 in principal amount at
maturity of outstanding Private Notes surrendered pursuant to the Exchange
Offer. Private Notes may be tendered only in integral multiples of $1,000.
The form and terms of the Exchange Notes are the same as the form and terms
of the Private Notes except that (i) the exchange will have been registered
under the Securities Act, and, therefore, the Exchange Notes will not bear
legends restricting the transfer thereof and (ii) holders of the Exchange Notes
will not be entitled to certain rights of holders of the Private Notes under the
Registration Rights Agreement, which rights will terminate upon the consummation
of the Exchange Offer. The Exchange Notes will evidence the same indebtedness as
the Private Notes (which they replace) and will be issued under, and be entitled
to the benefits of, the Indenture, which also authorized the issuance of the
Private Notes, such that both series of Notes will be treated as a single class
of debt securities under the Indenture.
As of the date of this Prospectus, $470,000,000 in aggregate principal
amount at maturity of the Private Notes are outstanding. Only a registered
holder of the Private Notes (or such holder's legal representative or
attorney-in-fact) as reflected on the records of the Trustee under the Indenture
may participate in the Exchange Offer. There will be no fixed record date for
determining registered holders of the Private Notes entitled to participate in
the Exchange Offer.
Holders of the Private Notes do not have any appraisal or dissenters' rights
under the Indenture in connection with the Exchange Offer. The Company intends
to conduct the Exchange Offer in accordance with the provisions of the
Registration Rights Agreement and the applicable requirements of the Securities
Act, the Securities Exchange Act of 1934, as amended (the "Exchange Act") and
the rules and regulations of the Commission thereunder.
The Company shall be deemed to have accepted validly tendered Private Notes
when, as and if the Company has given oral or written notice thereof to the
Exchange Agent. The Exchange Agent will act as agent for the tendering holders
of Private Notes for the purposes of receiving the Exchange Notes from the
Company.
Holders who tender Private Notes in the Exchange Offer will not be required
to pay brokerage commissions or fees or, subject to the instructions in the
Letter of Transmittal, transfer taxes with respect to the exchange of Private
Notes pursuant to the Exchange Offer. The Company will pay all charges and
expenses, other than certain applicable taxes described below, in connection
with the Exchange Offer. See "--Fees and Expenses."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean 5:00 p.m. New York City time on
, 1998, unless the Company, in its sole discretion, extends the
Exchange Offer, in which case the term "Expiration Date" shall mean the latest
date and time to which the Exchange Offer is extended.
In order to extend the Exchange Offer, the Company will (i) notify the
Exchange Agent of any extension by oral or written notice and (ii) mail to the
registered holders an announcement thereof which shall include disclosure of the
approximate number of Private Notes deposited to date, each prior to 9:00 a.m.,
New York City time, on the next business day after the previously scheduled
Expiration Date.
The Company reserves the right, in its reasonable discretion, (i) to delay
accepting any Private Notes, (ii) to extend the Exchange Offer or (iii) if any
conditions set forth below under "--Conditions" shall not have been satisfied,
to terminate the Exchange Offer by giving oral or written notice of such delay,
extension or termination to the Exchange Agent. Any such delay in acceptance,
extension, termination or amendment will be followed as promptly as practicable
by oral or written notice thereof to the registered holders. If the Exchange
Offer is amended in a manner determined by the Company to constitute a material
change, the Company will promptly disclose such amendment by means of a
prospectus supplement that will be distributed to the registered holders, and
the Company will extend the Exchange Offer
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for a period of five to ten business days, depending upon the significance of
the amendment and the manner of disclosure to the registered holders, if the
Exchange Offer would otherwise expire during such five to ten business day
period.
ACCRETION OF THE EXCHANGE NOTES AND THE PRIVATE NOTES; INTEREST
The Private Notes will continue to accrete in principal amount through (but
not including) the date of issuance of the Exchange Notes. Any Private Notes not
tendered or accepted for exchange will continue to accrete in principal amount
at the rate of 13% per annum through April 15, 2003 and thereafter cash interest
will accrue and be payable in accordance with its terms. From and after the date
of issuance of the Exchange Notes, the Exchange Notes shall accrete in principal
amount at the rate of 13% per annum, but no cash interest will accrue or be
payable in respect of the Exchange Notes prior to April 15, 2003. Thereafter,
the Exchange Notes will bear interest at a rate equal to 13% per annum. Interest
on the Exchange Notes will be payable semi-annually in arrears on April 15 and
October 15 of each year, commencing on October 15, 2003.
PROCEDURES FOR TENDERING
Only a registered holder of Private Notes may tender such Private Notes in
the Exchange Offer. To tender in the Exchange Offer, a holder of Private Notes
must complete, sign and date the Letter of Transmittal, or a facsimile thereof,
have the signatures thereon guaranteed if required by the Letter of Transmittal,
and mail or otherwise deliver such Letter of Transmittal or such facsimile to
the Exchange Agent at the address set forth below under "--Exchange Agent" for
receipt prior to the Expiration Date. In addition, either (i) certificates for
such Private Notes must be received by the Exchange Agent along with the Letter
of Transmittal, (ii) a timely confirmation of a book-entry transfer (a
"Book-Entry Confirmation") of such Private Notes, if such procedure is
available, into the Exchange Agent's account at the Depositary pursuant to the
procedure for book-entry transfer described below, must be received by the
Exchange Agent prior to the Expiration Date or (iii) the holder must comply with
the guaranteed delivery procedures described below.
The tender by a holder that is not withdrawn prior to the Expiration Date
will constitute an agreement between such holder and the Company in accordance
with the terms and subject to the conditions set forth herein and in the Letter
of Transmittal.
THE METHOD OF DELIVERY OF PRIVATE NOTES AND THE LETTER OF TRANSMITTAL AND
ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK
OF THE HOLDER. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS USE
AN OVERNIGHT OR HAND DELIVERY SERVICE, PROPERLY INSURED. IN ALL CASES,
SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT
BEFORE THE EXPIRATION DATE. NO LETTER OF TRANSMITTAL OR PRIVATE NOTES SHOULD BE
SENT TO THE COMPANY. HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS,
COMMERCIAL BANKS, TRUST COMPANIES OR NOMINEES TO EFFECT THE ABOVE TRANSACTIONS
FOR SUCH HOLDERS.
Any beneficial owner(s) of the Private Notes whose Private Notes are
registered in the name of a broker, dealer, commercial bank, trust company or
other nominee and who wishes to tender should contact the registered holder
promptly and instruct such registered holder to tender on such beneficial
owner's behalf. If such beneficial owner wishes to tender on such owner's own
behalf, such owner must, prior to completing and executing the Letter of
Transmittal and delivering such owner's Private Notes, either make appropriate
arrangements to register ownership of the Private Notes in such owner's name or
obtain a properly completed bond power from the registered holder. The transfer
of registered ownership may take considerable time.
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Signatures on a Letter of Transmittal or a notice of withdrawal described
below (see "--Withdrawal of Tenders"), as the case may be, must be guaranteed by
an Eligible Institution (as defined below) unless the Private Notes tendered
pursuant thereto are tendered (i) by a registered holder who has not completed
the box titled "Special Delivery Instructions" on the Letter of Transmittal or
(ii) for the account of an Eligible Institution. In the event that signatures on
a Letter of Transmittal or a notice of withdrawal, as the case may be, are
required to be guaranteed, such guarantee must be made by a member firm of a
registered national securities exchange or of the National Association of
Securities Dealers, Inc., a commercial bank or trust company having an office or
correspondent in the United States or an "eligible guarantor institution" within
the meaning of Rule 17Ad-15 under the Exchange Act which is a member of one of
the recognized signature guarantee programs identified in the Letter of
Transmittal (an "Eligible Institution").
If the Letter of Transmittal is signed by a person other than the registered
holder of any Private Notes listed therein, such Private Notes must be endorsed
or accompanied by a properly completed bond power, signed by such registered
holder as such registered holder's name appears on such Private Notes.
If the Letter of Transmittal or any Private Notes or bond powers are signed
by trustees, executors, administrators, guardians, attorneys-in-fact, officers
of corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and unless waived by the Company,
evidence satisfactory to the Company of their authority to so act must be
submitted with the Letter of Transmittal.
The Exchange Agent and the Depositary have confirmed that any financial
institution that is a participant in the Depositary's system may utilize the
Depositary's Automated Tender Offer Program to tender Private Notes.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of tendered Private Notes will be determined
by the Company in its sole discretion, which determination will be final and
binding. The Company reserves the absolute right to reject any and all Private
Notes not properly tendered or any Private Notes the Company's acceptance of
which would, in the opinion of counsel for the Company, be unlawful. The Company
also reserves the right to waive any defects, irregularities or conditions of
tender as to particular Private Notes. The Company's interpretation of the terms
and conditions of the Exchange Offer (including the instructions in the Letter
of Transmittal) will be final and binding on all parties. Unless waived, any
defects or irregularities in connection with tenders of Private Notes must be
cured within such time as the Company shall determine. Although the Company
intends to notify holders of defects or irregularities with respect to tenders
of Private Notes, neither the Company, the Exchange Agent nor any other person
shall incur any liability for failure to give such notification. Tenders of
Private Notes will not be deemed to have been made until such defects or
irregularities have been cured or waived.
While the Company has no present plan to acquire any Private Notes that are
not tendered in the Exchange Offer or to file a registration statement to permit
resales of any Private Notes that are not tendered pursuant to the Exchange
Offer, the Company reserves the right in its sole discretion to purchase or make
offers for any Private Notes that remain outstanding subsequent to the
Expiration Date or, as set forth below under "--Conditions," to terminate the
Exchange Offer and, to the extent permitted by applicable law, purchase Private
Notes in the open market, in privately negotiated transactions or otherwise. The
terms of any such purchases or offers could differ from the terms of the
Exchange Offer.
By tendering, each holder of Private Notes will represent to the Company
that, among other things, (i) Exchange Notes to be acquired by such holder of
Private Notes in connection with the Exchange Offer are being acquired by such
holder in the ordinary course of the respective business of such holder, (ii)
such holder has no arrangement or understanding with any person to participate
in the distribution of the Exchange Notes, (iii) if such holder is a resident of
the State of California, it falls under the self-executing institutional
investor exemption set forth under Section 25102(i) of the Corporate Securities
Law of 1968 and Rules 260.102.10 and 260.105.14 of the California Blue Sky
Regulations, (iv) if such holder is a
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resident of the Commonwealth of Pennsylvania, it falls under the self-executing
institutional investor exemption set forth under Sections 203(c), 102(d) and (k)
of the Pennsylvania Securities Act of 1972, Section 102.111 of the Pennsylvania
Blue Sky Regulations and an interpretive opinion dated November 16, 1985, (v)
such holder acknowledges and agrees that any person who is a broker-dealer
registered under the Exchange Act or is participating in the Exchange Offer for
the purposes of distributing the Exchange Notes must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with a secondary resale transaction of the Exchange Notes acquired by
such person and cannot rely on the position of the staff of the Commission set
forth in certain no-action letters, (vi) such holder understands that a
secondary resale transaction described in clause (v) above and any resales of
Exchange Notes obtained by such holder in exchange for Private Notes acquired by
such holder directly from the Company should be covered by an effective
registration statement containing the selling securityholder information
required by Item 507 or Item 508, as applicable, of Regulation S-K of the
Commission and (vii) such holder is not an "affiliate," as defined in Rule 405
under the Securities Act, of the Company. If the holder is a broker-dealer that
will receive Exchange Notes for such holder's own account in exchange for
Private Notes that were acquired as a result of market-making activities or
other trading activities, such holder will be required to acknowledge in the
Letter of Transmittal that such holder will deliver a prospectus in connection
with any resale of such Exchange Notes; however, by so acknowledging and by
delivering a prospectus, such holder will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
RETURN OF PRIVATE NOTES
If any tendered Private Notes are not accepted for any reason set forth in
the terms and conditions of the Exchange Offer or if Private Notes are withdrawn
or are submitted for a greater principal amount than the holders desire to
exchange, such unaccepted, withdrawn or non-exchanged Private Notes will be
returned without expense to the tendering holder thereof (or, in the case of
Private Notes tendered by book-entry transfer into the Exchange Agent's account
at the Depositary pursuant to the book-entry transfer procedures described
below, such Private Notes will be credited to an account maintained with the
Depositary) as promptly as practicable.
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with respect
to the Private Notes at the Depositary for purposes of the Exchange Offer within
two business days after the date of this Prospectus, and any financial
institution that is a participant in the Depositary's systems may make book-
entry delivery of Private Notes by causing the Depositary to transfer such
Private Notes into the Exchange Agent's account at the Depositary in accordance
with the Depositary's procedures for transfer. However, although delivery of
Private Notes may be effected through book-entry transfer at the Depositary, the
Letter of Transmittal or facsimile thereof, with any required signature
guarantees and any other required documents, must, in any case, be transmitted
to and received by the Exchange Agent at the address set forth below under
"--Exchange Agent" on or prior to the Expiration Date or pursuant to the
guaranteed delivery procedures described below.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Private Notes and (i) whose Private Notes
are not immediately available or (ii) who cannot deliver their Private Notes,
the Letter of Transmittal or any other required documents to the Exchange Agent
prior to the Expiration Date, may effect a tender if:
(a) The tender is made through an Eligible Institution;
(b) Prior to the Expiration Date, the Exchange Agent receives from such
Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery substantially in the form
30
<PAGE>
provided by the Company (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the holder, the certificate number(s)
of such Private Notes and the principal amount of Private Notes tendered,
stating that the tender is being made thereby and guaranteeing that, within
five New York Stock Exchange trading days after the Expiration Date, the
Letter of Transmittal (or a facsimile thereof), together with the
certificate(s) representing the Private Notes in proper form for transfer or
a Book-Entry Confirmation, as the case may be, and any other documents
required by the Letter of Transmittal, will be deposited by the Eligible
Institution with the Exchange Agent; and
(c) Such properly executed Letter of Transmittal (or facsimile thereof),
as well as the certificate(s) representing all tendered Private Notes in
proper form for transfer and all other documents required by the Letter of
Transmittal are received by the Exchange Agent within five New York Stock
Exchange trading days after the Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to holders who wish to tender their Private Notes according to the
guaranteed delivery procedures set forth above.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Private Notes may be
withdrawn at any time prior to 5:00 p.m. New York City time, on the Expiration
Date.
To withdraw a tender of Private Notes in the Exchange Offer, a written or
facsimile transmission notice of withdrawal must be received by the Exchange
Agent at its address set forth herein prior to the Expiration Date. Any such
notice of withdrawal must (i) specify the name of the person having deposited
the Private Notes to be withdrawn (the "Depositor"), (ii) identify the Private
Notes to be withdrawn (including the certificate number or numbers and principal
amount of such Private Notes) and (iii) be signed by the holder in the same
manner as the original signature on the Letter of Transmittal by which such
Private Notes were tendered (including any required signature guarantees). All
questions as to the validity, form and eligibility (including time of receipt)
of such notices will be determined by the Company in its sole discretion, whose
determination shall be final and binding on all parties. Any Private Notes so
withdrawn will be deemed not to have been validly tendered for purposes of the
Exchange Offer and no Exchange Notes will be issued with respect thereto unless
the Private Notes so withdrawn are validly retendered. Properly withdrawn
Private Notes may be retendered by following one of the procedures described
above under "The Exchange Offer--Procedures for Tendering" at any time prior to
the Expiration Date.
CONDITIONS
Notwithstanding any other term of the Exchange Offer, the Company shall not
be required to accept for exchange, or exchange the Exchange Notes for, any
Private Notes, and may terminate the Exchange Offer as provided herein before
the acceptance of such Private Notes, if the Exchange Offer violates applicable
law, rules or regulations or an applicable interpretation of the staff of the
Commission.
If the Company determines in its reasonable discretion that any of these
conditions are not satisfied, the Company may (i) refuse to accept any Private
Notes and return all tendered Private Notes to the tendering holders, (ii)
extend the Exchange Offer and retain all Private Notes tendered prior to the
expiration of the Exchange Offer, subject, however, to the rights of holders to
withdraw such Private Notes (see "--Withdrawal of Tenders") or (iii) waive such
unsatisfied conditions with respect to the Exchange Offer and accept all
properly tendered Private Notes that have not been withdrawn. If such waiver
constitutes a material change to the Exchange Offer, the Company will promptly
disclose such waiver by means of a prospectus supplement that will be
distributed to the registered holders of the Private Notes, and the Company will
extend the Exchange Offer for a period of five to ten business days, depending
upon the significance of the waiver and the manner of disclosure to the
registered holders, if the Exchange Offer would otherwise expire during such
five to ten business day period.
31
<PAGE>
TERMINATION OF CERTAIN RIGHTS
All rights under the Registration Rights Agreement (including registration
rights) of holders of the Private Notes eligible to participate in the Exchange
Offer will terminate upon consummation of the Exchange Offer except with respect
to the Company's continuing obligations (i) to indemnify such holders (including
any broker-dealers) and certain parties related to such holders against certain
liabilities (including liabilities under the Securities Act), (ii) to provide,
upon the request of any holder of a transfer-restricted Private Note, the
information required by Rule 144A(d)(4) under the Securities Act in order to
permit resales of such Private Notes pursuant to Rule 144A, (iii) to use its
best efforts to keep the Registration Statement effective to the extent
necessary to ensure that it is available for resales of transfer-restricted
Private Notes by broker-dealers for a period of one full year from the
Expiration Date and (iv) to provide copies of the latest version of the
Prospectus to broker-dealers upon their request for one full year after the
Expiration Date.
LIQUIDATED DAMAGES
In the event of a Registration Default (as defined in the Private Note),
Special Interest will accrue with respect to the first 90-day period immediately
following the occurrence of such Registration Default (from and including the
date on which such Registration Default shall occur to but excluding the date on
which all Registration Defaults have been cured), at a rate of 0.50% per annum.
The rate at which Special Interest accrues will increase by 0.25% per annum at
the end of each subsequent 90-day period until all Registration Defaults have
been cured, but in no event shall such rate exceed 2.00% per annum in the
aggregate regardless of the number of Registration Defaults. Following the cure
of all Registration Defaults, the accrual of all Special Interest will cease.
The filing and effectiveness of the Registration Statement of which this
Prospectus is a part and the consummation of the Exchange Offer will eliminate
all rights of the holders of Private Notes eligible to participate in the
Exchange Offer to receive damages that would have been payable if such actions
had not occurred.
Holders of Transfer Restricted Securities (as defined below) will be
required to make certain representations to the Company (as described in the
Registration Rights Agreement) in order to participate in the Exchange Offer and
will be required to deliver information to be used in connection with the Shelf
Registration Statement (as defined in the Registration Rights Agreement) and to
provide comments on the Shelf Registration Statement within the time periods set
forth in the Registration Rights Agreement in order to have their Transfer
Restricted Securities included in the Shelf Registration Agreement and benefit
from the provisions regarding Special Interest set forth above. Transfer
Restricted Securities shall mean each Private Note until (i) the date on which
such Private Note has been exchanged for an Exchange Note in the Exchange Offer,
(ii) following the exchange by a broker-dealer in the Exchange Offer of such
Private Note for one or more Exchange Notes, the date on which such Exchange
Notes are sold to a purchaser who receives from such broker-dealer on or prior
to the date of such sale a copy of this Prospectus, (iii) the date on which such
Private Note has been effectively registered under the Securities Act and
disposed of in accordance with the Shelf Registration Statement or (iv) the date
on which such Private Note is distributed to the public pursuant to Rule 144(k)
under the Securities Act.
32
<PAGE>
EXCHANGE AGENT
The Bank of New York has been appointed as Exchange Agent of the Exchange
Offer. Questions and requests for assistance, requests for additional copies of
this Prospectus or of the Letter of Transmittal and requests for Notice of
Guaranteed Delivery should be directed to the Exchange Agent addressed as
follows:
<TABLE>
<S> <C>
BY REGISTERED OR CERTIFIED MAIL: BY HAND DELIVERY:
The Bank of New York The Bank of New York
101 Barclay Street 101 Barclay Street
Floor 21 West Floor 21 West
New York, New York 10286 New York, New York 10286
Attn: Corporate Trust Trustee Attn: Corporate Trust Trustee
Administration Administration
BY OVERNIGHT DELIVERY: BY FACSIMILE:
The Bank of New York (212) 815-5915
101 Barclay Street CONFIRM BY TELEPHONE
Floor 21 West (212) 815-6285
New York, New York 10286
Attn: Corporate Trust Trustee
Administration
</TABLE>
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telegraph, telephone or in person by officers and regular
employees of the Company and its affiliates.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers or others
soliciting acceptances of the Exchange Offer. The Company, however, will pay the
Exchange Agent reasonable and customary fees for its services and will reimburse
it for its reasonable out-of-pocket expenses in connection therewith.
The cash expenses to be incurred in connection with the Exchange Offer will
be paid by the Company and are estimated in the aggregate to be approximately
$175,000. Such expenses include registration fees, fees and expenses of the
Exchange Agent and the Trustee, accounting and legal fees and printing costs,
among others.
The Company will pay all transfer taxes, if any, applicable to the exchange
of Private Notes pursuant to the Exchange Offer. If, however, a transfer tax is
imposed for any reason other than the exchange of the Private Notes pursuant to
the Exchange Offer, then the amount of any such transfer taxes (whether imposed
on the registered holder or any other persons) will be payable by the tendering
holder. If satisfactory evidence of payment of such taxes or exemption therefrom
is not submitted with the Letter of Transmittal, the amount of such transfer
taxes will be billed directly to such tendering holder.
CONSEQUENCE OF FAILURES TO EXCHANGE
Participation in the Exchange Offer is voluntary. Holders of the Private
Notes are urged to consult their financial and tax advisors in making their own
decisions on what action to take.
The Private Notes that are not exchanged for the Exchange Notes pursuant to
the Exchange Offer will remain restricted securities. Accordingly, such Private
Notes may be resold only (i) to a person whom the seller reasonably believes is
a QIB in a transaction meeting the requirements of Rule 144A, (ii) in a
transaction meeting the requirements of Rule 144 under the Securities Act, (iii)
outside the United States to a foreign person in a transaction meeting the
requirements of Rule 904 under the Securities Act, (iv) in
33
<PAGE>
accordance with another exemption from the registration requirements of the
Securities Act (and based upon an opinion of counsel if the Company so
requests), (v) to the Company or (vi) pursuant to an effective registration
statement and, in each case, in accordance with any applicable securities laws
of any state of the United States or any other applicable jurisdiction.
ACCOUNTING TREATMENT
For accounting purposes, the Company will recognize no gain or loss as a
result of the Exchange Offer. The expenses of the Exchange Offer will be
amortized over the term of the Exchange Notes.
34
<PAGE>
USE OF PROCEEDS
This Exchange Offer is intended to satisfy certain of the Company's
obligations under the Registration Rights Agreement. The Company will not
receive any cash proceeds from the issuance of the Exchange Notes offered in the
Exchange Offer. In consideration for issuing the Exchange Notes as contemplated
in this Prospectus, the Company will receive in exchange Private Notes in like
principal amount at maturity, the form and terms of the Exchange Notes are the
same as the form and terms of the Private Notes except that (i) the exchange
will have been registered under the Securities Act, and, therefore, the Exchange
Notes will not bear legends restricting the transfer thereof and (ii) holders of
the Exchange Notes will not be entitled to certain rights of holders of the
Private Notes under the Registration Rights Agreement, which rights will
terminate upon the consummation of the Exchange Offer. The Private Notes
surrendered in exchange for Private Notes will be retired and canceled and
cannot be reissued. Accordingly, issuance of the Exchange Notes will not result
in any increase in the indebtedness of the Company.
The net proceeds to the Company from the Private Note Offering and the sale
of equity pursuant to the Additional Equity Investment were approximately $260.7
million after deducting the discount and commissions and other expenses related
to the Private Note Offering and the Additional Equity Investment.
The Company intends to use the net proceeds of the Private Note Offering and
the Additional Equity Investment as follows: (i) to fund development and
construction costs of the Company's networks, including the costs of purchasing
or leasing communications equipment, computers, switches, facilities and related
support infrastructure; (ii) for the purchase and installation of equipment to
be located at customers' premises; (iii) for rights-of-way or access payments;
(iv) to fund the development of support, control and management information
systems; (v) to fund product development; and (vi) for working capital and other
general corporate purposes, including funding operating deficits and net losses.
The Company currently intends to allocate substantial proceeds to each of the
foregoing categories. However, the precise allocation of funds among these uses
will depend on future technological, regulatory and other developments in or
affecting the Company's business, the competitive climate in which it operates
and the emergence of future opportunities.
As part of its business strategy, the Company intends to continue to
evaluate potential acquisitions, joint ventures and strategic alliances that
complement the Company's business. A portion of the proceeds of the Private Note
Offering and the Additional Equity Investment, as well as additional sources of
capital such as credit facilities and other borrowings, and additional debt and
equity issuances, may be used to fund any such acquisitions, joint ventures and
strategic alliances. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
Because of the number and variability of factors that determine the
Company's use of the net proceeds of the Private Note Offering and the
Additional Equity Investment, management will retain a significant amount of
discretion over the application of the net proceeds. There can be no assurance
that such applications will not vary substantially from the Company's current
intention. Pending such utilization, the Company has and will continue to invest
the net proceeds of the Private Note Offering and the Additional Equity
Investment in short-term investment grade securities.
35
<PAGE>
CAPITALIZATION
The following table sets forth the actual and as adjusted capitalization of
the Company as of March 31, 1998. This table should be read in conjunction with
the Selected Consolidated Financial Data, the Consolidated Financial Statements
of the Company and notes thereto and the other financial data included elsewhere
in this Prospectus.
<TABLE>
<CAPTION>
AS OF
MARCH 31, 1998--UNAUDITED
--------------------------
ACTUAL AS ADJUSTED(1)
---------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents............................................................ $ 1,750 $ 261,450
---------- --------------
---------- --------------
Debt:
Current portion of long-term obligations and short-term borrowings:
Current portion of long-term debt................................................ $ 9 $ 9
Current portion of capital lease obligations..................................... 229 229
---------- --------------
Total current debt............................................................. $ 238 $ 238
---------- --------------
---------- --------------
Long-term obligations, less current portion:
Long-term debt, net of discount.................................................... $ 163 $ 163
Capital lease obligations.......................................................... 6,778 6,778
13% Senior discount notes, net of discount......................................... -- 235,204
---------- --------------
Total long-term debt........................................................... 6,941 242,145
---------- --------------
Stockholders' equity:
Preferred Stock, no par value, 10,000,000 shares authorized at March 31, 1998; no
shares issued or outstanding actual or as adjusted............................... -- --
Common Stock, no par value, 100,000,000 shares authorized at March 31, 1998:
Series A, 10,135,164 shares designated at March 31, 1998; 10,135,164 shares
issued and outstanding actual and as adjusted.................................. 16,914 16,914
Series B, 89,864,836 shares designated at March 31, 1998; 9,178,625 shares issued
and outstanding actual; 15,845,291 shares issued and outstanding as
adjusted(2).................................................................... 16,161 34,961
Warrants........................................................................... 10,629 25,630
Stockholder receivables............................................................ (96) (96)
Deficit accumulated during development stage....................................... (23,076) (27,625)
---------- --------------
Total stockholders' equity..................................................... 20,532 49,784
---------- --------------
Total capitalization......................................................... $ 27,473 $ 291,929
---------- --------------
---------- --------------
</TABLE>
- ------------------------
(1) The as adjusted column reflects the receipt and application of net proceeds
from the Private Note Offering ($241,900,000) and the Additional Equity
Investment ($18,800,000) and the termination of the Credit Facility. As of
March 31, 1998, costs associated with the termination of the Credit Facility
include payment of a $1,000,000 termination fee and the write-off of
unamortized debt discount and deferred financing costs totaling
approximately $3,500,000. The column reflects the aggregate value ascribed
to the Private Note Warrants as a component of stockholders' equity, which
value has been estimated by the Company to approximate $15,001,000. The
value ascribed to the Private Note Warrants has been reflected as a debt
discount and will be amortized to interest expense using the effective
interest method over the period that the Notes are outstanding.
(2) Excludes: (i) 6,666,666 shares of Series B Common Stock subject to issuance
upon exercise of warrants issued in connection with the closing of the
Additional Equity Investment; (ii) 1,317,701 shares of Series B Common Stock
issuable upon exercise of options outstanding under the Company's 1995 and
1997 Stock Option Plans as of March 31, 1998; (iii) 3,713,094 shares of
Series B Common Stock subject to issuance upon exercise of the Private Note
Warrants; and (iv) 14,808,261 shares of Series B Common Stock issuable upon
exercise of other warrants outstanding as of March 31, 1998, including all
adjustments resulting from the Equity Investment (as defined) and the
Additional Equity Investment.
36
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented below for the years ended
September 30, 1994, 1995, 1996 and 1997, for the period from September 1, 1993
(inception) to September 30, 1997, and as of September 30, 1997 have been
derived from the audited consolidated financial statements of the Company. The
selected consolidated financial data presented below as of March 31, 1998 and
for the six month periods ended March 31, 1997 and 1998 and the period from
September 1, 1993 (inception) to March 31, 1998 have been derived from the
unaudited consolidated financial statements of the Company. In the opinion of
management, the unaudited financial statements have been prepared on the same
basis as the audited financial statements and include all adjustments, which
consist only of normal recurring adjustments, necessary for a fair presentation
of the financial position and the results of operations for these periods. These
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States which may differ in certain aspects from
accounting principles generally accepted in certain of the jurisdictions in
which the Exchange Notes are being offered. Operating results for the six month
period ended March 31, 1998 are not necessarily indicative of the results that
may be expected for the full year ending September 30, 1998. The data below
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Consolidated Financial
Statements of the Company and notes thereto.
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
SEPTEMBER 30, PERIOD FROM ENDED
------------------------------------------ SEPTEMBER 1, 1993 MARCH 31,
(INCEPTION) TO --------------------
1994 1995 1996 1997 SEPTEMBER 30, 1997 1997 1998
--------- --------- --------- --------- ------------------ --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Service revenue................ $ 85 $ 57 $ 279 $ 75 $ 496 $ -- $ 234
Other revenue.................. -- 40 75 96 211 69 10
Costs and expenses:
Network development and
operations................. -- 188 1,708 3,170 5,067 1,610 3,549
Selling, general and
administrative............. 429 740 2,409 4,725 8,325 1,522 1,561
Depreciation and
amortization............... 21 39 75 501 637 186 1,029
--------- --------- --------- --------- -------- --------- ---------
Loss from operations........... (365) (870) (3,838) (8,225) (13,322) (3,249) (5,895)
Other income (expense):
Interest expense............. (53) (38) (27) (1,372) (1,489) (127) (2,480)
Interest income.............. -- -- 9 149 158 50 57
--------- --------- --------- --------- -------- --------- ---------
Loss before extraordinary
item......................... (418) (908) (3,856) (9,448) (14,653) (3,326) (8,318)
Extraordinary item--
extinguishment of debt....... -- -- -- (105) (105) -- --
--------- --------- --------- --------- -------- --------- ---------
Net loss....................... $ (418) $ (908) $ (3,856) $ (9,553) $ (14,758) $ (3,326) $ (8,318)
--------- --------- --------- --------- -------- --------- ---------
--------- --------- --------- --------- -------- --------- ---------
OTHER DATA:
EBITDA(1)...................... $ (344) $ (831) $ (3,763) $ (7,829) $ (12,790) $ (3,063) $ (4,866)
Net cash used in operating
activities................... 416 781 2,168 7,446 10,808 4,543 4,796
Net cash used in investing
activities................... 18 45 923 12,647 13,633 1,109 6,569
Net cash provided by financing
activities................... 425 827 3,156 20,557 24,976 11,682 12,579
Capital expenditures........... 6 25 908 12,637 13,576 1,109 6,569
Ratio of earnings to fixed
charges(2)................... -- -- -- -- -- -- --
<CAPTION>
PERIOD FROM
SEPTEMBER 1, 1993
(INCEPTION) TO
MARCH 31,
MARCH 31, 1998
-----------------
<S> <C>
STATEMENT OF OPERATIONS DATA:
Service revenue................ $ 730
Other revenue.................. 221
Costs and expenses:
Network development and
operations................. 8,615
Selling, general and
administrative............. 9,886
Depreciation and
amortization............... 1,667
--------
Loss from operations........... (19,217)
Other income (expense):
Interest expense............. (3,969)
Interest income.............. 215
--------
Loss before extraordinary
item......................... (22,971)
Extraordinary item--
extinguishment of debt....... (105)
--------
Net loss....................... $ (23,076)
--------
--------
OTHER DATA:
EBITDA(1)...................... $ (17,655)
Net cash used in operating
activities................... 15,604
Net cash used in investing
activities................... 20,201
Net cash provided by financing
activities................... 37,555
Capital expenditures........... 20,145
Ratio of earnings to fixed
charges(2)................... --
</TABLE>
37
<PAGE>
<TABLE>
<CAPTION>
MARCH 31, 1998
-------------------------
SEPTEMBER 30, 1997 ACTUAL AS ADJUSTED(3)
------------------- --------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................................ $ 536 $ 1,750 $ 261,450
Working capital (deficit)............................................ (3,319) (3,105) 256,595
Total assets......................................................... 25,321 32,650 297,106
Long-term debt....................................................... 18,964 6,941 242,145
Total stockholders' equity........................................... 2,265 20,532 49,784
</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. EBITDA is not necessarily comparable with
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 years ended September 30, 1994, 1995, 1996 and 1997, the
period from September 1, 1993 (inception) to September 30, 1997, the six
month periods ended March 31, 1997 and 1998 and the period from September 1,
1993 (inception) to March 31, 1998, earnings were insufficient to cover
fixed charges by $418,000, $908,000, $3,856,000, $9,500,000, $14,705,000,
$3,326,000, $8,318,000 and $23,023,000, respectively.
(3) The as adjusted column reflects the receipt and application of net proceeds
from the Private Note Offering ($241,900,000) and the Additional Equity
Investment ($18,800,000) and the termination of the Credit Facility. As of
March 31, 1998, costs associated with the termination of the Credit Facility
include payment of a $1,000,000 termination fee and the write-off of
unamortized debt discount and deferred financing costs totaling
approximately $3,500,000. The column reflects the aggregate value ascribed
to the Private Note Warrants as a component of stockholders' equity, which
value has been estimated by the Company to approximate $15,001,000. The
value ascribed to the Private Note Warrants has been reflected as a debt
discount and will be amortized to interest expense using the effective
interest method over the period that the Notes are outstanding.
38
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH "SELECTED
CONSOLIDATED FINANCIAL DATA" AND THE CONSOLIDATED FINANCIAL STATEMENTS OF THE
COMPANY, INCLUDING THE NOTES RELATED THERETO, AND OTHER FINANCIAL DATA APPEARING
ELSEWHERE IN THIS PROSPECTUS. 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, PROSPECTIVE INVESTORS 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 IN "RISK
FACTORS" AND "BUSINESS."
OVERVIEW
The Company is a facilities-based ICP which is deploying networks to provide
telecommunications solutions to businesses in clustered, demographically
attractive second tier markets. The Company offers "one-stop shopping" for a
broad array of telecommunications services, including local and long distance
telephone service, high speed Internet access, data connectivity, LAN
connectivity, web hosting, video communications and system integration services.
Within its target markets, the Company has segmented the potential business
customer base and tailored its service offerings, sales and marketing approach
and network development to provide service in a cost effective manner to each
segment. The Company believes its regional approach allows it to best leverage
its network facilities, sales force, customer support staff and brand identity.
The Company's first network clusters will serve the second tier markets
surrounding metropolitan Los Angeles, including Orange County and the San
Gabriel Valley and South Bay areas of Los Angeles County. The Company intends to
selectively expand its reach into other regional markets, both within and
outside of California.
FirstWorld has designed and implemented an advanced and reliable fiber-based
network. Central to the Company's network design is its state-of-the art
integrated voice and data central office service platform, which allows the
Company to integrate third-party systems and the Company's operational support
systems into a unified network. The Company has designed business processes to
simplify provisioning, billing, network management and customer service and has
incorporated operational support systems that implement such processes into its
networks. Among other things, the Company has designed its systems to maximize
operational efficiency by allowing the Company to provide
single-point-of-contact customer service and by facilitating electronic
exchanges of information with the ILEC when possible.
The Company is a development stage company and to date 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--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 local and long distance telephone service, high speed Internet access,
data connectivity, LAN connectivity, web hosting, video communications and
system integration services. The Company intends to generate near term
39
<PAGE>
revenue from basic services currently provided by ILECs and IXCs, 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 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 the San Gabriel Valley and South Bay areas of 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, wholesale transport
and wholesale functionality 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
local exchange carriers, 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, 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 and planning.
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, internal project management costs and consulting fees
related to the ongoing development of the Company's networks, customer service
and technical support, 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 integrated 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
four 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.
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CAPITAL EXPENDITURES. The Company's principal capital expenditure
requirements involve the installation of network infrastructure, which mainly
relates to the installation of fiber optic loops in fiber clusters and the
installation of CLE.
The Company employs a demand-driven approach to network construction. This
approach is intended to minimize deployment of capital not associated with
customer revenue and maximize flexibility to serve the higher margin data market
as demand for high speed data communications services grows. In the deployment
of infrastructure, the Company markets its services to a geographically targeted
cluster of businesses before committing to build a complete fiber-to-the-curb
ring. The Company connects customers to its networks through direct fiber
connections, DSL technology or unbundled network elements licensed from the ILEC
depending on the most cost-effective connection that will support the bundle of
services required by the customer.
For customers served by fiber, the Company generally requires a contract
specifying minimum product usage, pricing and term of service, among other
items. The Company's objective is to reduce the risk associated with capital
deployment of CLE. The Company's contracts generally have terms of one to three
years, depending upon total revenue, services provided and discount or
promotional package.
RESULTS OF OPERATIONS
SIX MONTHS ENDED MARCH 31, 1998 COMPARED WITH THE SIX MONTHS ENDED MARCH 31,
1997
Service revenue increased from zero for the six-month period ended March 31,
1997 to $234,000 for the six-month period ended March 31, 1998. The increase
reflects the Company's first two full quarters 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 $69,000 for the six-month period ended March 31, 1997 to $10,000 for the
six-month period ended March 31, 1998, a decrease of $59,000 or approximately
85%. 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 initial network rollout.
Network development and operations expenses increased from $1,610,000 for
the six-month period ended March 31, 1997 to $3,549,000 for the six-month period
ended March 31, 1998, an increase of $1,939,000 or approximately 120%. This
increase is principally comprised of increased personnel costs in the operations
and engineering groups and increased operating costs for the Company's Anaheim
central office.
Selling, general and administrative expenses increased from $1,522,000 for
the six-month period ended March 31, 1997 to $1,561,000 for the six-month period
ended March 31, 1998, an increase of $39,000 or approximately 3%. This increase
was principally due to additional marketing and administrative personnel and an
increase in administration expenses related to rent, insurance, and telephone,
offset by certain reductions in consulting and legal expenses.
Depreciation and amortization expenses increased from $186,000 for the
six-month period ended March 31, 1997 to $1,029,000 for the six-month period
ended March 31, 1998, an increase of $843,000 or approximately 455%. This
increase primarily relates to the Nortel DMS 500 switch and other equipment in
the Anaheim central office and the built and leased elements of the Company's
fiber optic network and office and other equipment associated with the Company's
general operations.
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Interest expense increased from $127,000 for the six-month period ended
March 31, 1997 to $2,480,000 for the six-month period ended March 31, 1998, an
increase of $2,353,000 or approximately 1,855%. $631,245 of the increase relates
to interest expense associated with the Company's capital lease arrangements
with the City of Anaheim and $511,504 of the increase relates to interest
expense under the Credit Facility. The remaining portion of the increase relates
to other short-term loans and interest expense associated with the Company's
capitalized central office building lease and other capital equipment leases.
Interest income increased from $50,000 for the six-month period ended March
31, 1997 to $57,000 for the six-month period ended March 31, 1998, an increase
of $7,000 or approximately 14%. This increase is a result of additional funds
available for short-term, cash equivalent investments.
YEAR ENDED SEPTEMBER 30, 1997 COMPARED WITH YEAR ENDED SEPTEMBER 30, 1996
Service revenue decreased from $279,000 in 1996 to $75,000 in 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 fiscal
1997. Other revenue represents royalties from the license of the Company's
patent for fiber optic connectors. Royalty revenue increased from $75,000 in
1996 to $96,000 in 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
1996 to $3,170,000 in 1997, an increase of $1,462,000 or 86%. This increase is
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
1996 to $4,725,000 in 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 1996 to
$501,000 in 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 1996 to $1,372,000 in 1997.
$997,000 of the increase relates to interest expense associated with the
Company's capital lease arrangements with the City of Anaheim. See
"Business--Agreements with the City of Anaheim and The Irvine Company" and Note
8 of Notes to Consolidated Financial Statements. 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 central
office building lease and other capital equipment leases. See "--Liquidity and
Capital Resources."
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Interest income increased from $9,000 to $149,000 in 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.
YEAR ENDED SEPTEMBER 30, 1996 COMPARED WITH YEAR ENDED SEPTEMBER 30, 1995
Service revenue increased from $57,000 in 1995 to $279,000 in 1996, an
increase of $222,000. This increase relates to the engineering contracts with
the cities of Lakeland, Florida and Santa Clara, California, for which revenue
was first recognized in late 1995, with a majority of the revenue being
generated in 1996. Other revenue represents royalties from the license of the
Company's patent for fiber optic connectors.
Network development and operations expenses increased from $188,000 in 1995
to $1,708,000 in 1996, an increase of $1,520,000. The increase is principally
comprised of increased personnel costs of the engineering and operations group,
increased consulting costs associated with the start-up of the Company's Anaheim
central office and network, legal fees relating to the agreements with the City
of Anaheim and regulatory issues, and general increases in operations expenses,
including rent, travel, supplies and telephone.
Selling, general and administrative expenses increased from $740,000 in 1995
to $2,409,000 in 1996, an increase of $1,669,000. This increase was principally
due to increased personnel costs in sales, marketing, administration and
executive personnel, an increase in consultant expenses, including political,
public relations and general business consultants, increased legal fees and an
increase of general business and administrative expenses.
Depreciation and amortization expenses increased from $39,000 in 1995 to
$75,000 in 1996, an increase of $36,000. This increase primarily consists of
depreciation related to office and other equipment associated with the Company's
general operations and depreciation related to network assets.
Interest expense decreased from $38,000 in 1995 to $27,000 in 1996, a
decrease of $11,000. Interest in 1996 related to interest on capital equipment
leases. Interest in 1995 related to capital lease interest and expense incurred
on notes payable prior to their conversion into preferred stock.
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. During
fiscal year 1997, the Company used $7,446,000 in cash for operating activities,
compared to $2,168,000 in fiscal 1996. The increase was primarily due to a
substantial increase in the Company's activities associated with the development
and initiation of switched local services in the City of Anaheim. During fiscal
1997, the Company invested an additional $12,637,000 of cash in property and
equipment and another $7,097,000 in equipment purchased under capitalized
leases. During fiscal 1996, the Company invested $908,000 of cash in property
and equipment and another $106,000 in equipment purchased under capitalized
leases. 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 March 31, 1998, the Company raised approximately
$47 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
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bridge notes, totaled approximately $26,330,000, net of offering commissions and
certain other advisory fees, and were received on January 6, 1998. See "Certain
Transactions." The Company used $16.9 million of the net proceeds to repay
amounts outstanding under the Credit Facility and other short-term debt.
Pursuant to the Additional Equity Investment, Spectra 3 and Enron invested an
additional $20 million to purchase shares of Series B Common Stock at $3.00 per
share and warrants to purchase shares of Series B Common Stock at $3.00 per
share concurrently with the closing of the Private Note Offering.
On September 16, 1997, the Company entered into 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. As of
the end of the Company's second fiscal quarter of 1998, no borrowings were
outstanding under the Credit Facility. The Company terminated the Credit
Facility concurrently with the closing of the Private Note Offering and paid the
Lenders the $1,000,000 termination fee pursuant to the terms thereof.
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 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, together with the proceeds from
the Private Note Offering and the Additional Equity Investment will be
sufficient to fund its capital plan and operations through the buildout of its
proposed networks in the Orange County, San Gabriel Valley and South Bay areas,
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. The Company has had preliminary
discussions with a number of banks regarding implementing a new credit facility.
There can be no assurance as to the availability or the terms upon which such
financing might be available.
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BUSINESS
The Company is a facilities-based ICP which is deploying networks to provide
telecommunications solutions to business customers in clustered, demographically
attractive second tier markets. The Company offers "one-stop shopping" for a
broad array of telecommunications services, including local and long distance
telephone service, high speed Internet access, data connectivity, LAN
connectivity, web hosting, video communications and system integration services.
Within its target markets, the Company has segmented the potential business
customer base and tailors its service offerings, sales and marketing approach
and network development to provide service in a cost-effective manner to each
segment. The Company believes its regional approach allows it to best leverage
its network facilities, sales force, customer support staff and brand identity.
The Company's first network clusters will serve second tier markets surrounding
metropolitan Los Angeles, including Orange County and the San Gabriel Valley and
South Bay areas of Los Angeles County. The Company intends to selectively expand
its reach into other regional markets, both within and outside of California.
The Company's largest stockholders are entities controlled by Donald L.
Sturm, former Vice Chairman of Peter Kiewit Sons' Inc., the founder of MFS
Communications, and Enron, a subsidiary of Enron Corp., one of the world's
leading integrated natural gas and electricity companies. To date, these
stockholders have provided $55 million of the $67 million in equity capital
received by the Company. The Company and Enron have an informal collaborative
relationship to jointly market telecommunications and utility services which the
Company believes can provide it with access to new markets, sales synergies and
product development opportunities.
The Company began network operations in August 1997 and began providing
services to commercial customers in November 1997. As of May 31, 1998, the
Company had 66 commercial customers under contract. The City of Anaheim, the
Company's most significant customer, relies on the Company to supply local
dialtone, long distance, dedicated facilities and Internet service to
substantially all of its municipal facilities.
FirstWorld has designed and implemented an advanced and reliable fiber-based
network. Central to the Company's network design is its state-of-the-art
integrated voice and data central office service platform, which allows the
Company to integrate third-party systems and the Company's operational support
systems into a unified network. The Company believes its networks also are
capable of providing server-based applications, such as virtual LANs and
e-commerce, and will be compatible with voice over Internet technologies as such
technologies are refined in the industry. The Company has designed business
processes to simplify provisioning, billing, network management and customer
service and has incorporated operational support systems that implement such
processes into its networks. Among other things, the Company has designed its
systems to allow the Company to provide single-point-of-contact customer service
and to facilitate electronic exchanges of information with the ILEC when
possible.
The Company employs a demand-driven approach to network construction. This
approach is intended to minimize deployment of capital not associated with
customer revenues 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. The Company generally requires customers that are connected by
fiber to sign long-term contracts to offset the cost of capital deployed.
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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. 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 Voice, data, Internet, Consultative sales approach Fiber, DSL and unbundled
video and systems by account team loops
integration
Basic Commercial Voice and Internet Direct mail and DSL and unbundled loops
Functionality
Wholesale Transport Dedicated access (DS-1, Direct sales to other Fiber
DS-3, OC-1 and OC-3) service providers
Wholesale Functionality Switch and server based Direct sales to Central office and product
applications applications providers servers
</TABLE>
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 capabilities on a wholesale basis to
other local exchange carriers, including CLECs, IXCs, ISPs and other
communications providers.
The Company uses strategic relationships with municipalities, 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
the City of Anaheim, The Irvine Company and Enron provide the Company with
significant advantages in marketing and network deployment.
The Company intends to generate near-term revenue from basic services
currently provided by ILECs and IXCs, 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's strategy and network architecture are designed to exploit a
number of trends reshaping the $190 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, TCP/IP and voice over Internet
technologies, (v) the further development of server-based applications and (vi)
the migration of existing business processes to electronic formats.
BUSINESS STRATEGY
The Company's goal is to become the premier ICP in the markets that it
serves. The Company also is seeking to achieve a high degree of market
penetration, form long-term customer relationships and establish 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, wholesale transport and
wholesale functionality customers. The Company believes these market segments
have
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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 fiber-based networks capable of providing integrated
voice, data, 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 and e-commerce, and voice over Internet.
PURSUE DEMAND-DRIVEN NETWORK DEPLOYMENT. The Company utilizes a
demand-driven approach to network construction. In the deployment of
infrastructure, the Company markets its services to a geographically targeted
cluster of businesses before committing to build a complete fiber-to-the-curb
ring. In addition, the Company connects customers to its networks through direct
fiber connections, DSL or unbundled loops, 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 building networks in second tier cities clustered within geographic
regions 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 construction costs, achieve
a high degree of scalability, reduce operating costs, increase reliability and
facilitate migration to new technologies over time.
DEVELOP STRATEGIC RELATIONSHIPS. The Company intends to continue to develop
strategic relationships with municipalities, 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. To date, the Company has established such relationships with the City
of Anaheim, The Irvine Company, Enron and others. The Company's agreements with
the City of Anaheim give the Company exclusive commercial rights to a 50-mile
fiber loop that serves as the backbone for the Company's Anaheim network. The
Irvine Company agreements give the Company rights to install fiber in existing
conduit within a commercial development known as the "Irvine Spectrum." While
the Company intends to establish additional strategic relationships, it also
intends to enter otherwise attractive markets without such relationships.
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 voice, data, Internet and video offerings, sales and marketing
approach and network development to provide cost-effective service to prime
commercial, basic commercial, wholesale transport and wholesale functionality
customers that it targets.
PRIME COMMERCIAL. Prime commercial customers are large and medium sized
businesses that demand a range of sophisticated voice, data, Internet 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 undersupported by
information and technology professionals. The Company also has found that
medium-sized businesses
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have not been aggressively targeted by the Company's competitors, which have
tended to target large and extra 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 "one-stop shopping"
for a broad array of advanced voice, video, Internet and data 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
brand equity. The Company intends to connect prime customers to its networks
through fiber, DSL or unbundled loops, depending on cost effectiveness and
customer needs.
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
dialtone and high-speed Internet access and by using telemarketing, direct mail
or affinity group marketing to reduce 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 to connect basic customers to its network.
WHOLESALE TRANSPORT. The Company's wholesale sales force markets dedicated
access and other connectivity services to other service providers such as
out-of-region local exchange carriers, IXCs and other CLECs. The primary
services are DS-0, DS-1(T1), DS-3 and OC-n connectivity within the network
footprint.
WHOLESALE FUNCTIONALITY. The Company markets non-transport
functionality--including advanced switching capabilities, 24-hour network
management services, billing and customer services and Internet dial-up
access--to other service providers. By providing such services, the Company can
serve as a virtual central office to other service providers.
PRODUCTS AND SERVICES
The Company currently offers a wide variety of voice and data services,
including local and long distance telephone service, dedicated/high speed access
service, application support services, 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.
TELEPHONY
The Company currently provides local and long distance telephone service and
a full range of other narrowband telecommunications services.
LOCAL EXCHANGE. The Company offers local exchange services, including local
dialtone, call forwarding, call waiting and voice mail.
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 PBX systems with analog or digital PBX trunks.
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LONG DISTANCE, TOLL FREE AND CALLING CARD SERVICES. The Company provides
domestic and international long distance service, toll free services and
operator services.
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-12. The Company also implements numerous
transmission protocols, including ISDN, Asynchronous Transfer Mode ("ATM"),
frame relay, native speed Ethernet (10 Mbps) 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, 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.
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. The Company is developing and intends to
offer a managed desk-top service to allow business customers to use servers
located at the Company's central office instead of building and maintaining
their own networks.
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 CLE to
make such interconnection possible. By supplying the CLE, the Company allows
customers to use the Company's services without the initial capital costs often
associated with connecting remote LANs.
SALES AND MARKETING
Consistent with its market segmentation strategy, the Company uses different
sales channels to target customers within the four 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
transport and wholesale functionality by 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 five
different positions within its sales force structure: strategic account manager,
account manager, wholesale account manager, inside sales representative and
building entry
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manager. Strategic account managers are primarily responsible for selling a
complete line of products and services to prime customers in their assigned
territories. Account managers are responsible for selling pre-set product
bundles or single product solutions to basic customers, usually in conjunction
with the Company's direct mail and telemarketing efforts. 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 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 large businesses, IXCs and other CLECs.
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 fiber-based networks. 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 dialtone services. The
Company believes that its consultative sales approach will be particularly
successful with respect to sales of the Company's value-added Internet and
transparent LAN services.
WHOLESALE TRANSPORT AND WHOLESALE FUNCTIONALITY. The Company's wholesale
account managers offer wholesale customers, such as large businesses, IXCs and
CLECs, 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.
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 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 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, regional 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
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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 regional advertising
aimed at the business community. Such advertising is designed to create a
FirstWorld brand "umbrella" that reinforces retail sales efforts by generating
additional leads, establishing brand awareness and differentiating the Company
from its competitors. The Company also uses advertising to support the launch of
new services as they are introduced to the marketplace.
CO-MARKETING RELATIONSHIPS
The Company seeks to establish co-marketing arrangements with the
municipalities, property developers and service providers with which it
establishes strategic relationships. The Company expects these co-marketing
relationships to take several different forms, depending on market opportunity.
For example, the Company works with the City of Anaheim's economic development
group to promote the presence of the Company's advanced network to attract new
businesses to the area. The Company intends to work with additional
municipalities to position the Company as the premier ICP to new businesses in
such cities. Similarly, The Irvine Company markets the Company's advanced
network services as an amenity available to tenants. In addition, the Company
and Enron have worked together to offer bundles of telecommunications and
utility services to municipalities and property developers.
As of May 31, 1998, the Company employed 37 persons in sales and marketing.
The Company is in the process of significantly 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. The Company's sales operations are conducted from its
headquarters in San Diego, California and its central office in Anaheim,
California.
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, and price of directly comparable service. The
Company currently prices services which are directly comparable to its
competitors' offerings below prevailing market rates to build market share.
For customers served by fiber, the Company generally requires a contract
specifying minimum product usage, pricing and term of service, among other
items. The Company's objective is to reduce the risk associated with capital
deployment of customer located equipment. The Company's contracts generally have
terms of one to three years, depending on total revenue commitment, services
provided and discount or promotional package.
The Company commenced network operations in August 1997 when it brought the
City of Anaheim on line. The Company began providing services to commercial
customers in November 1997, has signed contracts with 66 commercial customers as
of May 31, 1998 and has been successful in selling multiple products including
voice and data applications to the majority of these customers. The Company also
provides a full suite of voice, data, dedicated access and Internet services to
the City of Anaheim pursuant to a 30-year contract. See "--Agreements with the
City of Anaheim and The Irvine Company." While not a primary component of the
Company's long-term business plan, the Company currently sells long distance
services to individuals and businesses not served by the Company's networks.
STRATEGIC RELATIONSHIPS
The Company actively pursues strategic relationships with municipalities,
property developers and service providers as part of its core business strategy.
The Company believes that these relationships can
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provide it with enhanced brand identity, access to physical assets, new products
and technologies, joint marketing synergies and other benefits, and thereby
accelerate market rollout and reduce asset deployment, sales costs and customer
turnover.
MUNICIPAL RELATIONSHIPS
The Company seeks strategic relationships with municipalities in order to
obtain a network anchor customer, a "local" brand identity, media coverage and,
in certain circumstances, access to physical assets. The Company will, however,
pursue a network rollout into a region without a municipal alliance if the area
is otherwise commercially attractive.
The Company's relationship with the City of Anaheim provides the Company
with the general benefits described above. The Company has exclusive commercial
rights to use the 50-mile fiber loop owned by the City of Anaheim and is now the
primary supplier of local dialtone, long distance, dedicated facilities and
Internet service to substantially all of its municipal facilities. See
"--Agreements with the City of Anaheim and The Irvine Company."
DEVELOPER RELATIONSHIPS
The Company pursues relationships with property developers in order to gain
access to prime commercial customers, to facilitate marketing of the Company's
products and services and, in some cases, to gain access to physical assets.
The Company has developed a strategic relationship with The Irvine Company
to provide service to The Irvine Company's properties located within an area of
commercial properties in Irvine, California known as the "Irvine Spectrum." The
Irvine Company owns and has granted the Company access to 106 prime commercial
buildings within the Irvine Spectrum. The Irvine Spectrum, including the
buildings not owned by The Irvine Company, consists of approximately 25 million
square feet of commercial and industrial space. The Company believes the tenant
base is comprised of businesses with greater-than-average demand for advanced
telephony and data communications services. The Irvine Company has granted the
Company rights to install fiber within an extensive existing conduit system, as
well as building access. The Irvine Company also promotes the Company's services
in its marketing materials to current and prospective tenants. The Company and
The Irvine Company also have established a framework for discussions regarding
the Company's providing services to tenants at Irvine Company properties
throughout California. See "--Agreements with the City of Anaheim and The Irvine
Company."
SERVICE PROVIDER RELATIONSHIPS
The Company has established and intends to continue to establish
relationships with service providers in complementary industries to create
competitive or innovative products. In general, 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 generally expects to contribute
its network platform, sales force channels, operational support, engineering
expertise and wholesale purchases.
ENRON. The Company and Enron have an informal collaborative relationship to
jointly market telecommunications and utility services to municipalities,
project developers and other large wholesale markets and have presented a number
of joint proposals to municipalities. 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 Transactions."
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NAVISITE. The Company has entered into an agreement with Navi-Site Internet
Services Corporation, a national Internet protocol network ("NaviSite"), calling
for the two companies to establish a remote access MegaPOP at the Company's
central office. The MegaPOP would allow 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 NaviSite in the co-location room in the
Company's central office and helps manage and provision elements of network
connectivity. In return, NaviSite has granted the Company the right to resell
NaviSite'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. The following diagram
illustrates FirstWorld's network design.
[DIAGRAM]
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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.
TRANSPORT. The Company's networks consist of fiber optic clusters linked to
one another and to the central office through fiber optic backbones. The Company
builds clusters in areas with (i) high concentrations of customers with
sophisticated communications needs and a willingness to pay for direct fiber
connectivity or (ii) a large number of smaller customers that can be aggregated
on a fiber-optic cluster to reduce the Company's cost of service. The Company
uses SONET technology to ensure maximum reliability and continuity of service in
the event of equipment changes or upgrades. Customers are served from nodes or
hubs that are placed in strategic positions throughout the networks. The nodes
also contain redundant electronics that switch automatically to the backup
equipment in the event of a failure to protect the network from signal
deterioration or outages.
The Company uses unmanned access offices as junctions to link network
clusters with the fiber backbone. As the Company expands into new areas, it will
need to install one or two additional access offices per network cluster,
depending on the size of the cluster. Each access office will store network
equipment and its own back-up power source. In addition, the Company has
established a number of remote computer/telephony facilities to interconnect
with the ILEC, IXCs and CLECs.
CONNECTIVITY. The Company typically connects prime commercial customers to
its networks through direct fiber connections. In such cases, the Company
installs fiber directly to the customer's premises and installs the CLE
necessary to provide the services requested by the customer.
The Company complements its fiber roll-out by leasing unbundled loops from
Pacific Bell and 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 exploring direct interconnection with the
major CLECs in Orange County, including MFS Communications, TCG, and the major
IXCs.
Although the use of unbundled loops and other connections to reach off-fiber
customers limits the availability of some high-bandwidth products and services,
it enables the Company to serve businesses with its advanced services until
establishing fiber links with such customers becomes economically feasible. The
Company also intends to use wireless links and other transmission technologies
to reach customers when connecting customers through fiber or unbundled loops is
impractical.
OPERATIONAL SUPPORT SYSTEMS
The Company believes 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. Management 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 then developed systems,
incorporated systems from existing external sources and retained third parties
to produce systems meeting the Company's specifications to create integrated
systems that implement the Company's business processes.
CUSTOMER CARE SYSTEM. The Company has developed and is implementing a
Customer Care System designed to perform a wide variety of customer service
functions, including service order creation and
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tracking, telephone number administration, trouble reporting and dispatch and
billing inquiry. The Customer Care System is designed to be a "point and click"
system. Among other things, the system simultaneously implements the customer's
order, bills the customer and updates equipment inventory. The Customer Care
System allows a single customer service person to solve most customer problems
in real time without having to refer the call to another department and in the
future will allow members of the Company's sales force to create a customer's
service order while at the customer's premises. The Company also expects that
customers in good standing will be permitted to access the system directly to
request new services beginning in the second quarter of 1999. In addition, the
Company has established a direct link between its Customer Care System and
Pacific Bell's operational support systems, which allows the Company to place
orders for additional unbundled loops directly with Pacific Bell's computers.
The Company believes placing orders electronically eliminates many of the errors
that often result when orders are placed by voice or fax.
To develop the Customer Care System, the Company purchased a basic platform
and then enhanced its functions through joint efforts with the vendor of the
system, ACE*COMM Corporation ("ACE*COMM"). Under an agreement with the Company,
ACE*COMM is required to share with the Company revenues from future licenses of
software containing a substantial amount of the technology developed by it for
the Company up to the total license and service fees paid by the Company
pursuant to the agreement. ACE*COMM also provides data processing services to
the Company, including the preparation of customer invoices, pursuant to a
separate Data Processing Services Agreement.
NETWORK MANAGEMENT SYSTEM. The Network Management System developed by the
Company gives it the ability to monitor its networks from the central office to
customers' premises when customers are connected by fiber. In such cases, the
Network Management System notifies the Company's network operations personnel of
interruptions prior to, or simultaneously with, the customer becoming aware of
such problems. The Company also intends to deploy devices currently under
development by third parties that would allow the Company to monitor its
connection to customers across unbundled loops. The Company expects such
technology to allow the Company to quickly and efficiently isolate sources of
service disruption on unbundled loops, thereby reducing system downtime.
NETWORK CONSTRUCTION STATUS AND PROPOSED EXPANSION
ORANGE COUNTY
The Company currently provides on-fiber services to customers connected to
fiber clusters in Anaheim. Additional clusters in Anaheim are either under
construction or authorized for construction with design completed and building
permits obtained. In addition, the Company has started construction within the
Irvine Spectrum area and has begun offering services to buildings in the Irvine
Spectrum. The Company has identified additional fiber clusters in Orange County
compatible with the Company's strategies for network expansion and intends to
begin construction of such clusters during 1998.
The Company also currently provides off-fiber service to customers located
around the Pacific Bell central office located in downtown Anaheim through
Pacific Bell unbundled copper loops. The Company has applied for
interconnections with additional Pacific Bell central offices in Orange County
by co-locating the Company's equipment at such central offices in order to
expand the areas in which it can offer off-fiber services. These
interconnections, which the Company expects to begin 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 Orange County.
SAN GABRIEL VALLEY AND SOUTH BAY
The Company has commenced planning for the construction of fiber clusters in
the cities of Glendale, Burbank and Pasadena, which are located in the San
Gabriel Valley near Los Angeles, and in the City of Torrance, in the South Bay
area near Los Angeles. The Company expects to begin construction of these
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fiber clusters during the fourth quarter of 1998. The Company anticipates that
the San Gabriel Valley and South Bay areas each will require a central office
with its own DMS-500 or equivalent switch. The Company also intends to co-locate
equipment with Pacific Bell central offices in both the San Gabriel Valley and
the South Bay areas. The Company has determined that such areas are home to high
concentrations of businesses with telecommunications and information needs
addressed by the Company's services. In addition, businesses in such areas tend
to be clustered together in business parks, which would allow the Company to
utilize its strategy of maximizing revenues from its installed base of fiber.
FUTURE EXPANSION
In addition to its planned networks in Orange County and the San Gabriel
Valley and South Bay areas of Los Angeles County, the Company intends
selectively to expand into additional markets 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, both within and outside
of California, 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. At this time, the Company has not made a decision regarding any
specific areas for future expansion beyond Orange County, San Gabriel Valley and
South Bay.
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 Communications, NEXTLINK, ICG, GST and 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, MCI, Sprint,
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. In January 1998 AT&T announced a plan
to acquire Teleport. The deal, if consummated, would allow AT&T to sell
integrated local, long-distance and data communications services to businesses
in the areas served by Teleport. Sprint recently 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. WorldCom already has acquired
MFS Communications and Brooks Fiber Properties, Inc., both major CLECs, and
WorldCom has agreed to acquire MCI, subject to regulatory approvals. Recently
Ameritech and US West have announced plans to enter the long distance market by
forming joint sales ventures with Qwest, a growing
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provider of fiber optic-based telecommunications services. Although the legality
of these particular deals have been challenged as a result of actions brought by
AT&T and MCI and remain subject to judicial and FCC review, 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 new competitors for the
Company. The Company also expects increased competition from ILECs operating
outside of their current local service areas, cable television companies,
electric utilities, microwave and other wireless carriers and satellite
licensees. In addition, sweeping changes mandated by 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.
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.
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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 and equipment and manufacturing
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 an application
with the FCC for "in-region" long distance authority. The FCC denied the
application of 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. 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. See
"--Federal Regulation."
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. If the court's decision (which has
been stayed pending appeal) is upheld, 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."
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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 and the
application of access charges to Internet traffic). 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, 1996
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, MCI, 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 were 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. On January 26, 1998, the Supreme Court agreed to
review the Interconnection Orders, with briefing calendared for April through
June of 1998. A Supreme Court decision in the cases is not expected until some
time in late 1998 or 1999.
The Eighth Circuit decisions and Supreme Court grant of review 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 the 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 address certain of these issues, but
leave others for decision by the states and the still-to-be selected neutral
numbering plan administrator. In August 1997, the FCC designated two neutral
numbering plan administrators and the process of transferring numbering
administration to these entities is underway. The FCC numbering decisions, among
other things,
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(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 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. The Company's initial
service areas in Orange County are scheduled to have permanent local portability
implemented by June 30, 1998.
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. Several parties have sought
FCC reconsideration or judicial review of various parts of the new FCC rules,
including the revenue basis on which universal service contributions are
determined. 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 fro
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
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.
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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. These various petitions have been consolidated by the
FCC and are currently pending. Although the Company does not, at the present
time, anticipate utilizing RBOC DSL or other high-speed services under its
interconnection agreements, any grant of regulatory relief by the FCC would
likely permit Pacific Bell to introduce DSL-based services, in competition with
the Company, on a more rapid basis and at reduced costs to Pacific Bell than
under current regulatory rules. 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 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.
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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
implicated in such litigation. 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").
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 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
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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 prior to April 1, 1998 and expects completion of the fiber clusters
currently under construction and approved for construction to satisfy the 90%
completion requirement in a timely manner. See "--Network Construction Status
and Proposed Expansion."
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 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 also requires FWA to commence construction of a
demonstration center in the City's downtown area by August 20, 1998, and to
complete the demonstration center by June 30, 1999. The Company expects the
demonstration center to be commenced and completed in a timely manner.
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,
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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 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 California
Public Utilities Commission 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
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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.
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 Company has guaranteed the payment obligations of FWOC under The Irvine
Company agreements.
EMPLOYEES
As of May 31, 1998, the Company had 108 employees, of whom 44 were in
network operations and development, 37 were in sales, marketing and product
development and 27 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. 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.
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PROPERTIES
The Company's headquarters are located in facilities consisting of
approximately 11,500 square feet in San Diego, California, which the Company
occupies under a lease that expires on September 30, 1999. The Company's central
office in Anaheim, California 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 central office, the Company has (i) the option
to purchase the central office through October 1998 for approximately $600,000
and (ii) 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.
LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company and their ages as of May
31, 1998 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------ --- ---------------------------------------------------------------
<S> <C> <C>
Donald L. Sturm........................... 66 Chairman of the Board, President and Chief Executive Officer(1)
Robert E. Randall......................... 51 Executive Vice President, Chief Operating Officer, Acting Chief
Financial Officer and Director(1)
Robert Cerasoli........................... 53 Senior Vice President, Communications and Public Policy
John Lewis................................ 60 Senior Vice President, Network and Operations
G. Bradford Saunders...................... 45 Senior Vice President, Project Development
Andrew B. Taubman......................... 31 Senior Vice President, Corporate Finance and Development
Dennis Mulroy............................. 43 Vice President, Finance and Administration and Secretary
C. Kevin Garland.......................... 30 Director(1)(2)
Rodney Malcolm............................ 34 Director
James O. Spitzenberger.................... 54 Director(3)
John C. Stiska............................ 56 Director
Melanie Sturm............................. 36 Director(2)
</TABLE>
- ------------------------
(1) Member of Chairman's Committee
(2) Member of Compensation Committee
(3) Member of Audit Committee
DONALD L. STURM joined the Company as Chairman of the Board and President of
the Company in January 1998 and was named Chief Executive Officer in March 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. 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.
ROBERT E. RANDALL has served as Executive Vice President and Chief Operating
Officer of the Company since April 1995 and acting Chief Financial Officer since
November 1996. Mr. Randall is responsible for directing all corporate and
business activities. Prior to joining the Company, Mr. Randall founded the
engineering firm of Randall Lamb Associates in 1974, which he subsequently built
into a large electrical
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and mechanical engineering firm, with offices in San Diego and San Francisco. In
1993, he was appointed by the State of California Board of Registration for
Professional Engineers and Land Surveyors to the Electrical Technical Advisory
Committee. Mr. Randall also is an active member of several other professional
engineering associations.
ROBERT CERASOLI has been with the Company since November 1994 and has served
as Senior Vice President, Communications and Public Policy of the Company since
December 1997. Mr. Cerasoli is responsible for the development and
implementation of the Company's corporate communications activities. Mr.
Cerasoli has 26 years of experience in marketing, advertising, corporate
communications, sales promotion and strategic planning, with managerial
experience in both entrepreneurial and larger corporate environments. From 1981
to March 1994, Mr. Cerasoli served as Chairman of Franklin Stoorza in San Diego,
a large multi-disciplined advertising and communications firm.
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 Manager of Switching at Pacific Telephone from 1981 to 1983 and as
Division Manager of Performance at New York Telephone from 1975 to 1980.
G. BRADFORD SAUNDERS joined the Company in November of 1995 and has served
as Senior Vice President, Project Development of the Company since July 1996. He
has twenty years of experience in project development management, including the
turnkey development of eight major public/private projects with cities and
municipal agencies in San Diego County. Prior to joining the Company, Mr.
Saunders served as President of Starboard Financial Corporation, a San
Diego-based development company ("Starboard"), for 17 years. Mr. Saunders became
obligated on certain significant obligations of Starboard personally guaranteed
by him and in April 1996 filed a voluntary petition for relief under Chapter VII
of the Bankruptcy Code. This petition was discharged in August 1996. Mr.
Saunders also is a former president of the San Diego Chapter of Lambda Alpha
International and is a member of the Urban Land Institute.
ANDREW B. TAUBMAN joined the Company as Senior Vice President, Corporate
Development in February 1997 and was made Senior Vice President, Corporate
Finance and Development in March 1998. Prior to joining the Company, Mr. Taubman
held various positions at J.P. Morgan Securities, Inc. and affiliates ("J.P.
Morgan") from 1989 to January 1997. Most recently, he served as Vice President
in the Private Finance Group and prior to that time he worked in the Mergers and
Acquisitions and Real Estate groups at J.P. Morgan.
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 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.
68
<PAGE>
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.
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 President and Chief Executive Officer of D C Acquisition
Corp., a company formed to obtain financing for and provide management services
to a new digital cinema company. Mr. Stiska is a member of the board of
directors of 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 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.
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.
COMMITTEES OF THE BOARD OF DIRECTORS
CHAIRMAN'S COMMITTEE. Established by the Board of Directors in January
1998, 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 established the Compensation
Committee in April 1998. 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 established the Audit Committee in
June 1998. 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 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.
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
69
<PAGE>
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 $620,000 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 Services Agreements. See "Certain
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 five other most highly compensated executive
officers of the Company whose combined salary and bonus exceeded $100,000 during
the fiscal year ended September 30, 1997 (the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION AWARDS
---------------------------------------------
ANNUAL COMPENSATION SECURITIES
--------------------------------------- RESTRICTED UNDERLYING ALL OTHER
SALARY BONUS OTHER ANNUAL STOCK AWARDS OPTIONS COMPENSATION
NAME AND PRINCIPAL POSITION ($) ($) COMPENSATION ($) (#) ($)
- ------------------------------------- --------- --------- ----------------- ------------- ----------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Renney Senn(1) ...................... 223,022 -- -- -- -- --
Former Chief Executive Officer
Robert E. Randall ................... 199,063 41,085 -- -- -- --
Executive Vice President, Chief
Operating Officer and Acting Chief
Financial Officer
Robert Cerasoli ..................... 184,688 40,463 -- -- -- --
Senior Vice President,
Communications and Public Policy
G. Bradford Saunders ................ 148,750 -- -- -- 75,000 --
Senior Vice President, Project
Development
John Lewis .......................... 130,000 -- -- -- 14,000 --
Senior Vice President, Network and
Operations
William Johnson(2) .................. 184,688 100,000 -- -- -- --
Former Senior Vice President
</TABLE>
- ------------------------
(1) Mr. Senn resigned in January 1998 and in connection with such resignation
received approximately $12,000 less applicable federal and state taxes for
accrued vacation days.
(2) Mr. Johnson resigned in September 1997.
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<PAGE>
OPTION GRANTS DURING FISCAL 1997
The following table sets forth information with respect to grants of stock
options to each of the Named Executive Officers during the fiscal year ended
September 30, 1997.
<TABLE>
<CAPTION>
POTENTIAL REALIZED
VALUE AT ASSUMED
NUMBER OF ANNUAL RATES OF
SECURITIES % OF TOTAL STOCK PRICE
UNDERLYING OPTIONS GRANTED APPRECIATION FOR
OPTIONS TO EMPLOYEES IN EXERCISE OR OPTION TERM(1)
GRANTED FISCAL YEAR BASE PRICE --------------------
NAME (#) (%) ($/SH) EXPIRATION DATE 5% 10%
- ------------------------------------- ----------- --------------- ------------- --------------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Renney Senn.......................... -- -- -- -- -- --
Robert E. Randall.................... -- -- -- -- -- --
Robert Cerasoli...................... -- -- -- -- -- --
G. Bradford Saunders................. 75,000(2) 15.32% $ .50 Nov. 25, 2006 $ 0 $ 11,133
John Lewis........................... 14,000(3) 2.86% $ 3.20(4) May 29, 2007 $ 0 $ 0
William Johnson...................... -- -- -- -- -- --
</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) Issued pursuant to the 1995 Stock Option Plan.
(3) Issued pursuant to the 1997 Stock Option Plan.
(4) Mr. Lewis's 14,000 options were issued at an exercise price of $3.20 per
share. As of September 30, 1997, the exercise price remained $3.20; however,
in December 1997, the Board of Directors adopted an amendment to the 1995
and 1997 Stock Option Plans that reduced the exercise price of all options
originally issued at an exercise price over $3.00 to $3.00. Thus, these
options now have an exercise price of $3.00.
OPTION EXERCISES AND FISCAL YEAR-END VALUES
The following table sets forth the information with respect to the Named
Executive Officers concerning the exercise of options during fiscal year 1997
and unexercised options held as of September 30, 1997.
OPTIONS EXERCISED DURING FISCAL 1997
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
SHARES ACQUIRED ON VALUE UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
EXERCISE REALIZED OPTIONS AT FY-END (#) AT FY-END ($)(1)
NAME (#) ($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ------------------------------------ ------------------- ----------- ----------------------- -----------------------
<S> <C> <C> <C> <C>
Renney Senn......................... -- -- 0/0 --
Robert E. Randall................... -- -- 0/0 --
Robert Cerasoli..................... -- -- 0/0 --
G. Bradford Saunders................ -- -- 50,000(2)/75,000(3) 60,000/90,000
John Lewis.......................... -- -- 10,000(4)/40,000(5) 9,720/38,880
William Johnson(6).................. -- -- 240,000/60,000 348,000/87,000
</TABLE>
- ------------------------
(1) Calculated by determining the difference between the fair market value of
the securities underlying the options at September 30, 1997 ($1.60 per share
as determined by the Board of Directors) and the exercise price of the
options.
71
<PAGE>
(2) Includes 20,000 options with an exercise price of $.25 and 30,000 options
with an exercise price of $.50.
(3) Includes 30,000 options with an exercise price of $.25 and 45,000 options
with an exercise price of $.50.
(4) Includes 7,200 options with an exercise price of $.25 and 2,800 options with
an exercise price of $3.20 (Pursuant to an amendment to the Company's stock
option plans adopted by the Board of Directors, the exercise price of Mr.
Lewis's 2,800 options was reduced to $3.00 in December 1997). See "--Stock
Option Plans."
(5) Includes 28,800 options with an exercise price of $.25 and 11,200 options
with an exercise price of $3.20 (Pursuant to an amendment to the Company's
stock option plans adopted by the Board of Directors, the exercise price of
Mr. Lewis's 11,200 options was reduced to $3.00 in December 1997). See
"--Stock Option Plans."
(6) Includes 300,000 options with an exercise price of $.15. Mr. Johnson
resigned from the Company in September 1997 and from the Company's Board of
Directors in December 1997. In connection with such resignation, Mr. Johnson
exercised the vested portion of his options (240,000) and the remaining
options (60,000) were terminated pursuant to the provisions of the 1995
Stock Option Plan.
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
The Company adopted the SpectraNet International 1995 Incentive Stock Option
Plan (the "1995 Stock Option Plan") in 1995 to incentivize certain employees of
the Company by enabling them to acquire or increase their proprietary interest
in the Company and to encourage continued service with the Company. The 1995
Stock Option Plan will terminate on April 10, 2005, unless sooner terminated by
the Board of Directors. The Company is authorized to issue incentive stock
options ("ISOs") as defined in the Internal Revenue Code of 1986, as amended, to
acquire up to an aggregate of 1,500,000 shares of Series B Common Stock pursuant
to the 1995 Stock Option Plan.
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. In addition pursuant to an
amendment to the 1995 Stock Option Plan adopted by the Board of Directors in
December 1997, if an employee is terminated without "cause" prior to June 30,
1998, then all options held by such optionee become immediately vested and
exercisable.
72
<PAGE>
The exercise price of options granted under the 1995 Stock Option Plan is
determined by the Board of Directors (or a committee thereof) at the time of
grant. The exercise price of options must be no less than the fair market value
of the Series B Common Stock on the date of grant. The exercise price of options
granted to an employee who owns more than 10% of the total combined voting power
of all classes of stock must be at least 110% of the fair market value of the
Series B Common Stock on the date of grant, and the term of these options cannot
exceed five years. As of May 31, 1998, options to purchase an aggregate of
702,400 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
The Company adopted the SpectraNet International 1997 Stock Plan (the "1997
Stock Option Plan") in 1997 to attract and retain personnel for positions of
substantial responsibility and to provide additional incentives to existing
employees, consultants and directors. The 1997 Stock Option Plan provides for
the grant of both stock options intended to qualify as ISOs and nonqualified
stock options ("NQSOs"). The 1997 Stock Option Plan terminates on April 22,
2007, unless sooner terminated by the Board of Directors. Pursuant to an
amendment duly adopted by the Board and approved at the 1998 Annual Meeting of
Stockholders, the 1997 Stock Option Plan provides for aggregate option grants of
up to 1,500,000 shares of Series B Common Stock.
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 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, the vesting schedule of such options, other terms of the
options and any other matters delegated to it under the 1997 Stock Option Plan
or necessary for the proper administration of the 1997 Stock Option Plan.
Options awarded pursuant to the 1997 Stock Option Plan shall vest and become
exercisable as determined by the Administrator.
Options awarded under the 1997 Stock Option Plan are nontransferable and
generally expire ten years from the date of grant (or, in the case of ISOs
granted to an optionee who owns more than 10% of the total combined voting power
of all classes of stock, five years). Unless otherwise indicated in the 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. In addition, pursuant to an amendment
to the 1997 Stock Option Plan duly adopted by the Board of Directors in December
1997, if an employee is terminated without "cause" prior to June 30, 1998, then
all options held by such optionee become immediately vested and exercisable.
The exercise price of options granted under the 1997 Stock Option Plan is
determined by the Administrator at the time of grant, subject to the following
limitations. In the case of ISOs, the exercise price may not be less than 100%
of the fair market value of the Series B Common Stock on the date of grant, and
the exercise price of ISOs granted to an optionee who owns more than 10% of the
total combined voting power of all classes of stock may not be less than 110% of
the fair market value of the Series B Common Stock on the date of grant. In the
case of NQSOs, the exercise price may not be less than 85% of the fair market
value of the Series B Common Stock on the date of grant, and the exercise price
of NQSOs granted to an optionee who owns more than 10% of the total combined
voting power of all classes of stock may not be less than 110% of the fair
market value of the Series B Common Stock on the date of grant.
The Board of Directors, acting as Administrator under the 1997 Stock Option
Plan, previously issued options under the plan with exercise prices of $3.00 and
$3.20. In December 1997, the Board of Directors
73
<PAGE>
lowered to $3.00 the exercise prices of options originally issued with an
exercise price of $3.20. As of May 31, 1998, options to purchase an aggregate of
742,360 shares of Series B Common Stock at an exercise price of $3.00 were
outstanding under the 1997 Stock Option Plan.
LIMITED LIABILITY AND INDEMNIFICATION
The Company's Certificate of Incorporation (as amended or restated from time
to time, the "Certificate of Incorporation") and bylaws ("Bylaws") provide that
the Company shall, to the fullest extent permitted by Section 145 of the General
Corporation Law of the State of Delaware ("DGCL"), as the same may be amended
and supplemented from time to time, indemnify all directors and officers and all
other persons whom it has authority to indemnify under Section 145 of the DGCL.
FirstWorld has entered into indemnification agreements with its officers and
directors containing provisions which may require FirstWorld, among other
things, to indemnify the officers and directors against certain liabilities that
may arise by reason of their status or service as directors or officers (other
than liabilities arising from willful misconduct of a culpable nature), and to
advance their expenses incurred as a result of any proceeding against them as to
which they could be indemnified. The Company believes that these provisions and
agreements will assist the Company in attracting and retaining qualified persons
to serve as directors and officers.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the foregoing provisions, or otherwise, the Company has been advised
that in the opinion of the Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the Company of expenses incurred or paid by a director, officer
or controlling person of the Company in the successful defense of any action,
suit, or proceeding) is asserted by such director, officer or controlling person
in connection with the Exchange Notes being registered hereunder, the Company
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
The Company maintains insurance on behalf of its directors and officers,
insuring them against liabilities that they may incur in such capacities or
arising out of such status.
74
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's voting securities as of May 31, 1998, by (i) each of
the Company's named executive officers and directors; (ii) the Company's named
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 Prospectus, 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., 9333 Genesee
Avenue, Suite 200, San Diego, California 92121.
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF
SERIES A COMMON SERIES B 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 15,452,839 55.69% of Common Stock
51.16% of Voting Stock
Enron Capital & Trade Resources Corp.(4)........ 5,000,000 11,666,666 48.54% of Common Stock
49.11% 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 1.88% of Common Stock
*% of Voting Stock
James O. Spitzenberger(8)....................... 0 0 *% of Common Stock
*% of Voting Stock
John C. Stiska(9)............................... 0 25,000 *% of Common Stock
*% of Voting Stock
Melanie Sturm(10)............................... 0 0 *% of Common Stock
*% of Voting Stock
Robert Cerasoli(11)............................. 0 346,417 1.33% of Common Stock
*% of Voting Stock
John Lewis(12).................................. 0 49,769 *% of Common Stock
*% of Voting Stock
G. Bradford Saunders(13)........................ 0 126,417 *% of Common Stock
*% of Voting Stock
Renney Senn..................................... 0 879,417 3.38% of Common Stock
*% of Voting Stock
All directors and executive officers as a group
(10 persons)(15).............................. 5,000,000 16,490,190 58.17% of Common Stock
51.88% of Voting Stock
</TABLE>
- ------------------------
* Less than one percent beneficially owned
75
<PAGE>
(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 of 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
May 31, 1998 and those shares of Series A Common Stock or Series B Common
Stock that may be acquired by such stockholder within 60 days.
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.
(3) Shares listed include: (a) 5,000,000 shares of Series A Common Stock held
of record by Spectra 3; (b) 1,392,747 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, and therefore may be deemed to be the beneficial
76
<PAGE>
owner of the shares of Series A Common Stock and Series B Common Stock
beneficially owned by such entities. 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 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, and
therefore may be deemed to be the beneficial owner of the shares of Series
A Common Stock and Series B Common Stock beneficially owned by such
entities. Ms. Sturm disclaims beneficial ownership of such shares.
(11) Shares listed include (a) 11,000 shares of Series B Common Stock held of
record by Smith Barney, as IRA Custodian for Robert Cerasoli; beneficial
ownership of such shares is attributable to Mr. Cerasoli because he has
the power to direct the voting and investment of such shares; (b) 16,667
shares of Series B Common Stock held of record jointly by Mr. Cerasoli and
his wife; (c) 8,333 shares of Series B Common Stock subject to currently
exercisable warrants held by Mr. Cerasoli at an exercise price of $1.50;
and (d) 16,417 shares of Series B Common Stock subject to currently
exercisable options held by Mr. Cerasoli at an exercise price of $3.00.
(12) 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) 14,400 shares of
Series B Common Stock subject to currently exercisable options held by Mr.
Lewis at an exercise price of $.25.
(13) 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; and 30,000
shares of Series B Common Stock subject to currently exercisable options
held by Mr. Saunders at an exercise price of $.25.
(14) Shares listed include 865,856 shares of Series B Common Stock held of
record jointly by Mr. Senn and his wife.
(15) See notes 3-13 above.
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CERTAIN 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 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 Private
Note 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
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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. The Sturm
Entities and Enron are the only entities having a right of first refusal or
other preemptive right on future equity financing transactions.
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.
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
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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, 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
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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 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
provides that if any eligible employee is 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.
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 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 has amended the Management Services Agreement with
Corporate Managers, LLC to provide for an annual management fee of $620,000 plus
out of pocket expenses because Mr. Sturm has taken a more active management role
with the Company than originally anticipated. Corporate Managers, LLC and Enron
each has the right in its discretion to terminate its Management Services
Agreement with the Company.
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DESCRIPTION OF EXCHANGE NOTES
GENERAL
The Exchange Notes will be issued pursuant to an indenture (the "Indenture")
between the Company and The Bank of New York, as trustee (the "Trustee"). The
Exchange Notes will evidence the same indebtedness as the Private Notes (which
they replace) and will be entitled to the benefits of the Indenture. The form
and terms of the Exchange Notes are the same as the form and terms of the
Private Notes except that (i) the Exchange Notes will have been registered under
the Securities Act, and, therefore, the Exchange Notes will not bear legends
restricting the transfer thereof and (ii) Holders of the Exchange Notes will not
be entitled to certain rights of Holders of Private Notes under the Registration
Rights Agreement, which rights will terminate upon the consummation of the
Exchange Offer. The terms of the Exchange Notes include those stated in the
Indenture and those made part of the Indenture by reference to the Trust
Indenture Act of 1939 (the "TIA"), as in effect on the date of the Indenture.
The following summary of the material provisions of the Indenture does not
purport to be complete and is qualified in its entirety by reference to such
agreement, including the definitions therein of certain terms used below. A copy
of the Indenture is available from the Company upon request. The definitions of
certain terms used in the following summary are set forth below under "--Certain
Definitions." As used below in this "Description of Exchange Notes" section, the
term "Company" refers only to FirstWorld Communications, Inc. and not to any of
its Subsidiaries.
The Exchange Notes will be senior obligations of the Company, will rank PARI
PASSU in right of payment with all existing and future senior Indebtedness of
the Company and will rank senior in right of payment to any future Subordinated
Indebtedness of the Company, but will be effectively subordinated to any secured
Indebtedness of the Company and future Indebtedness and other liabilities
(including Subordinated Indebtedness and trade payables) of the Company's
Subsidiaries. The Indenture will permit the incurrence of substantial additional
Indebtedness, including secured Indebtedness, by the Company and its
Subsidiaries, subject to certain restrictions. See "Risk Factors--Effective
Subordination of Notes; Holding Company Structure." On an as adjusted basis
after giving effect to the Private Note Offering and the Additional Equity
Investment, as if the Notes had been issued and such proceeds had been received
on March 31, 1998, the Company would have had no Subordinated Indebtedness and
$7.2 million in outstanding Indebtedness that would rank PARI PASSU with the
Notes. The Notes will not be secured by any assets and will be effectively
subordinated to any existing and future secured indebtedness of the Company and
its Subsidiaries, to the extent of the value of the assets securing such
indebtedness. On an as adjusted basis after giving effect to the Private Note
Offering and the Additional Equity Investment, the Company would have had
approximately $242.4 million of outstanding indebtedness as of March 31, 1998.
In addition, all existing and future liabilities (including trade payables) of
the Company's Subsidiaries will be effectively senior to the Notes. See "Risk
Factors--Effective Subordination of Notes; Holding Company Structure." On an as
adjusted basis after giving effect to the Private Note Offering and the
Additional Equity Investment, the total liabilities of the Company's
Subsidiaries would have been approximately $21.3 million as of March 31, 1998.
Any rights of the Company and its creditors, including the Holders of Notes, to
participate in the assets of any of the Company's Subsidiaries upon any
liquidation or reorganization of any such subsidiary will be subject to the
prior claims of that subsidiary's creditors (including trade creditors).
The operations of the Company are conducted primarily through its
Subsidiaries and the Company is therefore dependent upon the cash flow of its
Subsidiaries to meet its obligations, including its obligations under the Notes.
See "Risk Factors--Effective Subordination of Notes; Holding Company Structure."
As of the date of the Indenture, the Company had six Subsidiaries, each of
which was designated as a Restricted Subsidiary. Under certain circumstances,
the Company will be able to designate Subsidiaries of
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the Company, including Subsidiaries that it creates or acquires in the future,
to be Unrestricted Subsidiaries. Unrestricted Subsidiaries will not be subject
to many of the restrictive covenants set forth in the Indenture. See "--Certain
Covenants--Restricted and Unrestricted Subsidiaries."
PRINCIPAL, MATURITY AND INTEREST
The Notes are limited in aggregate principal amount at maturity to $470
million and will mature on April 15, 2008. Until the Full Accretion Date, no
interest will accrue or be payable on the Notes, but the Accreted Value will
accrete (representing the amortization of original issue discount) between the
date of issuance and the Full Accretion Date, on a semi-annual bond equivalent
basis using a 360-day year comprised of twelve 30-day months such that the
Accreted Value shall be equal to the full principal amount at maturity of the
Notes on the Full Accretion Date. Beginning on the Full Accretion Date, interest
on the Notes will accrue at the rate of 13% per annum and will be payable in
cash semi-annually in arrears on April 15 and October 15 of each year,
commencing on October 15, 2003, to Holders of record on the immediately
preceding April 1 and October 1. Interest on the Notes will accrue from the most
recent date to which interest has been paid or, if no interest has been paid,
from the Full Accretion Date. Interest will be computed on the basis of a
360-day year comprised of twelve 30-day months. Principal, premium, if any, and
interest on the Notes will be payable at the office or agency of the Company
maintained for such purpose within the City and State of New York or, at the
option of the Company, payment of interest may be made by check mailed to the
Holders of the Notes at their respective addresses set forth in the register of
Holders of Notes; PROVIDED that all payments of principal, premium, if any, and
interest with respect to Notes of Holders which have given wire transfer
instructions to the Company will be required to be made by wire transfer of
immediately available funds to the accounts specified by the Holders thereof.
Until otherwise designated by the Company, the Company's office or agency in New
York, New York will be the office of the Trustee maintained for such purpose.
The Notes will be issued in denominations of $1,000 and integral multiples
thereof.
OPTIONAL REDEMPTION
Except as noted below, the Notes will not be redeemable at the Company's
option prior to April 15, 2003. Thereafter, the Notes will be subject to
redemption at any time at the option of the Company, in whole or in part, in
amounts of $1,000 or integral multiples thereof, upon not less than 30 nor more
than 60 days notice, at the redemption prices (expressed as percentages of
principal amount) set forth below, plus accrued and unpaid interest thereon to
the applicable redemption date, if redeemed during the twelve-month period
beginning on April 15 of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ---------------------------------------------------------------------------------- -----------
<S> <C>
2003.............................................................................. 106.500%
2004.............................................................................. 104.333%
2005.............................................................................. 102.167%
2006 and thereafter............................................................... 100.000%
</TABLE>
In addition, at any time on or prior to April 15, 2001, the Company, at its
option, may use the net cash proceeds (but only to the extent such proceeds
consist of cash or Cash Equivalents) from one or more Public Equity Offerings or
the sale of Capital Stock (other than Disqualified Stock) to one or more
Strategic Investors in a single transaction or a series of related transactions
to redeem up to an aggregate of 35% of the Accreted Value of the Notes at a
redemption price of 113% of the Accreted Value thereof at the time of
redemption, plus accrued and unpaid interest, if any, to the date of redemption;
PROVIDED that at least 65% of the Accreted Value of the Notes originally issued
must remain outstanding immediately after the occurrence of such redemption. In
order to effect the foregoing redemption, the Company must mail a notice of
redemption no later than 30 days after the related Public Equity Offering or
sale of Capital
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Stock and must consummate such redemption within 60 days of the closing of such
Public Equity Offering or sale of Capital Stock.
SELECTION AND NOTICE
If less than all of the Notes are to be redeemed at any time, selection of
Notes for redemption will be made by the Trustee in compliance with the
requirements of the principal national securities exchange, if any, on which the
Notes are listed, or, if the Notes are not so listed, on a pro rata basis, by
lot or by such method as the Trustee shall deem fair and appropriate; PROVIDED
that no Notes of $1,000 or less shall be redeemed in part. Notices of redemption
shall be mailed by first class mail at least 30 but not more than 60 days before
the redemption date to each Holder of Notes to be redeemed at its registered
address. Notices of redemption may not be conditional. If any Note is to be
redeemed in part only, the notice of redemption that relates to such Note shall
state the portion of the principal amount thereof to be redeemed. A new Note in
principal amount equal to the unredeemed portion thereof will be issued in the
name of the Holder thereof upon cancellation of the original Note. Notes called
for redemption become due on the date fixed for redemption. On and after the
redemption date, interest ceases to accrue on Notes or portions of them called
for redemption.
MANDATORY REDEMPTION
The Company is not required to make mandatory redemption or sinking fund
payments with respect to the Notes.
REPURCHASE AT THE OPTION OF HOLDERS
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, the Indenture requires the
Company to make an offer to each Holder of Notes to repurchase all or any part
(equal to $1,000 or an integral multiple thereof) of such Holder's Notes
pursuant to the offer described below (the "Change of Control Offer") at an
offer price in cash (the "Change of Control Payment") equal to 101% of the
aggregate principal amount thereof, plus accrued and unpaid interest thereon to
the date of purchase (or if such Change of Control Offer is prior to the Full
Accretion Date, 101% of the Accreted Value thereof on the date of repurchase).
Within 10 days following any Change of Control, the Company or the Trustee (at
the expense of the Company) will mail a notice to each Holder describing the
transaction or transactions that constitute the Change of Control and offering
to repurchase Notes on the date specified in such notice, which date shall be no
earlier than 30 days and no later than 60 days from the date such notice is
mailed (the "Change of Control Payment Date"), pursuant to the procedures
required by the Indenture and described in such notice. The Company will comply
with the applicable requirements of Section 14(e) under the Exchange Act and any
other securities laws and regulations thereunder to the extent such laws and
regulations are applicable in connection with the repurchase of the Notes
pursuant to a Change of Control Offer.
On the Change of Control Payment Date, the Company will, to the extent
lawful, (i) accept for payment all Notes or portions thereof properly tendered
pursuant to the Change of Control Offer, (ii) irrevocably deposit with the
paying agent for the Notes an amount equal to the Change of Control Payment in
respect of all Notes or portions thereof so tendered and (iii) deliver or cause
to be delivered to the Trustee the Notes so accepted together with an Officers'
Certificate stating the aggregate principal amount or Accreted Value, as
applicable, of Notes or portions thereof tendered to the Company and accepted
for payment. The paying agent for the Notes will promptly mail to each Holder of
Notes so tendered the Change of Control Payment for such Notes, and the Trustee
will promptly authenticate and mail (or cause to be transferred by book-entry)
to each Holder a new Note equal in principal amount at maturity to any
unpurchased portion of the Notes surrendered, if any; provided that each such
new Note will be in a principal amount of $1,000 or an integral multiple
thereof.
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ASSET SALES
The Company will not, and will not permit any Restricted Subsidiary to,
consummate an Asset Sale unless (i) the Company or such Restricted Subsidiary,
as the case may be, receives consideration for such Asset Sale at least equal to
the Fair Market Value (as evidenced by a Board Resolution delivered to the
Trustee) of the Property or assets sold or otherwise disposed of; (ii) at least
80% of the consideration received by the Company or such Restricted Subsidiary
for such Property or assets consists of (a) cash, Cash Equivalents, or
Telecommunications Assets; and/or (b) the assumption of Indebtedness of the
Company or such Restricted Subsidiary (other than Indebtedness that is
subordinated to the Notes) and the release of the Company or the Restricted
Subsidiary, as the case may be, from all liability on the Indebtedness assumed;
and (iii) the Company or such Restricted Subsidiary, as the case may be, uses
the Net Cash Proceeds from such Asset Sale in the manner set forth in the next
two paragraphs.
Within 360 days after any Asset Sale, the Company or such Restricted
Subsidiary, as the case may be, may at its option (i) reinvest an amount equal
to the Net Cash Proceeds (or any portion thereof) from such Asset Sale in
Telecommunications Assets or in Voting Stock of any Person engaged in the
Telecommunications Business in the United States (PROVIDED that such Person
concurrently becomes a Restricted Subsidiary of the Company) and/or (ii) apply
an amount equal to such Net Cash Proceeds (or remaining Net Cash Proceeds) to
the permanent reduction of Indebtedness of the Company (other than Indebtedness
to a Restricted Subsidiary) that is senior to or PARI PASSU with the Notes or to
the permanent reduction of Indebtedness or preferred stock of any Restricted
Subsidiary (other than Indebtedness to, or preferred stock owned by, the Company
or another Restricted Subsidiary). Pending the final application of any such Net
Cash Proceeds, the Company may temporarily reduce revolving credit borrowings or
otherwise invest such Net Cash Proceeds in any manner that is not prohibited by
the Indenture. Any Net Cash Proceeds from any Asset Sale that are not used to
reinvest in Telecommunications Assets or in Capital Stock of any Person engaged
in the Telecommunications Business (as described above) and/or to reduce senior
or PARI PASSU Indebtedness of the Company or Indebtedness or preferred stock of
its Restricted Subsidiaries shall constitute "Excess Proceeds."
If at any time the aggregate amount of Excess Proceeds calculated as of such
date exceeds $5 million, the Company shall, within 30 days, use such Excess
Proceeds to make an offer to purchase (an "Asset Sale Offer") on a PRO RATA
basis, from all Holders, Notes in an aggregate principal amount equal to the
maximum principal amount that may be purchased out of Excess Proceeds, at a
purchase price (the "Offer Purchase Price") in cash equal to 100% of the
Accreted Value thereof on any purchase date occurring prior to the Full
Accretion Date, or 100% of the principal amount thereof on any purchase date
occurring on or after the Full Accretion Date, plus accrued and unpaid interest,
if any, to the purchase date, in accordance with the procedures set forth in the
Indenture. Upon completion of an Asset Sale Offer (including payment of the
Offer Purchase Price), any surplus Excess Proceeds that were the subject of such
offer shall cease to be Excess Proceeds, and the Company may then use such
amounts for general corporate purposes.
The Company will comply with the requirements of Section 14(e) under the
Exchange Act and any other securities laws and regulations, to the extent such
laws and regulations are applicable, in connection with the repurchase of Notes
pursuant to an Asset Sale Offer. If the aggregate Accreted Value or principal
amount, as the case may be, of Notes tendered pursuant to such Asset Sale Offer
exceeds the amount of Excess Proceeds, the Trustee shall select the Notes to be
purchased on a pro rata basis.
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CERTAIN COVENANTS
Set forth below are certain covenants that are contained in the Indenture:
LIMITATION ON CONSOLIDATED INDEBTEDNESS
The Company will not, and will not permit any Restricted Subsidiary to,
Incur any Indebtedness (including Acquired Indebtedness) after the Issue Date
unless the ratio of (i) the aggregate consolidated principal amount of
Indebtedness of the Company outstanding as of the most recent available
quarterly or annual balance sheet, after giving PRO FORMA effect to the
Incurrence of such Indebtedness and any other Indebtedness Incurred since such
balance sheet date and the receipt and application of the proceeds thereof, to
(ii) Consolidated Cash Flow Available for Fixed Charges for the four full fiscal
quarters immediately preceding the Incurrence of such Indebtedness for which
consolidated financial statements of the Company have become available,
determined on a PRO FORMA basis as if any such Indebtedness had been Incurred
and the proceeds thereof had been applied at the beginning of such four fiscal
quarters, would be less than 6.0 to 1.0 for such four-quarter periods ending on
or prior to December 31, 2000 and 5.5 to 1.0 for such periods ending thereafter,
after giving PRO FORMA effect to the Incurrence of such Indebtedness and any
other Indebtedness Incurred since such balance sheet date and the receipt and
application of the proceeds thereof.
Notwithstanding the foregoing limitation, the provisions of the preceding
paragraph will not apply to the Incurrence of any of the following items of
Indebtedness, each such item to be given independent effect:
(i) the Incurrence by the Company and/or any of its Restricted
Subsidiaries of Indebtedness under Senior Credit Facilities in an aggregate
principal amount outstanding or available at any one time not to exceed $75
million, and any renewal, extension, refinancing or refunding thereof in an
amount which, together with any principal amount remaining outstanding or
available under all Senior Credit Facilities, does not exceed the aggregate
principal amount outstanding or available under all Senior Credit Facilities
immediately prior to such renewal, extension, refinancing or refunding, less
amounts permanently repaid with proceeds from an Asset Sale;
(ii) the Incurrence by the Company and/or any of its Restricted
Subsidiaries of Purchase Money Indebtedness and Vendor Financing
Indebtedness, provided that the aggregate amount of such Purchase Money
Indebtedness or Vendor Financing Indebtedness Incurred does not exceed 80%
of the total cost of the Telecommunications Assets financed therewith (or,
in the case of Vendor Financing Indebtedness, 100% of the total cost of the
Telecommunications Assets financed therewith if such Vendor Financing
Indebtedness was extended for the purchase of tangible physical assets and
was so financed by the vendor thereof or an affiliate of such vendor);
(iii) the Incurrence by the Company and/or any of its Restricted
Subsidiaries, as applicable, of Indebtedness owed by the Company to any
Restricted Subsidiary of the Company or Indebtedness owed by a Restricted
Subsidiary of the Company to the Company or another Restricted Subsidiary of
the Company; provided that upon (x) the transfer or other disposition by
such Restricted Subsidiary or the Company of any Indebtedness so permitted
to a Person other than the Company or another Restricted Subsidiary of the
Company, (y) the issuance (other than directors' qualifying shares), sale,
lease, transfer or other disposition of shares of Capital Stock (including
by consolidation or merger) of such Restricted Subsidiary to a Person other
than the Company or another such Restricted Subsidiary or (z) the
designation of such Restricted Subsidiary as an Unrestricted Subsidiary, the
provisions of this clause (iii) shall no longer be applicable to such
Indebtedness and such Indebtedness shall be deemed to have been Incurred at
the time of such transfer or other disposition;
(iv) the Incurrence by the Company and/or any of its Restricted
Subsidiaries of Indebtedness Incurred to renew, extend, refinance or refund
(each, a "refinancing") the Notes or Indebtedness
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outstanding at the date of the Indenture or Purchase Money Indebtedness or
Vendor Financing Indebtedness Incurred pursuant to clause (ii) of this
paragraph in an aggregate amount (as determined pursuant to the definition
of "Indebtedness") not to exceed the aggregate amount of Indebtedness (as so
determined), and accrued interest on, the Indebtedness so refinanced plus
the amount of any premium required to be paid in connection with such
refinancing pursuant to the terms of the Indebtedness so refinanced or the
amount of any premium reasonably determined by the Company as necessary to
accomplish such refinancing by means of a tender offer or privately
negotiated repurchase, plus the reasonable expenses of the Company Incurred
in connection with such refinancing; PROVIDED that Indebtedness the proceeds
of which are used to refinance the Notes or Indebtedness which is PARI PASSU
to the Notes or Indebtedness which is subordinate in right of payment to the
Notes shall only be permitted under this clause (iv) if (A) in the case of
any refinancing of the Notes or Indebtedness which is PARI PASSU to the
Notes, the refinancing Indebtedness is PARI PASSU to the Notes or
constitutes Subordinated Indebtedness, and, in the case of any refinancing
of Subordinated Indebtedness, the refinancing Indebtedness constitutes
Subordinated Indebtedness and (B) in any case, the refinancing Indebtedness
by its terms, or by the terms of any agreement or instrument pursuant to
which such Indebtedness is issued, (x) does not provide for payments of
principal of such Indebtedness at stated maturity or by way of a sinking
fund applicable thereto or by way of any mandatory redemption, defeasance,
retirement or repurchase thereof by the Company (including any redemption,
retirement or repurchase which is contingent upon events or circumstances,
but excluding any retirement required by virtue of the acceleration of any
payment with respect to such Indebtedness upon any event of default
thereunder), in each case prior to the time the same are required by the
terms of the Indebtedness being refinanced and (y) does not permit
redemption or other retirement (including pursuant to an offer to purchase
made by the Company or a Restricted Subsidiary of the Company) of such
Indebtedness at the option of the holder thereof prior to the time the same
are required by the terms of the Indebtedness being refinanced, other than a
redemption or other retirement at the option of the holder of such
Indebtedness (including pursuant to an offer to purchase made by the Company
or a Restricted Subsidiary of the Company) which is conditioned upon a
change of control pursuant to provisions substantially similar to those
described under "--Repurchase at the Option of Holders--Change of Control;"
(v) the Incurrence by the Company and/or any of its Restricted
Subsidiaries of Indebtedness consisting of Permitted Interest Rate
Protection Agreements;
(vi) the Incurrence by the Company and/or any of its Restricted
Subsidiaries of Indebtedness (A) in respect of performance, surety or appeal
bonds provided in the ordinary course of business or (B) arising from
customary agreements providing for indemnification, adjustment of purchase
price for closing balance sheet changes within 90 days after closing, or
similar obligations, or from Guarantees or letters of credit, surety bonds
or performance bonds securing any obligations of the Company or any of its
Restricted Subsidiaries pursuant to such agreements, in each case Incurred
in connection with the disposition of any business, assets or Restricted
Subsidiary of the Company (other than Guarantees of Indebtedness Incurred by
any Person acquiring all or any portion of such business, assets or
Restricted Subsidiary of the Company for the purpose of financing such
acquisition) and in an aggregate principal amount not to exceed the gross
proceeds actually received by the Company or any Restricted Subsidiary in
connection with such disposition;
(vii) the Incurrence by the Company of Indebtedness (other than secured
Acquired Indebtedness) in an aggregate principal amount not to exceed 2.0
times the sum of the net cash proceeds received by the Company after the
date of the Indenture in connection with any issuance and sale of Capital
Stock (other than Disqualified Stock and other than the proceeds of the
Equity Commitment), PROVIDED that such Indebtedness does not mature prior to
the Stated Maturity of the Notes or has an Average Life at least equal to
the Notes; and
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(viii) the Incurrence by the Company and/or any of its Restricted
Subsidiaries of Indebtedness not otherwise permitted to be Incurred pursuant
to clauses (i) through (vii) above, which, together with any other
outstanding Indebtedness Incurred pursuant to this clause (viii), has an
aggregate principal amount not in excess of $10 million at any time
outstanding.
Notwithstanding any other provision of this "--Certain Covenants--Limitation
on Consolidated Indebtedness" covenant, the maximum amount of Indebtedness that
the Company or a Restricted Subsidiary may Incur pursuant to this "--Certain
Covenants--Limitation on Consolidated Indebtedness" covenant shall not be deemed
to be exceeded due solely as the result of fluctuations in the exchange rates of
currencies.
For purposes of determining any particular amount of Indebtedness under this
"--Certain Covenants--Limitation on Consolidated Indebtedness" covenant (1)
Guarantees, Liens or obligations with respect to letters of credit supporting
Indebtedness otherwise included in the determination of such particular amount
shall not be included and (2) any Liens granted pursuant to the equal and
ratable provisions referred to in the "--Certain Covenants--Limitation on Liens"
covenant described below shall not be treated as Indebtedness. For purposes of
determining compliance with this "--Certain Covenants-- Limitation on
Consolidated Indebtedness" covenant, in the event that an item of Indebtedness
meets the criteria of more than one of the types of Indebtedness described in
the above clauses, the Company, in its sole discretion, shall classify such item
of Indebtedness and only be required to include the amount and type of such
Indebtedness in one of such clauses.
LIMITATION ON RESTRICTED PAYMENTS
The Company will not, and will not permit any of its Restricted Subsidiaries
to, directly or indirectly, make any Restricted Payment unless, at the time of
and after giving effect to such proposed Restricted Payment (i) no Default or
Event of Default shall have occurred and be continuing or shall occur as a
consequence thereof; (ii) after giving effect, on a PRO FORMA basis, to such
Restricted Payment and the Incurrence of any Indebtedness the net proceeds of
which are used to finance such Restricted Payment, the Company could Incur at
least $1.00 of additional Indebtedness pursuant to the first paragraph of
"--Certain Covenants--Limitation on Consolidated Indebtedness;" and (iii) after
giving effect to such Restricted Payment on a PRO FORMA basis, the aggregate
amount expended (the amount so expended, if other than cash, to be determined in
good faith by a majority of the disinterested members of the Board of Directors,
whose determination shall be conclusive and evidenced by a resolution thereof
filed with the Trustee) or declared for all Restricted Payments after the Issue
Date does not exceed the sum of (A) 50% of the Consolidated Net Income of the
Company (or, if Consolidated Net Income shall be a deficit, minus 100% of such
deficit) for the period (taken as one accounting period) beginning on the last
day of the fiscal quarter immediately preceding the Issue Date and ending on the
last day of the fiscal quarter for which the Company's financial statements have
become available immediately preceding the date of such Restricted Payment, PLUS
(B) 100% of the net reduction in Investments, subsequent to the Issue Date, in
any Person, resulting from payments of interest on Indebtedness, dividends,
repayments of loans or advances, or other transfers of Property (but only to the
extent such interest, dividends, repayments or other transfers of Property are
not included in the calculation of Consolidated Net Income), in each case to the
Company or any Restricted Subsidiary from any Person (including, without
limitation, from Unrestricted Subsidiaries) or from redesignations of
Unrestricted Subsidiaries as Restricted Subsidiaries (valued in each case as
provided in the definition of "Investments"), not to exceed in the case of any
Person the amount of Investments previously made subsequent to the Issue Date by
the Company or any Restricted Subsidiary in such Person and which was treated as
a Restricted Payment PLUS (C) the aggregate net proceeds (other than proceeds
received by the Company pursuant to the Equity Commitment or used in the manner
set forth in clause (ii) of the following paragraph) received after the date of
the Indenture, including the fair value of property other than cash (determined
in good faith by a majority of the disinterested members of the Board of
Directors, whose determination shall be conclusive and evidenced by a resolution
thereof
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filed with the Trustee): (x) as capital contributions to the Company, (y) from
the issuance (other than to a Restricted Subsidiary) of Capital Stock (other
than Disqualified Stock) of the Company and warrants, rights or options on
Capital Stock (other than Disqualified Stock) of the Company, or (z) from the
conversion of Indebtedness of the Company into Capital Stock (other than
Disqualified Stock and other than by a Restricted Subsidiary) of the Company
after the date of the Indenture.
The foregoing limitations shall not prevent the Company from (i) paying a
dividend at any time within 60 days after the declaration thereof if, on the
declaration date, the Company could have paid such dividend in compliance with
the preceding paragraph; (ii) retiring (A) any Capital Stock of the Company or
any Restricted Subsidiary of the Company, (B) Indebtedness of the Company that
is subordinate to the Notes, in exchange for, or out of the proceeds of, the
substantially concurrent sale of Qualified Stock of the Company or (C)
Indebtedness of a Restricted Subsidiary which is subordinate (whether pursuant
to its terms or by operation of law) in right of payment to the Notes and which
was scheduled to mature on or after the maturity of the Notes, in exchange for,
or out of the proceeds of (x) the substantially concurrent sale of Qualified
Stock of the Company or (y) the substantially concurrent Incurrence of
Indebtedness of the Company or any Restricted Subsidiary that (I) is permitted
under the covenant described under "--Certain Covenants--Limitation on
Consolidated Indebtedness" (II) is not secured by any assets of the Company or
any Restricted Subsidiary to a greater extent than the retired Indebtedness was
so secured, (III) has an Average Life at least as long as the retired
Indebtedness and (IV) is subordinated in right of payment to the Notes at least
to the same extent as the retired Indebtedness; (iii) retiring any Indebtedness
of the Company that is subordinated in right of payment to the Notes in exchange
for, or out of the proceeds of, the substantially concurrent Incurrence of
Indebtedness of the Company (other than Indebtedness to a Subsidiary of the
Company), provided that such new Indebtedness (A) is subordinated in right of
payment to the Notes at least to the same extent as, (B) has an Average Life at
least as long as, and (C) has no scheduled principal payments due in any amount
earlier than, any equivalent amount of principal under the Indebtedness so
retired; (iv) making payments or distributions to dissenting stockholders
pursuant to applicable law in connection with a consolidation, merger or
transfer of assets permitted under "--Consolidation, Merger, Conveyance, Lease
or Transfer"; (v) retiring any Capital Stock of the Company to the extent
necessary (as determined in good faith by a majority of the disinterested
members of the Board of Directors, whose determination shall be conclusive and
evidenced by a resolution thereof filed with the Trustee) to prevent the loss,
or to secure the renewal or reinstatement, of any license or franchise held by
the Company or any Restricted Subsidiary from any governmental agency; (vi)
retiring any Capital Stock or warrants or options to acquire Capital Stock of
the Company or any Restricted Subsidiary held by any directors, officers or
employees of the Company or any Restricted Subsidiary, PROVIDED that the
aggregate price paid for all such retired Capital Stock, warrants or options
shall not exceed $500,000 in any twelve-month period; (vii) making Investments
in connection with Permitted Joint Ventures in an aggregate amount not to exceed
$15 million; and (viii) making Investments not otherwise permitted in an
aggregate amount not to exceed $5 million at any time outstanding.
In determining the amount of Restricted Payments permissible under this
covenant, amounts expended pursuant to clauses (ii) and (iii) of the foregoing
paragraph shall not be included as Restricted Payments.
Not later than the date of making any Restricted Payment (including any
Restricted Payment permitted to be made pursuant to the three previous
paragraphs), the Company shall deliver to the Trustee an Officers' Certificate
stating that such Restricted Payment is permitted and setting forth the basis
upon which the required calculations were computed, which calculations may be
based upon the Company's latest available financial statements.
LIMITATION ON LIENS
The Company may not, and may not permit any Restricted Subsidiary of the
Company to, Incur or suffer to exist any Lien (other than a Permitted Lien) on
or with respect to any property or assets now
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owned or hereafter acquired to secure any Indebtedness without making, or
causing such Restricted Subsidiary to make, effective provision for securing the
Notes (i) equally and ratably with such Indebtedness as to such property for so
long as such Indebtedness will be so secured or (ii) in the event such
Indebtedness is Indebtedness of the Company which is subordinate in right of
payment to the Notes, prior to such Indebtedness as to such property for so long
as such Indebtedness will be so secured.
LIMITATION ON SALE AND LEASEBACK TRANSACTIONS
The Company will not, and will not permit any of its Restricted Subsidiaries
to, directly or indirectly, enter into, assume, Guarantee or otherwise become
liable with respect to any Sale and Leaseback Transaction (other than a Sale and
Leaseback Transaction between the Company or a Restricted Subsidiary on the one
hand and a Restricted Subsidiary or the Company on the other hand), unless (i)
the Company or such Restricted Subsidiary, as the case may be, receives
consideration at the time of such Sale and Leaseback Transaction at least equal
to the Fair Market Value (as evidenced by a Board Resolution delivered to the
Trustee) of the Property subject to such transaction; (ii) the Attributable
Indebtedness of the Company or such Restricted Subsidiary with respect thereto
is included as Indebtedness and would be permitted by the covenant described
under "--Certain Covenants--Limitation on Consolidated Indebtedness"; (iii) the
Company or such Restricted Subsidiary would be permitted to create a Lien on
such Property without securing the Notes by the covenant described under
"--Certain Covenants--Limitation on Liens"; and (iv) the Net Cash Proceeds from
such transaction are applied in accordance with the covenant described under
"--Asset Sales," if applicable.
LIMITATION ON DIVIDENDS AND OTHER PAYMENT RESTRICTIONS AFFECTING RESTRICTED
SUBSIDIARIES
The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, cause or suffer to exist or become effective, or enter
into, any encumbrance or restriction (other than pursuant to law or regulation)
on the ability of any Restricted Subsidiary (i) to pay dividends or make any
other distributions in respect of its Capital Stock or pay any Indebtedness or
other obligation owed to the Company or any Restricted Subsidiary; (ii) to make
loans or advances to the Company or any Restricted Subsidiary; or (iii) to
transfer any of its Property to the Company or any other Restricted Subsidiary,
except: (a) any encumbrance or restriction existing as of the Issue Date
pursuant to the Indenture or any other agreement relating to any Existing
Indebtedness or any Indebtedness under a Senior Credit Facility otherwise
permitted under the Indenture; (b) any encumbrance or restriction pursuant to an
agreement relating to an acquisition of Property, so long as the encumbrances or
restrictions in any such agreement relate solely to the Property so acquired;
(c) any encumbrance or restriction relating to any Indebtedness of any
Restricted Subsidiary existing on the date on which such Restricted Subsidiary
is acquired by the Company or another Restricted Subsidiary (other than any such
Indebtedness Incurred by such Restricted Subsidiary in connection with or in
anticipation of such acquisition); (d) any encumbrance or restriction existing
under or by reason of applicable law; (e) any encumbrance or restriction
pursuant to an agreement effecting a permitted refinancing of Indebtedness
issued pursuant to an agreement referred to in the foregoing clauses (a) through
(d), so long as the encumbrances and restrictions contained in any such
refinancing agreement are not materially more restrictive than the encumbrances
and restrictions contained in such agreements; (f) customary provisions (A) that
restrict the subletting, assignment or transfer of any property or asset that is
a lease, license, conveyance or contract or similar property or asset; (B)
existing by virtue of any transfer of, agreement to transfer, option or right
with respect to, or Lien on, any property or assets of the Company or any
Restricted Subsidiary not otherwise prohibited by the Indenture or (C) arising
or agreed to in the ordinary course of business, not relating to any
Indebtedness, and that do not, individually or in the aggregate, detract from
the value of property or assets of the Company or any Restricted Subsidiary in
any manner material to the Company or any Restricted Subsidiary; (g) in the case
of clause (iii) above, restrictions contained in any security agreement
(including a Capital Lease Obligation) securing Indebtedness of the Company or a
Restricted Subsidiary otherwise permitted under the Indenture, but only to the
extent such restrictions restrict the transfer of the property
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subject to such security agreement and (h) any restriction with respect to a
Restricted Subsidiary of the Company imposed pursuant to an agreement which has
been entered into for the sale or disposition of all or substantially all of the
Capital Stock or assets of such Restricted Subsidiary, provided that the
consummation of such transaction would not result in an Event of Default or an
event that, with the passing of time or the giving of notice or both, would
constitute an Event of Default, that such restriction terminates if such
transaction is not consummated and that the consummation or abandonment of such
transaction occurs within one year of the date such agreement was entered into.
Nothing contained in this "--Certain Covenants--Limitation on Dividend and
Other Payment Restrictions Affecting Restricted Subsidiaries" covenant shall
prevent the Company or any other Restricted Subsidiary from (1) creating,
Incurring, assuming or suffering to exist any Liens otherwise permitted under
the covenant described in "--Certain Covenants--Limitation on Liens" or (2)
restricting the sale or other disposition of property or assets of the Company
or any of its Restricted Subsidiaries that secure Indebtedness of the Company or
any of its Restricted Subsidiaries otherwise permitted under "--Certain
Covenants--Limitation on Consolidated Indebtedness."
LIMITATION ON ISSUANCE AND SALE OF CAPITAL STOCK OF RESTRICTED SUBSIDIARIES
The Company (i) shall not permit any Restricted Subsidiary to issue any
Capital Stock other than to the Company or a Restricted Subsidiary unless
immediately after giving effect thereto such Restricted Subsidiary would no
longer constitute a Restricted Subsidiary and any Investment of the Company or
any other Restricted Subsidiary in such Restricted Subsidiary would have been
permitted under "--Certain Covenants--Limitation on Restricted Payments" if made
on the date of such issuance and (ii) shall not permit any Person other than the
Company or a Restricted Subsidiary to own any Capital Stock of any Restricted
Subsidiary, other than directors' qualifying shares except for a sale of 100% of
the Capital Stock of a Restricted Subsidiary sold in a transaction not
prohibited by the covenant described under "Repurchase at the Option of
Holders--Asset Sales."
TRANSACTIONS WITH AFFILIATES
The Company will not, and will not permit any of its Restricted Subsidiaries
to, directly or indirectly, sell, lease, transfer, or otherwise dispose of, any
of its Properties or assets to, or purchase any Property or assets from, or
enter into any contract, agreement, understanding, loan, advance or Guarantee
with or for the benefit of, any Affiliate (each of the foregoing, an "Affiliate
Transaction"), unless (a) such Affiliate Transaction or series of related
Affiliate Transactions is on terms that are no less favorable to the Company or
such Restricted Subsidiary than those that would have been obtained in a
comparable arms-length transaction by the Company or such Restricted Subsidiary
with a Person that is not an Affiliate (or, in the event that there are no
comparable transactions involving Persons who are not Affiliates of the Company
or the relevant Restricted Subsidiary to apply for comparative purposes, is
otherwise on terms that, taken as a whole, the Company has determined to be fair
to the Company or the relevant Restricted Subsidiary) and (b) the Company
delivers to the Trustee (i) with respect to any Affiliate Transaction or series
of related Affiliate Transactions involving aggregate payments in excess of $1
million, a Board Resolution certifying that such Affiliate Transaction or series
of related Affiliate Transactions complies with clause (a) above and that such
Affiliate Transaction or series of related Affiliate Transactions has been
approved by a majority of the disinterested members of the Board of Directors
who have determined that such Affiliate Transaction or series of related
Affiliate Transactions is in the best interest of the Company or such Restricted
Subsidiary and (ii) with respect to any Affiliate Transaction or series of
related Affiliate Transactions involving aggregate payments in excess of $10
million, a written opinion from an investment banking firm of national standing
in the United States which, in the good faith judgment of the Board of
Directors, is independent with respect to the Company and its Subsidiaries and
qualified to perform such task; PROVIDED that the following shall not be deemed
Affiliate Transactions: (i) any employment agreement entered into by the Company
or any of its Restricted Subsidiaries in the ordinary course of business and
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consistent with industry practice; (ii) any agreement or arrangement with
respect to the compensation of a director or officer of the Company or any
Restricted Subsidiary approved by a majority of the disinterested members of the
Board of Directors and consistent with industry practice; (iii) transactions
between or among the Company and its Restricted Subsidiaries; (iv) transactions
permitted by the covenant described under "--Certain Covenants--Limitation on
Restricted Payments"; and (v) transactions pursuant to the Management Services
Agreements described under "Certain Transactions," as in effect on the Issue
Date.
LIMITATIONS ON ISSUANCES OF GUARANTEES OF INDEBTEDNESS
The Indenture provides that the Company will not permit any Subsidiary,
directly or indirectly, to Guarantee, assume or in any other manner become
liable with respect to any Pari Passu Indebtedness or Subordinated Indebtedness
of the Company unless such Subsidiary simultaneously executes and delivers a
supplemental indenture to the Indenture providing for a Guarantee of the Notes
on the same terms as the Guarantee of such Indebtedness; PROVIDED that (i) such
Guarantee need not be secured unless required pursuant to "Limitation on Liens"
and (ii) if such Indebtedness is by its terms expressly subordinated to the
Notes, any such assumption, Guarantee or other liability of such Subsidiary with
respect to such Indebtedness shall be subordinated to such Subsidiary's
Guarantee of the Notes at least to the same extent as such Indebtedness is
subordinated to the Notes. This paragraph shall not apply to any Guarantee or
assumption of liability of Indebtedness permitted under the Indenture described
in clauses (i), (iv), (v) and (vi) of the second paragraph under "--Limitation
on Consolidated Indebtedness."
Notwithstanding the foregoing, any Guarantee by a Subsidiary of the Notes
shall provide by its terms that it (and all Liens securing the same) shall be
automatically and unconditionally released and discharged upon any sale,
exchange or transfer, to any Person not an Affiliate of the Company, of all or
substantially all of the assets of such Subsidiary or all of the Capital Stock
of such Subsidiary owned by the Company, which transaction is in compliance with
the terms of the Indenture and such Subsidiary is released from its Guarantees
of other Indebtedness of the Company or any of its Subsidiaries.
RESTRICTED AND UNRESTRICTED SUBSIDIARIES
(a) The Company may designate a Subsidiary (including a newly formed or
newly acquired Subsidiary) of the Company or any of its Restricted Subsidiaries
as an Unrestricted Subsidiary so long as (A) such Subsidiary (i) does not have
any obligations which, if in Default, would result in a cross default on
Indebtedness of the Company or a Restricted Subsidiary (other than Indebtedness
to the Company or a Restricted Subsidiary), (ii) is not party to any agreement,
contract, arrangement or understanding with the Company or any Restricted
Subsidiary of the Company unless the terms of any such agreement, contract,
arrangement or understanding are no less favorable to the Company or such
Restricted Subsidiary than those that might be obtained at the time from Persons
who are not Affiliates of the Company, unless such agreement, contract,
arrangement or understanding constitutes a Restricted Payment permitted by the
Indenture; (iii) is a Person with respect to which neither the Company nor any
of its Restricted Subsidiaries has any direct or indirect obligation (x) to
subscribe for additional Equity Interests or (y) to maintain or preserve such
Person's financial condition or to cause such Person to achieve any specified
levels of operating results; (iv) has not Guaranteed or otherwise directly or
indirectly provided credit support for any Indebtedness of the Company or any of
its Restricted Subsidiaries; (v) has at least one director on its board of
directors that is not a director or executive officer of the Company or any of
its Restricted Subsidiaries or has at least one executive officer that is not a
director or executive officer of the Company or any of its Restricted
Subsidiaries, (vi) such Subsidiary does not own any Telecommunications Assets
that are essential to the operation of the Company's business, taken as a whole
and (vii) one of the following is true: (x) such Subsidiary has total assets of
$1,000 or less, (y) such Subsidiary has assets of more than $1,000 and an
Investment in such Subsidiary in an amount equal to the Fair Market Value of
such Subsidiary would then be permitted under the first paragraph of "--Certain
Covenants--Limitation on Restricted Payments" or (z) such designation is
effective immediately upon such Person becoming a
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Subsidiary; and (B) no Default or Event of Default would occur as a result of
such designation. Unless so designated as an Unrestricted Subsidiary, any Person
that becomes a Subsidiary of the Company or any of its Restricted Subsidiaries
shall be classified as a Restricted Subsidiary thereof.
(b) The Company will not, and will not permit any of its Restricted
Subsidiaries to, take any action or enter into any transaction or series of
related transactions that would result in a Person (other than a newly formed
Subsidiary having no outstanding Indebtedness (other than Indebtedness to the
Company or a Restricted Subsidiary) at the date of determination) becoming a
Restricted Subsidiary (whether through an acquisition, the redesignation of an
Unrestricted Subsidiary or otherwise) unless, after giving effect to such
action, transaction or series of related transactions, on a pro forma basis, (i)
the Company could Incur at least $1.00 of additional Indebtedness pursuant to
"--Certain Covenants--Limitation on Consolidated Indebtedness" and (ii) no
Default or Event of Default would occur.
(c) Subject to clause (b), an Unrestricted Subsidiary may be redesignated as
a Restricted Subsidiary. The designation of a Subsidiary as an Unrestricted
Subsidiary or the designation of an Unrestricted Subsidiary as a Restricted
Subsidiary in compliance with clause (b) shall be made by the Board of Directors
pursuant to a Board Resolution delivered to the Trustee and shall be effective
as of the date specified in such Board Resolution, which shall not be prior to
the date such Board Resolution is delivered to the Trustee.
BUSINESS ACTIVITIES
The Indenture provides that the Company and its Restricted Subsidiaries may
not, directly or indirectly, engage in any business other than the
Telecommunications Business.
PAYMENTS FOR CONSENT
The Indenture provides that neither the Company nor any of its Affiliates
shall, directly or indirectly, pay or cause to be paid any consideration,
whether by way of interest, fee or otherwise, to any Holder of any Notes for or
as an inducement to any consent, waiver or amendment of any of the terms or
provisions of the Indenture or the Notes unless such consideration is offered to
be paid or agreed to be paid to all Holders of the Notes that consent, waive or
agree to amend in the time frame set forth in the solicitation documents
relating to such consent, waiver or agreement.
REPORTS
The Indenture provides that, whether or not required by the rules and
regulations of the Commission, so long as any Notes are outstanding, the Company
will furnish to the Holders of Notes and file with the Commission (i) all
quarterly and annual financial information that would be required to be
contained in a filing with the Commission on Forms 10-Q and 10-K if the Company
were required to file such forms, including a "Management's Discussion and
Analysis of Financial Condition and Results of Operations" that describes the
financial condition and results of operations of the Company and its
consolidated Subsidiaries (showing in reasonable detail, either on the face of
the financial statements or in the footnotes thereto and in Management's
Discussion and Analysis of Financial Condition and Results of Operations, the
financial condition and results of operations of the Company and its Restricted
Subsidiaries separate from the financial condition and results of operations of
the Unrestricted Subsidiaries of the Company) and, with respect to the annual
information only, a report thereon by the Company's certified independent
accountants and (ii) all current reports that would be required to be filed with
the Commission on Form 8-K if the Company were required to file such reports, in
each case within the time periods specified in the Commission's rules and
regulations. In addition, for so long as any Notes are outstanding, the Company
will furnish to the Holders of the Notes, securities analysts and prospective
investors or beneficial owners of the Notes, upon their request, the information
required to be delivered pursuant to Rule 144A(d)(4) under the Securities Act.
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CONSOLIDATION, MERGER, CONVEYANCE, LEASE OR TRANSFER
The Company will not, in any transaction or series of related transactions,
consolidate with, or merge with or into, any other Person (other than a merger
of a Restricted Subsidiary into the Company in which the Company is the
continuing corporation), or sell, convey, assign, transfer, lease or otherwise
dispose of all or substantially all of the Property and assets of the Company
and the Restricted Subsidiaries taken as a whole to any other Person, unless:
(i) either (a) the Company shall be the continuing corporation or (b)
the corporation (if other than the Company) formed by such consolidation or
into which the Company is merged, or the Person which acquires, by sale,
assignment, conveyance, transfer, lease or disposition, all or substantially
all of the Property and assets of the Company and the Restricted
Subsidiaries taken as a whole (such corporation or Person, the "Surviving
Entity"), shall be a corporation organized and validly existing under the
laws of the United States of America, any state thereof or the District of
Columbia, and shall expressly assume, by a supplemental indenture, the due
and punctual payment of the principal of (and premium, if any) and interest
on all the Notes and the performance of the Company's covenants and
obligations under the Indenture;
(ii) immediately after giving effect to such transaction or series of
related transactions on a PRO FORMA basis (including, without limitation,
any Indebtedness Incurred in connection with or in respect of such
transaction or series of related transactions), no Event of Default or
Default shall have occurred and be continuing;
(iii) immediately after giving effect to such transaction or series of
related transactions on a PRO FORMA basis (including, without limitation,
any Indebtedness Incurred in connection with or in respect of such
transaction or series of related transactions), the Company (or the
Surviving Entity, if the Company is not continuing) would (A) be permitted
to Incur at least $1.00 of additional Indebtedness pursuant to the first
paragraph of "--Certain Covenants--Limitation on Consolidated Indebtedness"
and (B) have a Consolidated Net Worth that is not less than the Consolidated
Net Worth of the Company immediately before such transaction or series of
related transactions; and
(iv) if, as a result of any such transaction, Property of the Company
would become subject to a Lien prohibited by the provisions of the Indenture
described under "--Certain Covenants--Limitation on Liens" above, the
Company or the successor entity shall have secured the Notes as required
thereby.
EVENTS OF DEFAULT
Each of the following is an "Event of Default" under the Indenture:
(a) default in the payment of interest (including any Special Interest)
on any Note when the same becomes due and payable, and the continuance of
such default for a period of 30 days;
(b) default in the payment of the principal of (or premium, if any, on)
any Note at its maturity, upon optional redemption, required repurchase
(including pursuant to a Change of Control Offer or an Asset Sale Offer) or
otherwise or the failure to make an offer to purchase any Note as required;
(c) the Company or any of its Restricted Subsidiaries fails to comply
with any of its covenants or agreements described under "--Repurchase at the
Option of Holders," "--Certain Covenants-- Limitation on Restricted
Payments," "--Certain Covenants--Limitation on Consolidated Indebtedness,"
"--Certain Covenants--Limitation on Liens," "--Certain Covenants--Limitation
on Dividends and Other Payment Restrictions Affecting Restricted
Subsidiaries" or "--Consolidation, Merger, Conveyance, Lease or Transfer";
(d) default in the performance, or breach, of any covenant or warranty
of the Company in the Indenture (other than a covenant or warranty addressed
in (a), (b) or (c) above) and continuance of
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such Default or breach for a period of 60 days after written notice thereof
has been given to the Company by the Trustee or to the Company and the
Trustee by Holders of at least 25% of the aggregate principal amount of the
outstanding Notes;
(e) (i) any payment of principal, and premium, if any, in excess of $5
million with respect to Indebtedness of the Company or any Restricted
Subsidiary is not paid when due within the applicable grace period, if any,
or (ii) Indebtedness of the Company or any Restricted Subsidiary is
accelerated by the holders thereof and the amount of principal and premium,
if any, of such accelerated Indebtedness exceeds $5 million;
(f) the entry by a court of competent jurisdiction of one or more final
judgments against the Company or any Restricted Subsidiary in an uninsured
and unindemnified aggregate amount in excess of $5 million which is not
discharged, waived, stayed, bonded or satisfied for a period of 45
consecutive days;
(g) the entry by a court having jurisdiction in the premises of (i) a
decree or order for relief in respect of the Company or any Restricted
Subsidiary in an involuntary case or proceeding under U.S. bankruptcy laws,
as now or hereafter constituted, or any other applicable Federal, state, or
foreign bankruptcy, insolvency, or other similar law or (ii) a decree or
order adjudging the Company or any Restricted Subsidiary a bankrupt or
insolvent, or approving as properly filed a petition seeking reorganization,
arrangement, adjustment or composition of or in respect of the Company or
any Restricted Subsidiary under U.S. bankruptcy laws, as now or hereafter
constituted, or any other applicable Federal, state or foreign bankruptcy,
insolvency or similar law, or appointing a custodian, receiver, liquidator,
assignee, trustee, sequestrator or other similar official of the Company or
any Restricted Subsidiary or of any substantial part of the Property or
assets of the Company or any Restricted Subsidiary, or ordering the winding
up or liquidation of the affairs of the Company or any Restricted
Subsidiary, and the continuance of any such decree or order for relief or
any such other decree or order unstayed and in effect for a period of 45
consecutive days; or
(h) (i) the commencement by the Company or any Restricted Subsidiary of
a voluntary case or proceeding under U.S. bankruptcy laws, as now or
hereafter constituted, or any other applicable Federal, state or foreign
bankruptcy, insolvency or other similar law or of any other case or
proceeding to be adjudicated a bankrupt or insolvent; or (ii) the consent by
the Company or any Restricted Subsidiary to the entry of a decree or order
for relief in respect of the Company or any Restricted Subsidiary in an
involuntary case or proceeding under U.S. bankruptcy laws, as now or
hereafter constituted, or any other applicable Federal, state or foreign
bankruptcy, insolvency or other similar law or to the commencement of any
bankruptcy or insolvency case or proceeding against the Company or any
Restricted Subsidiary; or (iii) the filing by the Company or any Restricted
Subsidiary of a petition or answer or consent seeking reorganization or
relief under U.S. bankruptcy laws, as now or hereafter constituted, or any
other applicable Federal, state or foreign bankruptcy, insolvency or other
similar law; or (iv) the consent by the Company or any Restricted Subsidiary
to the filing of such petition or to the appointment of or taking possession
by a custodian, receiver, liquidator, assignee, trustee, sequestrator or
similar official of the Company or any Restricted Subsidiary or of any
substantial part of the Property or assets of the Company or any Restricted
Subsidiary, or the making by the Company or any Restricted Subsidiary of an
assignment for the benefit of creditors; or (v) the admission by the Company
or any Restricted Subsidiary in writing of its inability to pay its debts
generally as they become due; or (vi) the taking of corporate action by the
Company or any Restricted Subsidiary in furtherance of any such action.
If any Event of Default (other than an Event of Default specified in clause
(g) or (h) above) occurs and is continuing, then and in every such case the
Trustee or the Holders of not less than 25% of the outstanding aggregate
principal amount of Notes may declare the Default Amount (as defined below) and
any accrued and unpaid interest on all Notes then outstanding to be immediately
due and payable by a
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notice in writing to the Company (and to the Trustee if given by Holders of the
Notes), and upon any such declaration, such Default Amount and any accrued
interest will become and be immediately due and payable. If any Event of Default
specified in clause (g) or (h) above occurs, the Default Amount and any accrued
and unpaid interest on the Notes then outstanding shall become immediately due
and payable without any declaration or other act on the part of the Trustee or
any Holder of Notes. Until the Full Accretion Date, the "Default Amount" shall
equal the Accreted Value of the Notes as of such date. On or after the Full
Accretion Date, the "Default Amount" shall equal 100% of the principal amount
thereof. Under certain circumstances, the Holders of a majority in principal
amount of the outstanding Notes by notice to the Company and the Trustee may
rescind an acceleration and its consequences.
In the case of any Event of Default occurring by reason of any willful
action (or inaction) taken (or not taken) by or on behalf of the Company with
the intention of avoiding payment of the premium that the Company would have had
to pay if the Company then had elected to redeem the Notes pursuant to the
optional redemption provisions of the Indenture, an equivalent premium shall
also become and be immediately due and payable to the extent permitted by law
upon the acceleration of the Notes. If an Event of Default occurs prior to April
15, 2003 by reason of any willful action (or inaction) taken (or not taken) by
or on behalf of the Company with the intention of avoiding the prohibition on
redemption of the Notes prior to such date, then the premium specified in the
Indenture shall also become immediately due and payable to the extent permitted
by law upon the acceleration of the Notes.
The Company will be required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Company is required within 30
days after becoming aware of any Default or Event of Default, to deliver to the
Trustee a statement describing such Default or Event of Default, its status and
what action the Company is taking or proposes to take with respect thereto. The
Trustee may withhold from Holders of the Notes notice of any continuing Default
or Event of Default (other than relating to the payment of principal or
interest) if the Trustee determines that withholding such notice is in the
Holders' interest.
AMENDMENT, SUPPLEMENT AND WAIVER
The Company and the Trustee may, at any time and from time to time, without
notice to or consent of any Holder of Notes, enter into one or more indentures
supplemental to the Indenture (1) to evidence the succession of another Person
to the Company and the assumption by such successor of the covenants of the
Company in the Indenture and the Notes; (2) to add to the covenants of the
Company, for the benefit of the Holders, or to surrender any right or power
conferred upon the Company by the Indenture; (3) to add any additional Events of
Default; (4) to provide for uncertificated Notes in addition to or in place of
certificated Notes; (5) to evidence and provide for the acceptance of
appointment under the Indenture of a successor Trustee; (6) to secure the Notes;
(7) to cure any ambiguity in the Indenture, to correct or supplement any
provision in the Indenture which may be inconsistent with any other provision
therein or to add any other provisions with respect to matters or questions
arising under the Indenture; PROVIDED such actions shall not adversely affect
the interests of the Holders in any material respect; or (8) to comply with the
requirements of the Commission in order to effect or maintain the qualification
of the Indenture under the TIA
With the consent of the Holders of not less than a majority in principal
amount of the outstanding Notes, the Company and the Trustee may enter into one
or more indentures supplemental to the Indenture for the purpose of adding any
provisions to or changing in any manner or eliminating any of the provisions of
the Indenture or modifying in any manner the rights of the Holders; provided
that no such supplemental indenture shall, without the consent of the Holder of
each outstanding Note: (1) change the Stated Maturity of the principal of, or
any installment of interest on, any Note, or alter the redemption provisions
thereof, or reduce the principal amount thereof (or premium, if any), or the
interest thereon that would be due and payable upon Maturity thereof, or change
the place of payment where, or the coin or currency in which, any Note or any
premium or interest thereon is payable, or impair the right to
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institute suit for the enforcement of any such payment on or after the maturity
thereof; (2) reduce the percentage in principal amount of the outstanding Notes,
the consent of whose Holders is necessary for any such supplemental indenture or
required for any waiver of compliance with certain provisions of the Indenture
or certain Defaults thereunder; (3) subordinate in right of payment, or
otherwise subordinate, the Notes to any other Indebtedness; (4) modify any
provision of the Indenture relating to the calculation of Accreted Value; or (5)
modify any provision described in this paragraph (except to increase any
percentage set forth herein).
The Holders of not less than a majority in principal amount of the
outstanding Notes may, on behalf of the Holders of all the Notes, waive any past
Default under the Indenture and its consequences, except a Default (1) in the
payment of the principal of (or premium, if any) or interest on any Note, or (2)
in respect of a covenant or provision hereof which under the proviso to the
prior paragraph cannot be modified or amended without the consent of the Holder
of each outstanding Note affected.
SATISFACTION AND DISCHARGE OF THE INDENTURE; DEFEASANCE
The Company may terminate its obligations under the Indenture when (i)
either (A) all outstanding Notes have been delivered to the Trustee for
cancellation or (B) all such Notes not theretofore delivered to the Trustee for
cancellation have become due and payable, will become due and payable within one
year or are to be called for redemption within one year under irrevocable
arrangements satisfactory to the Trustee for the giving of notice of redemption
by the Trustee in the name and at the expense of the Company, and the Company
has irrevocably deposited or caused to be deposited with the Trustee funds in an
amount sufficient to pay and discharge the entire indebtedness on the Notes not
theretofore delivered to the Trustee for cancellation, for principal of (or
premium, if any, on) and interest to the date of deposit or maturity or date of
redemption; (ii) the Company has paid or caused to be paid all sums payable by
the Company under the Indenture; and (iii) the Company has delivered an
Officers' Certificate and an Opinion of Counsel relating to compliance with the
conditions set forth in the Indenture.
The Company, at its election, shall (a) be deemed to have paid and
discharged its debt on the Notes and the Indenture shall cease to be of further
effect as to all outstanding Notes (except as to (i) rights of registration of
transfer, substitution and exchange of Notes and the Company's right of optional
redemption, (ii) rights of Holders to receive payments of principal of, premium,
if any, and interest on the Notes (but not the Change of Control Purchase Price
or the Offer Purchase Price) and any rights of the Holders with respect to such
amounts, (iii) the rights, obligations and immunities of the Trustee under the
Indenture and (iv) certain other specified provisions in the Indenture) or (b)
cease to be under any obligation to comply with certain restrictive covenants
including those described under "--Certain Covenants," after the irrevocable
deposit by the Company with the Trustee, in trust for the benefit of the
Holders, at any time prior to the maturity of the Notes, of (A) money in an
amount, (B) U.S. Government Obligations which through the payment of interest
and principal will provide, not later than one day before the due date of
payment in respect of the Notes, money in an amount, or (C) a combination
thereof, sufficient in the opinion of a nationally recognized firm of
independent public accountants, to pay and discharge the principal of, and
interest on, the Notes then outstanding on the dates on which any such payments
are due in accordance with the terms of the Indenture and of the Notes. Such
defeasance or covenant defeasance shall be deemed to occur only if certain
conditions are satisfied, including, among other things, delivery by the Company
to the Trustee of an opinion of counsel reasonably acceptable to the Trustee to
the effect that (i) such deposit, defeasance and discharge will not be deemed,
or result in, a taxable event for federal income tax purposes with respect to
the Holders; and (ii) the Company's deposit will not result in the Trust or the
Trustee being subject to regulation under the Investment Company Act of 1940.
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THE TRUSTEE
The Bank of New York is the Trustee under the Indenture.
The Holders of not less than a majority in principal amount of the
outstanding Notes will have the right to direct the time, method and place of
conducting any proceeding for exercising any remedy available to the Trustee,
subject to certain exceptions. Except during the continuance of an Event of
Default, the Trustee will perform only such duties as are specifically set forth
in the Indenture. The Indenture provides that in case an Event of Default shall
occur (which shall not be cured or waived), the Trustee will be required, in the
exercise of its rights and powers under the Indenture, to use the degree of care
of a prudent person in the conduct of such person's own affairs. Subject to such
provisions, the Trustee will be under no obligation to exercise any of its
rights or powers under the Indenture at the request of any of the Holders of the
Notes, unless such Holders shall have offered to the Trustee indemnity
satisfactory to it against any loss, liability or expense.
NO PERSONAL LIABILITY OF CONTROLLING PERSONS, DIRECTORS, OFFICERS, EMPLOYEES AND
STOCKHOLDERS
No controlling Person, director, officer, employee, incorporator or
stockholder of the Company, as such, shall have any liability for any covenant,
agreement or other obligations of the Company under the Notes or the Indenture
or for any claim based on, in respect of, or by reason of, such obligations or
their creation, solely by reason of its past, present or future status as a
controlling Person, director, officer, employee, incorporator or stockholder of
the Company. By accepting a Note each Holder waives and releases all such
liability (but only such liability). The waiver and release are part of the
consideration for issuance of the Notes. Nonetheless, such waiver may not be
effective to waive liabilities under the federal securities laws and it has been
the view of the Commission that such a waiver is against public policy.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full disclosure of all such terms, as well as any
other capitalized terms used herein for which no definition is provided.
"ACCRETED VALUE" is defined to mean, for any date of calculation, the amount
calculated pursuant to (i), (ii), (iii) or (iv) for each $1,000 of principal
amount at maturity of Notes:
(i) if such date of calculation occurs on one or more of the following
dates (each a "Semi-Annual Accrual Date"), the Accreted Value will equal the
amount set forth below for such Semi-Annual Accrual Date:
<TABLE>
<CAPTION>
SEMI-ANNUAL ACCRETED
ACCRUAL DATE VALUE
- --------------------------------------------------------------------------------- ----------
<S> <C>
April 15, 1998................................................................... $ 532.73
October 15, 1998................................................................. 567.36
April 15, 1999................................................................... 604.24
October 15, 1999................................................................. 643.52
April 15, 2000................................................................... 685.34
October 15, 2000................................................................. 729.89
April 15, 2001................................................................... 777.34
October 15, 2001................................................................. 827.86
April 15, 2002................................................................... 881.67
October 15, 2002................................................................. 938.98
April 15, 2003................................................................... 1,000.00
</TABLE>
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(ii) if such date of calculation occurs before the first Semi-Annual
Accrual Date, the Accreted Value will equal the sum of (a) $532.35 and (b)
an amount equal to the product of (1) the Accreted Value for the first
Semi-Annual Accrual Date less $532.35 MULTIPLIED by (2) a fraction, the
numerator of which is the number of days from the Issue Date to such date of
calculation, using a 360-day year of twelve 30-day months, and the
denominator of which is the number of days elapsed from the Issue Date to
the first Semi-Annual Accrual Date, using a 360-day year of twelve 30-day
months;
(iii) if such date of calculation occurs between two Semi-Annual Accrual
Dates, the Accreted Value will equal the sum of (a) the Accreted Value of
Semi-Annual Accrual Date immediately preceding such date of calculation and
(b) an amount equal to the product of (1) the Accreted Value for the
immediately following Semi-Annual Accrual Date less the Accreted Value for
the immediately preceding Semi-Annual Accrual Date multiplied by (2) a
fraction, the numerator of which is the number of days from the immediately
preceding Semi-Annual Accrual Date to such date of calculation, using a
360-day year of twelve 30-day months, and the denominator of which is 180;
or
(iv) if such date of calculation occurs after the last Semi-Annual
Accrual Date, the Accreted Value will equal $1,000.
"ACQUIRED INDEBTEDNESS" means, with respect to any specified Person,
Indebtedness of any other Person existing at the time such other Person merged
with or into or became a Subsidiary of such specified Person, but excluding
Indebtedness which is extinguished, retired or repaid in connection with such
other Person merging with or into or becoming a Subsidiary of such specified
Person.
"AFFILIATE" means, as to any Person, any other Person which directly or
indirectly controls, or is under common control with, or is controlled by, such
Person. For purposes of this definition, "control" (including, with correlative
meanings, the terms "controlling," "under common control with" and "controlled
by"), as used with respect to any Person, shall mean 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 Stock, by
agreement or otherwise; PROVIDED, that Beneficial Ownership of 10% or more of
the Voting Stock of a Person shall be deemed to be control.
"ASSET SALE" by any Person means any transfer, conveyance, sale, lease or
other disposition by such Person or any of its Restricted Subsidiaries
(including a consolidation or merger or other sale of any such Restricted
Subsidiary with, into or to another Person in a transaction in which such
Restricted Subsidiary ceases to be a Restricted Subsidiary of the specified
Person, but excluding a disposition by a Restricted Subsidiary of such Person to
such Person or a Restricted Subsidiary of such Person or by such Person to a
Restricted Subsidiary of such Person) of (i) shares of Capital Stock or other
ownership interests of a Restricted Subsidiary of such Person, (ii)
substantially all of the assets of such Person or any of its Restricted
Subsidiaries representing a division or line of business (other than as part of
a Permitted Investment) or (iii) other assets or rights of such Person or any of
its Restricted Subsidiaries outside of the ordinary course of business and, in
each case, that is not governed by the provisions of the Indenture applicable to
consolidations, mergers, and transfers of all or substantially all of the assets
of the Company; PROVIDED that "Asset Sale" shall not include (i) sales or other
dispositions of inventory, receivables and other current assets in the ordinary
course of business, (ii) simultaneous exchanges by the Company or any Restricted
Subsidiary of Telecommunications Assets for other Telecommunications Assets in
the ordinary course of business; PROVIDED that the applicable Telecommunications
Assets received by the Company or such Restricted Subsidiary have at least
substantially equal Fair Market Value to the Company or such Restricted
Subsidiary (as determined by the Board of Directors whose good faith
determination shall be conclusive and evidenced by a Board Resolution filed with
the Trustee), (iii) disposals or replacements of obsolete, uneconomical,
negligible, worn-out or surplus property in the ordinary course of business;
(iv) sales or other dispositions of assets in a single or series of related
transactions with a Fair Market Value or net proceeds (as certified in an
Officers' Certificate) not in excess of $2 million; (v) a Restricted
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Payment that is permitted by the covenant described under "--Certain
Covenants--Limitation on Restricted Payments"; or (vi) a conveyance constituting
or pursuant to a Permitted Lien.
"ATTRIBUTABLE INDEBTEDNESS" means, with respect to any Sale and Leaseback
Transaction of any Person, as at the time of determination, the greater of (i)
the capitalized amount in respect of such transaction that would appear on the
balance sheet of such Person in accordance with GAAP and (ii) the present value
(discounted at a rate consistent with accounting guidelines, as determined in
good faith by the responsible accounting officer of such Person) of the payments
during the remaining term of the lease (including any period for which such
lease has been extended or may, at the option of the lessor, be extended) or
until the earliest date on which the lessee may terminate such lease without
penalty or upon payment of a penalty (in which case the rental payments shall
include such penalty).
"AVERAGE LIFE" means, as of any date, with respect to any debt security or
Disqualified Stock, the quotient obtained by dividing (i) the sum of the
products of (x) the number of years from such date to the dates of each
scheduled principal payment or redemption payment (including any sinking fund or
mandatory redemption payment requirements) of such debt security or Disqualified
Stock multiplied in each case by (y) the amount of such principal or redemption
payment, by (ii) the sum of all such principal or redemption payments.
"BENEFICIAL OWNER" means a beneficial owner as defined in Rules 13d-3 and
13d-5 under the Exchange Act (or any successor rules), including the provision
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 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.
"BOARD OF DIRECTORS" means the Board of Directors of the Company or any
committee thereof duly authorized to act on behalf of the Board of Directors.
"BOARD RESOLUTION" means a duly adopted resolution of the Board of Directors
in full force and effect at the time of determination.
"CAPITAL LEASE OBLIGATION" of any Person means the obligation to pay rent or
other payment amounts under a lease of (or other Indebtedness arrangement
conveying the right to use) real or personal property of such Person which is
required to be classified and accounted for as a capital lease or a liability on
the face of a balance sheet of such Person prepared in accordance with GAAP, and
the stated maturity thereof shall be the date of the last payment of rent or any
amount due under such lease prior to the first date upon which such lease may be
terminated by the lessee without payment of a penalty.
"CAPITAL STOCK" in any Person means any and all shares, interests,
participations or other equivalents in the equity interest (however designated)
in such Person and any rights (other than Indebtedness convertible into an
equity interest), warrants or options to subscribe for or acquire an equity
interest in such Person.
"CASH EQUIVALENTS" means (i) United States dollars, (ii) securities issued
or directly and fully Guaranteed or insured by the United States government or
any agency or instrumentality thereof (provided that the full faith and credit
of the United States is pledged in support thereof) having maturities of not
more than six months from the date of acquisition, (iii) certificates of deposit
and eurodollar time deposits with maturities of six months or less from the date
of acquisition, bankers acceptances with maturities not exceeding six months and
overnight bank deposits, in each case with any domestic commercial bank having
capital and surplus in excess of $500 million and ratings of "A" or better from
Moody's Investor's Service, Inc. ("Moody's") and Standard & Poor's Rating
Services ("S&P"), (iv) repurchase obligations with a term of not more than seven
days for underlying securities of the types described in clauses (ii) and (iii)
above entered into with any financial institution meeting the qualifications
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specified in clause (iii) above, (v) commercial paper having A-2; P-2 ratings
obtainable from Moody's or S&P and in each case maturing within six months after
the date of acquisition and (vi) money market and mutual funds at least 95% of
the assets of which constitute Cash Equivalents of the kinds described in
clauses (i)-(v) of this definition.
"CHANGE OF CONTROL" means the occurrence of any of the following: (i) 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 Restricted Subsidiaries, taken as a whole, to any Person or group (as
such term is used in Section 13(d)(3) and 14(d)(2) of the Exchange Act), (ii)
the adoption of a plan relating to the liquidation or dissolution of the
Company, (iii) any Person or group (as defined above) other than the Permitted
Holders is or becomes the Beneficial Owner, directly or indirectly, of more than
35% of the total Voting Stock or Total Common Equity of the Company, including
by way of merger, consolidation or otherwise or (iv) the first day on which a
majority of the members of the Board of Directors of the Company are not
Continuing Directors.
"CLOSING DATE" means April 13, 1998, the date on which Private Notes were
issued by the Company.
"CLOSING PRICE" on any Trading Day with respect to the per share price of
any shares of Capital Stock means the last reported sale price regular way or,
in case no such reported sale takes place on such day, the average of the
reported closing bid and asked prices regular way, in either case on the New
York Stock Exchange or, if such shares of Capital Stock are not listed or
admitted to trading on such exchange, on the principal national securities
exchange on which such shares are listed or admitted to trading or, if not
listed or admitted to trading on any national securities exchange, on the Nasdaq
National Market or, if such shares are not listed or admitted to trading on any
national securities exchange or quoted on Nasdaq National Market but the issuer
is a Foreign Issuer (as defined in Rule 3b-4(b) under the Exchange Act) and the
principal securities exchange on which such shares are listed or admitted to
trading is a Designated Offshore Securities Market (as defined in Rule 902(a)
under the Securities Act), the average of the reported closing bid and asked
prices regular way on such principal exchange, or, if such shares are not listed
or admitted to trading on any national securities exchange or quoted on Nasdaq
National Market and the issuer and principal securities exchange do not meet
such requirements, the average of the closing bid and asked prices in the
over-the-counter market as furnished by any New York Stock Exchange member firm
that is selected from time to time by the Company for that purpose and is
reasonably acceptable to the Trustee.
"COMMON STOCK" means Capital Stock other than Preferred Stock.
"COMMISSION" means the Securities and Exchange Commission, as from time to
time constituted.
"CONSOLIDATED CASH FLOW AVAILABLE FOR FIXED CHARGES" for any period means
the Consolidated Net Income of the Company and its Restricted Subsidiaries for
such period increased by the sum of (i) Consolidated Interest Expense of the
Company and its Restricted Subsidiaries for such period, plus (ii) Consolidated
Income Tax Expense of the Company and its Restricted Subsidiaries for such
period, plus (iii) the consolidated depreciation and amortization expense
included in the income statement of the Company and its Restricted Subsidiaries
for such period, plus (iv) any non-cash expense related to the issuance to
employees of the Company or any Restricted Subsidiary of the Company of options
to purchase Capital Stock of the Company or such Restricted Subsidiary, plus (v)
any non-cash expense related to a purchase accounting adjustment not requiring
an accrual or reserve and separately disclosed in the Company's income
statement, and decreased by the amount of any non-cash item that increases such
Consolidated Net Income, all as determined on a consolidated basis in accordance
with GAAP; PROVIDED that there shall be excluded therefrom the Consolidated Cash
Flow Available for Fixed Charges (if positive) of any Restricted Subsidiary of
the Company (calculated separately for such Restricted Subsidiary in the same
manner as provided above for the Company) that is subject to a restriction which
prevents the payment of dividends or the making of distributions to the Company
or another Restricted Subsidiary of the Company to the extent of such
restriction.
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"CONSOLIDATED INCOME TAX EXPENSE" for any period means the aggregate amounts
of the provisions for income taxes of the Company and its Restricted
Subsidiaries for such period calculated on a consolidated basis in accordance
with GAAP.
"CONSOLIDATED INTEREST EXPENSE" means for any period the interest expense
included in a consolidated income statement (excluding interest income) of the
Company and its Restricted Subsidiaries for such period in accordance with GAAP,
including without limitation or duplication (or, to the extent not so included,
with the addition of), (i) the amortization of original issue discount on any
Indebtedness and the interest portion of any deferred payment obligation
calculated in accordance with the effective interest method of accounting; (ii)
any payments or fees with respect to letters of credit, bankers' acceptances or
similar facilities; (iii) fees with respect to interest rate swap or similar
agreements or foreign currency hedge, exchange or similar agreements: (iv)
Preferred Stock dividends of the Company and its Restricted Subsidiaries (other
than dividends paid in shares of Preferred Stock that is not Disqualified Stock)
declared and paid or payable; (v) accrued Disqualified Stock dividends of the
Company and its Restricted Subsidiaries, whether or not declared or paid; (vi)
interest on Indebtedness Guaranteed by the Company and its Restricted
Subsidiaries: and (vii) the portion of any Capital Lease Obligation paid during
such period that is allocable to interest expense in accordance with GAAP.
"CONSOLIDATED NET INCOME" of any Person means, for any period, the aggregate
net income (or net loss) of such Person and its Restricted Subsidiaries for such
period on a consolidated basis determined in accordance with GAAP; PROVIDED that
there shall be excluded therefrom, without duplication (i) all items classified
as extraordinary, (ii) any net income (or net loss) of any Person other than
such Person and its Restricted Subsidiaries, except to the extent of the amount
of dividends or other distributions actually paid to such Person or its
Restricted Subsidiaries by such other Person during such period, (iii) the net
income of any Person acquired by such Person or any of its Restricted
Subsidiaries in a pooling-of-interests transaction for any period prior to the
date of the related acquisition, (iv) any gain or loss, net of taxes, realized
on the termination of any employee pension benefit plan, (v) net gains (or net
losses) in respect of Asset Sales by such Person or its Restricted Subsidiaries,
(vi) the net income (or net loss) of any Restricted Subsidiary of such Person to
the extent that the payment of dividends or other distributions to such Person
is restricted by the terms of its charter or any agreement, instrument,
contract, judgment, order, decree, statute, rule, governmental regulation or
otherwise, except for any dividends or distributions actually paid by such
Restricted Subsidiary to such Person, and (vii) the cumulative effect of changes
in accounting principles.
"CONSOLIDATED NET WORTH" of any Person means, at any date of determination,
the consolidated stockholders' equity or partners' capital (excluding
Disqualified Stock) of such Person and its Subsidiaries, as determined in
accordance with GAAP.
"CONTINUING DIRECTORS" means, as of any date of determination, any member of
the Board of Directors of the Company who (i) was a member of such Board of
Directors on the date of issuance or (ii) was nominated for election to such
Board of Directors with the affirmative vote of a majority of the Continuing
Directors who were members of such Board at the time of such nomination or
election or who was elected or appointed in the ordinary course by Continuing
Directors or other directors so elected or appointed.
"DEFAULT" means any event, act or condition, the occurrence of which is, or
after notice or the passage of time would be, an Event of Default.
"DISQUALIFIED STOCK" means any Capital Stock which, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, or otherwise, matures or is
mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or
is redeemable at the option of the holder thereof, or is exchangeable for
Indebtedness at any time, in whole or in part, on or prior to the Stated
Maturity of the Notes.
"ENRON" means Enron Capital & Trade Resources Corp.
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"EQUITY INTERESTS" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"EXISTING INDEBTEDNESS" means Indebtedness outstanding on the date of the
Indenture (other than under any Senior Credit Facility).
"EQUITY COMMITMENT" means the investment in the Company by Spectra 3 and
Enron, no later than the closing of the Offering, of an additional $20 million
pursuant to the SpectraNet International Common Stock Purchase Agreement dated
as of December 30, 1997, as amended, among the Company, Enron and Spectra 3.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended (or any
successor act), and the rules and regulations thereunder.
"FAIR MARKET VALUE" means, with respect to any asset or Property, the sale
value that would be obtained in an arm's-length transaction between an informed
and willing seller under no compulsion to sell and an informed and willing buyer
under no compulsion to buy, as determined in good faith by the Board of
Directors.
"FULL ACCRETION DATE" means April 15, 2003.
"GAAP" means United States generally accepted accounting principles,
consistently applied, as set forth in the opinions and pronouncements of the
Accounting Principles Board of the American Institute of Certified Public
Accountants and statements and pronouncements of the Financial Accounting
Standards Board, or in such other statements by such other entity as may be
approved by a significant segment of the accounting profession of the United
States, that are applicable to the circumstances as of the date of
determination; provided that, except as otherwise specifically provided, all
calculations made for purposes of determining compliance with the terms of the
provisions of the Indenture shall utilize GAAP as in effect on the Issue Date.
"GUARANTEE" means any direct or indirect obligation, contingent or
otherwise, of a Person guaranteeing or having the economic effect of
guaranteeing any Indebtedness of any other Person in any manner (and
"Guaranteed," "Guaranteeing" and "Guarantor" shall have meanings correlative to
the foregoing).
"HOLDER" means (i) in the case of any Note that is a Certificated Security,
the Person in whose name such Note is registered in the Note Register and (ii)
in the case of any Note that is a Global Security, the Depositary.
"INCUR" means, with respect to any Indebtedness or other obligation of any
Person, to create, issue, incur (by conversion, exchange or otherwise), assume,
Guarantee or otherwise become liable in respect of such Indebtedness or other
obligation including by acquisition of Subsidiaries or the recording, as
required pursuant to GAAP or otherwise, of any such Indebtedness or other
obligation on the balance sheet of such Person (and "Incurrence," "Incurred,"
"Incurrable" and "Incurring" shall have meanings correlative to the foregoing);
provided that a change in GAAP that results in an obligation of such Person that
exists at such time becoming Indebtedness shall not be deemed an Incurrence of
such Indebtedness and that neither the accrual of interest nor the accretion of
original issue discount shall be deemed an Incurrence of Indebtedness.
Indebtedness otherwise incurred by a Person before it becomes a Subsidiary of
the Company (whether by merger, consolidation, acquisition or otherwise) shall
be deemed to have been Incurred at the time at which such Person becomes a
Subsidiary of the Company.
"INDEBTEDNESS" means, at any time (without duplication), with respect to any
Person, whether recourse is to all or a portion of the assets of such Person,
and whether or not contingent, (i) any obligation of such Person for money
borrowed, (ii) any obligation of such Person evidenced by bonds, debentures,
notes, Guarantees or other similar instruments, including, without limitation,
any such obligations Incurred in connection with the acquisition of Property,
assets or businesses, excluding trade accounts payable made in the ordinary
course of business, (iii) any reimbursement obligation of such Person with
respect to letters of
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credit, bankers' acceptances or similar facilities issued for the account of
such Person, (iv) any obligation of such Person issued or assumed as the
deferred purchase price of Property or services (but excluding trade accounts
payable or accrued liabilities arising in the ordinary course of business, which
in either case are not more than 60 days overdue or which are being contested in
good faith), (v) any Capital Lease Obligation of such Person, (vi) the maximum
fixed redemption or repurchase price of Disqualified Stock of such Person and,
to the extent held by Persons other than such Person or its Restricted
Subsidiaries, the maximum fixed redemption or repurchase price of Disqualified
Stock of such Person's Restricted Subsidiaries, at the time of determination,
(vii) every obligation under Interest Rate Protection Agreements of such Person,
(viii) any Attributable Indebtedness with respect to any Sale and Leaseback
Transaction to which such Person is a party, (ix) to the extent held by Persons
other than such Person or its Restricted Subsidiaries, the liquidation value of
any Preferred Stock issued by Restricted Subsidiaries of such Person, plus
accrued and unpaid dividends, and (x) any obligation of the type referred to in
clauses (i) through (ix) of this definition of another Person and all dividends
and distributions of another Person the payment of which, in either case, such
Person has Guaranteed or is responsible or liable, directly or indirectly, as
obligor, Guarantor or otherwise. For purposes of the preceding sentence, the
maximum fixed repurchase price of any Disqualified Stock that does not have a
fixed repurchase price shall be calculated in accordance with the terms of such
Disqualified Stock as if such Disqualified Stock were repurchased on any date on
which Indebtedness shall be required to be determined pursuant to the Indenture;
PROVIDED that, if such Disqualified Stock is not then permitted to be
repurchased, the repurchase price shall be the book value of such Disqualified
Stock. The amount of Indebtedness of any Person at any date shall be the
outstanding balance at such date of all unconditional obligations as described
above and, with respect to contingent obligations, the maximum liability upon
the occurrence of the contingency giving rise to the obligation; PROVIDED that
the amount outstanding at any time of any Indebtedness issued with original
issue discount (including, without limitation, the Notes) is the face amount of
such Indebtedness less the remaining unamortized portion of the original issue
discount of such Indebtedness at such time as determined in conformity with
GAAP.
"INTEREST RATE PROTECTION AGREEMENT" of any Person means any forward
contract, futures contract, swap, option, future option or other financial
agreement or arrangement (including, without limitation, caps, floors, collars
and similar agreements) relating to, or the value of which is dependent upon,
interest rates.
"INVESTMENT" in any Person means any direct, indirect or contingent (i)
advance or loan to, Guarantee of any Indebtedness of, extension of credit or
capital contribution to such Person, (ii) the acquisition of any shares of
Capital Stock, bonds, notes, debentures or other securities of such Person, or
(iii) the acquisition, by purchase or otherwise, of all or substantially all of
the business, assets or stock or other evidence of beneficial ownership of such
Person; PROVIDED that Investments shall exclude commercially reasonable
extensions of trade credit. The amount of any Investment shall be the original
cost of such Investment, PLUS the cost of all additions thereto and minus the
amount of any portion of such Investment repaid to such Person in cash as a
repayment of principal or a return of capital, as the case may be, up to the
total amount of such Investment, but without any other adjustments for increases
or decreases in value, or write-ups, write-downs or write-offs with respect to
such Investment. In determining the amount of any Investment involving a
transfer of any Property other than cash, such Property shall be valued at its
Fair Market Value at the time of such transfer.
"ISSUE DATE" means April 13, 1998, the date on which the Private Notes were
first authenticated and delivered under the Indenture.
"LIEN" means, with respect to any Property or other asset, any mortgage or
deed of trust, pledge, hypothecation, assignment, deposit arrangement, security
interest, lien (statutory or other), charge, easement, encumbrance, preference,
priority or other security or similar agreement or preferential arrangement of
any kind or nature whatsoever on or with respect to such Property or other asset
(including, without limitation, any conditional sale or title retention
agreement having substantially the same economic effect as any of the
foregoing).
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"MATURITY" means, when used with respect to a Note, the date on which the
principal of such Note becomes due and payable as provided therein or in the
Indenture, whether on the date specified in such Note as the fixed date on which
the principal of such Note is due and payable, on the Change of Control Payment
Date or purchase date established pursuant to the terms of the Indenture with
regard to a Change of Control Offer or an Asset Sale Offer, as applicable, or by
declaration of acceleration, call for redemption or otherwise.
"NET CASH PROCEEDS" means, with respect to the sale of any Property or
assets by any Person or any of its Restricted Subsidiaries, cash or readily
marketable cash equivalents received net of (i) all reasonable out-of-pocket
expenses of such Person or such Restricted Subsidiary Incurred in connection
with such sale, including, without limitation, all legal, title and recording
tax expenses, commissions and other fees and expenses Incurred (but excluding
any finder's fee or broker's fee payable to any Affiliate of such Person) and
all federal, state, foreign and local taxes arising in connection with such sale
that are paid or required to be accrued as a liability under GAAP by such Person
or its Restricted Subsidiaries, (ii) all payments made or required to be made by
such Person or its Restricted Subsidiaries on any Indebtedness which is secured
by such Properties or other assets in accordance with the terms of any Lien upon
or with respect to such Properties or other assets or which must, by the terms
of such Lien, or in order to obtain a necessary consent to such transaction or
by applicable law, be repaid in connection with such sale, (iii) all
contractually required distributions and other payments made to minority
interest holders (but excluding distributions and payments to Affiliates of such
Person) in Restricted Subsidiaries of such Person as a result of such
transaction and (iv) appropriate amounts to be provided by such Person or any
Restricted Subsidiary thereof, as the case may be, as a reserve in accordance
with GAAP against any liabilities associated with such assets and retained by
such Person or any Restricted Subsidiary thereof, as the case may be, after such
transaction, including, without limitation, liabilities under any
indemnification obligations and severance and other employee termination costs
associated with such transaction, in each case as determined by the Board of
Directors of such Person, in its reasonable good faith judgment evidenced by a
resolution of the Board of Directors filed with the Trustee; PROVIDED that, in
the event that any consideration for a transaction (which would otherwise
constitute Net Cash Proceeds) is required to be held in escrow pending
determination of whether a purchase price adjustment will be made, such
consideration (or any portion thereof) shall become Net Cash Proceeds only at
such time as it is released to such Person or its Restricted Subsidiaries from
escrow; and PROVIDED, FURTHER, that any non-cash consideration received in
connection with any transaction, which is subsequently converted to cash, shall
be deemed to be Net Cash Proceeds at such time, and shall thereafter be applied
in accordance with the Indenture.
"OFFICERS' CERTIFICATE" means a certificate signed by (i) the Chairman of
the Board, a Vice Chairman of the Board, the President, the Chief Executive
Officer or a Vice President, and (ii) the Chief Financial Officer, the Chief
Accounting Officer, the Treasurer, an Assistant Treasurer, the Secretary or an
Assistant Secretary of the Company and delivered to the Trustee, which shall
comply with the Indenture.
"OPINION OF COUNSEL" shall mean a written opinion of counsel, who may be
counsel to the Company and who shall be satisfactory to the Trustee.
"PARI PASSU INDEBTEDNESS" means (i) any Indebtedness of the Company that is
PARI PASSU in right of payment to the Notes and (ii) with respect to any
Guarantee, Indebtedness which ranks PARI PASSU in right of payment to such
Guarantee.
"PERMITTED HOLDERS" means Donald L. Sturm, Spectra 1, Spectra 2, Spectra 3,
Enron and their respective Affiliates (other than the Company and its Restricted
Subsidiaries) and any relative in the immediate family of Donald L. Sturm (or
any entity all of the benefit ownership interest of which are owned by such a
relative) to whom membership interests in Spectra 1, Spectra 2 or Spectra 3 are
distributed upon the death of Donald L. Sturm.
"PERMITTED INTEREST RATE PROTECTION AGREEMENT" of any Person means any
Interest Rate Protection Agreement entered into with one or more financial
institutions in the ordinary course of business that is
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designed to protect such Person against fluctuations in interest rates with
respect to Indebtedness Incurred and which shall have a notional amount no
greater than the payments due with respect to the Indebtedness being hedged
thereby and not for purposes of speculation.
"PERMITTED INVESTMENT" means (i) Cash Equivalents; (ii) Investments in
Property used in the ordinary course of business; (iii) Investments in any
Person as a result of which such Person becomes (or, in the case of the
acquisition of all or substantially all of a Person's assets, such assets are
acquired by) a Restricted Subsidiary in compliance with the Indenture; (iv)
Investments in prepaid expenses, negotiable instruments held for collection and
lease, utility and workers' compensation, performance and other similar
deposits; (v) Permitted Interest Rate Protection Agreements with respect to any
floating rate Indebtedness that is permitted by the terms of the Indenture to be
outstanding; (vi) bonds, notes, debentures or other debt securities received as
a result of Asset Sales permitted under the covenant described under "--Asset
Sales"; (vii) Investments in existence at the Issue Date; (viii) commission,
payroll, travel and similar advances to employees in the ordinary course of
business to cover matters that are expected at the time of such advances
ultimately to be treated as expenses in accordance with GAAP; and (ix) stock,
obligations or securities received in satisfaction of judgments.
"PERMITTED JOINT VENTURE" means an Investment in a Person who is not a
Restricted Subsidiary and who is engaged in the Telecommunications Business.
"PERMITTED LIENS" means (i) Liens existing on the date of the Indenture and
securing Indebtedness outstanding on the date of the Indenture or Incurred on or
after the Issue Date pursuant to any Senior Credit Facility; (ii) Liens in favor
of the Company or any Restricted Subsidiary of the Company; (iii) Liens on
Property of the Company or a Restricted Subsidiary acquired, constructed or
constituting improvements made after the Issue Date of the Notes to secure
Purchase Money Indebtedness or Vendor Financing Indebtedness which is otherwise
permitted under the Indenture, PROVIDED that (a) the principal amount of any
Indebtedness secured by any such Lien does not exceed 100% of such purchase
price or cost of construction or improvement of the Property subject to such
Lien, (b) such Lien attaches to such property prior to, at the time of or within
180 days after the acquisition, completion of construction or commencement of
operation of such Property and (c) such Lien does not extend to or cover any
Property other than the specific item of Property (or portion thereof) acquired,
constructed or constituting the improvements made with the proceeds of such
Purchase Money Indebtedness or Vendor Financing Indebtedness; (iv) Liens to
secure Acquired Indebtedness, provided that (a) such Lien attaches to the
acquired asset prior to the time of the acquisition of such asset, (b) such Lien
does not extend to or cover any other Property and (c) such Lien was not
Incurred in contemplation of such acquisition; (v) Liens to secure Indebtedness
Incurred to extend, renew, refinance or refund (or successive extensions,
renewals, refinancings or refundings), in whole or in part, Indebtedness secured
by any Lien referred to in the foregoing clauses (i), (iii) and (iv) so long as
such Lien does not extend to any other Property and the principal amount of
Indebtedness so secured is not increased except as otherwise permitted under
clause (iv) of the second paragraph of "--Certain Covenants--Limitation on
Consolidated Indebtedness"; (vi) Liens for taxes, assessments, governmental
charges or claims which are not yet delinquent or which are being contested in
good faith by appropriate proceedings, if a reserve or other appropriate
provision, if any, as shall be required in conformity with GAAP shall have been
made therefor; (vii) other Liens incidental to the conduct of the Company's and
its Restricted Subsidiaries' business or the ownership of its property and
assets not securing any Indebtedness, and which do not in the aggregate
materially detract from the value of the Company's and its Restricted
Subsidiaries' property or assets when taken as a whole, or materially impair the
use thereof in the operation of its business; (viii) pledges and deposits made
in the ordinary course of business in connection with workers' compensation and
unemployment insurance, statutory Liens of landlords, carriers, warehousemen,
mechanics, materialmen, repairmen and other types of statutory obligations; (ix)
deposits made to secure the performance of tenders, bids, leases, and other
obligations of like nature Incurred in the ordinary course of business
(exclusive of obligations for the payment of borrowed money); (x) zoning
restrictions, servitudes, easements, rights-of-way, restrictions and
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other similar charges or encumbrances Incurred in the ordinary course of
business which, in the aggregate, do not materially detract from the value of
the property subject thereto or interfere with the ordinary conduct of the
business of the Company or its Restricted Subsidiaries; (xi) Liens arising out
of judgments or awards against the Company or any Restricted Subsidiary with
respect to which the Company or such Restricted Subsidiary is prosecuting an
appeal or proceeding for review and the Company or such Restricted Subsidiary is
maintaining adequate reserves in accordance with GAAP; (xii) any interest or
title of a lessor in the property subject to any lease other than a capital
lease; (xiii) leases or subleases granted to others that do not materially
interfere with the ordinary course of business of the Company and its Restricted
Subsidiaries; (xiv) Liens encumbering property or assets under construction
arising from progress or partial payments by a customer of the Company or its
Restricted Subsidiaries relating to such property or assets; (xv) Liens arising
from filing precautionary Uniform Commercial Code financing statements regarding
leases; (xvi) Liens on property of, or on shares of stock or Indebtedness of,
any corporation existing at the time such corporation becomes, or becomes a part
of, any Restricted Subsidiary; PROVIDED that such Liens do not extend to or
cover any property or assets of the Company or any Restricted Subsidiary other
than the property or assets acquired and PROVIDED, FURTHER, that such Liens were
not Incurred in contemplation of such transaction; (xvii) Liens securing
reimbursement obligations with respect to letters of credit that encumber
documents and other property relating to such letters of credit and the products
and proceeds thereof; (xviii) Liens in favor of customs and revenue authorities
arising as a matter of law to secure payment of customs duties in connection
with the importation of goods; (xix) Liens encumbering customary initial
deposits and margin deposits, and other Liens that are either within the general
parameters customary in the industry and Incurred in the ordinary course of
business, in each case, securing Indebtedness under Permitted Interest Rate
Protection Agreements; and (xx) Liens arising out of conditional sale, title
retention, consignment or similar arrangements for the sale of goods entered
into by the Company or any of its Restricted Subsidiaries in the ordinary course
of business in accordance with the past practices of the Company and its
Restricted Subsidiaries prior to the Issue Date.
"PERSON" means any individual, corporation, limited liability company,
partnership, limited liability partnership, joint venture, trust, unincorporated
organization or government or any agency or political subdivision thereof.
"PREFERRED STOCK" of any Person means Capital Stock of such Person of any
class or classes (however designated) that ranks prior, as to the payment of
dividends or as to the distribution of assets upon any voluntary or involuntary
liquidation, dissolution or winding up of such Person, to shares of Capital
Stock of any other class of such Person.
"PROPERTY" means, with respect to any Person, any interest of such Person in
any kind of property or asset, whether real, personal or mixed, or tangible or
intangible, excluding Capital Stock in any other Person.
"PUBLIC EQUITY OFFERING" means an underwritten offering of Common Stock with
gross proceeds to the Company of at least $25.0 million pursuant to a
registration statement that has been declared effective by the Commission
pursuant to the Securities Act (other than a registration statement on Form S-8
or otherwise relating to equity securities issuable under any employee benefit
plan of the Company).
"PURCHASE MONEY INDEBTEDNESS" means Indebtedness of the Company or any
Restricted Subsidiary (including Acquired Indebtedness and Capital Lease
Obligations, mortgage financings and purchase money obligations) Incurred for
the purpose of financing all or any part of the cost of construction,
acquisition, development or improvement by the Company or any Restricted
Subsidiary of any Telecommunications Assets of the Company or any Restricted
Subsidiary and including any related notes, Guarantees, collateral documents,
instruments and agreements executed in connection therewith, as the same may be
amended, supplemented, modified or restated from time to time.
"QUALIFIED STOCK" of any Person means a class of Capital Stock other than
Disqualified Stock.
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"REGISTERED EXCHANGE OFFER" shall have the meaning set forth under "Exchange
Offer; Registration Rights."
"RESTRICTED PAYMENT" means (i) a dividend or other distribution declared or
paid on the Capital Stock of the Company or to the Company's stockholders (in
their capacity as such), or declared or paid to any Person other than the
Company or a Restricted Subsidiary of the Company on the Capital Stock of any
Restricted Subsidiary of the Company, in each case, other than dividends,
distributions or payments made solely in Qualified Stock of the Company or such
Restricted Subsidiary, (ii) a payment made by the Company or any of its
Restricted Subsidiaries (other than to the Company or any Restricted Subsidiary)
to purchase, redeem, acquire or retire any Capital Stock of the Company or of a
Restricted Subsidiary, (iii) a payment made by the Company or any of its
Restricted Subsidiaries to redeem, repurchase, defease (including an
in-substance or legal defeasance) or otherwise acquire or retire for value
(including pursuant to mandatory repurchase covenants), prior to any scheduled
maturity, scheduled sinking fund or mandatory redemption payment, Indebtedness
of the Company or such Restricted Subsidiary which is subordinate (whether
pursuant to its terms or by operation of law) in right of payment to the Notes
and which was scheduled to mature on or after the maturity of the Notes or (iv)
an Investment in any Person, including an Unrestricted Subsidiary or the
designation of a Subsidiary as an Unrestricted Subsidiary, other than (a) a
Permitted Investment, (b) an Investment by the Company in a Restricted
Subsidiary or (c) an Investment by a Restricted Subsidiary in the Company or a
Restricted Subsidiary of the Company.
"RESTRICTED SUBSIDIARY" means any Wholly-Owned Subsidiary of the Company
that has not been designated as an "Unrestricted Subsidiary."
"SALE AND LEASEBACK TRANSACTION" means, with respect to any Person, any
direct or indirect arrangement pursuant to which Property is sold or transferred
by such Person or a Restricted Subsidiary of such Person and is thereafter
leased back from the purchaser or transferee thereof by such Person or one of
its Restricted Subsidiaries.
"SENIOR CREDIT FACILITY" means Indebtedness of the Company and its
Subsidiaries Incurred from time to time pursuant to one or more credit
agreements or similar facilities made available from time to time to the Company
and its Subsidiaries, whether or not secured, and including any related notes,
Guarantees, collateral documents, instruments and agreements executed in
connection therewith, as the same may be amended, supplemented, modified or
restated from time to time.
"SPECTRA 1" means Colorado Spectra 1, LLC and any member as of the Issue
Date of Colorado Spectra 1, LLC, and any relative in the immediate family of
Donald L. Sturm (or any entity all of the beneficial ownership interests of
which are owned by such a relative) to whom assets of Colorado Spectra 1, LLC
are distributed following a dissolution of Colorado Spectra 1, LLC due to the
death of Donald L. Sturm.
"SPECTRA 2" means Colorado Spectra 2, LLC and any member as of the Issue
Date of Colorado Spectra 2, LLC, and any relative in the immediate family of
Donald L. Sturm (or any entity all of the beneficial ownership interests of
which are owned by such a relative) to whom assets of Colorado Spectra 2, LLC
are distributed following a dissolution of Colorado Spectra 2, LLC due to the
death of Donald L. Sturm.
"SPECTRA 3" means Colorado Spectra 3, LLC and any member as of the Issue
Date of Colorado Spectra 3, LLC, and any relative in the immediate family of
Donald L. Sturm (or any entity all of the beneficial ownership interests of
which are owned by such a relative) to whom assets of Colorado Spectra 3, LLC
are distributed following a dissolution of Colorado Spectra 3, LLC due to the
death of Donald L. Sturm.
"STATED MATURITY" means, with respect to any installment of interest or
principal on any series of related Indebtedness, the date on which such payment
of interest or principal was scheduled to be paid in the original documentation
governing such Indebtedness, and shall not include any contingent obligations
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to repay, redeem or repurchase any such interest or principal prior to the date
originally scheduled for the payment thereof.
"STRATEGIC EQUITY INVESTMENT" means an equity investment made by a Strategic
Investor in the Company in an aggregate amount of not less than $25 million.
"STRATEGIC INVESTOR" means a Person (other than the Permitted Holders)
engaged in one or more Telecommunications Businesses that has, or 80% or more of
the Voting Stock of which is owned by a Person that has, an equity market
capitalization at the time of its initial investment in the Company in excess of
$1 billion.
"SUBORDINATED INDEBTEDNESS" means Indebtedness of the Company as to which
the payment of principal of (and premium, if any) and interest and other payment
obligations in respect of such Indebtedness shall be subordinate to the prior
payment in full of the Notes to at least the following extent: (i) no payments
of principal of (or premium, if any) or interest on or otherwise due in respect
of such Indebtedness may be permitted for so long as any default in the payment
of principal (or premium, if any) or interest on the Notes exists; (ii) in the
event that any other default that with the passing of time or the giving of
notice, or both, would constitute an event of default exists with respect to the
Notes, upon notice by 25% or more in principal amount of the Notes to the
Trustee, the Trustee shall have the right to give notice to the Company and the
holders of such Indebtedness (or trustees or agents therefor) of a payment
blockage, and thereafter no payments of principal of (or premium, if any) or
interest on or otherwise due in respect of such Indebtedness may be made for a
period of 179 days from the date of such notice; and (iii) such Indebtedness may
not (x) provide for payments of principal of such Indebtedness at the stated
maturity thereof or by way of a sinking fund applicable thereto or by way of any
mandatory redemption, defeasance, retirement or repurchase thereof by the
Company (including any redemption, retirement or repurchase which is contingent
upon events or circumstances, but excluding any retirement required by virtue of
acceleration of such Indebtedness upon an event of default thereunder), in each
case prior to the final Stated Maturity of the Notes or (y) permit redemption or
other retirement (including pursuant to an offer to purchase made by the
Company) of such other Indebtedness at the option of the holder thereof prior to
the final Stated Maturity of the Notes, other than a redemption or other
retirement at the option of the holder of such Indebtedness (including pursuant
to an offer to purchase made by the Company) which is conditioned upon a change
of control of the Company pursuant to provisions substantially similar to those
described under "--Repurchase at the Option of Holders--Change of Control" (and
which shall provide that such Indebtedness will not be repurchased pursuant to
such provisions prior to the Company's repurchase of the Notes required to be
repurchased by the Company pursuant to the provisions described under
"--Repurchase at the Option of Holders--Change of Control").
"SUBSIDIARY" means, with respect to any Person, (i) any corporation more
than 50% of the outstanding shares of Voting Stock of which is owned, directly
or indirectly, by such Person, or by one or more other Subsidiaries of such
Person, or by such Person and one or more other Subsidiaries of such Person,
(ii) any general partnership, joint venture or similar entity, more than 50% of
the outstanding partnership or similar interests of which are owned, directly or
indirectly, by such Person, or by one or more other Subsidiaries of such Person,
or by such Person and one or more other Subsidiaries of such Person and (iii)
any limited partnership of which such Person or any Subsidiary of such Person is
a general partner.
"TELECOMMUNICATIONS ASSETS" means all assets, rights (contractual or
otherwise) and properties, whether tangible or intangible, used or intended for
use in connection with a Telecommunications Business.
"TELECOMMUNICATIONS BUSINESS" means the business of (i) transmitting,
providing services relating to or developing applications for the transmission
of, voice, video or data through owned or leased wireline or wireless
transmission facilities or over the internet, (ii) creating, developing,
constructing, installing, repairing, maintaining or marketing
communications-related systems, network equipment and facilities, software and
other products, (iii) creating, developing, producing or marketing audiotext or
videotext,
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(iv) marketing (including direct marketing and telemarketing), or (v)
evaluating, participating in or pursuing any other business that is primarily
related to those identified in the foregoing clauses (i), (ii), (iii) or (iv)
above (in the case of clauses (iii) and (iv), however, in a manner consistent
with the Company's manner of business on the Issue Date), and shall, in any
event, include all businesses in which the Company or any of its Subsidiaries
are engaged on the Issue Date; PROVIDED that the determination of what
constitutes a Telecommunications Business shall be made in good faith by the
Board of Directors.
"TOTAL COMMON EQUITY" of any Person means, as of any date of determination
the product of (i) the aggregate number of outstanding primary shares of Common
Stock of such Person on such day (which shall not include any options or
warrants on, or securities convertible or exchangeable into, shares of Common
Stock of such Person) and (ii) the average Closing Price of such Common Stock
over the 20 consecutive Trading Days immediately preceding such day. If no such
Closing Price exists with respect to shares of any such class, the value of such
shares for purposes of clause (ii) of the preceding sentence shall be determined
by the Board of Directors of the Company in good faith and evidenced by a
resolution of the Board of Directors filed with the Trustee.
"TRADING DAY" means, with respect to a security traded on a securities
exchange, automated quotation system or market, a day on which such exchange,
system or market is open for a full day of trading.
"UNRESTRICTED SUBSIDIARY" means any Subsidiary of the Company that the
Company has classified as an "Unrestricted Subsidiary" and that has not been
reclassified as a Restricted Subsidiary, pursuant to the terms of the Indenture.
"U.S. GOVERNMENT OBLIGATIONS" means (x) securities that are (i) direct
obligations of the United States of America for the payment of which the full
faith and credit of the United States of America is pledged or (ii) obligations
of a Person controlled or supervised by and acting as an agency or
instrumentality of the United States of America the payment of which is
unconditionally Guaranteed as a full faith and credit obligation by the United
States of America, which, in either case, are not callable or redeemable at the
option of the issuer thereof, and (y) depository receipts issued by a bank (as
defined in Section 3(a)(2) of the Securities Act) as custodian with respect to
any U.S. Government Obligation which is specified in clause (x) above and held
by such Bank for the account of the holder of such depository receipt, or with
respect to any specific payment of principal or interest on any U.S. Government
Obligation which is so specified and held, PROVIDED that (except as required by
law) such custodian is not authorized to make any deduction from the amount
payable to the holder of such depository receipt from any amount received by the
custodian in respect of the U.S. Government Obligation or the specific payment
of principal or interest of the U.S. Government Obligation evidenced by such
depository receipt.
"VENDOR FINANCING INDEBTEDNESS" means any Indebtedness of the Company or any
Restricted Subsidiary Incurred in connection with the acquisition or
construction of Telecommunications Assets.
"VOTING STOCK" means, with respect to any Person, securities of any class or
classes of Capital Stock in such Person entitling the holders thereof (whether
at all times or at the times that such class of Capital Stock has voting power
by reason of the happening of any contingency) to vote in the election of
members of the board of directors or comparable body of such Person.
"WHOLLY-OWNED SUBSIDIARY" of any Person means a Subsidiary of such Person
all of the outstanding Capital Stock or other ownership interests (other than
any director's qualifying shares) of which shall at the time be owned by such
Person or by one or more other Wholly-Owned Subsidiaries of such Person or by
such Person and one or more other Wholly-Owned Subsidiaries of such Person.
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BOOK-ENTRY; DELIVERY AND FORM
The Exchange Notes will initially be represented by one or more permanent
global notes in definitive, fully registered form without interest coupons (each
a "Global Note") and will be deposited with the Trustee as custodian for, and
registered in the name of, Cede & Co., as nominee of the Depositary.
Except as set forth below regarding "Certificated Notes," owners of
beneficial interests in the Global Note(s) will not be entitled to receive
physical delivery of Certificated Notes (as defined below).
The Depositary is a limited-purpose trust company that was created to hold
securities for its participating organizations (collectively, the "Participants"
or the "Depositary's Participants") and to facilitate the clearance and
settlement of transactions in such securities between Participants through
electronic book-entry changes in accounts of its Participants. The Depositary's
Participants include securities brokers and dealers, banks and trust companies,
clearing corporations and certain other organizations. Access to the
Depositary's system is also available to other entities such as banks, brokers,
dealers and trust companies (collectively, the "Indirect Participants" or the
"Depositary's Indirect Participants") that clear through or maintain a custodial
relationship with a Participant, either directly or indirectly. Persons who are
not Participants may beneficially own securities held by or on behalf of the
Depositary only through the Depositary's Participants or the Depositary's
Indirect Participants.
The Company expects that pursuant to procedures established by the
Depositary (i) upon deposit of the Global Note(s), the Depositary will credit
the accounts of Participants designated by the Exchange Agent with portions of
the principal amount of the Global Note(s) and (ii) ownership of the Notes
evidenced by the Global Note(s) will be shown on, and the transfer of ownership
thereof will be effected only through, records maintained by the Depositary
(with respect to the interests of the Depositary's Participants), the
Depositary's Participants and the Depositary's Indirect Participants. Holders of
Notes are advised that the laws of some states require that certain persons take
physical delivery in definitive form of securities that they own. Consequently,
the ability to transfer Notes evidenced by the Global Note(s) will be limited to
such extent.
So long as the holder of the Global Note(s) is the registered owner of any
Notes, the holder of the Global Note(s) will be considered the sole holder under
the Indenture of any Notes evidenced by the Global Note(s). Beneficial owners of
Notes evidenced by the Global Note(s) under the Indenture will not be considered
the owners or holders thereof under the Indenture for any purpose, including
with respect to the giving of any directions, instructions or approvals to the
Trustee thereunder. Neither the Company nor the Trustee will have any
responsibility or liability for any aspect of the records of the Depositary or
for maintaining, supervising or reviewing any records of the Depositary relating
to the Notes.
Payments in respect of the principal of, premium, if any, and interest on
any Notes registered in the name of the holder of the Global Note(s) on the
applicable record date will be payable by the Trustee to or at the direction of
the holder of the Global Note(s) in its capacity as the registered holder under
the Indenture. Under the terms of the Indenture, the Company and the Trustee may
treat the persons in whose names Notes, including the Global Note(s), are
registered as the owners thereof for the purpose of receiving such payments.
Consequently, neither the Company nor the Trustee has or will have any
responsibility or liability for the payment of such amounts to beneficial owners
of Notes. The Company believes, however, that it is currently the policy of the
Depositary to immediately credit the accounts of the relevant Participants with
such payments, in amounts proportionate to their respective holdings of
beneficial interests in the Notes as shown on the records of the Depositary.
Payments by the Depositary's Participants and the Depositary's Indirect
Participants to the beneficial owners of Notes will be governed by standing
instructions and customary practice and will be the responsibility of the
Depositary's Participants or the Depositary's Indirect Participants.
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CERTIFICATED NOTES
Subject to certain conditions, any person having a beneficial interest in
the Global Note(s) may, upon request to the trustee, exchange such beneficial
interest for Notes in registered form without interest coupons ("Certificated
Notes"). Upon any such issuance, the Trustee is required to register such
Certificated Notes in the name of, and cause the same to be delivered to, such
person or persons (or the nominee of any thereof). If (i) the Company notifies
the Trustee in writing that the Depositary is no longer willing or able to act
as a depositary and the Company is unable to locate a qualified successor within
90 days or (ii) the Company, at its option, notifies the Trustee in writing that
it elects to cause the issuance of Notes in the form of Certificated Notes under
the Indenture, then, upon surrender by the holder of Global Note(s) of its
Global Note(s), Certificated Notes will be issued to each person that the holder
of Global Note(s) and the Depositary identify as being the beneficial owner of
the related Notes.
Neither the Company nor the Trustee will be liable for any delay by the
holder of Global Note(s) or the Depositary in identifying the beneficial owners
of Notes and the Company and the Trustee may conclusively rely on, and will be
protected in relying on, instructions from the holder of the Global Note(s) or
the Depositary for all purposes.
SAME DAY SETTLEMENT AND PAYMENT
The Indenture requires that payments in respect of the Notes represented by
the Global Note(s) (including principal, premium, if any, and interest, if any)
be made by wire transfer of immediately available funds to the accounts
specified by the holder of the Global Note(s). With respect to Certificated
Notes, the Company will make all payments of principal, premium, if any,
interest, if any, by wire transfer of immediately available funds to the
accounts specified by the holders thereof or, if no such account is specified,
by mailing a check to each such holder's registered address. The Notes
represented by the Global Note(s) are expected to trade in the Depositary's Same
Day Funds Settlement System, and any permitted secondary market trading activity
in such Notes will therefore be required by the Depositary to be settled in
immediately available funds. The Company expects that secondary trading in the
Certificated Notes will also be settled in immediately available funds.
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of: (i) 100,000,000
shares of Common Stock and (ii) 10,000,000 shares of preferred stock, $.0001 par
value per share. Of the authorized Common Stock, 10,135,164 shares have been
designated Series A Common Stock and 89,864,836 have been designated Series B
Common Stock. As of May 31, 1998, no shares of preferred stock, 10,135,164
shares of Series A Common Stock, 15,865,208 shares of Series B Common Stock and
warrants to purchase 25,188,021 shares of Series B Common Stock were issued and
outstanding.
COMMON STOCK
Except as otherwise required by law, actions taken at the Company's
stockholder meetings require the affirmative vote of a majority of the shares
represented at the meeting and that a quorum be present. Other than the right of
first refusal held by Enron and the Sturm Entities described elsewhere herein,
the holders of Common Stock have no preemptive rights. See "Certain
Transactions--Investor Rights Agreement." In the event of a liquidation,
dissolution or winding up of the Company, holders of Common Stock are entitled
to share ratably in the assets of the Company which are legally available for
distribution, if any, remaining after the payment of all debts and liabilities
of the Company and the liquidation preference of any then outstanding preferred
stock. At present there is no established market for the Company's Common Stock.
SERIES A COMMON STOCK. Each share of the Company's Series A Common Stock
entitles the holder thereof to ten votes on all matters submitted to a vote of
stockholders. Each share of Series A Common
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Stock is convertible at any time and from time to time at the option of the
holder thereof into one share of Series B Common Stock in accordance with the
terms of the Company's Certificate of Incorporation. In addition, (i) upon a
sale or transfer of any Series A Common Stock to anyone other than (A) a natural
person who is qualified as an accredited investor under applicable securities
laws and who is a member, manager or officer of Spectra 3 or an affiliate of any
such member, manager or officer (a "Permitted Transferee") or (B) an affiliate
of Donald L. Sturm or Enron, or (ii) with respect to shares of Series A Common
Stock held by Spectra 3, upon a transfer of a controlling interest in Spectra 3
to any person or entity other than Enron, Donald L. Sturm, a Permitted
Transferee or one of their affiliates, each share of Series A Common Stock
automatically converts into one share of Series B Common Stock. Spectra 3 and
Enron, the two principal holders of Series A Common Stock, are parties to the
Securityholders Agreement, which, among other things, contains agreements with
respect to the designation, election, removal and replacement of the members of
the Company's Board of Directors other than the director elected by the holders
of the Company's Series B Common Stock. See "Certain
Transactions--Securityholders Agreement."
SERIES B COMMON STOCK. Each share of Series B Common Stock of the Company
entitles the holder thereof to one vote on all matters submitted to a vote of
stockholders. From and after July 1, 1998, the holders of Series B Common Stock
voting as a class will be entitled to elect one director of the Company at each
meeting called for the election of directors. Any vacancy occurring because of
the death, resignation or removal of a director elected by holders of Series B
Common Stock shall be filled by the vote or written consent of a majority of the
shares of Series B Common Stock or, in the absence of such action by the holders
of Series B Common Stock, by the action of the remaining directors then in
office. All other directors shall be elected by the holders of Series A Common
Stock and Series B Common Stock voting together.
PREFERRED STOCK
The preferred stock may be issued from time to time in one or more series.
Subject to limitations imposed by the Certificate of Incorporation of the
Company, the Board of Directors has the authority to fix the number of shares of
each such series, determine the designation thereof and to determine or alter
the rights, preferences and restrictions imposed upon any unissued series of
preferred stock. The issuance of preferred stock in the future could adversely
affect the rights of the holders of Common Stock. For example, an issuance of
preferred stock could result in a class of securities outstanding with
preferences over the common stock with respect to liquidations.
REGISTRATION RIGHTS
Several agreements provide registration rights to certain of the Company's
investors.
THE INVESTOR RIGHTS AGREEMENT. The Amended and Restated Investor Rights
Agreement grants certain demand and "piggyback" registration rights to the Sturm
Entities, Enron and certain other investors. Subject to certain exceptions and
requirements, the parties to the Amended and Restated Investor Rights Agreement
are entitled to demand three long-form registrations; provided, however, that
the Company is not required to effect demand registrations prior to the earlier
to occur of January 31, 2000 or the Company's first firm commitment underwritten
public offering of its Series B Common Stock. In addition, subject to certain
exceptions and requirements, the parties to the Amended and Restated Investor
Rights Agreement are entitled to demand unlimited short-form registrations once
such short-form registration becomes available to the Company. The parties to
the Amended and Restated Investor Rights Agreement also possess "piggyback"
registration rights which entitle them to have their shares registered on
registration statements relating to primary or secondary registered public
offerings of the Company's securities. The parties to the Amended and Restated
Investor Rights Agreement are subject to certain cutback restrictions in
connection with any public offerings of the Company's equity securities.
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CREDIT FACILITY LENDER WARRANT. Pursuant to a warrant (the "Lender
Warrant") to purchase 800,000 shares of Series B Common Stock issued to one of
the Lenders in connection with the Credit Facility, the holder thereof is
entitled, subject to certain exceptions and requirements more particularly set
forth therein, to demand two long-form registrations; PROVIDED, HOWEVER, that
the Company is not required to effect such demand registrations prior to the
earlier to occur of January 31, 2000 or the Company's first firm commitment
public offering of its Series B Common Stock. The holder of the Lender Warrant
also possesses "piggyback" registration rights which entitle it to have its
shares registered on registration statements relating to primary or secondary
registered public offerings of the Company's securities. The holder of the
Lender Warrant is subject to certain cutback restrictions in connection with any
public offerings of the Company's equity securities.
PREVIOUS LENDER WARRANT. Pursuant to two warrants to purchase an aggregate
amount of 470,092 shares of Series B Common Stock issued to a previous lender of
the Company, the holder thereof was granted the same rights to "piggyback"
registrations as were granted to the parties under the Amended and Restated
Investor Rights Agreement.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following are the material federal tax income consequences expected to
result to holders whose Private Notes are exchanged for Exchange Notes in the
Exchange Offer. This discussion is based upon current provisions of the Internal
Revenue Code of 1986, as amended (the "Code"), applicable Treasury regulations,
judicial authority and administrative rulings and practice. There can be no
assurance that the Internal Revenue Service (the "Service") will not take a
contrary view, and no ruling from the Service has been or will be sought with
respect to the Exchange Offer. Legislative, judicial or administrative changes
or interpretations may be forthcoming that could alter or modify the statements
and conclusions set forth herein. Any such changes or interpretations may or may
not be retroactive and could affect the tax consequences to holders. Certain
holders (including insurance companies, tax-exempt organizations, financial
institutions, broker-dealers, foreign corporations and persons who are not
citizens or residents of the United States) may be subject to special rules not
discussed below. EACH HOLDER OF PRIVATE NOTES SHOULD CONSULT ITS OWN TAX ADVISOR
AS TO THE PARTICULAR TAX CONSEQUENCES OF EXCHANGING PRIVATE NOTES FOR EXCHANGE
NOTES, INCLUDING THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR FOREIGN
LAWS.
The exchange of Private Notes for Exchange Notes should be treated as a
"non-event" for federal income tax purposes because the Exchange Notes should
not be considered to differ materially in kind or extent from the Private Notes.
As a result, no material federal income tax consequences should result to
holders exchanging Private Notes for Exchange Notes.
PLAN OF DISTRIBUTION
Each broker-dealer that receives Exchange Notes for its own account pursuant
to the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such Exchange Notes. This Prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of Exchange Notes received in exchange for Private Notes
where such Private Notes were acquired as a result of market-making activities
or other trading activities. The Company has agreed that, starting on the
Expiration Date and ending on the close of business one year after the
Expiration Date, it will make this Prospectus, as amended or supplemented,
available to any broker-dealer for use in connection with any such resale. In
addition, until , 199 , all dealers effecting transactions in the
Exchange Notes may be required to deliver a prospectus.
The Company will not receive any proceeds from any sale of Exchange Notes by
broker-dealers. Exchange Notes received by broker-dealers for their own account
pursuant to the Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated
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transactions, through the writing of options on the Exchange Notes or a
combination of such methods of resale, at market prices prevailing at the time
of resale, at prices related to such prevailing market prices or negotiated
prices. Any such resale may be made directly to purchasers or to or through
brokers or dealers who may receive compensation in the form of commissions or
concessions from any such broker-dealer and/or the purchasers of any such
Exchange Notes. Any broker-dealer that resells Exchange Notes that were received
by it for its own account pursuant to the Exchange Offer and any broker or
dealer that participates in a distribution of such Exchange Notes may be deemed
to be an "underwriter" within the meaning of the Securities Act and any profit
of any such resale of Exchange Notes and any commissions or concessions received
by any such persons may be deemed to be underwriting compensation under the
Securities Act. The Letter of Transmittal states that by acknowledging that it
will deliver and by delivering a prospectus, a broker-dealer will not be deemed
to admit that it is an "underwriter" within the meaning of the Securities Act.
For a period of one year after the Expiration Date, the Company will
promptly send additional copies of this Prospectus and any amendment or
supplement to this Prospectus to any broker-dealer that requests such documents
in the Letter of Transmittal. The company has agreed to pay all expenses
incident to the Exchange Offer (including the expenses of one counsel for the
holders of the Notes) other than commissions or concessions of any brokers or
dealers and will indemnify the holders of the Notes (including any
broker-dealers) against certain liabilities, including liabilities under the
Securities Act.
LEGAL MATTERS
The validity of the Exchange Notes offered hereby will be passed upon for
the Company by Latham & Watkins, San Diego, CA, counsel to the Company. The
description of regulatory matters contained in this Prospectus is being passed
upon for the Company by Blumenfeld & Cohen, Washington, D.C. Five partners of
Latham & Watkins own an aggregate of 47,351 shares of Series B Common Stock and
warrants to purchase an aggregate of 9,634 shares of Series B Common Stock.
EXPERTS
The financial statements as of September 30, 1996 and 1997 and for each of
the three years in the period ended September 30, 1997 and for the period from
September 1, 1993 (inception) through September 30, 1997, included in this
Prospectus, have been so included in reliance on the report of Price Waterhouse
LLP, independent accountants, given on the authority of said firm as experts in
auditing and accounting.
CHANGE IN ACCOUNTANTS
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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AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-4 under the Securities Act with respect to the Exchange Notes offered hereby.
As permitted by the rules and regulations of the Commission, this Prospectus
omits certain information, exhibits and undertakings contained in the
Registration Statement. For further information with respect to the Company and
the Exchange Notes offered hereby, reference is made to the Registration
Statement, including the exhibits thereto and the financial statements, notes
and schedules filed as a part thereof. As a result of the Exchange Offer, the
Company will become subject to the informational requirements of the Exchange
Act. The Registration Statement (and the exhibits and schedules thereto), as
well as the periodic reports and other information filed by the Company with the
Commission, may be inspected and copied at the Public Reference Section of the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549 and at the regional offices of the Commission located at Room 1400,
75 Park Place, New York, New York 10007 and Suite 1400, Northwestern Atrium
Center, 500 West Madison Street, Chicago, Illinois 6061-2511. Copies of such
materials may be obtained from the Public Reference Section of the Commission,
Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and
its public reference facilities in New York, New York and Chicago, Illinois at
the prescribed rates. Additionally, the Commission maintains a Web site that
contains reports, proxy and information statements regarding registrants that
file electronically with the Commission and the address of this site is
http://www.sec.gov. Statements contained in this Prospectus as to the contents
of any contract or other document are not necessarily complete, and in each
instance reference is made to the copy of such contract or document filed as an
exhibit to the Registration Statement, each such statement being qualified in
all respects by such reference.
Pursuant to the Indenture, the Company has agreed to furnish to the Trustee
and to registered holders of the Notes, without cost to the Trustee or such
registered holders, copies of all reports and other information that would be
required to be filed by the Company with the Commission under the Exchange Act,
whether or not the Company is then required to file reports with the Commission.
As a result of this Exchange Offer, the Company will become subject to the
periodic reporting and other informational requirements of the Exchange Act. In
the event that the Company ceases to be subject to the informational
requirements of the Exchange Act, the Company has agreed that, so long as any
Notes remain outstanding, it will file with the Commission (but only if the
Commission at such time is accepting such voluntary filings) and distribute to
holders of the Private Notes or the Exchange Notes, as applicable, copies of the
financial information that would have been contained in such annual reports and
quarterly reports, including a "Management's Discussion and Analysis of
Financial Condition and Results of Operations," that would have been required to
be filed with the Commission pursuant to the Exchange Act. The Company will also
furnish such other reports as it may determine or as may be required by law.
The principal address of the Company is 9333 Genesee Avenue, Suite 200, San
Diego, California 92121, and the Company's telephone number is (619) 552-8010.
116
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
(FORMERLY SPECTRANET INTERNATIONAL)
(A DEVELOPMENT STAGE ENTERPRISE)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Accountants........................................................................ F-2
Consolidated Balance Sheets at September 30, 1996 and 1997............................................... F-3
Consolidated Statements of Operations for the years ended September 30, 1995, 1996 and 1997 and for the
period from September 1, 1993 (inception) through September 30, 1997................................... F-4
Consolidated Statements of Shareholders' Equity (Deficit) for the period from September 1, 1993
(inception) through September 30, 1997................................................................. F-5
Consolidated Statements of Cash Flows for the years ended September 30, 1995, 1996 and 1997 and for the
period from September 1, 1993 (inception) through September 30, 1997................................... F-6
Notes to Consolidated Financial Statements............................................................... F-7
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheet at March 31, 1998............................................................. F-30
Consolidated Statements of Operations for the six months ended March 31, 1997 and 1998 and for the period
from September 1, 1993 (inception) to March 31, 1998................................................... F-31
Consolidated Statement of Shareholders' Equity for the six months ended March 31, 1998................... F-32
Consolidated Statements of Cash Flows for the six months ended March 31, 1997 and 1998 and for the period
from September 1, 1993 (inception) to March 31, 1998................................................... F-33
Notes to Unaudited Consolidated Financial Statements..................................................... F-34
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
FirstWorld Communications, Inc. (formerly SpectraNet International)
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of shareholders' equity (deficit) and of
cash flows present fairly, in all material respects, the financial position of
FirstWorld Communications, Inc. (formerly SpectraNet International) and its
subsidiaries, a development stage enterprise, at September 30, 1996 and 1997,
and the results of their operations and their cash flows for each of the three
years in the period ended September 30, 1997 and for the period from September
1, 1993 (inception) through September 30, 1997, 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.
PRICE WATERHOUSE LLP
San Diego, California
March 5, 1998, except as to
Note 13 which is as
of March 17, 1998
F-2
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
(FORMERLY SPECTRANET INTERNATIONAL)
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------------
1996 1997
----------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................................................... $ 71,522 $ 536,275
Restricted cash.................................................................... -- 50,000
Accounts receivable................................................................ 102,521 72,567
Prepaid expenses................................................................... 24,406 100,442
Other current assets............................................................... 30,697 14,709
----------- -------------
Total current assets........................................................... 229,146 773,993
Property and equipment, net.......................................................... 1,087,552 20,331,353
Deferred financing costs, net of accumulated amortization of $0 and $60,872.......... -- 4,067,932
Other assets, net of accumulated amortization of $25,098 and $36,590................. 110,614 147,812
----------- -------------
$ 1,427,312 $ 25,321,090
----------- -------------
----------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable................................................................... $ 1,666,420 $ 2,483,793
Accrued interest................................................................... 18,138 569,816
Accrued employee costs............................................................. 272,065 205,012
Other accrued expenses............................................................. 2,807 113,266
Short-term borrowings, net of discount............................................. -- 401,262
Current portion of long-term debt.................................................. 27,212 8,446
Current portion of capital lease obligations....................................... 43,034 311,166
----------- -------------
Total current liabilities...................................................... 2,029,676 4,092,761
Long-term debt, net of discount...................................................... 17,299 11,756,283
Convertible bridge notes............................................................. 835,000 405,500
Capital lease obligations............................................................ 86,818 6,801,926
----------- -------------
Total liabilities.............................................................. 2,968,793 23,056,470
----------- -------------
Commitments (Note 8)................................................................. -- --
Shareholders' equity (deficit):
Preferred stock, no par value, 10,000,000 and 5,160,335 shares authorized at
September 30, 1996 and 1997:
Series C, convertible, voting, 2,600,000 shares designated at September 30, 1997;
2,600,000 shares issued and outstanding; liquidation preference at September
30, 1997 of $13,000,000........................................................ -- 12,279,362
Series B, convertible, voting, 7,000,000 and 2,426,135 shares designated at
September 30, 1996 and 1997; 2,016,638 shares issued and outstanding;
liquidation preference at September 30, 1997 of $3,387,955..................... 3,670,060 3,670,060
Series A, convertible, non-voting, 143,134 and 134,200 shares designated at
September 30, 1996 and 1997; 118,667 shares issued and outstanding............. 395,162 395,162
Common stock, voting, no par value, 5,000,000 and 15,000,000 shares authorized at
September 30, 1996 and 1997; 3,246,000 and 3,262,900 shares issued and
outstanding...................................................................... (228,934) (226,984)
Warrants........................................................................... -- 1,000,960
Shareholder receivables............................................................ (173,167) (96,500)
Deficit accumulated during development stage....................................... (5,204,602) (14,757,440)
----------- -------------
Total shareholders' equity (deficit)........................................... (1,541,481) 2,264,620
----------- -------------
$ 1,427,312 $ 25,321,090
----------- -------------
----------- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
(FORMERLY SPECTRANET INTERNATIONAL)
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED SEPTEMBER 30, SEPTEMBER 1, 1993
----------------------------------------- (INCEPTION) TO
1995 1996 1997 SEPTEMBER 30, 1997
----------- ------------- ------------- ------------------
<S> <C> <C> <C> <C>
Service revenue.................................... $ 56,513 $ 279,483 $ 75,118 $ 495,866
Other revenue...................................... 40,000 75,000 95,715 210,715
----------- ------------- ------------- ------------------
96,513 354,483 170,833 706,581
----------- ------------- ------------- ------------------
Costs and expenses:
Network development and operations............... 188,188 1,708,416 3,169,854 5,066,458
Selling, general and administrative.............. 739,584 2,409,442 4,724,649 8,324,904
Depreciation and amortization.................... 39,007 75,258 501,354 636,820
----------- ------------- ------------- ------------------
966,779 4,193,116 8,395,857 14,028,182
----------- ------------- ------------- ------------------
Loss from operations............................... (870,266) (3,838,633) (8,225,024) (13,321,601)
Other income (expense):
Interest expense................................. (38,011) (26,517) (1,372,377) (1,489,360)
----------- ------------- ------------- ------------------
Interest income.................................. -- 8,958 149,243 158,201
----------- ------------- ------------- ------------------
Loss before extraordinary item..................... (908,277) (3,856,192) (9,448,158) (14,652,760)
Extraordinary item--extinguishment of
debt (Note 5).................................... -- -- (104,680) (104,680)
----------- ------------- ------------- ------------------
Net loss........................................... $ (908,277) $ (3,856,192) $ (9,552,838) $ (14,757,440)
----------- ------------- ------------- ------------------
----------- ------------- ------------- ------------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
(FORMERLY SPECTRANET INTERNATIONAL)
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE PERIOD FROM SEPTEMBER 1, 1993 (INCEPTION) THROUGH SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
SERIES C SERIES B SERIES A
CONVERTIBLE CONVERTIBLE CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK COMMON STOCK
--------------------- -------------------- -------------------- --------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT WARRANTS
--------- ---------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of common stock
for net liabilities
assumed by Separating
Shareholders under
Separation Agreement... -- $ -- -- $ -- -- $ -- 100 $(404,621) $ --
Net loss for the period
from September 1, 1993
(inception) through
September 30, 1993..... -- -- -- -- -- -- -- -- --
--------- ---------- --------- --------- --------- --------- --------- --------- ---------
BALANCE AT SEPTEMBER 30,
1993................... -- -- -- -- -- -- 100 (404,621) --
Issuance of common stock
as
compensation--October
1993................... -- -- -- -- -- -- 2,519,900 2,520 --
Issuance of common
stock--March 1994 to
July 1994.............. -- -- -- -- -- -- 279,000 418,501 --
Net loss for 1994........ -- -- -- -- -- -- -- -- --
--------- ---------- --------- --------- --------- --------- --------- --------- ---------
BALANCE AT SEPTEMBER 30,
1994................... -- -- -- -- -- -- 2,799,000 16,400 --
Issuance of Series A
preferred stock for
settlement of notes
payable and
compensation--May
1995................... -- -- -- -- 127,601 424,912 -- -- --
Conversion of common
stock to Series B
preferred stock--June
1995................... -- -- 279,000 418,501 -- -- (279,000) (418,501) --
Issuance of Series B
preferred
stock--January 1995 to
September 1995......... -- -- 558,667 838,001 -- -- -- -- --
Net loss for 1995........ -- -- -- -- -- -- -- -- --
--------- ---------- --------- --------- --------- --------- --------- --------- ---------
BALANCE AT SEPTEMBER 30,
1995................... -- -- 837,667 1,256,502 127,601 424,912 2,520,000 (402,101) --
Issuance of Series B
preferred
stock--October 1995 to
January 1996........... -- -- 500,504 750,726 -- -- -- -- --
Issuance of Series B
preferred stock for
settlement of notes
payable and for
consulting
services--December
1995................... -- -- 33,334 50,000 -- -- -- -- --
Issuance of Series B
preferred
stock--January 1996 to
June 1996.............. -- -- 641,800 1,604,500 -- -- -- -- --
Repurchase of Series A
preferred
stock--January 1996.... -- -- -- -- (8,934) (29,750) -- -- --
Issuance of Series B
preferred stock for
property and
equipment--May 1996.... -- -- 3,333 8,332 -- -- -- -- --
Issuance of common stock
for notes
receivable--May 1996... -- -- -- -- -- -- 396,000 99,000 --
Exercise of options to
purchase common stock
for shareholder notes
receivable-- May 1996
to June 1996........... -- -- -- -- -- -- 330,000 74,167 --
Net loss for 1996........ -- -- -- -- -- -- -- -- --
--------- ---------- --------- --------- --------- --------- --------- --------- ---------
BALANCE AT SEPTEMBER 30,
1996................... -- -- 2,016,638 3,670,060 118,667 395,162 3,246,000 (228,934) --
Cancellation of
shareholder notes
receivable for common
stock repurchase--
October 1996........... -- -- -- -- -- -- (90,000) (22,500) --
Repayment of shareholder
notes
receivable--December
1996 to January 1997... -- -- -- -- -- -- -- -- --
Issuance of Series C
preferred stock with
warrants to purchase
520,000 shares of
common stock during
January 1997, net of
issuance costs of
$704,638............... 2,600,000 12,279,362 -- -- -- -- -- -- 16,000
Issuance of common stock
warrants as finders
fees--January 1997..... -- -- -- -- -- -- -- -- 10,000
Issuance of common stock
warrant for
cash--January 1996..... -- -- -- -- -- -- -- -- 200,000
Exercise of options and
warrants to purchase
common stock--November
1996 to August 1997.... -- -- -- -- -- -- 106,900 24,450 --
Issuance of common stock
warrants with
debt--August 1997 to
September 1997......... -- -- -- -- -- -- -- -- 747,760
Issuance of common stock
warrants as finders
fees--September 1997... -- -- -- -- -- -- -- -- 27,200
Net loss for 1997........ -- -- -- -- -- -- -- -- --
--------- ---------- --------- --------- --------- --------- --------- --------- ---------
BALANCE AT SEPTEMBER 30,
1997................... 2,600,000 $12,279,362 2,016,638 $3,670,060 118,667 $ 395,162 3,262,900 $(226,984) $1,000,960
--------- ---------- --------- --------- --------- --------- --------- --------- ---------
--------- ---------- --------- --------- --------- --------- --------- --------- ---------
<CAPTION>
DEFICIT
ACCUMULATED TOTAL
DURING SHAREHOLDERS'
SHAREHOLDER DEVELOPMENT EQUITY
RECEIVABLES STAGE (DEFICIT)
----------- ------------ -------------
<S> <C> <C> <C>
Issuance of common stock
for net liabilities
assumed by Separating
Shareholders under
Separation Agreement... $ -- $ -- $ (404,621)
Net loss for the period
from September 1, 1993
(inception) through
September 30, 1993..... -- (22,611) (22,611)
----------- ------------ -------------
BALANCE AT SEPTEMBER 30,
1993................... -- (22,611) (427,232)
Issuance of common stock
as
compensation--October
1993................... -- -- 2,520
Issuance of common
stock--March 1994 to
July 1994.............. -- -- 418,501
Net loss for 1994........ -- (417,522) (417,522)
----------- ------------ -------------
BALANCE AT SEPTEMBER 30,
1994................... -- (440,133) (423,733)
Issuance of Series A
preferred stock for
settlement of notes
payable and
compensation--May
1995................... -- -- 424,912
Conversion of common
stock to Series B
preferred stock--June
1995................... -- -- --
Issuance of Series B
preferred
stock--January 1995 to
September 1995......... -- -- 838,001
Net loss for 1995........ -- (908,277) (908,277)
----------- ------------ -------------
BALANCE AT SEPTEMBER 30,
1995................... -- (1,348,410) (69,097)
Issuance of Series B
preferred
stock--October 1995 to
January 1996........... -- -- 750,726
Issuance of Series B
preferred stock for
settlement of notes
payable and for
consulting
services--December
1995................... -- -- 50,000
Issuance of Series B
preferred
stock--January 1996 to
June 1996.............. -- -- 1,604,500
Repurchase of Series A
preferred
stock--January 1996.... -- -- (29,750)
Issuance of Series B
preferred stock for
property and
equipment--May 1996.... -- -- 8,332
Issuance of common stock
for notes
receivable--May 1996... (99,000) -- --
Exercise of options to
purchase common stock
for shareholder notes
receivable-- May 1996
to June 1996........... (74,167) -- --
Net loss for 1996........ -- (3,856,192) (3,856,192)
----------- ------------ -------------
BALANCE AT SEPTEMBER 30,
1996................... (173,167) (5,204,602) (1,541,481)
Cancellation of
shareholder notes
receivable for common
stock repurchase--
October 1996........... 22,500 -- --
Repayment of shareholder
notes
receivable--December
1996 to January 1997... 54,167 -- 54,167
Issuance of Series C
preferred stock with
warrants to purchase
520,000 shares of
common stock during
January 1997, net of
issuance costs of
$704,638............... -- -- 12,295,362
Issuance of common stock
warrants as finders
fees--January 1997..... -- -- 10,000
Issuance of common stock
warrant for
cash--January 1996..... -- -- 200,000
Exercise of options and
warrants to purchase
common stock--November
1996 to August 1997.... -- -- 24,450
Issuance of common stock
warrants with
debt--August 1997 to
September 1997......... -- -- 747,760
Issuance of common stock
warrants as finders
fees--September 1997... -- -- 27,200
Net loss for 1997........ -- (9,552,838) (9,552,838)
----------- ------------ -------------
BALANCE AT SEPTEMBER 30,
1997................... $ (96,500) ($14,757,440) $ 2,264,620
----------- ------------ -------------
----------- ------------ -------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
(FORMERLY SPECTRANET INTERNATIONAL)
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
SEPTEMBER 1,
1993
YEAR ENDED SEPTEMBER 30, (INCEPTION) TO
---------------------------------- SEPTEMBER 30,
1995 1996 1997 1997
--------- ---------- ----------- ----------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss...................................................... $(908,277) $(3,856,192) $(9,552,838) $(14,757,440)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization............................. 39,007 75,258 501,354 636,820
Amortization of deferred financing costs.................. -- -- 60,872 60,872
Amortization of debt discount............................. -- -- 58,242 58,242
Non-cash interest expense................................. -- -- 37,782 37,782
Extraordinary loss on extinguishment of debt.............. -- -- 104,680 104,680
Changes in assets and liabilities:........................
Restricted cash related to operating activities......... -- -- (50,000) (50,000)
Accounts receivable..................................... 34,250 (101,771) 29,954 (31,808)
Other assets............................................ (7,092) (116,117) (98,219) (221,582)
Accounts payable and accrued expenses................... 61,486 1,830,947 1,462,457 3,354,902
--------- ---------- ----------- ----------------
Net cash used in operating activities................. (780,626) (2,167,875) (7,445,716) (10,807,532)
--------- ---------- ----------- ----------------
Cash flows from investing activities:
Purchases of property and equipment........................... (24,639) (908,120) (12,636,918) (13,575,790)
Procurement of patents........................................ (20,115) (15,317) (9,827) (56,763)
--------- ---------- ----------- ----------------
Net cash used in investing activities................. (44,754) (923,437) (12,646,745) (13,632,553)
--------- ---------- ----------- ----------------
Cash flows from financing activities:
Proceeds from issuance of common stock........................ -- -- -- 418,501
Proceeds from stock option and warrant exercises.............. -- -- 24,450 24,450
Proceeds from issuance of Series B preferred stock............ 838,001 2,355,226 -- 3,193,227
Proceeds from issuance of Series C preferred stock and related
common stock warrants, net of offering costs................ -- -- 4,528,862 4,528,862
Proceeds from issuance of common stock warrants............... -- -- 200,000 200,000
Proceeds from collection of shareholder receivables........... -- -- 54,167 54,167
Principal payments on capital leases.......................... (10,663) (34,371) (114,197) (164,802)
Proceeds from issuance of convertible bridge notes............ -- 835,000 7,347,000 8,182,000
Proceeds from revolving credit facility and related
warrants.................................................... -- -- 12,172,592 12,172,592
Proceeds from short-term borrowings and related warrants...... -- -- 1,000,000 1,000,000
Principal payments on short-term borrowings................... -- -- (500,000) (500,000)
Proceeds from other long-term debt............................ -- 27,510 -- 267,735
Principal payments on other long-term debt.................... -- (26,934) (26,643) (271,355)
Payment of deferred financing costs........................... -- -- (4,129,017) (4,129,017)
--------- ---------- ----------- ----------------
Net cash provided by financing activities............. 827,338 3,156,431 20,557,214 24,976,360
--------- ---------- ----------- ----------------
Net increase in cash and cash equivalents....................... 1,958 65,119 464,753 536,275
Cash and cash equivalents at beginning of period................ 4,445 6,403 71,522 --
--------- ---------- ----------- ----------------
Cash and cash equivalents at end of period...................... $ 6,403 $ 71,522 $ 536,275 $ 536,275
--------- ---------- ----------- ----------------
--------- ---------- ----------- ----------------
Supplemental cash flows information:
Cash paid during the period for interest...................... $ 5,945 $ 14,142 $ 440,178 $ 473,765
Non-cash transactions:
Issuance of note payable for settlement of wages.............. -- -- -- 4,185
Issuance of common stock for settlement of wages.............. -- -- -- 2,520
Issuance of Series A preferred stock for settlement of notes
payable and wages........................................... 424,912 -- -- 424,912
Property and equipment purchased under capitalized leases..... 47,654 105,808 7,097,437 7,250,899
Issuance of Series B preferred stock for settlement of note
payable, for consulting services received, and for
procurement of property and equipment....................... -- 58,332 -- 58,332
Issuance of common stock for shareholder receivables.......... -- 173,167 -- 173,167
Issuance of note payable to repurchase Series A preferred
stock....................................................... -- 29,750 -- 29,750
Conversion of convertible bridge notes into Series C preferred
stock and related warrants.................................. -- -- 7,776,500 7,776,500
Issuance of common stock warrants as finders fees............. -- -- 10,000 10,000
Non-cash deferred financing costs............................. -- -- 27,200 27,200
Issuance of note payable for consulting services received..... -- -- 50,000 50,000
Cancellation of shareholder receivable for stock repurchase... -- -- 22,500 22,500
Net liabilities in excess of assets acquired in connection
with
Separation Agreement........................................ -- -- -- 404,621
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
(FORMERLY SPECTRANET INTERNATIONAL)
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--THE COMPANY
FirstWorld Communications, Inc. (the Company) commenced operations on
September 1, 1993 as a result of a Separation Agreement (the Separation
Agreement) by and among key shareholders of Lambda Link, a Nevada corporation
(Lambda Link), and Lambda Link. Pursuant to the Separation Agreement, two of the
three principal shareholders of Lambda Link (the Separating Shareholders)
exchanged the stock that they held in Lambda Link for 100 shares of Lambda Link
International, a California corporation (Lambda Link International),
representing all of the issued and outstanding stock of this wholly-owned
subsidiary of Lambda Link. In addition, the Separating Shareholders resigned
from the board of directors of Lambda Link, agreed to change the name of Lambda
Link International, and assumed certain of the existing assets and liabilities
of Lambda Link. In connection with the Separation Agreement, Lambda Link
International changed its name to SpectraNet International and assumed those
certain assets and liabilities of Lambda Link that the Separating Shareholders
received pursuant to the Separation Agreement. The transfer of such assets and
liabilities has been accounted for at historical cost because the two companies
were under common control. The book value of the liabilities assumed exceeded
the book value of the assets acquired in this transaction. As discussed in Note
12, SpectraNet International changed its name to FirstWorld Communications, Inc.
on January 29, 1998.
The Company is a facilities-based integrated communications provider which
is developing networks to provide telecommunications solutions to business
customers in clustered, demographically attractive second tier markets. The
Company offers a broad array of telecommunications services, including local and
long distance telephone service, high speed Internet access, data connectivity,
LAN connectivity, web hosting and system integration services. During July 1997,
the Company commenced operations associated with the first phase of its initial
telecommunications network cluster located in Anaheim, California.
NOTE 2--DEVELOPMENT STAGE ACTIVITIES AND DEPENDENCY ON ADDITIONAL FINANCING
The Company is a development stage enterprise which has incurred substantial
operating losses and negative cash flows from network development and operations
since inception. The Company has provided services for less than three months as
of September 30, 1997 and has not achieved a significant customer base. 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 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. In order
to implement its business plan, significant capital will be required to fund
capital expenditures, working capital, debt service and operating losses. The
Company's principal capital expenditure requirements involve the purchase,
installation and construction of network operations centers, other network
infrastructure and customer located equipment, including expenditures which
relate to the development and construction of the Anaheim network pursuant to
that certain Universal Telecommunications System Participation Agreement
described in Note 8, expenditures which will be required pursuant to those
certain agreements with The Irvine Company described in Note 12, as well as
expenditures associated with the expansion of its networks into additional
geographic clusters.
F-7
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
(FORMERLY SPECTRANET INTERNATIONAL)
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--DEVELOPMENT STAGE ACTIVITIES AND DEPENDENCY ON ADDITIONAL FINANCING
(CONTINUED)
The Company expects that its future 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, including the Company's ability to make
principal and interest payments on its then existing indebtedness.
As discussed in Note 12, the Company consummated a private placement of
common stock on December 30, 1997, which resulted in the receipt of
approximately $26,330,000 in net proceeds on January 6, 1998. It is the opinion
of Company management that such net proceeds, along with the available borrowing
base on the Company's revolving credit facility (Note 6), will be adequate to
support the Company's operations through September 30, 1998. However, based upon
the factors discussed above, there can be no assurance that the Company will
achieve profitability or positive cash flow in the future or that sufficient
financing will be available to complete the Company's planned network
development efforts.
NOTE 3--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 at
the date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Among the more significant estimates and
assumptions made by management are those related to the Company's projected
future earnings and cash flows. Estimates of future earnings and cash flows form
the basis for management's assessment of the Company's ability to continue as a
going concern and the basis for management's assessment of the realizability of
the Company's intangible and long-lived assets. The Company's earnings and cash
flows have been and will continue to be affected by a number of influences;
therefore, actual earnings and cash flows could differ from management's
estimates.
CASH EQUIVALENTS AND RESTRICTED CASH
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. Restricted cash in support of outstanding letters of
credit totaled $50,000 at September 30, 1997.
F-8
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
(FORMERLY SPECTRANET INTERNATIONAL)
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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. Service revenues recognized since the Company's inception consist
primarily of reimbursable engineering, design and construction costs associated
with network service contracts with two city governments, which revenues have
been recognized as the services are provided by the Company. Other revenues
consist primarily of royalties earned under a certain patent licensing agreement
and are recorded when earned and when payment is reasonably assured.
CONCENTRATION OF CREDIT RISK
The Company's financial instruments that are exposed to concentrations of
credit risk consist principally of cash and cash equivalents and accounts
receivable. The Company places its cash and temporary cash investments with
high-quality financial institutions for which credit loss is not anticipated.
Accounts receivable at September 30, 1997 are due from commercial
telecommunications customers, approximately 70 percent of which relates to a
single customer. Credit is extended based on an evaluation of the customer's
financial condition and generally collateral is not required. The Company has
not provided for any anticipated credit loss as of September 30, 1997.
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 equipment...... 5-7 years
Building and improvements......... 30 years
Furniture, office equipment and
other........................... 3-7 years
Shorter of estimated useful life or
Leasehold improvements............ 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
1997, the Company capitalized approximately $52,000 in interest costs associated
with the development of the Company's initial telecommunications network in
Anaheim, California.
F-9
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
(FORMERLY SPECTRANET INTERNATIONAL)
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEFERRED FINANCING COSTS
Deferred financing costs include commitment fees and other costs related to
certain debt financing transactions and are being amortized over the initial
term of the related debt using the interest method.
PATENTS
Costs associated with the registration of patents are deferred and amortized
using the straight-line method over the estimated useful lives of the associated
patents, which approximates five years.
DEBT DISCOUNT
Discounts recorded in connection with the issuance of debt financing are
deferred and amortized over the initial term of the related debt using the
interest method.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts shown for cash equivalents, short-term borrowings and
convertible bridge notes approximate their fair values due to the relatively
short-term maturities of these instruments. Management believes that the
carrying amounts shown for long-term debt are reasonable approximations of their
fair values based upon the interest rates at which the Company could enter into
similar borrowing arrangements.
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
F-10
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
(FORMERLY SPECTRANET INTERNATIONAL)
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
future tax returns. Tax rate changes are reflected in the statement of
operations in the period such changes are enacted.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the fiscal
1997 presentation.
NOTE 4--PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------------
1996 1997
------------ -------------
<S> <C> <C>
Network infrastructure........................................... $ -- $ 12,636,955
Telecommunications equipment..................................... -- 5,048,156
Building and improvements........................................ -- 1,328,237
Furniture, office equipment and other............................ 371,617 976,341
Leasehold improvements........................................... 63,953 507,573
Construction in process.......................................... 761,750 427,986
------------ -------------
1,197,320 20,925,248
Accumulated depreciation......................................... (109,768) (593,895)
------------ -------------
$ 1,087,552 $ 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,
------------------------
1996 1997
---------- ------------
<S> <C> <C>
Network infrastructure.............................................. $ -- $ 6,000,000
Telecommunications equipment........................................ -- 290,565
Building and improvements........................................... -- 557,612
Furniture, office equipment and other............................... 153,462 402,722
---------- ------------
153,462 7,250,899
Accumulated depreciation............................................ (40,675) (191,847)
---------- ------------
$ 112,787 $ 7,059,052
---------- ------------
---------- ------------
</TABLE>
NOTE 5--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
F-11
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
(FORMERLY SPECTRANET INTERNATIONAL)
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--SHORT-TERM BORROWINGS (CONTINUED)
through the consummation of a new loan agreement with the lender. The remaining
obligation under the new loan agreement, which bears interest at the rate of 18%
per annum, is collateralized by substantially all assets of the Company,
subordinate to the revolving credit facility described in Note 6. In connection
with the initial debt issuance on August 29, 1997, the Company issued to the
lender warrants for the purchase of 125,000 shares of common stock (Note 10).
The fair value of such warrants at the time of grant, as determined by
management based upon application of the Black-Scholes option pricing model, was
recorded as a discount on the underlying debt. 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 totaling $77,267 and $27,413,
respectively. Concurrently, the Company issued to the lender additional warrants
for the purchase of 175,000 shares of common stock (Note 10). The fair value of
these warrants at the time of grant, as determined by management based upon
application of the Black-Scholes option pricing model, has been recorded as a
discount on the underlying debt. The unamortized portion of the debt discount as
of September 30, 1997 totaled $148,738.
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.
NOTE 6--LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------------
1996 1997
---------- -------------
<S> <C> <C>
14% revolving credit facility; expiring September 2002 unless
earlier terminated by the lenders in September 2000; secured by
substantially all assets of the Company; net of unamortized debt
discount totaling $463,513 at September 30, 1997................. $ -- $ 11,746,861
11% secured term note with a bank; monthly installments of $681,
including interest, payable through June 1999; note secured by
certain property and equipment................................... 19,314 12,947
Other.............................................................. 25,197 4,921
---------- -------------
44,511 11,764,729
Less current portion............................................... (27,212) (8,446)
---------- -------------
$ 17,299 $ 11,756,283
---------- -------------
---------- -------------
</TABLE>
F-12
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
(FORMERLY SPECTRANET INTERNATIONAL)
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6--LONG-TERM DEBT (CONTINUED)
Aggregate principal maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR
- -------------------------------------------------------------------------------
<S> <C>
1998........................................................................... $ 8,446
1999........................................................................... 7,191
2000........................................................................... 11,748,205
2001........................................................................... 887
-------------
$ 11,764,729
-------------
-------------
</TABLE>
REVOLVING CREDIT FACILITY
On September 16, 1997, the Company entered into a 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. Under the terms of such facility, the Company has
available a maximum borrowing capacity of $23,000,000, which may be used for
either revolving loan advances or to support letters of credit. Subject to the
terms and conditions set forth in the Credit Facility, maximum borrowings at
anytime outstanding may not exceed the sum of the following: (i) 75% of approved
capital expenditures, as defined in the Credit Facility, plus (ii) eligible
accrued interest, as defined in the Credit Facility, plus (iii) $3,000,000. The
obligations of the Company under the Credit Facility have been collateralized,
in favor of the Lenders, by a first priority, perfected security interest in
substantially all of the Company's assets, including all present and future cash
balances, accounts receivable, inventories, property and equipment and general
intangibles.
Advances under the Credit Facility bear interest at the rate of 14% per
annum and are payable monthly in arrears at a cash pay rate of 6% per annum in
year one, 9% in year two, 12% in year three and 14% thereafter, with the
remainder accruing at a compounded monthly basis and being added to the maximum
borrowing base. The Company is required to pay an annual maintenance fee of
$210,000 and a monthly commitment fee equal to .5% per annum on the average
unused portion of the maximum borrowings under the Credit Facility. The Company
is also required to pay a letter of credit fee equal to .5% per month on the
aggregate undrawn amount of all outstanding letters of credit.
The Credit Facility imposes certain operating and financial restrictions on
the Company. Such restrictions affect, and in some cases limit or prohibit,
among other things, the ability of the Company to incur additional indebtedness,
repay certain indebtedness prior to its stated maturity, create liens, engage in
mergers and acquisitions, make certain capital expenditures or pay dividends. In
addition to such restrictions, the Company is required to maintain annualized
revenues which exceed certain minimum amounts as specified in the Credit
Facility. Failure to comply with these or any other of the covenants specified
in the Credit Facility constitutes an event of default, at which time all loan
obligations of the Company under this facility would immediately bear interest
at a rate of 18% per annum and the letter of credit fee would increase to .83%
per month. Upon the occurrence and during the continuation of an event of
default, all loan obligations under this facility would become immediately due
and payable at the sole discretion of the Lenders. At September 30, 1997, the
Company was in compliance with the covenants contained in the Credit Facility.
F-13
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
(FORMERLY SPECTRANET INTERNATIONAL)
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6--LONG-TERM DEBT (CONTINUED)
The Credit Facility matures on September 17, 2002. However, the Lenders, at
their sole discretion, may terminate this agreement on September 17, 2000. In
the event that the facility is terminated by the Company prior to the maturity
date, the Company must pay the Lenders a termination fee equal to the greater of
either $1,000,000 or the total interest and letter of credit fees for the
immediate six months preceding the termination date.
In connection with the consummation of the Credit Facility, the Company
granted to the Lenders warrants for the purchase of 800,000 shares of the
Company's common stock (Note 10). The aggregate fair value of these warrants at
their time of grant, as determined by management based upon application of the
Black-Scholes option pricing model, has been recorded as a discount on the
underlying debt. The unamortized portion of the debt discount as of September
30, 1997 totaled $463,513.
NOTE 7--CONVERTIBLE BRIDGE NOTES
During the period from August 9, 1996 through September 30, 1996, the
Company raised $835,000 through the issuance of 6.15% convertible bridge notes
maturing on January 31, 1997. During the period from October 1, 1996 to January
31, 1997, additional funding of $6,941,500 was received through the issuance of
such notes. On January 31, 1997, the aggregate principal balance of such notes
was converted by the holders into 1,555,300 shares of Series C convertible
preferred stock and related common stock warrants (Notes 9 and 10). Simultaneous
to this conversion, accrued interest on the associated notes totaling $116,812
was repaid by the Company to the note holders.
On May 30, 1997, the Company authorized the private placement of up to
$5,000,000 in principal funding through the issuance of 8% subordinated,
convertible bridge notes. As of September 30, 1997, the Company had received
proceeds totaling $405,500 from this financing. Pursuant to the individual note
agreements, the convertible bridge notes were to mature on December 31, 1997,
unless earlier converted or repaid upon the closing of an equity financing by
the Company in excess of $3,000,000. As discussed in Note 12, the convertible
bridge notes outstanding as of September 30, 1997 were converted into shares of
the Company's Series A common stock and related warrants at the conversion rate
of $3.00 per share. In connection with the issuance of such convertible bridge
notes, warrants for the purchase of 33,789 shares of the Company's common stock
were also issued to the note holders (Note 10). It is management's estimate that
the aggregate value of these warrants, based upon application of the
Black-Scholes option pricing model, was insignificant at their time of grant.
NOTE 8--COMMITMENTS
LEASE COMMITMENTS
The Company leases its office space, certain network access facilities and
automobiles under noncancelable operating lease arrangements which expire on
varying dates through fiscal 2002. Certain of the office leases contain rent
escalation clauses which require the Company to pay a pro-rata share of the
lessor's operating expenses for any calendar year which exceeds base year
operating expenses, as defined within the respective agreements.
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
F-14
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
(FORMERLY SPECTRANET INTERNATIONAL)
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--COMMITMENTS (CONTINUED)
Company has accounted for certain agreements with the City of Anaheim, as more
fully described in Note 8 and which extend through fiscal 2027, as a capital
lease in the accompanying financial statements.
Future minimum lease payments under capital and noncancelable operating
leases are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR CAPITAL OPERATING
- ---------------------------------------------------------------- -------------- ------------
<S> <C> <C>
1998............................................................ $ 817,813 $ 374,883
1999............................................................ 1,314,015 381,744
2000............................................................ 1,744,835 125,274
2001............................................................ 1,660,514 102,685
2002............................................................ 1,650,448 18,086
Thereafter...................................................... 41,139,093 --
-------------- ------------
Total minimum lease payments.................................... 48,326,718 $ 1,002,672
------------
------------
Amount representing interest.................................... (41,213,626)
--------------
Present value of minimum lease payments......................... $ 7,113,092
--------------
--------------
</TABLE>
Rent expense under noncancelable operating leases was $72,875, $108,429 and
$361,156 during fiscal 1995, 1996 and 1997, respectively, and for the period
from September 1, 1993 (inception) to September 30, 1997 was $589,858.
OTHER COMMITMENTS
During February 1997, the Company and its wholly-owned subsidiary FirstWorld
Anaheim (FWA) entered into a 30-year Universal Telecommunications System
Participation Agreement (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 to
maintain a $6,000,000 reserve account for debt service and capital improvements.
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
F-15
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
(FORMERLY SPECTRANET INTERNATIONAL)
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--COMMITMENTS (CONTINUED)
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, 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 minimum 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. FWA's interest in the leased property presently
is encumbered by a leasehold mortgage in favor of the lenders under the
Company's Credit Facility.
Under the terms of the UTS Agreement and the Operating Property Agreement,
which have collectively been accounted for as a capital lease in the
accompanying financial statements, remaining fixed rental payments aggregate
approximately $46,959,000 at September 30, 1997. Interest expense associated
with this capital lease totaled $995,434 during fiscal 1997.
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, which
allows 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, is
required to be 44% completed by April 1, 1998, and 90% completed by December 31,
1998. The UTS Agreement also requires FWA to commence construction of a
demonstration center in the City's downtown area by August 20, 1998 and to
ensure that such demonstration center is operational by June 30, 1999. The
Company anticipates that the aforementioned performance requirements will be
met. 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 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
F-16
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
(FORMERLY SPECTRANET INTERNATIONAL)
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--COMMITMENTS (CONTINUED)
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.
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 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.
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 $312,500, $1,937,500 and $250,000 during each of fiscal 1998, 1999 and
2000, respectively.
NOTE 9--SHAREHOLDERS' EQUITY (DEFICIT)
In December 1996, the Board of Directors and shareholders of the Company
approved a restatement of the Articles of Incorporation which provided for a
capital restructuring. Under the restated Articles of Incorporation, the Company
is authorized to issue up to 15,000,000 shares of common stock and 5,160,335
shares of preferred stock, of which 134,200 shares are designated Series A
preferred stock, 2,426,135 shares are designated Series B preferred stock and
2,600,000 shares are designated Series C preferred stock, and to fix the powers,
designations, preferences and rights of each series. As discussed in Note 12,
the Company converted the three existing classes of preferred stock and common
stock into shares of newly created Series B common stock on December 30, 1997.
COMMON STOCK
In connection with the Separation Agreement (Note 1), the Separating
Shareholders received 100 shares of common stock. Consideration for such shares
consisted of the assumption of net liabilities from Lambda Link totaling
$404,621.
In October 1993, the Company issued 2,519,900 shares of common stock as
compensation to the Separating Shareholders and certain employees in the amount
of $2,520.
In March 1994, in connection with a private placement offering, the Company
issued 279,000 shares of common stock at a price of $1.50 per share. In June
1995, these shares were converted into Series B preferred stock.
F-17
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
(FORMERLY SPECTRANET INTERNATIONAL)
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9--SHAREHOLDERS' EQUITY (DEFICIT) (CONTINUED)
During the period May 1996 to June 1996, 330,000 shares of common stock were
issued through the exercise of stock options at prices between $.15 and $.25 per
share. Additionally, 396,000 shares of common stock were issued to certain
option holders pursuant to a Board of Directors' resolution which prescribed for
the cancellation of options in favor of purchasing a like number of shares of
common stock at $.25 per share.
During the period November 1996 to August 1997, 106,900 shares of common
stock were issued through the exercise of stock options and warrants at prices
between $.15 and $.50 per share.
SERIES A PREFERRED STOCK
The holders of Series A preferred stock are entitled to cumulative dividends
at the rate of $.20 per share per annum, when, as and if declared by the
Company's Board of Directors. The holders of Series A preferred stock are not
entitled to liquidating distributions. So long as any shares of Series A
preferred stock remain outstanding, no dividends or distributions shall be paid
on any Series B preferred stock or common stock of the Company during any fiscal
year, nor shall any shares of the Series B preferred stock or common stock be
purchased, redeemed, or otherwise acquired for value by the Company until Series
A preferred stock dividends in the total amount of $.20 per share shall have
first been paid or declared and set apart during that fiscal year and any prior
fiscal year in which dividends accumulated but remain unpaid. No dividends have
been declared on Series A preferred stock through September 30, 1997. Cumulative
dividends in arrears on Series A preferred stock aggregate $47,467, or $.40 per
share, as of September 30, 1997. Each share of Series A preferred stock is
convertible, at the option of the holder thereof, at anytime into a one-tenth
share of common stock. The Series A preferred shares shall automatically convert
into one-tenth of a share of common stock upon the closing of a firm commitment
underwritten public offering of the Company's common stock resulting in an
aggregate offering price of not less than $20,000,000 based upon an offering
price per common share of not less than (i) $10.00 for an offering which occurs
prior to December 31, 1998; (ii) $12.50 for an offering which occurs after
December 31, 1998 and on or prior to December 31, 1999; (iii) $15.00 for an
offering which occurs after December 31, 1999 and on or prior to December 31,
2000; or (iv) $17.50 for an offering which occurs after December 31, 2000. Each
share of Series A preferred stock shall also be converted into one-tenth of a
share of common stock upon the affirmative vote of the holders of a majority of
the shares of such series outstanding at the time of vote. The number of common
shares in which Series A preferred stock may be converted pursuant to automatic
or voluntary events of conversion is subject to adjustment for customary events
of dilution. The Series A preferred shares do not have any voting rights.
In May 1995, the Company issued 127,601 shares of Series A preferred stock
to employees in exchange for the cancellation of notes and wages payable, which
conversion was made at the rate of $3.33 per share based upon the carrying
amounts of said liabilities.
In January 1996, the Company repurchased 8,934 shares of Series A preferred
stock at their original cost of $3.33 per share through the issuance of a note
payable.
F-18
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
(FORMERLY SPECTRANET INTERNATIONAL)
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9--SHAREHOLDERS' EQUITY (DEFICIT) (CONTINUED)
SERIES B CONVERTIBLE PREFERRED STOCK
The holders of Series B preferred stock are entitled to noncumulative
preferred dividends payable when and as declared by the Company's Board of
Directors. No dividends shall be paid on any share of Series B preferred stock
until dividends associated with Series C and Series A preferred stock have been
paid or declared and set apart. No dividends have been declared on Series B
preferred stock through September 30, 1997. In the event of liquidation,
dissolution or winding up of the Company, Series B holders are entitled to
liquidating distributions of $1.50 per share plus an amount equal to $.09 per
share per annum beginning July 1, 1995. Each share of Series B preferred stock
is convertible, at the option of the holder thereof, at anytime into equal
shares of common stock. The Series B preferred shares shall automatically
convert into equal shares of common stock upon the closing of a firm commitment
underwritten public offering of the Company's common stock resulting in an
aggregate offering price of not less than $20,000,000 based upon an offering
price per common share of not less than (i) $10.00 for an offering which occurs
prior to December 31, 1998; (ii) $12.50 for an offering which occurs after
December 31, 1998 and on or prior to December 31, 1999; (iii) $15.00 for an
offering which occurs after December 31, 1999 and on or prior to December 31,
2000; or (iv) $17.50 for an offering which occurs after December 31, 2000. Each
share of Series B preferred stock shall also be converted into equal shares of
common stock upon the affirmative vote of the holders of a majority of the
shares of such series outstanding at the time of vote. The number of common
shares in which Series B preferred stock may be converted pursuant to automatic
or voluntary events of conversion is subject to adjustment for customary events
of dilution. The Series B preferred shares, on an as-converted basis, have equal
voting rights as the Company's common shares.
In June 1995, 279,000 shares of common stock were exchanged for Series B
preferred stock.
During the period January 1995 to September 1995, in connection with a
private placement offering, the Company issued 558,669 shares of Series B
preferred stock at a price of $1.50 per share. Additionally, during the period
October 1995 to January 1996, the Company issued 500,504 shares of Series B
preferred stock at a price of $1.50 per share.
In December 1995, the Company issued 33,334 shares of Series B preferred
stock for the cancellation of a note payable to a relative of the president and
for consulting services received, which conversion was based upon the fair value
of Series B preferred stock of $1.50 per share, the carrying amount of the note
payable and the fair value of the consulting services received.
During the period January 1996 to June 1996, in connection with a private
placement offering, the Company issued 641,800 shares of Series B preferred
stock at a price of $2.50 per share.
In May 1996, the Company issued 3,333 shares of Series B preferred stock for
the procurement of property and equipment, which conversion was based upon the
fair value of Series B preferred stock of $2.50 per share and the fair value of
the property and equipment received.
SERIES C CONVERTIBLE PREFERRED STOCK
The holders of Series C preferred stock, in preference to the holders of any
other stock of the Company, shall be entitled to preferred dividends at the rate
of $.40 per share per annum or, in the event
F-19
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
(FORMERLY SPECTRANET INTERNATIONAL)
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9--SHAREHOLDERS' EQUITY (DEFICIT) (CONTINUED)
of liquidation, dissolution or winding up of the Company, liquidation
distributions of $5.00 per share, plus all accumulated or declared but unpaid
dividends. Series C preferred stock dividends shall be payable only when, as and
if declared by the Company's Board of Directors and shall be noncumulative;
provided, however, that after December 31, 1998, the holders of Series C
preferred stock shall be entitled to receive cumulative dividends at the rate of
$.40 per share per annum. Such dividends shall be payable only when, as and if
declared by the Board of Directors and shall accrue after December 31, 1998,
whether or not earned. So long as any shares of Series C preferred stock remain
outstanding, no dividends or distributions shall be paid on the Series B or
Series A preferred stock or the common stock of the Company during any fiscal
year, nor shall any shares of the Series B or Series A preferred stock or the
common stock be purchased, redeemed, or otherwise acquired for value by the
Company until Series C preferred stock dividends in the total amount of $.40 per
share shall have first been paid or declared and set apart during that fiscal
year and any prior fiscal year in which dividends accumulated but remain unpaid.
No dividends have been declared on Series C preferred stock through September
30, 1997. Each share of Series C preferred stock is convertible, at the option
of the holder thereof, at anytime into equal shares of common stock. The Series
C preferred shares shall automatically convert into equal shares of common stock
upon the closing of a firm commitment underwritten public offering of the
Company's common stock resulting in an aggregate offering price of not less than
$20,000,000 based upon an offering price per common share of not less than (i)
$10.00 for an offering which occurs prior to December 31, 1998; (ii) $12.50 for
an offering which occurs after December 31, 1998 and on or prior to December 31,
1999; (iii) $15.00 for an offering which occurs after December 31, 1999 and on
or prior to December 31, 2000; or (iv) $17.50 for an offering which occurs after
December 31, 2000. Each share of Series C preferred stock shall also be
converted into equal shares of common stock upon the affirmative vote of the
holders of a majority of the shares of such series outstanding at the time of
vote. The number of common shares in which Series C preferred stock may be
converted pursuant to automatic or voluntary events of conversion is subject to
adjustment for customary events of dilution, as well as certain additional
anti-dilutive adjustments as defined in the Company's Articles of Incorporation.
The Series C preferred shares, on an as-converted basis, have equal voting
rights as the Company's common shares.
Pursuant to the Articles of Incorporation, the Company shall not, without
first obtaining the affirmative vote or written consent of the holders of not
less than two-thirds of the outstanding shares of Series C preferred stock, (i)
pay or declare dividends on common stock or repurchase any shares of capital
stock of the corporation; (ii) take any action to materially amend the Company's
Articles of Incorporation or Bylaws; (iii) authorize or issue shares of capital
stock having preference equal to or superior to that of the Series C preferred
shares; or (iv) effect certain mergers or consolidations of the Company, each as
defined within the Articles of Incorporation.
During January 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 $4,528,862, net of placement
agent commissions and related fees, and 1,555,300 shares issued through the
retirement of convertible bridge notes (Note 7). In connection with this
offering, the holders of Series C shares also received warrants for the purchase
of 520,000 shares of common stock; additionally, warrants to purchase 233,118
shares of common stock were issued to certain financial advisors (Note 10).
F-20
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
(FORMERLY SPECTRANET INTERNATIONAL)
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10--WARRANTS AND STOCK OPTIONS
WARRANTS
In connection with the January 1994 private placement of common stock, the
Company issued warrants to purchase 139,494 shares of common stock at $1.50 per
share. During June 1995, these warrants were canceled and exchanged for warrants
to purchase 139,494 shares of Series B preferred stock at a price of $1.50 per
share, which warrants expire in April 1999 and contain customary adjustments to
protect against dilution. It is management's estimate that the aggregate fair
value of these warrants was insignificant at the time of grant. At September 30,
1997, all of these warrants remain outstanding.
In connection with the January 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 have an exercise price of $5.00 per share,
a term of five years and are subject to customary adjustments to protect against
dilution, as well as certain additional anti-dilutive adjustments as defined in
the warrant agreements. Based upon application of the Black-Scholes option
pricing model, it is management's estimate that the aggregate fair value of such
warrants was approximately $16,000 at the time of grant, which amount has been
allocated to the warrants. At September 30, 1997, all of these warrants remain
outstanding.
In connection with the January 1997 private placement of Series C preferred
stock, 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. Based upon application of the
Black-Scholes option pricing model, it is management's estimate that the
aggregate fair value of such warrants was approximately $10,000 at the time of
grant, which amount has been recorded as a non-cash equity issuance cost related
to the Series C preferred stock placement. During March 1997, 5,000 of the $.50
warrants were exercised for proceeds totaling $2,500. At September 30, 1997, all
of the remaining warrants remain outstanding.
Simultaneous to the above Series C equity transactions, the Company issued a
warrant for the purchase of 800,000 shares of common stock to a single investor.
The warrant has a term of five years and vests at the rate of 25% per year
beginning in January 1998. Pursuant to the warrant agreement, the initial
exercise price per underlying common share is $4.75. However, the warrant
contains a complex anti-dilution provision pursuant to which the number of
underlying common shares may be increased 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 the investor, and (iii) a public
offering of securities by the Company. The warrant also prescribes a formula
under which the exercise price per underlying common share is reduced in
successive years of the warrant agreement, which reduction is further affected
by the number of warrant shares previously exercised pursuant to this agreement.
This warrant was issued for cash proceeds totaling $200,000, which management
considers to be the fair value of this warrant at the time of grant. At
September 30, 1997, no shares have been exercised under this warrant agreement.
As discussed in Note 12, the terms of this warrant were amended on December 30,
1997.
During January 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. It is management's
estimate that the aggregate fair value of these warrants, determined based upon
application of the Black-
F-21
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
(FORMERLY SPECTRANET INTERNATIONAL)
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10--WARRANTS AND STOCK OPTIONS (CONTINUED)
Scholes option pricing model, was insignificant at their time of grant. At
September 30, 1997, all of these warrants remain outstanding.
During the period July 1997 to September 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. It is management's estimate that the
aggregate fair value of these warrants, determined based upon application of the
Black-Scholes option pricing model, was insignificant at their time of grant. At
September 30, 1997, all of these warrants remain outstanding.
During August 1997, in connection with the attainment of short-term bridge
financing, the Company issued to the lender warrants to purchase 125,000 shares
of common stock. During September 1997, in connection with the execution of a
new loan agreement, warrants to purchase an additional 175,000 common shares
were issued to the lender. Such warrants have an exercise price of $6.00 per
share, a term of seven years and are subject to customary adjustments to protect
against dilution, as well as certain additional anti-dilutive adjustments as
defined in the warrant agreements. The aggregate fair value of the warrants at
their date of grant, which was estimated by management to be $115,900 with
respect to the warrants issued during August 1997 and $162,260 with respect to
the warrants issued during September 1997, based upon application of the
Black-Scholes option pricing model, has been recorded as a discount on the
underlying debt. As discussed in Note 5, the unamortized debt discount
associated with those warrants issued in August 1997 was written off on
September 17, 1997 as a result of a debt extinguishment. At September 30, 1997,
all of these warrants remain outstanding.
During September 1997, in connection with the attainment of the Company's
Credit Facility, the Company issued to the lender warrants to purchase 800,000
shares of common stock. Such warrants have an exercise price of $6.00 per share,
a term of five years and are subject to customary adjustments to protect against
dilution, as well as certain additional anti-dilutive adjustments as defined in
the warrant agreement. The fair value of these warrants at the time of grant,
which was estimated by management to be $469,600 based upon application of the
Black-Scholes option pricing model, has been recorded as a discount on the
underlying debt. In connection with the consummation of this credit facility,
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. The aggregate fair value of these warrants at the time
of grant, which was estimated by management to be $27,200 based upon application
of the Black-Scholes option pricing model, has been recorded as a non-cash
deferred financing cost. At September 30, 1997, all of the warrants issued in
connection with this transaction remain outstanding.
STOCK OPTIONS
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
1,000,000 shares, respectively, of 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. As of September 30, 1997, 2,068,100 common shares remain
reserved for issuance under the Plans. Both plans provide for the granting of
incentive stock options (within the meaning of Section 422A
F-22
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
(FORMERLY SPECTRANET INTERNATIONAL)
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10--WARRANTS AND STOCK OPTIONS (CONTINUED)
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 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 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 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. Stock 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. Through September 30,
1997, no such purchase rights have been granted by 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:
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
--------------------------
1996 1997
------------ ------------
<S> <C> <C>
Net loss:
As reported..................................................... $ 3,856,192 $ 9,552,838
Pro forma....................................................... $ 3,859,992 $ 9,564,128
</TABLE>
The minimum value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted average
assumptions used for grants during fiscal 1996 and 1997: dividend yield of 0.0%
for both periods; volatility of 0.0% for both periods; risk-free interest rates
of 5.79% and 6.07%; and an expected life of 5.0 years for both periods. The
weighted average fair value of options granted during fiscal 1996 and 1997 was
approximately $.06 and $.09 per option, respectively.
F-23
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
(FORMERLY SPECTRANET INTERNATIONAL)
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10--WARRANTS AND STOCK OPTIONS (CONTINUED)
Stock option transactions under the Plans during the three fiscal years
ended September 30, 1997, all of which relate to employee transactions, are
summarized as follows:
<TABLE>
<CAPTION>
SHARES WEIGHTED
UNDERLYING AVERAGE
OPTIONS EXERCISE PRICE
---------- ---------------
<S> <C> <C>
Outstanding at September 30, 1994.................................. --
Granted............................................................ 763,333 $ .15
Exercised.......................................................... --
Canceled........................................................... --
----------
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
----------
----------
</TABLE>
The following table summarizes information about options outstanding at
September 30, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------- --------------------------
OUTSTANDING WEIGHTED- AVERAGE WEIGHTED- EXERCISABLE WEIGHTED-
RANGE OF AS OF REMAINING AVERAGE AS OF AVERAGE
EXERCISE SEPTEMBER 30, CONTRACTUAL LIFE EXERCISE SEPTEMBER 30, EXERCISE
PRICES 1997 (IN YEARS) PRICE 1997 PRICE
- ----------- ------------- ----------------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C>
$ .15 - .25 626,000 5.1 $ .19 485,800 $ .18
$ .50 362,300 8.9 $ .50 100,560 $ .50
$ 3.20 50,500 9.7 $ 3.20 2,800 $ 3.20
------------- -------------
1,038,800 6.6 $ .44 589,160 $ .25
------------- -------------
------------- -------------
</TABLE>
As discussed in Note 12, the Company's Board of Directors approved a
repricing of stock options in December 1997, pursuant to which the exercise
price of stock options designated at $3.20 per share was reduced to $3.00 per
share.
F-24
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
(FORMERLY SPECTRANET INTERNATIONAL)
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11--INCOME TAXES
Deferred tax assets (liabilities) are comprised of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------------
1996 1997
------------- -------------
<S> <C> <C>
Net operating loss carryforwards................................ $ 2,187,907 $ 4,733,931
Accrued employee costs.......................................... 100,000 39,834
Depreciation and amortization................................... (19,845) (78,845)
------------- -------------
2,268,062 4,694,920
Valuation allowance............................................. (2,268,062) (4,694,920)
------------- -------------
Deferred tax assets (liabilities), net.......................... $ -- $ --
------------- -------------
------------- -------------
</TABLE>
As of September 30, 1997, the Company has Federal and state net operating
loss carryforwards of approximately $14,810,000 and $10,798,000, respectively,
which amounts expire beginning in fiscal 2009 and fiscal 1999, respectively. As
a result of the capital transactions described in Note 12, which resulted in a
change of ownership as defined by Section 382 of the Internal Revenue Code, the
Company's utilization of such net operating loss carryforwards 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 built-in gains
in the future, the annual utilization rate of the net operating losses would be
increased. If the Company is able to recognize built-in losses, they will be
subject to the annual utilization limitation when recognized.
Based upon the lack of prior earnings history of the Company and based upon
available evidence, management has recorded a full valuation allowance for the
benefit of deferred tax assets. No income tax provision or benefit was recorded
during fiscal 1995, 1996 or 1997, or for the period from September 1, 1993
(inception) to September 30, 1997, due to the cumulative net losses of the
Company.
NOTE 12--SUBSEQUENT EVENTS
In October 1997, the Company entered into a three-year network services
agreement with a provider of voicemail and data services. Future minimum
payments under this agreement, which extend through October 2000, aggregate
$56,670, $239,040, $286,560 and $23,880 during each of fiscal 1998, 1999, 2000
and 2001, respectively. Simultaneous to the consummation of this agreement, the
Company granted a three-year, $150,000 unsecured promissory note to the vendor
as payment for certain up-front fees associated with this agreement. Aggregate
principal and interest payments due under this promissory note total $10,800,
$48,600, $109,365 and $31,455 during fiscal 1998, 1999, 2000 and 2001,
respectively. Also in October 1997, the Company entered into a four-year
agreement with a provider of data processing and billing services, under which
future minimum payments aggregate $150,000 during each of fiscal 1998, 1999,
2000 and 2001.
In December 1997, the Company's Board of Directors approved a repricing of
stock options whereby the exercise price of all outstanding stock options
granted under the Company's Plans was reduced to $3.00 per share, if previously
in excess of such amount.
F-25
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
(FORMERLY SPECTRANET INTERNATIONAL)
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12--SUBSEQUENT EVENTS (CONTINUED)
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). 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
7). 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 approximately $26,330,000, net of offering commissions and
certain other advisory fees paid in connection with the consummation of this
equity placement. The Company received the gross proceeds from this offering on
January 6, 1998, simultaneous to which the related offering costs were paid. In
connection with the aforementioned placement, the Company also issued to Spectra
3 and Enron warrants to purchase 5,000,000 shares each of newly created Series B
common stock and to the Noteholders warrants to purchase an aggregate of 135,164
shares of such Series B common stock at $3.00 per share. The number of shares of
Series B common stock and exercise price of the warrants are subject to
customary adjustments from time to time as stipulated in the warrant agreements.
Such warrants 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. It is management's estimate that the aggregate fair value of such
warrants approximates $9,628,000, based upon application of the Black-Scholes
option pricing model. The common stock purchase agreement, as amended, also
contains an option which grants Spectra 3 and Enron 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 as described above,
except that any additional shares of common stock to be acquired would be Series
B common stock. Such option is exercisable through the earlier of (i) June 9,
1998; or (ii) the closing of a high yield debt offering by the Company.
Simultaneous to the equity investment described above, the Company (i)
converted the three existing classes of preferred stock into common stock in
accordance with the automatic conversion provision of its 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 to
allow for the aforementioned equity transaction and to provide flexibility for
future anticipated financings; and (iii) amended its Articles of Incorporation
to designate two series of common stock, with the investors in the
aforementioned equity transaction receiving Series A common stock and all then
existing shares of common stock (including common stock issued upon conversion
of the 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 Series A common stock possess ten votes per share on
all matters subject to a vote of shareholders while the Series B common stock
possess one vote per share.
In connection with the above transactions, the Company entered into separate
management consulting services agreements with an affiliate of Spectra 3 and
Enron whereby such parties will provide general management consulting services
to the Company for a period of three years beginning January 1, 1998.
F-26
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
(FORMERLY SPECTRANET INTERNATIONAL)
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12--SUBSEQUENT EVENTS (CONTINUED)
Pursuant to such agreements, the Company will be required to pay to each party
consulting fees totaling $500,000 per annum.
Simultaneous to the above private placement and related transactions, that
certain warrant for the purchase of 800,000 shares of common stock, as
originally granted by the Company to a single investor (an affiliate of Spectra
3) on January 31, 1997 (Note 10), 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, as opposed to the 2,250,000
shares of Series B common stock with an exercise at $1.69 per share as would
have been purchasable following the aforementioned equity transactions pursuant
to the terms of the original warrant agreement. The warrant was amended in order
to fix the number of shares purchasable under the original warrant agreement and
to eliminate any further adjustment to the number of underlying Series B common
shares purchasable as a result of future equity issuances. This warrant, as
amended, remains subject to certain customary adjustments to protect against
dilution.
On January 29, 1998, SpectraNet International changed its name to FirstWorld
Communications, Inc.
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.
FWOC is obligated 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.
F-27
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
(FORMERLY SPECTRANET INTERNATIONAL)
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12--SUBSEQUENT EVENTS (CONTINUED)
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.
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.
F-28
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
(FORMERLY SPECTRANET INTERNATIONAL)
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13--ADDITIONAL SUBSEQUENT EVENTS
On March 17, 1998, the Company received a firm, written commitment from
Spectra 3 and Enron to invest, pursuant to that certain option held by Spectra 3
and Enron as described in Note 12, an additional $20,000,000 in the aggregate
for the purchase of 6,666,666 shares of Series B common stock and related Series
B common stock warrants concurrently with the closing of a high yield debt
offering by the Company, provided that such offering is consummated on or before
April 20, 1998.
On March 17, 1998, that certain management consulting services agreement
entered into by and among the Company and an affiliate of Spectra 3, as
described in Note 12, was amended, whereby the consulting fee payable by the
Company to the affiliate pursuant to such agreement was increased from $500,000
per annum to $620,000 per annum, retroactive to January 1, 1998.
F-29
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
(FORMERLY SPECTRANET INTERNATIONAL)
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED BALANCE SHEET (UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31,
1998
--------------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents....................................................................... $ 1,749,922
Restricted cash................................................................................. 50,000
Accounts receivable............................................................................. 134,050
Prepaid expenses................................................................................ 122,895
Other current assets............................................................................ 15,245
--------------
Total current assets........................................................................ 2,072,112
Property and equipment, net....................................................................... 25,915,923
Deferred financing costs, net..................................................................... 3,686,174
Other assets, net................................................................................. 975,805
--------------
$ 32,650,013
--------------
--------------
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable................................................................................ $ 3,806,545
Accrued interest................................................................................ 900,176
Accrued employee costs.......................................................................... 170,401
Other accrued expenses.......................................................................... 61,953
Current portion of long-term debt............................................................... 8,643
Current portion of capital lease obligations.................................................... 229,480
--------------
Total current liabilities................................................................... 5,177,198
Long-term debt, net of discount................................................................... 163,369
Capital lease obligations......................................................................... 6,777,803
--------------
Total liabilities........................................................................... 12,118,370
--------------
Commitments....................................................................................... --
Shareholders' equity:
Preferred stock, no par value, 10,000,000 shares authorized at March 31, 1998; no shares issued
or outstanding................................................................................ --
Common stock, voting, no par value, 100,000,000 shares authorized at March 31, 1998:
Series A, 10,135,164 shares designated at March 31, 1998; 10,135,164 shares issued and
outstanding................................................................................. 16,913,809
Series B, 89,864,836 shares designated at March 31, 1998; 9,178,625 shares issued and
outstanding................................................................................. 16,160,950
Warrants........................................................................................ 10,628,960
Shareholder receivables......................................................................... (96,500)
Deficit accumulated during development stage.................................................... (23,075,576)
--------------
Total shareholders' equity.................................................................. 20,531,643
--------------
$ 32,650,013
--------------
--------------
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
F-30
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
(FORMERLY SPECTRANET INTERNATIONAL)
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
PERIOD FROM
SIX MONTHS ENDED MARCH 31, SEPTEMBER 1, 1993
---------------------------- (INCEPTION) TO
1997 1998 MARCH 31, 1998
------------- ------------- -----------------
<S> <C> <C> <C>
Service revenue.................................................. $ -- $ 233,714 $ 729,580
Other revenue.................................................... 68,653 10,000 220,715
------------- ------------- -----------------
68,653 243,714 950,295
------------- ------------- -----------------
Costs and expenses:
Network development and operations............................. 1,610,347 3,548,519 8,614,977
Selling, general and administrative............................ 1,521,761 1,560,627 9,885,531
Depreciation and amortization.................................. 185,627 1,029,498 1,666,318
------------- ------------- -----------------
3,317,735 6,138,644 20,166,826
------------- ------------- -----------------
Loss from operations............................................. (3,249,082) (5,894,930) (19,216,531)
Other income (expense):
Interest expense............................................... (126,835) (2,479,726) (3,969,086)
Interest income................................................ 49,688 56,520 214,721
------------- ------------- -----------------
Loss before extraordinary item................................... (3,326,229) (8,318,136) (22,970,896)
Extraordinary item--extinguishment of debt....................... -- -- (104,680)
------------- ------------- -----------------
Net loss......................................................... $ (3,326,229) $ (8,318,136) $ (23,075,576)
------------- ------------- -----------------
------------- ------------- -----------------
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
F-31
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
(FORMERLY SPECTRANET INTERNATIONAL)
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED MARCH 31, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
SERIES C SERIES B
SERIES A SERIES B CONVERTIBLE CONVERTIBLE
COMMON STOCK COMMON STOCK PREFERRED STOCK PREFERRED STOCK
-------------------- -------------------- -------------------- --------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1997.......... -- -- -- -- 2,600,000 $12,279,362 2,016,638 $3,670,060
Exercise of options to purchase common
stock................................ -- -- -- -- -- -- -- --
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--
December 30, 1997.................... 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-- December 30,
1997; as follows:
Series C preferred stock; conversion
ratio of 1.39:1, including
anti-dilutive adjustments.......... -- -- 3,621,120 12,279,362 (2,600,000) (12,279,362) -- --
Series B preferred stock and common
stock; conversion ratio of 1:1..... -- -- 5,545,638 3,486,426 -- -- (2,016,638) (3,670,060)
Series A preferred stock; conversion
ratio of 1:10...................... -- -- 11,867 395,162 -- -- -- --
Net loss for the six-month period ended
March 31, 1998....................... -- -- -- -- -- -- -- --
--------- --------- --------- --------- --------- --------- --------- ---------
Balance at March 31, 1998.............. 10,135,164 $16,913,809 9,178,625 $16,160,950 -- -- -- --
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
<CAPTION>
SERIES A
CONVERTIBLE DEFICIT
PREFERRED STOCK ACCUMULATED
COMMON STOCK DURING
------------------------ ---------------------- SHAREHOLDER DEVELOPMENT
SHARES AMOUNT SHARES AMOUNT WARRANTS RECEIVABLES STAGE
----------- ----------- --------- ----------- ----------- ------------- ------------
<S> <C>
Balance at September 30, 1997.......... 118,667 $ 395,162 3,262,900 $(226,984) $1,000,960 $ (96,500) ($14,757,440)
Exercise of options to purchase common
stock................................ -- -- 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--
December 30, 1997.................... -- -- -- -- 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-- December 30,
1997; 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) -- -- -- -- --
Net loss for the six-month period ended
March 31, 1998....................... -- -- -- -- -- -- (8,318,136)
----------- ----------- --------- ----------- ----------- ------------- ------------
Balance at March 31, 1998.............. -- -- -- -- 1$0,628,960 $ (96,500) ($23,075,576)
----------- ----------- --------- ----------- ----------- ------------- ------------
----------- ----------- --------- ----------- ----------- ------------- ------------
<CAPTION>
TOTAL
SHAREHOLDERS'
EQUITY
-------------
Balance at September 30, 1997.......... $2,264,620
Exercise of options to purchase common
stock................................ 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--
December 30, 1997.................... 26,541,809
Conversion of Series C preferred stock,
Series B preferred stock, Series A
preferred stock and common stock to
Series B common stock-- December 30,
1997; 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...................... --
Net loss for the six-month period ended
March 31, 1998....................... (8,318,136)
-------------
Balance at March 31, 1998.............. 2$0,531,643
-------------
-------------
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
F-32
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
(FORMERLY SPECTRANET INTERNATIONAL)
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED MARCH PERIOD FROM
31, SEPTEMBER 1, 1993
---------------------- (INCEPTION) TO
1997 1998 MARCH 31, 1998
---------- ---------- -----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss................................................................. $(3,326,229) $(8,318,136) $ (23,075,576)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization.......................................... 185,627 1,029,498 1,666,318
Amortization of deferred financing costs............................... -- 773,634 834,506
Amortization of debt discount.......................................... -- 235,301 293,543
Non-cash interest expense.............................................. -- 293,264 331,046
Extraordinary loss on extinguishment of debt........................... -- -- 104,680
Changes in assets and liabilities:
Restricted cash related to operating activities...................... -- -- (50,000)
Accounts receivable.................................................. 70,131 (61,483) (93,291)
Other assets......................................................... (390,291) (315,733) (537,315)
Accounts payable and accrued expenses................................ (1,081,952) 1,567,188 4,922,090
---------- ---------- -----------------
Net cash used in operating activities.............................. (4,542,714) (4,796,467) (15,603,999)
---------- ---------- -----------------
Cash flows from investing activities:
Purchases of property and equipment...................................... (1,109,451) (6,568,847) (20,144,637)
Procurement of patents................................................... -- -- (56,763)
---------- ---------- -----------------
Net cash used in investing activities.............................. (1,109,451) (6,568,847) (20,201,400)
---------- ---------- -----------------
Cash flows from financing activities:
Proceeds from issuance of common stock................................... -- -- 418,501
Proceeds from issuance of Series A common stock and related Series B
common stock warrants, net of offering costs........................... -- 26,136,309 26,136,309
Proceeds from stock option and warrant exercises......................... 19,880 43,350 67,800
Proceeds from issuance of Series B preferred stock....................... -- -- 3,193,227
Proceeds from issuance of Series C preferred stock and related common
stock warrants, net of offering costs.................................. 4,528,862 -- 4,528,862
Proceeds from issuance of common stock warrants.......................... 200,000 -- 200,000
Proceeds from collection of shareholder receivables...................... 54,167 -- 54,167
Principal payments on capital leases..................................... (40,153) (151,030) (315,832)
Proceeds from issuance of convertible bridge notes....................... 6,941,500 -- 8,182,000
Proceeds from initial draw under revolving credit facility and related
warrants............................................................... -- -- 12,172,592
Proceeds from draws under revolving credit facility...................... -- 3,796,262 3,796,262
Principal payments on revolving credit facility.......................... -- (16,299,900) (16,299,900)
Proceeds from short-term borrowings and related warrants................. -- -- 1,000,000
Principal payments on short-term borrowings.............................. -- (550,000) (1,050,000)
Proceeds from other long-term debt....................................... -- -- 267,735
Principal payments on other long-term debt............................... (22,701) (4,155) (275,510)
Payment of deferred financing costs...................................... -- (391,875) (4,520,892)
---------- ---------- -----------------
Net cash provided by financing activities.......................... 11,681,555 12,578,961 37,555,321
---------- ---------- -----------------
Net increase in cash and cash equivalents.................................. 6,029,390 1,213,647 1,749,922
Cash and cash equivalents at beginning of period........................... 71,522 536,275 --
---------- ---------- -----------------
Cash and cash equivalents at end of period................................. $6,100,912 $1,749,922 $ 1,749,922
---------- ---------- -----------------
---------- ---------- -----------------
Non-cash transactions:
Issuance of note payable for settlement of wages......................... -- -- 4,185
Issuance of common stock for settlement of wages......................... -- -- 2,520
Issuance of Series A preferred stock for settlement of notes payable and
wages.................................................................. -- -- 424,912
Property and equipment purchased under capitalized leases................ 6,650,305 45,221 7,296,120
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 shareholder 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 -- 7,776,500
Conversion of convertible bridge notes into Series A common stock and
related warrants....................................................... -- 405,500 405,500
Issuance of common stock warrants as finders fees........................ 10,000 -- 10,000
Non-cash deferred financing costs........................................ -- -- 27,200
Issuance of note payable to vendor for up-front service fees............. -- 150,000 150,000
Issuance of note payable for consulting services received................ -- -- 50,000
Cancellation of shareholder receivable for stock repurchase.............. 22,500 -- 22,500
Net liabilities in excess of assets acquired in connection with
Separation Agreement................................................... -- -- 404,621
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
F-33
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
(FORMERLY SPECTRANET INTERNATIONAL)
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of FirstWorld
Communications, Inc. (the Company) have been prepared by Company management,
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission. The unaudited consolidated financial statements include the
accounts and results of operations of the Company and its subsidiaries, all of
which are wholly-owned. All significant intercompany balances and transactions
have been eliminated. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. However, in the opinion of Company management, the unaudited
consolidated financial statements include all adjustments, consisting only of
normal recurring adjustments, necessary to present fairly the Company's
financial position as of March 31, 1998, and the results of its operations and
its cash flows for the six months ended March 31, 1997 and 1998 and for the
period from September 1, 1993 (inception) to March 31, 1998. These unaudited
consolidated financial statements should be read in conjunction with the audited
consolidated financial statements and notes thereto for the fiscal year ended
September 30, 1997, included elsewhere in this Prospectus.
NOTE 2--SUBSEQUENT EVENTS
On April 23, 1998, the Company completed (i) 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) and (ii) a $20
million private placement to Colorado Spectra 3, LLC, a Colorado limited
liability company (Spectra 3), and Enron Capital & Trade Resources Corp., a
Delaware corporation (Enron) (the Equity Commitment) pursuant to the exercise of
an existing option held by Spectra 3 and Enron. In the High Yield Debt Offering,
the Company sold 470,000 units consisting of 15% Senior Discount Notes due 2008
and warrants to purchase an aggregate of 3,713,094 shares of the Company's
Series B Common Stock. Pursuant to the Equity Commitment, the Company sold to
each of Spectra 3 and Enron 3,333,333 shares of Series B Common Stock and
warrants to purchase an additional 3,333,333 shares of Series B Common Stock.
The aggregate net proceeds of the High Yield Debt Offering and the Equity
Commitment were $260.7 million.
On September 16, 1997, the Company entered into a 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 the Credit Facility
concurrently 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 approximately $4,500,000 associated with
such debt extinguishment in the quarter ending June 30, 1998, which loss is
inclusive of the aforementioned termination fee and the write-off of unamortized
debt discount and deferred financing costs.
F-34
<PAGE>
ANNEX A
GLOSSARY
ANALOG--A form of transmission employing a continuous electrical signal
(rather than a pulsed or digital system) that varies in frequency and amplitude.
ATM (ASYNCHRONOUS TRANSFER MODE)--ATM is packet-based switching and
transmission technology used to transmit voice, data and video.
BANDWIDTH--At any given level of compression, the amount of information
transportable over a link per unit of time. A single T1 circuit will carry up to
1,544,000 bits (or 1.544 megabits) per second.
BIT--A bit is the basic unit of information, yes-or-no, on-or-off, 1-or-0 in
the binary (base 2) system which is the basis of digital computing. In contrast,
a voice telephone signal over a copper wire is analog, reflecting a continuous
range of vocal tone (frequency) and volume (amplitude).
BROADBAND--Data streams of at least 1.544 megabits per second. Broadband
communications systems can transmit large quantities of voice, data and video by
way of digital or analog signals. Examples of broadband communications systems
include DS-3 systems, which can transmit 672 simultaneous voice conversations,
or a broadcast television station signal that transmits high resolution audio
and video signals into the home. Broadband connectivity is an essential element
for interactive multimedia applications.
CENTREX--A central office managed group of lines; each line is individually
connected to the central office switch, but four or five digit dialing is
permitted among the line group.
CLEC (COMPETITIVE LOCAL EXCHANGE CARRIER)--A company that provides local
exchange services in competition with the incumbent local exchange carrier.
CO-LOCATION--The ability of a CLEC to connect its network to the ILEC's
central offices. Physical co-location occurs when a CLEC places its network
connection equipment inside the ILEC's central offices. Virtual co-location is
an alternative to physical co-location pursuant to which the ILEC permits a CLEC
to connect its network to the ILEC's central offices on comparable terms, even
though the CLEC's network connection equipment is not physically located inside
the ILEC's central office.
DEDICATED ACCESS SERVICES--A line which bypasses the ILEC local network to
connect end-user customers to long distance voice and data networks.
DIALING PARITY--Dialing parity is one of the changes, required by the
Telecommunications Act, intended to level the competitive playing field. Dialing
parity when implemented will enable customers to dial only 1+ or 0+ for service
no matter which local or long distance carrier they choose.
DIGITAL--A method of storing, processing and transmitting information
through the use of distinct electronic or optical pulses that represent the
binary code digits 0 and 1. Digital transmission and switching technologies
employ a sequence of these pulses to represent information as opposed to the
continuously variable analog signal. Digital transmission and switching
technologies offer a threefold improvement in speed and capacity over analog
techniques, allowing much more efficient and cost-effective transmission of
voice, video, and data.
DS-0, DS-1, DS-3--Standard telecommunications industry digital signal
formats, which are distinguishable by bit rate (the number of binary digits (0
and 1) transmitted per second). DS-0 service has a bit rate of 64 kilobits per
second, DS-1 service has a bit rate of 1.544 megabits per second and DS-3
service has a bit rate of 45 megabits per second.
DSL (DIGITAL SUBSCRIBER LINES)--DSL is a family of technologies for
high-speed data transmission over existing copper twisted pair wiring in the
telephone local loops. Asymmetric DSL ("ADSL"), provides transmission at speeds
of up to 8 Mbps and Very-high-bit-rate DSL ("VDSL") can provide transmission at
speeds of up to 52 Mbps. VDSL technology is still in development.
A-1
<PAGE>
ETHERNET--A set of media independent LAN transport protocols that offers 10
(Ethernet), 100 (Fast Ethernet) and 1,000 (Gigabit Ethernet) megabit per second
speeds for data throughput.
FCC--Federal Communications Commission.
FIBER OPTICS--Fiber optic cable largely immune to electrical interference
and environmental factors that affect copper wiring and satellite transmission.
Fiber optic technology involves sending laser light pulses across glass strands
in order to transmit digital information.
FRAME RELAY--A high speed data packet switching service used to transmit
data between computers. Frame relay supports data units of variable lengths at
access speeds ranging from 56 kps to 1.5 megabits per second.
ICP (INTEGRATED COMMUNICATIONS PROVIDER)--A telecommunications carrier that
provides packaged or integrated services from among a broad range of categories,
including local exchange service, long distance service, enhanced data service
and other communication services.
ILEC (INCUMBENT LOCAL EXCHANGE CARRIER)--A company providing local exchange
services on the date of enactment of the Telecommunications Act, including
traditional local telephone companies including RBOCs and GTE.
INTERNET--An array of interconnected networks using a common set of
protocols defining the information coding and processing requirements that can
communicate across hardware platforms and over many links now operated by a
consortium of telecommunications service providers and others.
INTRALATA--Telecommunications services originating and terminating in the
same LATA.
INTRANET--An organization's private network or local area network which
utilizes Internet data formats and communications protocols and which may use
the Internet's facilities as the backbone for network communications.
ISDN (INTEGRATED SERVICES DIGITAL NETWORK)--A standardized all-digital
network that integrates voice and data communications through existing copper
wiring.
ISP--Internet service provider.
IT (INFORMATION TECHNOLOGY)--Describes the use of computers and software
applications to manage information within an organization.
IXC (INTER-EXCHANGE CARRIER)--Usually referred to as a long-distance service
provider. There are many facilities-based IXCs, including AT&T, MCI, WorldCom,
Sprint and Frontier.
KBPS--Kilobits per second.
KILOBIT--One thousand bits of information. The information-carrying capacity
(i.e., bandwidth) of a circuit may be measured in "kilobits per second."
LANS (LOCAL AREA NETWORKS)--The interconnection of computers for the purpose
of sharing files, programs and various devices such as work stations, printers
and high-speed modems. LANs may include dedicated computers or file servers that
provide a centralized source of shared files and programs. Most office computer
networks use a LAN to share files, printers, modems and other items. Where
computers are separated by greater distances, a Metropolitan Area Network (MAN)
or other Wide Area Network (WAN) may be used.
LATAS (LOCAL ACCESS AND TRANSPORT AREAS)--The geographically defined areas
in which RBOCs were authorized by the MFJ to provide local exchange services.
These LATAs roughly reflect the population density of their respective states
(California has 11 LATAs while Wyoming has only one). There are 163 LATAs in the
United States. LATAs have one or more area codes and may cross state lines.
LEC (LOCAL EXCHANGE CARRIER)--A company that provides local exchange
services; see ILEC and CLEC.
MBPS--Megabits per second.
A-2
<PAGE>
MEGABIT--One million bits of information. The information-carrying capacity
(i.e. bandwidth) of a circuit may be measured in "megabits per second."
MEGAPOP--A single physical location capable of providing local calling
services for multiple area codes. See "POPs."
MFJ (MODIFIED FINAL JUDGMENT)--The MFJ was a settlement of an antitrust suit
reached in 1982 between AT&T and the Department of Justice which forced the
breakup of the old Bell System. This judgment, also known as the Divestiture of
AT&T, established seven separate RBOCs and enhanced the establishment of two
distinct segments of telecommunications service; local and long distance. This
laid the groundwork for intense competition in the long distance industry. The
MFJ has been superseded by the Telecommunications Act of 1996.
MICROWAVE--A portion of the radio spectrum having radio waves that are
physically very short, ranging in length between about 30 cm and 0.3 cm and
generally used to refer to frequencies above 2 GHz.
NARROWBAND--Data streams of less than 64 kilobits per second.
NUMBER PORTABILITY--The ability of an end user to change local exchange or
long distance carriers while retaining the same telephone number. If number
portability does not exist, customers will have to change phone numbers when
they change carriers.
PBX (PRIVATE BRANCH EXCHANGE)--A device located on the customer premises
that provides call routing capability.
POPS (POINTS OF PRESENCE)--Locations where a carrier has installed
transmission equipment in a service area that serves as, or relays calls to, a
network switching center of that carrier.
RBOCS (REGIONAL BELL OPERATING COMPANIES)--The holding companies owning LEC
affiliates of the old AT&T or Bell system.
RESALE--Resale by a provider of telecommunications services (such as a local
exchange carrier) of such services to other providers or carriers on a wholesale
or a retail basis.
SONET (SYNCHRONOUS OPTICAL NETWORK)--A set of standards of optical
communications transmission systems that define the optical rates and formats,
signal characteristics, performance, management and maintenance information to
be embedded within the signals and the multiplexing techniques to be employed in
optical communications transmission systems. SONET facilitates the
interpretability of dissimilar vendors' equipment. SONET benefits business
customers by minimizing the equipment necessary for various telecommunications
applications and supports networking diagnostic and maintenance features.
T1--Telecommunications industry standard data transfer rate of 1.544
megabits per second.
TCP/IP (TRANSMISSION CONTROL PROTOCOL/INTERNET PROTOCOL)--A suite of network
protocols that allow computers with different architectures and operating system
software to communicate with other computers on the Internet.
UNBUNDLED LOOP--Essentially the two-wire copper loop that runs from the
ILEC's central office to the customer's premises.
UNBUNDLED NETWORK ELEMENTS--As a result of the Telecommunications Act of
1996, the ILECs were told to make all the different elements of their networks
available to competitors to lease on wholesale basis. Pursuant to this order,
the ILECs have had to divide their networks into 14 different elements and
allocate costs to them individually. One example of the significance of this
ruling is that if a CLEC has its own fiber backbone and its own switch, and only
needs the last mile connection from the central office to the customer premises,
it can lease that connection from the ILEC without paying for other network
elements that it does not need.
WAN--Wide Area Network; see LAN.
A-3
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON, OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THE OFFER
CONTAINED HEREIN OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL,
OR THE SOLICITATION OF AN OFFER TO BUY, ANY SECURITY OTHER THAN THOSE TO WHICH
IT RELATES NOR DOES IT CONSTITUTE AN OFFER TO SELL, OR THE SOLICITATION OF AN
OFFER TO BUY, TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE
HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE OF THIS PROSPECTUS.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary............................. 1
Risk Factors................................... 13
The Exchange Offer............................. 26
Use of Proceeds................................ 35
Capitalization................................. 36
Selected Consolidated Financial Data........... 37
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 39
Business....................................... 45
Management..................................... 67
Principal Stockholders......................... 75
Certain Transactions........................... 78
Description of Exchange Notes.................. 82
Book Entry; Delivery and Form.................. 111
Description of Capital Stock................... 112
Certain United States Federal Income Tax
Considerations................................ 114
Plan of Distribution........................... 114
Legal Matters.................................. 115
Experts........................................ 115
Change in Accountants.......................... 115
Available Information.......................... 116
Index to Financial Statements.................. F-1
Glossary....................................... A-1
</TABLE>
[LOGO]
FIRSTWORLD
COMMUNICATIONS, INC.
OFFER TO EXCHANGE ITS
13% SENIOR DISCOUNT NOTES
DUE 2008
WHICH HAVE BEEN REGISTERED
UNDER THE SECURITIES ACT OF
1933, AS AMENDED, FOR ANY
AND ALL
OF ITS OUTSTANDING
13% SENIOR DISCOUNT
NOTES DUE 2008
---------------------
PROSPECTUS
---------------------
, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The General Corporation Law of the State of Delaware (the "DGCL") permits a
Delaware corporation to indemnify officers, directors, employees and agents for
actions taken in good faith and in a manner they reasonably believed to be in,
or not opposed to, the best interests of the corporation, and with respect to
any criminal action, which they had no reasonable cause to believe was unlawful.
The DGCL also provides that a corporation may advance the expenses of defense
(upon receipt of a written undertaking to reimburse the corporation if it is
ultimately determined that such individual is not entitled to indemnification)
and must reimburse a successful defendant for expenses, including attorneys'
fees, actually and reasonably incurred. The DGCL further provides that
indemnification may not be made for any claim, issue or matter as to which a
person has been adjudged by a court of competent jurisdiction, after exhaustion
of all appeals therefrom, to be liable to the corporation, except only to the
extent a court determines that the person is entitled to indemnify for such
expenses that such court deems proper. The DGCL also permits a corporation to
purchase and maintain liability insurance for its directors and officers.
The Company's Certificate of Incorporation and bylaws provide that the
Company shall, to the fullest extent permitted by Section 145 of the DGCL, as
the same may be amended and supplemented from time to time, indemnify all
directors and officers and all other persons whom it has authority to indemnify
under Section 145 of the DGCL. Such limitation of liability does not affect the
availability of equitable remedies such as injunctive relief or rescission.
FirstWorld has entered into indemnification agreements with its officers and
directors containing provisions which may require FirstWorld, among other
things, to indemnify the officers and directors against certain liabilities that
may arise by reason of their status or service as directors or officers (other
than liabilities arising from willful misconduct of a culpable nature), and to
advance their expenses incurred as a result of any proceeding against them as to
which they could be indemnified. The Company maintains insurance on behalf of
its directors and officers, insuring them against liabilities that they may
incur in such capacities or arising out of such status.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------ --------------------------------------------------------------------------
<C> <S>
1.1 Purchase Agreement dated April 6, 1998 among the Registrant, Bear, Stearns
& Co. Inc., ING Baring (U.S.) Securities, Inc., J.P. Morgan Securities,
Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated.
3.1 Certificate of Incorporation (to be filed by Amendment).
3.2 Certificate of Ownership and Merger filed June , 1998 (to be filed by
Amendment).
3.3 Bylaws, adopted February 23, 1998 and amended June , 1998 (to be filed
by Amendment).
4.1 Indenture dated as of April 13, 1998 between the Registrant and The Bank
of New York.
4.2 Form of 13% Senior Discount Notes due 2008 and schedule of 13% Senior
Discount Notes due 2008.
4.3 Registration Rights Agreement dated as of April 13, 1998 among the
Registrant and the Initial Purchasers.
5.1 Opinion of Latham & Watkins (to be filed by Amendment).
10.1 Form of Indemnification Agreement entered into by the Registrant and each
of its executive officers and directors (to be filed by Amendment).
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------ --------------------------------------------------------------------------
<C> <S>
10.2 1995 Stock Option Plan and related form of option agreement.
10.3 1997 Stock Option Plan and related form of option agreement.
10.4 Warrant Agreement dated as of April 13, 1998 among the Registrant and the
Initial Purchasers and related form of warrant attached thereto.
10.5 Warrant Registration Rights Agreement dated as of April 13, 1998 among the
Registrant and the Initial Purchasers.
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.
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.
10.8 Amended and Restated Investor Rights Agreement dated as of April 13, 1998
among the Registrant and the Investors set forth therein.
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.
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.
10.11 Management Consulting Services Agreement dated as of December 30, 1997, as
amended March 17, 1998, between the Registrant and Corporate Managers,
LLC.
10.12 Management Consulting Services Agreement dated as of December 30, 1997
between the Registrant and Enron Trade & Capital Resources Corp.
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.
10.14 Warrant to Purchase 2,110,140 shares of Series B Common Stock issued to
Colorado Spectra 2, LLC on December 30, 1997
10.15 Agreement for Use of Operating Property dated as of February 25, 1997
between FirstWorld Anaheim and the City of Anaheim.
10.16 Universal Telecommunications System Participation Agreement dated as of
February 25, 1997 among the Registrant, FirstWorld Anaheim and the City
of Anaheim.
10.17 Development Fee Agreement dated as of February 25, 1997 between the
Registrant and the City of Anaheim.
*10.18 Agreement for Lease of Telecommunications Conduit dated as of March 5,
1998 between FirstWorld Orange Coast and The Irvine Company.
*10.19 Telecommunications System License Agreement dated as of March 5, 1998
between FirstWorld Orange Coast and The Irvine Company.
10.20 Office Lease for Genesee Executive Plaza dated as of September 4, 1996
between Talcott Realty I Limited Partnership and the Registrant.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------ --------------------------------------------------------------------------
<C> <S>
10.21 Standard Industrial/Commercial Single-Tenant Lease--Gross dated as of
August 26, 1996 between Scope Development and FirstWorld Anaheim.
12.1 Computation of Ratio of Earnings to Fixed Charges.
21.1 Subsidiaries of the Registrant (to be filed by Amendment).
23.1 Consent of Price Waterhouse LLP.
23.2 Consent of Latham & Watkins (contained in Exhibit 5.1).
24.1 Power of Attorney (included on signature page hereof).
25.1 Statement of Eligibility of Trustee (to be filed by Amendment).
27.1 Financial Data Schedule.
99.1 Form of Letter of Transmittal (to be filed by Amendment).
99.2 Form of Notice of Guaranteed Delivery (to be filed by Amendment).
</TABLE>
- ------------------------
* Portions of this Exhibit have been omitted pursuant to an application for an
order requesting confidential treatment filed with the Securities and
Exchange Commission.
(b) Financial Statement Schedules:
<TABLE>
<S> <C>
Schedule II. Valuation and Qualifying Accounts.
</TABLE>
SCHEDULES OMITTED
Schedules not listed above are omitted because of the absence of the
conditions under which they are required or because the information required by
such omitted schedules is set forth in the financial statements or the notes
thereto.
ITEM 22. UNDERTAKINGS.
The undersigned Registrant hereby undertakes that insofar as indemnification
for liabilities arising under the Securities Act of 1933, as amended (the
"Act"), may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions described under Item 20 above,
or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act and is, therefore, unenforceable. In the event that a
claim of indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit paid by a
director, officer or controlling person of the Registrant in the successful
defense of any action, suit or proceeding) is asserted against the Registrant by
such director, officer or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question of whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes (i) to respond to requests for
information that is incorporated by reference into this Prospectus pursuant to
Items 4, 10(b), 11, or 13 of Form S-4, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the Registration Statement through the
date of responding to the request.
The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the Registration Statement when it became effective.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of San Diego,
State of California, on June 26, 1998.
<TABLE>
<S> <C> <C>
FIRSTWORLD COMMUNICATIONS, INC.
By: /s/ DONALD L. STURM
------------------------------------------
Donald L. Sturm
CHAIRMAN OF THE BOARD OF DIRECTORS,
PRESIDENT
AND CHIEF EXECUTIVE OFFICER
</TABLE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints Robert E. Randall his true and lawful
attorney-in-fact, acting alone, 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 including post-effective amendments
and any registration statement filed pursuant to Rule 462(b) under the
Securities Act of 1933 to this registration statement, and to file the same,
with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
said attorney-in-fact or his substitute, may lawfully do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
Chairman of the Board,
/s/ DONALD L. STURM President and Chief
- ------------------------------ Executive Officer June 26, 1998
Donald L. Sturm (Principal Executive
Officer)
Executive Vice President,
Chief Operating Officer,
/s/ ROBERT E. RANDALL Acting Chief Financial
- ------------------------------ Officer and Director June 26, 1998
Robert E. Randall (Principal Financial
Officer)
Vice President, Finance
/s/ DENNIS M. MULROY and Administration
- ------------------------------ (Principal Accounting June 26, 1998
Dennis M. Mulroy Officer)
/s/ C. KEVIN GARLAND
- ------------------------------ Director June 26, 1998
C. Kevin Garland
/s/ RODNEY MALCOLM
- ------------------------------ Director June 26, 1998
Rodney Malcolm
/s/ JAMES O. SPITZENBERGER
- ------------------------------ Director June 26, 1998
James O. Spitzenberger
/s/ MELANIE STURM
- ------------------------------ Director June 26, 1998
Melanie Sturm
/s/ JOHN C. STISKA
- ------------------------------ Director June 26, 1998
John C. Stiska
II-4
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
(FORMERLY SPECTRANET INTERNATIONAL)
(A DEVELOPMENT STAGE ENTERPRISE)
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT BALANCE AT
BEGINNING END OF
OF PERIOD ADDITIONS PERIOD
----------- ---------- ----------
<S> <C> <C> <C>
Deferred Tax Asset Valuation Allowance:
Year ended September 30, 1995............................................ 176,000 402,199 578,199
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
Period from September 31, 1993 (Inception) to
September 30, 1997..................................................... -- 4,694,920 4,694,920
</TABLE>
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
470,000 Units Consisting of
$470,000,000 Principal Amount at Maturity of
13% Senior Discount Notes due 2008
and
Warrants to Purchase 3,713,094 Shares of Series B Common Stock
PURCHASE AGREEMENT
April 6, 1998
BEAR, STEARNS & CO. INC.
ING BARING (U.S.) SECURITIES, INC.
J.P. MORGAN SECURITIES INC.
MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
470,000 Units Consisting of
$470,000,000 Principal Amount at Maturity of
13% Senior Discount Notes due 2008
and
Warrants to Purchase 3,713,094 Shares of Series B Common Stock
PURCHASE AGREEMENT
April 6, 1998
New York, New York
BEAR, STEARNS & CO. INC.
As Representative of
the Initial Purchasers
245 Park Avenue
New York, New York 10167
Ladies & Gentlemen:
FirstWorld Communications, Inc., a California corporation (the
"Company"), proposes to issue and sell to the parties named in Schedule I hereto
(the "Initial Purchasers"), for whom you are acting as representative (the
"Representative") 470,000 units (the "Units") consisting of $470,000,000
aggregate principal amount at maturity of 13% Senior Discount Notes due 2008
(the "Senior Discount Notes") and Warrants (the "Warrants") to purchase an
aggregate of 3,713,094 shares of Series B common stock, no par value (the
"Common Stock"), of the Company (the "Warrant Shares"), subject to the terms and
conditions set forth herein. Each Unit will consist of $1,000 principal amount
of the Senior Discount Notes and one Warrant to purchase 7.9002 shares of Common
Stock. The Senior Discount Notes will be issued pursuant to an indenture (the
"Indenture"), to be dated the Closing Date (as defined below), between the
Company and The Bank of New York, as trustee (the "Trustee"). The Warrants will
be issued pursuant to a warrant agreement (the "Warrant Agreement") to be dated
the Closing Date, between the Company and The Bank of New York, as warrant agent
(the "Warrant Agent"). The Senior Discount Notes and the Warrants comprising
each Unit will not trade separately until the earlier of (i) 90 days from the
date of issuance, (ii) such earlier date as the Initial Purchasers may, in their
discretion, deem appropriate, (iii) in the event a Change in Control (as defined
in the Indenture) occurs, the date the Company mails notice thereof to holders
of Senior Discount Notes, (iv) the date on which the Registered Exchange Offer
(as defined below) is consummated and (v) the date on which the Shelf
Registration Statement (as defined below) is declared
2
<PAGE>
effective (such date, the "Separation Date"). The Units, the Senior Discount
Notes and the Warrants are more fully described in the Offering Memorandum
referred to below.
1. ISSUANCE OF SECURITIES. The Company proposes to, upon the terms and
subject to the conditions set forth herein, issue and sell to the Initial
Purchasers the Units. The Senior Discount Notes forming a part of the Units and
the Senior Discount Exchange Notes (as defined below) issuable in exchange
therefor are hereinafter referred to as the Notes. The Units, the Notes and the
Warrants are collectively referred to herein as the "Securities." Capitalized
terms used but not otherwise defined herein shall have the meanings given to
such terms in the Indenture.
Upon original issuance thereof, and until such time as the same is no
longer required under the applicable requirements of the Securities Act of 1933
(as amended, the "Act"), the Units, the Notes, the Warrants and the Warrant
Shares (and all securities issued in exchange therefor or in substitution
thereof) shall bear the legends required to be set forth thereon in accordance
with the applicable provisions of the Warrant Agreement or the Indenture, as
applicable.
2. OFFERING. The Units will be offered and sold to the Initial
Purchasers pursuant to an exemption from the registration requirements under the
Act. The Company has prepared a preliminary offering memorandum, dated March 20,
1998 (the "Preliminary Offering Memorandum"), and a final offering memorandum,
dated April 6, 1998 (the "Offering Memorandum"), relating to the Company and the
Units.
The Initial Purchasers have advised the Company that the Initial
Purchasers will make offers to resell (the "Exempt Resales") the Units on the
terms set forth in the Offering Memorandum, as amended or supplemented, solely
to persons whom any of the Initial Purchasers reasonably believe to be
"qualified institutional buyers," as defined in Rule 144A under the Act
("QIBs"). Such QIBs shall be referred to herein as the "Eligible Purchasers."
The Initial Purchasers will offer the Units to the Eligible Purchasers initially
at a purchase price per Unit equal to $532.35. Such price may be changed at any
time without notice.
Holders (including subsequent transferees) of the Notes will have the
registration rights set forth in the registration rights agreement relating
thereto (the "Registration Rights Agreement"), and holders (including subsequent
transferees) of the Warrants and Warrant Shares will have the registration
rights set forth in the registration rights agreement relating thereto (the
"Warrant Registration Rights Agreement"), to be dated the Closing Date, for so
long as such Notes, Warrants or any Warrant Shares constitute "Transfer
Restricted Securities" (as defined in such agreements). Pursuant to the
Registration Rights Agreement, the Company will agree to file with the
Securities and Exchange Commission (the "Commission"), under the circumstances
set forth therein, (i) a registration statement under the Act (the "Exchange
Offer Registration Statement") with respect to an offer to exchange (the
"Registered Exchange Offer") the Senior Discount Notes for a new issue of 13%
Senior Discount Notes due 2008 (the "Exchange Senior Discount Notes") to be
offered in exchange for the Senior Discount Notes and (ii) a shelf registration
statement pursuant to Rule 415 under the Act (the "Shelf Registration
Statement") relating to the resale by certain holders of the Senior Discount
Notes, and to use its best efforts to
3
<PAGE>
cause such Registration Statements to be declared effective and consummate the
Registered Exchange Offer. This Agreement, the Securities, the Indenture, the
Warrant Agreement, the Registration Rights Agreement and the Warrant
Registration Rights Agreement are hereinafter sometimes referred to collectively
as the "Operative Documents."
3. PURCHASE, SALE AND DELIVERY. (a) On the basis of the
representations, warranties and covenants contained in this Agreement, and
subject to its terms and conditions, the Company agrees to issue and sell to
each Initial Purchaser, and each Initial Purchaser agrees severally and not
jointly to purchase from the Company, that number of Units set forth opposite
its name on Schedule I hereto. The purchase price for the Units shall be
$516.3795 per Unit.
(b) Delivery of, and payment of the purchase price for, the Units
shall be made, against payment of the purchase price, at the offices of
Cleary, Gottlieb, Steen & Hamilton, 1 Liberty Plaza, New York, New York
10006, or such other location as may be mutually acceptable. Such delivery
and payment shall be made at 10:00 A.M. New York time, on April 13, 1998 or
at such other time as shall be agreed upon by the Representative and the
Company. The time and date of such delivery and payment are herein called
the "Closing Date."
(c) Units sold to Eligible Purchasers will be represented by (x) one
or more permanent global Notes in definitive, fully registered form without
interest coupons (each a "Restricted Global Note") registered in the name
of Cede & Co., as nominee of DTC, having an aggregate amount corresponding
to the aggregate amount of the Notes sold to QIBs and (y) one or more
permanent global Warrants in definitive, fully registered form (each, a
"Restricted Global Warrant"), having an aggregate number corresponding to
the aggregate number of Warrants sold to QIBs. The Units shall be
delivered by the Company to the Initial Purchasers (or as the Initial
Purchasers direct), against payment by the Initial Purchasers of the
purchase price therefor, by wire transfer of immediately available funds to
an account specified by the Company or as the Company may direct in
writing, PROVIDED that the Company shall give at least two business days'
prior written notice to the Representative of the information required to
effect such wire transfers. The Units shall be made available to the
Representative for inspection not later than 10:00 a.m., New York City
time, on the business day immediately preceding the Closing Date.
4. AGREEMENTS OF THE COMPANY. The Company covenants and agrees with each
of the Initial Purchasers as follows:
(a) To advise the Representative promptly and, if requested by the
Representative confirm such advice in writing, (i) of the issuance by any
state securities commission of any stop order suspending the qualification
or exemption from qualification of any Securities for offering or sale in
any jurisdiction, or the initiation of any proceeding for such purpose by
any state securities commission or other regulatory authority and (ii) of
the happening of any event that, in the reasonable opinion of either
counsel to the Company or counsel to the Initial Purchasers, makes any
statement of a material fact made in the Preliminary Offering Memorandum or
the Offering Memorandum untrue or that requires the making of any additions
to or changes in the Preliminary Offering
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Memorandum or the Offering Memorandum in order to make the statements
therein, in the light of the circumstances under which they are made, not
misleading. The Company shall use its best efforts to prevent the issuance
of any stop order or order suspending the qualification or exemption of any
Securities under any state securities or Blue Sky laws and, if at any time
any state securities commission or other regulatory authority shall issue
an order suspending the qualification or exemption of any Securities under
any state securities or Blue Sky laws, the Company shall use its best
efforts to obtain the withdrawal or lifting of such order at the earliest
possible time.
(b) To furnish the Initial Purchasers and those persons identified by the
Initial Purchasers to the Company, without charge, as many copies of the
Preliminary Offering Memorandum and the Offering Memorandum, and any
amendments or supplements thereto, as the Initial Purchasers may reasonably
request. The Company consents to the use of the Preliminary Offering
Memorandum and the Offering Memorandum, and any amendments and supplements
thereto required pursuant hereto, by the Initial Purchasers in connection
with Exempt Resales.
(c) Not to amend or supplement the Preliminary Offering Memorandum or the
Offering Memorandum prior to the Closing Date unless the Representative
shall previously have been advised thereof and shall not have objected
thereto within a reasonable time after being furnished a copy thereof. The
Company shall promptly prepare, upon the Representative's request, any
amendment or supplement to the Preliminary Offering Memorandum or the
Offering Memorandum that may be necessary or advisable in connection with
Exempt Resales.
(d) If, after the date hereof and prior to completion of the Exempt
Resales, any event shall occur as a result of which, in the judgment of the
Company or in the reasonable opinion of either counsel to the Company or
counsel to the Initial Purchasers, it becomes necessary or advisable to
amend or supplement the Preliminary Offering Memorandum or Offering
Memorandum in order to make the statements therein, in the light of the
circumstances when such Offering Memorandum is delivered to an Eligible
Purchaser which is a prospective purchaser, not misleading, or if it is
necessary or advisable to amend or supplement the Preliminary Offering
Memorandum or Offering Memorandum to comply with applicable law, (i) notify
the Representative and (ii) forthwith to prepare an appropriate amendment
or supplement to such Offering Memorandum so that the statements therein as
so amended or supplemented will not, in the light of the circumstances when
it is so delivered, be misleading, or so that such Offering Memorandum will
comply with applicable law.
(e) To cooperate with the Representative and counsel to the Initial
Purchasers in connection with the qualification or registration of the
Units under the securities or Blue Sky laws of such jurisdictions as the
Initial Purchasers may reasonably request and to continue such
qualification in effect so long as required for the Exempt Resales;
PROVIDED, HOWEVER, that the Company shall not be required in connection
therewith to register or qualify as a foreign corporation where it is not
now so qualified or to take any action that would subject it to service of
process in suits or taxation, in each case, other
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<PAGE>
than as to matters and transactions relating to the Preliminary Offering
Memorandum, the Offering Memorandum or Exempt Resales, in any jurisdiction
where it is not now so subject.
(f) Whether or not the transactions contemplated by this Agreement are
consummated or this Agreement becomes effective or is terminated, to pay
all costs, expenses, fees and taxes incident to the performance of the
obligations of the Company hereunder, including in connection with: (i) the
preparation, printing, filing and distribution of the Preliminary Offering
Memorandum and the Offering Memorandum (including, without limitation,
financial statements) and all amendments and supplements thereto required
pursuant hereto, (ii) the preparation (including, without limitation,
duplication costs) and delivery of all preliminary and final Blue Sky
memoranda prepared and delivered in connection herewith and with the Exempt
Resales, (iii) the issuance, transfer and delivery by the Company of the
Securities to the Initial Purchasers, (iv) the qualification or
registration of the Securities for offer and sale under the securities or
Blue Sky laws of the several states (including, without limitation, the
cost of preparing, printing and mailing a preliminary and final Blue Sky
Memorandum and the reasonable fees and disbursements of counsel to the
Initial Purchasers relating thereto), (v) furnishing such copies of the
Preliminary Offering Memorandum and the Offering Memorandum, and all
amendments and supplements thereto, as may be requested by the Initial
Purchasers for use in connection with Exempt Resales, (vi) the preparation
of certificates for the Securities (including, without limitation, printing
and engraving thereof), (vii) the fees, disbursements and expenses of the
Company's counsel and accountants, (viii) all expenses and listing fees in
connection with the application for quotation of the Securities in the
National Association of Securities Dealers, Inc. ("NASD") Automated
Quotation System - PORTAL ("PORTAL"), (ix) all fees and expenses (including
fees and expenses of counsel to the Company) of the Company in connection
with the approval of the Global Securities by DTC for "book-entry"
transfer, (x) the reasonable fees and expenses of the Trustee and its
counsel in connection with the Indenture and the Notes, (xi) the reasonable
fees and expenses of the Warrant Agent and its counsel in connection with
the Warrant Agreement and the Warrants, (xii) the performance by the
Company of its other obligations under this Agreement and the other
Operative Documents and (xiii) "roadshow" travel and other expenses
incurred in connection with the marketing and sale of the Units, the Notes
and the Warrants.
(g) To use the proceeds from the sale of the Units in the manner described
in the Offering Memorandum under the caption "Use of Proceeds."
(h) Not to voluntarily claim, and to resist actively any attempts to
claim, the benefit of any usury laws against the holders of any Securities.
(i) To do and perform all things required to be done and performed under
this Agreement by it prior to or after the Closing Date and to satisfy all
conditions precedent on its part to the delivery of the Units.
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<PAGE>
(j) Not to, and cause its affiliates not to, sell, offer for sale or
solicit offers to buy or otherwise negotiate in respect of any security (as
defined in the Act) that would be integrated with the sale of the Units in
a manner that would require the registration under the Act of the sale to
the Initial Purchasers or the Eligible Purchasers of the Units, the Notes
or the Warrants or to take any other action that would result in the Exempt
Resales not being exempt from registration under the Act.
(k) For so long as any of the Securities remain outstanding and during any
period in which the Company is not subject to Section 13 or 15(d) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), to make
available to any beneficial owner of Units, Notes or Warrants in connection
with any sale thereof and any prospective purchaser of such Units, Notes or
Warrants from such beneficial owner, the information required by Rule
144A(d)(4) under the Act.
(l) To cause the Registered Exchange Offer to be made in the appropriate
form to permit registered Senior Discount Exchange Notes to be offered in
exchange for the Senior Discount Notes and to comply with all applicable
federal and state securities laws in connection with the Registered
Exchange Offer.
(m) To comply with all of its agreements set forth in the Registration
Rights Agreement and the Warrant Registration Rights Agreement and all
agreements set forth in the representation letters of the Company to DTC
relating to the approval of the Restricted Global Note and the Restricted
Global Warrant by DTC for "book-entry" transfer.
(n) To use its best efforts to effect the designation of the Securities as
eligible for PORTAL and to obtain approval of the Restricted Global Note
and the Restricted Global Warrant by DTC for "book-entry" transfer.
(o) For so long as any of the Securities remain outstanding, to deliver
without charge to each of the Initial Purchasers, as they may request,
promptly upon their becoming available, copies of (i) all reports or other
publicly available information that the Company shall mail or otherwise
make available to its shareholders and (ii) all reports, financial
statements and proxy or information statements filed by the Company with
the Commission or any national securities exchange and such other publicly
available information concerning the Company or its subsidiaries, including
without limitation, press releases.
(p) Prior to the Closing Date, to furnish to each of the Initial
Purchasers, as soon as they have been prepared in the ordinary course by
the Company, copies of any consolidated financial statements or any
unaudited interim financial statements of the Company for any period
subsequent to the periods covered by the financial statements appearing in
the Offering Memorandum.
(q) Not to take and to cause its subsidiaries not to take, directly or
indirectly, any action designed to, or that might reasonably be expected
to, cause or result in stabilization
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<PAGE>
or manipulation of the price of any security of the Company to facilitate
the sale or resale of the Securities. Except as permitted by the Act, the
Company will not distribute any Preliminary Offering Memorandum, Offering
Memorandum or other offering material in connection with the offering and
sale of the Securities.
(r) To comply with the agreements in the Indenture, the Warrant Agreement,
the Registration Rights Agreement, the Warrant Registration Rights
Agreement and any other Operative Document.
(s) To reserve and continue to reserve as long as any Warrants remain
outstanding, a sufficient number of shares of Common Stock for issuance
upon exercise of the Warrants.
(t) Not, until 180 days following the Closing Date, without the prior
written consent of the Representatives, to offer, sell or contract to sell,
or otherwise dispose of, directly or indirectly, or announce the offering
of, any debt securities issued or guaranteed by the Company (other than the
Securities).
(u) To cause each certificate for a Note or Warrant, as the case may be,
to bear the legends required by the Indenture or Warrant Agreement, as
applicable.
(v) Not to resell, and (i) to cause any of its subsidiaries not to, and
(ii) to use its best efforts to cause its non-subsidiary affiliates not to,
resell, any Securities that have been acquired by any of them.
(w) Not to, and (i) to cause its subsidiaries and any person acting on its
or their behalf not to, and (ii) to use its best efforts to cause its
non-subsidiary affiliates not to, directly or indirectly, make offers or
sales of any security, or solicit offers to buy any security, under
circumstances that would require the registration of the Securities under
the Act.
(x) Not to engage, and (i) to cause its subsidiaries not to engage and
(ii) to use its best efforts to cause its non-subsidiary affiliates not to
engage, any person acting on its or their behalf not to engage, in any form
of general solicitation or general advertising (within the meaning of
Regulation D) in connection with any offer or sale of the Securities in the
United States.
5. REPRESENTATIONS AND WARRANTIES. (a) The Company represents and
warrants to each of the Initial Purchasers that:
(i) The Preliminary Offering Memorandum and the Offering
Memorandum have been prepared in connection with the Exempt Resales. The
Preliminary Offering Memorandum and the Offering Memorandum do not, and any
supplement or amendment to them will not, contain any untrue statement of a
material fact or omit to state any material fact necessary in order to make
the statements therein, in the light of the circumstances under which they
were made, not misleading, except that the representations and warranties
contained in this paragraph shall not apply to statements in or omissions
from the Preliminary Offering Memorandum and the Offering Memorandum (or
any supplement or amendment thereto) made in reliance upon and in
8
<PAGE>
conformity with information relating to the Initial Purchasers furnished to
the Company in writing by the Initial Purchasers expressly for use therein.
Any projections and other information contained in the Preliminary Offering
Memorandum and the Offering Memorandum or provided to the Initial
Purchasers or any Eligible Purchaser have been prepared in good faith and
are based upon assumptions which, in light of the circumstances under which
they were made, are reasonable. No stop order preventing the use of the
Preliminary Offering Memorandum or the Offering Memorandum, or any
amendment or supplement thereto, or any order asserting that any of the
transactions contemplated by this Agreement are subject to the registration
requirements of the Act, has been issued.
(ii) When the Units, the Notes and the Warrants are issued and
delivered pursuant to this Agreement, no Unit, Note or Warrant will be of
the same class (within the meaning of Rule 144A under the Act) as
securities of the Company that are listed on a national securities exchange
registered under Section 6 of the Exchange Act or that are quoted in a
United States automated inter-dealer quotation system.
(iii) Each of the Company and its subsidiaries (A) has been duly
organized, is validly existing as a corporation in good standing under the
laws of its jurisdiction of incorporation, (B) has all requisite corporate
power and authority to carry on its business as it is currently being
conducted and as described in the Offering Memorandum and to own, lease and
operate its properties, and (C) is duly qualified and in good standing as a
foreign corporation authorized to do business in each jurisdiction in which
the nature of its business or its ownership or leasing of property requires
such qualification, except with respect to this clause (C), where the
failure to be so qualified or in good standing does not and could not
reasonably be expected to (x) individually or in the aggregate result in a
material adverse effect on the properties, business, result of operations,
condition (financial or otherwise), affairs or prospects of the Company and
its subsidiaries, taken as a whole, (y) interfere with or adversely affect
the issuance or marketability of the Units pursuant hereto or (z) in any
manner draw into question the validity of this Agreement or any other
Operative Document or the transactions described in the Offering Memorandum
under the caption "Use of Proceeds" (any of the events set forth in clauses
(x), (y) or (z) a "Material Adverse Effect").
(iv) All of the outstanding shares of capital stock of the
Company have been duly authorized, validly issued, and are fully paid and
nonassessable and were not issued in violation of any preemptive or similar
rights. At December 31, 1997 after giving effect to the issuance and sale
of the Units pursuant hereto, the consummation of the Equity Commitment (as
defined in the Offering Memorandum) and the events stated in the Offering
Memorandum, the Company had an authorized and outstanding consolidated
capitalization as set forth in the Offering Memorandum under the caption
"Capitalization."
(v) Except as disclosed in the Offering Memorandum, all of the
outstanding capital stock of each subsidiary is owned, directly or
indirectly, by the Company, free and clear of any lien, claim, encumbrance,
security interest, restriction on transfer,
9
<PAGE>
shareholders' security interest, claim, lien, limitation on voting rights
or encumbrance; and all such securities have been duly authorized, validly
issued, and are fully paid and non-assessable and were not issued in
violation of any preemptive or similar right.
(vi) Except as disclosed in the Offering Memorandum, there are
not currently, and will not be as a result of the Offering, any outstanding
subscriptions, rights, warrants, calls, commitments of sale or options to
acquire, or instruments convertible into or exchangeable for, any capital
stock or other equity interest of the Company or any subsidiary.
(vii) The Company has all requisite corporate power and authority
to execute, deliver and perform its obligations under this Agreement and
the other Operative Documents and to consummate the transactions
contemplated hereby and thereby, including, without limitation, the
corporate power and authority to issue, sell and deliver the Securities as
provided herein and therein and the power to effect the Use of Proceeds as
described in the Offering Memorandum.
(viii) This Agreement has been duly and validly authorized,
executed and delivered by the Company and is the legal, valid and binding
agreement of the Company, enforceable against it in accordance with its
terms, except insofar as indemnification and contribution provisions may be
limited by applicable law or equitable principles and subject to applicable
bankruptcy, insolvency, fraudulent conveyance, reorganization or similar
laws affecting the rights of creditors generally and subject to general
principles of equity.
(ix) The Indenture has been duly and validly authorized by the
Company and, when duly executed and delivered by the Company, will be the
legal, valid and binding obligation of the Company, enforceable against the
Company in accordance with its terms, subject to applicable bankruptcy,
insolvency, fraudulent conveyance, reorganization or similar laws affecting
the rights of creditors generally and subject to general principles of
equity. The Offering Memorandum contains a fair summary in all material
respects of the terms of the Indenture.
(x) The Senior Discount Notes have been duly and validly
authorized by the Company, and have been duly and validly authorized for
issuance and sale to the Initial Purchasers by the Company pursuant to this
Agreement and, when issued and authenticated in accordance with the terms
of the Indenture and delivered against payment therefor in accordance with
the terms hereof and thereof, will be the legal, valid and binding
obligations of the Company, enforceable against the Company in accordance
with their terms and entitled to the benefits of the Indenture, subject to
applicable bankruptcy, insolvency, fraudulent conveyance, reorganization or
similar laws affecting the rights of creditors generally and subject to
general principles of equity. The description of the Senior Discount Notes
in the Offering Memorandum contains a fair summary in all material respects
of the terms of the Senior Discount Notes.
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<PAGE>
(xi) The Senior Discount Exchange Notes have been duly and
validly authorized for issuance by the Company and, when issued and
authenticated pursuant to the Registered Exchange Offer and in accordance
with the terms of the Indenture, will be the legal, valid and binding
obligations of the Company, enforceable against the Company in accordance
with their terms and entitled to the benefits of the Indenture, subject to
applicable bankruptcy, insolvency, fraudulent conveyance, reorganization or
similar laws affecting the rights of creditors generally and subject to
general principles of equity. The description of the Senior Discount
Exchange Notes in the Offering Memorandum contains a fair summary in all
material respects of the terms of the Senior Discount Exchange Notes.
(xii) The Registration Rights Agreement has been duly and validly
authorized by the Company and, when duly executed and delivered by the
Company, will be the legal, valid and binding obligation of the Company,
enforceable against the Company in accordance with its terms, subject to
applicable bankruptcy, insolvency, fraudulent conveyance, reorganization or
similar laws affecting the rights of creditors generally and subject to
general principles of equity. The Offering Memorandum contains a fair
summary in all material respects of the terms of the Registration Rights
Agreement.
(xiii) The Warrant Agreement has been duly and validly authorized
by the Company, and, when duly executed and delivered by the Company, will
be the legal, valid binding obligation of the Company, enforceable against
the Company in accordance with its terms, subject to applicable bankruptcy,
insolvency, fraudulent conveyance, reorganization or similar laws affecting
the rights of creditors generally and subject to general principles of
equity. The Offering Memorandum contains a fair summary in all material
respects of the terms of the Warrant Agreement.
(xiv) The Warrants have been duly and validly authorized for
issuance and sale to the Initial Purchasers by the Company pursuant to this
Agreement and, when issued and countersigned in accordance with the terms
of the Warrant Agreement and delivered against payment therefor in
accordance with the terms hereof and thereof, will be the legal, valid and
binding obligations of the Company, enforceable against the Company in
accordance with their terms and entitled to the benefits of the Warrant
Agreement, subject to applicable bankruptcy, insolvency, fraudulent
conveyance, reorganization or similar laws affecting the rights of
creditors generally and subject to general principles of equity. The
Offering Memorandum contains a fair summary in all material respects of the
terms of the Warrants.
(xv) The Warrants will be exercisable for Warrant Shares in
accordance with the terms of the Warrant Agreement. The Warrant Shares have
been duly authorized for issuance by the Company and, when issued and paid
for upon exercise of the Warrants in accordance with the terms thereof,
will be validly issued, fully paid and nonassessable, free of any
preemptive or similar rights. The Company has reserved sufficient shares of
Common Stock for issuance upon the exercise of the Warrants (assuming the
exercise of the Warrants on the Closing Date).
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(xvi) The Warrant Registration Rights Agreement has been duly and
validly authorized by the Company and, when duly executed and delivered by
the Company, will be the legal, valid and binding obligation of the
Company, enforceable against the Company in accordance with its terms,
subject to applicable bankruptcy, insolvency, fraudulent conveyance,
reorganization or similar laws affecting the rights of creditors generally
and subject to general principles of equity. The Offering Memorandum
contains a fair summary in all material respects of the terms of the
Warrant Registration Rights Agreement.
(xvii) Neither the Company nor any of its subsidiaries is, nor,
after giving effect to the Offering, will be (A) in violation of its
charter or bylaws, (B) in default in the performance of any bond,
debenture, note, indenture, mortgage, deed of trust or other agreement or
instrument to which it is a party or by which it is bound or to which any
of its properties is subject, or (C) in violation of any local, state or
Federal law, statute, ordinance, rule, regulation, requirement, judgment or
court decree (including, without limitation, the Communications Act of
1934, as amended by the Telecommunications Act of 1996 (the
"Telecommunications Act") and the rules and regulations of the Federal
Communications Commission and environmental laws, statutes, ordinances,
rules, regulations, judgments or court decrees) applicable to the Company,
any of its subsidiaries or any of their assets or properties (whether owned
or leased) other than, in the case of clauses (B) and (C), any default or
violation that could not reasonably be expected to individually or in the
aggregate have a Material Adverse Effect or (2) which is disclosed in the
Offering Memorandum. There exists no condition that, with notice, the
passage of time or otherwise, would constitute a default under any such
document or instrument, except as disclosed in the Offering Memorandum.
(xviii) None of (A) the execution, delivery or performance by the
Company of this Agreement and the other Operative Documents, (B) the
issuance and sale of the Securities and (C) consummation by the Company of
the transactions described in the Offering Memorandum under the caption
"Use of Proceeds" does or will violate, conflict with or constitute a
breach of any of the terms or provisions of, or a default under (or an
event that with notice or the lapse of time, or both, would constitute a
default), or require consent under, or result in the imposition of a lien
or encumbrance on any properties of the Company or any of its subsidiaries,
or an acceleration of any indebtedness of the Company or any of its
subsidiaries pursuant to, (i) the charter or bylaws of the Company or any
of its subsidiaries, (ii) any bond, debenture, note, indenture, mortgage,
deed of trust or other agreement or instrument to which the Company or any
of its subsidiaries is a party or by which the Company or any of its
subsidiaries or their property is or may be bound, (iii) any statute, rule
or regulation applicable to the Company or any of its subsidiaries or any
of their assets or properties or (iv) any judgment, order or decree of any
court or governmental agency or authority having jurisdiction over the
Company or any of its subsidiaries or any of their assets or properties,
except in the case of clauses (ii), (iii) and (iv) for such violations
conflicts, breaches, defaults, consents, impositions of liens or
accelerations that (x) would not singly, or in the aggregate, have a
Material Adverse Effect or (y) which are disclosed in the Offering
Memorandum. Other than as described in the Offering Memorandum, no consent,
approval, authorization or order of,
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<PAGE>
or filing, registration, qualification, license or permit of or with, (A)
any court or governmental agency, body or administrative agency (including,
without limitation, the FCC or the California Public Utilities Commission)
or (B) any other person is required for (1) the execution, delivery and
performance by the Company of this Agreement and the other Operative
Documents or (2) the issuance and sale of the Securities and the
transactions contemplated hereby and thereby, except (x) such as have been
obtained and made (or, in the case of the Registration Rights Agreement or
Warrant Registration Rights Agreement, will be obtained and made) under the
Act and the Trust Indenture Act of 1939, as amended (the "Trust Indenture
Act") or (y) where the failure to obtain any such consent, approval,
authorization or order of, or filing registration, qualification, license
or permit would not reasonably be expected to result in a Material Adverse
Effect.
(xix) There is (i) no action, suit or proceeding before or by any
court, arbitrator or governmental agency, body or official, domestic or
foreign, now pending or, to the best knowledge of the Company, threatened
or contemplated to which the Company or any of its subsidiaries is a party
or to which the business or property of the Company or any of its
subsidiaries is subject, (ii) no statute, rule, regulation or order that
has been enacted, adopted or issued by any governmental agency or that has
been proposed by any governmental body or (iii) no injunction, restraining
order or order of any nature by a federal or state court or foreign court
of competent jurisdiction to which the Company or any of its subsidiaries
are or may be subject or to which the business, assets, or property of the
Company or any of its subsidiaries are or may be subject, that (x) is
required to be disclosed in the Preliminary Offering Memorandum and the
Offering Memorandum and that is not so disclosed or (y) could reasonably be
expected to individually or in the aggregate have a Material Adverse
Effect.
(xx) No action has been taken and no statute, rule, regulation
or order has been enacted, adopted or issued by any governmental agency
that prevents the issuance of the Securities or prevents or suspends the
use of the Offering Memorandum; no injunction, restraining order or order
of any nature by a federal or state court of competent jurisdiction has
been issued that prevents the issuance of the Securities, prevents or
suspends the sale of the Securities in any jurisdiction referred to in
Section 4(e) hereof or that could adversely affect the consummation of the
transactions contemplated by this Agreement, the Operative Documents or the
Offering Memorandum; and every request of any securities authority or
agency of any jurisdiction for additional information has been complied
with in all material respects.
(xxi) No labor dispute with the employees of the Company or any
of its subsidiaries exists or, to the best knowledge of the Company, is
threatened or imminent which is likely to result in a Material Adverse
Effect.
(xxii) The Company and its subsidiaries are in compliance with and
have not violated any environmental, safety or similar law or regulation
applicable to any of them or their business or property relating to the
protection of human health and safety, the environment or hazardous or
toxic substances or wastes, pollutants or contaminants ("Environmental
Laws"), do not lack any permit, license or other approval required of any
13
<PAGE>
of them under applicable Environmental Laws and are not violating any term
or condition of such permit, license or approval, any of which could
reasonably be expected to, either individually or in the aggregate, have a
Material Adverse Effect. No facilities owned or leased by the Company or
any of its subsidiaries, or to the knowledge of the Company, any facilities
of any predecessor in interest of the Company or any of its subsidiaries,
is listed or, to the knowledge of the Company, formally proposed for
listing on the National Priorities List or the Comprehensive Environmental
Response, Compensation, and Liability Information System, both as
promulgated under the Comprehensive Environmental Response, Compensation
and Liability Act ("CERCLA"), or on any comparable state list, or listed
or, to the knowledge of the Company, formally proposed for listing, on any
comparable local list, and the Company or any of its subsidiaries have not
received any written notification of potential or actual liability, or any
written request for information, pursuant to CERCLA or any comparable
state, local or foreign environmental law.
(xxiii) Each of the Company and its subsidiaries has (i) good and
marketable title to all of the properties and assets described in the
Offering Memorandum as owned by it, free and clear of all liens, charges,
encumbrances and restrictions, except such as are described in the Offering
Memorandum or as would not have a Material Adverse Effect, (ii) peaceful
and undisturbed possession under all material leases to which any of them
is a party as lessee, (iii) all licenses, certificates, permits,
authorizations, approvals, franchises and other rights from, and has made
all declarations and filings with, all federal, state and local authorities
(including, without limitation, the FCC and the California Public Utilities
Commission), all self-regulatory authorities and all courts and other
tribunals (each an "Authorization") necessary to engage in the business
conducted by the Company and its subsidiaries in the manner described in
the Offering Memorandum, except as described in the Offering Memorandum or
where the failure to hold such Authorizations would not, individually or in
the aggregate, have a Material Adverse Effect, and no such Authorization
contains a materially burdensome restriction that is not disclosed in the
Offering Memorandum and (iv) no reason to believe that any governmental
body or agency is considering limiting, suspending or revoking any such
Authorization. Except where the failure to be in full force and effect
would not have a Material Adverse Effect, all such Authorizations are valid
and in full force and effect and each of the Company and its subsidiaries
is in compliance in all material respects with the terms and conditions of
all such Authorizations and with the rules and regulations of the
regulatory authorities having jurisdiction with respect thereto. All
material leases to which any of the Company or its subsidiaries is a party
are valid and binding, and no default by the Company or any of its
subsidiaries has occurred and is continuing thereunder and, to the best
knowledge of the Company and its subsidiaries, no material defaults by the
landlord are existing under any such lease that could reasonably be
expected to result in a Material Adverse Effect.
(xxiv) Each of the Company and its subsidiaries owns, possesses or
has the right to employ all patents, patent rights, licenses (including all
FCC, state, local or other jurisdictional regulatory licenses), inventions,
copyrights, know-how (including trade secrets and other unpatented and/or
unpatentable proprietary or confidential information,
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software, systems or procedures), trademarks, service marks and trade
names, inventions, computer programs, technical data and information
(collectively, the "Intellectual Property") presently employed by it in
connection with the businesses now operated by it or which are proposed to
be operated by it free and clear of and to the knowledge of the Company
without violating any right, claimed right, charge, encumbrance, pledge,
security interest, restriction or lien of any kind of any other person, and
none of the Company or its subsidiaries has received any notice of
infringement of or conflict with asserted rights of others with respect to
any of the foregoing, except, with respect to all of the foregoing, as
could not reasonably be expected to have a Material Adverse Effect. The use
of the Intellectual Property in connection with the business and operations
of the Company and its subsidiaries does not infringe on the rights of any
person, except as could not reasonably be expected to have a Material
Adverse Effect.
(xxv) None of the Company or any of its subsidiaries, or to the
best knowledge of the Company, any of their officers, directors, partners,
employees, agents or affiliates or any other person acting on behalf of the
Company or any of its subsidiaries has, directly or indirectly, given or
agreed to give any money, gift or similar benefit (other than legal price
concessions to customers in the ordinary course of business) to any
customer, supplier, employee or agent of a customer or supplier, official
or employee of any governmental agency (domestic or foreign),
instrumentality of any government (domestic or foreign) or any political
party or candidate for office (domestic or foreign) or other person who
was, is or may be in a position to help or hinder the business of the
Company or any of its subsidiaries (or assist the Company or any of its
subsidiaries in connection with any actual or proposed transaction) which
(i) might subject the Company or any of its subsidiaries, or any other
individual or entity to any damage or penalty in any civil, criminal or
governmental litigation or proceeding (domestic or foreign), (ii) if not
given in the past, might have had a Material Adverse Effect on the assets,
business or operations of the Company or any of its subsidiaries or (iii)
if not continued in the future, might have a Material Adverse Effect.
(xxvi) All material tax returns required to be filed by the
Company or any of its subsidiaries in all jurisdictions have been so filed.
All taxes, including withholding taxes, penalties and interest,
assessments, fees and other charges due or claimed to be due from such
entities or that are due and payable have been paid, other than those being
contested in good faith and for which adequate reserves have been provided
or those currently payable without penalty or interest. To the knowledge of
the Company, there are no material proposed additional tax assessments
against the Company or any of its subsidiaries, their assets or their
property.
(xxvii) None of the Company or any of its subsidiaries is (i) an
"investment company" or a company "controlled" by an "investment company"
within the meaning of the Investment Company Act of 1940, as amended (the
"Investment Company Act"), or (ii) a "holding company" or a "subsidiary
company" or an "affiliate" of a holding company within the meaning of the
Public Utility Holding Company Act of 1935, as amended.
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(xxviii) Except as disclosed in the Offering Memorandum, there are
no holders of securities of the Company or any of its subsidiaries who, by
reason of the execution by the Company of this Agreement or any other
Operative Document to which it is a party or the consummation by the
Company of the transactions contemplated hereby or thereby, have the right
to request or demand that the Company or any of its subsidiaries register
under the Act or analogous foreign laws and regulations securities held by
them.
(xxix) Each of the Company and its subsidiaries maintains a system
of internal accounting controls sufficient to provide reasonable assurance
that: (i) transactions are executed in accordance with management's general
or specific authorizations; (ii) transactions are recorded as necessary to
permit preparation of financial statements in conformity with generally
accepted accounting principles and to maintain accountability for assets;
(iii) access to assets is permitted only in accordance with management's
general or specific authorization; and (iv) the recorded accountability for
assets is compared with the existing assets at reasonable intervals and
appropriate action is taken with respect thereto.
(xxx) Each of the Company and its subsidiaries maintains
insurance covering its properties, operations, personnel and businesses.
Except as disclosed in the Offering Memorandum, such insurance insures
against such losses and risks in accordance with customary industry
practice. None of the Company or any of its subsidiaries has received
notice from any insurer or agent of such insurer that substantial capital
improvements or other expenditures will have to be made in order to
continue such insurance. All such insurance is outstanding and duly in
force on the date hereof, subject only to changes made in the ordinary
course of business, consistent with past practice, which do not, singly or
in the aggregate, materially alter the coverage thereunder or the risks
covered thereby.
(xxxi) None of the Company or any of its subsidiaries has (i)
taken, directly or indirectly, any action designed to, or that might
reasonably be expected to, cause or result in stabilization or manipulation
of the price of any security of the Company to facilitate the sale or
resale of the Units, the Notes or the Warrants or (ii) since the date of
the Preliminary Offering Memorandum (A) sold, bid for, purchased or paid
any person any compensation for soliciting purchases of, the Units, the
Notes or the Warrants or (B) paid or agreed to pay to any person any
compensation for soliciting another to purchase any other securities of the
Company.
(xxxii) No registration under the Act of the Units, the Notes or
the Warrants is required for the sale of the Units to the Initial
Purchasers as contemplated hereby or for the Exempt Resales assuming (i)
that the purchasers who buy the Units in the Exempt Resales are either QIBs
or Accredited Investors and (ii) the accuracy of the Initial Purchasers'
representations regarding the absence of general solicitation in connection
with the sale of the Units to the Initial Purchasers and the Exempt Sales
contained herein. No form of general solicitation or general advertising
was used by the Company or any of its representatives (other than the
Initial Purchasers, as to which the Company makes no representation or
warranty) in connection with the offer and sale of any of the Securities
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in connection with Exempt Resales, including, but not limited to, articles,
notices or other communications published in any newspaper, magazine, or
similar medium or broadcast over television or radio, or any seminar or
meeting whose attendees have been invited by any general solicitation or
general advertising.
(xxxiii) ERISA:
(A) DEFINITIONS:
"Code" means the United States Internal Revenue Code of 1986, as
amended, and the regulations promulgated and the rulings issued thereunder.
"ERISA" means the United States Employee Retirement Income Security
Act of 1974, as amended, and the regulations promulgated and rulings issued
thereunder.
"ERISA Affiliate" means each trade or business (whether or not
incorporated) that would be treated together with the Company as a single
employer under Title IV or Section 302 of ERISA or Section 412 of the Code.
"ERISA Event" means (i) the occurrence of a "reportable event"
described in Section 4043 of ERISA (other than a "reportable event" not
subject to the provision for 30-day notice), or (ii) the provision or
filing of a notice of intent to terminate a Plan (other than in a standard
termination within the meaning of Section 4041 of ERISA) or the treatment
of a Plan amendment as a distress termination under Section 404l of ERISA,
or (iii) the institution of proceedings to terminate a Plan by the Pension
Benefit Guaranty Corporation, or (iv) the existence of any "accumulated
funding deficiency" or "liquidity shortfall" (within the meaning of Section
302 of ERISA or Section 412 of the Code), whether or not waived, or the
filing of an application pursuant to Section 412(e) of the Code or Section
304 of ERISA for any extension of an amortization period, or (v) the
receipt of notice by the Company or any ERISA Affiliate that any
Multiemployer Plan may be terminated, partitioned or reorganized or that
any Multiple Employer Plan may be terminated, or (vi) the occurrence of any
transaction which might reasonably be expected to constitute grounds for
the imposition of liability under Section 4069 or 4212 of ERISA.
"Multiemployer Plan" means a "multiemployer plan" as defined in
Section 4001(a)(3) of ERISA.
"Multiple Employer Plan" means an employee benefit plan described in
Section 4063 of ERISA.
"Plan" means an employee benefit plan, other than a Multiemployer
Plan, with respect to which the Company or any of its ERISA Affiliates
could be subject to any liability under Title IV of ERISA, Section 302 of
ERISA or Section 412 of the Code.
"Underfunding" means, with respect to any Plan, the excess, if any, of
the "projected benefit obligations" (within the meaning of Statement of
Financial Accounting
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Standards 87) under such Plan (determined using the actuarial assumptions
used for purposes of calculating funding requirements in the most recent
actuarial report for such plan) over the fair market value of the assets
held under the Plan.
(B) No ERISA Event has occurred, is planned or is reasonably expected
to occur and no condition or event currently exists or currently is
expected to occur that could result in any such ERISA Event. The aggregate
Underfunding with respect to all Plans which have any Underfunding does not
exceed $100,000.
(C) Neither the Company nor any of its ERISA Affiliates has incurred
unsatisfied liabilities in connection with withdrawals from Multiemployer
Plans and Multiple Employer Plans, if any, in excess of an aggregate amount
of $100,000. If the Company and each of its ERISA Affiliates were to
completely withdraw on the date hereof from all Multiemployer Plans and
Multiple Employer Plans to which such entity is contributing or has an
obligation to contribute, the Company would not incur, directly or
indirectly, liability in excess of an aggregate amount of $100,000.
(xxxiv) Each of the Preliminary Offering Memorandum and the
Offering Memorandum, as of its date, and each amendment or supplement
thereto, as of its date, contains the information specified in, and meets
the requirements of, Rule 144A(d)(4) under the Act.
(xxxv) Subsequent to the respective dates as of which information
is given in the Offering Memorandum and up to the Closing Date, except as
set forth in the Offering Memorandum, (i) none of the Company or any of its
subsidiaries has incurred any liabilities or obligations, direct or
contingent, which are material, individually or in the aggregate, to the
Company and its subsidiaries taken as a whole, nor entered into any
transaction not in the ordinary course of business, (ii) none of the
Company or any subsidiary has incurred any liabilities or obligations,
direct or contingent, which will be material to the Company and its
subsidiaries, taken as a whole, (iii) there has not been, singly or in the
aggregate, any change or development which could reasonably be expected to
result in a Material Adverse Effect, (iv) there has been no dividend or
distribution of any kind declared, paid or made by the Company or any of
its subsidiaries on any class of its capital stock, (v) there has been no
capital expenditure or commitment by the Company or any of its subsidiaries
exceeding $100,000, either individually or in the aggregate except in the
ordinary course of business as generally contemplated by the Offering
Memorandum, (vi) there has been no change in accounting methods or
practices (including any change in depreciation or amortization policies or
rates) by the Company or any of its subsidiaries, (vii) there has been no
revaluation by the Company or any of its subsidiaries of any of their
assets, (viii) except in the ordinary course of business consistent with
past practice, there has been no increase in the salary or other
compensation payable or to become payable by the Company or any of its
subsidiaries to any of their officers, directors, employees or advisors,
nor any declaration, payment or commitment or obligation of any kind for
the payment by the Company or any of its subsidiaries of a bonus or other
additional salary or compensation to any such person, (ix) there has been
no material amendment or termination of any material contract, agreement
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or license to which the Company or any subsidiary is a party or by which it
is bound, (x) there has been no waiver or release of any material right or
claim of the Company or any subsidiary, including any write off or other
compromise of any material account receivable of the Company or any
subsidiary and (xi) there has been no material change in pricing or
royalties set or charged by the Company or any subsidiary to their
respective customers or licensees or in pricing or royalties set or charged
by persons who have licensed intellectual property to the Company or its
subsidiaries.
(xxxvi) None of the execution, delivery and performance of this
Agreement, the issuance and sale of the Securities, the application of the
proceeds from the issuance and sale of the Securities and the consummation
of the transactions contemplated thereby as set forth in the Offering
Memorandum, will violate Regulations G, T, U or X promulgated by the Board
of Governors of the Federal Reserve System or analogous foreign laws and
regulations.
(xxxvii) The accountants who have certified or will certify the
financial statements (which term as used in this Agreement includes the
related notes thereto) included or to be included as part of the Offering
Memorandum are independent accountants. The historical consolidated
financial statements of the Company comply as to form in all material
respects with the requirements applicable to registration statements on
Form S-1 under the Act and present fairly in all material respects the
consolidated financial position and results of operations of the Company at
the respective dates and for the respective periods indicated. Such
financial statements have been prepared in accordance with generally
accepted accounting principles applied on a consistent basis throughout the
periods presented. The pro forma financial statements included in the
Offering Memorandum have been prepared on a basis consistent with such
historical statements, except for the pro forma adjustments specified
therein, and give effect to assumptions made on a reasonable basis and
present fairly in all material respects the historical and proposed
transactions contemplated by this Agreement and the other Operative
Documents; and such pro forma financial statements comply as to form in all
material respects with the requirements applicable to pro forma financial
statements included in registration statements on Form S-1 under the Act.
The other financial and statistical information and data included in the
Offering Memorandum, historical and pro forma, are accurately presented in
all material respects and prepared on a basis consistent with the financial
statements, historical and pro forma, included in the Offering Memorandum
and the books and records of the Company and its subsidiaries, as
applicable.
(xxxviii) The Company does not intend to, nor does it believe that it
or any of its subsidiaries will, incur debts beyond their ability to pay
such debts as they mature. The present fair saleable value of the assets of
the Company on a consolidated basis exceeds the amount that will be
required to be paid on or in respect of the existing debts and other
liabilities (including contingent liabilities) of the Company on a
consolidated basis as they become absolute and matured. The assets of the
Company on a consolidated basis do not constitute unreasonably small
capital to carry out the business of the Company and its subsidiaries,
taken as a whole, as conducted or as proposed to be conducted. Upon the
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issuance of the Units, the present fair saleable value of the assets of the
Company on a consolidated basis will exceed the amount that will be
required to be paid on or in respect of the existing debts and other
liabilities (including contingent liabilities) of the Company on a
consolidated basis as they become absolute and matured. Upon the issuance
of the Units, the assets of the Company on a consolidated basis will not
constitute unreasonably small capital to carry out its businesses as now
conducted, including the capital needs of the Company on a consolidated
basis, taking into account the projected capital requirements and capital
availability.
(xxxix) Except pursuant to this Agreement, there are no contracts,
agreements or understandings between the Company or any of its subsidiaries
and any other person that would give rise to a valid claim against the
Company or any of its subsidiaries or any of the Initial Purchasers for a
brokerage commission, finder's fee or like payment in connection with the
issuance, purchase and sale of the Securities.
(xl) There are no business relationships or related party
transactions involving the Company or any subsidiary or any other person
that would be required to be described in the Offering Memorandum were it
to be filed as part of a Registration Statement on Form S-1 under the Act
which have not been so described.
(xli) The information provided by the Company pursuant to this
Agreement will not, at the date thereof, contain any untrue statement of a
material fact or omit to state any material fact necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading.
(xlii) The statements (including the assumptions described
therein) included in the Offering Memorandum under the heading "Business"
and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" were made by the Company with a reasonable basis and
reflect the Company's good faith estimate of the matters described therein.
(xliii) Each certificate signed by any officer of the Company and
delivered to the Initial Purchasers or counsel for the Initial Purchasers
shall be deemed to be a representation and warranty by the Company to the
Initial Purchasers as to the matters covered thereby.
The Company acknowledges that each of the Initial Purchasers and, for
purposes of the opinions to be delivered to the Initial Purchasers pursuant to
Section 8 hereof, counsel to the Company and counsel to the Initial Purchasers,
will rely upon the accuracy and truth of the foregoing representations and
hereby consents to such reliance.
(b) Each of the Initial Purchasers severally and not jointly
represents, warrants and covenants to the Company and agrees that:
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(i) Such Initial Purchaser is a QIB, with such knowledge and
experience in financial and business matters as are necessary in order to
evaluate the merits and risks of an investment in the Units.
(ii) Such Initial Purchaser (A) is not acquiring the Units with a
view to any distribution thereof that would violate the Act or the
securities laws of any state of the United States or any other applicable
jurisdiction and (B) will be reoffering and reselling the Units only to
persons it reasonably believes are QIBs in reliance on the exemption from
the registration requirements of the Act provided by Rule 144A.
(iii) No form of general solicitation or general advertising has
been or will be used by any of the Initial Purchasers or any of their
representatives in connection with the offer and sale of any of the Units,
including, but not limited to, articles, notices or other communications
published in any newspaper, magazine, or similar medium or broadcast over
television or radio, or any seminar or meeting whose attendees have been
invited by any general solicitation or general advertising.
(iv) Each of the Initial Purchasers understands that the Company
and, for purposes of the opinions to be delivered to the Initial Purchasers
pursuant to Section 8 hereof, counsel to the Company and counsel to the
Initial Purchasers will rely upon the accuracy and truth of the foregoing
representations and hereby consents to such reliance.
6. INDEMNIFICATION.
(a) The Company agrees to indemnify and hold harmless (i) each of
the Initial Purchasers, (ii) each person, if any, who controls one of the
Initial Purchasers within the meaning of Section 15 of the Act or Section
20(a) of the Exchange Act and (iii) the respective officers, directors,
partners, employees, representatives and agents of any of the Initial
Purchasers or any controlling person to the fullest extent lawful, from and
against any and all losses, liabilities, claims, damages and expenses
whatsoever (including but not limited to attorneys' fees and any and all
expenses whatsoever incurred in investigating, preparing or defending
against any investigation or litigation, commenced or threatened, or any
claim whatsoever, and any and all amounts paid in settlement of any claim
or litigation), joint or several, to which they or any of them may become
subject under the Act, the Exchange Act or otherwise, insofar as such
losses, liabilities, claims, damages or expenses (or actions in respect
thereof) arise out of or are based upon any untrue statement or alleged
untrue statement of a material fact contained in the Preliminary Offering
Memorandum or the Offering Memorandum, or in any supplement thereto or
amendment thereof, or arise out of or are based upon the omission or
alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading; PROVIDED,
however, that (i) the Company will not be liable in any such case to the
extent, but only to the extent, that any such loss, liability, claim,
damage or expense arises out of or is based upon any such untrue statement
or alleged untrue statement or omission or alleged omission made therein in
reliance upon and in conformity with written information furnished to the
Company by or on behalf of
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the Initial Purchasers expressly for use therein and (ii) the foregoing
indemnity with respect to any untrue statement contained in or omitted from
the Preliminary Offering Memorandum shall not inure to the benefit of any
Initial Purchaser (or persons controlling such Initial Purchaser) from whom
the person asserting any such loss, liability claim, damage or expense
purchased any Units which are the subject thereof if it is not finally
judicially determined that such loss, liability, claim, damage or expense
resulted solely from the fact that such Initial Purchaser sold Units to the
person asserting loss, claim, damage or expense, who was not sent or given,
at or prior to the written confirmation of such sale, a copy of the
Offering Memorandum, as amended and supplemented. This indemnity agreement
will be in addition to any liability which the Company may otherwise have,
including under this Agreement.
(b) Each Initial Purchaser, severally and not jointly, agrees to
indemnify and hold harmless the Company and each person, if any, who
controls the Company within the meaning of Section 15 of the Act or Section
20(a) of the Exchange Act, against any losses, liabilities, claims, damages
and expenses whatsoever (including but not limited to attorneys' fees and
any and all expenses whatsoever incurred in investigating, preparing or
defending against any investigation or litigation, commenced or threatened,
or any claim whatsoever and any and all amounts paid in settlement of any
claim or litigation), joint or several, to which they or any of them may
become subject under the Act, the Exchange Act or otherwise, insofar as
such losses, liabilities, claims, damages or expenses (or actions in
respect thereof) arise out of or are based upon any untrue statement or
alleged untrue statement of a material fact contained in the Preliminary
Offering Memorandum or the Offering Memorandum, or in any amendment thereof
or supplement thereto, or arise out of or are based upon the omission or
alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, in each case to
the extent, but only to the extent, that any such loss, liability, claim,
damage or expense arises out of or is based upon any untrue statement or
alleged untrue statement or omission or alleged omission made therein in
reliance upon and in conformity with written information furnished to the
Company by or on behalf of such Initial Purchaser expressly for use
therein; PROVIDED, however, that in no case shall any Initial Purchaser be
liable or responsible for any amount in excess of the discounts and
commissions received by such Initial Purchaser from the sale of Securities.
This indemnity will be in addition to any liability which any Initial
Purchaser may otherwise have, including under this Agreement.
(c) Promptly after receipt by an indemnified party under
subsection (a) or (b) above of notice of the commencement of any action,
such indemnified party shall, if a claim in respect thereof is to be made
against the indemnifying party under such subsection, notify each party
against whom indemnification is to be sought in writing of the commencement
thereof (but the failure so to notify an indemnifying party shall not
relieve it from any liability which it may have under this Section 6 except
to the extent that it has been prejudiced in any material respect by such
failure or from any liability which it may otherwise have). In case any
such action is brought against any indemnified party, and it notifies an
indemnifying party of the commencement thereof, the indemnifying party will
be entitled to participate therein, and to the extent it may elect by
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written notice delivered to the indemnified party promptly after receiving
the aforesaid notice from such indemnified party, to assume the defense
thereof with counsel reasonably satisfactory to such indemnified party.
Notwithstanding the foregoing, the indemnified party or parties shall have
the right to employ its or their own counsel in any such case (and where
the Initial Purchasers are the indemnified parties, the Representative
shall have the right to select such counsel for the Initial Purchasers),
but the fees and expenses of such counsel shall be at the expense of such
indemnified party or parties unless (i) the employment of such counsel
shall have been authorized in writing by the indemnifying parties in
connection with the defense of such action, (ii) the indemnifying parties
shall not have employed counsel to take charge of the defense of such
action within a reasonable time after notice of commencement of the action,
or (iii) such indemnified party or parties shall have reasonably concluded
that there may be defenses available to it or them which are different from
or additional to those available to one or all of the indemnifying parties
(in which case the indemnifying party or parties shall not have the right
to direct the defense of such action on behalf of the indemnified party or
parties), in any of which events such fees and expenses of counsel shall be
borne by the indemnifying parties; PROVIDED, however, that the indemnifying
party under subsection (a) or (b) above, shall only be liable for the legal
expenses of one counsel (in addition to any local counsel) for all
indemnified parties in each jurisdiction in which any claim or action is
brought. Anything in this subsection to the contrary notwithstanding, an
indemnifying party shall not be liable for any settlement of any claim or
action effected without its prior written consent; PROVIDED, however, that
such consent was not unreasonably withheld.
7. CONTRIBUTION. In order to provide for contribution in circumstances
in which the indemnification provided for in Section 6 is for any reason held to
be unavailable from the Company or is insufficient to hold harmless a party
indemnified thereunder, the Company and the Initial Purchasers shall contribute
to the aggregate losses, claims, damages, liabilities and expenses of the nature
contemplated by such indemnification provision (including any investigation,
legal and other expenses incurred in connection with, and any amount paid in
settlement of, any action, suit or proceeding or any claims asserted, but after
deducting in the case of losses, claims, damages, liabilities and expenses
suffered by the Company, any contribution received by the Company from persons,
other than the Initial Purchasers, who may also be liable for contribution,
including persons who control the Company within the meaning of Section 15 of
the Act or Section 20(a) of the Exchange Act) to which the Company and one or
more of the Initial Purchasers may be subject, in such proportion as is
appropriate to reflect the relative benefits received by the Company and the
Initial Purchasers from the offering of the Units or, if such allocation is not
permitted by applicable law or indemnification is not available as a result of
the indemnifying party not having received notice as provided in Section 6, in
such proportion as is appropriate to reflect not only the relative benefits
referred to above but also the relative fault of the Company and the Initial
Purchasers in connection with the statements or omissions which resulted in such
losses, claims, damages, liabilities or expenses, as well as any other relevant
equitable considerations. The relative benefits received by the Company and the
Initial Purchasers shall be deemed to be in the same proportion as (x) the total
proceeds from the offering of Units (net of discounts but before deducting
expenses) received by the Company and (y) the discounts received by the Initial
Purchasers, respectively, from the sale of the Securities.
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The relative fault of the Company and of the Initial Purchasers shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by the Company or the Initial
Purchasers and the parties' relative intent, knowledge, access to information
and opportunity to correct or prevent such statement or omission. The Company
and the Initial Purchasers agree that it would not be just and equitable if
contribution pursuant to this Section 7 were determined by pro rata allocation
or by any other method of allocation which does not take into account the
equitable considerations referred to above. Notwithstanding the provisions of
this Section 7, (i) in no case shall any Initial Purchaser be required to
contribute any amount in excess of the amount by which the discount applicable
to the Units purchased by such Initial Purchaser pursuant to this Agreement
exceeds the amount of any damages which such Initial Purchaser has otherwise
been required to pay by reason of any untrue or alleged untrue statement or
omission or alleged omission and (ii) no person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation. For purposes of this Section 7, (A) each person, if any, who
controls any of the Initial Purchasers within the meaning of Section 15 of the
Act or Section 20(a) of the Exchange Act and (B) the respective officers,
directors, partners, employees, representatives and agents of any of the Initial
Purchasers or any controlling person shall have the same rights to contribution
as such Initial Purchaser, and each person, if any, who controls the Company
within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act
shall have the same rights to contribution as the Company, subject in each case
to clauses (i) and (ii) of this Section 7. Any party entitled to contribution
will, promptly after receipt of notice of commencement of any action, suit or
proceeding against such party in respect of which a claim for contribution may
be made against another party or parties under this Section 7, notify such party
or parties from whom contribution may be sought, but the failure to so notify
such party or parties shall not relieve the party or parties from whom
contribution may be sought from any obligation it or they may have under this
Section 7 or otherwise. No party shall be liable for contribution with respect
to any action or claim settled without its prior written consent; PROVIDED,
however, that such written consent was not unreasonably withheld.
8. CONDITIONS OF INITIAL PURCHASERS' OBLIGATIONS. The several obligations
of the Initial Purchasers to purchase and pay for the Units, if any, as provided
herein, shall be subject to the satisfaction of the following conditions:
(a) All of the representations and warranties of the Company contained in
this Agreement shall be true and correct on the date hereof and on the
Closing Date with the same force and effect as if made on and as of the
date hereof and the Closing Date, respectively. The Company shall have
performed or complied with all of the agreements herein contained and
required to be performed or complied with by it at or prior to the Closing
Date.
(b) The Offering Memorandum shall have been printed and copies distributed
to the Initial Purchasers not later than 10:00 a.m., New York City time, on
the day following the date of this Agreement or at such later date and time
as to which the Representative may agree, and no stop order suspending the
qualification or exemption from qualification of
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<PAGE>
the Units, the Notes or the Warrants in any jurisdiction referred to in
Section 4(e) shall have been issued and no proceeding for that purpose
shall have been commenced or shall be pending or threatened.
(c) No action shall have been taken and no statute, rule, regulation or
order shall have been enacted, adopted or issued by any governmental agency
which would, as of the Closing Date, prevent the issuance of the Units, the
Notes or the Warrants; no action, suit or proceeding shall have been
commenced and be pending against or affecting or, to the best knowledge of
the Company, threatened against, the Company or any of its subsidiaries
before any court or arbitrator or any governmental body, agency or official
that (1) could reasonably be expected to result in a Material Adverse
Effect or (2) has not been disclosed in the Offering Memorandum; and no
stop order shall have been issued preventing the use of the Offering
Memorandum, or any amendment or supplement thereto, or which could
reasonably be expected to have a Material Adverse Effect.
(d) Since the dates as of which information is given in the Offering
Memorandum, (i) there shall not have been any material adverse change, or
any development that is reasonably likely to result in a material adverse
change, in the capital stock or the long-term debt, or material increase in
the short-term borrowings, of the Company or any of its subsidiaries from
that set forth in the Offering Memorandum, (ii) no dividend or distribution
of any kind shall have been declared, paid or made by the Company or any of
its subsidiaries on any class of its capital stock, (iii) neither the
Company nor any of its subsidiaries shall have incurred any liabilities or
obligations, direct or contingent, other than in the ordinary course of
business, that are material, individually or in the aggregate, to the
Company or any of its subsidiaries, taken as a whole, and that are required
to be disclosed on a balance sheet or notes thereto in accordance with
generally accepted accounting principles and are not disclosed on the
latest balance sheet or notes thereto included in the Offering Memorandum.
Since the date hereof and since the dates as of which information is given
in the Offering Memorandum, there shall not have occurred any Material
Adverse Effect.
(e) The Representative shall have received a certificate, dated the
Closing Date, signed on behalf of the Company by (i) Donald L. Sturm,
Chairman of the Board, Chief Executive Officer and President (ii) Robert E.
Randall, Executive Vice President, Chief Operating Officer and Acting Chief
Financial Officer, in form and substance reasonably satisfactory to the
Representative, confirming, as of the Closing Date, the matters set forth
in paragraphs (a), (b), (c) and (d) of this Section 8 and that, as of the
Closing Date, the obligations of the Company to be performed hereunder on
or prior thereto have been duly performed in all material respects.
(f) The Representative shall have received on the Closing Date an opinion,
dated the Closing Date, in form and substance satisfactory to the
Representative and counsel to the Initial Purchasers, of Latham & Watkins,
counsel for the Company, to the effect set forth in Exhibit A hereto.
25
<PAGE>
(g) The Representative shall have received on the Closing Date an opinion,
dated the Closing Date, in form and substance satisfactory to the
Representative and counsel to the Initial Purchasers, of Blumenfeld &
Cohen, special regulatory counsel to the Company, to the effect set forth
in Exhibit B hereto.
(h) The Representative shall have received an opinion, dated the Closing
Date, in form and substance reasonably satisfactory to the Representative,
of Cleary, Gottlieb, Steen & Hamilton, counsel to the Initial Purchasers,
covering such matters as the Representative may reasonably request.
(i) At the time this Agreement is executed and at the Closing Date the
Representative shall have received from Price Waterhouse LLP, independent
public accountants for the Company, dated as of the date of this Agreement
and as of the Closing Date, customary comfort letters addressed to the
Representative and in form and substance satisfactory to the Representative
and counsel to the Initial Purchasers with respect to the financial
statements and certain financial information of the Company contained in
the Offering Memorandum.
(j) Cleary, Gottlieb, Steen & Hamilton shall have been furnished with such
documents, in addition to those set forth above, as they may reasonably
require for the purpose of enabling them to review or pass upon the matters
referred to in this Section 8 and in order to evidence the accuracy,
completeness or satisfaction in all material respects of any of the
representations, warranties or conditions herein contained.
(k) Prior to the Closing Date, the Company shall have furnished to the
Representative such further information, certificates and documents as the
Representative may reasonably request.
(l) The Company and the Trustee shall have entered into the Indenture and
the Representative shall have received counterparts, conformed as executed,
thereof.
(m) The Company shall have entered into the Registration Rights Agreement
and the Representative shall have received counterparts, conformed as
executed, thereof.
(n) The Company shall have entered into the Warrant Agreement and the
Representative shall have received counterparts, conformed as executed,
thereof.
(o) The Company shall have entered into the Warrant Registration Rights
Agreement and the Representative shall have received counterparts,
conformed as executed, thereof.
(p) The Company shall have consummated the Equity Commitment and provided
the Representative with evidence, in form and substance satisfactory to
them, that proceeds have been received by the Company thereunder in the
amounts and in the manner set forth in the Offering Memorandum.
(q) The Company shall have furnished to the Representative evidence, in
form and substance satisfactory to them, that all amounts outstanding under
the Company's Credit
26
<PAGE>
Facility (as defined in the Offering Memorandum) have been repaid in full,
that such Facility has been terminated and that the security interests
created in connection therewith have been released.
(r) The Amended and Restated Investor Rights Agreement, a copy of which
has been furnished to the Representative, has been duly authorized,
executed and delivered by each of the parties thereto.
All opinions, certificates, letters and other documents required by
this Section 8 to be delivered by the Company will be in compliance with
the provisions hereof only if they are reasonably satisfactory in form and
substance to the Representative. The Company will furnish the
Representative with such conformed copies of such opinions, certificates,
letters and other documents as it shall reasonably request.
9. INITIAL PURCHASERS' INFORMATION. The Company and the Initial
Purchasers severally acknowledge that the statements with respect to the
offering of the Units set forth in the last paragraph of the cover page and the
last sentence of the third paragraph and the fifth paragraph under the caption
"Plan of Distribution," in such Offering Memorandum constitute the only
information furnished in writing by the Initial Purchasers expressly for use in
the Offering Memorandum.
10. SURVIVAL OF REPRESENTATIONS AND AGREEMENTS. All representations and
warranties, covenants and agreements of the Initial Purchasers and the Company
contained in this Agreement, including the agreements contained in Sections 4(f)
and 11(d), the indemnity agreements contained in Section 6 and the contribution
agreements contained in Section 7, shall remain operative and in full force and
effect regardless of any investigation made by or on behalf of the Initial
Purchasers or any controlling person thereof or by or on behalf of the Company
or any controlling person thereof, and shall survive delivery of and payment for
the Units to and by the Initial Purchasers. The representations contained in
Section 5 and the agreements contained in Sections 4(f), 6, 7 and 11(d) shall
survive the termination of this Agreement, including any termination pursuant to
Section 11.
11. EFFECTIVE DATE OF AGREEMENT; TERMINATION.
(a) This Agreement shall become effective upon execution and delivery of a
counterpart hereof by each of the parties hereto.
(b) The Representative shall have the right to terminate this Agreement at
any time prior to the Closing Date by notice to the Company from the
Representative, without liability (other than with respect to Sections 6
and 7) on the Initial Purchasers' part to the Company if, on or prior to
such date, (i) the Company shall have failed, refused or been unable to
perform in any material respect any agreement on its part to be performed
hereunder, (ii) any other condition to the obligations of the Initial
Purchasers hereunder as provided in Section 8 is not fulfilled when and as
required in any material respect, (iii) in the reasonable judgment of the
Representative any material adverse change shall have occurred since the
respective dates as of which information is given in the Offering
27
<PAGE>
Memorandum in the condition (financial or otherwise), business, properties,
assets, liabilities, prospects, net worth, results of operations or cash
flows of the Company taken as a whole, other than as set forth in the
Offering Memorandum, or (iv)(A) any domestic or international event or act
or occurrence has materially disrupted, or in the opinion of the Initial
Purchasers will in the immediate future materially disrupt, the market for
the Company's securities or for securities in general; or (B) trading in
securities generally on the New York or American Stock Exchanges shall have
been suspended or materially limited, or minimum or maximum prices for
trading shall have been established, or maximum ranges for prices for
securities shall have been required, on such exchange, or by such exchange
or other regulatory body or governmental authority having jurisdiction; or
(C) a banking moratorium shall have been declared by Federal or state
authorities, or a moratorium in foreign exchange trading by major
international banks or persons shall have been declared; or (D) there is an
outbreak or escalation of armed hostilities involving the United States on
or after the date hereof, or if there has been a declaration by the United
States of a national emergency or war, the effect of which shall be, in the
Representative's judgment, to make it inadvisable or impracticable to
proceed with the offering or delivery of the Units on the terms and in the
manner contemplated in the Offering Memorandum; or (E) there shall have
been such a material adverse change in general economic, political or
financial conditions or if the effect of international conditions on the
financial markets in the United States shall be such as, in the
Representative's judgment, makes it inadvisable or impracticable to proceed
with the delivery of the Units as contemplated hereby.
(c) Any notice of termination pursuant to this Section 11 shall be by
telephone, telex, telephonic facsimile, or telegraph, confirmed in writing
by letter.
(d) If this Agreement shall be terminated pursuant to any of the
provisions hereof, or if the sale of the Units provided for herein is not
consummated because any condition to the obligations of the Initial
Purchasers set forth herein is not satisfied or because of any refusal,
inability or failure on the part of the Company to perform any agreement
herein or comply with any provision hereof, the Company will, subject to
demand by the Representative, reimburse the Initial Purchasers for all
out-of-pocket expenses (including the reasonable fees and expenses of
Initial Purchasers' counsel), incurred by the Initial Purchasers in
connection herewith.
28
<PAGE>
12. NOTICE. All communications hereunder, except as may be otherwise
specifically provided herein, shall be in writing and, if sent to the
Representative shall be mailed, delivered, or telexed, telegraphed or telecopied
and confirmed in writing to Bear, Stearns & Co. Inc., 245 Park Avenue, New York,
New York 10167, Attention: Corporate Finance Department, telecopy number: (212)
272-3092; and if sent to the Company, shall be mailed, delivered or telexed,
telegraphed or telecopied and confirmed in writing to FirstWorld Communications,
Inc., 9333 Genesee Avenue, Suite 200, San Diego, California 92121, Attention:
Robert A. Randall, telecopy number: (619) 552-8006, with a copy to Latham &
Watkins, 701 B Street, 21st Floor, San Diego, California 92101-8197, telecopy
number: (619) 696-7419, Attention: David A. Hahn.
13. PARTIES. This Agreement shall inure solely to the benefit of, and
shall be binding upon, the Initial Purchasers and the Company and the
controlling persons and agents referred to in Sections 6 and 7, and their
respective successors and assigns, and no other person shall have or be
construed to have any legal or equitable right, remedy or claim under or in
respect of or by virtue of this Agreement or any provision herein contained. The
term "successors and assigns" shall not include a purchaser, in its capacity as
such, of Units from the Initial Purchasers.
14. CONSTRUCTION. This Agreement shall be construed in accordance with
the internal laws of the State of New York. TIME IS OF THE ESSENCE IN THIS
AGREEMENT.
15. CAPTIONS. The captions included in this Agreement are included solely
for convenience of reference and are not to be considered a part of this
Agreement.
16. COUNTERPARTS. This Agreement may be executed in various counterparts
which together shall constitute one and the same instrument.
[Signature page to follow]
29
<PAGE>
If the foregoing correctly sets forth your understanding of our
agreement, please so indicate in the space provided below for that purpose,
whereupon this letter shall constitute a binding agreement between the Company
and the Initial Purchasers.
Very truly yours,
FIRSTWORLD COMMUNICATIONS, INC.
By: /s/ Donald L. Sturm
-------------------------------------
Name:
Title:
Accepted and agreed to as of
the date first above written:
BEAR, STEARNS & CO. INC.
By: /s/ Phil Berney
-----------------------------------
Name:
Title:
For themselves and the other Initial
Purchasers named in Schedule I to the
foregoing Agreement
30
<PAGE>
Schedule I
<TABLE>
<CAPTION>
Initial Purchaser Number of Units
- ----------------- to be Purchased
---------------
<S> <C>
Bear, Stearns & Co. Inc. . . . . . . . . . . . . . . . . . . 235,000
ING Baring (U.S.) Securities, Inc. . . . . . . . . . . . . . 94,000
J.P. Morgan Securities Inc.. . . . . . . . . . . . . . . . . 47,000
Merrill Lynch, Pierce, Fenner & Smith
Incorporated . . . . . . . . . . . . . . . . . . . . . . . . 94,000
---------------
---------------
Total: 470,000
</TABLE>
31
<PAGE>
EXHIBIT A
Form of Opinion of Latham & Watkins
1. The Company and each of the subsidiaries listed on an appendix to the
opinion have been duly incorporated and are validly existing and in good
standing under the laws of its jurisdiction of incorporation with corporate
power and authority to own, lease and operate their properties and to conduct
their businesses as described in the Offering Memorandum. The Company has all
requisite corporate power and authority to execute, deliver and perform its
obligations under this Agreement and the other Operative Documents, as
applicable, and to consummate the transactions contemplated thereby, including,
without limitation, the corporate power and authority to issue, sell and deliver
the Securities. Based solely on certificates from public officials, such counsel
shall confirm that the Company is qualified to do business in the State of
Texas.
2. All of the outstanding shares of capital stock of the Company have
been duly authorized, validly issued, and are fully paid and nonassessable. The
authorized, issued and outstanding capital stock of the Company conforms in all
material respects to the description thereof set forth in the Offering
Memorandum. All of the issued and outstanding shares of capital stock of each
of the subsidiaries listed on the appendix referenced above have been duly and
validly issued, are fully paid and nonassessable, are owned of record by the
Company, and, to the best of such counsel's knowledge, are free from any lien,
claim, encumbrance, security interest, restriction on transfer, shareholders'
agreement or voting trust, except as described in the Offering Memorandum.
3. Except as described in the Offering Memorandum, to the best of such
counsel's knowledge, there is no commitment or arrangement to issue, and there
are no outstanding options, warrants or other rights calling for the issuance
of, any share of capital stock of the Company or any security or other
instrument that by its terms is convertible into, exercisable for, or
exchangeable for capital stock of the Company.
4. When the Units are issued and delivered pursuant to this Agreement, no
Unit, Note or Warrant will be of the same class (within the meaning of Rule 144A
under the Act) as securities of the Company that are listed on a national
securities exchange registered under Section 6 of the Exchange Act or that are
quoted in a United States automated inter-dealer quotation system.
5. This Agreement has been duly and validly authorized, executed and
delivered by the Company.
6. Each of the Indenture, the Registration Rights Agreement, the Warrant
Agreement, the Warrant Registration Rights Agreement and the Amended and
Restated Investor
<PAGE>
Rights Agreement has been duly and validly authorized, executed and delivered by
the Company and is the legally valid and binding obligation of the Company,
enforceable against the Company in accordance with its terms, subject to the
following exceptions, limitations and qualifications: (i) the effect of
bankruptcy, insolvency, reorganization, moratorium or other similar laws now or
hereafter in effect relating to or affecting the rights and remedies of
creditors; (ii) the effect of general principles of equity, whether enforcement
is considered in a proceeding in equity or law, and the discretion of the court
before which any proceeding therefor may be brought; (iii) the unenforceability
under certain circumstances under law or court decisions of provisions providing
for the indemnification of or contribution to a party with respect to a
liability where such indemnification or contribution is contrary to public
policy; (iv) such counsel need not express any opinion concerning the
enforceability of the specific performance remedy contained in the Registration
Rights Agreement; (v) such counsel need not express any opinion concerning the
enforceability of the waiver of rights or defenses contained in Section 6.11 of
the Indenture; and (vi) the manner by which the acceleration of the Securities
may affect the collectibility of that portion of the stated principal amount
thereof which might be determined to constitute unearned interest thereon.
7. The Notes have been duly and validly authorized for issuance and sale
to the Initial Purchasers by the Company pursuant to this Agreement and, when
executed and authenticated in accordance with the terms of the Indenture and
delivered to and paid for by the Initial Purchasers in accordance with the terms
of this Agreement and the Indenture, will be legally valid and binding
obligations of the Company, enforceable against the Company in accordance with
their terms, except (i) as limited by the effect of bankruptcy, insolvency,
reorganization, moratoriurn or other similar laws now or hereafter in effect
relating to or affecting the rights and remedies of creditors, (ii) as limited
by the effect of general principles of equity, whether enforcement is considered
in a proceeding in equity or at law, and the discretion of the court before
which any proceeding therefor may be brought; and (iii) as limited by the
unenforceability under certain circumstances under law or court decisions of
provisions providing for the indemnification of or contribution to a party with
respect to a liability where such indemnification or contribution is contrary to
public policy; and (iv) the manner by which the acceleration of the Securities
may affect the collectibility of that portion of the stated principal amount
thereof which might be determined to constitute unearned interest thereon.
8. The Exchange Notes have been duly and validly authorized for issuance
by the Company and, when issued and authenticated in accordance with the terms
of the Exchange Offer and the Indenture, will be legally valid and binding
obligations of the Company, enforceable against the Company in accordance with
their terms, except (i) as limited by the effect of bankruptcy, insolvency,
reorganization, moratorium or other similar laws now or hereafter in effect
relating to or affecting the rights and remedies of creditors, (ii) as limited
by the effect of general principles of equity, whether enforcement is considered
in a proceeding in equity or at law, and the discretion of the court before
which any proceeding therefor may be brought and (iii) as limited by the
unenforceability under certain circumstances under law or court decisions of
provisions providing for the indemnification of or contribution to a party with
respect to a liability where such indemnification or contribution is contrary to
public policy; and (iv) the manner by which the acceleration of the Securities
may affect the collectibility of that
33
<PAGE>
portion of the stated principal amount thereof which might be determined to
constitute unearned interest thereon.
9. The Warrants have been duly and validly authorized for issuance and
sale to the Initial Purchasers by the Company pursuant to this Agreement and,
when issued and countersigned in accordance with the terms of the Warrant
Agreement and delivered against payment therefor in accordance with the terms of
this Agreement and the Warrant Agreement, will he legally valid and binding
agreements of the Company, enforceable against the Company in accordance with
their terms, except (i) as limited by the effect of bankruptcy, insolvency,
reorganization, moratorium or other similar laws now or hereafter in effect
relating to or affecting the rights and remedies of creditors, (ii) as limited
by the effect of general principles of equity, whether enforcement is considered
in a proceeding in equity or at law and the discretion of the court before which
any proceeding therefor may be brought and (ii) as limited by the
unenforceability under certain circumstances under law or court decisions of
provisions providing for the indemnification of or contribution to a party with
respect to a liability where such indemnification or contribution is contrary to
public policy.
10. The Warrant Shares have been duly authorized and reserved for issuance
upon exercise of the Warrants in accordance with the terms of the Warrant
Agreement, are free of preemptive rights and, when issued upon exercise of the
Warrants in accordance with the terms of the Warrant Agreement, will be validly
issued, fully paid and nonassessable.
11. The statements set forth in the Offering Memorandum under the headings
"Description of the Units," "Description of the Notes," "Description of the
Warrants," and "Exchange Offer; Registration Rights," insofar as such statements
constitute a summary of legal matters, documents or proceedings, are accurate in
all material respects. The statements in the Offering Memorandum under the
heading "Notice to Investors," insofar as they purport to summarize matters of
United States federal law, are accurate in all material respects.
12. Assuming (i) the accuracy of the representations and warranties of the
Initial Purchasers contained in Section 5(b) of this Agreement and (ii)
compliance by the Initial Purchasers with the covenants contained in Section
5(b) of this Agreement, no registration of the Units under the Securities Act is
required in connection with the purchase of the Units by the Initial Purchasers,
or the initial resale of the Units by the Initial Purchasers, in each case in
the manner contemplated by this Agreement and the Offering Memorandum and, prior
to effectiveness of the Exchange Registration Statement or the Shelf
Registration Statement (as defined in the Registration Rights Agreement), the
Indenture is not required to be qualified under the TIA. Such counsel, however,
need not express any opinion as to when or under what circumstances any
Securities initially sold by the Initial Purchasers may be reoffered or resold.
13. The execution and delivery of this Agreement and the Operative
Documents, the issuance and sale of the Securities pursuant to this Agreement
and the issuance and sale of shares of Common Stock and warrants to purchase
Common Stock pursuant to the Equity Commitment will not result (a) in the
violation by the Company of its Amended and Restated Certificate of
Incorporation or Bylaws or any federal, or California or New York statute, rule
or regulation
34
<PAGE>
known to us to be applicable to the Company, (b) in the breach of or a default
under any indenture, note, loan agreement, deed of trust, security agreement or
other written agreement or instrument identified to such counsel by an officer
of the Company as material to the Company and listed in an appendix to such
counsel's opinion (the "Material Agreements"), or (c) to the best of such
counsel's knowledge, based solely on the docket searches set forth on an
appendix and certificates from officers of the Company, in the breach of or a
default under any court and administrative orders, writs, judgments and decrees
specifically directed to the Company, except as disclosed in the Offering
Memorandum.
To the best of such counsel's knowledge, no consent, approval,
authorization or order of, or filing with, any federal, California or New York
court or governmental agency or body is required for the execution, delivery and
performance of the Purchase Agreement and the other Operative Documents, the
issuance and sale of the Securities or the issuance and sale of shares of Common
Stock and warrants to purchase Common Stock pursuant to the Equity Commitment,
except (x) such as may be required (i) in connection with the registration under
the Securities Act of the Exchange Notes, if any, pursuant to the Registration
Rights Agreement or under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), (ii) in connection with the registration under the Securities
Act of the Warrants and Warrant Shares pursuant to the Warrant Registration
Rights Agreement or under the Exchange Act, (iii) in connection with the
qualification of the Indenture under the Trust Indenture Act of 1939, as amended
(the "TIA") in connection with the registration of the Exchange Notes, if any,
pursuant to the Registration Rights Agreement, (iv) under the blue sky laws of
any jurisdiction; (y) those which have been obtained and are in full force and
effect; and (z) those identified in the Offering Memorandum.
14. The Company is not and, after giving effect to the sale of the Units
and the application of the net proceeds therefrom will not be, an "investment
company" within the meaning of the Investment Company Act of 1940, as amended
(the "Investment Company Act").
15. Except as set forth in this Agreement, the Registration Rights
Agreement or the Warrant Registration Rights Agreement or as disclosed in the
Offering Memorandum, to the best of such counsel's knowledge, there are no
holders of securities of the Company who, by reason of the execution by the
Company of this Agreement or any other Operative Document to which it is a party
or the consummation by the Company of the transactions contemplated thereby,
have the right to request or demand that the Company register securities held by
them under the Act.
16. Neither the execution or delivery of this Agreement or any of the
Operative Documents, the issuance and sale of the Securities, or the application
of the proceeds from the issuance and sale of the Securities in the manner set
forth under the caption "Use of Proceeds" in the Offering Memorandum will
violate Regulations G, T, U or X promulgated by the Board of Governors of the
Federal Reserve System. Such counsel may assume for purposes of such opinion
that the Company will not use any of the proceeds from the sale and issuance of
the Units to purchase "margined securities" within the meaning of Regulations G,
T, U and X.
17. To the best of our knowledge, based solely on docket searches in the
jurisdictions set forth on an appendix to such opinion for the entities
indicated on such appendix and
35
<PAGE>
certificates from officers of the Company, there are no actions, suits,
proceedings or investigations pending or threatened against the Company or any
of its subsidiaries before or by any court, governmental agency or arbitrator.
18. The statements contained in the Offering Memorandum under the caption
"Certain Federal Income Tax Consequences," insofar as such statements continue a
summary of legal matters, documents or proceedings, are accurate in all material
respects.
Such counsel has participated in conferences with officers and other
representatives of the Company, representatives of the independent public
accountants for the Company, and representatives of the Initial Purchasers, at
which the contents of the Offering Memorandum and related matters were discussed
and, although such counsel is not passing upon, and does not assume any
responsibility for, the accuracy, completeness or fairness of the statements
contained in the Offering Memorandum and has not made any independent check or
verification thereof, during the course of such participation, no facts came to
such counsel's attention that caused it to believe that the Offering Memorandum,
as of its date, contained an untrue statement of a material fact or omitted to
state a material fact necessary to make the statement therein, in the light of
the circumstances under which they were made, not misleading; it being
understood that such counsel expresses no belief with respect to the financial
statements or other financial data included in, or omitted from, the Offering
Memorandum.
35
<PAGE>
Exhibit B
Form of Opinion of Blumenfeld & Cohen
1. All of the licenses, permits and authorizations required by the
FCC for the provision of telecommunications services by the Company or any
of its subsidiaries, as such counsel understands those services to be
provided currently based upon the attached certificate and the Offering
Memorandum, have been issued to and are validly held by the Company or the
applicable subsidiary. All of the licenses, permits and authorizations
required by any "state commissions" as defined in Section 3 of the
Communications Act of 1934, as amended (the "State Telecommunications
Agencies") for the provision of telecommunications services by the Company
and its subsidiaries, as such counsel understands those services to be
provided currently based upon the attached certificate and the Offering
Memorandum, have been issued to and, to the best knowledge of such counsel,
are validly held by the Company or the applicable subsidiary, except where
the failure to obtain or hold such license, permit or authority would not
have a Material Adverse Effect. All such licenses, permits and
authorizations are in full force and effect.
2. None of the Company or any of its subsidiaries is the subject of
any proceeding (including a rule making proceeding), pending complaint or
investigation, or, to the best of such counsel's knowledge, any threatened
complaint or investigation, before the FCC, or, to the best of such
counsel's knowledge after oral inquiry, of any proceeding (including a rule
making proceeding), pending complaint or investigation, or any threatened
complaint or investigation, before the State Telecommunications Agencies
based, in each case, on any alleged violation of any statutes governing the
FCC or the State Telecommunications Agencies and the rules and regulations
promulgated thereunder (the "Telecommunications Laws") by the Company or
any of its subsidiaries in connection with their provision of or failure to
provide telecommunications services of a character required to be disclosed
in the Offering Memorandum which is not disclosed in the Offering
Memorandum.
3. The statements in the Offering Memorandum under the headings of
"Risk Factors -- Competition -- Telephony," "Risk Factors--Government
Regulation," and "Business -- Regulation" accurately summarize the matters
therein described.
4. The Company has the consents, approvals, authorizations,
licenses, certificates, permits, or orders of the FCC and the State
Telecommunications Agencies, if any is required, for the consummation of
the transactions contemplated in the Offering Memorandum, except where the
failure to obtain the consents, approvals, authorizations, licenses,
certificates, permits or orders would not have a Material Adverse Effect.
5. Neither the execution and delivery of the Operative Documents nor
the sale of the Securities contemplated thereby will conflict with or
result in a violation of any order or regulation of the FCC or the State
Telecommunications Agencies applicable to the Company, except where the
conflict with or the violation of which would not have a Material Adverse
Effect.
<PAGE>
EXECUTION COPY
----------------------------------------
----------------------------------------
FIRSTWORLD COMMUNICATIONS, INC.
$470,000,000 PRINCIPAL AMOUNT AT MATURITY
13% SENIOR DISCOUNT NOTES DUE 2008
----------------
INDENTURE
Dated as of April 13, 1998
----------------
The Bank of New York,
Trustee
----------------------------------------
----------------------------------------
<PAGE>
CROSS-REFERENCE TABLE
Reconciliation and tie between the Trust Indenture Act of 1939, as amended, and
the Indenture, dated as of April 13, 1998
<TABLE>
<CAPTION>
Trust Indenture Act Section Indenture Section
--------------------------- -----------------
<S> <C>
(Section)310(a)(1) 7.10
(a)(2) 7.10
(a)(3) N.A.
(a)(4) N.A.
(a)(5) 7.10
(b) 7.08; 7.10
(c) N.A.
(Section)311(a) 7.11
(b) 7.11
(c) N.A.
(Section)312(a) 7.06(a); 7.06(b)
(b) 7.06(c)
(c) 7.06(d)
(Section)313(a) 7.06(e)
(b) N.A.
(c) 7.06(e); 7.06(f)
(d) 7.06
(Section)314(a) 4.18; 4.19
(b) N.A.
(c)(1) 10.03
(c)(2) 10.03
(c)(3) N.A.
(d) N.A.
(e) 10.04
(f) 4.19
(Section)315(a) 7.01(b)
(b) 7.05(a)
(c) 7.01(a)
(d) 7.01(c)
(e) 6.10
(Section)316(a) 2.10
(a)(1)(A) 6.05
(a)(1)(B) 6.04
(a)(2) N.A.
(b) 6.07
(c) 9.05
(Section)317(a)(1) N.A.
(a)(2) 6.08
</TABLE>
i
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<TABLE>
<CAPTION>
<S> <C>
(b) 2.07
(Section)318(a) 10.01
</TABLE>
Note: This reconciliation and tie shall not, for any purpose, be deemed to
be part of the Indenture.
ii
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
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ARTICLE I.
DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION
<S> <C>
SECTION 1.01. Definitions . . . . . . . . . . . . . . . . . . . . . . . . . 1
SECTION 1.02. Incorporation by Reference of Trust Indenture Act . . . . . .25
SECTION 1.03. Rules of Construction . . . . . . . . . . . . . . . . . . . .25
SECTION 1.04. Form of Documents Delivered to Trustee. . . . . . . . . . . .26
SECTION 1.05. Acts of Holders . . . . . . . . . . . . . . . . . . . . . . .27
ARTICLE II.
THE NOTES
Section 2.01. Form and Dating . . . . . . . . . . . . . . . . . . . . . . .27
SECTION 2.02. Execution and Authentication. . . . . . . . . . . . . . . . .28
SECTION 2.03. Registrar and Paying Agent. . . . . . . . . . . . . . . . . .28
SECTION 2.04. Paying Agent to Hold Money in Trust . . . . . . . . . . . . .29
SECTION 2.05. Holder Lists. . . . . . . . . . . . . . . . . . . . . . . . .29
SECTION 2.06. Transfer and Exchange . . . . . . . . . . . . . . . . . . . .29
SECTION 2.07. Replacement Notes . . . . . . . . . . . . . . . . . . . . . .39
SECTION 2.08. Outstanding Notes . . . . . . . . . . . . . . . . . . . . . .39
SECTION 2.09. Treasury Notes. . . . . . . . . . . . . . . . . . . . . . . .39
SECTION 2.10. Temporary Notes . . . . . . . . . . . . . . . . . . . . . . .40
SECTION 2.11. Cancellation. . . . . . . . . . . . . . . . . . . . . . . . .40
SECTION 2.12. Defaulted Interest. . . . . . . . . . . . . . . . . . . . . .40
SECTION 2.13. CUSIP Numbers . . . . . . . . . . . . . . . . . . . . . . . .40
</TABLE>
iii
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<TABLE>
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ARTICLE III.
REDEMPTION
<S> <C>
SECTION 3.01. Notice to Trustee . . . . . . . . . . . . . . . . . . . . . .41
SECTION 3.02. Selection of Notes to be Redeemed . . . . . . . . . . . . . .41
SECTION 3.03. Notice of Redemption. . . . . . . . . . . . . . . . . . . . .41
SECTION 3.04. Effect of Notice of Redemption. . . . . . . . . . . . . . . .42
SECTION 3.05. Deposit of Redemption Price . . . . . . . . . . . . . . . . .42
SECTION 3.06. Notes Redeemed in Part. . . . . . . . . . . . . . . . . . . .43
ARTICLE IV.
COVENANTS
SECTION 4.01. Payment of Notes. . . . . . . . . . . . . . . . . . . . . . .43
SECTION 4.02. Maintenance of Office or Agency . . . . . . . . . . . . . . .43
SECTION 4.03. Money for the Note Payments to be Held in Trust . . . . . . .44
SECTION 4.04. Corporate Existence . . . . . . . . . . . . . . . . . . . . .44
SECTION 4.05. Maintenance of Property . . . . . . . . . . . . . . . . . . .45
SECTION 4.06. Payment of Taxes and Other Claims . . . . . . . . . . . . . .45
SECTION 4.07. Repurchase at the Option of Holders upon a
Change of Control. . . . . . . . . . . . . . . . . . . . .45
SECTION 4.08. Limitation on Asset Sales . . . . . . . . . . . . . . . . . .47
SECTION 4.09. Limitation on Consolidated Indebtedness . . . . . . . . . . .50
SECTION 4.10. Limitation on Issuances of Guarantees of Indebtedness . . . .53
SECTION 4.11. Limitation on Restricted Payments . . . . . . . . . . . . . .53
SECTION 4.12. Limitation on Liens . . . . . . . . . . . . . . . . . . . . .56
SECTION 4.13. Limitation on Sale and Leaseback Transactions . . . . . . . .56
</TABLE>
iv
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<TABLE>
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<S> <C>
SECTION 4.14. Limitation on Dividends and Other Payment Restrictions
Affecting Subsidiaries . . . . . . . . . . . . . . . . . .57
SECTION 4.15. Limitation on Issuance and Sale of Capital Stock of
Restricted Subsidiaries. . . . . . . . . . . . . . . . . .58
SECTION 4.16. Transactions with Affiliates. . . . . . . . . . . . . . . . .58
SECTION 4.17. Restricted and Unrestricted Subsidiaries. . . . . . . . . . .59
SECTION 4.18. Reports . . . . . . . . . . . . . . . . . . . . . . . . . . .61
SECTION 4.19. Compliance Certificate; Notice of Default or
Event of Default . . . . . . . . . . . . . . . . . . . . .61
SECTION 4.20. Limitation on Business Activities . . . . . . . . . . . . . .61
SECTION 4.21. Calculation of Original Issue Discount. . . . . . . . . . . .61
ARTICLE V.
CONSOLIDATION, MERGER, CONVEYANCE, LEASE OR TRANSFER
SECTION 5.01. Merger, Consolidation or Sale of Assets . . . . . . . . . . .62
SECTION 5.02. Successor Corporation Substituted . . . . . . . . . . . . . .63
ARTICLE VI.
DEFAULTS AND REMEDIES
SECTION 6.01. Events of Default . . . . . . . . . . . . . . . . . . . . . .63
SECTION 6.02. Acceleration. . . . . . . . . . . . . . . . . . . . . . . . .65
SECTION 6.03. Other Remedies. . . . . . . . . . . . . . . . . . . . . . . .66
SECTION 6.04. Waiver of Past Defaults . . . . . . . . . . . . . . . . . . .67
SECTION 6.05. Control by Majority . . . . . . . . . . . . . . . . . . . . .67
SECTION 6.06. Limitation on Suits . . . . . . . . . . . . . . . . . . . . .67
SECTION 6.07. Rights of Holders to Receive Payment. . . . . . . . . . . . .68
SECTION 6.08. Trustee May File Proofs of Claim. . . . . . . . . . . . . . .68
SECTION 6.09. Priorities. . . . . . . . . . . . . . . . . . . . . . . . . .69
</TABLE>
v
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<S> <C>
SECTION 6.10. Undertaking for Costs . . . . . . . . . . . . . . . . . . . .69
SECTION 6.11. Waiver of Stay or Extension Laws. . . . . . . . . . . . . . .70
SECTION 6.12. Trustee May Enforce Claims Without Possession of
the Notes. . . . . . . . . . . . . . . . . . . . . . . . .70
SECTION 6.13. Restoration of Rights and Remedies. . . . . . . . . . . . . .70
SECTION 6.14. Rights and Remedies Cumulative. . . . . . . . . . . . . . . .70
SECTION 6.15. Delay or Omission Not Waiver. . . . . . . . . . . . . . . . .70
ARTICLE VII.
TRUSTEE
SECTION 7.01. Duties of Trustee . . . . . . . . . . . . . . . . . . . . . .71
SECTION 7.02. Rights of Trustee . . . . . . . . . . . . . . . . . . . . . .71
SECTION 7.03. Individual Rights of Trustee. . . . . . . . . . . . . . . . .72
SECTION 7.04. Trustee's Disclaimer. . . . . . . . . . . . . . . . . . . . .73
SECTION 7.05. Notice of Defaults. . . . . . . . . . . . . . . . . . . . . .73
SECTION 7.06. Preservation of Information; Reports by Trustee to
Holders. . . . . . . . . . . . . . . . . . . . . . . . . .73
SECTION 7.07. Compensation and Indemnity. . . . . . . . . . . . . . . . . .74
SECTION 7.08. Replacement of Trustee. . . . . . . . . . . . . . . . . . . .75
SECTION 7.09. Successor Trustee by Merger . . . . . . . . . . . . . . . . .77
SECTION 7.10. Eligibility; Disqualification . . . . . . . . . . . . . . . .77
SECTION 7.11. Preferential Collection of Claims Against Company . . . . . .78
ARTICLE VIII.
DEFEASANCE
SECTION 8.01. Company's Option to Effect Legal Defeasance or
Covenant Defeasance. . . . . . . . . . . . . . . . . . . .78
SECTION 8.02. Legal Defeasance and Discharge. . . . . . . . . . . . . . . .78
SECTION 8.03. Covenant Defeasance . . . . . . . . . . . . . . . . . . . . .79
</TABLE>
vi
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<TABLE>
<CAPTION>
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<S> <C>
SECTION 8.04. Conditions to Defeasance or Covenant Defeasance . . . . . . .79
SECTION 8.05. Deposited Money and U.S. Government Obligations to be
Held in Trust; Miscellaneous Provisions. . . . . . . . . .81
SECTION 8.06. Reinstatement . . . . . . . . . . . . . . . . . . . . . . . .81
ARTICLE IX.
AMENDMENTS
SECTION 9.01. Without Consent of Holders. . . . . . . . . . . . . . . . . .82
SECTION 9.02. With Consent of Holders . . . . . . . . . . . . . . . . . . .82
SECTION 9.03. Effect of Supplemental Indentures . . . . . . . . . . . . . .83
SECTION 9.04. Compliance with Trust Indenture Act . . . . . . . . . . . . .83
SECTION 9.05. Revocation and Effect of Consents and Waivers . . . . . . . .83
SECTION 9.06. Notation on or Exchange of Notes. . . . . . . . . . . . . . .84
SECTION 9.07. Trustee to Execute Supplemental Indentures. . . . . . . . . .84
SECTION 9.08. Payments for Consent. . . . . . . . . . . . . . . . . . . . .84
ARTICLE X.
MISCELLANEOUS
SECTION 10.01. Trust Indenture Act Controls . . . . . . . . . . . . . . . .85
SECTION 10.02. Notices. . . . . . . . . . . . . . . . . . . . . . . . . . .85
SECTION 10.03. Certificate and Opinion as to Conditions Precedent . . . . .85
SECTION 10.04. Statements Required in Certificate or Opinion. . . . . . . .85
SECTION 10.05. Rules by Trustee, Paying Agent and Note Registrar. . . . . .86
SECTION 10.06. Payments on Business Days. . . . . . . . . . . . . . . . . .86
SECTION 10.07. Governing Law. . . . . . . . . . . . . . . . . . . . . . . .86
SECTION 10.08. No Recourse Against Others . . . . . . . . . . . . . . . . .86
</TABLE>
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<S> <C>
SECTION 10.09. Successors . . . . . . . . . . . . . . . . . . . . . . . . .86
SECTION 10.10. Counterparts . . . . . . . . . . . . . . . . . . . . . . . .86
SECTION 10.11. Table of Contents; Headings. . . . . . . . . . . . . . . . .86
SECTION 10.12. Severability . . . . . . . . . . . . . . . . . . . . . . . .86
SECTION 10.13. Further Instruments and Acts . . . . . . . . . . . . . . . .87
EXHIBIT A. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-1
EXHIBIT B. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-1
EXHIBIT B-2. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-2
EXHIBIT B-3. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-3
EXHIBIT C. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . C-1
</TABLE>
viii
<PAGE>
INDENTURE, dated as of April 13, 1998, between FIRSTWORLD COMMUNICATIONS, INC.,
a California corporation (the "COMPANY"), having its principal office at 9333
Genesee Avenue, Suite 200, San Diego, California 92121, and THE BANK OF NEW
YORK, a New York banking corporation, as trustee hereunder (the "Trustee"),
having its Corporate Trust Office at 101 Barclay Street, New York, New York
10286.
RECITALS OF THE COMPANY
The Company has duly authorized the creation and issue of its 13% Senior
Discount Notes due 2008 (the "Notes") of substantially the tenor and amount
hereinafter set forth, and to provide therefor the Company has duly authorized
the execution and delivery of this Indenture.
All things necessary to make the Notes, when executed by the Company and
authenticated and delivered by the Trustee hereunder and duly issued by the
Company, the valid obligations of the Company, and to make this Indenture a
valid instrument of the Company, in accordance with their respective terms, have
been done.
NOW, THEREFORE, THIS INDENTURE WITNESSETH, that, for and in consideration
of the premises and the purchase of the Notes by the Holders thereof, it is
mutually covenanted and agreed, for the equal and proportionate benefit of all
Holders, as follows:
ARTICLE I.
DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION
SECTION 1.01. DEFINITIONS. For all purposes of this Indenture, except as
otherwise expressly provided or unless the context otherwise requires:
(a) the terms defined in this Article have the meanings assigned to them
in this Article, and include the plural as well as the singular; and
(b) all accounting terms not otherwise defined herein have the meanings
assigned to them in accordance with GAAP.
"Accreted Value" means, for any date of calculation, the amount calculated
pursuant to (i), (ii), (iii) or (iv) for each $1,000 of principal amount at
maturity of Notes:
(i) if such date of calculation occurs on one or more of the following
dates (each a "Semi-Annual Accrual Date"), the Accreted Value will equal the
amount set forth below for such Semi-Annual Accrual Date:
<PAGE>
<TABLE>
<CAPTION>
SEMI-ANNUAL ACCRETED
ACCRUAL DATE VALUE
<S> <C>
April 15, 1998................... $532.73
October 15, 1998................. 567.36
April 15, 1999................... 604.24
October 15, 1999................. 643.52
April 15, 2000................... 685.34
October 15, 2000................. 729.89
April 15, 2001................... 777.34
October 15, 2001................. 827.86
April 15, 2002................... 881.67
October 15, 2002................. 938.98
April 15, 2003................... 1000.00
</TABLE>
(ii) if such date of calculation occurs before the first Semi-Annual
Accrual Date, the Accreted Value will equal the sum of (a) $532.35 and (b) an
amount equal to the product of (1) the Accreted Value for the first Semi-Annual
Accrual Date less $532.35 multiplied by (2) a fraction, the numerator of which
is the number of days from the Issue Date to such date of calculation, using a
360-day year of twelve 30-day months, and the denominator of which is the number
of days elapsed from the Issue Date to the first Semi-Annual Accrual Date, using
a 360-day year of twelve 30-day months;
(iii) if such date of calculation occurs between two Semi-Annual Accrual
Dates, the Accreted Value will equal the sum of (a) the Accreted Value of
Semi-Annual Accrual Date immediately preceding such date of calculation and (b)
an amount equal to the product of (1) the Accreted Value for the immediately
following Semi-Annual Accrual Date less the Accreted Value for the immediately
preceding Semi-Annual Accrual Date multiplied by (2) a fraction, the numerator
of which is the number of days from the immediately preceding Semi-Annual
Accrual Date to such date of calculation, using a 360-day year of twelve 30-day
months, and the denominator of which is 180; or
(iv) if such date of calculation occurs after the last Semi-Annual Accrual
Date, the Accreted Value will equal $1,000.
"Acquired Indebtedness" means, with respect to any specified Person,
Indebtedness of any other Person existing at the time such other Person merged
with or into or became a Subsidiary of such specified Person, but excluding
Indebtedness which is extinguished, retired or repaid in connection with such
other Person merging with or into or becoming a Subsidiary of such specified
Person.
"Act" when used with respect to any Holder, has the meaning set forth in
Section 1.05 hereof.
2
<PAGE>
"Affiliate" means, as to any Person, any other Person which directly or
indirectly controls, or is under common control with, or is controlled by, such
Person. For purposes of this definition, "control" (including, with correlative
meanings, the terms "controlling," "under common control with" and "controlled
by"), as used with respect to any Person, shall mean 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 Stock, by
agreement or otherwise; provided, that Beneficial Ownership of 10% or more of
the Voting Stock of a Person shall be deemed to be control.
"Affiliate Transaction" has the meaning set forth in Section 4.16 hereof.
"Applicable Procedures" means, with respect to any transfer or exchange of
or for beneficial interests in any Global Note, the rules and procedures of the
Depositary that apply to such transfer or exchange.
"Asset Sale" by any Person means any transfer, conveyance, sale, lease or
other disposition by such Person or any of its Restricted Subsidiaries
(including a consolidation or merger or other sale of any such Restricted
Subsidiary with, into or to another Person in a transaction in which such
Restricted Subsidiary ceases to be a Restricted Subsidiary of the specified
Person, but excluding a disposition by a Restricted Subsidiary of such Person to
such Person or a Restricted Subsidiary of such Person or by such Person to a
Restricted Subsidiary of such Person) of (i) shares of Capital Stock or other
ownership interests of a Restricted Subsidiary of such Person, (ii)
substantially all of the assets of such Person or any of its Restricted
Subsidiaries representing a division or line of business (other than as part of
a Permitted Investment) or (iii) other assets or rights of such Person or any of
its Restricted Subsidiaries outside of the ordinary course of business and, in
each case, that is not governed by the provisions of Section 4.07 or 5.01 of the
Indenture; PROVIDED that "Asset Sale" shall not include (i) sales or other
dispositions of inventory, receivables and other current assets in the ordinary
course of business, (ii) simultaneous exchanges by the Company or any Restricted
Subsidiary of Telecommunications Assets for other Telecommunications Assets in
the ordinary course of business; PROVIDED that the applicable Telecommunications
Assets received by the Company or such Restricted Subsidiary have at least
substantially equal Fair Market Value to the Company or such Restricted
Subsidiary (as determined by the Board of Directors whose good faith
determination shall be conclusive and evidenced by a Board Resolution filed with
the Trustee), (iii) disposals or replacements of obsolete, uneconomical,
negligible, worn-out or surplus property in the ordinary course of business;
(iv) sales or other dispositions of assets in a single or series of related
transactions with a Fair Market Value or net proceeds (as certified in an
Officers' Certificate) not in excess of $2 million; (v) a Restricted Payment
that is permitted by Section 4.11 of the Indenture; or (vi) a conveyance
constituting or pursuant to a Permitted Lien.
"Asset Sale Offer" has the meaning set forth in Section 4.08(c) hereof.
"Asset Sale Payment Date" has the meaning set forth in Section 4.08(d)(ii)
hereof.
3
<PAGE>
"Asset Sale Purchase Price" has the meaning set forth in Section 4.08(c)
hereof.
"Attributable Indebtedness" means, with respect to any Sale and Leaseback
Transaction of any Person, as at the time of determination, the greater of (i)
the capitalized amount in respect of such transaction that would appear on the
balance sheet of such Person in accordance with GAAP and (ii) the present value
(discounted at a rate consistent with accounting guidelines, as determined in
good faith by the responsible accounting officer of such Person) of the payments
during the remaining term of the lease (including any period for which such
lease has been extended or may, at the option of the lessor, be extended) or
until the earliest date on which the lessee may terminate such lease without
penalty or upon payment of a penalty (in which case the rental payments shall
include such penalty).
"Authentication Order" has the meaning set forth in Section 2.02.
"Average Life" means, as of any date, with respect to any debt security or
Disqualified Stock, the quotient obtained by dividing (i) the sum of the
products of (x) the number of years from such date to the dates of each
scheduled principal payment or redemption payment (including any sinking fund or
mandatory redemption payment requirements) of such debt security or Disqualified
Stock multiplied in each case by (y) the amount of such principal or redemption
payment, by (ii) the sum of all such principal or redemption payments.
"Beneficial Owner" means a beneficial owner as defined in Rules 13d-3 and
13d-5 under the Exchange Act (or any successor rules), including the provision
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 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.
"Board of Directors" means the Board of Directors of the Company or any
committee thereof duly authorized to act on behalf of the Board of Directors.
"Board Resolution" means a duly adopted resolution of the Board of
Directors in full force and effect at the time of determination.
"Business Day" means each Monday, Tuesday, Wednesday, Thursday and Friday
that is not a day on which banking institutions in The City of New York are
authorized or obligated by law, executive order or regulation to close.
"Capital Lease Obligation" of any Person means the obligation to pay rent
or other payment amounts under a lease of (or other Indebtedness arrangement
conveying the right to use) real or personal property of such Person which is
required to be classified and accounted for as a capital lease or a liability on
the face of a balance sheet of such Person prepared in accordance
4
<PAGE>
with GAAP, and the stated maturity thereof shall be the date of the last payment
of rent or any amount due under such lease prior to the first date upon which
such lease may be terminated by the lessee without payment of a penalty.
"Capital Stock" in any Person means any and all shares, interests,
participations or other equivalents in the equity interest (however designated)
in such Person and any rights (other than Indebtedness convertible into an
equity interest), warrants or options to subscribe for or acquire an equity
interest in such Person.
"Cash Equivalents" means (i) United States dollars, (ii) securities issued
or directly and fully Guaranteed or insured by the United States government or
any agency or instrumentality thereof (PROVIDED that the full faith and credit
of the United States is pledged in support thereof) having maturities of not
more than six months from the date of acquisition, (iii) certificates of deposit
and eurodollar time deposits with maturities of six months or less from the date
of acquisition, bankers acceptances with maturities not exceeding six months and
overnight bank deposits, in each case with any domestic commercial bank having
capital and surplus in excess of $500 million and a rating from Moody's
Investors Service, Inc. or Standard & Poor's Corporation of "A" or better, (iv)
repurchase obligations with a term of not more than seven days for underlying
securities of the types described in clauses (ii) and (iii) above entered into
with any financial institution meeting the qualifications specified in clause
(iii) above, (v) commercial paper having a rating from Moody's Investors
Service, Inc. or Standard & Poor's Corporation of A-2; P-2 or better and in each
case maturing within six months after the date of acquisition and (vi) money
market and mutual funds at least 95% of the assets of which constitute Cash
Equivalents of the kinds described in clauses (i)-(v) of this definition.
"Change of Control" means the occurrence of any of the following: (i) 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 Restricted Subsidiaries, taken as a whole, to any Person or group (as
such term is used in Section 13(d)(3) and 14 (d)(2) of the Exchange Act), (ii)
the adoption of a plan relating to the liquidation or dissolution of the
Company, (iii) any Person or group (as defined above) other than the Permitted
Holders is or becomes the Beneficial Owner, directly or indirectly, of more than
35% of the total Voting Stock or Total Common Equity of the Company, including
by way of merger, consolidation or otherwise or (iv) the first day on which a
majority of the members of the Board of Directors of the Company are not
Continuing Directors.
"Change of Control Offer" has the meaning set forth in Section 4.07(a)
hereof.
"Change of Control Payment Date" has the meaning set forth in Section
4.07(b)(ii) hereof.
"Change of Control Purchase Price" has the meaning set forth in Section
4.07(a) hereof.
"clearing agency" has the meaning set forth in Section 3(a)(23) of the
Exchange Act.
5
<PAGE>
"Closing Date" shall mean the first date on which Notes are issued by the
Company.
"Closing Price" on any Trading Day with respect to the per share price of
any shares of Capital Stock means the last reported sale price regular way or,
in case no such reported sale takes place on such day, the average of the
reported closing bid and asked prices regular way, in either case on the New
York Stock Exchange or, if such shares of Capital Stock are not listed or
admitted to trading on such exchange, on the principal national securities
exchange on which such shares are listed or admitted to trading or, if not
listed or admitted to trading on any national securities exchange, on the Nasdaq
National Market or, if such shares are not listed or admitted to trading on any
national securities exchange or quoted on Nasdaq National Market but the issuer
is a Foreign Issuer (as defined in Rule 3b-4(b) under the Exchange Act) and the
principal securities exchange on which such shares are listed or admitted to
trading is a Designated Offshore Securities Market (as defined in Rule 902(a)
under the Securities Act), the average of the reported closing bid and asked
prices regular way on such principal exchange, or, if such shares are not listed
or admitted to trading on any national securities exchange or quoted on Nasdaq
National Market and the issuer and principal securities exchange do not meet
such requirements, the average of the closing bid and asked prices in the
over-the-counter market as furnished by any New York Stock Exchange member firm
that is selected from time to time by the Company for that purpose and is
reasonably acceptable to the Trustee.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commission" means the United States Securities and Exchange Commission, as
from time to time constituted, created under the Exchange Act, or, if at any
time after the execution of this Indenture such commission is not existing and
performing the duties now assigned to it under the Trust Indenture Act, the body
performing such duties at such time.
"Common Stock" means Capital Stock other than Preferred Stock.
"Company" means the party named as such in the preamble to this Indenture
until a successor replaces it pursuant to the applicable provisions hereof and,
thereafter, means such successor.
"Company Order" means a written order signed in the name of the Company by
(i) its Chairman of the Board, President, a Vice Chairman or a Vice President,
and (ii) its Treasurer, an Assistant Treasurer, its Secretary or an Assistant
Secretary.
"Consolidated Cash Flow Available for Fixed Charges" for any period means
the Consolidated Net Income of the Company and its Restricted Subsidiaries for
such period increased by the sum of (i) Consolidated Interest Expense of the
Company and its Restricted Subsidiaries for such period, plus (ii) Consolidated
Income Tax Expense of the Company and its Restricted Subsidiaries for such
period, plus (iii) the consolidated depreciation and amortization expense
included in the income statement of the Company and its Restricted Subsidiaries
for
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such period, plus (iv) any non-cash expense related to the issuance to employees
of the Company or any Restricted Subsidiary of the Company of options to
purchase Capital Stock of the Company or such Restricted Subsidiary, plus (v)
any non-cash expense related to a purchase accounting adjustment not requiring
an accrual or reserve and separately disclosed in the Company's income
statement, and decreased by the amount of any non-cash item that increases such
Consolidated Net Income, all as determined on a consolidated basis in accordance
with GAAP; PROVIDED that there shall be excluded therefrom the Consolidated Cash
Flow Available for Fixed Charges (if positive) of any Restricted Subsidiary of
the Company (calculated separately for such Restricted Subsidiary in the same
manner as provided above for the Company) that is subject to a restriction which
prevents the payment of dividends or the making of distributions to the Company
or another Restricted Subsidiary of the Company to the extent of such
restriction.
"Consolidated Income Tax Expense" for any period means the aggregate
amounts of the provisions for income taxes of the Company and its Restricted
Subsidiaries for such period calculated on a consolidated basis in accordance
with GAAP.
"Consolidated Interest Expense" means for any period the interest expense
included in a consolidated income statement (excluding interest income) of the
Company and its Restricted Subsidiaries for such period in accordance with GAAP,
including without limitation or duplication (or, to the extent not so included,
with the addition of), (i) the amortization of original issue discount on any
Indebtedness and the interest portion of any deferred payment obligation
calculated in accordance with the effective interest method of accounting; (ii)
any payments or fees with respect to letters of credit, bankers' acceptances or
similar facilities; (iii) fees with respect to interest rate swap or similar
agreements or foreign currency hedge, exchange or similar agreements: (iv)
Preferred Stock dividends of the Company and its Restricted Subsidiaries (other
than dividends paid in shares of Preferred Stock that is not Disqualified Stock)
declared and paid or payable; (v) accrued Disqualified Stock dividends of the
Company and its Restricted Subsidiaries, whether or not declared or paid; (vi)
interest on Indebtedness Guaranteed by the Company and its Restricted
Subsidiaries: and (vii) the portion of any Capital Lease Obligation paid during
such period that is allocable to interest expense in accordance with GAAP.
"Consolidated Net Income" of any Person means, for any period, the
aggregate net income (or net loss) of such Person and its Restricted
Subsidiaries for such period on a consolidated basis determined in accordance
with GAAP; PROVIDED that there shall be excluded therefrom, without duplication
(i) all items classified as extraordinary, (ii) any net income (or net loss) of
any Person other than such Person and its Restricted Subsidiaries, except to the
extent of the amount of dividends or other distributions actually paid to such
Person or its Restricted Subsidiaries by such other Person during such period,
(iii) the net income of any Person acquired by such Person or any of its
Restricted Subsidiaries in a pooling-of-interests transaction for any period
prior to the date of the related acquisition, (iv) any gain or loss, net of
taxes, realized on the termination of any employee pension benefit plan, (v) net
gains (or net losses) in respect of Asset Sales by such Person or its Restricted
Subsidiaries, (vi) the net income (or net loss) of any
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Restricted Subsidiary of such Person to the extent that the payment of dividends
or other distributions to such Person is restricted by the terms of its charter
or any agreement, instrument, contract, judgment, order, decree, statute, rule,
governmental regulation or otherwise, except for any dividends or distributions
actually paid by such Restricted Subsidiary to such Person, and (vii) the
cumulative effect of changes in accounting principles.
"Consolidated Net Worth" of any Person means, at any date of determination,
the consolidated stockholders' equity or partners' capital (excluding
Disqualified Stock) of such Person and its Subsidiaries, as determined in
accordance with GAAP.
"Continuing Directors" means, as of any date of determination, any member
of the Board of Directors of the Company who (i) was a member of such Board of
Directors on the Issue Date or (ii) was nominated for election to such Board of
Directors with the affirmative vote of a majority of the Continuing Directors
who were members of such Board at the time of such nomination or election or who
was elected or appointed in the ordinary course by Continuing Directors or other
directors so elected or appointed.
"Corporate Trust Office" means the principal office of the Trustee in the
Borough of Manhattan, The City of New York, New York at which at any particular
time its corporate trust business shall be principally administered, which at
the date hereof is located at 101 Barclay Street, New York, New York 10286.
"Covenant Defeasance" has the meaning set forth in Section 8.03 hereof.
"CUSIP" has the meaning assigned to it in Section 2.13.
"Default" means any event, act or condition, the occurrence of which is, or
after notice or the passage of time or both would be, an Event of Default.
"Default Amount" means (i) until (but excluding) the Full Accretion Date,
the Accreted Value of the Notes as of such date and (ii) on or after the Full
Accretion Date, the "Default Amount" shall equal 100% of the principal amount
thereof.
"Defaulted Interest" has the meaning set forth in Section 2.12 hereof.
"Defeasance" has the meaning set forth in Section 8.02 hereof.
"Definitive Note" means a certificated Note registered in the name of the
Holder thereof and issued in accordance with Section 2.06 hereof, in the form of
Exhibit A hereto except that such Note shall not bear the Global Note Legend and
shall not have the "Schedule of Exchanges of Interests in the Global Note"
attached thereto.
"Depositary" means, with respect to the Notes issuable or issued in whole
or in part in global form, the Person specified in Section 2.03 hereof as the
Depositary with respect to the
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Notes, and any and all successors thereto appointed as depositary hereunder and
having become such pursuant to the applicable provision of this Indenture.
"Disqualified Stock" means any Capital Stock which, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, or otherwise, matures or is
mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or
is redeemable at the option of the holder thereof, or is exchangeable for
Indebtedness at any time, in whole or in part, on or prior to the Stated
Maturity of the Notes.
"DTC" has the meaning assigned to it in Section 2.03.
"Enron" means Enron Capital & Trade Resources Corp.
"Equity Commitment" means the investment in the Company by Spectra 3 and
Enron, no later than the Issue Date, of an additional $20 million pursuant to
the SpectraNet International Common Stock Purchase Agreement dated as of
December 30, 1997, as amended, among the Company, Enron and Spectra 3.
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Event of Default" has the meaning set forth in Section 6.01 hereof.
"Excess Proceeds" has the meaning set forth in Section 4.08(b) hereof.
"Exchange Act" means the Securities Exchange Act of 1934, as amended, and
the rules and regulations promulgated thereunder.
"Exchange Note" means any Note issued in exchange for an Original Note or
Original Notes pursuant to the Registered Exchange Offer or otherwise registered
under the Securities Act and any Note with respect to which the next preceding
Predecessor Note of such Note was an Exchange Note.
"Existing Indebtedness" means Indebtedness outstanding on the date of this
Indenture (other than under the Senior Credit Facility).
"Fair Market Value" means, with respect to any asset or Property, the sale
value that would be obtained in an arm's-length transaction between an informed
and willing seller under no compulsion to sell and an informed and willing buyer
under no compulsion to buy, as determined in good faith by the Board of
Directors.
"Full Accretion Date" means April 15, 2003.
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"GAAP" means United States generally accepted accounting principles,
consistently applied, as set forth in the opinions and pronouncements of the
Accounting Principles Board of the American Institute of Certified Public
Accountants and statements and pronouncements of the Financial Accounting
Standards Board, or in such other statements by such other entity as may be
approved by a significant segment of the accounting profession of the United
States, that are applicable to the circumstances as of the date of
determination; PROVIDED that, except as otherwise specifically provided herein,
all calculations made for purposes of determining compliance with Article IV or
Section 5.01 hereof shall utilize GAAP as in effect on the Issue Date.
"Global Note" means a global certificate representing Notes, in the form of
Exhibit A hereto bearing the Global Note Legend and deposited with or on behalf
of, and registered in the name of, the Depositary or its nominee.
"Global Note Legend" means the legend set forth in Section 2.06(g)(ii),
which is required to be placed on all Global Notes issued under this Indenture.
"Guarantee" means any direct or indirect obligation, contingent or
otherwise, of a Person guaranteeing or having the economic effect of
guaranteeing any Indebtedness of any other Person in any manner. The terms
"Guaranteed," "Guaranteeing" and "Guarantor" shall have correlative meanings.
"Holder" means (i) in the case of any Definitive Note, the Person in whose
name such Definitive Note is registered in the Note Register and (ii) in the
case of any Global Note, the Depositary.
"Incur" means, with respect to any Indebtedness or other obligation of any
Person, to create, issue, incur (by conversion, exchange or otherwise), assume,
Guarantee or otherwise become liable in respect of such Indebtedness or other
obligation including by acquisition of Subsidiaries or the recording, as
required pursuant to GAAP or otherwise, of any such Indebtedness or other
obligation on the balance sheet of such Person (and "Incurrence," "Incurred,"
"Incurrable" and "Incurring" shall have meanings correlative to the foregoing);
PROVIDED that a change in GAAP that results in an obligation of such Person that
exists at such time becoming Indebtedness shall not be deemed an Incurrence of
such Indebtedness and that neither the accrual of interest nor the accretion of
original issue discount shall be deemed an Incurrence of Indebtedness.
Indebtedness otherwise incurred by a Person before it becomes a Subsidiary of
the Company (whether by merger, consolidation, acquisition or otherwise) shall
be deemed to have been incurred at the time at which such Person becomes a
Subsidiary of the Company.
"Indebtedness" means, at any time (without duplication), with respect to
any Person, whether recourse is to all or a portion of the assets of such
Person, and whether or not contingent, (i) any obligation of such Person for
money borrowed, (ii) any obligation of such Person evidenced by bonds,
debentures, notes, Guarantees or other similar instruments, including,
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without limitation, any such obligations Incurred in connection with the
acquisition of Property, assets or businesses, excluding trade accounts payable
made in the ordinary course of business, (iii) any reimbursement obligation of
such Person with respect to letters of credit, bankers' acceptances or similar
facilities issued for the account of such Person, (iv) any obligation of such
Person issued or assumed as the deferred purchase price of Property or services
(but excluding trade accounts payable or accrued liabilities arising in the
ordinary course of business, which in either case are not more than 60 days
overdue or which are being contested in good faith), (v) any Capital Lease
Obligation of such Person, (vi) the maximum fixed redemption or repurchase price
of Disqualified Stock of such Person and, to the extent held by Persons other
than such Person or its Restricted Subsidiaries, the maximum fixed redemption or
repurchase price of Disqualified Stock of such Person's Restricted Subsidiaries,
at the time of determination, (vii) every obligation under Interest Rate
Protection Agreements of such Person, (viii) any Attributable Indebtedness with
respect to any Sale and Leaseback Transaction to which such Person is a party,
(ix) to the extent held by Persons other than such Person or its Restricted
Subsidiaries, the liquidation value of any Preferred Stock issued by Restricted
Subsidiaries of such Person, plus accrued and unpaid dividends, and (x) any
obligation of the type referred to in clauses (i) through (ix) of this
definition of another Person and all dividends and distributions of another
Person the payment of which, in either case, such Person has Guaranteed or is
responsible or liable, directly or indirectly, as obligor, Guarantor or
otherwise. For purposes of the preceding sentence, the maximum fixed repurchase
price of any Disqualified Stock that does not have a fixed repurchase price
shall be calculated in accordance with the terms of such Disqualified Stock as
if such Disqualified Stock were repurchased on any date on which Indebtedness
shall be required to be determined pursuant to the Indenture; PROVIDED that, if
such Disqualified Stock is not then permitted to be repurchased, the repurchase
price shall be the book value of such Disqualified Stock. The amount of
Indebtedness of any Person at any date shall be the outstanding balance at such
date of all unconditional obligations as described above and, with respect to
contingent obligations, the maximum liability upon the occurrence of the
contingency giving rise to the obligation; PROVIDED that the amount outstanding
at any time of any Indebtedness issued with original issue discount (including,
without limitation, the Notes) is the face amount of such Indebtedness less the
remaining unamortized portion of the original issue discount of such
Indebtedness at such time as determined in conformity with GAAP.
"Indenture" means this instrument as originally executed or as it may from
time to time be supplemented or amended by one or more indentures supplemental
hereto entered into pursuant to the applicable provisions hereof, including, for
all purposes of this instrument and any such supplemental indenture, the
provisions of the Trust Indenture Act that are deemed to be a part of and govern
this instrument, and any such supplemental indenture, respectively.
"Indirect Participant" means a Person who holds a beneficial interest in a
Global Note through a Participant.
"Institutional Accredited Investor" means an institution that is an
"accredited investor" as defined in Rule 501(a)(1), (2), (3) or (7) under the
Securities Act, which is not also a QIB.
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"Interest Payment Date" means the Stated Maturity of an installment of
interest on the Notes.
"Interest Rate Protection Agreement" of any Person means any forward
contract, futures contract, swap, option, future option or other financial
agreement or arrangement (including, without limitation, caps, floors, collars
and similar agreements) relating to, or the value of which is dependent upon,
interest rates.
"Investment" in any Person means any direct, indirect or contingent (i)
advance or loan to, Guarantee of any Indebtedness of, extension of credit or
capital contribution to such Person, (ii) the acquisition of any shares of
Capital Stock, bonds, notes, debentures or other securities of such Person, or
(iii) the acquisition, by purchase or otherwise, of all or substantially all of
the business, assets or stock or other evidence of beneficial ownership of such
Person; PROVIDED that Investments shall exclude commercially reasonable
extensions of trade credit. The amount of any Investment shall be the original
cost of such Investment, PLUS the cost of all additions thereto and MINUS the
amount of any portion of such Investment repaid to such Person in cash as a
repayment of principal or a return of capital, as the case may be, up to the
total amount of such Investment, but without any other adjustments for increases
or decreases in value, or write-ups, write-downs or write-offs with respect to
such Investment. In determining the amount of any Investment involving a
transfer of any Property other than cash, such Property shall be valued at its
Fair Market Value at the time of such transfer.
"Issue Date" means the date on which the Notes are first authenticated and
delivered under this Indenture.
"Lien" means, with respect to any Property or other asset, any mortgage or
deed of trust, pledge, hypothecation, assignment, deposit arrangement, security
interest, lien (statutory or other), charge, easement, encumbrance, preference,
priority or other security or similar agreement or preferential arrangement of
any kind or nature whatsoever on or with respect to such Property or other asset
(including, without limitation, any conditional sale or title retention
agreement having substantially the same economic effect as any of the
foregoing).
"Management Services Agreements" means the Management Consulting Services
Agreement dated December 30, 1997 between the Company and Corporate Managers,
LLC and the Management Consulting Services Agreement dated December 30, 1997
between the Company and Enron, each as in effect on the Issue Date.
"Maturity" means, when used with respect to a Note, the date on which the
principal of such Note becomes due and payable as provided therein or in this
Indenture, whether on the date specified in such Note as the fixed date on which
the principal of such Note is due and payable, on the Change of Control Payment
Date or Asset Sale Payment Date, or by declaration of acceleration, call for
redemption or otherwise.
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"Moody's" means Moody's Investors Service, Inc., or, if Moody's Investors
Service, Inc. shall cease rating the specified debt securities and such ratings
business with respect thereto shall have been transferred to a successor Person,
such successor Person; PROVIDED that if Moody's Investors Service, Inc. ceases
rating the specified debt securities and its ratings business with respect
thereto shall not have been transferred to any successor Person or such
successor Person is Standard & Poor's, then "Moody's" shall mean any other
nationally recognized rating agency (other than Standard & Poor's) that rates
the specified debt securities and that shall have been designated by the Company
in an Officers' Certificate.
"Net Cash Proceeds" means, with respect to the sale of any Property or
assets by any Person or any of its Restricted Subsidiaries, cash or readily
marketable cash equivalents received net of (i) all reasonable out-of-pocket
expenses of such Person or such Restricted Subsidiary Incurred in connection
with such sale, including, without limitation, all legal, title and recording
tax expenses, commissions and other fees and expenses Incurred (but excluding
any finder's fee or broker's fee payable to any Affiliate of such Person) and
all federal, state, foreign and local taxes arising in connection with such sale
that are paid or required to be accrued as a liability under GAAP by such Person
or its Restricted Subsidiaries, (ii) all payments made or required to be made by
such Person or its Restricted Subsidiaries on any Indebtedness which is secured
by such Properties or other assets in accordance with the terms of any Lien upon
or with respect to such Properties or other assets or which must, by the terms
of such Lien, or in order to obtain a necessary consent to such transaction or
by applicable law, be repaid in connection with such sale, (iii) all
contractually required distributions and other payments made to minority
interest holders (but excluding distributions and payments to Affiliates of such
Person) in Restricted Subsidiaries of such Person as a result of such
transaction and (iv) appropriate amounts to be provided by such Person or any
Restricted Subsidiary thereof, as the case may be, as a reserve in accordance
with GAAP against any liabilities associated with such assets and retained by
such Person or any Restricted Subsidiary thereof, as the case may be, after such
transaction, including, without limitation, liabilities under any
indemnification obligations and severance and other employee termination costs
associated with such transaction, in each case as determined by the Board of
Directors of such Person, in its reasonable good faith judgment evidenced by a
resolution of the Board of Directors filed with the Trustee; PROVIDED that, in
the event that any consideration for a transaction (which would otherwise
constitute Net Cash Proceeds) is required to be held in escrow pending
determination of whether a purchase price adjustment will be made, such
consideration (or any portion thereof) shall become Net Cash Proceeds only at
such time as it is released to such Person or its Restricted Subsidiaries from
escrow; and provided, further, that any non-cash consideration received in
connection with any transaction, which is subsequently converted to cash, shall
be deemed to be Net Cash Proceeds at such time, and shall thereafter be applied
in accordance with the Indenture.
"Non-U.S. Person" means a Person who is not a U.S. Person within the
meaning of Rule 902 promulgated under the Securities Act.
"Note Register" has the meaning set forth in Section 2.03.
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"Notes" has the meaning set forth in the Recitals of the Company in this
Indenture and more particularly means any of the Notes authenticated and
delivered under this Indenture.
"Notice of Default" has the meaning set forth in Section 6.01.
"Officer" means the Chairman of the Board of Directors, a Vice Chairman of
the Board of Directors, the President, a Vice President, the Chief Financial
Officer, the Chief Accounting Officer, the Treasurer, an Assistant Treasurer,
the Secretary or an Assistant Secretary.
"Officers' Certificate" means a certificate signed by (i) the Chairman of
the Board of Directors, a Vice Chairman of the Board of Directors, the
President, the Chief Executive Officer or a Vice President, and (ii) the Chief
Financial Officer, the Chief Accounting Officer, the Treasurer, an Assistant
Treasurer, the Secretary or an Assistant Secretary, and delivered to the
Trustee, which certificate shall comply with the provisions of Section 10.04
hereof; PROVIDED that any Officers' Certificate delivered pursuant to the first
paragraph of Section 4.19 hereof shall be signed by the Chief Executive Officer,
the Chief Financial Officer or the Chief Accounting Officer.
"Opinion of Counsel" means a written opinion from legal counsel (who may be
counsel to the Company or the Trustee) who is acceptable to the Trustee, which
opinion shall comply with the provisions of Section 10.04 hereof.
"Original Notes" means the Notes issued on the Issue Date.
"Pari Passu Indebtedness" means (i) any Indebtedness of the Company that is
pari passu in right of payment to the Notes and (ii) with respect to any
Guarantee, Indebtedness which ranks pari passu in right of payment to such
Guarantee.
"Participant" means a Person who has an account with the Depositary.
"Paying Agent" means any Person authorized by the Company to make payments
of principal, premium or interest with respect to the Notes on behalf of the
Company.
"Permitted Holders" means Donald L. Sturm, Spectra 1, Spectra 2, Spectra 3,
Enron and their respective Affiliates (other than the Company and its Restricted
Subsidiaries) and any relative in the immediate family 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 upon the death of Donald L. Sturm.
"Permitted Interest Rate Protection Agreement" of any Person means any
Interest Rate Protection Agreement entered into with one or more financial
institutions in the ordinary course of business that is designed to protect such
Person against fluctuations in interest rates with respect to Indebtedness
Incurred and which shall have a notional amount no greater than the
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payments due with respect to the Indebtedness being hedged thereby and not for
purposes of speculation.
"Permitted Investment" means
(i) Cash Equivalents;
(ii) Investments in Property used in the ordinary course of business;
(iii) Investments in any Person as a result of which such Person becomes
(or, in the case of the acquisition of all or substantially all of a
Person's assets, such assets as are acquired by) a Restricted Subsidiary in
compliance with the Indenture;
(iv) Investments in prepaid expenses, negotiable instruments held for
collection and lease, utility and workers' compensation, performance and
other similar deposits;
(v) Permitted Interest Rate Protection Agreements with respect to any
floating rate Indebtedness that is permitted by the terms of the Indenture
to be outstanding;
(vi) bonds, notes, debentures or other debt securities received as a result
of Asset Sales permitted under Section 4.08 of this Indenture;
(vii) Investments in existence at the Issue Date;
(viii) commission, payroll, travel and similar advances to employees in the
ordinary course of business to cover matters that are expected at the time
of such advances ultimately to be treated as expenses in accordance with
GAAP; and
(ix) stock, obligations or securities received in satisfaction of
judgments.
"Permitted Joint Venture" means an Investment in a Person who is not a
Restricted Subsidiary and who is engaged in the Telecommunications Business.
"Permitted Liens" means (i) Liens existing on the date of the Indenture and
securing Indebtedness outstanding on the date of the Indenture or Incurred on or
after the Issue Date pursuant to any Senior Credit Facility; (ii) Liens in favor
of the Company or any Restricted Subsidiary of the Company; (iii) Liens on
Property of the Company or a Restricted Subsidiary acquired, constructed or
constituting improvements made after the Issue Date of the Notes to secure
Purchase Money Indebtedness or Vendor Financing Indebtedness which is otherwise
permitted under the Indenture, PROVIDED that (a) the principal amount of any
Indebtedness secured by any such Lien does not exceed 100% of such purchase
price or cost of construction or improvement of the Property subject to such
Lien, (b) such Lien attaches to such property prior to, at the time of or within
180 days after the acquisition, completion of construction or commencement of
operation of such Property and (c) such Lien does not extend to or cover any
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Property other than the specific item of Property (or portion thereof) acquired,
constructed or constituting the improvements made with the proceeds of such
Purchase Money Indebtedness or Vendor Financing Indebtedness; (iv) Liens to
secure Acquired Indebtedness, PROVIDED that (a) such Lien attaches to the
acquired asset prior to the time of the acquisition of such asset, (b) such Lien
does not extend to or cover any other Property and (c) such Lien was not
Incurred in contemplation of such acquisition; (v) Liens to secure Indebtedness
Incurred to extend, renew, refinance or refund (or successive extensions,
renewals, refinancings or refundings), in whole or in part, Indebtedness secured
by any Lien referred to in the foregoing clauses (i), (iii) and (iv) so long as
such Lien does not extend to any other Property and the principal amount of
Indebtedness so secured is not increased except as otherwise permitted under
clause (iv) of Section 4.09(b) of this Indenture; (vi) Liens for taxes,
assessments, governmental charges or claims which are not yet delinquent or
which are being contested in good faith by appropriate proceedings, if a reserve
or other appropriate provision, if any, as shall be required in conformity with
GAAP shall have been made therefor; (vii) other Liens incidental to the conduct
of the Company's and its Restricted Subsidiaries' business or the ownership of
its property and assets not securing any Indebtedness, and which do not in the
aggregate materially detract from the value of the Company's and its Restricted
Subsidiaries' property or assets when taken as a whole, or materially impair the
use thereof in the operation of its business; (viii) pledges and deposits made
in the ordinary course of business in connection with workers' compensation and
unemployment insurance, statutory Liens of landlords, carriers, warehousemen,
mechanics, materialmen, repairmen and other types of statutory obligations; (ix)
deposits made to secure the performance of tenders, bids, leases, and other
obligations of like nature Incurred in the ordinary course of business
(exclusive of obligations for the payment of borrowed money); (x) zoning
restrictions, servitudes, easements, rights-of-way, restrictions and other
similar charges or encumbrances Incurred in the ordinary course of business
which, in the aggregate, do not materially detract from the value of the
property subject thereto or interfere with the ordinary conduct of the business
of the Company or its Restricted Subsidiaries; (xi) Liens arising out of
judgments or awards against the Company or any Restricted Subsidiary with
respect to which the Company or such Restricted Subsidiary is prosecuting an
appeal or proceeding for review and the Company or such Restricted Subsidiary is
maintaining adequate reserves in accordance with GAAP; (xii) any interest or
title of a lessor in the property subject to any lease other than a capital
lease; (xiii) leases or subleases granted to others that do not materially
interfere with the ordinary course of business of the Company and its Restricted
Subsidiaries; (xiv) Liens encumbering property or assets under construction
arising from progress or partial payments by a customer of the Company or its
Restricted Subsidiaries relating to such property or assets; (xv) Liens arising
from filing precautionary Uniform Commercial Code financing statements regarding
leases; (xvi) Liens on property of, or on shares of stock or Indebtedness of,
any corporation existing at the time such corporation becomes, or becomes a part
of, any Restricted Subsidiary; PROVIDED that such Liens do not extend to or
cover any property or assets of the Company or any Restricted Subsidiary other
than the property or assets acquired and provided, further, that such Liens were
not Incurred in contemplation of such transaction; (xvii) Liens securing
reimbursement obligations with respect to letters of credit that encumber
documents and other property relating to such letters of credit and the products
and proceeds thereof; (xviii) Liens in favor of customs and revenue authorities
arising as a matter of law to secure payment of customs duties in connection
with the
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importation of goods; (xix) Liens encumbering customary initial deposits and
margin deposits, and other Liens that are either within the general parameters
customary in the industry and Incurred in the ordinary course of business, in
each case, securing Indebtedness under Permitted Interest Rate Protection
Agreements; and (xx) Liens arising out of conditional sale, title retention,
consignment or similar arrangements for the sale of goods entered into by the
Company or any of its Restricted Subsidiaries in the ordinary course of business
in accordance with the past practices of the Company and its Restricted
Subsidiaries prior to the Issue Date.
"Person" means any individual, corporation, limited liability company,
partnership, limited liability partnership, joint venture, trust, unincorporated
organization or government or any agency or political subdivision thereof.
"Predecessor Note" of any particular Note means every previous Note
evidencing all or a portion of the same Indebtedness as that evidenced by such
particular Note; and, for the purposes of this definition, any Note
authenticated and delivered under Section 2.07 in exchange for or in lieu of a
mutilated, destroyed, lost or stolen Note shall be deemed to evidence the same
debt as the mutilated, destroyed, lost or stolen Note.
"Preferred Stock" of any Person means Capital Stock of such Person of any
class or classes (however designated) that ranks prior, as to the payment of
dividends or as to the distribution of assets upon any voluntary or involuntary
liquidation, dissolution or winding up of such Person, to shares of Capital
Stock of any other class of such Person.
"Private Placement Legend" means the legend set forth in Section 2.06(f)(i)
to be placed on all Notes issued under this Indenture except where otherwise
permitted by the provisions of this Indenture.
"pro forma" means, with respect to any calculation made or required to be
made pursuant to the terms hereof, a calculation in accordance with Article 11
of Regulation S-X promulgated under the Securities Act (to the extent
applicable), as interpreted in good faith by the Board of Directors, or
otherwise, a calculation made in good faith by the Board of Directors, as the
case may be.
"Property" means, with respect to any Person, any interest of such Person
in any kind of property or asset, whether real, personal or mixed, or tangible
or intangible, excluding Capital Stock in any other Person.
"Public Equity Offering" means an underwritten offering of Common Stock
with gross proceeds to the Company of at least $25.0 million pursuant to a
registration statement that has been declared effective by the Commission
pursuant to the Securities Act (other than a registration statement on Form S-8
or otherwise relating to equity securities issuable under any employee benefit
plan of the Company).
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"Purchase Agreement" means the Purchase Agreement, dated as of April 6,
1998, between the Company and the Purchasers, as such agreement may be amended
from time to time.
"Purchase Money Indebtedness" means Indebtedness of the Company or any
Restricted Subsidiary (including Acquired Indebtedness and Capital Lease
Obligations, mortgage financings and purchase money obligations) Incurred for
the purpose of financing all or any part of the cost of construction,
acquisition, development or improvement by the Company or any Restricted
Subsidiary of any Telecommunications Assets of the Company or any Restricted
Subsidiary and including any related notes, Guarantees, collateral documents,
instruments and agreements executed in connection therewith, as the same may be
amended, supplemented, modified or restated from time to time.
"Purchasers" means Bear, Stearns & Co. Inc., ING Baring (U.S.) Securities,
Inc., J.P. Morgan Securities Inc. and Merrill, Lynch, Pierce, Fenner & Smith
Incorporated.
"QIB" means a qualified institutional buyer, as defined in Rule 144A.
"Qualified Stock" of any Person means a class of Capital Stock other than
Disqualified Stock.
"Redemption Date" means, when used with respect to any Note or part thereof
to be redeemed hereunder, the date fixed for redemption of such Notes pursuant
to the terms of the Notes and this Indenture.
"Redemption Price" means, when used with respect to any Note or part
thereof to be redeemed hereunder, the price fixed for redemption of such Note
pursuant to the terms of the Notes and this Indenture, plus accrued and unpaid
interest thereon, if any, to the Redemption Date.
"refinancing" has the meaning assigned to it in Section 4.09.
"Registered Exchange Offer" has the meaning assigned to it in the
Registration Rights Agreement.
"Registrar" has the meaning set forth in Section 2.03.
"Registration Rights Agreement" means the agreement among the Company and
the Purchasers with respect to the Notes dated April 13, 1998.
"Registered Notes" means the Exchange Notes and all other Notes sold or
otherwise disposed of pursuant to an effective registration statement under the
Securities Act, together with their respective Successor Notes.
"Regular Record Date" has the meaning set forth in Exhibit A.
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"Restricted Beneficial Interest" means a beneficial interest in a
Restricted Global Note.
"Restricted Definitive Note" means a Definitive Note bearing the Private
Placement Legend.
"Restricted Global Note" means a Global Note bearing the Private Placement
Legend.
"Restricted Payment" means
(i) a dividend or other distribution declared or paid on the Capital Stock
of the Company or to the Company's stockholders (in their capacity as
such), or declared or paid to any Person other than the Company or a
Restricted Subsidiary of the Company on the Capital Stock of any Restricted
Subsidiary of the Company, in each case, other than dividends,
distributions or payments made solely in Qualified Stock of the Company or
such Restricted Subsidiary,
(ii) a payment made by the Company or any of its Restricted Subsidiaries
(other than to the Company or any Restricted Subsidiary) to purchase,
redeem, acquire or retire any Capital Stock of the Company or of a
Restricted Subsidiary,
(iii) a payment made by the Company or any of its Restricted Subsidiaries
to redeem, repurchase, defease (including an in-substance or legal
defeasance) or otherwise acquire or retire for value (including pursuant to
mandatory repurchase covenants), prior to any scheduled maturity, scheduled
sinking fund or mandatory redemption payment, Indebtedness of the Company
or such Restricted Subsidiary which is subordinate (whether pursuant to its
terms or by operation of law) in right of payment to the Notes and which
was scheduled to mature on or after the maturity of the Notes or
(iv) an Investment in any Person, including an Unrestricted Subsidiary or
the designation of a Subsidiary as an Unrestricted Subsidiary, other than
(a) a Permitted Investment,
(b) an Investment by the Company in a Restricted Subsidiary or
(c) an Investment by a Restricted Subsidiary in the Company or a
Restricted Subsidiary of the Company.
"Restricted Subsidiary" means any Subsidiary of the Company that has not
been designated as an Unrestricted Subsidiary pursuant to Section 4.17 hereof.
"Rule 144" means Rule 144 promulgated under the Securities Act.
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"Rule 144A" means Rule 144A promulgated under the Securities Act.
"Rule 904" means Rule 904 promulgated the Securities Act.
"Sale and Leaseback Transaction" means, with respect to any Person, any
direct or indirect arrangement pursuant to which Property is sold or transferred
by such Person or a Restricted Subsidiary of such Person and is thereafter
leased back from the purchaser or transferee thereof by such Person or one of
its Restricted Subsidiaries.
"Securities Act" means the Securities Act of 1933, as amended, and the
rules and regulations promulgated thereunder.
"Senior Credit Facility" means Indebtedness of the Company and its
Subsidiaries Incurred from time to time pursuant to one or more credit
agreements or similar facilities made available from time to time to the Company
and its Subsidiaries, whether or not secured, and including any related notes,
Guarantees, collateral documents, instruments and agreements executed in
connection therewith, as the same may be amended, supplemented, modified or
restated from time to time.
"Separation Date" means the earliest of (i) the date that is 90 days from
the Issue Date, (ii) such date as the Initial Purchasers may, in their
discretion, deem appropriate, (iii) in the event of a Change of Control, the
date the Company mails notice thereof to holders of Notes, (iv) the date on
which the Registered Exchange Offer is consummated and (v) the date on which the
Shelf Registration Statement is declared effective. On the Separation Date, the
Notes and Warrants will be automatically separated.
"Shelf Registration Statement" means the Shelf Registration Statement as
defined in the Registration Rights Agreement.
"Special Interest" has the meaning set forth in the form of Note attached
as Exhibit A hereto. Unless the context otherwise requires, references herein
to "interest" on the Notes shall include Special Interest.
"Special Record Date" means a date fixed by the Trustee pursuant to Section
2.12 hereof for the payment of Defaulted Interest.
"Spectra 1" means Colorado Spectra 1, LLC and any member as of the Issue
Date of Colorado Spectra 1, LLC, and any relative in the immediate family of
Donald L. Sturm (or any entity all of the beneficial ownership interests of
which are owned by such a relative) to whom assets of Colorado Spectra 1, LLC
are distributed following a dissolution of Colorado Spectra 1, LLC due to the
death of Donald L. Sturm.
"Spectra 2" means Colorado Spectra 2, LLC and any member as of the Issue
Date of Colorado Spectra 2, LLC, and any relative in the immediate family of
Donald L. Sturm (or any
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entity all of the beneficial ownership interests of which are owned by such a
relative) to whom assets of Colorado Spectra 2, LLC are distributed following a
dissolution of Colorado Spectra 2, LLC due to the death of Donald L. Sturm.
"Spectra 3" means Colorado Spectra 3, LLC and any member as of the Issue
Date of Colorado Spectra 3, LLC, and any relative in the immediate family of
Donald L. Sturm (or any entity all of the beneficial ownership interests of
which are owned by such a relative) to whom assets of Colorado Spectra 3, LLC
are distributed following a dissolution of Colorado Spectra 3, LLC due to the
death of Donald L. Sturm.
"Standard & Poor's" means Standard & Poor's Ratings Group, a division of
McGraw Hill Corporation, or, if Standard & Poor's Ratings Group shall cease
rating the specified debt securities and such ratings business with respect
thereto shall have been transferred to a successor Person, such successor
Person; PROVIDED that if Standard & Poor's Ratings Group ceases rating the
specified debt securities and its ratings business with respect thereto shall
not have been transferred to any successor Person or such successor Person is
Moody's, then "Standard & Poor's" shall mean any other nationally recognized
rating agency (other than Moody's) that rates the specified debt securities and
that shall have been designated by the Company in an Officers' Certificate.
"Stated Maturity" means, with respect to any installment of interest or
principal on any series of related Indebtedness, the date on which such payment
of interest or principal was scheduled to be paid in the original documentation
governing such Indebtedness, and shall not include any contingent obligations to
repay, redeem or repurchase any such interest or principal prior to the date
originally scheduled for the payment thereof.
"Step-Up" has the meaning set forth in the form of the Note contained in
Exhibit A hereto.
"Strategic Equity Investment" means an equity investment made by a
Strategic Investor in the Company in an aggregate amount of not less than $25
million.
"Strategic Investor" means a Person (other than the Permitted Holders)
engaged in one or more Telecommunications Businesses that has, or 80% or more of
the Voting Stock of which is owned by a Person that has, an equity market
capitalization at the time of its initial investment in the Company in excess of
$1 billion.
"Subordinated Indebtedness" means Indebtedness of the Company as to which
the payment of principal of (and premium, if any) and interest and other payment
obligations in respect of such Indebtedness shall be subordinate to the prior
payment in full of the Notes to at least the following extent: (i) no payments
of principal of (or premium, if any) or interest on or otherwise due in respect
of such Indebtedness may be permitted for so long as any default in the payment
of principal (or premium, if any) or interest on the Notes exists; (ii) in the
event that any other default that with the passing of time or the giving of
notice, or both, would constitute an
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event of default exists with respect to the Notes, upon notice by 25% or more in
principal amount of the Notes to the Trustee, the Trustee shall have the right
to give notice to the Company and the holders of such Indebtedness (or trustees
or agents therefor) of a payment blockage, and thereafter no payments of
principal of (or premium, if any) or interest on or otherwise due in respect of
such Indebtedness may be made for a period of 179 days from the date of such
notice; and (iii) such Indebtedness may not (x) provide for payments of
principal of such Indebtedness at the stated maturity thereof or by way of a
sinking fund applicable thereto or by way of any mandatory redemption,
defeasance, retirement or repurchase thereof by the Company (including any
redemption, retirement or repurchase which is contingent upon events or
circumstances, but excluding any retirement required by virtue of acceleration
of such Indebtedness upon an event of default thereunder), in each case prior to
the final Stated Maturity of the Notes or (y) permit redemption or other
retirement (including pursuant to an offer to purchase made by the Company) of
such other Indebtedness at the option of the holder thereof prior to the final
Stated Maturity of the Notes, other than a redemption or other retirement at the
option of the holder of such Indebtedness (including pursuant to an offer to
purchase made by the Company) which is conditioned upon a change of control of
the Company pursuant to provisions substantially similar to those described
under Section 4.07 (and which shall provide that such Indebtedness will not be
repurchased pursuant to such provisions prior to the Company's repurchase of the
Notes required to be repurchased by the Company pursuant to the provisions
described under Section 4.07).
"Subsidiary" means, with respect to any Person, (i) any corporation more
than 50% of the outstanding shares of Voting Stock of which is owned, directly
or indirectly, by such Person, or by one or more other Subsidiaries of such
Person, or by such Person and one or more other Subsidiaries of such Person,
(ii) any general partnership, joint venture or similar entity, more than 50% of
the outstanding partnership or similar interests of which are owned, directly or
indirectly, by such Person, or by one or more other Subsidiaries of such Person,
or by such Person and one or more other Subsidiaries of such Person and (iii)
any limited partnership of which such Person or any Subsidiary of such Person is
a general partner.
"Successor Note" of any particular Note means every Note issued after, and
evidencing all or a portion of the same Indebtedness as that evidenced by, such
particular Note; and, for the purposes of this definition, any Note
authenticated and delivered under Section 2.07 in exchange for or in lieu of a
mutilated, destroyed, lost or stolen Note shall be deemed to evidence the same
debt as the mutilated, destroyed, lost or stolen Note.
"Surviving Entity" has the meaning set forth in Section 5.01(a) hereof.
"Telecommunications Assets" means all assets, rights (contractual or
otherwise) and properties, whether tangible or intangible, used or intended for
use in connection with a Telecommunications Business.
"Telecommunications Business" means the business of (i) transmitting,
providing services relating to or developing applications for the transmission
of, voice, video or data through owned or leased wireline or wireless
transmission facilities or over the internet, (ii)
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creating, developing, constructing, installing, repairing, maintaining or
marketing communications-related systems, network equipment and facilities,
software and other products, (iii) creating, developing, producing or marketing
audiotext or videotext, (iv) marketing (including direct marketing and
telemarketing), or (v) evaluating, participating in or pursuing any other
business that is primarily related to those identified in the foregoing clauses
(i), (ii), (iii) or (iv) above (in the case of clauses (iii) and (iv), however,
in a manner consistent with the Company's manner of business on the Issue Date),
and shall, in any event, include all businesses in which the Company or any of
its Subsidiaries are engaged on the Issue Date; PROVIDED that the determination
of what constitutes a Telecommunications Business shall be made in good faith by
the Board of Directors.
"Temporary Note" means a temporary Note delivered under Section 2.10
hereof.
"Total Common Equity" of any Person means, as of any date of determination
the product of (i) the aggregate number of outstanding primary shares of Common
Stock of such Person on such day (which shall not include any options or
warrants on, or securities convertible or exchangeable into, shares of Common
Stock of such Person) and (ii) the average Closing Price of such Common Stock
over the 20 consecutive Trading Days immediately preceding such day. If no such
Closing Price exists with respect to shares of any such class, the value of such
shares for purposes of clause (ii) of the preceding sentence shall be determined
by the Board of Directors of the Company in good faith and evidenced by a
resolution of the Board of Directors filed with the Trustee.
"Trading Day" means, with respect to a security traded on a securities
exchange, automated quotation system or market, a day on which such exchange,
system or market is open for a full day of trading.
"Transfer Restricted Securities" means Notes or beneficial interests
therein that bear or are required to bear the Private Placement Legend.
"Trust Indenture Act" means the Trust Indenture Act of 1939 (15 U.S.C.
Sections 77aaa-77bbbb) as in effect on the date of this Indenture except as
required by Section 9.04 hereof; PROVIDED that in the event the Trust Indenture
Act of 1939 is amended after such date, "Trust Indenture Act" means, to the
extent required by any such amendment, the Trust Indenture Act of 1939, as so
amended.
"Trust Officer" means any officer assigned to the Corporate Trust Office of
the Trustee, including any Vice President, Assistant Vice President, Trust
Officer, any Assistant Secretary, any trust officer or any other officer of the
Trustee customarily performing functions similar to those performed by any of
the above designated officers and having direct responsibility for the
administration of this Agreement.
"Trustee" means the party named as such in this Indenture until a successor
replaces it in accordance with the provisions of this Indenture and, thereafter,
means such successor.
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"Unit Legend" has the meaning set forth in Section 2.06(f)(vi).
"Unrestricted Definitive Note" means a Definitive Note that does not bear
and is not required to bear the Private Placement Legend.
"Unrestricted Global Note" means a permanent global Note in the form of
Exhibit A attached hereto that bears the Global Note Legend and that has the
"Schedule of Exchanges of Interests in the Global Note" attached thereto, and
that is deposited with or on behalf of and registered in the name of the
Depositary, representing Notes that do not bear the Private Placement Legend.
"Unrestricted Subsidiary" means any Subsidiary of the Company that the
Company has classified as an "Unrestricted Subsidiary" and that has not been
reclassified as a Restricted Subsidiary, pursuant to Section 4.17 hereof.
"U.S. Government Obligations" means (x) securities that are (i) direct
obligations of the United States of America for the payment of which the full
faith and credit of the United States of America is pledged or (ii) obligations
of a Person controlled or supervised by and acting as an agency or
instrumentality of the United States of America the payment of which is
unconditionally Guaranteed as a full faith and credit obligation by the United
States of America, which, in either case, are not callable or redeemable at the
option of the issuer thereof, and (y) depository receipts issued by a bank (as
defined in Section 3(a)(2) of the Securities Act) as custodian with respect to
any U.S. Government Obligation which is specified in clause (x) above and held
by such Bank for the account of the holder of such depository receipt, or with
respect to any specific payment of principal or interest on any U.S. Government
Obligation which is so specified and held, PROVIDED that (except as required by
law) such custodian is not authorized to make any deduction from the amount
payable to the holder of such depository receipt from any amount received by the
custodian in respect of the U.S. Government Obligation or the specific payment
of principal or interest of the U.S. Government Obligation evidenced by such
depository receipt.
"Vendor Financing Indebtedness" means any Indebtedness of the Company or
any Restricted Subsidiary Incurred in connection with the acquisition or
construction of Telecommunications Assets.
"Voting Stock" means, with respect to any Person, securities of any class
or classes of Capital Stock in such Person entitling the holders thereof
(whether at all times or at the times that such class of Capital Stock has
voting power by reason of the happening of any contingency) to vote in the
election of members of the board of directors or comparable body of such Person.
"Warrant Agreement" means the Warrant Agreement dated as of April 13, 1998,
by and among the Company and The Bank of New York, as Warrant Agent.
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"Warrants" means the Warrants to purchase Common Stock issued pursuant to
the Warrant Agreement.
"Wholly-Owned Restricted Subsidiary" of any Person means a Subsidiary of
such Person all of the outstanding Capital Stock or other ownership interests
(other than director's qualifying shares) of which shall at the time be owned by
such Person or by one or more other Wholly-Owned Restricted Subsidiary of such
Person or by such Person and one or more other Wholly-Owned Restricted
Subsidiary of such Person.
SECTION 1.02. INCORPORATION BY REFERENCE OF TRUST INDENTURE ACT. Whenever
this Indenture refers to a provision of the Trust Indenture Act, the provision
is incorporated by reference in and made a part of this Indenture. The following
Trust Indenture Act terms incorporated by reference in this Indenture have the
following meanings:
"indenture securities" means the Notes.
"indenture security holder" means a Holder.
"indenture to be qualified" means this Indenture.
"indenture trustee" or "institutional trustee" means the Trustee.
"obligor" on the indenture securities means the Company or other obligor on
the Notes, if any.
All other Trust Indenture Act terms used or incorporated by reference in
this Indenture that are defined by the Trust Indenture Act, defined by Trust
Indenture Act reference to another statute or defined by Commission rule have
the meanings assigned to them therein.
SECTION 1.03. RULES OF CONSTRUCTION. Unless the context otherwise
requires:
(a) the words "herein," "hereof" and "hereunder," and other words of
similar import, refer to this Indenture as a whole and not to any particular
Article, Section or other subdivision;
(b) "or" is not exclusive;
(c) "including" means including without limitation;
(d) the principal amount of any noninterest bearing or other discount
security (other than the Notes), at any date shall be the principal amount
thereof that would be shown on a balance sheet of the issuer dated such date
prepared in accordance with GAAP;
(e) when used with respect to the Notes, the term "principal amount" shall
mean the principal amount thereof at the Stated Maturity of such principal
amount; and
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(f) unless otherwise expressly provided herein, the principal amount of any
Preferred Stock shall be the greater of (i) the maximum liquidation value of
such Preferred Stock or (ii) the maximum mandatory redemption or mandatory
repurchase price with respect to such Preferred Stock.
SECTION 1.04. FORM OF DOCUMENTS DELIVERED TO TRUSTEE. In any case where
several matters are required to be certified by, or covered by an opinion of,
any specified Person, it is not necessary that all such matters be certified by,
or covered by the opinion of, only one such Person, or that they be so certified
or covered by only one document, but one such Person may certify or give an
opinion with respect to some matters and one or more other such Persons as to
other matters, and any such Person may certify or give an opinion as to such
matters in one or several documents.
Any certificate or opinion of an Officer of the Company may be based,
insofar as it relates to legal matters, upon a certificate or opinion of, or
representations by, counsel, unless such Officer knows, or in the exercise of
reasonable care should know, that the certificate or opinion or representations
with respect to the matters upon which his certificate or opinion is based are
erroneous. Any such certificate or Opinion of Counsel may be based, insofar as
it relates to factual matters, upon a certificate or opinion of, or
representations by, an Officer or Officers of the Company stating that the
information with respect to such factual matters is in the possession of the
Company, unless such counsel knows that the certificate or opinion or
representations with respect to such matters are erroneous. Where any Person is
required to make, give or execute two or more applications, requests, consents,
certificates, statements, opinions or other instruments under this Indenture,
they may, but need not, be consolidated and form one instrument.
SECTION 1.05. ACTS OF HOLDERS. (a) Any request, demand, authorization,
direction, notice, consent, waiver or other action provided by this Indenture to
be given or taken by Holders may be embodied in and evidenced by one or more
instruments of substantially similar tenor signed by such Holders in person or
by an agent duly appointed in writing; and, except as herein otherwise expressly
provided, such action shall become effective when such instrument or instruments
are delivered to the Trustee and, where it is hereby expressly required, to the
Company. Such instrument or instruments (and the action embodied therein and
evidenced thereby) are herein sometimes referred to as the "Act" of the Holders
signing such instrument or instruments. Proof of execution of any such
instrument or of a writing appointing any such agent shall be sufficient for any
purpose of this Indenture and (subject to Section 7.01) conclusive in favor of
the Trustee and the Company, if made in the manner provided in this Section.
(b) The fact and date of the execution by any Person of any such
instrument or writing may be proved by the affidavit of a witness of such
execution or by an acknowledgment of a notary public or other officer authorized
by law to take acknowledgments of deeds, certifying that the individual signing
such instrument or writing acknowledged to him the execution thereof. Where such
execution is by a signer acting in a capacity other than such signer's
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individual capacity, such certificate or affidavit shall also constitute
sufficient proof of the signer's authority. The fact and date of the execution
of any such instrument or writing, or the authority of the person executing the
same, may also be proved in any other manner which the Trustee deems sufficient.
ARTICLE II.
THE NOTES
Section 2.01. FORM AND DATING.
The Notes and the Trustee's certificate of authentication shall be
substantially in the form of EXHIBIT A attached hereto. The Notes may have
notations, legends or endorsements required by law, stock exchange rule or
usage. Each Note shall be dated the date of its authentication. The Notes
initially shall be issued in denominations of $1,000 and integral multiples
thereof.
The terms and provisions contained in the Notes shall constitute, and are
hereby expressly made, a part of this Indenture and the Company and the Trustee,
by their execution and delivery of this Indenture, expressly agree to such terms
and provisions and to be bound thereby.
(a) GLOBAL NOTES. Notes offered and sold to QIBs in reliance on Rule
144A shall be issued initially in the form of Global Notes, which shall be
deposited on behalf of the purchasers of the Notes represented thereby with a
custodian of the Depositary, and registered in the name of the Depositary or a
nominee of the Depositary, duly executed by the Company and authenticated by the
Trustee as hereinafter provided. The aggregate principal amount of the Global
Notes may from time to time be increased or decreased by adjustments made on the
records of the Trustee and the Depositary or its nominee as hereinafter
provided.
Each Global Note shall represent such of the outstanding Notes as shall be
specified therein and each shall provide that it shall represent the aggregate
amount of outstanding Notes from time to time endorsed thereon and that the
aggregate amount of outstanding Notes represented thereby may from time to time
be reduced or increased, as appropriate, to reflect exchanges, redemptions and
transfers of interests. Any endorsement of a Global Note to reflect the amount
of any increase or decrease in the amount of outstanding Notes represented
thereby shall be made by the Trustee, at the direction of the Trustee, in
accordance with instructions given by the Holder thereof as required by Section
2.06 hereof.
Except as set forth in Section 2.06 hereof, the Global Notes may be
transferred, in whole and not in part, only to another nominee of the Depositary
or to a successor of the Depositary or its nominee.
(b) BOOK-ENTRY PROVISIONS. This Section 2.01(b) shall apply only to
Global Notes.
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The Company shall execute and the Trustee shall, in accordance with this
Section 2.01(b) and Section 2.02, authenticate and deliver the Global Notes that
(i) shall be registered in the name of the Depositary or the nominee of the
Depositary and (ii) shall be delivered by the Trustee to the Depositary or
pursuant to the Depositary's instructions or held by the Trustee as custodian
for the Depositary.
Participants shall have no rights either under this Indenture with respect
to any Global Note held on their behalf by the Depositary or under such Global
Note, and the Depositary may be treated by the Company, the Trustee and any
agent of the Company or the Trustee as the absolute owner of such Global Note
for all purposes whatsoever. Notwithstanding the foregoing, nothing herein shall
prevent the Company, the Trustee or any agent of the Company or the Trustee from
giving effect to any written certification, proxy or other authorization
furnished by the Depositary or impair, as between the Depositary and its
Participants, the operation of customary practices of such Depositary governing
the exercise of the rights of an owner of a beneficial interest in any Global
Note.
(c) DEFINITIVE NOTES. Notes issued in certificated form shall be
substantially in the form of EXHIBIT A attached hereto (but without including
the text referred to in footnotes 1 and 3 thereto).
SECTION 2.02. EXECUTION AND AUTHENTICATION.
Two Officers shall sign the Notes for the Company by manual or facsimile
signature.
If an Officer whose signature is on a Note no longer holds that office at
the time a Note is authenticated, the Note shall nevertheless be valid.
A Note shall not be valid until authenticated by the manual signature of
the Trustee. The signature shall be conclusive evidence that the Note has been
authenticated under this Indenture.
The Trustee shall, upon a written order of the Company signed by two
Officers (an "Authentication Order"), authenticate Notes for original issue up
to $470,000,000 aggregate principal amount at maturity on the Issue Date. The
aggregate principal amount at maturity of Notes outstanding at any time may not
exceed such amount except as provided in Section 2.07 hereof.
The Trustee may appoint an authenticating agent acceptable to the Company
to authenticate Notes. An authenticating agent may authenticate Notes whenever
the Trustee may do so. Each reference in this Indenture to authentication by
the Trustee includes authentication by such agent. An authenticating agent has
the same rights as an agent to deal with Holders or an Affiliate of the Company.
SECTION 2.03. REGISTRAR AND PAYING AGENT.
The Company shall maintain an office or agency where Notes may be presented
for registration of transfer or for exchange ("Registrar") and an office or
agency where Notes may be
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presented for payment ("Paying Agent"). The Registrar shall keep a register
(the "Note Register") of the Notes and of their transfer and exchange. The
Company may appoint one or more co-registrars and one or more additional paying
agents. The term "Registrar" includes any co-registrar and the term "Paying
Agent" includes any additional paying agent. The Company may change any Paying
Agent or Registrar without notice to any Holder. The Company shall notify the
Trustee in writing of the name and address of any agent not a party to this
Indenture. If the Company fails to appoint or maintain another entity as
Registrar or Paying Agent, the Trustee shall act as such. The Company or any of
its Subsidiaries may act as Paying Agent or Registrar.
The Company initially appoints The Depository Trust Company ("DTC") to act
as Depositary with respect to the Global Notes.
The Company initially appoints the Trustee to act as the Registrar and
Paying Agent with respect to the Global Notes.
SECTION 2.04. PAYING AGENT TO HOLD MONEY IN TRUST.
The Company shall require each Paying Agent other than the Trustee to agree
in writing that the Paying Agent will hold in trust for the benefit of Holders
or the Trustee all money held by the Paying Agent for the payment of principal,
premium, if any, or interest on the Notes, and will notify the Trustee of any
default by the Company in making any such payment. While any such default
continues, the Trustee may require a Paying Agent to pay all money held by it to
the Trustee. The Company at any time may require a Paying Agent to pay all
money held by it to the Trustee. Upon payment over to the Trustee, the Paying
Agent (if other than the Company or a Subsidiary) shall have no further
liability for the money. If the Company or a Subsidiary acts as Paying Agent,
it shall segregate and hold in a separate trust fund for the benefit of the
Holders all money held by it as Paying Agent. Upon any bankruptcy or
reorganization proceedings relating to the Company, the Trustee shall serve as
Paying Agent for the Notes.
SECTION 2.05. HOLDER LISTS.
The Trustee shall preserve in as current a form as is reasonably
practicable the most recent list available to it of the names and addresses of
all Holders and shall otherwise comply with Section 312(a) of the Trust
Indenture Act. If the Trustee is not the Registrar, the Company shall furnish
to the Trustee at least seven Business Days before each interest payment date
and at such other times as the Trustee may request in writing, a list in such
form and as of such date as the Trustee may reasonably require of the names and
addresses of the Holders of Notes and the Company shall otherwise comply with
Section 312(a) of the Trust Indenture Act.
SECTION 2.06. TRANSFER AND EXCHANGE.
(a) TRANSFER AND EXCHANGE OF DEFINITIVE NOTES. When Definitive Notes are
presented by a Holder to the Registrar with a request to register the transfer
of the Definitive Notes or to exchange such Definitive Notes for an equal
principal amount of Definitive Notes of other authorized denominations, the
Registrar shall register the transfer or make the exchange as
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requested only if the Definitive Notes are presented or surrendered for
registration of transfer or exchange, are endorsed and contain a signature
guarantee or accompanied by a written instrument of transfer in form
satisfactory to the Registrar duly executed by such Holder or by his attorney
and contain a signature guarantee, duly authorized in writing and the Registrar
receives the following documentation (all of which may be submitted by
facsimile):
(i) in the case of Definitive Notes that are Transfer Restricted
Securities, such request shall be accompanied by the following
additional information and documents, as applicable:
(A) if such Transfer Restricted Security is being delivered to
the Registrar by a Holder for registration in the name of
such Holder, without transfer, or such Transfer Restricted
Security is being transferred to the Company or any of its
Subsidiaries, a certification to that effect from such
Holder (in substantially the form of EXHIBIT B-1 hereto); or
(B) if such Transfer Restricted Security is being transferred to
a QIB in accordance with Rule 144A under the Securities Act
or pursuant to an exemption from registration in accordance
with Rule 144 under the Securities Act or pursuant to an
effective registration statement under the Securities Act, a
certification to that effect from such Holder (in
substantially the form of EXHIBIT B-1 hereto); or
(C) if such Transfer Restricted Security is being transferred to
a Non-U.S. Person in an offshore transaction in accordance
with Rule 904 under the Securities Act, a certification to
that effect from such Holder (in substantially the form of
EXHIBIT B-1 hereto);
(D) if such Transfer Restricted Security is being transferred to
an Institutional Accredited Investor in reliance on an
exemption from the registration requirements of the
Securities Act other than those listed in subparagraphs (B)
and (C) above, a certification to that effect from such
Holder (in substantially the form of EXHIBIT B-1 hereto), a
certification substantially in the form of EXHIBIT C hereto,
and, if such transfer is in respect of an aggregate
principal amount of Notes of less than $250,000, an Opinion
of Counsel acceptable to the Company that such transfer is
in compliance with the Securities Act; or
(E) if such Transfer Restricted Security is being transferred in
reliance on any other exemption from the registration
requirements of the Securities Act, a certification to that
effect from such Holder (in substantially the form of
EXHIBIT B-1 hereto) and an Opinion of Counsel from such
Holder or the transferee reasonably acceptable
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to the Company and to the Registrar to the effect that such
transfer is in compliance with the Securities Act.
(b) TRANSFER OF A BENEFICIAL INTEREST IN A GLOBAL NOTE FOR A DEFINITIVE
NOTE.
(i) Any Person having a beneficial interest in a Global Note may
upon request, subject to the Applicable Procedures, exchange
such beneficial interest for a Definitive Note. Upon receipt
by the Trustee of written instructions or such other form of
instructions as is customary for the Depositary, from the
Depositary or its nominee on behalf of any Person having a
beneficial interest in a Global Note, and, in the case of a
Transfer Restricted Security, the following additional
information and documents (all of which may be submitted by
facsimile):
(A) if such beneficial interest is being transferred to the
Person designated by the Depositary as being the
beneficial owner, a certification to that effect from
such Person (in substantially the form of EXHIBIT B-2
hereto);
(B) if such beneficial interest is being transferred to a
QIB in accordance with Rule 144A under the Securities
Act or pursuant to an exemption from registration in
accordance with Rule 144 under the Securities Act or
pursuant to an effective registration statement under
the Securities Act, a certification to that effect from
the transferor (in substantially the form of EXHIBIT
B-2 hereto);
(C) if such beneficial interest is being transferred to an
Institutional Accredited Investor, pursuant to a
private placement exemption from the registration
requirements of the Securities Act that such transfer
is in compliance with the Securities Act and a
certificate in the form of EXHIBIT B-2 attached thereto
and, if such transfer is in respect of an aggregate
principal amount of less than $250,000, an Opinion of
Counsel acceptable to the Company that such transfer is
in compliance with the Securities Act and a certificate
from the applicable transferee (in substantially the
form of EXHIBIT C hereto); or
(D) if such beneficial interest is being transferred in
reliance on any other exemption from the registration
requirements of the Securities Act, a certification to
that effect from the transferor (in substantially the
form of EXHIBIT B-2 hereto) and an Opinion of Counsel
from the transferee or the transferor reasonably
acceptable to the Company and to the Registrar to the
effect that such transfer is in compliance with the
Securities Act, in which case the Trustee, at the
direction of the Trustee, shall, in accordance with the
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standing instructions and procedures existing between
the Depositary, cause the aggregate principal amount of
Global Notes, to be reduced accordingly and, following
such reduction, the Company shall execute and, the
Trustee shall authenticate and deliver to the
transferee a Definitive Note in the appropriate
principal amount.
(ii) Definitive Notes issued in exchange for a beneficial interest
in a Global Note, pursuant to this Section 2.06(b) shall be
registered in such names and in such authorized denominations
as the Depositary, pursuant to instructions from its direct or
Indirect Participants or otherwise, shall instruct the
Trustee. The Trustee shall deliver such Definitive Notes to
the Persons in whose names such Notes are so registered.
Following any such issuance of Definitive Notes, the Trustee,
as Registrar, shall instruct the Depositary to reduce or cause
to be reduced the aggregate principal amount at maturity of
the applicable Global Note to reflect the transfer.
(c) RESTRICTIONS ON TRANSFER AND EXCHANGE OF GLOBAL NOTES. Notwithstanding
any other provision of this Indenture (other than the provisions set forth in
subsection (f) of this Section 2.06), a Global Note may not be transferred as a
whole except by the Depositary to a nominee of the Depositary or by a nominee of
the Depositary to the Depositary or another nominee of the Depositary or by the
Depositary or any such nominee to a successor Depositary or a nominee of such
successor Depositary.
(d) TRANSFER AND EXCHANGE OF A DEFINITIVE NOTE FOR A BENEFICIAL INTEREST
IN A GLOBAL NOTE. A Definitive Note may not be transferred for a beneficial
interest in a Global Note except upon satisfaction of the requirements set forth
below. Upon receipt by the Trustee of a Definitive Note, duly endorsed or
accompanied by appropriate instruments of transfer, in form satisfactory to the
Note, together with:
(A) certification (in substantially the form of EXHIBIT B-3
hereto) that such Definitive Note is being transferred
to a QIB in accordance with Rule 144A under the
Securities Act; and
(B) written instructions directing the Trustee to make, or
to direct the Depositary to make, an endorsement on the
Global Notes to reflect an increase in the aggregate
amount of the Notes represented by the Global Note,
then the Trustee shall cancel such Definitive Note and
cause, or direct the Depositary to cause, in accordance
with the standing instructions and procedures existing
between the Depositary and the Trustee, the number of
Notes represented by the Global Note to be increased
accordingly. If no Global Note is then outstanding, the
Company shall issue and the Trustee shall authenticate
a new Global Note in the appropriate amount.
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(e) AUTHENTICATION OF DEFINITIVE NOTES IN ABSENCE OF DEPOSITARY. If at
any time:
(i) the Depositary for the Notes notifies the Company that the
Depositary is unwilling or unable to continue as Depositary
for the Global Notes and a successor Depositary for the Global
Notes is not appointed by the Company within 90 days after
delivery of such notice; or
(ii) the Company, at its sole discretion, notifies the Trustee in
writing that it elects to cause the issuance of Definitive
Notes under this Indenture,
then the Company shall execute, and the Trustee shall, upon receipt of an
authentication order in accordance with Section 2.02 hereof, authenticate and
deliver, Definitive Notes in an aggregate principal amount equal to the
principal amount of the Global Notes in exchange for such Global Notes.
(f) LEGENDS.
(i) Except as permitted by the following paragraphs (ii), (iii)
and (iv), each Note certificate evidencing Global Notes and
Definitive Notes (and all Notes issued in exchange therefor or
substitution thereof) shall bear the legend (the "Private
Placement Legend") in substantially the following form:
"THE SECURITY (OR ITS PREDECESSOR) EVIDENCED HEREBY WAS
ORIGINALLY ISSUED IN A TRANSACTION EXEMPT FROM
REGISTRATION UNDER SECTION 5 OF THE UNITED STATES
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT"), AND THE SECURITY EVIDENCED HEREBY MAY NOT BE
OFFERED, SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE
OF SUCH REGISTRATION OR AN APPLICABLE EXEMPTION
THEREFROM. EACH PURCHASER OF THE SECURITY EVIDENCED
HEREBY IS HEREBY NOTIFIED THAT THE SELLER MAY BE
RELYING ON THE EXEMPTION FROM THE PROVISIONS OF SECTION
5 OF THE SECURITIES ACT PROVIDED BY RULE 144A
THEREUNDER. THE HOLDER OF THE SECURITY EVIDENCED HEREBY
AGREES FOR THE BENEFIT OF THE COMPANY THAT (A) SUCH
SECURITY MAY BE RESOLD, PLEDGED OR OTHERWISE
TRANSFERRED, ONLY (1)(a) INSIDE THE UNITED STATES TO A
PERSON WHO THE SELLER REASONABLY BELIEVES IS A
QUALIFIED INSTITUTIONAL BUYER (AS DEFINED IN RULE 144A
UNDER THE SECURITIES ACT), IN A TRANSACTION MEETING THE
REQUIREMENTS OF RULE 144A, (b) IN A TRANSACTION MEETING
THE
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REQUIREMENTS OF RULE 144 UNDER THE SECURITIES ACT, (c)
OUTSIDE THE UNITED STATES TO A FOREIGN PERSON IN A
TRANSACTION MEETING THE REQUIREMENTS OF RULE 904 UNDER
THE SECURITIES ACT, (d) TO AN INSTITUTIONAL "ACCREDITED
INVESTOR" (AS DEFINED IN RULE 501(a)(1), (2), (3) OR
(7) OF THE SECURITIES ACT (AN "INSTITUTIONAL ACCREDITED
INVESTOR"), THAT PRIOR TO SUCH TRANSFER, FURNISHED THE
TRUSTEE A SIGNED LETTER CONTAINING CERTAIN
REPRESENTATIONS AND AGREEMENTS (THE FORM OF WHICH CAN
BE OBTAINED FROM THE TRUSTEE) AND, IF SUCH TRANSFER IS
IN RESPECT OF AN AGGREGATE PRINCIPAL AMOUNT OF
SECURITIES LESS THAN $250,000, AN OPINION OF COUNSEL
THAT SUCH TRANSFER IS IN COMPLIANCE WITH THE SECURITIES
ACT, OR (e) IN ACCORDANCE WITH ANOTHER EXEMPTION FROM
THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT
(AND, IN THE CASE OF CLAUSE (b), (c), (d) OR (e), BASED
UPON AN OPINION OF COUNSEL IF THE COMPANY SO REQUESTS),
(2) TO THE COMPANY OR (3) PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT AND, IN EACH CASE, IN ACCORDANCE
WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE
UNITED STATES OR ANY OTHER APPLICABLE JURISDICTION AND
(B) THE HOLDER WILL, AND EACH SUBSEQUENT HOLDER IS
REQUIRED TO, NOTIFY ANY PURCHASER FROM IT OF THE
SECURITY EVIDENCED HEREBY OF THE RESALE RESTRICTIONS
SET FORTH IN (A) ABOVE."
(ii) Upon any sale or transfer of a Transfer Restricted Security
(including any Transfer Restricted Security represented by a
Global Note) pursuant to Rule 144 under the Securities Act or
pursuant to an effective registration statement under the
Securities Act:
(A) in the case of any Transfer Restricted Security that is
a Definitive Note, the Registrar shall permit the
Holder thereof to exchange such Transfer Restricted
Security for a Definitive Note that does not bear the
legend set forth in (i) above and rescind any
restriction on the transfer of such Transfer Restricted
Security upon receipt of an Opinion of Counsel from the
transferring holder; and
(B) in the case of any Transfer Restricted Security
represented by a Global Note, such Transfer Restricted
Security shall not be
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required to bear the legend set forth in (i) above, but
shall continue to be subject to the provisions of
Section 2.06(b) hereof; PROVIDED, HOWEVER, that with
respect to any request for an exchange of a Transfer
Restricted Security that is represented by a Global
Note for a Definitive Note that does not bear the
legend set forth in (i) above, which request is made in
reliance upon Rule 144, the Holder thereof shall
certify in writing to the Registrar that such request
is being made pursuant to Rule 144 (such certification
to be substantially in the form of EXHIBIT B-2 hereto).
(iii) Upon any sale or transfer of a Transfer Restricted Security
(including any Transfer Restricted Security represented by a
Global Note) in reliance on any exemption from the
registration requirements of the Securities Act (other than
exemptions pursuant to Rule 144A or Rule 144 under the
Securities Act) in which the Holder or the transferee provides
an Opinion of Counsel to the Company and the Registrar in form
and substance reasonably acceptable to the Company and the
Registrar (which Opinion of Counsel shall also state that the
transfer restrictions contained in the legend are no longer
applicable):
(A) in the case of any Transfer Restricted Security that is
a Definitive Note, the Registrar shall permit the
Holder thereof to exchange such Transfer Restricted
Security for a Definitive Note that does not bear the
legend set forth in (i) above and rescind any
restriction on the transfer of such Transfer Restricted
Security; and
(B) in the case of any Transfer Restricted Security
represented by a Global Note, such Transfer Restricted
Security shall not be required to bear the legend set
forth in (i) above, but shall continue to be subject to
the provisions of Section 2.06(a) hereof.
(iv) Notwithstanding the foregoing, upon the consummation of the
Registered Exchange Offer in accordance with the Registration
Rights Agreement, the Company shall issue and, upon receipt of
an authentication order in accordance with Section 2.02
hereof, the Trustee shall authenticate (i) one or more
Unrestricted Global Notes in aggregate principal amount equal
to the principal amount of the Restricted Beneficial Interests
tendered for acceptance by persons that are not (x)
broker-dealers, (y) Persons participating in the distribution
of the Notes or (z) Persons who are affiliates (as defined in
Rule 144) of the Company and accepted for exchange in the
Registered Exchange Offer and (ii) Definitive Notes that do
not bear the Private Placement Legend in an aggregate
principal amount equal to the principal amount of the
Restricted Definitive Notes accepted for exchange in the
Registered Exchange Offer. The Trustee shall be entitled to
rely upon the authentication order when authenticating the
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Notes without any obligation to verify that the restrictions
in the preceding sentence have been complied with.
Concurrently with the issuance of such Notes, the Trustee
shall cause the aggregate principal amount of the applicable
Restricted Global Notes to be reduced accordingly and the
Company shall execute and the Trustee shall authenticate and
deliver to the Persons designated by the Holders of Definitive
Notes so accepted Definitive Notes in the appropriate
principal amount.
(v) GLOBAL NOTE LEGEND. Each Global Note shall bear a legend in
substantially the following form:
"THIS GLOBAL NOTE IS HELD BY THE DEPOSITARY (AS DEFINED
IN THE INDENTURE GOVERNING THIS NOTE) OR ITS NOMINEE IN
CUSTODY FOR THE BENEFIT OF THE BENEFICIAL OWNERS HEREOF, AND
IS NOT TRANSFERABLE TO ANY PERSON UNDER ANY CIRCUMSTANCES
EXCEPT THAT (I) THE TRUSTEE MAY MAKE SUCH NOTATIONS HEREON AS
MAY BE REQUIRED, (II) THIS GLOBAL NOTE MAY BE DELIVERED TO THE
TRUSTEE FOR CANCELLATION PURSUANT TO SECTION 2.11 OF THE
INDENTURE AND (III) THIS GLOBAL NOTE MAY BE TRANSFERRED TO A
SUCCESSOR DEPOSITARY WITH THE PRIOR WRITTEN CONSENT OF THE
COMPANY.
"UNLESS AND UNTIL IT IS EXCHANGED IN WHOLE OR IN PART
FOR NOTES IN DEFINITIVE FORM, THIS NOTE MAY NOT BE TRANSFERRED
EXCEPT AS A WHOLE BY THE DEPOSITARY TO A NOMINEE OF THE
DEPOSITARY OR BY A NOMINEE OF THE DEPOSITARY TO THE DEPOSITARY
OR ANOTHER NOMINEE OF THE DEPOSITARY OR BY THE DEPOSITARY OR
ANY SUCH NOMINEE TO A SUCCESSOR DEPOSITARY OR A NOMINEE OF
SUCH SUCCESSOR DEPOSITARY. UNLESS THIS CERTIFICATE IS
PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY
TRUST COMPANY (55 WATER STREET, NEW YORK, NEW YORK) ("DTC"),
TO THE COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER,
EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED
IN THE NAME OF CEDE & CO. OR SUCH OTHER NAME AS MAY BE
REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY
PAYMENT IS MADE TO CEDE & CO. OR SUCH OTHER ENTITY AS MAY BE
REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY
TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY
OR TO ANY PERSON IS WRONGFUL INASMUCH
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AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST
HEREIN."
(vi) UNIT LEGEND. Each Note issued prior to the Separation Date
shall bear the following legend (the "Unit Legend") on the face
thereof:
"THE NOTES EVIDENCED BY THIS CERTIFICATE ARE INITIALLY
ISSUED AS PART OF AN ISSUANCE OF UNITS, EACH OF WHICH CONSIST
OF $1,000 PRINCIPAL AMOUNT AT MATURITY OF THE NOTES AND ONE
WARRANT (EACH, A "WARRANT") INITIALLY ENTITLING THE HOLDER
THEREOF TO PURCHASE 7.9002 SHARES OF SERIES B COMMON STOCK, NO
PAR VALUE, OF THE COMPANY. THE NOTES AND WARRANTS WILL BE
AUTOMATICALLY SEPARATED UPON THE EARLIEST TO OCCUR OF (i) 90
DAYS FROM THE DATE OF ISSUANCE, (ii) SUCH DATE AS THE INITIAL
PURCHASERS MAY, IN THEIR DISCRETION, DEEM APPROPRIATE, (iii)
IN THE EVENT OF A CHANGE OF CONTROL (AS DEFINED IN THE
INDENTURE), THE DATE THE COMPANY MAILS NOTICE THEREOF TO
HOLDERS OF NOTES, (iv) THE DATE ON WHICH THE REGISTERED
EXCHANGE OFFER (AS DEFINED IN THE INDENTURE) IS CONSUMMATED
AND (v) THE DATE ON WHICH THE SHELF REGISTRATION STATEMENT (AS
DEFINED IN THE INDENTURE) IS DECLARED EFFECTIVE (THE EARLIEST
OF SUCH DATES, THE "SEPARATION DATE"). THE NOTES EVIDENCED BY
THIS CERTIFICATE MAY NOT BE TRANSFERRED OR SEPARATED FROM, BUT
MAY BE TRANSFERRED OR EXCHANGED ONLY TOGETHER, WITH THE
WARRANTS UNTIL THE SEPARATION DATE.
(vii) ORIGINAL ISSUE DISCOUNT LEGEND. Each Note shall bear a legend
in substantially the following form:
"FOR THE PURPOSES OF SECTIONS 1272, 1273 AND 1275 OF THE
INTERNAL REVENUE CODE OF 1986, AS AMENDED, THIS SECURITY IS
BEING ISSUED WITH ORIGINAL ISSUE DISCOUNT; NOT LATER THAN 10
DAYS AFTER APRIL 13, 1998, INFORMATION TO INCLUDE THE ISSUE
PRICE, AMOUNT OF ORIGINAL ISSUE DISCOUNT, ISSUE DATE, AND
YIELD TO MATURITY OF THE SECURITY WILL BE MADE AVAILABLE TO
HOLDERS UPON REQUEST TO ROBERT RANDALL, CHIEF FINANCIAL
OFFICER, FIRSTWORLD COMMUNICATIONS, INC., (619) 552-8010."
(g) CANCELLATION AND/OR ADJUSTMENT OF GLOBAL NOTES. At such time as all
beneficial interests in Global Notes have been exchanged for Definitive Notes,
redeemed, repurchased or
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cancelled, all Global Notes shall be returned to or retained and cancelled by
the Trustee in accordance with Section 2.11 hereof. At any time prior to such
cancellation, if any beneficial interest in a Global Note is exchanged for
Definitive Notes, redeemed, repurchased or cancelled, the principal amount of
Notes represented by such Global Note shall be reduced accordingly and an
endorsement may be made on such Global Note, by the Trustee, at the direction of
the Trustee, to reflect such reduction but any failure to make such an
endorsement shall not affect the reductions.
(h) GENERAL PROVISIONS RELATING TO TRANSFERS AND EXCHANGES.
(i) To permit registrations of transfers and exchanges, the
Company shall execute and the Trustee shall authenticate
Global Notes and Definitive Notes at the Registrar's request.
(ii) No service charge shall be made to a Holder for any
registration of transfer or exchange, but the Company may
require payment of a sum sufficient to cover any stamp or
transfer tax or similar governmental charge payable in
connection therewith (other than any such stamp or transfer
taxes or similar governmental charge payable upon exchange or
transfer pursuant to Sections 2.10, 4.07, 4.08 and 9.06
hereto).
(iii) All Global Notes and Definitive Notes issued upon any
registration of transfer or exchange of Global Notes or
Definitive Notes shall be the valid obligations of the
Company, evidencing the same debt, and entitled to the same
benefits under this Indenture, as the Global Notes or
Definitive Notes surrendered upon such registration of
transfer or exchange.
(iv) The Registrar shall not be required: (A) to issue, to register
the transfer of or to exchange Notes during a period beginning
at the opening of fifteen (15) Business Days before the day of
any selection of Notes for redemption under Section 3.02
hereof and ending at the close of business on the day of
selection, (B) to register the transfer of or to exchange any
Note so selected for redemption in whole or in part, except
the unredeemed portion of any Note being redeemed in part, or
(C) to register the transfer of or to exchange a Note between
a record date and the next succeeding interest payment date.
(v) Prior to due presentment for the registration of a transfer of
any Note, the Trustee, any agent and the Company may deem and
treat the Person in whose name any Note is registered as the
absolute owner of such Note for the purpose of receiving
payment of principal of and interest on such Notes and for all
other purposes, and neither the Trustee, any agent nor the
Company shall be affected by notice to the contrary.
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(vi) The Trustee shall authenticate Global Notes and Definitive
Notes in accordance with the provisions of Section 2.02
hereof.
SECTION 2.07. REPLACEMENT NOTES.
If any mutilated Note is surrendered to the Trustee, or the Company and the
Trustee receives evidence to their satisfaction of the destruction, loss or
theft of any Note, the Company shall issue and the Trustee, upon the written
order of the Company signed by an Officer of the Company, shall authenticate a
replacement Note if the Trustee's requirements are met. If required by the
Trustee or the Company, an indemnity bond must be supplied by the Holder that is
sufficient in the judgment of the Trustee and the Company to protect the
Company, the Trustee, any agent and any authenticating agent from any loss that
any of them may suffer if a Note is replaced. The Company and the Trustee may
charge for their expenses in replacing a Note.
Every replacement Note is an additional obligation of the Company and shall
be entitled to all of the benefits of this Indenture equally and proportionately
with all other Notes duly issued hereunder.
SECTION 2.08. OUTSTANDING NOTES.
The Notes outstanding at any time are all the Notes authenticated by the
Trustee except for those canceled by it, those delivered to it for cancellation,
those reductions in the interest in a Global Note effected by the Trustee in
accordance with the provisions hereof, and those described in this Section as
not outstanding. Except as set forth in Section 2.09 hereof, a Note does not
cease to be outstanding because the Company or an Affiliate of the Company holds
the Note.
If a Note is replaced pursuant to Section 2.07 hereof, it ceases to be
outstanding unless the Trustee receives proof satisfactory to it that the
replaced Note is held by a bona fide purchaser.
If the principal amount at maturity or Accreted Value, as applicable, of
any Note is considered paid under Section 4.01 hereof, it ceases to be
outstanding and ceases to accrete in value or, if applicable, interest on it
ceases to accrue.
If the Paying Agent (other than the Company, a Subsidiary or an Affiliate
of any thereof) holds, on a redemption date or maturity date, money sufficient
to pay Notes payable on that date, then on and after that date such Notes shall
be deemed to be no longer outstanding and shall cease to accrete in value or
accrue interest.
SECTION 2.09. TREASURY NOTES.
In determining whether the Holders of the required principal amount at
maturity of Notes have concurred in any direction, waiver or consent, Notes
owned by the Company, or by any Person directly or indirectly controlling or
controlled by or under direct or indirect common control with the Company, shall
be considered as though not outstanding, except that for the
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purposes of determining whether the Trustee shall be protected in relying on any
such direction, waiver or consent, only Notes that the Trustee knows are so
owned shall be so disregarded.
SECTION 2.10. TEMPORARY NOTES.
Until certificates representing Notes are ready for delivery, the Company
may prepare and the Trustee, upon receipt of an Authentication Order, shall
authenticate temporary Notes. Temporary Notes shall be substantially in the
form of certificated Notes but may have variations that the Company considers
appropriate for temporary Notes and as shall be reasonably acceptable to the
Trustee. Without unreasonable delay, the Company shall prepare and the Trustee
shall authenticate definitive Notes in exchange for temporary Notes.
Holders of temporary Notes shall be entitled to all of the benefits of this
Indenture.
SECTION 2.11. CANCELLATION.
The Company at any time may deliver Notes to the Trustee for cancellation.
The Registrar and Paying Agent shall forward to the Trustee any Notes
surrendered to them for registration of transfer, exchange or payment. The
Trustee and no one else shall cancel all Notes surrendered for registration of
transfer, exchange, payment, replacement or cancellation and shall return such
canceled Notes to the Company. The Company may not issue new Notes to replace
Notes that it has paid or that have been delivered to the Trustee for
cancellation.
SECTION 2.12. DEFAULTED INTEREST.
If the Company defaults in a payment of interest on the Notes, it shall pay
the defaulted interest ("Defaulted Interest") in any lawful manner plus, to the
extent lawful, interest payable on the defaulted interest, to the Persons who
are Holders on a subsequent Special Record Date, in each case at the rate
provided in the Notes and in Section 4.01 hereof. The Company shall notify the
Trustee in writing of the amount of defaulted interest proposed to be paid on
each Note and the date of the proposed payment. The Company shall fix or cause
to be fixed each such Special Record Date and payment date, provided that no
such Special Record Date shall be less than 10 days prior to the related payment
date for such defaulted interest. At least 15 days before the Special Record
Date, the Company (or, upon the written request of the Company, the Trustee in
the name and at the expense of the Company) shall mail or cause to be mailed to
Holders a notice that states the Special Record Date, the related payment date
and the amount of such interest to be paid.
SECTION 2.13. CUSIP NUMBERS.
The Company in issuing the Notes may use "CUSIP" numbers (if then generally
in use), and, if so, the Trustee shall use CUSIP numbers in notices of
redemption as a convenience to Holders; PROVIDED that any such notice may state
that no representation is made as to the correctness of such numbers either as
printed on the Notes or as contained in any notice of a redemption and that
reliance may be placed only on the other identification numbers printed on
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the Notes, and any such redemption shall not be affected by any defect in or the
omission of such numbers. The Company will promptly notify the Trustee of any
change in the CUSIP numbers.
ARTICLE III.
REDEMPTION
SECTION 3.01. NOTICE TO TRUSTEE. If the Company elects to redeem Notes
pursuant to the optional redemption provisions contained on the reverse side of
the Notes (see EXHIBIT A), it shall notify the Trustee in writing of the
Redemption Date and the principal amount of Notes to be redeemed. The Company
shall give each such notice to the Trustee at least 60 calendar days prior to
the Redemption Date unless the Trustee consents in writing to a shorter period.
Such notice shall be accompanied by an Officers' Certificate and an Opinion of
Counsel from the Company to the effect that such redemption will comply with any
conditions to such redemption set forth herein and in the Notes.
SECTION 3.02. SELECTION OF NOTES TO BE REDEEMED. If less than all the
Notes are to be redeemed at any time, the Trustee shall select the Notes to be
redeemed among the Holders in compliance with the requirements of the principal
national securities exchange, if any, on which the Notes are listed or, if the
Notes are not so listed, on a pro rata basis, by lot or in accordance with any
other method the Trustee considers fair and appropriate. In selecting Notes to
be redeemed pursuant to this Section 3.02, the Trustee shall make such
adjustments, reallocations and eliminations as it shall deem proper so that the
principal amount at maturity of each Note to be redeemed shall be $1,000 or an
integral multiple thereof, by increasing, decreasing or eliminating any amount
less than $1,000 which would be allocable to any Holder. If the Notes to be
redeemed are Definitive Notes, the Definitive Notes to be redeemed shall be
selected by the Trustee by prorating, as nearly as may be, the principal amount
of Definitive Notes to be redeemed among the Holders of Definitive Notes
registered in their respective names. The Trustee in its discretion may
determine the particular Notes (if there are more than one) registered in the
name of any Holder which are to be redeemed, in whole or in part. Provisions of
this Indenture that apply to Notes called for redemption also apply to portions
of Notes called for redemption. The Trustee shall notify the Company promptly of
the Notes or portions of Notes to be redeemed.
SECTION 3.03. NOTICE OF REDEMPTION. At least 30 calendar days but not
more than 60 calendar days before a Redemption Date, the Company shall send a
notice of redemption, first class mail, postage prepaid, to Holders of Notes to
be redeemed at the addresses of such Holders as they appear in the Note
Register.
The notice shall identify the Notes to be redeemed and shall state:
(a) the Redemption Date;
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(b) the Redemption Price (and shall specify the portion of such Redemption
Price that constitutes the amount of accrued and unpaid interest to be
paid, if any);
(c) the name and address of the Paying Agent;
(d) that the Notes called for redemption must be surrendered to the Paying
Agent to collect the Redemption Price;
(e) if any Note is being redeemed in part, the portion of the principal
amount of such Note to be redeemed and that, after the Redemption Date, a
new Note or Notes in principal amount equal to the unredeemed portion will
be issued;
(f) if fewer than all the outstanding Notes are to be redeemed, the
identification and principal amounts of the particular Notes to be
redeemed;
(g) that, unless the Company defaults in making the redemption payment,
interest on, or the accretion of the value of, the Notes (or portions
thereof) called for redemption shall cease and such Notes (or portions
thereof) shall cease to accrue interest or cease to accrete in value, as
the case may be, on and after the Redemption Date;
(h) the paragraph of the Notes pursuant to which the Notes are being
called for redemption;
(i) any other information necessary to enable Holders to comply with the
notice of redemption; and
(j) the applicable CUSIP number(s).
At the Company's request, the Trustee shall give the notice of redemption in the
Company's name and at the Company's expense. In such event, the Company shall
provide the Trustee with the information required by this Section 3.03 in a
timely manner.
SECTION 3.04. EFFECT OF NOTICE OF REDEMPTION. Once notice of redemption
is mailed, Notes called for redemption shall become due and payable on the
Redemption Date and at the Redemption Price stated in such notice. A notice of
redemption may not be conditional. Upon surrender to the Paying Agent, such
Notes shall be paid at the Redemption Price stated in such notice. Failure to
give notice or any defect in the notice to any Holder shall not affect the
validity of the notice to any other Holder.
SECTION 3.05. DEPOSIT OF REDEMPTION PRICE. On or prior to 10:00 a.m., New
York City time, on each Redemption Date, the Company shall deposit with the
Paying Agent (or, if the Company, one of its Subsidiaries or any of their
Affiliates is the Paying Agent, the Paying Agent shall segregate and hold in
trust for the benefit of the Holders) money, in federal or other immediately
available funds, sufficient to pay the Redemption Price on all Notes to be
redeemed
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on that date other than Notes or portions of Notes called for redemption on such
date which have been delivered by the Company to the Trustee for cancellation.
So long as the Company complies with the preceding paragraph and the other
provisions of this Article III, interest on the Notes to be redeemed on the
applicable Redemption Date shall cease to accrue or such Notes shall cease to
accrete in value, as the case may be, from and after such date and such Notes or
portions thereof shall be deemed not to be entitled to any benefit under this
Indenture except to receive payment of the Redemption Price on the Redemption
Date. If any Note called for redemption shall not be so paid upon surrender for
redemption, then, from the Redemption Date until such principal is paid,
interest shall be paid on the unpaid principal and, to the extent permitted by
law, on any accrued but unpaid interest thereon, in each case at the rate
prescribed therefor by such Notes, or such Notes shall continue to accrete in
value, as the case may be.
SECTION 3.06. NOTES REDEEMED IN PART. Upon surrender and cancellation of
Note that is redeemed in part, the Company shall issue and the Trustee shall
authenticate and deliver to the surrendering Holder (at the Company's expense) a
new Note equal in principal amount to the unredeemed portion of the Note
surrendered and canceled; PROVIDED that each such Note shall be in a principal
amount at maturity of $1,000 or an integral multiple thereof.
ARTICLE IV.
COVENANTS
SECTION 4.01. PAYMENT OF NOTES. The Company shall promptly pay the
principal of, premium, if any, and interest on, the Notes on the dates and in
the manner provided in the Notes and in this Indenture. Principal, premium and
interest shall be considered paid on the date due if, on such date, the Trustee
or the Paying Agent holds in accordance with this Indenture money sufficient to
pay all principal, premium and interest then due.
To the extent lawful, the Company shall pay interest on (i) if prior to the
Full Accretion Date, any overdue Accreted Value of (and premium, if any, on) the
Notes, or if on or after the Full Accretion Date, any overdue principal of (and
premium, if any, on) the Notes, at the accretion rate or interest rate, as the
case may be, borne on the Notes, plus 1% per annum, and (ii) Defaulted Interest
(without regard to any applicable grace period), at the same rate. The
Company's obligation pursuant to the previous sentence shall apply whether such
overdue amount is due at its Stated Maturity, as a result of the Company's
obligations pursuant to Section 3.05, Section 4.07 or Section 4.08 hereof, or
otherwise.
SECTION 4.02. MAINTENANCE OF OFFICE OR AGENCY. The Company shall maintain
in the Borough of Manhattan, The City of New York, an office or agency where
Notes may be presented or surrendered for payment, where Notes may be
surrendered for registration of transfer or exchange and where notices and
demands to or upon the Company in respect of the Notes and this Indenture may be
served. The Company shall give prompt written notice to the
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Trustee of the location, and any change in the location, of such office or
agency. If at any time the Company shall fail to maintain any such required
office or agency or shall fail to furnish the Trustee with the address thereof,
such presentations, surrenders, notices and demands may be made or served at the
Corporate Trust Office of the Trustee, and the Company hereby appoints the
Trustee its agent to receive all presentations, surrenders, notices and demands.
The Company may also from time to time designate one or more other offices
or agencies (in or outside of The City of New York) where the Notes may be
presented or surrendered for any or all of such purposes, and may from time to
time rescind such designations; PROVIDED that no such designation or rescission
shall in any manner relieve the Company of its obligation to maintain an office
or agency in The City of New York, for such purposes. The Company shall give
prompt written notice to the Trustee of any such designation and any change in
the location of any such other office or agency.
The Company hereby designates the Corporate Trust Office of the Trustee as
one such office or agency of the Company in accordance with Section 2.03.
SECTION 4.03. MONEY FOR THE NOTE PAYMENTS TO BE HELD IN TRUST. If the
Company, any Subsidiary of the Company or any of their respective Affiliates
shall at any time act as Paying Agent with respect to the Notes, such Paying
Agent shall, on or before each due date of the principal of (and premium, if
any) or interest on any of the Notes, segregate and hold in trust for the
benefit of the Persons entitled thereto money sufficient to pay the principal
(and premium, if any) or interest so becoming due until such money shall be paid
to such Persons or otherwise disposed of as herein provided, and shall promptly
notify the Trustee of its action or failure so to act.
Whenever the Company shall have one or more Paying Agents with respect to
the Notes, it shall, prior to or on each due date of the principal of (and
premium, if any) or interest on any of the Notes, deposit with a Paying Agent a
sum sufficient to pay the principal (and premium, if any) or interest so
becoming due, such sum to be held in trust for the benefit of the Persons
entitled to such principal, premium or interest, and (unless such Paying Agent
is the Trustee) the Paying Agent shall promptly notify the Trustee of the
Company's action or failure so to act.
SECTION 4.04. CORPORATE EXISTENCE. Subject to the provisions of Article
IV and Article V hereof, the Company shall do or cause to be done all things
necessary to preserve and keep in full force and effect the corporate existence,
rights (charter and statutory) and franchises of the Company and each of its
Restricted Subsidiaries; PROVIDED that the Company and any such Restricted
Subsidiary shall not be required to preserve the corporate existence of any such
Restricted Subsidiary or any such right or franchise if the Board of Directors
shall determine that the preservation thereof is no longer desirable in the
conduct of the business of the Company and provided further that any Restricted
Subsidiary may consolidate with, merge into, or sell, convey, lease or otherwise
dispose of all of its property and assets to the Company or any wholly owned
Restricted Subsidiary.
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SECTION 4.05. MAINTENANCE OF PROPERTY. The Company shall cause all
Property used or useful in the conduct of its business or the business of any of
its Restricted Subsidiaries and material to the Company and its Restricted
Subsidiaries taken as a whole to be maintained and kept in good condition,
repair and working order and supplied with all necessary equipment and shall
cause to be made all necessary repairs, renewals, replacements, betterments and
improvements thereof, all as, in the judgment of the Company, may be necessary
so that the business carried on in connection therewith may be properly and
advantageously conducted at all times; PROVIDED that nothing in this Section
4.05 shall prevent the Company from discontinuing the operation or maintenance
of any of such Property if such discontinuance is, in the judgment of the
Company, desirable in the conduct of its business or the business of any of its
Restricted Subsidiaries.
SECTION 4.06. PAYMENT OF TAXES AND OTHER CLAIMS. The Company shall pay or
discharge or cause to be paid or discharged, before the same shall become
delinquent, (a) all material taxes, assessments and governmental charges levied
or imposed upon the Company or any of its Restricted Subsidiaries or upon the
income, profits or Property of the Company or any of its Restricted Subsidiaries
and (b) all material lawful claims for labor, materials and supplies which, if
unpaid, might by law become a Lien upon the Property of the Company or any of
its Restricted Subsidiaries; PROVIDED that the Company shall not be required to
pay or discharge or cause to be paid or discharged any such tax, assessment,
charge or claim whose amount, applicability or validity is being contested in
good faith by appropriate proceedings upon stay of execution or the enforcement
thereof and for which adequate reserves in accordance with GAAP, if required, or
other appropriate provision has been made.
SECTION 4.07. REPURCHASE AT THE OPTION OF HOLDERS UPON A CHANGE OF
CONTROL. (a) Upon the occurrence of a Change of Control, each Holder shall
have the right to require the Company to purchase such Holder's Notes, in whole,
or in part in a principal amount at maturity that is an integral multiple of
$1,000, pursuant to the offer described in Section 4.07(b) hereof (the "Change
of Control Offer"), at a purchase price (the "Change of Control Purchase Price")
in cash equal to 101% of the Accreted Value of such Notes (or portions thereof)
on any Change of Control Payment Date prior to the Full Accretion Date, or 101%
of the principal amount of such Notes (or portions thereof) on any Change of
Control Payment Date on or after the Full Accretion Date, plus accrued and
unpaid interest, if any, to the Change of Control Payment Date.
(b) Within 10 calendar days of the date of any Change of Control, the
Company, or the Trustee at the request and expense of the Company, shall send to
each Holder by first class mail, postage prepaid, a notice prepared by the
Company stating:
(i) that a Change of Control has occurred and a Change of Control Offer is
being made pursuant to this Section 4.07, and that all Notes that are timely
tendered will be accepted for payment;
(ii) the Change of Control Purchase Price, and the date Notes are to be
purchased pursuant to the Change of Control Offer (the "Change of Control
Payment Date"), which date
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shall be a date occurring no earlier than 30 calendar days nor later than 60
calendar days subsequent to the date such notice is mailed;
(iii) that any Notes or portions thereof not tendered or accepted for
payment will continue to accrete in value or accrue interest, as the case may
be;
(iv) that, unless the Company defaults in the payment of the Change of
Control Purchase Price with respect thereto, all Notes or portions thereof
accepted for payment pursuant to the Change of Control Offer shall cease to
accrete in value or accrue interest, as the case may be, from and after the
Change of Control Payment Date;
(v) that any Holder electing to have any Notes or portions thereof
purchased pursuant to a Change of Control Offer will be required to surrender
such Notes, with the form entitled "Option of Holder to Elect Purchase" on the
reverse of such Notes completed, to the Paying Agent at the address specified in
the notice, prior to the close of business on the third Business Day preceding
the Change of Control Payment Date;
(vi) that any Holder shall be entitled to withdraw such election if the
Paying Agent receives, not later than the close of business on the second
Business Day preceding the Change of Control Payment Date, a telegram, telex,
facsimile transmission or letter, setting forth the name of the Holder, the
principal amount of Notes delivered for purchase, and a statement that such
Holder is withdrawing such Holder's election to have such Notes or portions
thereof purchased pursuant to the Change of Control Offer;
(vii) that any Holder electing to have Notes purchased pursuant to the
Change of Control Offer must specify the principal amount that is being tendered
for purchase, which principal amount at maturity must be $1,000 or an integral
multiple thereof;
(viii) that any Holder whose Notes are being purchased only in part will
be issued new Notes equal in principal amount to the unpurchased portion of the
Note or Notes surrendered, which unpurchased portion will be equal in principal
amount to $1,000 or an integral multiple thereof; and
(ix) any other information necessary to enable any Holder to tender Notes
and to have such Notes purchased pursuant to this Section 4.07.
(c) On the Change of Control Payment Date, the Company shall (i) accept
for payment any Notes or portions thereof properly tendered pursuant to the
Change of Control Offer; (ii) irrevocably deposit with the Paying Agent, by
10:00 a.m., New York City time, on such date, in immediately available funds, an
amount equal to the Change of Control Purchase Price in respect of all Notes or
portions thereof so accepted; and (iii) deliver, or cause to be delivered, to
the Trustee the Notes so accepted together with an Officers' Certificate listing
the Notes or portions thereof tendered to the Company and accepted for payment.
The Paying Agent shall promptly send by first class mail, postage prepaid, to
each Holder of Notes or portions thereof so accepted
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for payment, payment in an amount equal to the Change of Control Purchase Price
for such Notes or portions thereof. The Company shall publicly announce the
results of the Change of Control Offer on or as soon as practicable after the
Change of Control Payment Date.
(d) Upon surrender and cancellation of a Note that is purchased in part
pursuant to the Change of Control Offer, the Company shall promptly issue and
the Trustee shall authenticate and deliver to the surrendering Holder of such
Note, a new Note equal in principal amount to the unpurchased portion of such
surrendered Note; PROVIDED that each such new Note shall be in a principal
amount at maturity of $1,000 or an integral multiple thereof.
(e) The Company shall comply with the requirements of Section 14(e) under
the Exchange Act and any other securities laws or regulations, to the extent
such laws and regulations are applicable, in connection with the purchase of
Notes pursuant to a Change of Control Offer.
SECTION 4.08. LIMITATION ON ASSET SALES. (a) The Company shall not, and
shall not permit any of its Restricted Subsidiaries, directly or indirectly, to,
consummate any Asset Sale, unless:
(i) the Company or such Restricted Subsidiary, as the case may be,
receives consideration for such Asset Sale at least equal to the Fair Market
Value (as evidenced by a Board Resolution delivered to the Trustee) of the
Property or assets sold or otherwise disposed of;
(ii) at least 80 percent of the consideration received in respect of such
Asset Sale by the Company or such Restricted Subsidiary, as the case may be, for
such Property or assets consists of (a) cash, Cash Equivalents and/or
Telecommunications Assets; and / or (b) the assumption of Indebtedness of the
Company or such Restricted Subsidiary (other than Indebtedness that is
subordinated to the Notes) and the release of the Company or the Restricted
Subsidiary, as the case may be, from all liability on the Indebtedness assumed;
and
(iii) the Company or such Restricted Subsidiary, as the case may be, uses
the Net Cash Proceeds from such Asset Sale in the manner set forth in Sections
4.08(b) and (c) hereof.
(b) Within 360 calendar days after the closing of any Asset Sale, the
Company or such Restricted Subsidiary, as the case may be, may, at its option:
(i) reinvest an amount equal to the Net Cash Proceeds, or any portion
thereof, from such Asset Sale in Telecommunications Assets or in Capital Stock
of any Person engaged in the Telecommunications Business in the United States
(PROVIDED that such Person concurrently becomes a Restricted Subsidiary of the
Company); and/or
(ii) apply an amount equal to such Net Cash Proceeds, or remaining Net
Cash Proceeds, to the permanent reduction of Indebtedness of the Company (other
than Indebtedness to a
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Restricted Subsidiary of the Company) that is senior to or pari passu with the
Notes or to the permanent reduction of Indebtedness or Preferred Stock of any
Restricted Subsidiary of the Company (other than Indebtedness to, or Preferred
Stock owned by, the Company or another Restricted Subsidiary of the Company).
Net Cash Proceeds from any Asset Sale that are not applied pursuant to
clause (i) or (ii) above within 360 calendar days of the closing of such Asset
Sale shall constitute "Excess Proceeds." Pending the final application of any
such Net Cash Proceeds, the Company may temporarily reduce revolving credit
borrowings or otherwise invest such Net Cash Proceeds in any manner that is not
prohibited by this Indenture.
(c) If at any time the aggregate amount of Excess Proceeds calculated as
of such date exceeds $5 million, the Company shall use the then-existing Excess
Proceeds to make an offer, as described in Section 4.08(d) hereof (an "Asset
Sale Offer"), to purchase from all Holders, on a pro rata basis, Notes in an
aggregate principal amount equal to the maximum principal amount that may be
purchased out of the then-existing Excess Proceeds, at a purchase price (the
"Asset Sale Purchase Price") in cash equal to 100 percent of the Accreted Value
of such Notes on any Asset Sale Payment Date occurring prior to the Full
Accretion Date, or 100 percent of the principal amount of such Notes on any
Asset Sale Payment Date on or after the Full Accretion Date, plus accrued and
unpaid interest, if any, to the Asset Sale Payment Date.
(d) Within 30 calendar days of the date the amount of Excess Proceeds
exceeds $5 million, the Company, or the Trustee at the request and expense of
the Company, shall send to each Holder by first class mail, postage prepaid, a
notice prepared by the Company stating:
(i) that an Asset Sale Offer is being made pursuant to this Section 4.08,
and that all Notes that are timely tendered will be accepted for payment,
subject to proration in the event the amount of Excess Proceeds is less than the
aggregate Asset Sale Purchase Price of all Notes timely tendered pursuant to the
Asset Sale Offer;
(ii) the Asset Sale Purchase Price, the amount of Excess Proceeds that are
available to be applied to purchase tendered Notes, and the date Notes are to be
purchased pursuant to the Asset Sale Offer (the "Asset Sale Payment Date"),
which date shall be a date no earlier than 30 calendar days nor later than 60
calendar days subsequent to the date such notice is mailed;
(iii) that any Notes or portions thereof not tendered or accepted for
payment will continue to accrete in value or accrue interest, as the case may
be;
(iv) that, unless the Company defaults in the payment of the Asset Sale
Purchase Price with respect thereto, all Notes or portions thereof accepted for
payment pursuant to the Asset Sale Offer shall cease to accrete in value or
accrue interest, as the case may be, from and after the Asset Sale Payment Date;
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(v) that any Holder electing to have any Notes or portions thereof
purchased pursuant to the Asset Sale Offer will be required to surrender such
Notes, with the form entitled "Option of Holder to Elect Purchase" on the
reverse of such Notes completed, to the Paying Agent at the address specified in
the notice, prior to the close of business on the third Business Day preceding
the Asset Sale Payment Date;
(vi) that any Holder shall be entitled to withdraw such election if the
Paying Agent receives, not later than the close of business on the second
Business Day preceding the Asset Sale Payment Date, a telegram, facsimile
transmission or letter, setting forth the name of the Holder, the principal
amount of Notes delivered for purchase, and a statement that such Holder is
withdrawing such Holder's election to have such Notes or portions thereof
purchased pursuant to the Asset Sale Offer;
(vii) that any Holder electing to have Notes purchased pursuant to the
Asset Sale Offer must specify the principal amount that is being tendered for
purchase, which principal amount at maturity must be $1,000 or an integral
multiple thereof;
(viii) that any Holder whose Notes are being purchased only in part will
be issued new Notes equal in principal amount to the unpurchased portion of the
Note or Notes surrendered, which unpurchased portion will be equal in principal
amount at maturity to $1,000 or an integral multiple thereof; and
(ix) any other information necessary to enable any Holder to tender Notes
and to have such Notes purchased pursuant to this Section 4.08.
(e) If the aggregate Asset Sale Purchase Price of the Notes surrendered by
Holders exceeds the amount of Excess Proceeds as indicated in the notice
required by Section 4.08(d) hereof, the Trustee shall select the Notes to be
purchased on a pro rata basis based on the Accreted Value, as of the Asset Sale
Payment Date, if such Asset Sale Payment Date is prior to the Full Accretion
Date, or principal amount, if such Asset Sale Payment Date is on or after the
Full Accretion Date, of the Notes tendered, with such adjustments as may be
deemed appropriate by the Trustee, so that only Notes in denominations of $1,000
or integral multiples thereof shall be purchased.
(f) On the Asset Sale Payment Date, the Company shall (i) accept for
payment any Notes or portions thereof properly tendered and selected for
purchase pursuant to the Asset Sale Offer and Section 4.08(e) hereof; (ii)
irrevocably deposit with the Paying Agent, by 10:00 a.m., New York City time, on
such date, in immediately available funds, an amount equal to the Asset Sale
Purchase Price in respect of all Notes or portions thereof so accepted; and
(iii) deliver, or cause to be delivered, to the Trustee the Notes so accepted
together with an Officers' Certificate listing the Notes or portions thereof
tendered to the Company and accepted for payment. The Paying Agent shall
promptly send by first class mail, postage prepaid, to each Holder of Notes or
portions thereof so accepted for payment, payment in an amount equal to the
Asset Sale Purchase
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Price for such Notes or portions thereof. The Company shall publicly announce
the results of the Asset Sale Offer on or as soon as practicable after the Asset
Sale Payment Date.
(g) Upon surrender and cancellation of a Note that is purchased in part,
the Company shall promptly issue and the Trustee shall authenticate and deliver
to the surrendering Holder of such Note a new Note equal in principal amount to
the unpurchased portion of such surrendered Note; PROVIDED that each such new
Note shall be in a principal amount at maturity of $1,000 or an integral
multiple thereof.
(h) Upon completion of an Asset Sale Offer (including payment of the Asset
Sale Purchase Price for accepted Notes), any surplus Excess Proceeds that were
the subject of such offer shall cease to be Excess Proceeds, and the Company may
then use such amounts for general corporate purposes.
(i) The Company shall comply with the requirements of Section 14(e) under
the Exchange Act and any other securities laws or regulations, to the extent
such laws and regulations are applicable, in connection with the purchase of
Notes pursuant to an Asset Sale Offer.
SECTION 4.09. LIMITATION ON CONSOLIDATED INDEBTEDNESS. (a) The Company
shall not, and shall not permit any Restricted Subsidiary to, Incur any
Indebtedness after the Issue Date unless the ratio of (i) the aggregate
consolidated principal amount of Indebtedness of the Company outstanding as of
the most recent available quarterly or annual balance sheet, after giving pro
forma effect to the Incurrence of such Indebtedness and any other Indebtedness
Incurred since such balance sheet date and the receipt and application of the
proceeds thereof, to (ii) Consolidated Cash Flow Available for Fixed Charges for
the four full fiscal quarters immediately preceding the Incurrence of such
Indebtedness for which consolidated financial statements of the Company have
become available, determined on a pro forma basis as if any such Indebtedness
had been Incurred and the proceeds thereof had been applied at the beginning of
such four fiscal quarters, would be less than 6.0 to 1.0 for such four-quarter
periods ending on or prior to December 31, 2000 and 5.5 to 1.0 for such periods
ending thereafter, after giving pro forma effect to the Incurrence of such
Indebtedness and any other Indebtedness Incurred since such balance sheet date.
(b) Notwithstanding the foregoing limitation, the provisions of Section
4.09(a) shall not apply to the Incurrence of any of the following items of
Indebtedness, each such item to be given independent effect:
(i) the Incurrence by the Company and/or any of its Restricted
Subsidiaries of Indebtedness under Senior Credit Facilities in an aggregate
principal amount outstanding or available at any one time not to exceed $75
million, and any renewal, extension, refinancing or refunding thereof in an
amount which, together with any principal amount remaining outstanding or
available under all Senior Credit Facilities, does not exceed the aggregate
principal amount outstanding or available under all Senior Credit Facilities
immediately prior to such renewal,
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extension, refinancing or refunding, less amounts permanently repaid with
proceeds from an Asset Sale;
(ii) the Incurrence by the Company and/or any of its Restricted
Subsidiaries of Purchase Money Indebtedness and Vendor Financing Indebtedness,
PROVIDED that the aggregate amount of such Purchase Money Indebtedness or Vendor
Financing Indebtedness Incurred does not exceed 80% of the total cost of the
Telecommunications Assets financed therewith (or, in the case of Vendor
Financing Indebtedness, 100% of the total cost of the Telecommunications Assets
financed therewith if such Vendor Financing Indebtedness was extended for the
purchase of tangible physical assets and was so financed by the vendor thereof
or an affiliate of such vendor);
(iii) the Incurrence by the Company and/or any of its Restricted
Subsidiaries, as applicable, of Indebtedness owed by the Company to any
Restricted Subsidiary of the Company or Indebtedness owed by a Restricted
Subsidiary of the Company to the Company or another Restricted Subsidiary of the
Company; PROVIDED THAT upon (x) the transfer or other disposition by such
Restricted Subsidiary or the Company of any Indebtedness so permitted to a
Person other than the Company or another Restricted Subsidiary of the Company,
(y) the issuance (other than directors' qualifying shares), sale, lease,
transfer or other disposition of shares of Capital Stock (including by
consolidation or merger) of such Restricted Subsidiary to a Person other than
the Company or another such Restricted Subsidiary or (z) the designation of such
Restricted Subsidiary as an Unrestricted Subsidiary, the provisions of this
clause (iii) shall no longer be applicable to such Indebtedness and such
Indebtedness shall be deemed to have been Incurred at the time of such transfer
or other disposition;
(iv) the Incurrence by the Company and/or any of its Restricted
Subsidiaries of Indebtedness Incurred to renew, extend, refinance or refund
(each, a "refinancing") the Notes or Indebtedness outstanding at the date of the
Indenture or Purchase Money Indebtedness or Vendor Financing Indebtedness
Incurred pursuant to clause (ii) of this paragraph in an aggregate amount (as
determined pursuant to the definition of "Indebtedness") not to exceed the
aggregate amount of Indebtedness (as so determined), and accrued interest on,
the Indebtedness so refinanced plus the amount of any premium required to be
paid in connection with such refinancing pursuant to the terms of the
Indebtedness so refinanced or the amount of any premium reasonably determined by
the Company as necessary to accomplish such refinancing by means of a tender
offer or privately negotiated repurchase, plus the reasonable expenses of the
Company Incurred in connection with such refinancing; PROVIDED THAT Indebtedness
the proceeds of which are used to refinance the Notes or Indebtedness which is
PARI PASSU to the Notes or Indebtedness which is subordinate in right of payment
to the Notes shall only be permitted under this clause (iv) if (A) in the case
of any refinancing of the Notes or Indebtedness which is PARI PASSU to the
Notes, the refinancing Indebtedness is PARI PASSU to the Notes or constitutes
Subordinated Indebtedness, and, in the case of any refinancing of Subordinated
Indebtedness, the refinancing Indebtedness constitutes Subordinated Indebtedness
and (B) in any case, the refinancing Indebtedness by its terms, or by the terms
of any agreement or instrument pursuant to which such Indebtedness is issued,
(x) does not provide for payments of principal of such Indebtedness at stated
maturity or
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by way of a sinking fund applicable thereto or by way of any mandatory
redemption, defeasance, retirement or repurchase thereof by the Company
(including any redemption, retirement or repurchase which is contingent upon
events or circumstances, but excluding any retirement required by virtue of the
acceleration of any payment with respect to such Indebtedness upon any event of
default thereunder), in each case prior to the time the same are required by the
terms of the Indebtedness being refinanced and (y) does not permit redemption or
other retirement (including pursuant to an offer to purchase made by the Company
or a Restricted Subsidiary of the Company) of such Indebtedness at the option of
the holder thereof prior to the time the same are required by the terms of the
Indebtedness being refinanced, other than a redemption or other retirement at
the option of the holder of such Indebtedness (including pursuant to an offer to
purchase made by the Company or a Restricted Subsidiary of the Company) which is
conditioned upon a change of control pursuant to provisions substantially
similar to those described under Section 4.07 hereof;
(v) the Incurrence by the Company and/or any of its Restricted
Subsidiaries of Indebtedness consisting of Permitted Interest Rate Protection
Agreements;
(vi) the Incurrence by the Company and/or any of its Restricted
Subsidiaries of Indebtedness (A) in respect of performance, surety or appeal
bonds provided in the ordinary course of business or (B) arising from customary
agreements providing for indemnification, adjustment of purchase price for
closing balance sheet changes within 90 days after closing, or similar
obligations, or from Guarantees or letters of credit, surety bonds or
performance bonds securing any obligations of the Company or any of its
Restricted Subsidiaries pursuant to such agreements, in each case Incurred in
connection with the disposition of any business, assets or Restricted Subsidiary
of the Company (other than Guarantees of Indebtedness Incurred by any Person
acquiring all or any portion of such business, assets or Restricted Subsidiary
of the Company for the purpose of financing such acquisition) and in an
aggregate principal amount not to exceed the gross proceeds actually received by
the Company or any Restricted Subsidiary in connection with such disposition;
and
(vii) the Incurrence by the Company of Indebtedness (other than secured
Acquired Indebtedness) in an aggregate principal amount not to exceed 2.0 times
the sum of the net cash proceeds received by the Company after the date of the
Indenture in connection with any issuance and sale of Capital Stock (other than
Disqualified Stock and other than the proceeds of the Equity Commitment),
PROVIDED THAT such Indebtedness does not mature prior to the Stated Maturity of
the Notes or has an Average Life at least equal to the Notes;
(viii) the Incurrence by the Company and/or any of its Restricted
Subsidiaries of Indebtedness not otherwise permitted to be Incurred pursuant to
clauses (i) through (vii) above, which, together with any other outstanding
Indebtedness Incurred pursuant to this clause (viii), has an aggregate principal
amount not in excess of $10 million at any time outstanding.
(c) Notwithstanding any other provision of this Section 4.09, the maximum
amount of Indebtedness that the Company or a Restricted Subsidiary may Incur
pursuant to this Section
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4.09, shall not be deemed to be exceeded due solely as the result of
fluctuations in the exchange rates of currencies.
(d) For purposes of determining any particular amount of Indebtedness
under this Section 4.09, (1) Guarantees, Liens or obligations with respect to
letters of credit supporting Indebtedness otherwise included in the
determination of such particular amount shall not be included and (2) any Liens
granted pursuant to the equal and ratable provisions referred to in Section 4.12
hereof shall not be treated as Indebtedness. For purposes of determining
compliance with this Section 4.09, in the event that an item of Indebtedness
meets the criteria of more than one of the types of Indebtedness described in
the above clauses, the Company, in its sole discretion, shall classify such item
of Indebtedness and only be required to include the amount and type of such
Indebtedness in one of such clauses.
SECTION 4.10. LIMITATION ON ISSUANCES OF GUARANTEES OF INDEBTEDNESS. (a)
The Company will not permit any Subsidiary, directly or indirectly, to
Guarantee, assume or in any other manner become liable with respect to any Pari
Passu Indebtedness or Subordinated Indebtedness of the Company unless such
Subsidiary simultaneously executes and delivers a supplemental indenture to the
Indenture providing for a Guarantee of the Notes on the same terms as the
Guarantee of such Indebtedness PROVIDED THAT (i) such Guarantee need not be
secured unless required pursuant to Section 4.12 and (ii) if such Indebtedness
is by its terms expressly subordinated to the Notes, any such assumption,
Guarantee or other liability of such Subsidiary with respect to such
Indebtedness shall be subordinated to such Subsidiary's Guarantee of the Notes
at least to the same extent as such Indebtedness is subordinated to the Notes.
This paragraph shall not apply to any Guarantee or assumption of liability of
Indebtedness permitted under the Indenture described in clauses (i), (iv), (v)
and (vi) of Section 4.09 (b).
(b) Notwithstanding paragraph (a) of this Section 4.10, any Guarantee by a
Subsidiary of the Notes shall provide by its terms that it (and all Liens
securing the same) shall be automatically and unconditionally released and
discharged upon any sale, exchange or transfer, to any Person not an Affiliate
of the Company, of all or substantially all of the assets of, such Subsidiary,
or all of the Capital Stock of such Subsidiary owned by the Company, which
transaction is in compliance with the terms of the Indenture and such Subsidiary
is released from its Guarantees of other Indebtedness of the Company or any of
its Subsidiaries.
SECTION 4.11. LIMITATION ON RESTRICTED PAYMENTS. (a) The Company shall
not, and will not permit any of its Restricted Subsidiaries to, directly or
indirectly, make any Restricted Payment unless, at the time of and after giving
effect to such proposed Restricted Payment:
(i) no Default or Event of Default shall have occurred and be continuing
or shall occur as a consequence thereof;
(ii) after giving effect, on a pro forma basis, to such Restricted Payment
and the Incurrence of any Indebtedness the net proceeds of which are used to
finance such Restricted
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Payment, the Company could incur at least $1.00 of additional Indebtedness
pursuant to Section 4.09(a) hereof; and
(iii) after giving effect to such Restricted Payment on a pro forma basis,
the aggregate amount expended (the amount so expended, if other than cash, to be
determined in good faith by a majority of the disinterested members of the Board
of Directors, whose determination shall be conclusive and evidenced by a
resolution thereof filed with the Trustee) or declared for all Restricted
Payments after the Issue Date does not exceed the sum of
(A) 50% of the Consolidated Net Income of the Company (or, if Consolidated
Net Income shall be a deficit, minus 100% of such deficit) for the period (taken
as one accounting period) beginning on the last day of the fiscal quarter
immediately preceding the Issue Date and ending on the last day of the fiscal
quarter for which the Company's financial statements have become available
immediately preceding the date of such Restricted Payment, PLUS
(B) 100% of the net reduction in Investments, subsequent to the Issue Date,
in any Person, resulting from payments of interest on Indebtedness, dividends,
repayments of loans or advances, or other transfers of Property (but only to the
extent such interest, dividends, repayments or other transfers of Property are
not included in the calculation of Consolidated Net Income), in each case to the
Company or any Restricted Subsidiary from any Person (including, without
limitation, from Unrestricted Subsidiaries) or from redesignations of
Unrestricted Subsidiaries as Restricted Subsidiaries (valued in each case as
provided in the definition of "Investments" in Section 1.01 hereof), not to
exceed in the case of any Person the amount of Investments previously made
subsequent to the Issue Date by the Company or any Restricted Subsidiary in such
Person and which was treated as a Restricted Payment; PLUS
(C) the aggregate net proceeds (other than proceeds received by the Company
pursuant to the Equity Commitment or used in the manner set forth in clause (ii)
of the following paragraph) received after the date of the Indenture, including
the fair value of property other than cash (determined in good faith by a
majority of the disinterested members of the Board of Directors, whose
determination shall be conclusive and evidenced by a resolution thereof filed
with the Trustee): (x) as capital contributions to the Company, (y) from the
issuance (other than to a Restricted Subsidiary) of Capital Stock (other than
Disqualified Stock) of the Company and warrants, rights or options on Capital
Stock (other than Disqualified Stock) of the Company, or (z) from the conversion
of Indebtedness of the Company into Capital Stock (other than Disqualified Stock
and other than by a Restricted Subsidiary) of the Company after the date of the
Indenture.
(b) The foregoing limitations shall not prevent the Company from:
(i) paying a dividend at any time within 60 days after the declaration
thereof if, on the declaration date, the Company could have paid such dividend
in compliance with Section 4.11(a);
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(ii) retiring:
(A) any Capital Stock of the Company or any Restricted Subsidiary of the
Company,
(B) Indebtedness of the Company that is subordinate to the Notes, in
exchange for, or out of the proceeds of, the substantially concurrent sale of
Qualified Stock of the Company; or
(C) Indebtedness of a Restricted Subsidiary which is subordinate (whether
pursuant to its terms or by operation of law) in right of payment to the Notes
and which was scheduled to mature on or after the maturity of the Notes, in
exchange for, or out of the proceeds of:
(x) the substantially concurrent sale of Qualified Stock of the Company or
(y) the substantially concurrent Incurrence of Indebtedness of the Company
or any Restricted Subsidiary that
(I) is permitted under Section 4.09 hereof,
(II) is not secured by any assets of the Company or any Restricted
Subsidiary to a greater extent than the retired Indebtedness was so secured,
(III) has an Average Life at least as long as the retired Indebtedness, and
(IV) is subordinated in right of payment to the Notes at least to the same
extent as the retired Indebtedness;
(iii) retiring any Indebtedness of the Company that is subordinated in
right of payment to the Notes in exchange for, or out of the proceeds of, the
substantially concurrent Incurrence of Indebtedness of the Company (other than
Indebtedness to a Subsidiary of the Company), PROVIDED THAT such new
Indebtedness
(A) is subordinated in right of payment to the Notes at least to the same
extent as,
(B) has an Average Life at least as long as, and
(C) has no scheduled principal payments due in any amount earlier than, any
equivalent amount of principal under the Indebtedness so retired;
(iv) making payments or distributions to dissenting stockholders pursuant
to applicable law in connection with a consolidation, merger or transfer of
assets permitted in Article V hereof;
(v) retiring any Capital Stock of the Company to the extent necessary (as
determined in good faith by a majority of the disinterested members of the Board
of Directors, whose determination shall be conclusive and evidenced by a
resolution thereof filed with the Trustee) to
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prevent the loss, or to secure the renewal or reinstatement, of any license or
franchise held by the Company or any Restricted Subsidiary from any governmental
agency;
(vi) retiring any Capital Stock or warrants or options to acquire Capital
Stock of the Company or any Restricted Subsidiary held by any directors,
officers or employees of the Company or any Restricted Subsidiary, PROVIDED
that the aggregate price paid for all such retired Capital Stock, warrants or
options shall not exceed $500,000 in any twelve-month period;
(vii) making Investments in connection with Permitted Joint Ventures in an
aggregate amount not to exceed $15 million; and
(viii) making Investments not otherwise permitted in an aggregate amount
not to exceed $5 million at any time outstanding.
(c) In determining the amount of Restricted Payments permissible under
this Section 4.11, amounts expended pursuant to clauses (ii) and (iii) of the
foregoing paragraph shall not be included as Restricted Payments.
(d) Not later than the date of making any Restricted Payment (including
any Restricted Payment permitted to be made pursuant to the two previous
paragraphs), the Company shall deliver to the Trustee an Officers' Certificate
stating that such Restricted Payment is permitted and setting forth the basis
upon which the required calculations were computed, which calculations may be
based upon the Company's latest available financial statements.
SECTION 4.12. LIMITATION ON LIENS. The Company may not, and may not permit
any Restricted Subsidiary of the Company to, Incur or suffer to exist any Lien
(other than a Permitted Lien) on or with respect to any property or assets now
owned or hereafter acquired to secure any Indebtedness without making, or
causing such Restricted Subsidiary to make, effective provision for securing the
Notes (i) equally and ratably with such Indebtedness as to such property for so
long as such Indebtedness will be so secured or (ii) in the event such
Indebtedness is Indebtedness of the Company which is subordinate in right of
payment to the Notes, prior to such Indebtedness as to such property for so long
as such Indebtedness will be so secured.
SECTION 4.13. LIMITATION ON SALE AND LEASEBACK TRANSACTIONS. The Company
shall not, and shall not permit any of its Restricted Subsidiaries to, directly
or indirectly, enter into, assume, Guarantee or otherwise become liable with
respect to any Sale and Leaseback Transaction (other than a Sale and Leaseback
Transaction between the Company or a Restricted Subsidiary on the one hand and a
Restricted Subsidiary or the Company on the other hand), unless (i) the Company
or such Restricted Subsidiary, as the case may be, receives consideration at the
time of such Sale and Leaseback Transaction at least equal to the Fair Market
Value (as evidenced by a Board Resolution delivered to the Trustee) of the
Property subject to such transaction; (ii) the Attributable Indebtedness of the
Company or such Restricted Subsidiary with respect thereto is included as
Indebtedness and would be permitted by Section 4.09 hereof; (iii) the Company or
such Restricted Subsidiary would be permitted to create a Lien on such Property
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without securing the Notes by Section 4.12 hereof; and (iv) the Net Cash
Proceeds from such transaction are applied in accordance with Section 4.08
hereof, if applicable.
SECTION 4.14. LIMITATION ON DIVIDENDS AND OTHER PAYMENT RESTRICTIONS
AFFECTING SUBSIDIARIES. The Company shall not, and shall not permit any
Restricted Subsidiary to, directly or indirectly, cause or suffer to exist or
become effective, or enter into, any encumbrance or restriction (other than
pursuant to law or regulation) on the ability of any Restricted Subsidiary (i)
to pay dividends or make any other distributions in respect of its Capital Stock
or pay any Indebtedness or other obligation owed to the Company or any
Restricted Subsidiary; (ii) to make loans or advances to the Company or any
Restricted Subsidiary; or (iii) to transfer any of its Property to the Company
or any other Restricted Subsidiary, except:
(a) any encumbrance or restriction existing as of the Issue Date pursuant
to any agreement relating to any Existing Indebtedness or any Indebtedness under
a Senior Credit Facility otherwise permitted under this Indenture;
(b) any encumbrance or restriction pursuant to an agreement relating to an
acquisition of Property, so long as the encumbrances or restrictions in any such
agreement relate solely to the Property so acquired;
(c) any encumbrance or restriction relating to any Indebtedness of any
Restricted Subsidiary existing on the date on which such Restricted Subsidiary
is acquired by the Company or another Restricted Subsidiary (other than any such
Indebtedness Incurred by such Restricted Subsidiary in connection with or in
anticipation of such acquisition);
(d) any encumbrance or restriction existing under or by reason of
applicable law;
(e) any encumbrance or restriction pursuant to an agreement effecting a
permitted refinancing of Indebtedness issued pursuant to an agreement referred
to in the foregoing clauses (a) through (d), so long as the encumbrances and
restrictions contained in any such refinancing agreement are not materially more
restrictive than the encumbrances and restrictions contained in such agreements;
(f) customary provisions (A) that restrict the subletting, assignment or
transfer of any property or asset that is a lease, license, conveyance or
contract or similar property or asset; (B) existing by virtue of any transfer
of, agreement to transfer, option or right with respect to, or Lien on, any
property or assets of the Company or any Restricted Subsidiary not otherwise
prohibited by the Indenture or (C) arising or agreed to in the ordinary course
of business, not relating to any Indebtedness, and that do not, individually or
in the aggregate, detract from the value of property or assets of the Company or
any Restricted Subsidiary in any manner material to the Company or any
Restricted Subsidiary;
(g) in the case of clause (iii) above, restrictions contained in any
security agreement (including a Capital Lease Obligation) securing Indebtedness
of the Company or a Restricted
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Subsidiary otherwise permitted under the Indenture, but only to the extent such
restrictions restrict the transfer of the property subject to such security
agreement; and
(h) any restriction with respect to a Restricted Subsidiary of the Company
imposed pursuant to an agreement which has been entered into for the sale or
disposition of all or substantially all of the Capital Stock or assets of such
Restricted Subsidiary, PROVIDED that the consummation of such transaction would
not result in an Event of Default or an event that, with the passing of time or
the giving of notice or both, would constitute an Event of Default, that such
restriction terminates if such transaction is not consummated and that the
consummation or abandonment of such transaction occurs within one year of the
date such agreement was entered into.
Nothing contained in this Section 4.14 shall prevent the Company or any
other Restricted Subsidiary from (1) creating, incurring, assuming or suffering
to exist any Liens otherwise permitted under Section 4.12 or (2) restricting the
sale or other disposition of property or assets of the Company or any of its
Restricted Subsidiaries that secure Indebtedness of the Company or any of its
Restricted Subsidiaries otherwise permitted under Section 4.09 hereof.
SECTION 4.15. LIMITATION ON ISSUANCE AND SALE OF CAPITAL STOCK OF
RESTRICTED SUBSIDIARIES. The Company (i) shall not permit any Restricted
Subsidiary to issue any Capital Stock other than to the Company or a Wholly-
Owned Restricted Subsidiary unless immediately after giving effect thereto such
Restricted Subsidiary would no longer constitute a Restricted Subsidiary and any
Investment of the Company or any other Restricted Subsidiary in such Restricted
Subsidiary would have been permitted under Section 4.11 hereof if made on the
date of such issuance and (ii) shall not permit any Person other than the
Company or a Wholly-Owned Restricted Subsidiary to own any Capital Stock of any
Restricted Subsidiary, other than directors' qualifying shares and except for a
sale of 100% of the Capital Stock of a Restricted Subsidiary sold in a
transaction not prohibited by the covenant described under Section 4.08 hereof.
SECTION 4.16. TRANSACTIONS WITH AFFILIATES. The Company shall not, and
shall not permit any of its Restricted Subsidiaries to, directly or indirectly,
sell, lease, transfer, or otherwise dispose of, any of its Properties or assets
to, or purchase any Property or assets from, or enter into any contract,
agreement, understanding, loan, advance or Guarantee with or for the benefit of,
any Affiliate (each of the foregoing, an "Affiliate Transaction"), unless
(a) such Affiliate Transaction or series of related Affiliate Transactions
is on terms that are no less favorable to the Company or such Restricted
Subsidiary than those that would have been obtained in a comparable arm's-length
transaction by the Company or such Restricted Subsidiary with a Person that is
not an Affiliate (or, in the event that there are no comparable transactions
involving Persons who are not Affiliates of the Company or the relevant
Restricted Subsidiary to apply for comparative purposes, is otherwise on terms
that, taken as a whole, the Company has determined to be fair to the Company or
the relevant Restricted Subsidiary) and
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(b) the Company delivers to the Trustee
(i) with respect to any Affiliate Transaction or series of related
Affiliate Transactions involving aggregate payments in excess of $1 million, a
Board Resolution certifying that such Affiliate Transaction or series of related
Affiliate Transactions complies with Section 4.16(a) and has been approved by a
majority of the disinterested members of the Board of Directors who have
determined that such Affiliate Transaction or series of related Affiliate
Transactions is in the best interest of the Company or such Restricted
Subsidiary and
(ii) with respect to any Affiliate Transaction or series of related
Affiliate Transactions involving aggregate payments in excess of $10 million, a
written opinion from an investment banking firm of national standing in the
United States which, in the good faith judgment of the Board of Directors, is
independent with respect to the Company and its Subsidiaries and qualified to
perform such task; PROVIDED that the following shall not be deemed Affiliate
Transactions:
(i) any employment agreement entered into by the Company or any of its
Restricted Subsidiaries in the ordinary course of business and consistent with
industry practice;
(ii) any agreement or arrangement with respect to the compensation of a
director or officer of the Company or any Restricted Subsidiary approved by a
majority of the disinterested members of the Board of Directors and consistent
with industry practice;
(iii) transactions between or among the Company and its Restricted
Subsidiaries;
(iv) transactions permitted by Section 4.11 hereof; and
(v) transactions pursuant to the Management Services Agreements, as in
effect on the Issue Date.
SECTION 4.17. RESTRICTED AND UNRESTRICTED SUBSIDIARIES. (a) The Company
may designate a Subsidiary (including a newly formed or newly acquired
Subsidiary) of the Company or any of its Restricted Subsidiaries as an
Unrestricted Subsidiary so long as:
(A) such Subsidiary
(i) does not have any obligations which, if in Default, would result in a
cross default on Indebtedness of the Company or a Restricted Subsidiary (other
than Indebtedness to the Company or a Restricted Subsidiary),
(ii) is not party to any agreement, contract, arrangement or understanding
with the Company or any Restricted Subsidiary of the Company unless the terms of
any such agreement, contract, arrangement or understanding are no less favorable
to the Company or such Restricted Subsidiary than those that might be obtained
at the time from Persons who are not Affiliates of
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the Company, unless such agreement, contract, arrangement or understanding
constitutes a Restricted Payment permitted by the Indenture;
(iii) is a Person with respect to which neither the Company nor any of its
Restricted Subsidiaries has any direct or indirect obligation (x) to subscribe
for additional Equity Interests or (y) to maintain or preserve such Person's
financial condition or to cause such Person to achieve any specified levels of
operating results;
(iv) has not Guaranteed or otherwise directly or indirectly provided credit
support for any Indebtedness of the Company or any of its Restricted
Subsidiaries;
(v) has at least one director on its board of directors that is not a
director or executive officer of the Company or any of its Restricted
Subsidiaries or has at least one executive officer that is not a director or
executive officer of the Company or any of its Restricted Subsidiaries;
(vi) such Subsidiary does not own any Telecommunications Assets that are
essential to the operation of the Company's business, taken as a whole and
(vii) one of the following is true:
(x) such Subsidiary has total assets of $1,000 or less,
(y) such Subsidiary has assets of more than $1,000 and an Investment in
such Subsidiary in an amount equal to the Fair Market Value of such Subsidiary
would then be permitted under Section 4.11(a) or
(z) such designation is effective immediately upon such Person becoming a
Subsidiary; and
(B) no Default or Event of Default would occur as a result of such
designation.
(b) The Company shall not, and shall not permit any of its Restricted
Subsidiaries to, take any action or enter into any transaction or series of
related transactions that would result in a Person (other than a newly formed
Subsidiary having no outstanding Indebtedness (other than Indebtedness to the
Company or a Restricted Subsidiary) at the date of determination) becoming a
Restricted Subsidiary (whether through an acquisition, the redesignation of an
Unrestricted Subsidiary or otherwise), unless, after giving effect to such
action, transaction or series of related transactions on a pro forma basis, (i)
the Company could incur at least $1 of additional Indebtedness pursuant to
Section 4.09 and (ii) no Default or Event of Default would occur.
(c) Subject to clause (b), an Unrestricted Subsidiary may be redesignated
as a Restricted Subsidiary. The designation of a Subsidiary as an Unrestricted
Subsidiary or the designation of an Unrestricted Subsidiary as a Restricted
Subsidiary in compliance with clause (b) shall be made by the Board of Directors
pursuant to a Board Resolution delivered to the Trustee and shall be effective
as of the date specified in such Board Resolution, which shall not be prior to
the date such Board Resolution is delivered to the Trustee.
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SECTION 4.18. REPORTS. For as long as any Notes remain outstanding,
whether or not required by the rules and regulations of the Commission, the
Company will furnish to the holders of Notes and file with the Commission (i)
all quarterly and annual financial information that would be required to be
contained in a filing with the Commission on Forms 10-Q and 10-K if the Company
were required to file such forms, including a "Management's Discussion and
Analysis of Financial Condition and Results of Operations" that describes the
financial condition and results of operations of the Company and its
consolidated Subsidiaries (showing in reasonable detail, either on the face of
the financial statements or in the footnotes thereto and in Management's
Discussion and Analysis of Financial Condition and Results of Operations, the
financial condition and results of operations of the Company and its Restricted
Subsidiaries separate from the financial condition and results of operations of
the Unrestricted Subsidiaries of the Company) and, with respect to the annual
information only, a report thereon by the Company's certified independent
accountants and (ii) all current reports that would be required to be filed with
the Commission on Form 8-K if the Company were required to file such reports, in
each case within the time periods specified in the Commission's rules and
regulations. In addition, for so long as any Notes are outstanding, the Company
will furnish to the holders of the Notes, securities analysts and prospective
investors or beneficial owners of the Notes, upon their request, the information
required to be delivered pursuant to Rule 144A(d)(4) under the Securities Act.
SECTION 4.19. COMPLIANCE CERTIFICATE; NOTICE OF DEFAULT OR EVENT OF
DEFAULT. The Company shall deliver to the Trustee within 120 calendar days
after the end of each fiscal year of the Company ending after the date hereof,
an Officers' Certificate stating whether or not, to the best knowledge of such
officer, the Company has complied with all conditions and covenants under this
Indenture, and, if the Company shall be in Default, specifying all such Defaults
and the nature thereof of which such officer may have knowledge.
For the purposes of this Section 4.19, compliance shall be determined
without regard to any period of grace or requirement of notice under this
Indenture.
The Company shall deliver written notice to the Trustee within 30 calendar
days after any executive officer of the Company becomes aware of the occurrence
of any event which constitutes, or with the giving of notice or the lapse of
time or both would constitute, a Default or Event of Default, describing such
Default or Event of Default, its status and what action the Company is taking or
proposes to take with respect thereto.
SECTION 4.20. LIMITATION ON BUSINESS ACTIVITIES. The Company shall not,
and shall not permit its Restricted Subsidiaries to, directly or indirectly,
engage in any business other than the Telecommunications Business.
SECTION 4.21. CALCULATION OF ORIGINAL ISSUE DISCOUNT. The Company shall
file with the Trustee promptly at the end of each calendar year (i) a written
notice specifying the amount of original issue discount (including daily rates
and accrual periods) accrued on outstanding Notes
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as of the end of such year and (ii) such other specific information relating to
such original issue discount as may then be relevant under the Code, as amended
from time to time.
ARTICLE V.
CONSOLIDATION, MERGER, CONVEYANCE, LEASE OR TRANSFER
SECTION 5.01. MERGER, CONSOLIDATION OR SALE OF ASSETS. The Company shall
not in any transaction or series of related transactions, consolidate with, or
merge with or into, any other Person or permit any other Person to merge with or
into the Company (other than a merger of a Restricted Subsidiary of the Company
into the Company in which the Company is the continuing corporation), or sell,
convey, assign, transfer, lease or otherwise dispose of all or substantially all
of the Property and assets of the Company and its Restricted Subsidiaries taken
as a whole to any other Person, unless:
(a) either (i) the Company shall be the continuing corporation or (ii) the
corporation (if other than the Company) formed by such consolidation or into
which the Company is merged, or the Person which acquires, by sale, assignment,
conveyance, transfer, lease or disposition, all or substantially all of the
Property and assets of the Company and its Restricted Subsidiaries taken as a
whole (any such corporation or Person being the "Surviving Entity") shall be a
corporation organized and validly existing under the laws of the United States
of America, any political subdivision thereof, any state thereof or the District
of Columbia, and shall expressly assume, by an indenture supplemental hereto,
executed and delivered to the Trustee, in form reasonably satisfactory to the
Trustee, the due and punctual payment of the principal of (and premium, if any)
and interest on all the Notes and the performance of every covenant and
obligation in this Indenture on the part of the Company to be performed or
observed;
(b) immediately after giving effect to such transaction or series of
related transactions on a pro forma basis (including, without limitation, any
Indebtedness incurred in connection with or in respect of such transaction or
series of related transactions), no Default or Event of Default shall have
occurred and be continuing;
(c) immediately after giving effect to such transaction or series of
related transactions on a pro forma basis (including, without limitation, any
Indebtedness Incurred in connection with or in respect of such transaction or
series of related transactions), the Company (or the Surviving Entity, if the
Company is not continuing) would (A) be permitted to Incur $1.00 of additional
Indebtedness under Section 4.09(a) hereof and (B) have a Consolidated Net Worth
that is not less than the Consolidated Net Worth of the Company immediately
before such transaction or series of related transactions; PROVIDED THAT this
Section 5.01(c) shall not apply to a merger of the Company or a Restricted
Subsidiary into a wholly-owned Subsidiary solely for the purpose of
reincorporating the Company or such Restricted Subsidiary in the State of
Delaware; and
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(d) if, as a result of any such transaction, Property of the Company would
become subject to a Lien prohibited by the provisions of the Indenture described
under Section 4.12 hereof, the Company or the successor entity to the Company
shall have secured the Notes as required thereby.
In connection with any consolidation, merger, conveyance, lease or other
disposition contemplated by this Section 5.01, the Company shall deliver, or
cause to be delivered, to the Trustee, in form reasonably satisfactory to the
Trustee, an Officers' Certificate and an Opinion of Counsel, each stating that
such consolidation, merger, conveyance, lease or disposition and any
supplemental indenture in respect thereto comply with this Article V and that
all conditions precedent herein provided for relating to such transaction have
been complied with.
SECTION 5.02. SUCCESSOR CORPORATION SUBSTITUTED. Upon any consolidation
with, or merger by the Company with or into, any other corporation, or any sale,
assignment, transfer, lease, conveyance or other disposition of all or
substantially all of the Property and assets of the Company and its Restricted
Subsidiaries taken as a whole in accordance with Section 5.01 hereof, the
successor corporation formed by such consolidation or into which the Company is
merged, or the Person to which such sale, conveyance, assignment, transfer,
lease, conveyance or other disposition is made, shall succeed to, and be
substituted for, and may exercise every right and power of, the Company under
this Indenture with the same effect as if such successor Person has been named
as the Company herein; and thereafter the predecessor corporation shall be
relieved of all obligations and covenants under this Indenture and the Notes,
except for the obligation to pay the principal of (and premium, if any) and
interest on the Notes.
ARTICLE VI.
DEFAULTS AND REMEDIES
SECTION 6.01. EVENTS OF DEFAULT. "Event of Default," wherever used herein
with respect to the Notes, means any one of the following events (whatever the
reason for such event, and whether it shall be voluntary or involuntary, or be
effected by operation of law, pursuant to any judgment, decree or order of any
court or any order, rule or regulation of any administrative or governmental
body):
(a) default in the payment of interest (including any Special Interest) on
any Note when the same becomes due and payable, and the continuance of such
Default for a period of 30 calendar days; or
(b) default in the payment of the principal of (or premium, if any, on) any
Note when the same becomes due and payable whether upon Maturity, optional
redemption, required repurchase (including pursuant to a Change of Control Offer
or an Asset Sale Offer) or otherwise, or the failure to make an offer to
purchase any Note as herein required; or
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(c) default in the performance, or breach, of any covenant or agreement
contained in Section 4.07, Section 4.08, Section 4.09, Section 4.11, Section
4.12, Section 4.14 or Article V hereof; or
(d) default in the performance, or breach, of any covenant or warranty of
the Company contained in this Indenture or the Notes (other than a covenant or
warranty addressed in Section 6.01(a), Section 6.01(b) or Section 6.01(c)
hereof), and the continuance of such Default or breach for a period of 60
calendar days after written notice thereof has been given to the Company by the
Trustee or to the Company and the Trustee by the Holders of at least 25 percent
of the aggregate principal amount of the outstanding Notes specifying such
Default and stating that such notice is a "Notice of Default" delivered in
connection with this Indenture; or
(e) (i) any payment of principal, and premium, if any, in excess of $5
million with respect to Indebtedness of the Company or any Restricted Subsidiary
is not paid when due within the applicable grace period, if any, or (ii)
Indebtedness of the Company or any Restricted Subsidiary is accelerated by the
holders thereof and the amount of principal and premium, if any, of such
accelerated Indebtedness exceeds $5 million; or
(f) a final judgment or final judgments for the payment of money (other
than to the extent covered by insurance as to which the insurance company has
acknowledged coverage and other than to the extent covered by an indemnity given
by an insurance company) is entered against the Company or any Restricted
Subsidiary of the Company in an aggregate amount in excess of $5 million by a
court or courts of competent jurisdiction, which judgment is not discharged,
waived, stayed, bonded or satisfied for a period of 45 consecutive calendar
days; or
(g) the entry by a court having jurisdiction in the premises of (i) a
decree or order for relief in respect of the Company or any Restricted
Subsidiary of the Company in an involuntary case or proceeding under United
States bankruptcy laws, as now or hereafter constituted, or any other applicable
Federal, state, or foreign bankruptcy, insolvency, or other similar law or (ii)
a decree or order adjudging the Company or any Restricted Subsidiary of the
Company a bankrupt or insolvent, or approving as properly filed a petition
seeking reorganization, arrangement, adjustment or composition of, or in respect
of, the Company or any Restricted Subsidiary of the Company under United States
bankruptcy laws, as now or hereafter constituted, or any other applicable
Federal, state or foreign bankruptcy, insolvency, or similar law, or appointing
a custodian, receiver, liquidator, assignee, trustee, sequestrator or other
similar official of the Company or any Restricted Subsidiary of the Company or
of any substantial part of the Property or assets of the Company or any
Restricted Subsidiary of the Company, or ordering the winding-up or liquidation
of the affairs of the Company or any Restricted Subsidiary of the Company, and
the continuance of any such decree or order for relief or any such other decree
or order unstayed and in effect for a period of 45 consecutive calendar days; or
(h) the commencement by the Company or any Restricted Subsidiary of the
Company of a voluntary case or proceeding under United States bankruptcy laws,
as now or hereafter constituted, or any other applicable Federal, state, or
foreign bankruptcy, insolvency or other
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similar law or of any other case or proceeding to be adjudicated a bankrupt or
insolvent; or (ii) the consent by the Company or any Restricted Subsidiary of
the Company to the entry of a decree or order for relief in respect of the
Company or any Restricted Subsidiary of the Company in an involuntary case or
proceeding under United States bankruptcy laws, as now or hereafter constituted,
or any other applicable Federal, state, or foreign bankruptcy, insolvency, or
other similar law or to the commencement of any bankruptcy or insolvency case or
proceeding against the Company or any Restricted Subsidiary of the Company; or
(iii) the filing by the Company or any Restricted Subsidiary of the Company of a
petition or answer or consent seeking reorganization or relief under United
States bankruptcy laws, as now or hereafter constituted, or any other applicable
Federal, state or foreign bankruptcy, insolvency or other similar law; or (iv)
the consent by the Company or any Restricted Subsidiary of the Company to the
filing of such petition or to the appointment of or taking possession by a
custodian, receiver, liquidator, assignee, trustee, sequestrator or similar
official of the Company or any Restricted Subsidiary of the Company or of any
substantial part of the Property or assets of the Company or any Restricted
Subsidiary of the Company, or the making by the Company or any Restricted
Subsidiary of the Company of an assignment for the benefit of creditors; or (v)
the admission by the Company or any Restricted Subsidiary of the Company in
writing of its inability to pay its debts generally as they become due; or (vi)
the taking of corporate action by the Company or any Restricted Subsidiary of
the Company in furtherance of any such action.
SECTION 6.02. ACCELERATION. If any Event of Default (other than an Event
of Default specified in Section 6.01(g) or Section 6.01(h) hereof) occurs and is
continuing, then and in every such case, the Trustee by a notice in writing to
the Company may, and at the direction of the Holders of not less than 25 percent
of the outstanding aggregate principal amount of Notes by a notice in writing to
the Company and the Trustee, shall declare the Default Amount and any accrued
and unpaid interest on all Notes then outstanding to be immediately due and
payable. Upon any such declaration, such Default Amount and any accrued and
unpaid interest on all Notes then outstanding will become and be immediately due
and payable.
If an Event of Default specified in Section 6.01(g) or Section 6.01(h)
hereof occurs, the Default Amount and any accrued and unpaid interest on all
Notes then outstanding shall ipso facto become and be immediately due and
payable without any declaration or other act on the part of the Trustee or any
Holder of Notes.
In the event of a declaration of acceleration because an Event of Default
set forth in Section 6.01(e) hereof has occurred and is continuing, such
declaration of acceleration shall be automatically rescinded and annulled if the
event of default triggering such Event of Default pursuant to Section 6.01(e)
hereof shall be remedied, or cured, or waived by the holders of the relevant
Indebtedness, within 60 calendar days after such event of default; provided no
judgment or decree for the payment of the money due on the Notes has been
obtained by the Trustee as hereinafter in this Article VI provided.
In the case of any Event of Default occurring by reason of any willful
action (or inaction) taken (or not taken) by or on behalf of the Company with
the intention of avoiding payment of
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the premium that the Company would have had to pay if the Company then had
elected to redeem the Notes pursuant to the optional redemption provisions of
the Indenture, an equivalent premium shall also become and be immediately due
and payable to the extent permitted by law upon the acceleration of the Notes.
If an Event of Default occurs prior to April 15, 2003 by reason of any willful
action (or inaction) taken (or not taken) by or on behalf of the Company with
the intention of avoiding the prohibition on redemption of the Notes prior to
such date, then the premium specified in the Indenture shall also become
immediately due and payable to the extent permitted by law upon the acceleration
of the Notes.
At any time after a declaration of acceleration with respect to Notes has
been made and before a judgment or decree for payment of the money due has been
obtained by the Trustee as hereinafter in this Article VI provided, the Holders
of a majority in principal amount of the outstanding Notes, by written notice to
the Company and the Trustee, may rescind and annul such declaration and its
consequences if,
(a) the Company has paid or deposited with the Trustee a sum sufficient to
pay
(i) all overdue installments of interest on all Notes,
(ii) the principal of (and premium, if any, on) any Notes which have
become due otherwise than by such declaration of acceleration and interest
thereon at the rate or rates prescribed therefor in such Notes,
(iii) to the extent that payment of such interest is lawful, interest on
the Defaulted Interest at the rate prescribed therefor in the Notes and this
Indenture, and
(iv) all moneys paid or advanced by the Trustee hereunder and the
reasonable compensation, expenses, disbursements and advances of the Trustee,
its agents and counsel and all other amounts due to the Trustee pursuant to
Section 7.07 hereof; and
(b) all Events of Default with respect to the Notes, other than the
non-payment of the principal of Notes which have become due solely by such
declaration of acceleration, have been cured or waived by the Holders as
provided herein.
No such rescission shall affect any subsequent Default or impair any right
consequent thereon.
SECTION 6.03. OTHER REMEDIES. The Company covenants that if an Event of
Default specified in Section 6.01(a) or Section 6.01(b) occurs the Company
shall, upon demand of the Trustee, pay to the Trustee, for the benefit of the
Holders, the whole amount then due and payable on the Notes for principal (and
premium, if any) and interest and, to the extent that payment of such interest
shall be legally enforceable, interest upon the overdue principal (and premium,
if any) and upon Defaulted Interest, at the rate or rates prescribed therefor in
such Notes; and, in addition thereto, such further amount as shall be sufficient
to cover the costs and
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expenses of collection, including the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents and counsel and all other
amounts due to the Trustee pursuant to Section 7.07 hereof.
If the Company fails to pay such amounts forthwith upon such demand, the
Trustee, in its own name and as trustee of an express trust, may and, at the
direction of the Holders of not less than a majority of the outstanding
aggregate principal amount of the Notes, shall institute a judicial proceeding
for the collection of the sums so due and unpaid, and may prosecute such
proceeding to judgment or final decree, and may enforce the same against the
Company or any other obligor upon such Notes and collect the moneys adjudged or
decreed to be payable in the manner provided by law out of the Property and
assets of the Company or any other obligor upon such Notes, wherever situated.
If an Event of Default with respect to the Notes occurs and is continuing,
the Trustee may in its discretion proceed to protect and enforce its rights and
the rights of the Holders by such appropriate judicial proceedings as the
Trustee shall deem most effectual to protect and enforce any such rights,
whether for the specific enforcement of any covenant or agreement in this
Indenture or in aid of the exercise of any power granted herein, or to enforce
any other proper remedy.
SECTION 6.04. WAIVER OF PAST DEFAULTS. The Holders of not less than a
majority in principal amount of the outstanding Notes may, on behalf of the
Holders of all the Notes, waive any past Default and its consequences under this
Article VI, except a Default (a) in the payment of the principal of (or premium,
if any) or interest on, any Note, or (b) in respect of a covenant or provision
hereof which under Section 9.02 hereof cannot be modified or amended without the
consent of the Holders of each outstanding Note affected.
SECTION 6.05. CONTROL BY MAJORITY. The Holders of not less than a
majority in principal amount of the outstanding Notes shall have the right to
direct the time, method and place of conducting any proceeding for any remedy
available to the Trustee or exercising any trust or power conferred on the
Trustee; PROVIDED that
(a) such direction shall not be in conflict with any rule of law or with
this Indenture or unduly prejudicial to the rights of other Holders and would
not subject the Trustee to personal liability, and
(b) the Trustee may take any other action deemed proper by the Trustee
which is not inconsistent with such direction.
SECTION 6.06. LIMITATION ON SUITS. No Holder of Notes shall have any
right to institute any proceeding, judicial or otherwise, with respect to this
Indenture, or for the appointment of a receiver or trustee, or for any other
remedy hereunder, unless
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(a) such Holder has previously given written notice to the Trustee of a
continuing Event of Default with respect to the Notes;
(b) the Holders of not less than 25 percent in principal amount of the
outstanding Notes shall have made written request to the Trustee to institute
proceedings in respect of such Event of Default in its own name as Trustee
hereunder;
(c) such Holder or Holders have offered and, if requested, provided to
the Trustee security or indemnity satisfactory to the Trustee in its reasonable
discretion against the costs, expenses and liabilities to be incurred in
compliance with such request;
(d) the Trustee for 30 calendar days after its receipt of such notice,
request and offer of indemnity has failed to institute any such proceeding; and
(e) no direction inconsistent with such written request has been given to
the Trustee during such 30-day period by the Holders of a majority in principal
amount of the outstanding Notes;
in any event, it being understood and intended that no one or more Holders of
Notes shall have any right in any manner whatever by virtue of, or by availing
of, any provision of this Indenture to affect, disturb or prejudice the rights
of any other Holders of Notes, or to obtain or to seek to obtain priority or
preference over any other of such Holders or to enforce any right under this
Indenture, except in the manner herein provided and for the equal and ratable
benefit of all Holders of Notes.
SECTION 6.07. RIGHTS OF HOLDERS TO RECEIVE PAYMENT. Notwithstanding any
other provision of this Indenture, the right of any Holder to receive payment of
principal of (premium, if any) and interest on the Notes held by such Holder, on
or after the respective due dates expressed in the Notes or the redemption dates
or purchase dates provided for therein, or to bring suit for the enforcement of
any such payment on or after such respective dates, shall be absolute and
unconditional and shall not be impaired or affected without the consent of such
Holder.
SECTION 6.08. TRUSTEE MAY FILE PROOFS OF CLAIM. In case of the pendency
of any receivership, insolvency, liquidation, bankruptcy, reorganization,
arrangement, adjustment, composition or other judicial proceedings, or any
voluntary or involuntary case under United States bankruptcy laws, as now or
hereafter constituted, relative to the Company or any other obligor upon the
Notes or the Property and assets of the Company or of such other obligor or
their creditors, the Trustee (irrespective of whether the principal of such
Notes shall then be due and payable as therein expressed or by declaration or
otherwise and irrespective of whether the Trustee shall have made any demand on
the Company for the payment of overdue principal or interest) shall be entitled
and empowered, by intervention in such proceeding or otherwise, (i) to file and
prove a claim for the whole amount of principal (and premium, if any) and
interest owing and unpaid in respect of the Notes, to file such other papers or
documents and to take such other actions, including participating as a member or
otherwise in any official committee of creditors
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appointed in the matter, as may be necessary or advisable in order to have the
claims of the Trustee (including any claim for the reasonable compensation,
expenses, disbursements and advances of the Trustee, its agents and counsel and
all other amounts due to the Trustee pursuant to Section 7.07 hereof) and of the
Holders allowed in such judicial proceeding, and (ii) to collect and receive any
moneys or other Property payable or deliverable on any such claims and to
distribute the same; and any receiver, assignee, trustee, custodian, liquidator,
sequestrator (or other similar official) in any such proceeding is hereby
authorized by each Holder to make such payments to the Trustee, and in the event
that the Trustee shall consent to the making of such payments directly to the
Holders, to pay to the Trustee any amount due it for the reasonable
compensation, expenses, disbursements and advances of the Trustee, its agents
and counsel, and any other amounts due the Trustee under Section 7.07 hereof.
Nothing contained herein shall be deemed to authorize the Trustee to authorize
or consent to or accept or adopt on behalf of any Holder any plan of
reorganization, arrangement, adjustment or composition affecting the Notes or
the rights of any Holder thereof, or to authorize the Trustee to vote in respect
of the claim of any Holder in any such proceeding.
SECTION 6.09. PRIORITIES. Any money collected by the Trustee pursuant to
this Article VI shall be applied in the following order, at the date or dates
fixed by the Trustee and, in case of the distribution of such money on account
of principal (premium, if any) or interest, upon presentation of the Notes and
the notation thereon of the payment if only partially paid and upon surrender
thereof if fully paid:
FIRST: To the payment of all amounts due the Trustee under Section 7.07
hereof;
SECOND: To the payment of the amounts then due and unpaid for principal of
(and premium, if any) and interest on the Notes, ratably, without preference or
priority of any kind, according to the amounts due and payable on such Notes for
principal (and premium, if any) and interest, respectively; and
THIRD: To the Company.
The Trustee may fix a record date and payment date for any payment to
Holders pursuant to this Section 6.09. At least 15 calendar days before such
record date, the Company shall mail to each Holder and the Trustee a notice that
states such record date, the payment date and amount to be paid. The Trustee
may mail such notice in the name and at the expense of the Company.
SECTION 6.10. UNDERTAKING FOR COSTS. All parties to this Indenture agree,
and each Holder of any Note by such Holder's acceptance thereof shall be deemed
to have agreed, that any court may in its discretion require, in any suit for
the enforcement of any right or remedy under this Indenture, or in any suit
against the Trustee for any action taken, suffered or omitted by it as Trustee,
the filing by any party litigant in such suit of an undertaking to pay the costs
of such suit and that such court may in its discretion assess reasonable costs,
including reasonable attorneys' fees, against any party litigant in such suit,
having due regard to the merits and good faith of the claims or defenses made by
such party litigant; but the provisions of this Section shall not apply
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to any suit instituted by the Trustee, to any suit instituted by any Holder, or
group of Holders, holding in the aggregate more than 10 percent in principal
amount of the outstanding Notes, or to any suit instituted by any Holder for the
enforcement of the payment of the principal of (or premium, if any) or interest
on any Note on or after its Stated Maturity.
SECTION 6.11. WAIVER OF STAY OR EXTENSION LAWS. The Company (to the
extent it may lawfully do so) shall not at any time insist upon, or plead, or in
any manner whatsoever claim or take the benefit or advantage of, any stay or
extension law wherever enacted, now or at any time hereafter in force, which may
affect the covenants or the performance of this Indenture; and the Company (to
the extent that it may lawfully do so) hereby expressly waives all benefit or
advantage of any such law, and shall not hinder, delay or impede the execution
of any power herein granted to the Trustee, but shall suffer and permit the
execution of every such power as though no such law had been enacted.
SECTION 6.12. TRUSTEE MAY ENFORCE CLAIMS WITHOUT POSSESSION OF THE NOTES.
All rights of action and claims under this Indenture or the Notes may be
prosecuted and enforced by the Trustee without the possession of any of the
Notes or the production thereof in any proceeding relating thereto, and any such
proceeding instituted by the Trustee shall be brought in its own name, as
trustee of an express trust, and any recovery of judgment shall, after provision
for the payment of the reasonable compensation, expenses, disbursements and
advances of the Trustee, its agents and counsel, be for the ratable benefit of
the Holders of the Notes.
SECTION 6.13. RESTORATION OF RIGHTS AND REMEDIES. If the Trustee or any
Holder of Notes has instituted any proceeding to enforce any right or remedy
under this Indenture and such proceeding has been discontinued or abandoned for
any reason, or has been determined adversely to the Trustee or to such Holder,
then and in every such case the Company, the Trustee and the Holders shall,
subject to any determination in such proceeding, be restored severally and
respectively to their former positions hereunder, and thereafter all rights and
remedies of the Trustee and the Holders shall continue as though no such
proceeding had been instituted.
SECTION 6.14. RIGHTS AND REMEDIES CUMULATIVE. Except as otherwise
provided herein, no right or remedy herein conferred upon or reserved to the
Trustee or to the Holders is intended to be exclusive of any other right or
remedy, and every right and remedy shall, to the extent permitted by law, be
cumulative and in addition to every other right and remedy given hereunder or
now or hereafter existing at law or in equity or otherwise. The assertion or
employment of any right or remedy hereunder, or otherwise, shall not prevent the
concurrent assertion or employment of any other appropriate right or remedy.
SECTION 6.15. DELAY OR OMISSION NOT WAIVER. No delay or omission of the
Trustee or of any Holder of any Note to exercise any right or remedy accruing
upon any Event of Default shall impair any such right or remedy or constitute a
waiver of any such Event of Default or an acquiescence therein. Every right and
remedy given by this Article VI or by law to the Trustee or to the Holders may
be exercised from time to time, and as often as may be deemed expedient, by the
Trustee or by the Holders, as the case may be.
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ARTICLE VII.
TRUSTEE
SECTION 7.01. DUTIES OF TRUSTEE. (a) If an Event of Default has occurred
and is continuing, the Trustee shall exercise the rights and powers vested in it
by this Indenture and shall use the same degree of care and skill in their
exercise as a prudent person would exercise or use under the circumstances in
the conduct of such person's own affairs.
(b) Except during the continuance of an Event of Default of which a Trust
Officer has actual knowledge: (i) the Trustee undertakes to perform such duties
and only such duties as are specifically set forth in this Indenture and no
implied covenants or obligations shall be read into this Indenture against the
Trustee; and (ii) in the absence of bad faith on its part, the Trustee may
conclusively rely, as to the truth of the statements and the correctness of the
opinions expressed therein, upon certificates or opinions furnished to the
Trustee and conforming to the requirements of this Indenture; PROVIDED that in
the case of any such certificates or opinions that by any provision of this
Indenture are specifically required to be furnished to the Trustee, the Trustee
shall examine such certificates and opinions to determine whether or not they
conform to the requirements of this Indenture (but need not confirm or
investigate the accuracy of any mathematical calculations or other facts stated
therein).
(c) The Trustee may not be relieved from liability for its own negligent
action, its own negligent failure to act or its own willful misconduct; PROVIDED
that: (i) this paragraph (c) shall not limit the effect of paragraph (b) of this
Section 7.01; (ii) the Trustee shall not be liable for any error of judgment
made in good faith by a Trust Officer unless it is proved that the Trustee was
negligent in ascertaining the pertinent facts; and (iii) the Trustee shall not
be liable with respect to any action it takes or omits to take in good faith in
accordance with a direction received by it pursuant to Section 6.05 hereof.
(d) Money held in trust by the Trustee need not be segregated from other
funds except to the extent required by law.
(e) No provision of this Indenture shall require the Trustee to expend or
risk its own funds or otherwise incur any financial liability in the performance
of any of its duties hereunder, or in the exercise of any of its rights or
powers.
(f) Every provision of this Indenture relating to the conduct or affecting
the liability of or affording protection to the Trustee shall be subject to the
provisions of this Article VII and to the provisions of the Trust Indenture Act.
SECTION 7.02. RIGHTS OF TRUSTEE. (a) The Trustee may conclusively rely
on any document (whether in its original or facsimile form) believed by it to be
genuine and to have
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been signed or presented by the proper Person. Except as provided in Section
7.01(b) hereof, the Trustee need not investigate any fact or matter stated in
the document.
(b) Before the Trustee acts or refrains from acting, it may require an
Officers' Certificate or an Opinion of Counsel. The Trustee shall not be liable
for any action it takes or omits to take in good faith in reliance on any
Officers' Certificate or Opinion of Counsel.
(c) The Trustee may act through agents and shall not be responsible for
the misconduct or negligence of any such agent; PROVIDED that such agent was
appointed with due care by the Trustee.
(d) The Trustee shall not be liable for any action it takes or omits to
take in good faith which it believes to be authorized or within its rights or
powers; PROVIDED that the Trustee's conduct does not constitute willful
misconduct or gross negligence.
(e) The Trustee shall not be charged with knowledge of any Default or
Event of Default under Section 6.01(c), 6.01(d), 6.01(e) or 6.01(f) hereof, or
of the existence of any Change of Control or Asset Sale unless either (i) a
Trust Officer shall have actual knowledge thereof, or (ii) the Trustee shall
have received notice thereof in accordance with Section 10.02 hereof from the
Company or any Holder of Notes.
(f) The Trustee may consult with counsel of its selection and the advice
of such counsel or any Opinion of Counsel shall be full and complete
authorization and protection in respect of any action taken, suffered or omitted
by it hereunder in good faith and in reliance thereon.
(g) The Trustee shall not be bound to make any investigation into the
facts or matters stated in any resolution, certificate, statement, instrument,
opinion, report, notice, request, direction, consent, order, bond, debenture or
other paper or document, but the Trustee, in its discretion may make such
further inquiry or investigation into such facts or matters as it may see fit,
and, if the Trustee shall determine to make such further inquiry or
investigation, it shall be entitled at the sole expense of the Company to
examine the books, records and premises of the Company, personally or by agent
or attorney and shall incur no liability or additional liability of any kind by
reason of such inquiry or investigation.
(h) The Trustee shall not be liable for any action it takes or omits to
take in good faith in accordance with the direction of the Holders of a majority
of the aggregate outstanding principal amount of Notes relating to the time,
method and place of conducting any proceeding for any remedy available to the
Trustee, or exercising any trust or power conferred upon the Trustee, under this
Indenture.
SECTION 7.03. INDIVIDUAL RIGHTS OF TRUSTEE. The Trustee, any Paying Agent
or Note Registrar, in its individual or any other capacity, may become the owner
or pledgee of Notes and may otherwise deal with the Company or its Affiliates
with the same rights it would have if it
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were not Trustee, Paying Agent or Note Registrar hereunder, as the case may be;
PROVIDED that the Trustee must in any event comply with Sections 7.10 and 7.11
hereof.
SECTION 7.04. TRUSTEE'S DISCLAIMER. The Trustee shall not be responsible
for and makes no representation as to the validity or adequacy of this Indenture
or the Notes, it shall not be accountable for the Company's use of the proceeds
from the Notes, and it shall not be responsible (a) for any statement of the
Company in this Indenture, including the recitals contained herein, or in any
document issued in connection with the sale of the Notes or in the Notes other
than the Trustee's certificate of authentication or (b) for compliance by the
Company with the Registration Rights Agreement.
SECTION 7.05. NOTICE OF DEFAULTS. Within 90 calendar days after the
occurrence of any Default hereunder known to a Trust Officer with respect to the
Notes, the Trustee shall transmit by mail to all Holders, as their names and
addresses appear in the Note Register, notice of such Default hereunder known to
the Trustee, unless such Default shall have been cured or waived; PROVIDED that,
except in the case of a Default in the payment of the principal of (or premium,
if any) or interest on any Note, the Trustee shall be protected in withholding
such notice if and so long as the board of directors, the executive committee or
a trust committee of directors and/or Trust Officers of the Trustee in good
faith determine that the withholding of such notice is in the interest of the
Holders.
SECTION 7.06. PRESERVATION OF INFORMATION; REPORTS BY TRUSTEE TO HOLDERS.
(a) The Company shall furnish or cause to be furnished to the Trustee:
(i) semiannually, not less than 10 calendar days prior to each Interest
Payment Date, a list, in such form as the Trustee may reasonably require, of the
names and addresses of the Holders as of the Regular Record Date immediately
preceding such Interest Payment Date, and
(ii) at such other times as the Trustee may request in writing, within 30
calendar days after the receipt by the Company of any such request, a list of
similar form and content as of a date not more than 15 calendar days prior to
the time such list is furnished; PROVIDED that if and so long as the Trustee
shall be the Note Registrar for the Notes, no such list need be furnished with
respect to the Notes.
(b) The Trustee shall preserve, in as current a form as is reasonably
practicable, the names and addresses of Holders contained in the most recent
list furnished to the Trustee as provided in Section 7.06(a) hereof and the
names and addresses of Holders received by the Trustee in its capacity as Note
Registrar, if so acting. The Trustee may destroy any list furnished to it as
provided in Section 7.06(a) hereof upon receipt of a new list so furnished.
(c) Holders may communicate as provided in Section 312(b) of the Trust
Indenture Act with other Holders with respect to their rights under this
Indenture or under the Notes.
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(d) Each Holder, by receiving and holding the same, agrees with the
Company and the Trustee that neither the Company nor the Trustee shall be held
accountable by reason of the disclosure of any such information as to the names
and addresses of the Holders in accordance with this Section 7.06, regardless of
the source from which such information was derived, and that the Trustee shall
not be held accountable by reason of mailing any material pursuant to a request
made under this Section 7.06.
(e) Within 60 calendar days after October 15 of each year commencing with
the year 1998, the Trustee shall transmit by mail to all Holders of Notes, a
brief report dated as of such October 15 if and to the extent required under
Section 313(a) of the Trust Indenture Act.
(f) The Trustee shall comply with Sections 313(b) and 313(c) of the Trust
Indenture Act.
(g) A copy of each report described in Section 7.06(e) hereof shall, at
the time of its transmission to Holders, be filed by the Trustee with each stock
exchange, if any, upon which the Notes are then listed, with the Commission and
also with the Company. The Company shall promptly notify the Trustee of any
stock exchange upon which the Notes are listed or any delisting therefrom.
SECTION 7.07. COMPENSATION AND INDEMNITY. The Company shall pay to the
Trustee from time to time such compensation as shall be agreed upon in writing
for their services. The Company shall reimburse the Trustee upon request for all
out-of-pocket expenses incurred or made by them, including costs of collection,
in addition to the compensation for their services. Such expenses shall include
the compensation and expenses, disbursements and advances of the Trustee's
counsel. The Trustee's compensation shall not be limited by any law on
compensation of a trustee of an express trust.
The Company shall indemnify each of the Trustee and any predecessor Trustee
for, and hold them harmless against, any and all loss, liability, claim, damage
or expense (including reasonable attorneys' fees and taxes other than taxes
based on the income of the Trustee) arising out of or incurred by it in
connection with the acceptance or administration of the trust created by this
Indenture and the performance of its duties hereunder, except as set forth in
the next paragraph. The Trustee shall notify the Company promptly of any claim
for which it may seek indemnity. Failure by the Trustee to so notify the Company
shall not relieve the Company of its obligations hereunder. The Company shall
defend any such claim and the Trustee shall cooperate in the defense of such
claim. The Trustee may have separate counsel of its selection and the Company
shall pay the reasonable fees and expenses of such counsel. The Company need not
pay for any settlement made without its consent, which consent shall not be
unreasonably withheld.
The Company need not reimburse any expense or indemnify against any loss,
liability or expense incurred by the Trustee through the Trustee's own willful
misconduct, negligence or bad faith.
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To secure the Company's payment obligations in this Section 7.07, the
Trustee shall have a Lien prior to the Notes on all money or property held or
collected by the Trustee other than money or property held in trust to pay
principal of, premium, if any, and interest on, particular Notes.
The Company's payment obligations pursuant to this Section 7.07 shall
survive the resignation or removal of the Trustee and discharge of this
Indenture. Subject to any other rights available to the Trustee under
applicable bankruptcy law, when the Trustee incurs expenses after the occurrence
of a Default specified in Section 6.01(g) or Section 6.01(h) hereof, the
expenses are intended to constitute expenses of administration under bankruptcy
law.
SECTION 7.08. REPLACEMENT OF TRUSTEE. (a) No resignation or removal of
the Trustee and no appointment of a successor Trustee pursuant to this Article
VII shall become effective until the acceptance of appointment by the successor
Trustee under this Section 7.08.
(b) The Trustee may resign at any time by giving written notice thereof to
the Company. If an instrument of acceptance by a successor Trustee shall not
have been delivered to the Trustee within 30 calendar days after the giving of
such notice of resignation, the resigning Trustee may petition at the expense of
the Company any court of competent jurisdiction for the appointment of a
successor Trustee.
(c) The Trustee may be removed at any time by Act of the Holders of a
majority in principal amount of the outstanding Notes, delivered to the Trustee
and to the Company. If an instrument of acceptance by a successor Trustee shall
not have been delivered to the Trustee within 30 calendar days after such
removal, the removed Trustee may petition at the expense of the Company any
court of competent jurisdiction for the appointment of a successor Trustee.
(d) If at any time:
(i) the Trustee shall fail to comply with Section 310(b) of the Trust
Indenture Act after written request therefor by the Company or by any Holder who
has been a bona fide Holder of a Note for at least six months, unless the
Trustee's duty to resign is stayed in accordance with the provisions of Section
310(b) of the Trust Indenture Act; or
(ii) the Trustee shall cease to be eligible under Section 7.10 hereof and
shall fail to resign after written request therefor by the Company or by any
such Holder; or
(iii) the Trustee shall become incapable of acting or a decree or order
for relief by a court having jurisdiction in the premises shall have been
entered in respect of the Trustee in an involuntary case under the United States
bankruptcy laws, as now or hereafter constituted, or any other applicable
Federal or state bankruptcy, insolvency or similar law; or a decree or order by
a court having jurisdiction in the premises shall have been entered for the
appointment of a receiver, custodian, liquidator, assignee, trustee,
sequestrator (or other similar official) of the Trustee or of its Property and
assets or affairs, or any public officer shall take charge or control of
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the Trustee or of its Property and assets or affairs for the purpose of
rehabilitation, conservation, winding up or liquidation; or
(iv) the Trustee shall commence a voluntary case under the United States
bankruptcy laws, as now or hereafter constituted, or any other applicable
Federal or state bankruptcy, insolvency or similar law or shall consent to the
appointment of or taking possession by a receiver, custodian, liquidator,
assignee, trustee, sequestrator (or other similar official) of the Trustee or
its Property and assets or affairs, or shall make an assignment for the benefit
of creditors, or shall admit in writing its inability to pay its debts generally
as they become due, or shall take corporate action in furtherance of any such
action,
then, in any such case, (i) the Company by a Board Resolution may remove
the Trustee with respect to the Notes, or (ii) subject to Section 6.10 hereof,
any Holder who has been a bona fide Holder of a Note for at least six months
may, on behalf of such Holder and all others similarly situated, petition any
court of competent jurisdiction for the removal of the Trustee and the
appointment of a successor Trustee for the Notes.
(e) If the Trustee shall resign, be removed or become incapable of acting,
or if a vacancy shall occur in the office of Trustee for any cause, the Company,
by or pursuant to a Board Resolution, shall promptly appoint a successor
Trustee. If, within one year after such resignation, removal or incapability,
or the occurrence of such vacancy, a successor Trustee shall be appointed by the
Holders of a majority in principal amount of the outstanding Notes delivered to
the Company and the retiring Trustee, the successor Trustee so appointed shall,
forthwith upon its acceptance of such appointment in accordance with this
Section 7.08, become the successor Trustee and to that extent replace any
successor Trustee appointed by the Company. If no successor Trustee shall have
been so appointed by the Company or the Holders and shall have accepted
appointment in the manner hereinafter provided, any Holder that has been a bona
fide Holder of a Note for at least six months may, subject to Section 6.10
hereof, on behalf of himself and all others similarly situated, petition any
court of competent jurisdiction for the appointment of a successor Trustee.
(f) The Company shall give notice of each resignation and each removal of
the Trustee and each appointment of a successor Trustee by mailing written
notice of such resignation, removal and appointment by first class mail, postage
prepaid, to the Holders as their names and addresses appear in the Note
Register. Each notice shall include the name of the successor Trustee with
respect to the Notes and the address of its Corporate Trust Office.
(g) In the event of an appointment hereunder of a successor Trustee, each
such successor Trustee so appointed shall execute, acknowledge and deliver to
the Company and to the retiring Trustee an instrument accepting such
appointment, and thereupon the resignation or removal of the retiring Trustee
shall become effective and such successor Trustee, without any further act, deed
or conveyance, shall become vested with all the rights, powers, trusts and
duties of the retiring Trustee but, on request of the Company or the successor
Trustee, such retiring Trustee shall, upon payment of its charges, execute and
deliver an instrument transferring to such
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successor Trustee all the rights, powers and trusts of the retiring Trustee, and
shall duly assign, transfer and deliver to such successor Trustee all Property
and money held by such former Trustee hereunder, subject to its Lien, if any,
provided for in Section 7.07 hereof.
(h) Upon request of any such successor Trustee, the Company shall execute
any and all instruments for more fully and certainly vesting in and confirming
to such successor Trustee all such rights, powers and trusts referred to in
Section 7.08(g) hereof.
(i) No successor Trustee shall accept its appointment unless at the time
of such acceptance such successor Trustee shall be qualified and eligible under
this Article VII and under the Trust Indenture Act.
SECTION 7.09. SUCCESSOR TRUSTEE BY MERGER. Any corporation into which the
Trustee may be merged or converted or with which it may be consolidated, or any
corporation resulting from any merger, conversion or consolidation to which the
Trustee shall be a party, or any corporation succeeding to all or substantially
all of the corporate trust business of the Trustee, shall be the successor of
the Trustee hereunder; PROVIDED that such corporation shall be otherwise
qualified and eligible under this Article VII and under the Trust Indenture Act,
without the execution or filing of any paper or any further act on the part of
any of the parties hereto. In case any Notes shall have been authenticated, but
not delivered, by the Trustee then in office, any successor by merger,
conversion or consolidation to such authenticating Trustee may adopt such
authentication and deliver the Notes so authenticated with the same effect as if
such successor Trustee had itself authenticated such Notes. In the event that
any Notes shall not have been authenticated by such predecessor Trustee, any
such successor Trustee may authenticate and deliver such Notes, in either its
own name or that of its predecessor Trustee, with the full force and effect
which this Indenture provides for the certificate of authentication of the
Trustee.
SECTION 7.10. ELIGIBILITY; DISQUALIFICATION. There shall at all times be
a Trustee hereunder which shall be
(i) a corporation organized and doing business under the laws of the United
States of America, any State or Territory thereof or the District of Columbia,
authorized under such laws to exercise corporate trust powers, and subject to
supervision or examination by Federal, State, Territorial or District of
Columbia authority,
(ii) or a corporation or other Person organized and doing business under
the laws of a foreign government that is permitted to act as Trustee pursuant to
a rule, regulation or order of the Commission, authorized under such laws to
exercise corporate trust powers, and subject to supervision or examination by
authority of such foreign government or a political subdivision thereof
substantially equivalent to supervision or examination applicable to United
States institutional trustees,
in either case having a combined capital and surplus of at least
$25,000,000.
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If such Person publishes reports of condition at least annually, pursuant
to law or to the requirements of the aforesaid supervising or examining
authority, then for the purposes of this Section 7.10, the combined capital and
surplus of such corporation shall be deemed to be its combined capital and
surplus as set forth in its most recent report of condition so published.
Neither the Company nor any Affiliate of the Company shall serve as Trustee
hereunder. If at any time the Trustee shall cease to be eligible to serve as
Trustee hereunder pursuant to the provisions of this Section 7.10, it shall
resign immediately in the manner and with the effect specified in this Article
VII.
If the Trustee has or shall acquire any "conflicting interest" within the
meaning of Section 310(b) of the Trust Indenture Act, the Trustee and the
Company shall in all respects comply with the provisions of Section 310(b) of
the Trust Indenture Act. Nothing herein shall prevent the Trustee from filing
with the Commission the application referred to in the penultimate paragraph of
Section 310(b) of the Trust Indenture Act.
SECTION 7.11. PREFERENTIAL COLLECTION OF CLAIMS AGAINST COMPANY. The
Trustee shall comply with Section 311(a) of the Trust Indenture Act, excluding
any creditor relationship listed in Section 311(b) of the Trust Indenture Act. A
Trustee who has resigned or been removed shall be subject to Section 311(a) of
the Trust Indenture Act to the extent indicated therein.
ARTICLE VIII.
DEFEASANCE
SECTION 8.01. COMPANY'S OPTION TO EFFECT LEGAL DEFEASANCE OR COVENANT
DEFEASANCE. The Company may elect, at its option, at any time, to have Section
8.02 or Section 8.03 hereof applied to the outstanding Notes (in whole and not
in part) upon compliance with the conditions set forth below in this Article
VIII, such election shall be evidenced by a Board Resolution delivered to the
Trustee.
SECTION 8.02. LEGAL DEFEASANCE AND DISCHARGE. Upon the Company's
exercise of its option to have this Section 8.02 applied to the outstanding
Notes (in whole and not in part), the Company shall be deemed to have been
discharged from its obligations with respect to such Notes as provided in this
Section 8.02 on and after the date the conditions set forth in Section 8.04
hereof are satisfied (hereinafter called "Defeasance"). For this purpose, such
Defeasance means that the Company shall be deemed to have paid and discharged
the entire indebtedness represented by such Notes and to have satisfied all its
other obligations under such Notes and this Indenture insofar as such Notes are
concerned (and the Trustee, at the expense of the Company, shall execute proper
instruments acknowledging the same), subject to the following which shall
survive until otherwise terminated or discharged hereunder:
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(a) the rights of Holders of such Notes to receive, solely from the trust
fund described in Section 8.04 hereof and as more fully set forth in such
Section 8.04, payments in respect of the principal of and any premium and
interest on such Notes when payments are due,
(b) the Company's obligations with respect to such Notes under Sections
2.09, 2.10, 2.12, 4.02 and 4.03 hereof,
(c) the rights, powers, trusts, duties and immunities of the Trustee under
this Indenture and
(d) this Article VIII.
Subject to compliance with this Article VIII, the Company may exercise its
option to have this Section 8.02 applied to the outstanding Notes (in whole and
not in part) notwithstanding the prior exercise of its option to have Section
8.03 hereof applied to such Notes.
SECTION 8.03. COVENANT DEFEASANCE. Upon the Company's exercise of its
option to have this Section 8.03 applied to the outstanding Notes (in whole and
not in part), (i) the Company shall be released from its obligations under
Section 5.01(c) and (d), Sections 4.05 through 4.20, inclusive, and any covenant
added to this Indenture subsequent to the Issue Date pursuant to Section 9.01
hereof, (ii) the occurrence of any event specified in Section 6.01(c) or Section
6.01(d) hereof, with respect to any of Section 5.01(c) and (d), Sections 4.05
through 4.20, inclusive, and any covenant added to this Indenture subsequent to
the Issue Date pursuant to Section 9.01 hereof, shall be deemed not to be or
result in an Event of Default, in each case with respect to such Notes as
provided in this Section 8.03 on and after the date the conditions set forth in
Section 8.04 hereof are satisfied (hereinafter called "Covenant Defeasance").
For this purpose, such Covenant Defeasance means that, with respect to such
Notes, the Company may omit to comply with and shall have no liability in
respect of any term, condition or limitation set forth in any such specified
Section (to the extent so specified in the case of Sections 6.01(c) and 6.01(d)
hereof), whether directly or indirectly by reason of any reference elsewhere
herein to any such Section or by reason of any reference in any such Section to
any other provision herein or in any other document; but the remainder of this
Indenture and such Notes shall be unaffected thereby.
SECTION 8.04. CONDITIONS TO DEFEASANCE OR COVENANT DEFEASANCE. The
following shall be the conditions to the application of Section 8.02 or Section
8.03 hereof to the outstanding Notes:
(a) The Company shall irrevocably have deposited or caused to be deposited
with the Trustee as trust funds in trust for the purpose of making the following
payments, specifically pledged as security for, and dedicated solely to the
benefits of the Holders of such Notes, (i) money in an amount, or (ii) U.S.
Government Obligations which through the scheduled payment of principal and
interest in respect thereof in accordance with their terms will provide, not
later than one day before the due date of any payment, money in an amount, or
(iii) a combination
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thereof, in each case sufficient, in the opinion of a nationally recognized firm
of independent public accountants expressed in a written certification thereof
delivered to the Trustee, to pay and discharge, and which shall be applied by
the Trustee (or any such other qualifying trustee) to pay and discharge, the
principal of and any installment of interest on such Notes on the respective
Stated Maturities thereof, in accordance with the terms of this Indenture and
such Notes.
(b) In the event of an election to have Section 8.02 hereof apply to the
outstanding Notes, the Company shall have delivered to the Trustee an Opinion of
Counsel stating that (i) the Company has received from, or there has been
published by, the Internal Revenue Service a ruling or (ii) since the date of
this Indenture, there has been a change in the applicable Federal income tax
law, in either case (i) or (ii) to the effect that, and based thereon such
opinion shall confirm that, the Holders of such Notes will not recognize gain or
loss for Federal income tax purposes as a result of the deposit, Defeasance and
discharge to be effected with respect to such Notes and will be subject to
Federal income tax on the same amount, in the same manner and at the same times
as would be the case if such deposit, Defeasance and discharge were not to
occur.
(c) In the event of an election to have Section 8.03 hereof apply to the
outstanding Notes, the Company shall have delivered to the Trustee an Opinion of
Counsel reasonably acceptable to the Trustee to the effect that the Holders of
such Notes will not recognize gain or loss for Federal income tax purposes as a
result of the deposit and Covenant Defeasance to be effected with respect to
such Notes and will be subject to Federal income tax on the same amount, in the
same manner and at the same times as would be the case if such deposit and
Covenant Defeasance were not to occur.
(d) No Default or Event of Default with respect to the outstanding Notes
shall have occurred and be continuing at the time of such deposit after giving
effect thereto ( other than a Default or Event of Default resulting from the
Incurrence of Indebtedness, all or a portion of the proceeds of which will be
used to defease the Notes pursuant to this Article VIII concurrently with such
Incurrence) or at any time on or prior to the 91st calendar day after the date
of such deposit.
(e) Such Defeasance or Covenant Defeasance shall not cause the Trustee to
have a conflicting interest within the meaning of the Trust Indenture Act
(assuming for the purpose of this clause (e) that all Notes are in default
within the meaning of such Act).
(f) Such Defeasance or Covenant Defeasance shall not result in a breach or
violation of, or constitute a default under, any other material agreement or
instrument to which the Company is a party or by which it is bound.
(g) The Company shall have delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that all conditions
precedent with respect to such Defeasance or Covenant Defeasance have been
complied with.
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SECTION 8.05. DEPOSITED MONEY AND U.S. GOVERNMENT OBLIGATIONS TO BE HELD
IN TRUST; MISCELLANEOUS PROVISIONS. All money and U.S. Government Obligations
(including the proceeds thereof) deposited with the Trustee pursuant to Section
8.04 hereof in respect of the outstanding Notes shall be held in trust and
applied by the Trustee, in accordance with the provisions of such Notes and this
Indenture, to the payment, either directly or through any such Paying Agent as
the Trustee may determine, to the Holders of such Notes, of all sums due and to
become due thereon in respect of principal and any premium and interest, but
money so held in trust need not be segregated from other funds except to the
extent required by law. The Company shall pay and indemnify the Trustee against
any tax, fee or other charge imposed on or assessed against the U.S. Government
Obligations deposited pursuant to Section 8.04 hereof or the principal and
interest received in respect thereof other than any such tax, fee or other
charge which by law is for the account of the Holders of outstanding Notes.
Anything in this Article VIII to the contrary notwithstanding, the Trustee
shall deliver or pay to the Company from time to time upon Company Order any
money or U.S. Government Obligations held by it as provided in Section 8.04
hereof which, in the opinion of a nationally recognized firm of independent
public accountants expressed in a written certification thereof delivered to the
Trustee, are in excess of the amount thereof that would then be required to be
deposited to effect the Defeasance or Covenant Defeasance, as the case may be,
with respect to the outstanding Notes.
The Trustee and the Paying Agent shall pay to the Company upon written
request any money held by them for the payment of principal, premium, if any, or
interest that remains unclaimed for two years; PROVIDED that the Trustee or such
Paying Agent before being required to make any payment may cause to be published
at the expense of the Company once in a newspaper of general circulation in the
City of New York or mail to each Holder entitled to such money at such Holder's
address (as set forth in the Note Register) notice that such money remains
unclaimed and that after a date specified therein (which shall be at least 30
days from the date of such publication or mailing) any unclaimed balance of such
money then remaining will be repaid to the Company. After payment to the
Company, Holders entitled to such money must look to the Company for payment as
general creditors unless an applicable law designates another Person, and all
liability of the Trustee and such Paying Agent with respect to such money shall
cease.
SECTION 8.06. REINSTATEMENT. If the Trustee or Paying Agent is unable to
apply any money in accordance with this Article VIII with respect to any Notes
by reason of any order or judgment of any court or governmental authority
enjoining, restraining or otherwise prohibiting such application then the
obligations under this Indenture and such Notes from which the Company has been
discharged or released pursuant to Sections 8.02 or 8.03 hereof shall be revived
and reinstated as though no deposit had occurred pursuant to this Article VIII
with respect to such Notes, until such time as the Trustee or Paying Agent is
permitted to apply all money held in trust pursuant to Section 8.05 hereof with
respect to such Notes in accordance with this Article VIII; PROVIDED that if the
Company makes any payment of principal of or any premium or interest on any such
Note following such reinstatement of its obligations, the
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Company shall be subrogated to the rights (if any) of the Holders of such Notes
to receive such payment from the money so held in trust.
ARTICLE IX.
AMENDMENTS
SECTION 9.01. WITHOUT CONSENT OF HOLDERS. The Company and the Trustee
may, at any time, and from time to time, without notice to or consent of any
Holder of Notes, enter into one or more indentures supplemental hereto, in form
satisfactory to the Trustee, for any of the following purposes:
(a) to evidence the succession of another Person to the Company and the
assumption by such successor of the covenants of the Company herein and
contained in the Notes; or
(b) to add to the covenants of the Company, for the benefit of the Holders
of all of the Notes, or to surrender any right or power herein conferred upon
the Company; or
(c) to add any additional Events of Default; or
(d) to provide for uncertificated Notes in addition to or in place of
Definitive Notes; or
(e) to evidence and provide for the acceptance of appointment hereunder of
a successor Trustee; or
(f) to secure the Notes; or
(g) to cure any ambiguity herein, or to correct or supplement any
provision hereof which may be inconsistent with any other provision hereof or to
add any other provisions with respect to matters or questions arising under this
Indenture; PROVIDED that such actions shall not adversely affect the interests
of the Holders of Notes in any material respect; or
(h) to comply with the requirements of the Commission in order to effect
or maintain the qualification of this Indenture under the Trust Indenture Act.
SECTION 9.02. WITH CONSENT OF HOLDERS. With the consent of the Holders of
not less than a majority in principal amount of the outstanding Notes, by Act of
said Holders delivered to the Company and the Trustee, the Company and the
Trustee may enter into one or more indentures supplemental hereto for the
purpose of adding any provisions to or changing in any manner or eliminating any
of the provisions of this Indenture or of modifying in any manner the rights of
the Holders; PROVIDED that no such supplemental indenture shall, without the
consent of the Holder of each outstanding Note,
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(a) change the Stated Maturity of the principal of, or any installment of
interest on, any Note, or alter the redemption provisions thereof, or reduce the
principal amount thereof (or any premium, if any), or the interest thereon, that
would be due and payable upon Maturity thereof, or change the place of payment
where, or the coin or currency in which, any Note or any premium or interest
thereon is payable, or impair the right to institute suit for the enforcement of
any such payment on or after the Maturity thereof; or
(b) reduce the percentage in principal amount of the outstanding Notes,
the consent of whose Holders is required for any such supplemental indenture; or
(c) modify any of the provisions of Section 6.04 hereof, except to
increase any percentage set forth therein or to provide that certain other
provisions of this Indenture cannot be modified or waived without the consent of
the Holder of each outstanding Note affected thereby; or
(d) subordinate in right of payment, or otherwise subordinate, the Notes
to any other Indebtedness; or
(e) modify any provision of this Indenture relating to the calculation of
Accreted Value; or
(f) modify any of the provisions of this Section 9.02, except to increase
any percentage set forth herein or to provide that certain other provisions of
this Indenture cannot be modified or waived without the consent of the Holder of
each outstanding Note affected thereby.
It shall not be necessary for any Act of Holders under this Section 9.02 to
approve the particular form of any proposed supplemental indenture, but it shall
be sufficient if such Act shall approve the substance thereof.
SECTION 9.03. EFFECT OF SUPPLEMENTAL INDENTURES. Upon the execution of
any supplemental indenture under this Article IX, this Indenture shall be
modified in accordance therewith, and such supplemental indenture shall form a
part of this Indenture for all purposes; and every Holder of Notes theretofore
or thereafter authenticated and delivered hereunder shall be bound thereby.
SECTION 9.04. COMPLIANCE WITH TRUST INDENTURE ACT. Every amendment or
supplement to this Indenture or the Notes shall comply with the Trust Indenture
Act as then in effect.
SECTION 9.05. REVOCATION AND EFFECT OF CONSENTS AND WAIVERS. A consent to
an amendment, supplement or a waiver by a Holder of a Note shall bind the Holder
and every subsequent Holder of such Note or portion of such Note that evidences
the same debt as the consenting Holder's Note, even if notation of the consent
or waiver is not made on such Note; PROVIDED that any such Holder or subsequent
Holder may revoke the consent or waiver as to such Holder's Note or portion of
such Note if the Trustee receives the notice of revocation at least one
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day prior to the date the amendment, supplement or waiver becomes effective.
After an amendment, supplement or waiver becomes effective pursuant to this
Article IX, it shall bind every Holder.
The Company may, but shall not be obligated to, fix a record date for the
purpose of determining the Holders entitled to give their consent or take any
other action described above or required or permitted to be taken pursuant to
this Indenture. If a record date is fixed, then notwithstanding the immediately
preceding paragraph, those Persons who were Holders at such record date (or
their duly designated proxies), and only those Persons, shall be entitled to
give such consent or to revoke any consent previously given or to take any such
action, whether or not such Persons continue to be Holders after such record
date. No such consent shall be valid or effective for more than 120 calendar
days after such record date.
SECTION 9.06. NOTATION ON OR EXCHANGE OF NOTES. If a supplemental
indenture changes the terms of a Note, the Trustee may require the Holder
thereof to deliver such Note to the Trustee. The Trustee may place an
appropriate notation on such Note regarding the changed terms and return it to
the Holder. Alternatively, if the Company or the Trustee so determines, the
Company in exchange for such Note shall issue and the Trustee shall authenticate
a new Note that reflects the changed terms. Failure to make the appropriate
notation or to issue a new Note shall not affect the validity of such amendment
or supplement.
SECTION 9.07. TRUSTEE TO EXECUTE SUPPLEMENTAL INDENTURES. The Trustee
shall execute any supplemental indenture authorized pursuant to this Article IX
if such supplemental indenture does not adversely affect the rights, duties,
liabilities or immunities of the Trustee. If it does, the Trustee may, but shall
not be required to, execute such supplemental indenture. In executing any
supplemental indenture, the Trustee shall be (subject to Section 7.01 hereof)
fully protected in relying upon an Officers' Certificate and an Opinion of
Counsel, which shall not be at the expense of the Trustee, stating that the
execution of such supplemental indenture is authorized or permitted by this
Indenture.
SECTION 9.08. PAYMENTS FOR CONSENT. Neither the Company nor any of its
Affiliates shall, directly or indirectly, pay or cause to be paid any
consideration, whether by way of interest, fee or otherwise, to any holder of
any Notes for or as an inducement to any consent, waiver or amendment of any of
the terms or provisions of the Indenture or the Notes unless such consideration
is offered to be paid or agreed to be paid to all holders of the Notes that
consent, waive or agree to amend in the time frame set forth in the solicitation
documents relating to such consent, waiver or agreement.
84
<PAGE>
ARTICLE X.
MISCELLANEOUS
SECTION 10.01. TRUST INDENTURE ACT CONTROLS. If and to the extent that
any provision of this Indenture limits, qualifies or conflicts with the duties
imposed by, or with another provision (an "incorporated provision") included in
this Indenture by operation of, Sections 310 to 318, inclusive, of the Trust
Indenture Act, such imposed duties or incorporated provision shall control.
SECTION 10.02. NOTICES. Any notice or communication shall be in writing
and delivered in person or mailed by first class mail, postage prepaid,
addressed as follows: if to the Company: FirstWorld Communications, Inc., 9333
Genesee Avenue, Suite 200, San Diego, California 92121; if to the Trustee: The
Bank of New York, 101 Barclay Street, Floor 21 West, New York, New York 10286,
Attn.: Corporate Trust Trustee Administration.
The Company or the Trustee, by notice to the other, may designate
additional or different addresses for subsequent notices or communications. Any
notice or communication mailed to a Holder shall be sent to the Holder by first
class mail, postage prepaid, at the Holder's address as it appears in the Note
Register and shall be duly given if so sent within the time prescribed. Failure
to mail a notice or communication to a Holder or any defect in it shall not
affect its sufficiency with respect to other Holders. If a notice or
communication is mailed to the Company, the Trustee or a Holder in the manner
provided above, it is duly given, whether or not the addressee receives it. In
case by reason of the suspension of regular mail service or by reason of any
other cause it shall be impracticable to give notice by mail to Holders, then
such notification as shall be made with the approval of the Trustee shall
constitute a sufficient notification for every purpose hereunder.
SECTION 10.03. CERTIFICATE AND OPINION AS TO CONDITIONS PRECEDENT. Upon
any request or application by the Company to the Trustee to take or refrain from
taking any action under this Indenture, the Company shall furnish to the
Trustee: (a) an Officers' Certificate stating that, in the opinion of the
signers, all conditions precedent, if any, provided for in this Indenture
relating to the proposed action have been complied with; and (b) an Opinion of
Counsel stating that, in the opinion of such counsel, all such conditions
precedent have been complied with.
SECTION 10.04. STATEMENTS REQUIRED IN CERTIFICATE OR OPINION. Each
certificate or opinion with respect to compliance with a covenant or condition
provided for in this Indenture (other than pursuant to Section 4.19 hereof)
shall include: (a) a statement that the individual making such certificate or
opinion has read such covenant or condition; (b) a brief statement as to the
nature and scope of the examination or investigation upon which the statements
or opinions contained in such certificate or opinion are based; (c) a statement
that, in the opinion of such individual, such person has made such examination
or investigation as is necessary to enable such person to express an informed
opinion as to whether or not such covenant or condition has been complied with;
and (d) a statement as to whether or not, in the opinion of such individual,
85
<PAGE>
such covenant or condition has been complied with; PROVIDED that, with respect
to matters of fact, an Opinion of Counsel may rely on an Officers' Certificate
or certificates of public officials.
SECTION 10.05. RULES BY TRUSTEE, PAYING AGENT AND NOTE REGISTRAR. The
Trustee may make reasonable rules for action by or a meeting of Holders, and any
Note Registrar or Paying Agent may make reasonable rules for their functions;
PROVIDED that no such rule shall conflict with terms of this Indenture or the
Trust Indenture Act.
SECTION 10.06. PAYMENTS ON BUSINESS DAYS. If a payment hereunder is
scheduled to be made on a date that is not a Business Day, payment shall be made
on the next succeeding day that is a Business Day, and no interest shall accrue
with respect to that payment during the intervening period. If a Regular Record
Date is a date that is not a Business Day, such record date shall not be
affected.
SECTION 10.07. GOVERNING LAW. THIS INDENTURE AND THE NOTES SHALL BE
GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK
APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED IN SAID STATE.
SECTION 10.08. NO RECOURSE AGAINST OTHERS. No controlling Person,
director, officer, employee, incorporator or stockholder of the Company, as
such, shall have any liability for any obligations of the Company under the
Notes or this Indenture or for any claim based on, in respect of, or by reason
of, such obligations or their creation, solely by reason of its past, present or
future status as a controlling Person, director, officer, employee, incorporator
or stockholder of the Company. By accepting a Note, each Holder waives and
releases all such liability (but only such liability) as part of the
consideration for issuance of such Note to such Holder.
SECTION 10.09. SUCCESSORS. All agreements of the Company in this
Indenture and the Notes shall bind its successors and assigns whether so
expressed or not. All agreements of the Trustee in this Indenture shall bind
its successors and assigns whether so expressed or not.
SECTION 10.10. COUNTERPARTS. This Indenture may be executed in any number
of counterparts and by the parties thereto in separate counterparts, each of
which when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement.
SECTION 10.11. TABLE OF CONTENTS; HEADINGS. The table of contents,
cross-reference table and headings of the Articles and Sections of this
Indenture have been inserted for convenience of reference only, are not intended
to be considered a part hereof and shall not modify or restrict any of the terms
or provisions hereof.
SECTION 10.12. SEVERABILITY. In case any provision in this Indenture or
the Notes shall be invalid, illegal or unenforceable, the validity, legality and
enforceability of the remaining provisions shall not in any way be affected or
impaired thereby.
86
<PAGE>
SECTION 10.13. FURTHER INSTRUMENTS AND ACTS. Upon request of the Trustee,
the Company will execute and deliver such further instruments and do such
further acts as may be reasonably necessary or proper to carry out more
effectively the purposes of this Indenture.
87
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be
duly executed all as of the day and year first above written.
FIRSTWORLD COMMUNICATIONS, INC.
By: /s/ Andrew B. Taubman
--------------------------
Name: Andrew B. Taubman
Title: Senior Vice President, Corporate
Finance and Development
Attest:
/s/ G. Bradford Saunders
- -------------------------
G. Bradford Saunders
Assistant Secretary
[Seal]
THE BANK OF NEW YORK
as Trustee
By: /s/ Michael Culhane
--------------------------
Name: Michael Culhane
Title: Vice President
Attest:
/s/ Remo J. Reale
- -------------------------
Remo J. Reale
Assistant Vice President
[Seal]
88
<PAGE>
STATE OF CALIFORNIA )
COUNTY OF ) SS.:
On the 9th day of April, 1998, before me personally came Andrew B. Taubman, to
me known, who, being by me duly sworn, did depose and say that he is Sr. Vice
President of FirstWorld Communications, Inc., one of the corporations described
in and which executed the foregoing instrument and that she signed her name
thereto by authority of the Board of Directors of said corporation.
/s/ Pamela P. Lopez
--------------------
Notary Public
[Seal]
STATE OF NEW YORK )
COUNTY OF NEW YORK ) SS.:
On the 9th day of April, 1998, before me personally came Michael Culhane, to me
known, who, being by me duly sworn, did depose and say that he is a Vice
President of The Bank of New York, one of the corporations described in and
which executed the foregoing instrument and that he signed his name thereto by
authority of the Board of Directors of said corporation.
/s/ Jean F. Newman
--------------------
Notary Public
[Seal]
89
<PAGE>
(Face of Note)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
"FOR THE PURPOSES OF SECTIONS 1272, 1273 AND 1275 OF THE INTERNAL REVENUE CODE
OF 1986, AS AMENDED, THIS SECURITY IS BEING ISSUED WITH ORIGINAL ISSUE DISCOUNT;
NOT LATER THAN 10 DAYS AFTER APRIL 13, 1998, INFORMATION TO INCLUDE THE ISSUE
PRICE, AMOUNT OF ORIGINAL ISSUE DISCOUNT, ISSUE DATE, AND YIELD TO MATURITY OF
THE SECURITY WILL BE MADE AVAILABLE TO HOLDERS UPON REQUEST TO ROBERT RANDALL,
CHIEF FINANCIAL OFFICER, FIRSTWORLD COMMUNICATIONS, INC., (619) 552-8010.
UNIT CUSIP 337625 AD 9
NOTE CUSIP 337625AA5
13 % Senior Discount Notes due 2008
No. 1 $200,000,000 (1)
----- ---------------
FIRSTWORLD COMMUNICATIONS, INC.
promises to pay to Cede & Co. or registered assigns,the principal sum of Two
Hundred Million Dollars on April 15, 2008.
Interest Payment Dates: April 15 and October 15
Record Dates: April 1 and October 1
- --------------------
(1) TO BE INITIALLY $200,000,000.00 AGGREGATE PRINCIPAL AMOUNT AT MATURITY,
SUBJECT TO INCREASE AND DECREASE IN ACCORDANCE WITH THE SCHEDULE OF
EXCHANGES OF INTEREST IN THE GLOBAL NOTE ATTACHED HERETO AND, IN
COMBINATION WITH GLOBAL NOTE NUMBERS 2 AND 3 IDENTIFIED BY CUSIP NO.
337625AA5, TO EQUAL $470,000,000 IN AGGREGATE PRINCIPAL AMOUNT AT MATURITY.
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Note to be signed manually
or by facsimile by its duly authorized officers.
FIRSTWORLD COMMUNICATIONS, INC.
By: /s/ ANDREW B. TAUBMAN
-----------------------------
Name: Andrew B. Taubman
Title: Senior Vice President,
Corporate Finance and
Administration
By: /s/ G. BRADFORD SAUNDERS
-----------------------------
Name: G. Bradford Saunders
Title: Senior Vice President,
Project Development and
Assistant Secretary
Dated April 13, 1998:
This is one of the Global
Notes referred to in the
within-mentioned Indenture:
The Bank of New York,
as Trustee
By: /s/ THOMAS B. ZAKRZEWSKI
--------------------------
Authorized Signatory
<PAGE>
(Back of Note)
13% Senior Discount Notes due 2008
THIS GLOBAL NOTE IS HELD BY THE DEPOSITARY (AS DEFINED IN THE INDENTURE
GOVERNING THIS NOTE) OR ITS NOMINEE IN CUSTODY FOR THE BENEFIT OF THE BENEFICIAL
OWNERS HEREOF, AND IS NOT TRANSFERABLE TO ANY PERSON UNDER ANY CIRCUMSTANCES
EXCEPT THAT (I) THE TRUSTEE MAY MAKE SUCH NOTATIONS HEREON AS MAY BE REQUIRED,
(II) THIS GLOBAL NOTE MAY BE DELIVERED TO THE TRUSTEE FOR CANCELLATION PURSUANT
TO SECTION 2.11 OF THE INDENTURE AND (III) THIS GLOBAL NOTE MAY BE TRANSFERRED
TO A SUCCESSOR DEPOSITARY WITH THE PRIOR WRITTEN CONSENT OF THE COMPANY.
UNLESS AND UNTIL IT IS EXCHANGED IN WHOLE OR IN PART FOR NOTES IN DEFINITIVE
FORM, THIS NOTE MAY NOT BE TRANSFERRED EXCEPT AS A WHOLE BY THE DEPOSITARY TO A
NOMINEE OF THE DEPOSITARY OR BY A NOMINEE OF THE DEPOSITARY TO THE DEPOSITARY OR
ANOTHER NOMINEE OF THE DEPOSITARY OR BY THE DEPOSITARY OR ANY SUCH NOMINEE TO A
SUCCESSOR DEPOSITARY OR A NOMINEE OF SUCH SUCCESSOR DEPOSITARY. UNLESS THIS
CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST
COMPANY (55 WATER STREET, NEW YORK, NEW YORK) ("DTC"), TO THE COMPANY OR ITS
AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE
ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR SUCH OTHER NAME AS MAY BE
REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO
CEDE & CO. OR SUCH OTHER ENTITY AS MAY BE REQUESTED BY AN AUTHORIZED
REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR
OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER
HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.
THE SECURITY (OR ITS PREDECESSOR) EVIDENCED HEREBY WAS ORIGINALLY ISSUED IN A
TRANSACTION EXEMPT FROM REGISTRATION UNDER SECTION 5 OF THE UNITED STATES
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND THE SECURITY
EVIDENCED HEREBY MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED IN THE
ABSENCE OF SUCH REGISTRATION OR AN APPLICABLE EXEMPTION THEREFROM. EACH
PURCHASER OF THE SECURITY EVIDENCED HEREBY IS HEREBY NOTIFIED THAT THE SELLER
MAY BE RELYING ON THE EXEMPTION FROM THE PROVISIONS OF SECTION 5 OF THE
SECURITIES ACT PROVIDED BY RULE 144A THEREUNDER. THE HOLDER OF THE SECURITY
EVIDENCED HEREBY AGREES FOR THE BENEFIT OF THE COMPANY THAT (A) SUCH SECURITY
MAY BE RESOLD, PLEDGED OR OTHERWISE TRANSFERRED, ONLY (1)(a) INSIDE THE
UNITED STATES TO A PERSON WHO THE SELLER REASONABLY BELIEVES IS A QUALIFIED
INSTITUTIONAL BUYER (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT), IN A
TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A, (b) IN A TRANSACTION MEETING
THE REQUIREMENTS OF RULE 144 UNDER THE SECURITIES ACT, (c) OUTSIDE THE UNITED
STATES TO A FOREIGN PERSON IN A TRANSACTION MEETING THE
<PAGE>
REQUIREMENTS OF RULE 904 UNDER THE SECURITIES ACT, (d) TO AN INSTITUTIONAL
"ACCREDITED INVESTOR" (AS DEFINED IN RULE 501(a)(1), (2), (3) OR (7) OF THE
SECURITIES ACT (AN "INSTITUTIONAL ACCREDITED INVESTOR"), THAT PRIOR TO SUCH
TRANSFER, FURNISHED THE TRUSTEE A SIGNED LETTER CONTAINING CERTAIN
REPRESENTATIONS AND AGREEMENTS (THE FORM OF WHICH CAN BE OBTAINED FROM THE
TRUSTEE) AND, IF SUCH TRANSFER IS IN RESPECT OF AN AGGREGATE PRINCIPAL AMOUNT OF
SECURITIES LESS THAN $250,000, AN OPINION OF COUNSEL THAT SUCH TRANSFER IS IN
COMPLIANCE WITH THE SECURITIES ACT, OR (e) IN ACCORDANCE WITH ANOTHER EXEMPTION
FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT (AND, IN THE CASE OF
CLAUSE (b), (c), (d) OR (e), BASED UPON AN OPINION OF COUNSEL IF THE COMPANY SO
REQUESTS), (2) TO THE COMPANY OR (3) PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT AND, IN EACH CASE, IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS
OF ANY STATE OF THE UNITED STATES OR ANY OTHER APPLICABLE JURISDICTION AND (B)
THE HOLDER WILL, AND EACH SUBSEQUENT HOLDER IS REQUIRED TO, NOTIFY ANY PURCHASER
FROM IT OF THE SECURITY EVIDENCED HEREBY OF THE RESALE RESTRICTIONS SET FORTH IN
(A) ABOVE.
THE NOTES EVIDENCED BY THIS CERTIFICATE ARE INITIALLY ISSUED AS PART OF AN
ISSUANCE OF UNITS, EACH OF WHICH CONSIST OF $1,000 PRINCIPAL AMOUNT AT MATURITY
OF THE NOTES AND ONE WARRANT (EACH, A "WARRANT") INITIALLY ENTITLING THE HOLDER
THEREOF TO PURCHASE 7.9002 SHARES OF SERIES B COMMON STOCK, NO PAR VALUE, OF THE
COMPANY. THE NOTES AND WARRANTS WILL BE AUTOMATICALLY SEPARATED UPON THE
EARLIEST TO OCCUR OF (i) 90 DAYS FROM THE DATE OF ISSUANCE, (ii) SUCH DATE AS
THE INITIAL PURCHASERS MAY, IN THEIR DISCRETION, DEEM APPROPRIATE, (iii) IN THE
EVENT OF A CHANGE OF CONTROL (AS DEFINED IN THE INDENTURE), THE DATE THE COMPANY
MAILS NOTICE THEREOF TO HOLDERS OF NOTES, (iv) THE DATE ON WHICH THE REGISTERED
EXCHANGE OFFER (AS DEFINED IN THE INDENTURE) IS CONSUMMATED AND (v) THE DATE ON
WHICH THE SHELF REGISTRATION STATEMENT (AS DEFINED IN THE INDENTURE) IS DECLARED
EFFECTIVE (THE EARLIEST OF SUCH DATES, THE "SEPARATION DATE"). THE NOTES
EVIDENCED BY THIS CERTIFICATE MAY NOT BE TRANSFERRED OR SEPARATED FROM, BUT MAY
BE TRANSFERRED OR EXCHANGED ONLY TOGETHER, WITH THE WARRANTS UNTIL THE
SEPARATION DATE.
Capitalized terms used herein shall have the meanings assigned to them
in the Indenture referred to below unless otherwise indicated.
1. INTEREST. FirstWorld Communications, Inc., a Delaware
corporation (the "Company"), promises to pay interest on the principal amount of
this Note at 13 % per annum. Interest will not accrue until April 15, 2003.
Thereafter, the Company shall pay interest and
<PAGE>
Special Interest, if any, semi-annually on April 15 and October 15, commencing
on October 15, 2003, or if any such day is not a Business Day, on the next
succeeding Business Day (each an "Interest Payment Date"). Interest on the
Notes will accrue from the most recent date to which interest has been paid or,
if no interest has been paid, from the Full Accretion Date; PROVIDED that if
there is no existing Default in the payment of interest, and if this Note is
authenticated between a record date referred to on the face hereof and the next
succeeding Interest Payment Date, interest shall accrue from such next
succeeding Interest Payment Date; PROVIDED, FURTHER, that the first Interest
Payment Date shall be October 15, 2003. The Company shall pay interest
(including post-petition interest in any proceeding under any Bankruptcy Law) on
overdue principal and premium, if any, from time to time on demand at a rate
that is 1% per annum in excess of the rate then in effect; it shall pay interest
(including post-petition interest in any proceeding under any Bankruptcy Law) on
overdue installments of interest (without regard to any applicable grace
periods) from time to time on demand at the same rate to the extent lawful.
Interest will be computed on the basis of a 360-day year of twelve 30-day
months. The Accreted Value will accrete between the date hereof and April 15,
2003, on a semi-annual bond equivalent basis using a 360-day year comprised of
twelve 30-day months. All references in this Note and in the Indenture to
"interest" shall be deemed to include any Special Interest that may become
payable thereon according to the provisions of the Indenture;
provided, however, that if (i) the Company has
not filed a registration statement (the "Exchange Offer Registration
Statement") under the Securities Act of 1933, as amended (the " Act"),
registering a security substantially identical to this Note (except that such
Note will not contain terms with respect to the Special Interest payments
described below or transfer restrictions) pursuant to an registered exchange
offer (the "Registered Exchange Offer") (or, in lieu thereof, a registration
statement registering this Note for resale (a "Shelf Registration
Statement")) by July 12, 1998, or (ii) the Exchange Offer Registration
Statement relating to the Registered Exchange Offer has not become or been
declared effective by September 10, 1998, or (iii) neither the Registered
Exchange Offer has been consummated nor the Shelf Registration Statement has
been declared effective prior to October 10, 1998, or (iv) either the
Exchange Offer Registration Statement or, if applicable, the Shelf
Registration Statement is filed and declared effective (except as
specifically permitted therein) but shall thereafter cease to be effective
without being succeeded promptly by an additional registration statement
filed and declared effective, in each case (i) through (iv) upon the terms
and conditions set forth in the Registration Rights Agreement (each such
event referred to in clauses (i) through (iv), a "Registration Default"),
then interest will accrue (in addition to the original issue discount and any
stated interest on the Notes) (the "Step-Up") at a rate of 0.5% per annum,
determined daily, on the Accreted Value of the Notes, during the 90-day
period from and including the date on which any such Registration Default
shall occur to but excluding the date on which all Registration Defaults have
been cured and shall increase by 0.25% per annum at the end of each
subsequent 90-day period, but in no event shall such rate exceed 2.00% per
annum, in the aggregate regardless of the number of Registration Defaults.
Interest accruing as a result of the Step-Up is referred to herein as
"Special Interest." Accrued Special Interest, if any, shall be paid
semi-annually on April 15 and October 15 in each year; and the amount of
accrued Special Interest shall be determined on the basis of the number of
days actually elapsed. Any accrued and unpaid interest (including Special
Interest) on this Note upon the issuance of an Exchange Note
<PAGE>
(as defined in the Indenture) in exchange for this Note shall cease to be
payable to the Holder hereof but such accrued and unpaid interest (including
Special Interest) shall be payable on the next Interest Payment Date for such
Exchange Note to the Holder thereof on the related Regular Record Date (as
defined herein).
2. METHOD OF PAYMENT. The Company will pay interest on the Notes
(except Defaulted Interest) to the Persons who are registered Holders of Notes
at the close of business on April 1 or October 1 preceding the Interest Payment
Date (each such date, a "Regular Record Date"), even if such Notes are canceled
after such record date and on or before such Interest Payment Date, except as
provided in Section 2.12 of the Indenture with respect to Defaulted Interest.
The Notes will be payable as to principal, premium and interest at the office or
agency of the Company maintained for such purpose within or without the City and
State of New York, or, at the option of the Company, payment of interest may be
made by check mailed to the Holders at their addresses set forth in the register
of Holders, and provided that payment by wire transfer of immediately available
funds will be required with respect to principal of and interest, and premium,
if any, on, all Global Notes and all other Notes the Holders of which shall have
provided wire transfer instructions to the Company or the Paying Agent. Such
payment shall be in such coin or currency of the United States of America as at
the time of payment is legal tender for payment of public and private debts.
3. PAYING AGENT AND REGISTRAR. Initially, The Bank of New York, the
Trustee under the Indenture, will act as Paying Agent and Registrar. The
Company may change any Paying Agent or Registrar without notice to any Holder.
The Company or any of its Subsidiaries may act in any such capacity.
4. INDENTURE. The Company issued the Notes under an Indenture dated
as of April 13, 1998 ("Indenture") between the Company and the Trustee. The
terms of the Notes include those stated in the Indenture and those made part of
the Indenture by reference to the Trust Indenture Act of 1939, as amended (15
U.S. Code Sections 77aaa-77bbbb). The Notes are subject to all such terms, and
Holders are referred to the Indenture and such Act for a statement of such
terms. To the extent any provision of this Note conflicts with the express
provisions of the Indenture, the provisions of the Indenture shall govern and be
controlling. The Notes are obligations of the Company limited to $470,000,000
in aggregate principal amount at maturity.
5. OPTIONAL REDEMPTION.
(a) Except as set forth in subparagraph (b) of this Paragraph 5, the
Company shall not have the option to redeem the Notes prior to April 15, 2003.
Thereafter, the Company shall have the option to redeem the Notes, in whole or
in part, at the redemption prices (expressed as percentages of principal amount)
set forth below plus accrued and unpaid interest thereon, if any, to the
applicable redemption date, if redeemed during the twelve-month period beginning
on April 15 of the years indicated below:
- ------------------------------
<PAGE>
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2003 . . . . . . . . . . . . . . . . . . . . . . . .106.500%
2004 . . . . . . . . . . . . . . . . . . . . . . . .104.333%
2005 . . . . . . . . . . . . . . . . . . . . . . . .102.167%
2006 and thereafter. . . . . . . . . . . . . . . . .100.000%
</TABLE>
(b) Notwithstanding the provisions of subparagraph (a) of this
Paragraph 5, at any time prior to April 15, 2001, the Company, at its option,
may use the net cash proceeds (but only to the extent such proceeds consist of
cash or Cash Equivalents) of one or more Public Equity Offerings or the sale of
Capital Stock (other than Disqualified Stock and other than the net cash
proceeds received by the Company pursuant to the Equity Commitment) to one or
more Strategic Investors in a single transaction or a series of related
transactions to redeem up to an aggregate of 35% of the Accreted Value of Notes
at a redemption price of 113 % of the Accreted Value, plus accrued and unpaid
interest, if any, to the date of redemption; PROVIDED that at least 65% of the
Accreted Value of Notes originally issued must remain outstanding immediately
after the occurrence of such redemption. In order to effect the foregoing
redemption, the Company must mail a notice of redemption no later than 30 days
after the related Public Equity Offering or sale of Capital Stock and must
consummate such redemption within 60 days of the closing of such Public Equity
Offering or sale of Capital Stock.
6. MANDATORY REDEMPTION.
Except as set forth in paragraph 7 below, the Company shall not be
required to make mandatory redemption payments with respect to the Notes.
7. REPURCHASE AT OPTION OF HOLDER.
(a) If there is a Change of Control, the Company shall be required to
make an offer (a "Change of Control Offer") to repurchase all or any part (equal
to $1,000 or an integral multiple thereof) of each Holder's Notes at a purchase
price equal to 101% of the Accreted Value thereof on the date of purchase (if
prior to the Full Accretion Date) or 101% of the aggregate principal amount
thereof plus accrued and unpaid interest to the date of purchase (if on or after
the Full Accretion Date) (in either case, the "Change of Control Payment").
Within 10 days following any Change of Control, the Company shall mail a notice
to each Holder setting forth the procedures governing the Change of Control
Offer as required by the Indenture.
(b) If the Company or a Restricted Subsidiary consummates any Asset
Sales, within 30 days of each date on which the aggregate amount of Excess
Proceeds exceeds $5 million, the Company shall commence an offer to all Holders
of Notes (as "Asset Sale Offer") pursuant to Section 4.08 of the Indenture to
purchase the maximum principal amount of Notes that may be purchased out of the
Excess Proceeds at an offer price in cash equal to 100% of the Accreted Value
thereof on the date fixed for the closing of such offer (if prior to the Full
Accretion Date) or 100% of the principal amount thereof plus accrued and unpaid
interest and Special Interest thereon, if any, to the date fixed for the closing
of such offer (if on or after the Full Accretion Date), in accordance with the
procedures set forth in the Indenture. To the extent
<PAGE>
that the aggregate amount of Notes tendered pursuant to an Asset Sale Offer is
less than the Excess Proceeds, the Company may use such deficiency for general
corporate purposes. If the aggregate Accreted Value of Notes surrendered by
Holders thereof exceeds the amount of Excess Proceeds, the Trustee shall select
the Notes to be purchased on a PRO RATA basis. Holders of Notes that are the
subject of an offer to purchase will receive an Asset Sale Offer from the
Company prior to any related purchase date and may elect to have such Notes
purchased by completing the form entitled "Option of Holder to Elect Purchase"
on the reverse of the Notes.
8. NOTICE OF REDEMPTION. Notice of redemption will be mailed at
least 30 days but not more than 60 days before the redemption date to each
Holder whose Notes are to be redeemed at its registered address. Notes in
denominations larger than $1,000 may be redeemed in part but only in whole
multiples of $1,000, unless all of the Notes held by a Holder are to be
redeemed. On and after the redemption date interest ceases to accrue on Notes
or portions thereof called for redemption.
9. DENOMINATIONS, TRANSFER, EXCHANGE. The Notes are in registered
form without coupons in denominations of $1,000 and integral multiples of
$1,000. The transfer of Notes may be registered and Notes may be exchanged as
provided in the Indenture. The Registrar and the Trustee may require a Holder,
among other things, to furnish appropriate endorsements and transfer documents
and the Company may require a Holder to pay any taxes and fees required by law
or permitted by the Indenture. The Company need not exchange or register the
transfer of any Note or portion of a Note selected for redemption, except for
the unredeemed portion of any Note being redeemed in part. Also, the Company
need not exchange or register the transfer of any Notes for a period of 15 days
before a selection of Notes to be redeemed or during the period between a record
date and the corresponding Interest Payment Date.
10. PERSONS DEEMED OWNERS. The registered Holder of a Note may be
treated as its owner for all purposes.
11. AMENDMENT, SUPPLEMENT AND WAIVER. Subject to certain exceptions,
the Indenture or the Notes may be amended or supplemented with the consent of
the Holders of at least a majority in principal amount of the then outstanding
Notes voting as a single class, and any existing default or compliance with any
provision of the Indenture or the Notes may be waived with the consent of the
Holders of a majority in principal amount of the then outstanding Notes voting
as a single class. Without the consent of any Holder of a Note, the Indenture
or the Notes may be amended or supplemented to cure any ambiguity, defect or
inconsistency, to provide for uncertificated Notes in addition to or in place of
certificated Notes, to provide for the assumption of the Company's obligations
to Holders of the Notes in case of a merger or consolidation or sale of all or
substantially all of the Company's assets, to make any change that would provide
any additional rights or benefits to the Holders of the Notes or that does not
adversely affect the legal rights under the Indenture of any such Holder, to
comply with the requirements of the Commission in order to effect or maintain
the qualification of the Indenture under the Trust Indenture Act, or to
otherwise comply with applicable law.
<PAGE>
12. DEFAULTS AND REMEDIES. Events of Default include: (a) default in
the payment of interest (including any Special Interest) on any Note when the
same becomes due and payable, and the continuance of such Default for a period
of 30 calendar days; (b) default in the payment of the principal of (or premium,
if any, on) any Note when the same becomes due and payable whether upon
Maturity, optional redemption, required repurchase (including pursuant to a
Change of Control Offer or an Asset Sale Offer) or otherwise, or the failure to
make an offer to purchase any Note as herein required; or (c) default in the
performance, or breach, of any covenant or agreement contained in Section 4.07,
Section 4.08, Section 4.09, Section 4.11, Section 4.12, Section 4.14 or Article
V of the Indenture; or (d) default in the performance, or breach, of any
covenant or warranty of the Company contained in this Indenture or the Notes
(other than a covenant or warranty addressed in 12(a), 12(b) or 12(c) above),
and the continuance of such Default or breach for a period of 60 calendar days
after written notice thereof has been given to the Company by the Trustee or to
the Company and the Trustee by the Holders of at least 25 percent of the
aggregate principal amount of the outstanding Notes specifying such Default and
stating that such notice is a "Notice of Default" delivered in connection with
this Indenture; or (e) (i) any payment of principal, and premium, if any, in
excess of $5 million with respect to Indebtedness of the Company or any
Restricted Subsidiary is not paid when due within the applicable grace period,
if any, or (ii) Indebtedness of the Company or any Restricted Subsidiary is
accelerated by the holders thereof and the amount of principal and premium, if
any, of such accelerated Indebtedness exceeds $5 million; or (f) a final
judgment or final judgments for the payment of money (other than to the extent
covered by insurance as to which the insurance company has acknowledged coverage
and other than to the extent covered by an indemnity given by an insurance
company) is entered against the Company or any Restricted Subsidiary of the
Company in an aggregate amount in excess of $5 million by a court or courts of
competent jurisdiction, which judgment is not discharged, waived, stayed, bonded
or satisfied for a period of 45 consecutive calendar days; or (g) certain events
of bankruptcy or insolvency with respect to the Company or any of its Restricted
Subsidiaries. If any Event of Default occurs and is continuing, the Trustee or
the Holders of at least 25% in principal amount at maturity of the then
outstanding Notes may declare all the Notes to be due and payable immediately.
Notwithstanding the foregoing, in the case of an Event of Default arising from
certain events of bankruptcy or insolvency, all outstanding Notes will become
due and payable without further action or notice. Holders may not enforce the
Indenture or the Notes except as provided in the Indenture. Subject to certain
limitations, Holders of a majority in principal amount of the then outstanding
Notes may direct the Trustee in its exercise of any trust or power. The Trustee
may withhold from Holders of the Notes notice of any continuing Default or Event
of Default (except a Default or Event of Default relating to the payment of
principal or interest) if it determines that withholding notice is in their
interest. The Holders of a majority in aggregate principal amount of the Notes
then outstanding by notice to the Trustee may on behalf of the Holders of all of
the Notes waive any existing Default or Event of Default and its consequences
under the Indenture except a continuing Default or Event of Default in the
payment of interest on, or the principal of, the Notes. The Company is required
to deliver to the Trustee annually a statement regarding compliance with the
Indenture, and the Company is required upon becoming aware of any Default or
Event of Default, to deliver to the Trustee a statement specifying such Default
or Event of Default.
<PAGE>
13. TRUSTEE DEALINGS WITH COMPANY. The Trustee, in its individual or
any other capacity, may make loans to, accept deposits from, and perform
services for the Company or its Affiliates, and may otherwise deal with the
Company or its Affiliates, as if it were not the Trustee.
14. NO RECOURSE AGAINST OTHERS. A director, officer, employee,
incorporator or stockholder, of the Company, as such, shall not have any
liability for any obligations of the Company under the Notes or the Indenture or
for any claim based on, in respect of, or by reason of, such obligations or
their creation. Each Holder by accepting a Note waives and releases all such
liability. The waiver and release are part of the consideration for the
issuance of the Notes.
15. AUTHENTICATION. This Note shall not be valid until authenticated
by the manual signature of the Trustee or an authenticating agent.
16. ABBREVIATIONS. Customary abbreviations may be used in the name
of a Holder or an assignee, such as: TEN COM (= tenants in common), TEN ENT (=
tenants by the entireties), JT TEN (= joint tenants with right of survivorship
and not as tenants in common), CUST (= Custodian), and U/G/M/A (= Uniform Gifts
to Minors Act).
17. ADDITIONAL RIGHTS OF HOLDERS OF RESTRICTED GLOBAL NOTES AND
RESTRICTED DEFINITIVE NOTES. In addition to the rights provided to Holders of
Notes under the Indenture, Holders of Restricted Global Notes and Restricted
Definitive Notes shall have all the rights set forth in the Registration Rights
Agreement dated as of April 13, 1998, between the Company and the parties named
on the signature pages thereof (the "Registration Rights Agreement").
18. CUSIP NUMBERS. Pursuant to a recommendation promulgated by the
Committee on Uniform Security Identification Procedures, the Company has caused
CUSIP numbers to be printed on the Notes and the Trustee may use CUSIP numbers
in notices of redemption as a convenience to Holders. No representation is made
as to the accuracy of such numbers either as printed on the Notes or as
contained in any notice of redemption and reliance may be placed only on the
other identification numbers placed thereon.
<PAGE>
The Company will furnish to any Holder upon written request and
without charge a copy of the Indenture and/or the Registration Rights Agreement.
Requests may be made to:
FirstWorld Communications, Inc.
9333 Genesee Avenue
Suite 200
San Diego, California 92121
Attention: Chief Financial Officer
<PAGE>
ASSIGNMENT FORM
To assign this Note, fill in the form below: (I) or (we) assign and transfer
this Note to
- --------------------------------------------------------------------------------
(Insert assignee's soc. sec. or tax I.D. no.)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Print or type assignee's name, address and zip code)
and irrevocably appoint
---------------------------------------------------------
to transfer this Note on the books of the Company. The agent may substitute
another to act for him.
- --------------------------------------------------------------------------------
Date:
Your Signature:
-----------------------------------
(Sign exactly as your name appears on the face of
this Note)
SIGNATURE GUARANTEE.
Signatures must be guaranteed by an "eligible guarantor institution" meeting the
requirements of the [Registrar], which requirements include membership or
participation in the Security Transfer Agent Medallion Program ("STAMP") or such
other "signature guarantee program" as may be determined by the [Registrar] in
addition to, or in substitution for, STAMP, all in accordance with the
Securities Exchange Act of 1934, as amended.
<PAGE>
OPTION OF HOLDER TO ELECT PURCHASE
If you want to elect to have this Note purchased by the Company
pursuant to Section 4.07 or 4.08 of the Indenture, check the box below:
/ / Section 4.07 / / Section 4.08
If you want to elect to have only part of the Note purchased by the
Company pursuant to Section 4.07 or Section 4.08 of the Indenture, state the
amount you elect to have purchased: $________
Date: Your Signature:
---------- -----------------------------
(Sign exactly as your name
appears on the Note)
Tax Identification No:
----------------------
Signature Guarantee.
Signatures must be guaranteed by an "eligible guarantor institution" meeting the
requirements of the [Registrar], which requirements include membership or
participation in the Security Transfer Agent Medallion Program ("STAMP") or such
other "signature guarantee program" as may be determined by the [Registrar] in
addition to, or in substitution for, STAMP, all in accordance with the
Securities Exchange Act of 1934, as amended.
<PAGE>
SCHEDULE OF EXCHANGES OF INTERESTS IN THE GLOBAL NOTE
The following exchanges of a part of this Global Note for a Definitive
Note, or exchanges of a Definitive Note for an interest in this Global Note,
have been made:
<TABLE>
<CAPTION>
Principal Amount
Amount of Amount of at maturity of
decrease in increase in this Global Note Signature of
Principal Amount Principal Amount following such authorized
Date of at maturity of at maturity of decrease (or officer of
Exchange this Global Note this Global Note increase) Trustee
-------- ---------------- ---------------- --------- -------
<S> <C> <C> <C> <C>
</TABLE>
<PAGE>
Schedule of 13% Senior Discount Notes due 2008 Issued by
FirstWorld Communications, Inc. in Global Form
<TABLE>
<CAPTION>
No. Principal Amount at Maturity
<S> <C>
1(*) $200,000,000
2 $200,000,000
3 $70,000,000
</TABLE>
- -----------------------
(*) Note No.1 is the 13% Senior Discount Note attached hereto.
<PAGE>
EXECUTION COPY
FIRSTWORLD COMMUNICATIONS, INC.
470,000,000 PRINCIPAL AMOUNT AT MATURITY 13% SENIOR DISCOUNT NOTES DUE 2008
REGISTRATION RIGHTS AGREEMENT
New York, New York
April 13, 1998
Bear, Stearns & Co. Inc.
As Representative of the
Initial Purchasers
245 Park Avenue
New York, New York 10167
Ladies and Gentlemen:
FirstWorld Communications, Inc., a California corporation (the
"Company"), proposes to issue and sell (the "Initial Placement") to Bear,
Stearns & Co. Inc., ING Baring (U.S.) Securities, Inc., J.P. Morgan Securities
Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated (the "Initial
Purchasers") for whom you (the "Representative") are acting as representative,
upon the terms set forth in a Purchase Agreement of even date herewith (the
"Purchase Agreement") among the Initial Purchasers and the Company, units (the
"Units"), each consisting of $1,000 in principal amount at maturity of 13%
Senior Discount Notes due 2008 (the "Notes") and one warrant (a "Warrant")
initially exercisable to purchase 7.9002 shares of Series B common stock, no par
value, of the Company. As an inducement to the Initial Purchasers to enter into
the Purchase Agreement and purchase the Units and in satisfaction of a condition
to your obligations under the Purchase Agreement, the Company agrees with you
for the benefit of the holders from time to time of the Notes (including the
Initial Purchasers) (each of the foregoing a "Holder" and together the
"Holders"), as follows:
1. DEFINITIONS. Capitalized terms used herein without definition
shall have the respective meanings set forth in the Purchase Agreement. As used
in this Agreement, the following capitalized defined terms shall have the
following meanings:
"AFFILIATE" of any specified person means any other person that,
directly or indirectly, is in control of, is controlled by, or is under common
control with, such specified person. For purposes of this definition, control
of a person means the power, direct or indirect, to direct or cause the
direction of the management and policies of such person whether by contract
<PAGE>
or otherwise; and the terms "controlling" and "controlled" have meanings
correlative to the foregoing.
"CLOSING DATE" has the meaning set forth in the Purchase Agreement.
"COMMISSION" means the Securities and Exchange Commission.
"COMPANY" has the meaning set forth in the preamble hereto.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended,
and the rules and regulations of the Commission promulgated thereunder.
"EXCHANGE NOTES" means debt securities of the Company identical in all
material respects to the Notes (except that the transfer restrictions pertaining
to such Notes will be modified or eliminated, as appropriate), to be issued
under the Indenture.
"EXCHANGE OFFER REGISTRATION PERIOD" means the one-year period
following the consummation of the Registered Exchange Offer, exclusive of any
period during which any stop order shall be in effect suspending the
effectiveness of the Exchange Offer Registration Statement.
"EXCHANGE OFFER REGISTRATION STATEMENT" means a registration statement
of the Company on an appropriate form under the Securities Act with respect to
the Registered Exchange Offer, all amendments and supplements to such
registration statement, including post-effective amendments, in each case
including the Prospectus contained therein, all exhibits thereto and all
material incorporated by reference therein.
"EXCHANGING DEALER" means any Holder (which may include the Initial
Purchasers) which is a broker-dealer, electing to exchange Notes acquired for
its own account as a result of market-making activities or other trading
activities (other than Notes acquired directly from the Company or any of its
Affiliates) for Exchange Notes.
"HOLDER" has the meaning set forth in the preamble hereto.
"INDENTURE" means the indenture relating to the Notes and the Exchange
Notes, to be dated as of the Closing Date, between the Company and The Bank of
New York, as trustee, as the same may be amended or supplemented from time to
time in accordance with the terms thereof.
"INITIAL PLACEMENT" has the meaning set forth in the preamble hereto.
"INITIAL PURCHASERS" has the meaning set forth in the preamble hereto.
2
<PAGE>
"LOSSES" has the meaning set forth in Section 6(d) hereto.
"MAJORITY HOLDERS" means the Holders of a majority of the aggregate
principal amount of Notes registered under a Registration Statement.
"MANAGING UNDERWRITERS" means the investment banker or investment
bankers and manager or managers that shall administer an underwritten offering
under a Shelf Registration Statement.
"NOTES" has the meaning set forth in the preamble hereto.
"PROSPECTUS" means the prospectus included in any Registration
Statement (including, without limitation, a prospectus that discloses
information previously omitted from a prospectus filed as part of an effective
registration statement in reliance upon Rule 430A under the Securities Act), as
amended or supplemented by any prospectus supplement, with respect to the terms
of the offering of any portion of the Notes or the Exchange Notes covered by
such Registration Statement, and all amendments and supplements to the
Prospectus, including post-effective amendments.
"PERSON" means any individual, corporation, partnership, joint
venture, association, joint-stock company, trust, unincorporated organization or
government or agency or political subdivision thereof.
"PURCHASE AGREEMENT" has the meaning set forth in the preamble hereto.
"REGISTERED EXCHANGE OFFER" means the proposed offer to the Holders to
issue and deliver to such Holders, in exchange for the Notes, a like principal
amount of Exchange Notes.
"REGISTRATION STATEMENT" means any Exchange Offer Registration
Statement or Shelf Registration Statement that covers any of the Notes or the
Exchange Notes pursuant to the provisions of this Agreement, amendments and
supplements to such registration statement, including post-effective amendments,
in each case including the Prospectus contained therein, all exhibits thereto,
and all material incorporated by reference therein.
"SECURITIES ACT" means the Securities Act of 1933, as amended, and the
rules and regulations of the Commission promulgated thereunder.
"SHELF REGISTRATION" means a registration effected pursuant to
Section 3 hereof.
"SHELF REGISTRATION PERIOD" has the meaning set forth in Section 3(b)
hereof.
3
<PAGE>
"SHELF REGISTRATION STATEMENT" means a "shelf" registration statement
of the Company pursuant to the provisions of Section 3 hereof, which covers some
or all of the Notes or Exchange Notes, as applicable, on an appropriate form
under Rule 415 under the Securities Act, or any similar rule that may be adopted
by the Commission, amendments and supplements to such registration statement,
including post-effective amendments, in each case including the Prospectus
contained therein, all exhibits thereto, and all material incorporated by
reference therein.
"TRUSTEE" means the trustee with respect to the Notes or Exchange
Notes, as applicable, under the Indenture.
"UNDERWRITER" means any underwriter of Notes in connection with an
offering thereof under a Shelf Registration Statement.
2. REGISTERED EXCHANGE OFFER; RESALES OF EXCHANGE NOTES BY EXCHANGING
DEALERS; PRIVATE EXCHANGE. (a) The Company shall prepare and, not later than
90 days following the Closing Date, shall file with the Commission the Exchange
Offer Registration Statement with respect to the Registered Exchange Offer. The
Company shall use its best efforts to cause the Exchange Offer Registration
Statement to become effective under the Securities Act within 150 days of the
Closing Date.
(b) Upon the effectiveness of the Exchange Offer Registration
Statement, the Company shall promptly commence the Registered Exchange Offer, it
being the objective of such Registered Exchange Offer to enable each Holder
electing to exchange Notes for Exchange Notes (assuming that such Holder is not
an affiliate of the Company within the meaning of the Securities Act, acquires
the Exchange Notes in the ordinary course of such Holder's business and has no
arrangements with any person to participate in the distribution of the Exchange
Notes) to trade such Exchange Notes from and after their receipt without any
limitations or restrictions under the Securities Act and without material
restrictions under the securities laws of a substantial proportion of the
several states of the United States.
(c) In connection with the Registered Exchange Offer, the Company
shall:
(i) mail to each Holder a copy of the Prospectus forming part of
the Exchange Offer Registration Statement, together with an appropriate
letter of transmittal and related documents;
(ii) keep the Registered Exchange Offer open for not less than 30
days (or longer if required by applicable law) and not more than 45 days
(or longer if required by applicable law) after the date notice thereof is
mailed to the Holders;
(iii) utilize the services of a depositary for the Registered
Exchange Offer with an address in the Borough of Manhattan, The City of New
York; and
4
<PAGE>
(iv) comply in all material respects with all applicable federal and
state securities laws.
(d) As soon as practicable after the close of the Registered
Exchange Offer, the Company shall:
(i) accept for exchange all Notes tendered and not validly
withdrawn pursuant to the Registered Exchange Offer;
(ii) deliver to the Trustee for cancellation all Notes so accepted
for exchange; and
(iii) cause the Trustee promptly to authenticate and deliver to each
Holder Exchange Notes equal in principal amount to the Notes of such Holder
so accepted for exchange.
(e) The Initial Purchasers and the Company acknowledge that,
pursuant to interpretations by the staff of the Commission of Section 5 of the
Securities Act, and in the absence of an applicable exemption therefrom, each
Exchanging Dealer is required to deliver a Prospectus in connection with a sale
of any Exchange Notes received by such Exchanging Dealer pursuant to the
Registered Exchange Offer in exchange for Notes acquired for its own account as
a result of market-making activities or other trading activities. Accordingly,
the Company shall:
(i) include the information set forth in Annex A hereto on the
cover of the Exchange Offer Registration Statement, in Annex B hereto in
the forepart of the Exchange Offer Registration Statement in a section
setting forth details of the Exchange Offer, in Annex C hereto in the
underwriting or plan of distribution section of the Prospectus forming a
part of the Exchange Offer Registration Statement, and in Annex D hereto in
the letter of transmittal delivered pursuant to the Registered Exchange
Offer; and
(ii) use its best efforts to keep the Exchange Offer Registration
Statement continuously effective under the Securities Act during the
Exchange Offer Registration Period for delivery by Exchanging Dealers in
connection with sales of Exchange Notes received pursuant to the Registered
Exchange Offer, as contemplated by Section 4(h) below.
(f) In the event that any Initial Purchaser determines that it is
not eligible to participate in the Registered Exchange Offer with respect to the
exchange of Notes constituting any portion of an unsold allotment, upon the
effectiveness of the Shelf Registration Statement as contemplated by Section 3
hereof and at the request of such Initial Purchaser, the Company shall issue and
deliver to such Initial Purchaser, or to the party purchasing Exchange Notes
registered under such Shelf Registration Statement from such Initial Purchaser,
in exchange for such Notes, a like principal amount of Exchange Notes. The
Company shall seek to cause the CUSIP Service Bureau to issue the same CUSIP
number for such Exchange Notes as for Exchange Notes issued pursuant to the
Registered Exchange Offer.
5
<PAGE>
(g) As a condition to its participation in the Registered Exchange
Offer pursuant to the terms of this Agreement, each Holder of Notes shall
furnish, upon the request of the Company, prior to the consummation of the
Registered Exchange Offer, a written representation to the Company (which may be
contained in the letter of transmittal contemplated by the Exchange Offer
Registration Statement) to the effect that (i) it is not an affiliate of the
Company, (ii) it is not engaged in, and does not intend to engage in, and has no
arrangement or understanding with any person to participate in, a distribution
of the Exchange Notes to be issued in the Registered Exchange Offer and (C) it
is acquiring the Exchange Notes in its ordinary course of business. Each Holder
hereby acknowledges and agrees that any broker-dealer and any such Holder using
the Registered Exchange Offer to participate in a distribution of the securities
to be acquired in the Registered Exchange Offer (1) could not under Commission
policy as in effect on the date of this Agreement rely on the position of the
Commission enunciated in MORGAN STANLEY AND CO. INC. (available June 5, 1991)
and EXXON CAPITAL HOLDINGS CORPORATION (available May 13, 1988), as interpreted
in the Commission's letter to Shearman & Sterling dated July 2, 1993, and
similar no-action letters, and (2) must comply with the registration and
prospectus delivery requirements of the Act in connection with a secondary
resale transaction and that such a secondary resale transaction must be covered
by an effective registration statement containing the selling security holder
information required by Item 507 or 508, as applicable, of Regulation S-K if the
resales are of Exchange Notes obtained by such Holder in exchange for Exchange
Notes acquired by such Holder directly from the Company.
(h) Prior to effectiveness of the Exchange Offer Registration
Statement, the Company shall provide a supplemental letter to the Commission (A)
stating that the Company is registering the Exchange Offer in reliance on the
position of the Commission enunciated in EXXON CAPITAL HOLDINGS CORPORATION
(available May 13, 1988) and MORGAN STANLEY AND CO. INC. (available June 5,
1991) and (B) including a representation that the Company has not entered into
any arrangement or understanding with any Person to distribute the Exchange
Notes to be received in the Registered Exchange Offer and that, to the best of
the Company's information and belief, each Holder participating in the
Registered Exchange Offer is acquiring the Exchange Notes in its ordinary course
of business and has no arrangement or understanding with any Person to
participate in the distribution of the Exchange Notes received in the Registered
Exchange Offer.
3. SHELF REGISTRATION. If, (i) because of any change in law or
applicable interpretations thereof by the Commission's staff, the Company
determines upon advice of its outside counsel that it is not permitted to effect
the Registered Exchange Offer as contemplated by Section 2 hereof, or (ii) for
any reason, the Exchange Offer Registration Statement is not filed with the
Commission within 90 days of the Closing Date or declared effective within 150
days following the Closing Date, or (iii) for any reason, the Registered
Exchange Offer is not consummated within 180 days of the Closing Date, or (iv)
any Initial Purchaser so requests with respect to Notes held by it following
consummation of the Registered Exchange Offer, or (v) any Holder (other than an
Initial Purchaser) is not eligible to participate in the Registered Exchange
Offer, or (vi) any Initial Purchaser that participates in the Registered
Exchange Offer or acquires Exchange Notes pursuant to Section 2(f) hereof does
not receive freely tradable Exchange Notes in exchange for Notes constituting
any portion of an unsold allotment (it being understood that, for purposes of
this Section 3, (x) the requirement that an Initial Purchaser deliver a
Prospectus containing the information required by Items 507 and/or 508 of
Regulation S-K under the Securities Act in connection with sales of Exchange
Notes acquired in exchange for such Notes shall result in such Exchange Notes
being not "freely tradable" but (y) the requirement that an Exchanging Dealer
deliver a Prospectus in connection with sales of Exchange Notes acquired in the
Registered Exchange Offer in exchange for Notes acquired as a result of
market-making activities or other trading activities shall not result in such
Exchange Notes being not "freely tradable"), the following provisions shall
apply:
(a) The Company shall, as promptly as practicable (but in no event
more than 30 days after so required or requested pursuant to this Section 3
(which request may not be made within 60 days after the Closing Date)),
file with the Commission a Shelf Registration Statement relating to the
offer and sale of the Notes or the Exchange Notes, as applicable, by the
Holders from time to time in accordance with the methods of distribution
elected by such Holders and set forth in such Shelf Registration Statement
and Rule 415 under the Securities Act; PROVIDED, that with respect to
Exchange Notes received by an Initial Purchaser in exchange for Notes
constituting any portion of an unsold allotment, the Company may, if
permitted by current interpretations by the Commission's staff, file a
post-effective amendment to the Exchange Offer Registration Statement
containing the information required by Regulation S-K Items 507 and/or 508,
as applicable, in satisfaction of its obligations under this paragraph (a)
with respect thereto, and any such Exchange Offer Registration Statement,
as so amended, shall be referred to herein as, and governed by the
provisions herein applicable to, a Shelf Registration Statement.
(b) The Company shall use its best efforts to cause the Shelf
Registration Statement to be declared effective under the Securities Act
within 60 days after the date on which it is required to file such Shelf
Registration Statement pursuant to this Section 3, and keep the Shelf
Registration Statement continuously effective in order to permit the
Prospectus contained therein to be usable by Holders for a period of two
years (or any shorter period under Rule 144(k) under the Securities Act)
from the date the Shelf Registration Statement is declared effective by the
Commission or such shorter period that will terminate when all the Notes or
Exchange Notes, as applicable, covered by the Shelf Registration Statement
have been sold pursuant to the Shelf
6
<PAGE>
Registration Statement (in any such case, such period being called the
"Shelf Registration Period"). The Company shall have been deemed not to
have used its best efforts to keep the Shelf Registration Statement
effective during the requisite period if it voluntarily takes any action
that would result in Holders of Notes covered thereby not being able to
offer and sell such Notes during that period, unless (i) such action is
required by applicable law, or (ii) such action is taken by the Company in
good faith and for valid business reasons (not including avoidance of the
Company's obligations hereunder), including the acquisition or divestiture
of assets, so long as the Company promptly thereafter complies with the
requirements of Section 4(k) hereof, if applicable.
(c) No Holder of Notes may include any of its Notes in any Shelf
Registration Statement pursuant to this Agreement unless such Holder
furnishes to the Company in writing, within 10 days after receipt of a
request therefor, such information as the Company may reasonably request
for use in connection with any Shelf Registration Statement or Prospectus
or preliminary Prospectus included therein, and each such Holder agrees to
furnish promptly to the Company all information required to be disclosed in
order to make the information previously furnished to the Company by such
Holder not materially misleading.
4. REGISTRATION PROCEDURES. In connection with any Shelf
Registration Statement and, to the extent applicable, any Exchange Offer
Registration Statement, the following provisions shall apply:
(a) The Company shall furnish to you, prior to the filing thereof
with the Commission, a copy of any Registration Statement, and each amendment
thereof and each amendment or supplement, if any, to the Prospectus included
therein and shall use its best efforts to reflect in each such document, when so
filed with the Commission, such comments as you reasonably may propose in a
timely manner.
(b) The Company shall ensure that:
(i) any Registration Statement and any amendment thereto and any
Prospectus contained therein and any amendment or supplement thereto
complies in all material respects with the Securities Act and the rules and
regulations thereunder,
(ii) any Registration Statement and any amendment thereto does not,
when it becomes effective, contain an untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary
to make the statements therein not misleading, and
(iii) any Prospectus forming part of any Registration Statement and
any amendment or supplement to such Prospectus does not include an untrue
statement of a
7
<PAGE>
material fact or omit to state a material fact necessary in order to make
the statements therein, in the light of the circumstances under which they
were made, not misleading.
(c) (1) The Company shall advise you and, in the case of a Shelf
Registration Statement, the Holders of Notes covered thereby, and, if requested
by you or any such Holder, confirm such advice in writing:
(i) when a Registration Statement and any amendment thereto has
been filed with the Commission and when the Registration Statement or any
post-effective amendment thereto has become effective; and
(ii) of any request by the Commission for amendments or supplements
to the Registration Statement or the Prospectus included therein or for
additional information.
(2 The Company shall advise you and, in the case of a Shelf
Registration Statement, the Holders of Notes covered thereby, and, in the case
of an Exchange Offer Registration Statement, any Exchanging Dealer that has
provided in writing to the Company a telephone or facsimile number and address
for notices, and, if requested by you or any such Holder or Exchanging Dealer,
confirm such advice in writing:
(i) of the issuance by the Commission of any stop order suspending
the effectiveness of the Registration Statement or the initiation of any
proceedings for that purpose;
(ii) of the receipt by the Company of any notification with respect
to the suspension of the qualification of the Notes included therein for
sale in any jurisdiction or the initiation or threatening of any proceeding
for such purpose; and
(iii) of the happening of any event that requires the making of any
changes in the Registration Statement or the Prospectus so that, as of such
date, the statements therein are not misleading and do not omit to state a
material fact required to be stated therein or necessary to make the
statements therein (in the case of the Prospectus, in light of the
circumstances under which they were made) not misleading (which advice
shall be accompanied by an instruction to suspend the use of the Prospectus
until the requisite changes have been made).
(d) The Company shall use its best efforts to obtain the withdrawal
of any order suspending the effectiveness of any Registration Statement at the
earliest possible time.
(e) The Company shall furnish to each Holder of Notes covered by
any Shelf Registration Statement, without charge, at least one copy of such
Shelf Registration Statement and any post-effective amendment thereto, including
financial statements and schedules, and, if the Holder so requests in writing,
all exhibits thereto (including those incorporated by reference).
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(f) The Company shall, during the Shelf Registration Period,
deliver to each Holder of Notes covered by any Shelf Registration Statement,
without charge, as many copies of the Prospectus (including each preliminary
Prospectus) included in such Shelf Registration Statement and any amendment or
supplement thereto as such Holder may reasonably request; and the Company
consents to the use of the Prospectus or any amendment or supplement thereto by
each of the selling Holders of Notes in connection with the offering and sale of
the Notes covered by the Prospectus or any amendment or supplement thereto.
(g) The Company shall furnish to each Exchanging Dealer that so
requests, without charge, at least one copy of the Exchange Offer Registration
Statement and any post-effective amendment thereto, including financial
statements and schedules, any documents incorporated by reference therein, and,
if the Exchanging Dealer so requests in writing, all exhibits thereto (including
those incorporated by reference).
(h) The Company shall, during the Exchange Offer Registration
Period, promptly deliver to each Exchanging Dealer, without charge, as many
copies of the Prospectus included in such Exchange Offer Registration Statement
and any amendment or supplement thereto as such Exchanging Dealer may reasonably
request for delivery by such Exchanging Dealer in connection with a sale of
Exchange Notes received by it pursuant to the Registered Exchange Offer; and the
Company consents to the use of the Prospectus or any amendment or supplement
thereto by any such Exchanging Dealer, as aforesaid.
(i) Prior to the Registered Exchange Offer or any other offering of
Notes pursuant to any Registration Statement, the Company shall register or
qualify or cooperate with the Holders of Notes included therein and their
respective counsel in connection with the registration or qualification of such
Notes for offer and sale under the securities or blue sky laws of such
jurisdictions as any such Holders reasonably request in writing and do any and
all other acts or things necessary or advisable to enable the offer and sale in
such jurisdictions of the Notes covered by such Registration Statement;
PROVIDED, HOWEVER, that the Company will not be required to qualify generally to
do business in any jurisdiction where it is not then so qualified or to take any
action that would subject it to general service of process or to taxation in any
such jurisdiction where it is not then so subject.
(j) The Company shall cooperate with the Holders to facilitate the
timely preparation and delivery of certificates representing Notes to be sold
pursuant to any Registration Statement free of any restrictive legends and in
such denominations and registered in such names as Holders may request prior to
sales of Notes pursuant to such Registration Statement.
(k) Upon the occurrence of any event contemplated by
paragraph (c)(2)(iii) of this Section 4, the Company shall promptly prepare a
post-effective amendment to any Registration Statement or an amendment or
supplement to the related Prospectus or file any other required document so
that, as thereafter delivered to purchasers of the Notes included therein, the
Prospectus will not include an untrue statement of a material fact or omit to
state any material
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fact necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading.
(l) Not later than the effective date of any such Registration
Statement hereunder, the Company shall provide a CUSIP number for the Notes or
Exchange Notes, as the case may be, registered under such Registration
Statement, and provide the Trustee with printed certificates for such Notes or
Exchange Notes, in a form eligible for deposit with The Depository Trust
Company.
(m) The Company shall use its best efforts to comply with all
applicable rules and regulations of the Commission and shall make generally
available to its security holders as soon as practicable after the effective
date of the applicable Registration Statement an earnings statement satisfying
the provisions of Section 11(a) of the Securities Act and Rule 158 thereunder.
(n) The Company shall cause the Indenture to be qualified under the
Trust Indenture Act of 1939, as amended, not later than the effective date of
the first Registration Statement required under this Agreement.
(o) The Company may require each Holder of Notes to be sold
pursuant to any Shelf Registration Statement to furnish to the Company such
information regarding the Holder and the distribution of such Notes as the
Company may from time to time reasonably require for inclusion in such
Registration Statement.
(p) The Company shall, if requested, promptly incorporate in a
Prospectus supplement or post-effective amendment to a Shelf Registration
Statement such information as the Managing Underwriters and Majority Holders
reasonably agree should be included therein and shall make all required filings
of such Prospectus supplement or post-effective amendment as soon as notified of
the matters to be incorporated in such Prospectus supplement or post-effective
amendment.
(q) In the case of any Shelf Registration Statement, the Company
shall enter into such agreements (including underwriting agreements) and take
all other appropriate actions in order to expedite or facilitate the
registration or the disposition of any Notes included therein, and in connection
therewith, if an underwriting agreement is entered into, cause the same to
contain indemnification provisions and procedures no less favorable than those
set forth in Section 6 (or such other provisions and procedures acceptable to
the Majority Holders and the Managing Underwriters, if any) with respect to all
parties to be indemnified pursuant to Section 6.
(r) In the case of any Shelf Registration Statement, the Company
shall:
(i) make reasonably available for inspection by the Holders of
Notes to be registered thereunder, any Underwriter participating in any
disposition pursuant to such Registration Statement, and any attorney,
accountant or other agent retained by the
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Holders or any such Underwriter all relevant financial and other records,
pertinent corporate documents and properties of the Company and its
subsidiaries;
(ii) cause the Company's officers, directors and employees to supply
all relevant information reasonably requested by the Holders or any such
Underwriter, attorney, accountant or agent in connection with any such
Registration Statement as is customary for similar due diligence
examinations; PROVIDED, HOWEVER, that any information that is designated in
writing by the Company, in good faith, as confidential at the time of
delivery of such information shall be kept confidential by the Holders or
any such Underwriter, attorney, accountant or agent, unless such disclosure
is made in connection with a court proceeding or required by law, or such
information becomes available to the public generally or through a third
party without an accompanying obligation of confidentiality; and make such
representatives of the Company as shall be reasonably requested by the
Initial Purchasers available for discussion of any such Registration
Statement;
(iii) make such representations and warranties to the Holders of
Notes registered thereunder and the Underwriters, if any, in form,
substance and scope as are customarily made by issuers to underwriters in
primary underwritten offerings and covering matters including those set
forth in the Purchase Agreement;
(iv) obtain opinions of counsel to the Company and updates thereof
(which counsel and opinions (in form, scope and substance) shall be
reasonably satisfactory to the Managing Underwriters, if any) addressed to
each selling Holder and the Underwriters, if any, covering such matters as
are customarily covered in opinions requested in underwritten offerings and
such other matters as may be reasonably requested by such Holders and
Underwriters, PROVIDED THAT such counsel shall not be required to provide
to any Holders a negative assurance statement to the effect that a
registration statement or prospectus does not contain any material
misstatements or omissions;
(v) if the registration is a registration in which securities of
the Company are sold to an Underwriter for reoffering to the public, obtain
"comfort" letters and updates thereof from the independent certified public
accountants of the Company (and, if necessary, any other independent
certified public accountants of any subsidiary of the Company or of any
business acquired by the Company for which financial statements and
financial data are, or are required to be, included in the Registration
Statement), addressed to the Underwriters in customary form and covering
matters of the type customarily covered in "comfort" letters in connection
with primary underwritten offerings; and
(vi) deliver such documents and certificates as may be reasonably
requested by the Majority Holders and the Managing Underwriters, if any,
including those to evidence compliance with Section 4(k) and with any
conditions contained in the underwriting agreement or other agreement
entered into by the Company.
The foregoing actions set forth in clauses (iii), (iv), (v) and (vi)
of this Section 4(r) shall be performed at (A) the effectiveness of such
Registration Statement and each post-
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effective amendment thereto and (B) each closing under any underwriting or
similar agreement as and to the extent required thereunder.
(s) In the case of any Exchange Offer Registration Statement, the
Company shall:
(i) make reasonably available for inspection by such Initial
Purchaser, and any attorney, accountant or other agent retained by such
Initial Purchaser, all relevant financial and other records, pertinent
corporate documents and properties of the Company and its subsidiaries;
(ii) cause the Company's officers, directors and employees to supply
all relevant information reasonably requested by such Initial Purchaser or
any such attorney, accountant or agent in connection with any such
Registration Statement as is customary for similar due diligence
examinations; PROVIDED, HOWEVER, that any information that is designated in
writing by the Company, in good faith, as confidential at the time of
delivery of such information shall be kept confidential by such Initial
Purchaser or any such attorney, accountant or agent, unless such disclosure
is made in connection with a court proceeding or required by law, or such
information becomes available to the public generally or through a third
party without an accompanying obligation of confidentiality; and make such
representatives of the Company as shall be reasonably requested by the
Initial Purchasers available for discussion of any such Registration
Statement;
(iii) make such representations and warranties to such Initial
Purchaser, in form, substance and scope as are customarily made by issuers
to underwriters in primary underwritten offerings and covering matters set
forth in the Purchase Agreement;
(iv) obtain opinions of counsel to the Company and updates thereof
(which counsel and opinions (in form, scope and substance) shall be
reasonably satisfactory to such Initial Purchaser and its counsel,
addressed to such Initial Purchaser, covering such matters as are
customarily covered in opinions requested in underwritten offerings and
such other matters as may be reasonably requested by such Initial Purchaser
or its counsel;
(v) obtain "comfort" letters and updates thereof from the
independent certified public accountants of the Company (and, if necessary,
any other independent certified public accountants of any subsidiary of the
Company or of any business acquired by the Company for which financial
statements and financial data are, or are required to be, included in the
Registration Statement), addressed to such Initial Purchaser, in customary
form and covering matters of the type customarily covered in "comfort"
letters in connection with primary underwritten offerings; and
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(vi) deliver such documents and certificates as may be reasonably
requested by such Initial Purchaser or its counsel, including those to
evidence compliance with Section 4(k) and with conditions customarily
contained in underwriting agreements.
The foregoing actions set forth in clauses (iii), (iv), (v), and (vi)
of this Section 4(s) shall be performed at the close of the Registered Exchange
Offer and the effective date of any post-effective amendment to the Exchange
Offer Registration Statement.
(t) Each Holder agrees by acquisition of a Note that, upon receipt
of any notice from the Company of the existence of any fact of the kind
described in Section 4(c)(2)(iii) hereof, such Holder will forthwith discontinue
disposition of Notes pursuant to the applicable Registration Statement until
such Holder's receipt of the copies of the supplemented or amended Prospectus
contemplated by Section 4(k) hereof, or until it is advised in writing (the
"Advice") by the Company that the use of the Prospectus may be resumed, and has
received copies of any additional or supplemental filings that are incorporated
by reference in the Prospectus. If so directed by the Company, each Holder will
deliver to the Company (at the Company's expense) all copies, other than
permanent file copies then in such Holder's possession, of the Prospectus
covering such Notes that was current at the time of receipt of such notice. In
the event the Company shall give any such notice, the time period regarding the
effectiveness of such Registration Statement set forth in Section 2 or 3 hereof,
as applicable, shall be extended by the number of days during the period from
and including the date of the giving of such notice pursuant to Section
4(c)(2)(iii) hereof to and including the date when each selling Holder covered
by such Registration Statement shall have received the copies of the
supplemented or amended Prospectus contemplated by Section 4(k) hereof or shall
have received the Advice.
5. REGISTRATION EXPENSES. The Company shall bear all expenses
incurred in connection with the performance of its obligations under Sections 2,
3 and 4 hereof and, in the event of any Shelf Registration Statement, will
reimburse the Holders for the reasonable fees and disbursements of one firm or
counsel designated by the Majority Holders to act as counsel for the Holders in
connection therewith, and, in the case of any Exchange Offer Registration
Statement, will reimburse the Initial Purchasers for the reasonable fees and
disbursements of not more than one firm or counsel acting in connection
therewith.
6. INDEMNIFICATION AND CONTRIBUTION. (a) The Company agrees to
indemnify and hold harmless each Holder of Securities covered hereby (including
each of you and, with respect to any Prospectus delivery as contemplated by
Section 4(h) hereof, each Exchanging Dealer), the directors, officers, employees
and agents of each such Holder and each person who controls any such Holder
within the meaning of either the Securities Act or the Exchange Act, from and
against any and all losses, liabilities, claims, damages and expenses whatsoever
(including but not limited to attorneys' fees and any and all expenses
whatsoever incurred in investigating, preparing or defending against any
investigation or litigation, commenced or threatened, or any claim whatsoever,
and any and all amounts paid in settlement of any claim or litigation), joint or
several, to which they or any of them may become subject under the Act, the
Exchange Act or otherwise, insofar as such losses, liabilities, claims, damages
or expenses (or actions in respect thereof) ("Losses") arise out of or are based
upon any untrue statement or alleged untrue statement of a material fact
contained in the Registration Statement as originally filed or in any amendment
thereof, or in any preliminary Prospectus or Prospectus, or in any amendment
thereof or supplement thereto, or arise out of or are based upon the omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading; PROVIDED, however, that (i) the
Company will not be liable in any such case to the extent, but only to the
extent, that any such loss, liability, claim, damage or expense arises out of or
is based upon any such untrue statement or alleged untrue statement or omission
or alleged omission made therein in reliance upon and in conformity with written
information furnished to the Company by or on behalf of such Holder expressly
for use therein and (ii) the foregoing indemnity with respect to any untrue
statement contained in or omitted from the preliminary Prospectus shall not
inure to the benefit of any Holder (or persons controlling such Holder) from
whom the person asserting any such loss, liability claim, damage or expense
purchased any Exchange Notes which are the subject thereof if it is not finally
judicially determined that such loss, liability, claim, damage or expense
resulted solely from the fact that such Holder sold Exchange Notes to the person
asserting loss, claim, damage or expense, who was not sent or given, at or prior
to the written confirmation of such sale, a copy of the Prospectus, as amended
and supplemented. This indemnity agreement will be in addition to any liability
which the Company may otherwise have, including under this Agreement.
The Company also agrees to indemnify or contribute to Losses of, as
provided in Section 6(d), any underwriters of Notes registered under a Shelf
Registration Statement, their employees, officers, and directors and each person
who controls such selling underwriters on the same basis as that of the
indemnification of the Initial Purchasers and the selling Holders
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provided in this Section 6(a) and shall, if requested by any Holder, enter into
an underwriting agreement reflecting such agreement, as provided in Section 4(q)
hereof.
(b) Each Holder of Notes covered by a Registration Statement
(including each Initial Purchaser and, with respect to any Prospectus delivery
as contemplated by Sections 2(e) and 4(h) hereof, each Exchanging Dealer)
severally and not jointly agrees to indemnify and hold harmless (i) the Company,
(ii) each of its directors, (iii) each of its officers who signs such
Registration Statement and (iv) each person who controls the Company within the
meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, against
any losses, liabilities, claims, damages and expenses whatsoever (including but
not limited to attorneys' fees and any and all expenses whatsoever incurred in
investigating, preparing or defending against any investigation or litigation,
commenced or threatened, or any claim whatsoever and any and all amounts paid in
settlement of any claim or litigation), joint or several, to which they or any
of them may become subject under the Act, the Exchange Act or otherwise, insofar
as such losses, liabilities, claims, damages or expenses (or actions in respect
thereof) arise out of or are based upon any untrue statement or alleged untrue
statement of a material fact contained in the Registration Statement as
originally filed or in any amendment thereof, or in any preliminary Prospectus
or Prospectus, or in any amendment thereof or supplement thereto, or arise out
of or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading, in each case to the extent, but only to the extent, that any such
loss, liability, claim, damage or expense arises out of or is based upon any
untrue statement or alleged untrue statement or omission or alleged omission
made therein in reliance upon and in conformity with written information
furnished to the Company by or on behalf of such Holder expressly for use
therein.
(c) Promptly after receipt by an indemnified party under subsection
(a) or (b) above of notice of the commencement of any action, such indemnified
party shall, if a claim in respect thereof is to be made against the
indemnifying party under such subsection, notify each party against whom
indemnification is to be sought in writing of the commencement thereof (but the
failure so to notify an indemnifying party shall not relieve it from any
liability which it may have under this Section 6 except to the extent that it
has been prejudiced in any material respect by such failure or from any
liability which it may otherwise have). In case any such action is brought
against any indemnified party, and it notifies an indemnifying party of the
commencement thereof, the indemnifying party will be entitled to participate
therein, and to the extent it may elect by written notice delivered to the
indemnified party promptly after receiving the aforesaid notice from such
indemnified party, to assume the defense thereof with counsel reasonably
satisfactory to such indemnified party. Notwithstanding the foregoing, the
indemnified party or parties shall have the right to employ its or their own
counsel in any such case (and where the Initial Purchasers are the indemnified
parties, Bear, Stearns & Co. Inc. shall have the right to select such counsel
for the Initial Purchasers), but the fees and expenses of such counsel shall be
at the expense of such indemnified party or parties unless (i) the employment of
such counsel shall have been authorized in writing by the indemnifying parties
in connection with the defense of such action, (ii) the indemnifying parties
shall not have employed counsel to take charge of the defense of such action
within a reasonable time after notice of commencement of the action, or (iii)
such indemnified party or parties shall have reasonably concluded that there may
be defenses available to it or them which are different from or additional to
those available to one or all of the indemnifying parties (in which case the
indemnifying party or parties shall not have the right to direct the defense of
such action on behalf of the indemnified party or parties), in any of which
events such fees and expenses of counsel shall be borne by the indemnifying
parties; PROVIDED, however, that the indemnifying party under subsection (a) or
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(b) above, shall only be liable for the legal expenses of one counsel (in
addition to any local counsel) for all indemnified parties in each jurisdiction
in which any claim or action is brought. Anything in this subsection to the
contrary notwithstanding, an indemnifying party shall not be liable for any
settlement of any claim or action effected without its prior written consent;
PROVIDED, however, that such consent was not unreasonably withheld.
(d) In order to provide for contribution in circumstances in which
the indemnification provided for in Section 6 is for any reason held to be
unavailable or is insufficient to hold harmless a party indemnified thereunder,
then each applicable indemnifying party, in lieu of indemnifying such
indemnified party, shall have a joint and several obligation to contribute to
the aggregate losses, claims, damages, liabilities and expenses of the nature
contemplated by such indemnification provision (including any investigation,
legal and other expenses incurred in connection with, and any amount paid in
settlement of, any action, suit or proceeding or any claims asserted, but after
deducting in the case of losses, claims, damages, liabilities and expenses
suffered by the Company, any contribution received by the Company from persons,
other than the Holders, who may also be liable for contribution, including
persons who control the Company within the meaning of Section 15 of the Act or
Section 20(a) of the Exchange Act) to which the Company and one or more of the
Holders may be subject, in such proportion as is appropriate to reflect the
relative benefits received by the Company and the Holders from the offering of
the Units or, if such allocation is not permitted by applicable law or
indemnification is not available as a result of the indemnifying party not
having received notice as provided in this Section 6, in such proportion as is
appropriate to reflect not only the relative benefits referred to above but also
the relative fault of the Company and the Holders in connection with the
statements or omissions which resulted in such losses, claims, damages,
liabilities or expenses, as well as any other relevant equitable considerations.
The relative benefits received by the Company and any Holder shall be deemed to
be in the same proportion as (x) the total proceeds from the offering of Units
(net of discounts but before deducting expenses) received by the Company and (y)
the total proceeds (before deducting expenses) received by such Holder upon its
sale of the Notes, which proceeds received by the Initial Purchasers shall be
deemed to be equal to the total discounts and commissions received by the
Initial Purchasers from the placement of the Notes. The relative fault of the
Company and of the Holders shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Company or the Holders and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission. The Company and the Holders agree that it would not be
just and equitable if contribution pursuant to this paragraph 6(d) were
determined by pro rata allocation or by any other method of allocation which
does not take into account the equitable considerations referred to above.
Notwithstanding the provisions of this paragraph 6(d), (i) in no case shall any
Holder be required to contribute any amount by in excess of the amount by which
the proceeds (before deducting expenses) received by such Holder from the sale
of the Notes exceeds the amount of any damages which such Holder has otherwise
been required to pay by reason of any untrue or alleged untrue statement or
omission or alleged omission and (ii) no person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation. For purposes of this paragraph 6(d), (A) each person, if any,
who controls any of the Holders within the meaning of Section 15 of the Act or
Section 20(a) of the Exchange Act and (B) the respective officers, directors,
partners, employees, representatives and agents of any of the Holders or any
controlling person shall have the same rights to contribution as such Holder,
and each person, if any, who controls the Company within the meaning of Section
15 of the Act or Section 20(a) of the Exchange Act shall have the same rights
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to contribution as the Company, subject in each case to clauses (i) and (ii) of
this paragraph 6(d). Any party entitled to contribution will, promptly after
receipt of notice of commencement of any action, suit or proceeding against such
party in respect of which a claim for contribution may be made against another
party or parties under this paragraph 6(d), notify such party or parties from
whom contribution may be sought, but the failure to so notify such party or
parties shall not relieve the party or parties from whom contribution may be
sought from any obligation it or they may have under this paragraph 6(d) or
otherwise. No party shall be liable for contribution with respect to any action
or claim settled without its prior written consent; PROVIDED, however, that such
written consent was not unreasonably withheld.
7. UNDERWRITTEN OFFERINGS. No Holder may participate in any
underwritten Shelf Registration Statement hereunder unless such Holder (i)
agrees to sell such Holder's Notes on the basis provided in any underwriting
agreements entered into in connection therewith and (ii) completes and executes
all questionnaires, powers of attorney, indemnities, underwriting agreements and
other documents reasonably required under the terms of such underwriting
arrangements.
8. SELECTION OF UNDERWRITERS. In any underwritten offering, the
Underwriter or Underwriters will be selected by the Majority Holders; provided,
that such Underwriters must be reasonably satisfactory to the Company.
9. MISCELLANEOUS.
(a) NO INCONSISTENT AGREEMENTS. The Company has not, as of the
date hereof, entered into, nor shall it, on or after the date hereof, enter
into, any agreement that is inconsistent with the rights granted to the Holders
herein or otherwise conflicts with the provisions hereof.
(b) AMENDMENTS AND WAIVERS. The provisions of this Agreement,
including the provisions of this sentence, may not be amended, qualified,
modified or supplemented, and waivers or consents to departures from the
provisions hereof may not be given, unless the Company has obtained the written
consent of the Holders of at least a majority of the then-outstanding aggregate
principal amount of Notes (or, after the consummation of any Exchange Offer in
accordance with Section 2 hereof, of Exchange Notes), PROVIDED that, with
respect to any matter that directly or indirectly affects the rights of any
Initial Purchaser hereunder, the Company shall obtain the written consent of
each such Initial Purchaser against which such amendment, qualification,
supplement, waiver or consent is to be effective. Notwithstanding the foregoing
(except the foregoing proviso), a waiver or consent to departure from the
provisions hereof with respect to a matter that relates exclusively to the
rights of Holders whose Notes are being sold pursuant to a Registration
Statement and that does not directly or indirectly affect the rights of other
Holders may be given by the Majority Holders, determined on the basis of Notes
being sold rather than registered under such Registration Statement.
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(c) NOTICES. All notices and other communications provided for or
permitted hereunder shall be made in writing by hand-delivery, first-class mail,
telex, telecopier, or air courier guaranteeing overnight delivery:
(i) if to a Holder, at the most current address given by such
Holder to the Company in accordance with the provisions of this
Section 8(c), which address initially is, with respect to each Holder, the
address of such Holder maintained by the Registrar under the Indenture,
with a copy in like manner to Bear, Stearns & Co. Inc.
(ii) if to you, initially at the address set forth in the Purchase
Agreement; and
(iii) if to the Company, initially at its address set forth in the
Purchase Agreement.
All such notices and communications shall be deemed to have been duly
given when received. You or the Company by notice to the other may designate
additional or different addresses for subsequent notices or communications.
(d) SUCCESSORS AND ASSIGNS. This Agreement shall inure to the
benefit of and be binding upon the successors and assigns of each of the
parties, including, without the need for an express assignment or any consent by
the Company thereto, subsequent Holders of Notes and/or Exchange Notes. The
Company hereby agrees to extend the benefits of this Agreement to any Holder of
Notes and/or Exchange Notes and any such Holder may specifically enforce the
provisions of this Agreement as if an original party hereto.
(e) COUNTERPARTS. This agreement may be executed in any number of
counterparts and by the parties hereto in separate counterparts, each of which
when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement.
(f) HEADINGS. The headings in this agreement are for convenience
of reference only and shall not limit or otherwise affect the meaning hereof.
(g) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO
AGREEMENTS MADE AND TO BE PERFORMED IN SAID STATE.
(h) SEVERABILITY. In the event that any one or more of the
provisions contained herein, or the application thereof in any circumstances, is
held invalid, illegal or unenforceable in any respect for any reason, the
validity, legality and enforceability of any such provision in every other
respect and of the remaining provisions hereof shall not be in any way impaired
or affected thereby, it being intended that all of the rights and privileges of
the parties shall be enforceable to the fullest extent permitted by law.
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(i) NOTES HELD BY THE COMPANY, ETC. Whenever the consent or
approval of Holders of a specified percentage of principal amount of Notes or
Exchange Notes is required hereunder, Notes or Exchange Notes, as applicable,
held by the Company or its Affiliates (other than subsequent Holders of Notes or
Exchange Notes if such subsequent Holders are deemed to be Affiliates solely by
reason of their holdings of such Notes or Exchange Notes) shall not be counted
in determining whether such consent or approval was given by the Holders of such
required percentage.
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Please confirm that the foregoing correctly sets forth the agreement
between the Company and you.
Very truly yours,
FIRSTWORLD COMMUNICATIONS, INC.
By: /s/ ANDREW B. TAUBMAN
----------------------------
Name: Andrew B. Taubman
Title:Senior Vice President, Corporate
Finance and Administration
The forgoing Agreement is hereby
accepted as of the date first above written.
BEAR, STEARNS & CO. INC.
By: /s/ PHIL BERNEY
------------------------
Name: PHIL BERNEY
Title:
For itself and the other
Initial Purchasers
named in the preamble
hereto.
19
<PAGE>
ANNEX A
Each broker-dealer that receives Exchange Notes for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such Exchange Notes. The Letter of Transmittal
states that by so acknowledging and by delivering a prospectus, a broker-dealer
will not be deemed to admit that it is an "underwriter" within the meaning of
the Securities Act. This Prospectus, as it may be amended or supplemented from
time to time, may be used by a broker-dealer in connection with resales of
Exchange Notes received in exchange for Notes where such Notes were acquired by
such broker-dealer as a result of market-making activities or other trading
activities. The Company has agreed that, starting on the Expiration Date (as
defined herein) and ending on the close of business one year after the
Expiration Date, it will make this Prospectus available to any broker-dealer for
use in connection with any such resale. See "Plan of Distribution."
20
<PAGE>
ANNEX B
Each broker-dealer that receives Exchange Notes for its own account in exchange
for Notes, where such Notes were acquired by such broker-dealer as a result of
market-making activities or other trading activities, must acknowledge that it
will deliver a prospectus in connection with any resale of such Exchange Notes.
See "Plan of Distribution."
21
<PAGE>
ANNEX C
PLAN OF DISTRIBUTION
Each broker-dealer that receives Exchange Notes for its own account
pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Notes. This
Prospectus, as it may be amended or supplemented from time to time, may be used
by a broker-dealer in connection with resales of Exchange Notes received in
exchange for Notes where such Notes were acquired as a result of market-making
activities or other trading activities. The Company has agreed that, starting
on the Expiration Date and ending on the close of business one year after the
Expiration Date, it will make this Prospectus, as amended or supplemented,
available to any broker-dealer for use in connection with any such resale. In
addition, until __________________, 199___, all dealers effecting transactions
in the Exchange Notes may be required to deliver a prospectus.
The Company will not receive any proceeds from any sale of Exchange
Notes by broker-dealers. Exchange Notes received by broker-dealers for their
own account pursuant to the Exchange Offer may be sold from time to time in one
or more transactions in the over-the-counter market, in negotiated transactions,
through the writing of options on the Exchange Notes or a combination of such
methods of resale, at market prices prevailing at the time of resale, at prices
related to such prevailing market prices or negotiated prices. Any such resale
may be made directly to purchasers or to or through brokers or dealers who may
receive compensation in the form of commissions or concessions from any such
broker-dealer and/or the purchasers of any such Exchange Notes. Any
broker-dealer that resells Exchange Notes that were received by it for its own
account pursuant to the Exchange Offer and any broker or dealer that
participates in a distribution of such Exchange Notes may be deemed to be an
"underwriter" within the meaning of the Securities Act and any profit of any
such resale of Exchange Notes and any commissions or concessions received by any
such persons may be deemed to be underwriting compensation under the Securities
Act. The Letter of Transmittal states that by acknowledging that it will
deliver and by delivering a prospectus, a broker-dealer will not be deemed to
admit that it is an "underwriter" within the meaning of the Securities Act.
For a period of one year after the Expiration Date, the Company will
promptly send additional copies of this Prospectus and any amendment or
supplement to this Prospectus to any broker-dealer that requests such documents
in the Letter of Transmittal. The Company has agreed to pay all expenses
incident to the Exchange Offer (including the expenses of one counsel for the
Holders of the Notes) other than commissions or concessions of any brokers or
dealers and will indemnify the Holders of the Notes (including any
broker-dealers) against certain liabilities, including liabilities under the
Securities Act.
22
<PAGE>
[If applicable, add information required by Regulation S-K Items 507
and/or 508.]
23
<PAGE>
ANNEX D
RIDER A
/ / CHECK HERE IF YOU ARE A BROKER-DEALER AND WISH TO RECEIVE 10
ADDITIONAL COPIES OF THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR
SUPPLEMENTS THERETO.
Name:
--------------------------------------------
Address:
-----------------------------------------
-----------------------------------------
RIDER B
If the undersigned is not a broker-dealer, the undersigned represents that it is
not engaged in, and does not intend to engage in, a distribution of Exchange
Notes. If the undersigned is a broker-dealer that will receive Exchange Notes
for its own account in exchange for Notes, it represents that the Notes to be
exchanged for Exchange Notes were acquired by it as a result of market-making
activities or other trading activities and acknowledges that it will deliver a
prospectus in connection with any resale of such Exchange Notes; however, by so
acknowledging and by delivering a prospectus, the undersigned will not be deemed
to admit that it is an "underwriter" within the meaning of the Securities Act.
24
<PAGE>
SPECTRANET INTERNATIONAL
1995 INCENTIVE STOCK OPTION PLAN
1. PURPOSE. This Incentive Stock Option Plan (the "Plan") is intended to
serve as an incentive to, and to encourage stock ownership by, certain employees
of SpectraNet International, a California corporation (the "Corporation"), so
that they may acquire or increase their proprietary interest in the Corporation
and to encourage them to remain in the service of the Corporation. Options
granted pursuant to this Plan are intended to qualify under Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code").
2. ADMINISTRATION.
2.1 COMMITTEE. The Plan shall be administered by the Board of
Directors or a committee of three or more members appointed by the Board of
Directors of the Corporation (the "Committee"). The Committee shall select one
of its members as Chairman and shall appoint a Secretary, who need not be a
member of the Committee. The Committee shall hold meetings at such times and
places as it may determine and minutes of such meetings shall be recorded. Acts
by a majority of the Committee in a meeting at which a quorum is present and
acts approved in writing by a majority of the members of the Committee shall be
valid acts of the Committee. No member of the Committee shall vote on any
matter concerning his or her own participation in the Plan.
2.2 TERM. If the Board of Directors selects a Committee, the members
of the Committee shall serve on the Committee for the period of time determined
by the Board of Directors and shall be subject to removal by the Board of
Directors at any time. The Board of Directors may terminate the function of the
Committee at any time and resume all powers and authority previously delegated
to the Committee.
2.3 AUTHORITY. The Committee shall have sole discretion and
authority to grant options under the Plan to such employees of the Corporation
or any "parent" or "subsidiary" of the Corporation, as defined in Section 424 of
the Code ("Parent" or "Subsidiary"), at such times, under such terms and in such
amounts as it may decide. For purposes of this Plan and any Stock Option
Agreement (as defined below), the term "Corporation" shall include any Parent or
Subsidiary, if applicable. Subject to the express provisions of the Plan, the
Committee shall have complete authority to interpret the Plan, to describe,
amend and rescind the rules and regulations relating to it, to determine the
details and provisions of any Stock Option Agreement, to accelerate any options
and to make all other determinations necessary or advisable for the
administration of the Plan.
2.4 INTERPRETATION. The interpretation and construction by the
Committee of any provisions of the Plan or of any option granted under the Plan
shall be final and binding on all parties having an interest in this Plan or any
option granted hereunder. No member of
<PAGE>
the Committee shall be liable for any action or determination made in good faith
with respect to the Plan or any option granted under the Plan.
3. ELIGIBILITY.
3.1 GENERAL. All employees of the Corporation, or any Parent or
Subsidiary thereof, relative to the Corporation's management, operation or
development shall be eligible to receive options under the Plan. The selection
of recipients of options shall be within the sole and absolute discretion of the
Committee. No person shall be granted an option under this Plan unless such
person is an employee of the Corporation, or a Parent or Subsidiary thereof, on
the date of grant and has executed the grant representation letter set forth on
Exhibit "A", as such Exhibit may be amended by the Committee from time to time.
3.2 TERMINATION OF ELIGIBILITY. If an optionee ceases to be employed
by the Corporation or a Parent or Subsidiary thereof, for any reason (other than
such optionee's death), any option granted hereunder to such optionee shall
expire on the 90th day after the occurrence giving rise to such termination of
eligibility (or 1 year in the event an optionee is "disabled," as defined in
Section 22(e)(3) of the Code) or upon the date it expires by its terms,
whichever is earlier. Any option that has not vested in the optionee as of the
date of such termination shall immediately expire and shall be null and void.
The Committee shall, in its sole and absolute discretion, decide whether an
authorized leave of absence or absence for military or governmental service, or
absence for any other reason, shall constitute termination of eligibility for
purposes of this Section.
3.3 DEATH OF OPTIONEE AND TRANSFER OF OPTION. If the optionee shall
die while eligible to participate in the Plan, an option may be exercised
(subject to the condition that no option shall be exercisable after its
expiration and only to extent that the optionee's right to exercise such option
had accrued at the time of the optionee's death and had not previously been
exercised) at any time within six months after the optionee's death by the
executors or administrators of the optionee or by any person or persons who
shall have acquired the option directly from the optionee by bequest or
inheritance. Any option that has not vested in the optionee as of the date of
death or termination of employment, whichever is earlier, shall immediately
expire and shall be null and void. No option shall be transferable by the
optionee other than by will or the laws of interstate succession.
3.4 LIMITATION ON OPTIONS. No person shall be granted any Incentive
Option to the extent that the aggregate fair market value of the Stock (as
defined below) to which such options are exercisable for the first time by the
optionee during any calendar year (under all plans of the Corporation, and any
Parent or Subsidiary thereof) exceeds $100,000.
4. IDENTIFICATION OF STOCK. The Stock, as defined herein, subject to the
options shall be shares of the Corporation's authorized but unissued or acquired
or reacquired common stock (the "Stock"). The aggregate number of shares
subject to outstanding options
2
<PAGE>
shall not exceed 1,500,00 shares of Stock (subject to adjustment as provided in
Section 6). If any option granted hereunder shall expire or terminate for any
reason without having been exercised in full, the unpurchased shares subject
thereto shall again be available for purposes of this Plan.
5. TERMS AND CONDITIONS OF OPTIONS. Any option granted pursuant to the
Plan shall be evidenced by an agreement ("Stock Option Agreement") in such form
as the Committee shall from time to time determine, which agreement shall comply
with and be subject to the following terms and conditions:
5.1 NUMBER OF SHARES. Each option shall state the number of shares
of Stock to which it pertains.
5.2 OPTION EXERCISE PRICE. Each option shall state the option
exercise price, which shall be determined by the Committee; provided, however,
that (i) the exercise price of any option shall be not less than the fair
market value of the Stock, as determined by the Committee, on the date of
grant of such option and (ii) the exercise price of any Incentive Option
granted to an employee who owns more than 10% of the total combined voting
power of all classes of the Corporation's stock, or that of any Parent or
Subsidiary thereof, shall not be less than 110% of the fair market value of the
Stock, as determined by the Committee, on the date of grant of such option.
5.3 TERM OF OPTION. The term of an option granted hereunder shall be
determined by the Committee at the time of grant, but shall not exceed ten years
from the day of the grant. The term of an option granted to an employee who
owns more than 10% of the total combined voting power of all classes of the
Corporation's stock, or of a Parent or Subsidiary thereof, as determined
for purposes of Section 422 of the Code, shall in no event exceed five years
from the date of grant. All options shall be subject to early termination as
set forth in this Plan. In no event shall any option be exercisable after the
expiration of its term.
5.4 METHOD OF EXERCISE. An option shall be exercised by written
notice to the Corporation by the optionee (or successor in the event of death)
and execution by the optionee of an exercise representation letter in the form
set forth on Exhibit "B," as such Exhibit may be amended by the Committee from
time to time. The written notice shall state the number of shares with respect
to which the option is being exercised and designate a time, during normal
business hours of the Corporation, for the delivery thereof ("Exercise Date"),
which time shall be at least 30 days after the giving of such notice unless an
earlier date shall have been mutually agreed upon. At the time specified in the
written notice, the Corporation shall deliver to the optionee at the principal
office of the Corporation, or such other appropriate place as may be determined
by the Committee, a certificate or certificates for such shares of previously
authorized but unissued shares or acquired or reacquired shares of Stock as the
Corporation may elect. Notwithstanding the foregoing, the Corporation may
postpone
3
<PAGE>
delivery of any certificate or certificates after notice of exercise for such
reasonable period as may be required to comply with any applicable listing
requirements of any securities exchange. In the event an option shall be
exercisable by any person other than the optionee, the required notice under
this Section shall be accompanied by appropriate proof of the right of such
person to exercise the option.
5.5 MEDIUM AND TIME OF PAYMENT. The option exercise price shall be
payable in full on or before the option Exercise Date in any one of the
following alternative forms:
5.5.1 Full payment in cash, certified bank or cashier's check
or promissory note;
5.5.2 Full payment in shares of Stock having a fair market
value on the Exercise Date in the amount equal to the option exercise price;
5.6 FAIR MARKET VALUE. The fair market value of a share of Stock on
any relevant date shall be determined in accordance with the following
provisions:
5.6.1 If the Stock at the time is neither listed nor admitted
to trading on any stock exchange nor traded in the over-the-counter market, then
the fair market value shall be determined by the Committee after taking into
account such factors as the Committee shall deem appropriate.
5.6.2 If the Stock is not at the time listed or admitted to
trading on any stock exchange but is traded in the over-the-counter market, the
fair market value shall be the mean between the highest bid and lowest asked
prices (or, if such information is available, the closing selling price) of one
share of Stock on the date in question in the over-the-counter market, as such
prices are reported by the National Association of Securities Dealers through
its NASDAQ system or any successor system. If there are no reported bid and
asked prices (or closing selling price) for the Stock on the date in question,
then the mean between the highest bid price and lowest asked price (or the
closing selling price) on the last preceding date for which such quotations
exist shall be determinative of fair market value.
5.6.3 If the Stock is at the time listed or admitted to
trading on any stock exchange, then the fair market value shall be the closing
selling price of one share of Stock on the date in question on the stock
exchange determined by the Committee to be the primary market for the Stock as
such price is officially quoted in the composite tape of transactions on such
exchange. If there is no reported sale of Stock on such exchange on the date in
question, then the fair market value shall be the closing selling price on the
exchange on the last preceding date for which such quotation exists.
4
<PAGE>
5.7 RIGHTS AS A SHAREHOLDER. An optionee or successor shall have no
rights as a shareholder with respect to any Stock underlying any option until
the date of the issuance to such optionee of a certificate for such Stock. No
adjustment shall be made for dividends (ordinary or extraordinary, whether in
cash, securities or other property) or distributions or other rights for which
the record date is prior to the date such Stock certificate is issued, except as
provided in Section 6.
5.8 MODIFICATION, EXTENSION AND RENEWAL OF OPTIONS. Subject to the
terms and conditions of the Plan, the Committee may modify, extend or renew
outstanding options granted under the Plan, or accept the surrender of
outstanding options (to the extent not exercised) and authorize the granting of
new options in substitution therefor.
5.9 OTHER PROVISIONS. The Stock Option Agreements shall contain such
other provisions, including without limitation, restrictions upon the exercise
of options, as the Committee shall deem advisable. Thus, for example, the
Committee may require that all or any portion of an option not be exercisable
until a specified period of time has passed or some other event has occurred.
6. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION.
6.1 SUBDIVISION OR CONSOLIDATION. Subject to any required action by
shareholders of the Corporation, the number of shares of Stock covered by each
outstanding option, and the exercise price thereof, shall be proportionately
adjusted for any increase or decrease in the number of issued shares of Stock of
the Corporation resulting from a subdivision or consolidation of shares or the
payment of a stock dividend (but only on the Stock) or any other increase or
decrease in the number of such shares effected without receipt of consideration
by the Corporation. Any fraction of a share subject to option that would
otherwise result from an adjustment pursuant to this Section shall be rounded
downward to the next full number of shares without other compensation or
consideration to the holder of such option.
6.2 CAPITAL TRANSACTIONS. Upon a sale or exchange of all or
substantially all of the assets of the Corporation, a merger or consolidation in
which the Corporation is not the surviving corporation, a merger, reorganization
or consolidation in which the Corporation is the surviving corporation and
shareholders of the Corporation exchange their stock for securities or property,
a liquidation of the Corporation or similar transaction ("Capital Transaction"),
this Plan and each option issued under this Plan, whether vested or unvested,
shall terminate, unless such options are assumed by a successor corporation in a
merger or consolidation or otherwise determined by the Committee, 15 days prior
to such Capital Transaction; provided, however, that unless the outstanding
options are assumed by a successor corporation in a merger or consolidation,
subject to terms approved by the Committee, all optionees will have the right,
until 15 days prior to such Capital Transaction, to exercise all vested options.
Notwithstanding the foregoing, in the event there is a merger or
5
<PAGE>
consolidation where the Corporation is not the surviving corporation, all
options granted under this Plan shall vest 30 days prior to such merger or
consolidation unless such options are assumed by the successor corporation in
such merger or consolidation.
6.3 ADJUSTMENTS. To the extent that the foregoing adjustments relate
to stock or securities of the Corporation, such adjustments shall be made by the
Committee, whose determination in that respect shall be final, binding and
conclusive.
6.4 ABILITY TO ADJUST. The grant of an option pursuant to the Plan
shall not affect in any way the right or power of the Corporation to make
adjustments, reclassifications, reorganizations or changes of its capital or
business structure or to merge, consolidate, dissolve, liquidate, sell or
transfer all or any part of its business or assets.
6.5 NOTICE OF ADJUSTMENT. Whenever the Corporation shall take any
action resulting in any adjustment provided for in this Section, the Corporation
shall forthwith deliver notice of such action to each optionee, which notice
shall set forth the number of shares subject to the option and the exercise
price thereof resulting from such adjustment.
7. NONASSIGNABILITY. Options granted under the Plan may not be sold,
pledged, assigned or transferred in any manner other than by will or by the laws
of intestate succession, and may be exercised during the lifetime of an optionee
only by such optionee. Any transfer in violation of this provision shall void
such option and any Stock Option Agreement entered into by the optionee and the
Corporation regarding such option shall be void and have no further force or
effect. No option shall be pledged or hypothecated in any way, nor shall any
option be subject to execution, attachment or similar process.
8. NO RIGHT OF EMPLOYMENT. Neither the grant nor exercise of any option
nor anything in this Plan shall impose upon the Corporation or any other
corporation any obligation to employ or continue to employ any optionee. The
right of the Corporation and any other corporation to terminate any employee
shall not be diminished or affected because an option has been granted to such
employee.
9. TERM OF PLAN. This Plan is effective on the date the Plan is adopted
by the Board of Directors and options may be granted pursuant to the Plan from
time to time within a period of ten (10) years from such date, or the date of
any required shareholder approval required under the Plan, if earlier.
Termination of the Plan shall not affect any option theretofore granted.
10. AMENDMENT OF THE PLAN. The Board of Directors of the Corporation may,
subject to any required shareholder approval, suspend, discontinue or terminate
the Plan, or revise or amend it in any respect whatsoever with respect to any
shares of Stock at that time not subject to options.
6
<PAGE>
11. APPLICATION OF FUNDS. The proceeds received by the Corporation from
the sale of Stock pursuant to options may be used for general corporate
purposes.
12. RESERVATION OF SHARES. The Corporation, during the term of this Plan,
shall at all times reserve and keep available such number of shares of Stock as
shall be sufficient to satisfy the requirements of the Plan.
13. NO OBLIGATION TO EXERCISE OPTION. The granting of an option shall not
impose any obligation upon the optionee to exercise such option.
14. APPROVAL OF BOARD OF DIRECTORS AND SHAREHOLDERS. The Plan shall not
take effect until approved by the Board of Directors of the Corporation. This
Plan shall be approved by a vote of the shareholders within 12 months from the
date of approval by the Board of Directors. In the event such shareholder vote
is not obtained, all options granted hereunder, whether vested or unvested,
shall be null and void.
15. WITHHOLDING TAXES. Notwithstanding anything else to the contrary in
the Plan or any Stock Option Agreement, the exercise of any option shall be
conditioned upon payment by such optionee in cash, or other provisions
satisfactory to the Committee, by the optionee to the Corporation of all local,
state, federal or other withholding taxes applicable, in the Committee's
judgment, to the exercise or to later disposition of shares acquired upon
exercise of an option.
16. PARACHUTE PAYMENTS. Any outstanding option under the Plan may not be
accelerated to the extent any such acceleration of such option would, when added
to the present value of other payments in the nature of compensation which
becomes due and payable to the optionee, result in the payment to such optionee
of an excess parachute payment under Section 280G of the Code, except to the
extent such acceleration is required in a merger or consolidation under Section
6.2 as a result of the acquiring corporation's failure to assume options under
this Plan. The existence of any such excess parachute payment shall be
determined in the sole and absolute discretion of the Committee.
17. SECURITIES LAWS COMPLIANCE. Notwithstanding anything contained
herein, the Corporation shall not be obligated to grant any option under this
Plan or to sell, issue or effect any transfer of any Stock unless such grant,
sale, issuance or transfer is at such time effectively (i) registered or exempt
from registration under the Securities Act of 1933, as amended (the "Act"), and
(ii) qualified or exempt from qualification under the California Corporate
Securities Law of 1968 and any other applicable state securities laws. Each
optionee shall be required to make such representations, as may be deemed
appropriate by counsel to the Corporation for the Corporation to use any
available exemption from registration under the Act or qualification under any
applicable state securities law.
7
<PAGE>
18. RESTRICTIVE LEGENDS. The certificates representing the Stock issued
upon exercise of options granted pursuant to this Plan will bear the following
legends giving notice of restrictions on transfer under the Act and this Plan,
as follows:
(a) THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ISSUED OR
TRANSFERRED IN A TRANSACTION WHICH WAS NOT REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, IN RELIANCE UPON AN EXEMPTION
AFFORDED BY SUCH ACT. NO SALE OR TRANSFER OF THESE SHARES SHALL
BE MADE, NO ATTEMPTED SALE OR TRANSFER SHALL BE VALID, AND THE
ISSUER SHALL NOT BE REQUIRED TO GIVE ANY EFFECT TO ANY SUCH
TRANSACTION UNLESS (A) SUCH TRANSACTION SHALL HAVE BEEN DULY
REGISTERED UNDER THE ACT OR (B) THE ISSUER SHALL HAVE FIRST
RECEIVED AN OPINION OF COUNSEL SATISFACTORY TO IT THAT SUCH
REGISTRATION IS NOT REQUIRED.
(b) Any other legends required by applicable state securities laws as
determined by the Committee.
19. NOTICES. Any notice to be given under the terms of the Plan shall be
addressed to the Corporation in care of its Secretary at its principal office,
and any notice to be given to an optionee shall be addressed to such optionee at
the address maintained by the Corporation for such person or at such other
address as the optionee may specify in writing to the Corporation.
8
<PAGE>
SPECTRANET INTERNATIONAL
1995 INCENTIVE STOCK OPTION PLAN
STOCK OPTION AGREEMENT
This Incentive Stock Option Agreement ( the "Option Agreement") is made by
and between SpectraNet International, a California company (the "Company") and
XXXX, (the "Optionee"). Unless otherwise defined herein, the terms defined in
the 1995 Incentive Stock Option Plan (the "Plan"), attached hereto as EXHIBIT
A-1, for the Company shall have the same defined meanings in this Option
Agreement.
I. NOTICE OF STOCK OPTION GRANT
XXXX
XXXX
XXXX
You have been granted an option to purchase (the "Option") Common Stock of
the Company, subject to the terms and conditions of the Plan and this Option
Agreement, as follows:
Grant Number XXXX
Date of Grant XXXX
Vesting Commencement Date XXXX
Exercise Price per Share XXXX
Total Number of Shares Granted XXXX
Total Exercise Price XXXX
Type of Option: Incentive Stock Option
Term/Expiration Date: XXXX
VESTING SCHEDULE:
This Option may be exercised, in whole or in part, in accordance with the
following schedule:
The shares subject to the Plan vest 20% six months after the vesting
commencement date (the "Initial Vesting Date"). The shares shall vest
20% each year on the anniversary of the Initial Vesting Date
thereafter at the rate of 20% per year.
<PAGE>
TERMINATION OF OPTION:
Except as otherwise provided in this Option Agreement, to the extent not
previously exercised, the Option shall terminate upon the first to occur of any
of the following events:
(a) the dissolution or liquidation of the Company;
(b) the expiration of 10 years from the date of the grant of the Option
hereunder;
(c) the breech by Optionee of any provision of this Option Agreement;
(d) as more fully set forth in Section 3.2 of the Plan, ninety (90) days
after termination of employment;
(e) as more fully set forth in Section 3.3 of the Plan, six months after
an Optionee's death;
(f) as more fully set forth in Section 6.2 of the Plan, in the event of a
capital transaction.
II. AGREEMENT
1. GRANT OF OPTION. The Company hereby grants to the Optionee named in
the Notice of Grant attached as Part I of this Agreement an Option to purchase
the number of shares of Common Stock (the "Shares"), collectively (the
"Securities") as set forth in the Notice of Grant, at the exercise price per
share set forth in the Notice of Grant (the "Exercise Price"), subject to the
terms and conditions of the Plan, which is incorporated herein by reference the
right, privilege and Option to purchase XXXX Shares at XXXX per share, in the
manner and subject to the conditions provided hereinafter and in the Plan and
any amendments thereto and any rules and regulations thereunder.
If designated in the Notice of Grant as an Incentive Stock Option ("ISO"),
this Option is intended to qualify as an Incentive Stock Option under
Section 422 of the Code. However, if this Option is intended to be an Incentive
Stock Option, to the extent that it exceeds the $100,000 rule of Code Section
422(d) it shall be treated as a Nonstatutory Stock Option ("NSO").
2. EXERCISE OF OPTION. This Option shall be exercisable during its term
in accordance with the provisions of Sections 2 and 3 of the Plan as follows:
(a) RIGHT TO EXERCISE. This Option is exercisable during its term in
accordance with the vesting schedule set out in the Notice of Grant and the
applicable provisions of the Plan and this Option Agreement. In the event of
Optionee's death, disability or other termination of Optionee's employment, the
exercisability of the Option is governed by the applicable provisions of the
Plan and this Option Agreement.
(b) METHOD OF EXERCISE. This 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
-2-
<PAGE>
exercise the Option, the number of shares in respect of which the Option is
being exercised (the "Exercised Shares"), and such other representations and
agreements as may be required by the Company pursuant to the provisions of the
Plan. The Exercise Notice shall be signed by the Optionee and shall be
delivered in person or by certified mail to the Secretary of the Company. The
Exercise Notice shall be accompanied by payment of the aggregate Exercise Price
as to all Exercised Shares. This Option shall be deemed to be exercised upon
receipt by the Company of such fully executed Exercise Notice accompanied by
such aggregate Exercise Price.
No Shares shall be issued pursuant to the exercise of this Option
unless such issuance and exercise complies with all relevant provisions of law
and the requirements of any stock exchange or quotation service upon which the
Shares are then listed. Assuming such compliance, for income tax purposes the
Exercised Shares shall be considered transferred to the Optionee on the date the
Option is exercised with respect to such Exercised Shares.
3. 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:
(a) Full payment in cash or certified bank or cashier's check; or
(b) Full payment in shares of Stock having a Fair Market Value, as
defined in Section 5.6 of the Plan, on the Exercise Date in the amount equal to
the option exercise price.
4. NON-TRANSFERABILITY OF OPTION. This 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 the Optionee. The
terms of the Plan and this Option Agreement shall be binding upon the executors,
administrators, heirs, successors and assigns of the Optionee.
5. TERM OF OPTION. This 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 Plan and the terms of this Option Agreement.
6. INVESTMENT REPRESENTATIONS; RESTRICTIONS ON TRANSFER.
(a) By receipt of this Option, by its execution and by its exercise
in whole or in part, Optionee represents to the Company the following:
(i) Optionee understands that this Option and any Shares
purchased upon its exercise are securities, the issuance of which requires
compliance with federal and state securities laws.
(ii) Optionee is aware of the Company's business affairs and
financial condition and has acquired sufficient information about the Company to
reach an informed and knowledgeable decision to acquire the securities.
Optionee is acquiring these Securities for investment for Optionee's own account
only and not with a view to, or for resale in connection with,
-3-
<PAGE>
any "distribution" thereof within the meaning of the Securities Act of 1933, as
amended (the "Securities Act").
(iii) Optionee acknowledges and understands that the Securities
constitute "restricted securities" under the Securities Act and must be held
indefinitely unless they are subsequently registered under the Securities Act or
an exemption from such registration is available. Optionee further acknowledges
and understands that the Company is under no obligation to register the
securities. Optionee understands that the certificate evidencing the securities
will be imprinted with a legend which prohibits the transfer of the Securities
unless they are registered or such registration is not required in the opinion
of counsel satisfactory to the Company, a legend prohibiting their transfer
without the consent of the Commissioner of Corporations of the State of
California and any other legend required under applicable state securities laws.
(iv) Optionee is familiar with the provisions of Rule 701 and
Rule 144, each promulgated under the Securities Act, which, in substance, permit
limited public resale of "restricted securities" acquired, directly or
indirectly, from the issuer thereof, in a non-public offering subject to the
satisfaction of certain conditions. Rule 701 provides that if the issuer
qualifies under Rule 701 at the time of exercise of the Option by the Optionee,
such exercise will be exempt from registration under the Securities Act. In the
event the Company later becomes subject to the reporting requirements of Section
13 or 15(d) of the Securities Exchange Act of 1934, ninety (90) days thereafter
the Securities exempt under Rule 701 may be resold, subject to the satisfaction
of certain of the conditions specified by Rule 144, including among other
things: (1) the sale being made through a broker in an unsolicited "broker's
transaction" or in transactions directly with a market maker (as said term is
defined under the Securities Exchange Act of 1934); and, in the case of an
affiliate, (2) the availability of certain public information about the Company,
and the amount of Securities being sold during any three month period not
exceeding the limitations specified in Rule 144(e), if applicable.
Notwithstanding this paragraph 3(a)(iv), the Optionee acknowledges and agrees to
the restrictions set forth in paragraph 3(b).
In the event that the Company does not qualify under Rule 701 at
the time of exercise of the Option, then the Securities may be resold in certain
limited circumstances subject to the provisions of Rule 144, which requires
among other things: (1) the availability of certain public information about
the Company; (2) the resale occurring not less than two years after the party
has purchased, and made full payment for, within the meaning of Rule 144, the
securities to be sold; and (3) in the case of an affiliate, or of a
non-affiliate who has held the securities less than three years, the sale being
made through a broker in an unsolicited "broker's transaction" or in
transactions directly with a market maker (as said term is defined under the
Securities Exchange Act of 1934) and the amount of Securities being sold during
any three month period not exceeding the specified limitations stated therein,
if applicable.
(v) Optionee understands that transfer of the Shares may be
restricted by Section 260.141.11 of the Rules of the California Corporations
Commissioner.
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<PAGE>
(b) Optionee agrees, in connection with the Company's initial
underwritten public offering of the Company's Securities, (1) not to sell, make
short sale of, loan, grant any options for the purchase of, or otherwise dispose
of any shares of Common Stock of the Company held by Optionee (other than those
shares included in the registration) without the prior written consent of the
Company or the underwriters managing such initial underwritten public offering
of the Company's securities for one hundred eighty (180) days from the effective
date of such registration, and (2) further agrees to execute any agreement
reflecting (1) above as may be requested by the underwriters at the time of the
public offering.
7. RESTRICTIVE LEGENDS. Each certificate evidencing the shares acquired
hereunder, including any certificate issued to any transferee thereof, shall be
imprinted with legends substantially set forth in the Plan.
8. TAX CONSEQUENCES. Some of the federal and California tax consequences
relating to this Option, as of the date of this Option, are set forth below.
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 OPTION OR DISPOSING OF THE SHARES.
(a) EXERCISING THE OPTION.
(i) INCENTIVE STOCK OPTION. The Optionee will have no regular
federal income tax or California income tax liability upon its exercise,
although the excess, if any, of the fair market value of the Exercised Shares on
the date of exercise over their aggregate Exercise Price will be treated as an
adjustment to alternative minimum taxable income for federal tax purposes and
may subject the Optionee to alternative minimum tax in the year of exercise.
(b) DISPOSITION OF SHARES.
(i) ISO. If the Optionee holds ISO Shares for at least one
year after exercise and two years after the grant date, any gain realized on
disposition of the Shares will be treated as long-term capital gain for federal
income tax purposes. If the Optionee disposes of ISO Shares within one year
after exercise or two years after the grant date, any gain realized on such
disposition will be treated as compensation income (taxable at ordinary income
rates) to the extent of the excess, if any, of the lesser of (A) the difference
between the fair market value of the Shares acquired on the date of exercise and
the aggregate Exercise Price, or (B) the difference between the sale price of
such Shares and the aggregate Exercise Price. Any additional gain will be taxed
as capital gain, short-term or long-term depending on the period that the ISO
Shares were held.
(ii) NOTICE OF DISQUALIFYING DISPOSITION OF ISO SHARES. If the
Optionee sells or otherwise disposes of any of the Shares acquired pursuant to
an ISO on or before the later of (i) two years after the grant date, or (ii) one
year after the exercise date, the Optionee shall immediately notify the Company
in writing of such disposition. The Optionee agrees that he or she may be
subject to income tax withholding by the Company on the compensation income
recognized
-5-
<PAGE>
from such early disposition of ISO Shares by payment in cash or out of the
current earnings paid to the Optionee.
9. ENTIRE AGREEMENT; GOVERNING LAW. The Plan is incorporated herein by
reference. The Plan and this 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 California law except for that body of
law pertaining to conflict of laws.
10. NO GUARANTEE OF EMPLOYMENT. OPTIONEE ACKNOWLEDGES AND AGREES THAT THE
VESTING OF SHARES PURSUANT TO THE VESTING SCHEDULE HEREOF IS EARNED ONLY BY
CONTINUING SERVICE AS AN EMPLOYEE OR CONSULTANT AT THE WILL OF THE COMPANY (AND
NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED AN OPTION OR PURCHASING 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 OR CONSULTANT FOR THE VESTING PERIOD, FOR ANY PERIOD, OR AT ALL, AND
SHALL NOT INTERFERE WITH OPTIONEE'S RIGHT OR THE COMPANY'S RIGHT TO TERMINATE
OPTIONEE'S EMPLOYMENT OR CONSULTING RELATIONSHIP AT ANY TIME, WITH OR WITHOUT
CAUSE.
By your signature and the signature of the Company's representative below,
you and the Company agree that this Option is granted under and governed by the
terms and conditions of the Plan and this Option Agreement. Optionee has
reviewed the Plan and this Option Agreement in their entirety, has had an
opportunity to obtain the advice of counsel prior to executing this Option
Agreement and fully understands all provisions of the Plan and Option Agreement.
Optionee hereby agrees to accept as binding, conclusive and final all decisions
or interpretations of the Administrator upon any questions relating to the Plan
and Option Agreement. Optionee further agrees to notify the Company upon any
change in the residence address indicated below.
OPTIONEE: SpectraNet International
- ---------------------------------- ------------------------------------
Signature Renney E. Senn
Title: Chief Executive Officer and
President
XXXX
XXXX
XXXX
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<PAGE>
CONSENT OF SPOUSE
The undersigned spouse of Optionee has read and hereby approves the terms
and conditions of the Plan and this Option Agreement. In consideration of the
Company's granting his or her spouse the right to purchase Shares as set forth
in the Plan and this Option Agreement, the undersigned hereby agrees to be
irrevocably bound by the terms and conditions of the Plan and this Option
Agreement and further agrees that any community property interest shall be
similarly bound. The undersigned hereby appoints the undersigned's spouse as
attorney-in-fact for the undersigned with respect to any amendment or exercise
of rights under the Plan or this Option Agreement.
----------------------------------------
Spouse of Optionee
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<PAGE>
FIRSTWORLD COMMUNICATIONS
1997 STOCK PLAN
1) PURPOSES OF THE PLAN. The purposes of this 1997 Stock Plan are to
attract and retain the best available personnel for positions of
substantial responsibility, to provide additional incentive to
Employees, Directors, and Consultants and to promote the success of
the Company's business. Options granted under the Plan may be
incentive Stock Options or Nonstatutory Stock Options, as determined
by the Administrator at the time of the grant. Stock Purchase Rights
may also be granted under the Plan.
2) DEFINITIONS. As used herein, the following definitions shall apply:
a) "ADMINISTRATOR" means the Board or any of its Committees as shall
be administering the Plan in accordance with Section 4 hereof.
b) "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 Code, any stock
exchange or quotation system on which the Common Stock is listed
or quoted and the applicable laws of any other country or
jurisdiction where Options or Stock Purchase Rights are granted
under the Plan.
c) "BOARD" means the Board of Directors of the Company.
d) "CODE" means the Internal Revenue Code of 1986, as amended.
e) "COMMITTEE" means a committee of Directors appointed by the Board
in accordance with Section 4 hereof.
f) "COMMON STOCK" means the Common Stock of the Company.
g) "COMPANY" means FirstWorld Communications, a California
corporation.
h) "CONSULTANT" means any person who is engaged by the Company or
any Parent or Subsidiary to render consulting or advisory
services to such entity.
i) "DIRECTOR" means a member of the Board of Directors of the
Company.
j) "DISABILITY" means total and permanent disability as defined in
Section 22(e)(3) of the Code.
k) "EMPLOYEE" means any person, including Officers and Directors,
employed by the Company or any Parent or Subsidiary of the
Company. A Service Provide shall not cease to be an Employee in
the case of (i) any leave of absence approved by
<PAGE>
the Company or (ii) transfers between locations of the Company or
between the Company, its Parent, any Subsidiary, or any
successor. For purposes of Incentive Stock Options, no such
leave may exceed ninety days, unless reemployment upon expiration
of such leave is guaranteed by statute or contract. If
reemployment upon expiration of a leave of absence approved by
the Company is not so guaranteed, on the 181st day of such leave
any Incentive Stock Option held by the Optionee shall cease to be
treated as an Incentive Stock Option and shall be treated for tax
purposes as a Nonstatutory Stock Option. Neither service as a
Director nor payment of a director's fee by the Company shall be
sufficient to constitute "employment" by the Company.
l) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
m) "FAIR MARKET VALUE" means, as of any date, the value of Common
Stock determined as follows:
i) If the Common Stock is listed on any established stock
exchange or a national market system, including without
limitation the Nasddaq National Market or The Nasdaq
SmallCap Market of The Nasdaq Stock Market, its Fair
Market Value shall be the closing sales price for such
stock (or the closing bid, if no sales were reported) as
quoted on such exchange or system for the last market
trading day prior to the time of determination, as
reported in THE WALL STREET JOURNAL or such other source
as the Administrator deems reliable;
ii) If the Common Stock is regularly quoted by a recognized
securities dealer but selling prices are not reported, its
Fair Market Value shall be the mean between the high bid
and low asked prices for the Common Stock on the last
market trading day prior to the day of determination; or
iii) In the absence of an established market for the Common
Stock, the Fair Market Value thereof shall be determined
in good faith by the Administrator.
n) "INCENTIVE STOCK OPTION" means an Option intended to qualify as
an incentive stock option within the meaning of Section 422 of
the Code.
o) "NONSTATUTORY STOCK OPTION" means an Option not intended to
qualify as an Incentive Stock Option.
p) "OFFICER" means a person who is an officer of the Company within
the meaning of Section 16 of the Exchange Act and the rules and
regulations promulgated thereunder.
q) "OPTION" means a stock option granted pursuant to the Plan.
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FIRSTWORLD COMMUNICATIONS PAGE 2
1997 STOCK PLAN
<PAGE>
r) "OPTION AGREEMENT" means a written or electronic agreement
between the Company and an Optionee evidencing the terms and
conditions of an individual Option grant. The Option Agreement
is subject to the terms and conditions of the Plan.
s) "OPTION EXCHANGE PROGRAM" means a program whereby outstanding
Options are exchanged for Options with a lower exercise price.
t) "OPTIONED STOCK" means the Common Stock subject to an Option or a
Stock Purchase Right.
u) "OPTIONEE" means the holder of an outstanding Option or Stock
Purchase Right granted under the Plan.
v) "PARENT" means a "parent corporation," whether now or hereafter
existing, as defined in Section 424(e) of the Code.
w) "PLAN" means this 1997 Stock Option Plan.
x) "RESTRICTED STOCK" means shares of Common Stock acquired pursuant
to a grant of a Stock Purchase Right under Section 11 below.
y) "SECTION 16(b)" of the Securities Exchange Act of 1934, as
amended.
z) "SERVICE PROVIDER" means an Employee, Director or Consultant.
aa) "SHARE" means a share of the Common Stock, as adjusted in
accordance with Section 12 below.
bb) "STOCK PURCHASE RIGHT" means a right to purchase Common Stock
pursuant to Section 11 below.
cc) "Subsidiary" means a "subsidiary corporation," whether now or
hereafter existing, as defined in Section 424(f) of the Code.
3) STOCK SUBJECT TO THE PLAN. Subject to the provisions of Section 12 of
the Plan, the maximum aggregate number of shares which may be subject
to option and sold under the Plan is 1,000,000 Shares. The Shares may
be authorized but unissued, or reacquired Common Stock.
If an Option or Stock purchase Right expires or becomes unexercisable
without having been exercised in full, or is surrendered pursuant to
an Option Exchange Program, the unpurchased Shares which were subject
thereto shall become available for future grant or sale under the Plan
(unless the Plan has terminated). However, Shares that have actually
been issued under the Plan, upon exercise of either an Option or Stock
Purchase Right, shall not be returned to the Plan and shall not
- --------------------------------------------------------------------------------
FIRSTWORLD COMMUNICATIONS PAGE 3
1997 STOCK PLAN
<PAGE>
become available for future distribution under the Plan, except that
if Shares of Restricted Stock are repurchased by the Company at their
original purchase price, such Shares shall become available for future
grant under the Plan.
4) ADMINISTRATION OF THE PLAN.
a) ADMINISTRATOR. The Plan shall be administered by the Board or a
Committee appointed by the Board, which Committee shall be
constituted to comply with Applicable Laws.
b) POWERS OF THE ADMINISTRATOR. Subject to the provisions of the
Plan and, in the case of a Committee, the specific duties
delegated by the Board to such Committee, and subject to the
approval of any relevant authorities, the Administrator shall
have the authority in its discretion:
i) To determine the Fair Market Value;
ii) To select the Service Providers to whom Options and Stock
Purchase Rights may from time to time be granted
hereunder;
iii) To determine the number of Shares to be covered by each
such award granted hereunder;
iv) To approve forms of agreement for use under the Plan;
v) To determine the terms and conditions, of any Option or
Stock Purchase Right granted hereunder. Such terms and
conditions include, but are not limited to, the exercise
price, the time or times when Options or Stock Purchase
Rights may be exercised (which may be based on performance
criteria), any vesting acceleration or waiver of
forfeiture restrictions, and any restriction or limitation
regarding any Option or Stock Purchase Right or the Common
Stock relating thereto, based in each case on such factors
as the Administrator, in its sole discretion, shall
determine;
vi) To determine whether and under what circumstances an
Option may be settled in cash under subsection 9(e)
instead of Common Stock;
vii) To reduce the exercise price of any Option to the then
current Fair Market Value if the Fair Market Value of the
Common Stock covered by such Option has declined since the
date the Option was granted;
viii) To initiate an Option Exchange Program;
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FIRSTWORLD COMMUNICATIONS PAGE 4
1997 STOCK PLAN
<PAGE>
ix) To prescribe, amend and rescind rules and regulations
relating to the Plan, including rules and regulations
relating to sub-plans established for the purpose of
qualifying for preferred tax treatment under foreign tax
laws.
x) To allow Optionees to satisfy withholding tax obligations
by electing to have the Company withhold from the shares
to be issued upon exercise of an Option or Stock Purchase
Right that number of Shares having a Fair Market Value
equal to the amount required to be withheld. The Fair
Market Value of the Shares to be withheld shall be
determined on the date that the amount of tax to be
withheld is to be determined. All elections by Optionees
to have Shares withheld for this purpose shall be made in
such form and under such conditions as the Administrator
may deem necessary or advisable; and
xi) To construe and interpret the terms of the Plan and awards
granted pursuant to the Plan and awards granted pursuant
to the Plan.
c) EFFECT OF ADMINISTRATOR'S DECISION. All decisions,
determinations and interpretations of the Administrator shall be
final and binding on all Optionees.
5) ELIGIBILITY.
a) Nonstatutory Stock Options and Stock Purchase Rights may be
granted to Service Providers. Incentive Stock Options may be
granted only to Employees.
b) Each Option shall be designated in the Option Agreement as either
an Incentive Stock Option or a Nonstatutory Stock Option.
However, notwithstanding such designation, to the extent that the
aggregate Fair Market Value of the Shares with respect to which
Incentive Stock Options are exercisable for the first time by the
Optionee during any calendar year (under all plans of the Company
and any Parent or Subsidiary) exceeds $100,000, such Options
shall be treated as Nonstatutory Stock Options. For purposes of
this Section 5(b), Incentive Stock Options shall be taken into
account in the order in which they were granted. The Fair Market
Value of the Shares shall be determined as of the time the Option
with respect to such Shares is granted.
c) Neither the Plan nor any Option or Stock Purchase Right shall
confer upon any Optionee any right with respect to continuing the
optionee's relationship as a Service Provider with the Company,
nor shall it interfere in any way with his or her right or the
Company's right to terminate such relationship at any time, with
or without cause.
6) TERM OF PLAN. The Plan shall become effective upon its adoption by
the Board. It shall continue in effect for a term of ten (10) years
unless sooner terminated under Section 14 of the Plan.
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FIRSTWORLD COMMUNICATIONS PAGE 5
1997 STOCK PLAN
<PAGE>
7) TERM OF OPTION. The term of each Option shall be stated in the Option
Agreement; provided, however, that the term shall be no more than ten
(10) years from the date of grant thereof. In the case of an
Incentive Stock Option granted to an Optionee who, at the time the
Option is granted, owns stock representing more than ten percent (10%)
of the voting power of all classes of stock of the Company or any
Parent or Subsidiary, the term of the Option shall be five (5) years
from the date of grant or such shorter term as may be provided in the
Option Agreement.
8) OPTION EXERCISE PRICE AND CONSIDERATION.
a) The per share exercise price for the Shares to be issued upon
exercise of an Option shall be such price as is determined by the
Administrator, but shall be subject to the following:
i) In the case of an Incentive Stock Option
(1) Granted to an Employee who, at the time of grant of
such Option, owns stock representing more than ten
percent (10%) of the voting power of all classes of
stock of the Company or any Parent or subsidiary,
the exercise price shall be no less than 110% of the
Fair Market Value per Share on the date of grant.
(2) Granted to any other Employee, the per share
exercise price shall be no less than 100% of the
Fair Market Value per Share on the date of grant.
ii) In the case of a Nonstatutory Stock Option
(1) Granted to a Service Provider who, at the time of
grant of such Option, owns stock representing more
than ten percent (10%) of the voting power of all
classes of stock of the Company or any Parent or
Subsidiary, the exercise price shall be no less than
110% of the Fair Market Value per Share on the date
of grant.
(2) Granted to any other Service Provider, the per Share
exercise price shall be no less than 85% of the Fair
Market Value per Share on the date of grant.
iii) Notwithstanding the foregoing, Options may be granted with
a per Share exercise price other than as required above
pursuant to a merger or other corporate transaction.
b) The consideration to be paid for the Shares to be issued upon
exercise of an Option, including the method of payment, shall be
determined by the Administrator (and, in the case of an Incentive
Stock Option, shall be determined at the time of grant). Such
consideration may consist of (1) cash, (2) check, (3) promissory
note, (4) other Shares with (x) in the case of Shares acquired
upon
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FIRSTWORLD COMMUNICATIONS PAGE 6
1997 STOCK PLAN
<PAGE>
exercise of an Option, have been owned by the Optionee for more
than six months on the date of surrender, and (y) have a Fair
Market Value on the date of surrender equal to the aggregate
exercise price of the Shares as to which such option shall be
exercised, (5) consideration received by the Company under a
cashless exercise program implemented by the Company in
connection with the Plan, or (6) any combination of the foregoing
methods of payment. In making its determination as to the type
of consideration to accept, the Administrator shall consider if
acceptance of such consideration may be reasonably expected to
benefit the Company.
9) EXERCISE OF OPTION.
a) PROCEDURE FOR EXERCISE; RIGHTS AS A SHAREHOLDER. Any Option
granted hereunder shall be exercisable according to the terms
hereof at such times and under such conditions as determined by
the Administrator and set forth in the Option Agreement. Except
in the case of Option granted to Officers, Directors and
Consultants, Options shall become exercisable at a rate of no
less than 20% per year over five (5) years from the date the
Options are granted. An Option may not be exercised for a
fraction of a Share.
An Option shall be deemed exercised when the Company receives:
(I) written or electronic notice of exercise (in accordance with
the Option Agreement) from the person entitled to exercise the
Option, and (ii) full payment for the Shares with respect to
which the Option is exercised. Full payment may consist of any
consideration and method of payment authorized by the
Administrator and permitted by the Option Agreement and the Plan.
Shares issued upon exercise of an Option shall be issued in the
name of the Optionee, or if requested by the Optionee, in the
name of the Optionee and his or her spouse. Until the Shares are
issued (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
shareholder shall exist with respect to the Shares,
notwithstanding the exercise of the Option. The Company shall
issue (or cause to be issued) such Shares promptly after the
Option is exercised. No adjustment shall be made for a dividend
or other right for which the record date is prior to the date the
Shares are issued, except as provided in Section 12 of the Plan.
Exercise of an Option in any manner shall result in a decrease in
the number of Shares thereafter available, both for purposes of
the Plan and for sale under the Option, by the number of Shares
as to which the Option is exercised.
b) TERMINATION OF RELATIONSHIP AS A SERVICE PROVIDER. If an
Optionee ceases to be a Service Provider, such Optionee may
exercise his or her Option within such period of time as is
specified in the Option Agreement (of at least thirty (30) days)
to the extent that the Option is vested on the date of
termination (but in no event later than the expiration of the
term of the Option as set forth in the Option
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FIRSTWORLD COMMUNICATIONS PAGE 7
1997 STOCK PLAN
<PAGE>
Agreement). In the absence of a specified time in the Option
Agreement, the Option shall remain exercisable for three (3)
months following the Optionee's termination. If, on the date of
termination, the Optionee is not vested as to his or her entire
Option, the Shares covered by the unvested portion of the Option
shall revert to the Plan. If after termination, the Optionee
does not exercise his or her Option within the time specified by
the Administrator, the Option shall terminate, and the Shares
covered by such Option shall revert to the Plan.
c) DISABILITY OF OPTIONEE. If an Optionee ceases to be a Service
Provider as a result of the Optionee's Disability, the Optionee
may exercise his or her Option within such period of time as is
specified in the Option Agreement (of at least six (6) months) to
the extent the Option is vested on the date of termination (but
in no event later than the expiration of the term of such Option
as set forth in the Option Agreement). In the absence of a
specified time in the Option Agreement, the Option shall remain
exercisable for twelve (12) months following the Optionee's
termination. If, on the date of termination, the Optionee is not
vested as to his or her entire Option, the Shares covered by the
unvested portion of the Option shall revert to the Plan. If,
after termination, the Option is not exercised within the time
specified herein, the Option shall terminate, and the Shares
covered by such Option shall revert to the Plan.
d) DEATH OF OPTIONEE. If an Optionee dies while a Service Provider,
the Option may be exercised within such period of time as is
specified in the Option Agreement of at least six (6) months to
the extent that the Option is vested on the date of death (but in
no event later than the expiration of the term of such Option as
set forth in the Option Agreement), by the Optionee's estate or
by a person who acquires the right to exercise the Option by
bequest or inheritance, but only to the extent that the Option is
vested on the date of death. In the absence of a specified time
in the Option Agreement, the Option shall remain exercisable for
twelve (12) months following the Optionee's termination. If, at
the time of death, the Optionee is not vested as to the entire
Option, the Shares covered by the unvested portion of the Option
shall immediately revert to the Plan. The Option may be
exercised by the executor or administrator of the Optionee's
estate or, if none, by the person(s) entitled to exercise the
Option under the Optionee's will or the laws of descent or
distribution. If the Option is not so exercised within the time
specified herein, the Option shall terminate, and the Shares
covered by such Option shall revert to the Plan.
e) BUYOUT PROVISIONS. The Administrator may at any time offer to
buy out for a payment in cash or Shares, an Option previously
granted, based on such terms and conditions as the Administrator
shall establish and communicate to the Optionee at the time that
such offer is made.
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FIRSTWORLD COMMUNICATIONS PAGE 8
1997 STOCK PLAN
<PAGE>
10) NON-TRANSFERABILITY OF OPTIONS AND STOCK PURCHASE RIGHTS. Options and
Stock Purchase Rights may not be sold, pledged, assigned,
hypothecated, transferred, or disposed of in any manner other than by
will or by the laws of descent or distribution and may be exercised,
during the lifetime of the Optionee, only by the Optionee.
11) STOCK PURCHASE RIGHTS.
a) RIGHTS TO PURCHASE. Stock Purchase Rights may be issued either
alone, in addition to, or in tandem with other awards granted
under the Plan and/or cash awards made outside of the Plan.
After the Administrator determines that it will offer Stock
Purchase Rights under the Plan, it shall advise the offeree in
writing or electronically of the terms, conditions and
restrictions related to the offer, including the number of Shares
that such person shall be entitled to purchase, the price to be
paid, and the time within which such person must accept such
offer. The terms of the offer shall comply in all respects with
Section 260.140.42 of Title 10 of the California Code of
Regulations. The offer shall be accepted by execution of a
Restricted Stock purchase agreement in the form determined by the
Administrator.
b) REPURCHASE OPTION. Unless the Administrator determines
otherwise, the Restricted Stock purchase agreement shall grant
the Company a repurchase option exercisable upon the voluntary or
involuntary termination of the purchaser's service with the
Company for any reason (including death or disability). The
purchase price for Shares repurchased pursuant to the Restricted
Stock purchase agreement shall be the original price paid by the
purchaser and may be paid by cancellation of any indebtedness of
the purchaser to the Company. The repurchase option shall lapse
at such rate as the Administrator may determine, except with
respect to the Shares purchased by Officers, Directors and
Consultants, the repurchase option shall in no case lapse at a
rate of less than 20% per year over five years from the date of
purchase.
c) OTHER PROVISIONS. The Restricted Stock purchase agreement shall
contain such other terms, provisions and conditions not
inconsistent with the Plan as may be determined by the
Administrator in its sole discretion.
d) RIGHTS AS A SHAREHOLDER. Once the Stock Purchase Right is
exercised, the purchaser shall have rights equivalent to those of
a shareholder and shall be a shareholder when his or her purchase
is entered upon the records of the duly authorized transfer agent
of the Company. No adjustment shall be made for a dividend or
other right for which the record date is prior to the date the
Stock Purchase Right is exercised, except as provided in Section
12 of the Plan.
- --------------------------------------------------------------------------------
FIRSTWORLD COMMUNICATIONS PAGE 9
1997 STOCK PLAN
<PAGE>
12) ADJUSTMENTS UPON CHANGES IN CAPITALIZATION, MERGER OR ASSET SALE.
a) CHANGES IN CAPITALIZATION. Subject to any required action by the
shareholders of the Company, the number of shares of Common Stock
covered by each outstanding Option or Stock Purchase Right, and
the number of shares of Common Stock which have been authorized
for issuance under the Plan but as to which no Options or Stock
Purchase Rights have yet been granted or which have been returned
to the Plan upon cancellation or expiration of an Option or Stock
Purchase Right, as well as the price per share of Common Stock
covered by each such outstanding Option or Stock Purchase Right,
shall be proportionately adjusted for any increase or decrease in
the number of issued shares of Common Stock resulting from a
stock split, reverse stock split, stock dividend, combination or
reclassification of the Common Stock, or any other increase or
decrease in the number of issued shares of Common Stock effected
without receipt of consideration by the Company. The conversion
of any convertible securities of the Company shall not be deemed
to have been "effected without receipt of consideration." Such
adjustment shall be made by the Board, whose determination in
that respect shall be final, binding and conclusive. Except as
expressly provided herein, no issuance by the Company of shares
of stock of any class, or securities convertible into shares of
stock of any class shall affect, and no adjustment by reason
thereof shall be made with respect to, the number or price of
shares of Common Stock subject to an Option or Stock Purchase
Right.
b) DISSOLUTION OF LIQUIDATION. In the event of the proposed
dissolution or liquidation of the Company, the Administrator
shall notify each Optionee as soon as practicable prior to the
effective date of such proposed transaction. The administrator
in its discretion may provide for an Optionee to have the right
to exercise his or her Option or Stock Purchase Right until
fifteen (15) days prior to such transaction as to all of the
Optioned Stock covered thereby, including Shares as to which the
Option or Stock Purchase Right would not otherwise be
exercisable. In addition, the Administrator may provide that any
Company repurchase option applicable to any Shares purchased upon
exercise of an Option or Stock Purchase Right shall lapse as to
all such Shares, provided the proposed dissolution or liquidation
takes place at the time and manner contemplated. To the extent
it has not been previously exercised, an Option or Stock Purchase
Right will terminate immediately prior to the consummation of
such proposed action.
c) MERGER OR ASSET SALE. In the event of a merger of the Company
with or into another corporation, or the sale of substantially
all of the assets of the Company, each outstanding Option and
Stock Purchase Right shall be assumed or an equivalent option or
right substituted by the successor corporation or a Parent or
Subsidiary of the successor corporation. In the event that the
successor corporation refuses to assume or substitute for the
Option or Stock Purchase Right, the Optionee shall fully vest in
and have the right to exercise the Option or Stock Purchase Right
as to all of the Optioned Stock, including Shares as to which it
would not otherwise be vested or exercisable. If an Option or
Stock
- --------------------------------------------------------------------------------
FIRSTWORLD COMMUNICATIONS PAGE 10
1997 STOCK PLAN
<PAGE>
Purchase Right becomes fully vested and exercisable in lieu of
assumption or substitution in the event of a merger or sale of
assets, the Administrator shall notify the Optionee in writing or
electronically that the Option or Stock Purchase Right shall be
fully exercisable for a period of fifteen (15) days from the date
of such notice, and the Option or Stock Purchase Right shall
terminate upon the expiration of such period. For the purposes
of this paragraph, the Option or Stock Purchase Right shall be
considered assumed if, following the merger or sale of assets,
the option or right confers the right to purchase or receive, for
each Share of Optioned Stock subject to the Option or Stock
Purchase Right immediately prior to the merger or sale of assets,
the consideration (whether stock, cash, or other securities or
property) received in the merger or sale of assets by holders of
Common Stock for each Share held on the effective date of the
transaction (and if holders were offered a choice of
consideration, the type of consideration chosen by the holders of
a majority of the outstanding Shares); provided, however, that if
such consideration received in the merger or sale of assets is
not solely common stock of the successor corporation or its
Parent, the Administrator may, with the consent of the successor
corporation, provide for the consideration to be received upon
the exercise of the Option or Stock Purchase Right, for each
Share of optioned Stock subject to the Option or Stock Purchase
Right, to be solely common stock of the successor corporation or
its Parent equal in fair market value to the per share
consideration received by holders of Common Stock in the merger
or sale of assets.
13) TIME OF GRANTING OPTIONS AND STOCK PURCHASE RIGHTS. The date of grant
of an Option or Stock Purchase Right shall, for all purposes, be the
date on which the Administrator makes the determination granting such
Option or Stock Purchase Right, or such other date as is determined by
the Administrator. Notice of the determination shall be given to each
Employee or Consultant to whom an Option or Stock Purchase Right is so
granted within a reasonable time after the date of such grant.
14) AMENDMENT AND TERMINATION OF THE PLAN.
a) AMENDMENT AND TERMINATION. The Board may at any time amend,
alter, suspend or terminate the Plan.
b) SHAREHOLDER APPROVAL. The Board shall obtain shareholder
approval of any Plan amendment to the extent necessary and
desirable to comply with Applicable Laws.
c) EFFECT OF AMENDMENT OR TERMINATION. No amendment, alteration,
suspension or termination of the Plan shall impair the rights of
any Optionee, unless mutually agreed otherwise between the
Optionee and the Administrator, which agreement must be in
writing and signed by the Optionee and the Company. Termination
of
- --------------------------------------------------------------------------------
FIRSTWORLD COMMUNICATIONS PAGE 11
1997 STOCK PLAN
<PAGE>
the Plan shall not affect the Administrator's ability to exercise
the powers granted to it hereunder with respect to Options
granted under the Plan prior to the date of such termination.
15) CONDITIONS UPON ISSUANCE OF SHARES.
a) LEGAL COMPLIANCE. Shares shall not be issued pursuant to the
exercise of an Option unless the exercise of such Option and the
issuance and delivery of such Shares shall comply with Applicable
Laws and shall be further subject to the approval of counsel for
the Company with respect to such compliance.
b) INVESTMENT REPRESENTATIONS. As a condition to the exercise of an
Option, the Administrator may require the person exercising such
Option to represent and warrant at the time of any such exercise
that the Shares are being purchased only for investment and
without any present intention to sell or distribute such Shares
if, in the opinion of counsel for the Company, such a
representation is required.
16) INABILITY TO OBTAIN AUTHORITY. The inability of the Company to obtain
authority from any regulatory body having jurisdiction, which
authority is deemed by the Company's counsel to be necessary to the
lawful issuance and sale of any Shares hereunder, shall relieve the
Company of any liability in respect of the failure to issue or sell
such Shares as to which such requisite authority shall not have been
obtained.
17) RESERVATION OF SHARES. The Company, during the term of this Plan,
shall at all times reserve and keep available such number of Shares as
shall be sufficient to satisfy the requirements of the Plan.
18) SHAREHOLDER APPROVAL. The Plan shall be subject to approval by the
shareholders of the Company within twelve (12) months after the date
the Plan is adopted. Such shareholder approval shall be obtained in
the degree and manner required under Applicable Laws.
19) INFORMATION TO OPTIONEES AND PURCHASERS. The Company shall provide to
each Optionee and to each individual who acquires Shares pursuant to
the Plan, not less frequently than annually during the period such
Optionee or purchaser has one or more Options or Stock Purchase Rights
outstanding, and, in the case of an individual who acquires Shares
pursuant to the Plan, during the period such individual owns such
Shares, copies of annual financial statements. The Company shall not
be required to provide such statements to key employees whose duties
in connection with the Company assure their access to equivalent
information.
- --------------------------------------------------------------------------------
FIRSTWORLD COMMUNICATIONS PAGE 12
1997 STOCK PLAN
<PAGE>
FIRSTWORLD COMMUNICATIONS
1997 STOCK PLAN
STOCK OPTION AGREEMENT
Unless otherwise defined herein, the terms defined in the Plan shall have
the same defined meanings in this Option Agreement.
I. NOTICE OF STOCK OPTION GRANT
c/o FirstWorld Communications
9333 Genesee Avenue, Suite 200
San Diego, CA 92121
The undersigned Optionee has been granted an Option to purchase Common
Stock of the Company, subject to the terms and conditions of the Plan and this
Option Agreement, as follows.
<TABLE>
<CAPTION>
<S> <C>
Date of Grant XXX
Vesting Commencement Date XXX
Exercise Price per Share XXX
Total Number of Shares Granted XXX
Total Exercise Price XXX
Type of Option: Incentive Stock Option
---
Nonstatutory Stock Option
---
Term/Expiration Date: XXX
</TABLE>
VESTING SCHEDULE:
This Options shall be exercisable, in whole or in part, according to the
following vesting schedule:
20% of the shares subject to the Option shall vest six months after the
Vesting Commencement Date (the "Initial Vesting Date"). The shares shall
vest 20% each year on the anniversary of the Initial Vesting Date
thereafter at the rate of 20% per year.
<PAGE>
TERMINATION PERIOD:
This Option shall be exercisable for ninety (90) days after Optionee ceases
to be a Service Provider. Upon Optionee's death or disability, this Option may
be exercised for one year after Optionee ceases to be a Service Provider. In no
event may Optionee exercise this Option after the Term/Expiration Date as
provided above.
II. AGREEMENT
1. GRANT OF OPTION. The Plan Administrator of the Company hereby grants
to the Optionee named in the Notice of Grant (the "Optionee"), an option
(the "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 of the
Plan, which is incorporated herein by reference. Subject to Section 14(c)
of the Plan, in the event of a conflict between the terms and conditions of
the Plan and this Option Agreement, the terms and conditions of the Plan
shall prevail.
If designated in the Notice of Grant as an Incentive Stock Option
("ISO"), this Option is intended to qualify as an Incentive Stock Option as
defined in Section 422 of the Code. Nevertheless, the extent that it
exceeds the $100,000 rule of Code Section 422(d), this Option shall be
treated as a Nonstatutory Stock Option ("NSO").
1. EXERCISE OF OPTION.
(a) RIGHT TO EXERCISE. This Option is exercisable during its term in
accordance with the vesting schedule set out in the Notice of Grant
and the applicable provisions of the Plan and this Option Agreement.
(b) METHOD OF EXERCISE. This 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 Option, the
number of shares with respect to which the Option is being exercised,
and such other representations and agreements as may be required by
the Company. The Exercise Notice shall be accompanied by payment of
the aggregate Exercise Price as to all Exercised Shares. This 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 an 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 Option
is exercised with respect to such Shares.
- --------------------------------------------------------------------------------
FIRSTWORLD COMMUNICATIONS PAGE 2
1997 INCENTIVE STOCK OPTION AGREEMENT
<PAGE>
3. OPTIONEE'S REPRESENTATIONS. In the event the Shares have not been
registered under the Securities Act of 1933, as amended, at the time this
Option is exercised, the Optionee shall, if required by the Company,
concurrently with the exercise of all or any portion of this Option,
deliver to the Company his or her Investment Representation Statement in
the form attached hereto as Exhibit B.
4. 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.
5. 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:
a) cash or check;
b) consideration received by the Company under a formal cashless
exercise program adopted by the Company in connection with the Plan;
or
c) 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 on the date of surrender equal to the aggregate
Exercise Price of the Exercised Shares.
6. RESTRICTIONS ON EXERCISE. This Option may not be exercised until such
time as the Plan has been approved by the shareholders of the Company, or
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.
7. NON-TRANSFERABILITY OF OPTION. This 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 the Plan and this Option Agreement shall be binding upon the
executors, administrators, heirs, successors and assigns of the Optionee.
- --------------------------------------------------------------------------------
FIRSTWORLD COMMUNICATIONS PAGE 3
1997 INCENTIVE STOCK OPTION AGREEMENT
<PAGE>
8. TERM OF OPTION. This 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 Plan and the terms of this Option.
9. TAX CONSEQUENCES. Set forth below is a brief summary as of the date
of this Option of some of the federal tax consequences of exercise of this
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 OPTION OR
DISPOSING OF THE SHARES.
(a) EXERCISE OF ISO. If this Option qualifies as an ISO, there will
be no regular federal income tax liability upon the exercise of the
Option, although the excess, if any, of the Fair Market Value of the
Shares on the date of exercise over the Exercise Price will be treated
as an adjustment to the alternative minimum tax for federal tax
purposes and may subject the Optionee to the alternative minimum tax
in the year of exercise.
(b) 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.
(c) 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. In the case of an ISO, if Shares transferred pursuant to
the Option are held for at least one year after exercise and for at
least two years after the Date of Grant, any gain realized on
disposition of the Shares will also be treated as long-term capital
gain for federal income tax purposes. If Shares purchased under an
ISO are disposed of within one year after exercise or two years after
the Date of Grant, any gain realized on such disposition will be
treated as compensation income (taxable at ordinary income rates) to
the extent of the difference between the Exercise Price and the lesser
of (1) the Fair Market Value of the Shares on the date of Exercise, or
(2) the sale price of the Shares. Any additional gain will be taxed
as capital gain, short-term or long-term depending on the period that
the ISO Shares were held.
- --------------------------------------------------------------------------------
FIRSTWORLD COMMUNICATIONS PAGE 4
1997 INCENTIVE STOCK OPTION AGREEMENT
<PAGE>
(d) NOTICE OF DISQUALIFYING DISPOSITION OF ISO SHARES. If the Option
granted to Optionee herein is an ISO, and if Optionee sells or
otherwise disposes of any of the Shares acquired pursuant to the ISO
on or before the later of (1) the date two years after the Date of
Grant, or (2) the date one year after the date of exercise, the
Optionee shall immediately notify the Company in writing of such
disposition. Optionee agrees that Optionee may be subject to income
tax withholding by the Company on the compensation income recognized
by the Optionee.
10. ENTIRE AGREEMENT; GOVERNING LAW. The Plan is incorporated herein by
reference. The Plan and this 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.
11. NO GUARANTEE OF CONTINUED SERVICE. OPTIONEE ACKNOWLEDGES AND AGREES THAT
THE VESTING OF SHARES PURSUANT TO THE VESTING SCHEDULE HEREOF IS EARNED ONLY
BY CONTINUING AS A SERVICE PROVIDER AT THE WILL OF THE COMPANY (NOT THROUGH
THE ACT OF BEING HIRED, BEING GRANTED THIS OPTION OR ACQUIRING SHARES
HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT THIS AGREEMENT,
THE TRANSACTIUONS CONTEMPLATED HEREUNDER AND THE VESTING SCHEDULE SET FORTH
HEREIN DO NOT CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUED
ENGAGEMENT AS A SERVICE PROVIDER FOR THE VESTING PERIOD, FOR ANY PERIOD, OR
AT ALL, AND SHALL NOT INTERFERE IN ANY WAY WITH OPTIONEE'S RIGHT OR THE
COMPANY'S RIGHT TO TERMINATE OPTIONEE'S RELATIONSHIP AS A SERVICE PROVIDER
AT ANY TIME, WITH OR WITHOUT CAUSE.
Optionee acknowledges receipt of a copy of the Plan and represents that he
or she is familiar with the terms and provisions thereof, and hereby accepts
this Option subject to all of the terms and provisions thereof. Optionee has
reviewed the Plan and this Option in their entirety, has had an opportunity to
obtain the advice of counsel prior to executing this Option and fully
understands all provisions of the Option. Optionee hereby agrees to accept as
binding, conclusive and final all decisions or interpretations of the
Administrator upon any questions arising under the Plan or this Option.
Optionee further agrees to notify the Company upon any change in the residence
address indicated below.
- --------------------------------------------------------------------------------
FIRSTWORLD COMMUNICATIONS PAGE 5
1997 INCENTIVE STOCK OPTION AGREEMENT
<PAGE>
OPTIONEE: FIRSTWORLD COMMUNICATIONS
- ----------------------------------- ----------------------------------------
Signature By: Robert E. Randall
- ----------------------------------- ----------------------------------------
Print Name Title: Chief Operating Officer
- -----------------------------------
Residence Address
- --------------------------------------------------------------------------------
FIRSTWORLD COMMUNICATIONS PAGE 6
1997 INCENTIVE STOCK OPTION AGREEMENT
<PAGE>
EXHIBIT A
1997 STOCK PLAN
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, _______________, 19___, the
undersigned ("Optionee") hereby elects to exercise Optionee's option to
purchase _____________ shares of the Common Stock (the "Shares") of
FirstWorld Communications (the "Company") under and pursuant to the 1997
Stock Plan (the "Plan") and the Stock Option Agreement dated _____________,
19___ (the "Option Agreement").
2) DELIVERY OF PAYMENT. Purchase 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 Plan and the Option Agreement and agrees
to abide by and be bound by their terms and conditions.
4) RIGHTS AS SHAREHOLDER. 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 shareholder shall exist with respect to the Optioned
Stock, notwithstanding the exercise of the Option. The Shares shall be
issued to the Optionee as soon as practicable after the Option is
exercised. No adjustment shall be made for a dividend or other right for
which the record date is prior to the date of issuance except as provided
in Section 12 of the Plan.
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
<PAGE>
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).
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 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
- --------------------------------------------------------------------------------
FIRSTWORLD COMMUNICATIONS - EXHIBIT A PAGE 2
1997 INCENTIVE STOCK OPTION - EXERCISE NOTICE
<PAGE>
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.
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
that 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 1933 Act.
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 SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933(THE "ACT") AND MAY NOT BE OFFERED,
SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS AND
UNTIL REGISTERED UNDER THE ACT OR, IN THE OPINION OF COMPANY
COUNSEL SATISFACTORY TO THE ISSUER OF THESE
- --------------------------------------------------------------------------------
FIRSTWORLD COMMUNICATIONS - EXHIBIT A PAGE 3
1997 INCENTIVE STOCK OPTION - EXERCISE NOTICE
<PAGE>
SECURITIES, SUCH OFFER, SALE OR TRANSFER, PLEDGE OR HYPOTHECATION
IS IN COMPLIANCE THEREWITH.
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.
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
Administrator which shall review such dispute at its next regular meeting.
The resolution of such a dispute by the Administrator shall be final and
binding on all parties.
10) GOVERNING LAW; SEVERABILITY. This Agreement is governed by the internal
substantive laws but not the choice of law rules, of California.
11) ENTIRE AGREEMENT. The Plan and Option Agreement are incorporated herein by
reference. This Agreement, the Plan, the Option Agreement and the
Investment Representation Statement 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
- --------------------------------------------------------------------------------
FIRSTWORLD COMMUNICATIONS - EXHIBIT A PAGE 4
1997 INCENTIVE STOCK OPTION - EXERCISE NOTICE
<PAGE>
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
- -----------------------------------
- ----------------------------------- ----------------------------------------
Signature By
- ----------------------------------- ----------------------------------------
Print Name Its
Address: Address:
9333 Genesee Avenue, Suite 200
- ----------------------------------- San Diego, California 92121
- -----------------------------------
----------------------------------------
Date Received
- --------------------------------------------------------------------------------
FIRSTWORLD COMMUNICATIONS - EXHIBIT A PAGE 5
1997 INCENTIVE STOCK OPTION - EXERCISE NOTICE
<PAGE>
EXHIBIT B
INVESTMENT REPRESENTATION STATEMENT
SECURITY: COMMON STOCK
FirstWorld Communications
9333 Genesee Avenue
Suite 200
San Diego, California 92121
In connection with the purchase of the above-listed Securities, the undersigned
Optionee represents to the Company the following:
a) Optionee is aware of the Company's business affairs and financial
condition and has acquired sufficient information about the Company to
reach an informed and knowledgeable decision to acquire the
Securities. Optionee is acquiring these Securities for investment for
Optionee's own account only and not with a view to, or for resale in
connection with, any "distribution" thereof within the meaning of the
Securities Act of 1933, as amended (the "Securities Act").
b) Optionee acknowledges and understands that the Securities
constitute "restricted securities" under the Securities Act and
have not been registered under the Securities Act in reliance
upon a specific exemption therefrom, which exemption depends
upon, among other things, the bona fide nature of Optionee's
investment intent as expressed herein. In this connection,
Optionee understands that, in the view of the Securities and
Exchange Commission, the statutory basis for such exemption may
be unavailable if Optionee's representation was predicated solely
upon a present intention to hold these Securities for the minimum
capital gains period specified under tax statutes, for a deferred
sale, for or until an increase or decrease in the market price of
the Securities, or for a period of one year or any other fixed
period in the future. Optionee further understands that the
Securities must be held indefinitely unless they are subsequently
registered under the Securities Act or an exemption from such
registration is available. Optionee further acknowledges and
understands that the Company is under no obligation to register
the Securities. Optionee understands that the certificate
evidencing the Securities will be imprinted with a legend which
prohibits the transfer of the
<PAGE>
Securities unless they are registered or such registration is not
required in the opinion of counsel satisfactory to the Company, a
legend prohibiting their transfer without the consent of the
Commissioner of Corporations of the State of California and any other
legend required under applicable state securities laws.
c) Optionee is familiar with the provisions of Rule 701 and Rule
144, each promulgated under the Securities Act, which, in
substance, permit limited public resale of "restricted
securities" acquired, directly or indirectly from the issuer
thereof, in a non-public offering subject to the satisfaction of
certain conditions. Rule 701 provides that if the issuer
qualifies under Rule 701 at the time of the grant of the Option
to the Optionee, the exercise will be exempt from registration
under the Securities Act. In the event the Company becomes
subject to the reporting requirements of Section 13 or 15(d) of
the Securities Exchange Act of 1934, ninety (90) days thereafter
(or such longer period as any market stand-off agreement may
require) the Securities exempt under Rule 701 may be resold,
subject to the satisfaction of certain of the conditions
specified by Rule 144, including: (1) the resale being made
through a broker in an unsolicited "broker's transaction" or in
transactions directly with a market marker (as said term is
defined under the Securities Exchange Act of 1934); and, in the
case of an affiliate, (2) the availability of certain public
information about the Company, (3) the amount of Securities being
sold during any three month period not exceeding the limitations
specified in Rule 144(e), and (4) the timely filing of a Form
144, if applicable.
In the event that the Company does not qualify under Rule
701 at the time of grant of the Option, then the Securities
may be resold in certain limited circumstances subject to
the provisions of Rule 144, which requires the resale to
occur not less than one year after the later of the date the
Securities were sold by the Company or the date the
Securities were sold by an affiliate of the Company, within
the meaning of Rule 144; and, in the case of acquisition of
the Securities by an affiliate, or by a non-affiliate who
subsequently holds the Securities less than two years, the
satisfaction of the conditions set forth in sections (1),
(2), (3) and (4) of the paragraph immediately above.
d) Optionee further understands that in the event all of the
applicable requirements of Rule 701 or 144 are not satisfied,
registration under the Securities Act, compliance with Regulation
A, or some other registration exemption will be required; and
that, notwithstanding the fact that Rules 144 and 701 are not
exclusive, the Staff of the Securities and Exchange Commission
has expressed its opinion that persons proposing to sell private
placement securities other
- --------------------------------------------------------------------------------
FIRSTWORLD COMMUNICATIONS - EXHIBIT B PAGE 2
1997 INCENTIVE STOCK OPTION - INVESTMENT REPRESENTATION STATEMENT
<PAGE>
than in a registered offering and otherwise than pursuant to Rules 144
or 701 will have a substantial burden of proof in establishing that an
exemption from registration is available for such offers or sales, and
that such persons and their respective brokers who participate in such
transactions do so at their own risk. Optionee understands that no
assurances can be given that any such other registration exemption
will be available in such event.
Signature of Optionee:
----------------------------------------
Date: , 19
--------------------------- ---
- --------------------------------------------------------------------------------
FIRSTWORLD COMMUNICATIONS - EXHIBIT B PAGE 3
1997 INCENTIVE STOCK OPTION - INVESTMENT REPRESENTATION STATEMENT
<PAGE>
EXECUTION COPY
WARRANT AGREEMENT
Dated April 13, 1998
by and between
FIRSTWORLD COMMUNICATIONS, INC.
and
THE BANK OF NEW YORK
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Section 1. Certain Definitions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 2. Appointment of Warrant Agent . . . . . . . . . . . . . . . . . . . . . . . . . 3
Section 3. Issuance of Warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Section 4. Execution of Warrant Certificates. . . . . . . . . . . . . . . . . . . . . . . 4
Section 5. Separation of Warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Section 6. Registration and Countersignature. . . . . . . . . . . . . . . . . . . . . . . 4
Section 7. Registration of Transfers and Exchanges. . . . . . . . . . . . . . . . . . . . 5
Section 8. Terms of Warrants: Exercise of Warrants. . . . . . . . . . . . . . . . . . . .12
Section 9. Payment of Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14
Section 10. Mutilated or Missing Warrant Certificates . . . . . . . . . . . . . . . . . .14
Section 11. Reservation of Warrant Shares . . . . . . . . . . . . . . . . . . . . . . . .14
Section 12. Obtaining Stock Exchange Listings . . . . . . . . . . . . . . . . . . . . . .15
Section 13. Adjustment of Exercise Price and Number of Warrant Shares Issuable. . . . . .15
(a) Stock Splits, Combinations, etc. . . . . . . . . . . . . . . . . . . . . . . . . .15
(b) Reclassification, Combinations, Mergers, etc.. . . . . . . . . . . . . . . . . . .15
(c) Issuance of Options or Convertible Securities. . . . . . . . . . . . . . . . . . .16
(d) Dividends and Distributions. . . . . . . . . . . . . . . . . . . . . . . . . . . .17
(e) Issuance of Common Stock Below Current Market Price. . . . . . . . . . . . . . . .18
(f) Current Market Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19
(g) Certain Distributions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19
(h) Consideration Received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19
(i) Deferral of Certain Adjustments. . . . . . . . . . . . . . . . . . . . . . . . . .19
(j) Changes in Options and Convertible Securities. . . . . . . . . . . . . . . . . . .20
(k) Expiration of Options and Convertible Securities . . . . . . . . . . . . . . . . .20
(l) Other Adjustments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20
(m) No Adjustment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21
Section 14. Statement on Warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . .21
Section 15. Fractional Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21
i
<PAGE>
Section 16. Notices to Warrant Holders. . . . . . . . . . . . . . . . . . . . . . . . . .22
Section 17. Merger, Consolidation or Change of Name of Warrant Agent. . . . . . . . . . .23
Section 18. Warrant Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .24
Section 19. Resignation and Removal of Warrant Agent; Appointment of Successor. . . . . .25
Section 20. Registration. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .26
Section 21. Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .26
Section 22. Rule 144A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .27
Section 23. Notices to Company and Warrant Agent. . . . . . . . . . . . . . . . . . . . .27
Section 24. Supplements and Amendments. . . . . . . . . . . . . . . . . . . . . . . . . .28
Section 25. Successors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .28
Section 26. Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .28
Section 27. Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .28
Section 28. Benefits of This Agreement. . . . . . . . . . . . . . . . . . . . . . . . . .29
Section 29. Counterparts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .29
</TABLE>
ii
<PAGE>
WARRANT AGREEMENT dated April 13, 1998 (this "Agreement") between
FIRSTWORLD COMMUNICATIONS, INC., a California corporation (the "Company"), and
THE BANK OF NEW YORK, a New York banking corporation, as warrant agent (the
"Warrant Agent").
WHEREAS, the Company proposes to issue common stock warrants, as
hereinafter described (the "Warrants"), initially exercisable (on the
Exercisability Date) to purchase an aggregate of 3,713,094 shares of Common
Stock (as defined below), in connection with an offering of units (the
"Units"), each Unit consisting of $1,000 principal amount at maturity of the
Company's 13% Senior Discount Notes due 2008 (the "Notes") and one Warrant, each
such Warrant entitling the holder thereof to purchase initially 7.9002 shares of
Common Stock.
WHEREAS, the Company desires the Warrant Agent to act on behalf of the
Company, and the Warrant Agent is willing so to act, in connection with the
exercise of the Warrant Certificates (as defined below) and other matters as
provided herein.
NOW, THEREFORE, in consideration of the premises and the mutual
agreements herein set forth, and for the purpose of defining the respective
rights and obligations of the Company, the Warrant Agent and the Holders (as
defined below), the parties hereto agree as follows:
Section 1. CERTAIN DEFINITIONS. As used in this Agreement, the
following terms shall have the following respective meanings:
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), 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, by agreement or otherwise; PROVIDED, HOWEVER,
that beneficial ownership of 10% or more of the Voting Stock (as defined in the
Indenture) of a Person shall be deemed to be control.
"Cheap Stock Issued" has the meaning assigned to it in Section 13(e).
"Commission" means the Securities and Exchange Commission or any
successor.
"Common Stock" means the Series B common stock, no par value, of the
Company.
"Company" means FirstWorld Communications, Inc., a California
corporation, and its successors and assigns.
"Definitive Warrant" means a certificated Warrant registered in the
name of the Holder thereof and issued in accordance with Section 3 and
substantially in the form of Exhibit A.
<PAGE>
"Depositary" means, with respect to the Global Warrants, the Person
specified in Section 3 as the depositary for the Global Warrants, and any and
all successors thereto appointed as depositary hereunder.
"Excluded Securities" means shares of Common Stock or other securities
convertible or exchangeable into Common Stock issued (i) pursuant to employee
stock ownership, stock option or other benefit or incentive plans, (ii) in
connection with mergers and acquisitions with non-affiliated third parties or
(iii) as compensation to directors (in the ordinary course) in lieu of cash.
"Exercisability Date" means any time on or after the earliest to occur
of (i) May 1, 1999, (ii) an initial Public Equity Offering of the Company and
(iii) in the event a Change of Control (as defined in the Indenture) occurs, the
date the Company mails notice thereof to holders of Notes and to the Holders.
"Exercise Price" means the purchase price per share of Common Stock to
be paid upon the exercise of each Warrant in accordance with the terms hereof,
which price shall initially be $.01 per share, subject to adjustment from time
to time pursuant to Section 13 hereof.
"Expiration Date" means April 15, 2008.
"Global Warrant" means a certificated Warrant in global form
registered in the name of the Depositary and issued in accordance with Section 3
and substantially in the form of Exhibit A.
"Holder" means a registered holder of Registrable Securities.
"Indenture" means the indenture, dated as of April 13, 1998, between
the Company and The Bank of New York, as trustee.
"Initial Purchasers" means Bear, Stearns & Co. Inc., ING Baring (U.S.)
Securities, Inc., J.P. Morgan Securities Inc. and Merrill Lynch, Pierce, Fenner
& Smith Incorporated.
"Officer's Certificate" has the meaning assigned thereto in the
Indenture.
"Ownership Ratio" has the meaning assigned to it in Section 13(e).
"Person" means any individual, corporation, partnership, joint
venture, association, joint-stock company, trust, unincorporated organization or
government or agency or political subdivision thereof.
"Public Equity Offering" means an underwritten offering of Common
Stock pursuant to a registration statement that has been declared effective by
the Commission pursuant to the Securities Act (other than a registration
statement on Form S-8 or otherwise relating to equity securities issuable under
any employee benefit plan of the Company).
"QIB" has the meaning assigned to it in Exhibit C attached hereto.
2
<PAGE>
"Registrable Securities" means the Warrant Shares and any other
securities issued or issuable with respect to the Warrants or the Warrant Shares
by way of a stock dividend or stock split or in connection with a combination of
shares, recapitalization, merger, consolidation or other reorganization or
otherwise until such date as such security (i) is effectively registered under
the Securities Act and disposed of in accordance with a registration statement
or (ii) is distributed to the public pursuant to Rule 144 under the Securities
Act.
"Registration Rights Agreement" means the registration rights
agreement relating to notes issued pursuant to the Indenture, dated April 13,
1998, by and among the Company and the Initial Purchasers, as such agreement may
be amended, modified or supplemented from time to time.
"Resale Restriction Termination Date" has the meaning assigned to it
in Section 7.
"Securities Act" means the Securities Act of 1933, as amended.
"Separation Date" means the earlier of (i) 90 days after the issuance
of the Units, (ii) such date as the Initial Purchasers may, in their discretion,
deem appropriate, (iii) in the event a Change of Control (as defined in the
Indenture) occurs, the date the Company mails notice thereof to holders of
Units, (iv) the date on which the Registered Exchange Offer (as defined in the
Registration Rights Agreement) is consummated and (v) the date on which the
Shelf Registration Statement (as defined in the Registration Rights Agreement)
is declared effective. On the Separation Date, the Notes and the Warrants will
be automatically separated.
"Transfer Agent" has the meaning assigned to it in Section 11 hereof.
"Trustee" means the trustee under the Indenture.
"Warrant Agent" means The Bank of New York or the successor or
successors of such Warrant Agent appointed in accordance with the terms hereof.
"Warrant Certificates" has the meaning set forth in Section 3 hereof.
"Warrant Registration Rights Agreement" means the registration rights
agreement, dated April 13, 1998, by and among the Company and the Initial
Purchasers relating to the Warrants and the Warrant Shares.
"Warrant Shares" means the shares of Common Stock issued or issuable
upon the exercise of the Warrants.
Section 2. APPOINTMENT OF WARRANT AGENT. The Company hereby
appoints the Warrant Agent to act as agent for the Company in accordance with
the instructions set forth hereinafter in this Agreement, and the Warrant Agent
hereby accepts such appointment.
Section 3. ISSUANCE OF WARRANTS. Warrant Certificates
representing Warrants offered and sold in reliance on Rule 144A shall be issued
initially in the form of one or more
3
<PAGE>
permanent Global Warrants (the "Global Warrants"), substantially in the form of
Exhibit A hereto (including footnote 1 thereto). The Warrant Certificates
evidencing the Global Warrants to be delivered pursuant to this Agreement shall
be substantially in the form set forth in Exhibit A attached hereto. Global
Warrants shall represent such of the outstanding Warrants as shall be specified
therein and each shall provide that it shall represent the aggregate amount of
outstanding Warrants from time to time endorsed thereon and that the aggregate
amount of outstanding Warrants represented thereby may from time to time be
reduced or increased, as appropriate. Any endorsement of a Global Warrant to
reflect the amount of any increase or decrease in the amount of outstanding
Warrants represented thereby shall be made by the Warrant Agent and the
Depositary in accordance with instructions given by the holder thereof. The
Depository Trust Company shall act as the Depositary with respect to the Global
Warrants until a successor shall be appointed by the Company. Upon written
request, a holder of a beneficial interest in a Global Warrant may receive from
the Warrant Agent Definitive Warrants as set forth in Section 7 hereof.
Section 4. EXECUTION OF WARRANT CERTIFICATES. Certificates (the
"Warrant Certificates") evidencing Global Warrants or Definitive Warrants to be
delivered pursuant hereto shall be signed on behalf of the Company by its
Chairman of the Board or its President or a Vice President and by its Secretary
or an Assistant Secretary. Each such signature upon the Warrant Certificates
may be in the form of a facsimile signature of the present or any future
Chairman of the Board, President, Vice President, Secretary or Assistant
Secretary and may be imprinted or otherwise reproduced on the Warrant
Certificates and for that purpose the Company may adopt and use the facsimile
signature of any person who shall have been Chairman of the Board, President,
Vice President, Secretary or Assistant Secretary, notwithstanding the fact that
at the time the Warrant Certificates shall be countersigned and delivered or
disposed of such person shall have ceased to hold such office.
In case any officer of the Company who shall have signed any of the
Warrant Certificates shall cease to be such officer before the Warrant
Certificates so signed shall have been countersigned by the Warrant Agent, or
disposed of by the Company, such Warrant Certificates nevertheless may be
countersigned and delivered or disposed of as though such person had not ceased
to be such officer of the Company; and any Warrant Certificate may be signed on
behalf of the Company by any person who, at the actual date of the execution of
such Warrant Certificate, shall be a proper officer of the Company to sign such
Warrant Certificate, although at the date of the execution of this Agreement any
such person was not such officer.
Warrant Certificates shall be dated the date of countersignature.
Section 5. SEPARATION OF WARRANTS. The Notes and Warrants shall
not be separately transferable prior to the Separation Date and shall be
automatically separated on the Separation Date. The Company shall give the
Warrant Agent prompt written notice of the Separation Date.
Section 6. REGISTRATION AND COUNTERSIGNATURE. The Warrant Agent,
on behalf of the Company, shall number and register the Warrant Certificates in
a register as they are issued by the Company.
4
<PAGE>
Warrant Certificates shall be manually countersigned by the Warrant
Agent and shall not be valid for any purpose unless so countersigned. The
Warrant Agent shall, upon written instructions of the Chairman of the Board, the
President, a Vice President, the Treasurer or the Controller of the Company and
at the expense of the Company, initially countersign, issue and deliver Warrants
entitling the Holders thereof to purchase not more than the aggregate number of
Warrant Shares referred to above in the first recital hereof and shall
countersign and deliver Warrants as otherwise provided in this Agreement.
The Company and the Warrant Agent may deem and treat the Holder(s) of
the Warrant Certificates as the absolute owner(s) thereof (notwithstanding any
notation of ownership or other writing thereon made by anyone), for all
purposes, and neither the Company nor the Warrant Agent shall be affected by any
notice to the contrary.
Section 7. REGISTRATION OF TRANSFERS AND EXCHANGES. (a) Transfer
and Exchange of Definitive Warrants. When Definitive Warrants are presented to
the Warrant Agent with a request:
(i) to register the transfer of the Definitive Warrants; or
(ii) to exchange such Definitive Warrants for an equal number of
Definitive Warrants,
the Warrant Agent shall register the transfer or make the exchange as requested
if the requirements under this Warrant Agreement as set forth in this Section 7
for such transactions are met; provided that the Definitive Warrants presented
or surrendered for registration of transfer or exchange:
(x) shall be duly endorsed or accompanied by a written
instruction of transfer in form satisfactory to the Company
and the Warrant Agent, duly executed by the holder thereof
or by his attorney, duly authorized in writing; and
(y) in the case of Warrants the offer and sale of which have not
been registered under the Securities Act and are presented
for transfer or exchange prior to (x) the date which is two
years after the later of the date of original issue and the
last date on which the Company or any Affiliate of the
Company was the owner of such Warrant, or any predecessor
thereto and (y) such later date, if any, as may be required
by any subsequent change in applicable law (the "Resale
Restriction Termination Date"), such Warrants shall be
accompanied by the following additional information and
documents, as applicable:
(A) if such Warrant is being delivered to the Warrant Agent
by a holder for registration in the name of such
holder, without
5
<PAGE>
transfer, a certification from such holder to that
effect (in substantially the form of Exhibit B hereto);
or
(B) if such Warrant is being transferred to a qualified
institutional buyer (as defined in Rule 144A under the
Securities Act) in accordance with Rule 144A under the
Securities Act or pursuant to an exemption from
registration in accordance with Rule 144 or Regulation
S under the Securities Act, a certification to that
effect (in substantially the form of Exhibit B hereto);
or
(C) if such Warrant is being transferred to an
institutional "accredited investor" within the meaning
of subparagraphs (a)(l), (a)(2), (a)(3) or (a)(7) of
Rule 501 under the Securities Act, delivery of a
Certificate of Transfer in the form of Exhibit C hereto
and an opinion of counsel and/or other information
satisfactory to the Company to the effect that such
transfer is in compliance with the Securities Act; or
(D) if such Warrant is being transferred in reliance on
another exemption from the registration requirements of
the Securities Act, a certification to that effect (in
substantially the form of Exhibit B hereto) and an
opinion of counsel reasonably acceptable to the Company
to the effect that such transfer is in compliance with
the Securities Act.
(b) RESTRICTIONS ON TRANSFER AND EXCHANGE OF A DEFINITIVE WARRANT FOR
A BENEFICIAL INTEREST IN A GLOBAL WARRANT. A Definitive Warrant may not be
transferred or exchanged for a beneficial interest in a Global Warrant except
upon satisfaction of the requirements set forth below. Upon receipt by the
Warrant Agent of a Definitive Warrant, duly endorsed or accompanied by
appropriate instruments of transfer, in form satisfactory to the Warrant Agent,
together with:
(A) certification, substantially in the form of Exhibit B
hereto, that such Definitive Warrant is being transferred to
a "qualified institutional buyer" (as defined in Rule 144A
under the Securities Act) in accordance with Rule 144A under
the Securities Act; and
(B) written instructions directing the Warrant Agent to make, or
to direct the Depositary to make, an endorsement on the
Global Warrant to reflect an increase in the aggregate
amount of the Warrants represented by the Global Warrant,
then the Warrant Agent shall cancel such Definitive Warrant
and cause, or direct the Depositary to cause, in accordance
with the standing instructions and procedures existing
between the Depositary and the Warrant
6
<PAGE>
Agent, the number of Warrants represented by the Global
Warrant to be increased accordingly.
(c) TRANSFER AND EXCHANGE OF GLOBAL WARRANTS. The transfer and
exchange of Global Warrants or beneficial interests therein shall be effected
through the Depositary, in accordance with this Section 7 and the procedures of
the Depositary therefor.
(d) TRANSFER OR EXCHANGE OF A BENEFICIAL INTEREST IN A GLOBAL WARRANT
FOR A DEFINITIVE WARRANT.
(i) Any person having a beneficial interest in a Global Warrant
may upon request transfer or exchange of such beneficial
interest for a Definitive Warrant. Upon receipt by the
Warrant Agent of written instructions or such other form of
instructions as is customary for the Depositary on behalf of
any person having a beneficial interest in a Global Warrant
and upon receipt by the Warrant Agent of a written order or
such other form of instructions as is customary for the
Depositary or the person designated by the Depositary as
having such a beneficial interest containing registration
instructions and, in the case of any such transfer or
exchange prior to the Resale Restriction Termination Date,
the following additional information and documents (all of
which may be submitted by facsimile):
(A) if such beneficial interest is being exchanged by the
person designated by the Depositary as being the
beneficial owner, a certification from such person to
that effect (in substantially the form of Exhibit B
hereto); or
(B) if such beneficial interest is being transferred to a
qualified institutional buyer (as defined in Rule 144A
under the Securities Act) in accordance with Rule 144A
under the Securities Act or pursuant to an exemption
from registration in accordance with Rule 144 or
Regulation S under the Securities Act, a certification
to that effect from the transferee or transferor (in
substantially the form of Exhibit B hereto); or
(C) if such beneficial interest is being transferred to an
institutional "accredited investor" within the meaning
of subparagraphs (a)(l), (a)(2), (a)(3) or (a)(7) of
Rule 501 under the Securities Act, delivery of a
Certificate of Transfer in the form of Exhibit C hereto
and an opinion of counsel and/or other information
satisfactory to the Company to the effect that such
transfer is in compliance with the Securities Act; or
7
<PAGE>
(D) if such beneficial interest is being transferred in
reliance on another exemption from the registration
requirements of the Securities Act, a certification to
that effect (in substantially the form of Exhibit B
hereto) and an opinion of counsel reasonably acceptable
to the Company to the effect that such transfer is in
compliance with the Securities Act, then the Warrant
Agent will cause, in accordance with the standing
instructions and procedures existing between the
Depositary and the Warrant Agent, the aggregate amount
of the Global Warrant to be reduced and, following such
reduction, the Company will execute and, upon receipt
of a countersignature order in accordance with Section
6, the Warrant Agent will countersign and deliver to
the transferee a Definitive Warrant.
(ii) Definitive Warrants issued in exchange for a beneficial
interest in a Global Warrant pursuant to this Section 7
shall be registered in such names and in such authorized
denominations as the Depositary, pursuant to instructions
from a person having a beneficial interest in a Global
Warrant, shall instruct the Warrant Agent in writing. The
Warrant Agent shall deliver such Definitive Warrants to the
persons in whose names such Warrants are so registered.
(e) RESTRICTIONS ON TRANSFER AND EXCHANGE OF GLOBAL WARRANTS.
Notwithstanding any other provisions of this Warrant Agreement (other than the
provisions set forth in subsection (f) of this Section 7), a Global Warrant may
not be transferred as a whole except by the Depositary to a nominee of the
Depositary or by a nominee of the Depositary to the Depositary or another
nominee of the Depositary or by the Depositary or any such nominee to a
successor Depositary or a nominee of such successor Depositary.
(f) COUNTERSIGNATURE OF DEFINITIVE WARRANTS IN ABSENCE OF DEPOSITARY.
If at any time:
(i) the Depositary for the Warrants notifies the Company that
the Depositary is unwilling or unable to continue as
Depositary for the Global Warrant and a successor Depositary
for the Global Warrant is not appointed by the Company
within 90 days after delivery of such notice; or
(ii) the Company, at its sole discretion, notifies the Warrant
Agent in writing that it elects to cause the issuance of
Definitive Warrants under this Warrant Agreement, then the
Company will execute, and the Warrant Agent, upon receipt of
an officers' certificate signed by two officers of the
Company (one of whom must be the principal executive
officer, principal financial officer or principal
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accounting officer) (an "Officers' Certificate") requesting
the countersignature and delivery of Definitive Warrants,
will countersign and deliver Definitive Warrants, in an
aggregate number equal to the aggregate number of warrants
represented by the Global Warrant, in exchange for such
Global Warrant.
(g) LEGENDS.
(i) Except to the extent permitted by the following paragraph
(ii), each Warrant Certificate evidencing the Global
Warrants and the Definitive Warrants (and all Warrants
issued in exchange therefor or substitution thereof) shall
bear a legend substantially to the following effect:
EXERCISABLE ON OR AFTER THE EXERCISABILITY DATE (AS DEFINED
HEREIN).
THE WARRANTS EVIDENCED BY THIS CERTIFICATE ARE INITIALLY
ISSUED AS PART OF AN ISSUANCE OF UNITS, EACH OF WHICH
CONSIST OF ONE NOTE, $1,000 PRINCIPAL AMOUNT AT MATURITY,
AND ONE WARRANT INITIALLY ENTITLING THE HOLDER THEREOF TO
PURCHASE 7.9002 SHARES OF SERIES B COMMON STOCK, NO PAR
VALUE, OF THE COMPANY. THE NOTES AND WARRANTS WILL BE
AUTOMATICALLY SEPARATED UPON THE EARLIEST TO OCCUR OF (i) 90
DAYS FROM THE DATE OF ISSUANCE, (ii) SUCH DATE AS THE
INITIAL PURCHASERS MAY, IN THEIR DISCRETION, DEEM
APPROPRIATE, (iii) IN THE EVENT OF A CHANGE OF CONTROL (AS
DEFINED IN THE INDENTURE), THE DATE THE COMPANY MAILS NOTICE
THEREOF TO HOLDERS OF NOTES, (iv) THE DATE ON WHICH THE
EXCHANGE OFFER (AS DEFINED IN THE INDENTURE) IS CONSUMMATED
AND (v) THE DATE ON WHICH THE SHELF REGISTRATION STATEMENT
(AS DEFINED IN THE INDENTURE) IS DECLARED EFFECTIVE (THE
EARLIEST OF SUCH DATES, THE "SEPARATION DATE"). THE
WARRANTS EVIDENCED BY THIS CERTIFICATE MAY NOT BE
TRANSFERRED OR SEPARATED FROM, BUT MAY BE TRANSFERRED OR
EXCHANGED ONLY TOGETHER, WITH THE NOTES UNTIL THE SEPARATION
DATE.
THE SECURITY (OR ITS PREDECESSOR) EVIDENCED HEREBY WAS
ORIGINALLY ISSUED IN A TRANSACTION EXEMPT FROM REGISTRATION
UNDER SECTION 5 OF THE UNITED STATES SECURITIES ACT OF 1933,
AS
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AMENDED (THE "SECURITIES ACT"), AND THE SECURITY EVIDENCED
HEREBY MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED IN
THE ABSENCE OF SUCH REGISTRATION OR AN APPLICABLE EXEMPTION
THEREFROM. EACH PURCHASER OF THE SECURITY EVIDENCED HEREBY
IS HEREBY NOTIFIED THAT THE SELLER MAY BE RELYING ON THE
EXEMPTION FROM THE PROVISIONS OF SECTION 5 OF THE SECURITIES
ACT PROVIDED BY RULE 144A THEREUNDER. THE HOLDER OF THE
SECURITY EVIDENCED HEREBY AGREES FOR THE BENEFIT OF THE
COMPANY THAT (A) SUCH SECURITY MAY BE RESOLD, PLEDGED OR
OTHERWISE TRANSFERRED, ONLY (1)(a) INSIDE THE UNITED STATES
TO A PERSON WHO THE SELLER REASONABLY BELIEVES IS A
QUALIFIED INSTITUTIONAL BUYER (AS DEFINED IN RULE 144A UNDER
THE SECURITIES ACT), IN A TRANSACTION MEETING THE
REQUIREMENTS OF RULE 144A, (b) IN A TRANSACTION MEETING THE
REQUIREMENTS OF RULE 144 UNDER THE SECURITIES ACT, (c)
OUTSIDE THE UNITED STATES TO A FOREIGN PERSON IN A
TRANSACTION MEETING THE REQUIREMENTS OF RULE 904 UNDER THE
SECURITIES ACT, (d) TO AN INSTITUTIONAL "ACCREDITED
INVESTOR" (AS DEFINED IN RULE 501(a)(1), (2), (3) OR (7) OF
THE SECURITIES ACT (AN "INSTITUTIONAL ACCREDITED INVESTOR"),
THAT PRIOR TO SUCH TRANSFER, FURNISHED THE WARRANT AGENT A
SIGNED LETTER CONTAINING CERTAIN REPRESENTATIONS AND
AGREEMENTS (THE FORM OF WHICH CAN BE OBTAINED FROM THE
WARRANT AGENT) AND, IF THE COMPANY SO REQUESTS, AN OPINION
OF COUNSEL THAT SUCH TRANSFER IS IN COMPLIANCE WITH THE
SECURITIES ACT, OR (e) IN ACCORDANCE WITH ANOTHER EXEMPTION
FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT
(AND, IN THE CASE OF CLAUSE (b), (c), (d) OR (e), BASED UPON
AN OPINION OF COUNSEL IF THE COMPANY SO REQUESTS), (2) TO
THE COMPANY OR (3) PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT AND, IN EACH CASE, IN ACCORDANCE WITH ANY
APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES
OR ANY OTHER APPLICABLE JURISDICTION AND (B) THE HOLDER
WILL, AND EACH SUBSEQUENT HOLDER IS REQUIRED TO, NOTIFY ANY
PURCHASER FROM IT OF THE SECURITY
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EVIDENCED HEREBY OF THE RESALE RESTRICTIONS SET FORTH IN (A)
ABOVE.
To the extent a Warrant Certificate evidences a Global Warrant, such
Warrant Certificate shall also bear the legend with respect thereto
substantially in the form set forth on Exhibit A hereto.
(ii) Upon any sale or transfer of a Warrant pursuant to Rule 144
under the Securities Act in accordance with Section 7 hereof
or an effective registration statement under the Securities
Act:
(A) in the case of any Warrant that is a Definitive
Warrant, the Warrant Agent shall permit the holder
thereof to exchange such Warrant for a Definitive
Warrant that does not bear the legends set forth above
and rescind any related restriction on the transfer of
such Warrant; and
(B) any such Warrant represented by a Global Warrant shall
not be subject to the provisions set forth in (i) above
(such sales or transfers being subject only to the
provisions of Section 7 hereof) provided, however, that
with respect to any request for an exchange of a
Warrant that is represented by a Global Warrant for a
Definitive Warrant that does not bear the legends set
forth above, which request is made in reliance upon
Rule 144 under the Securities Act, the holder thereof
shall certify in writing to the Warrant Agent that such
request is being made pursuant to Rule 144 under the
Securities Act (such certification to be substantially
in the form of Exhibit B hereto).
(h) CANCELLATION AND/OR ADJUSTMENT OF A GLOBAL WARRANT. At such time
as all beneficial interests in a Global Warrant have either been exchanged for
Definitive Warrants, redeemed, repurchased or canceled, such Global Warrant
shall be returned to or retained and canceled by the Warrant Agent. At any time
prior to such cancellation, if any beneficial interest in a Global Warrant is
exchanged for Definitive Warrants, redeemed, repurchased or canceled, the number
of Warrants represented by such Global Warrant shall be reduced and an
endorsement shall be made on such Global Warrant, by the Warrant Agent to
reflect such reduction.
(i) OBLIGATIONS WITH RESPECT TO TRANSFERS AND EXCHANGES OF DEFINITIVE
WARRANTS.
(i) To permit registrations of transfers and exchanges, the
Company shall execute, at the Warrant Agent's request, and
the Warrant Agent shall, upon receipt of a
countersignature order in accordance
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<PAGE>
with Section 6 hereof, countersign Definitive Warrants and
Global Warrants.
(ii) All Definitive Warrants and Global Warrants issued upon
any registration, transfer or exchange of Definitive
Warrants or Global Warrants shall be the valid obligations
of the Company, entitled to the same benefits under this
Warrant Agreement as the Definitive Warrants or Global
Warrants surrendered upon the registration of transfer or
exchange.
(iii) Prior to due presentment for registration of transfer of
any Warrant, the Warrant Agent and the Company may deem
and treat the person in whose name any Warrant is
registered as the absolute owner of such Warrant, and
neither the Warrant Agent nor the Company shall be
affected by notice to the contrary.
Section 8. TERMS OF WARRANTS: EXERCISE OF WARRANTS. Subject to the
terms of this Agreement, each Warrant holder shall have the right, which may be
exercised commencing at the opening of business on the Exercisability Date and
until 5:00 p.m., New York City time, on the Expiration Date to receive from the
Company the number of fully paid and nonassessable Warrant Shares which the
holder may at the time be entitled to receive on exercise of such Warrants and
payment of the Exercise Price then in effect for such Warrant Shares; PROVIDED,
HOWEVER, that no holder shall be entitled to exercise such holder's Warrants at
any time, unless, at the time of exercise, (i) a registration statement under
the Securities Act relating to the Warrant Shares has been filed with, and
declared effective by, the Commission, and no stop order suspending the
effectiveness of such registration statement has been issued by the Commission
or (ii) the issuance of the Warrant Shares is permitted pursuant to an exemption
from the registration requirements of the Securities Act. Subject to the
provisions of the following paragraph of this Section 8, each Warrant not
exercised prior to 5:00 p.m., New York City time, on the Expiration Date shall
become void and all rights thereunder and all rights in respect thereof under
this Agreement shall cease as of such time. No adjustments as to dividends will
be made upon exercise of the Warrants.
The Company shall give notice not less than 90, and not more than 120,
days prior to the Expiration Date to the holders of all then outstanding
Warrants to the effect that the Warrants will terminate and become void as of
5:00 p.m., New York City time, on the Expiration Date. If the Company fails to
give such notice, the Warrants will not expire until 90 days after the Company
gives such notice; PROVIDED, HOWEVER, in no event will holders be entitled to
any damages or other remedy for the Company's failure to give such notice other
than any such extension.
A Warrant may be exercised upon surrender to the Company at the
principal office of the Warrant Agent of the certificate or certificates
evidencing the Warrant to be exercised with the form of election to purchase on
the reverse thereof duly completed and signed, which signature shall be
guaranteed by a bank or trust company having an office or correspondent in the
United States or a broker or dealer which is a member of a registered
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<PAGE>
securities exchange or the National Association of Securities Dealers, Inc., and
upon payment to the Warrant Agent for the account of the Company of the Exercise
Price in federal funds as adjusted as herein provided for each of the Warrant
Shares in respect of which such Warrant is then exercised. Payment of the
aggregate Exercise Price shall be made by Federal wire transfer to the account
designated by the Company or by certified or official bank check, payable to the
order of the Company. In the alternative, each holder may exercise its right to
receive Warrant Shares on a net basis, such that without the exchange of any
funds, the holder receives that number of Warrant Shares otherwise issuable upon
exercise of its Warrants less that number of Warrant Shares having a fair market
value equal to the aggregate Exercise Price that would otherwise have been paid
by the holder of the Warrant Shares. For purposes of the foregoing sentence,
"fair market value" of the Warrant Shares shall be the current market price of
the Warrant Shares on the date immediately preceding the date of payment of the
Exercise Price as determined by the procedures set forth in Section 13(f).
Subject to the provisions of Section 9 hereof, upon surrender of
Warrants and payment of the Exercise Price as provided above by any holder, the
Warrant Agent shall promptly notify the Company, and the Company shall promptly
transfer to such holder a certificate or certificates for the appropriate number
of Warrant Shares or other securities or property (including any money) to which
such holder is entitled, registered or otherwise placed in, or payable to the
order of, such name or names as may be directed in writing by such holder, and
shall deliver such certificate or certificates representing the Warrant Shares
and any other securities or property (including any money) to such holder or any
other Person or Persons entitled to receive the same, together with an amount in
cash in lieu of any fraction of a share as provided in Section 15. Any such
certificate or certificates representing the Warrant Shares shall be deemed to
have been issued and any Person so designated to be named therein shall be
deemed to have become a holder of record of such Warrant Shares as of the date
of the surrender of such Warrants and payment of the Exercise Price.
The Warrants shall be exercisable commencing on the Exercisability
Date, at the election of the holders thereof, either in full or from time to
time in part, and, in the event that a certificate evidencing Warrants is
exercised in respect of fewer than all of the Warrant Shares issuable on such
exercise at any time prior to the Expiration Date, a new certificate evidencing
the remaining Warrant or Warrants will be issued, and the Warrant Agent is
hereby irrevocably authorized to countersign and to deliver the required new
Warrant Certificate or Certificates pursuant to the provisions of this Section 8
and of Section 4 hereof, and the Company, whenever required by the Warrant
Agent, will supply the Warrant Agent with Warrant Certificates duly executed on
behalf of the Company for such purpose.
All Warrant Certificates surrendered upon exercise of Warrants shall
be canceled by the Warrant Agent. Such canceled Warrant Certificates shall be
returned by the Warrant Agent to the Company. The Warrant Agent shall account
promptly to the Company with respect to Warrants exercised and concurrently pay
to the Company all monies received by the Warrant Agent for the purchase of the
Warrant Shares through the exercise of such Warrants.
The Warrant Agent shall keep copies of this Agreement and any notices
given or received hereunder by or from the Company available for inspection by
the holders during
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<PAGE>
normal business hours at its office. The Company shall supply the Warrant Agent
from time to time with such numbers of copies of this Agreement as the Warrant
Agent may request.
Section 9. PAYMENT OF TAXES. The Company will pay all
documentary stamp taxes attributable to the initial issuance of Warrant
Shares upon the exercise of Warrants or to any separation of the Warrants
from the Notes; PROVIDED, HOWEVER, that the Company shall not be required to
pay any tax or taxes which may be payable in respect of any transfer involved
in the issue of any Warrant Certificates or any certificates for Warrant
Shares in a name other than that of the holder of a Warrant Certificate
surrendered upon the exercise of a Warrant, and the Company shall not be
required to issue or deliver such Warrant Certificates unless or until the
Person or Persons requesting the issuance thereof shall have paid to the
Company the amount of such tax or shall have established to the satisfaction
of the Company that such tax has been paid.
Section 10. MUTILATED OR MISSING WARRANT CERTIFICATES. In case any
of the Warrant Certificates shall be mutilated, lost, stolen or destroyed, the
Company shall issue and the Warrant Agent shall countersign, in exchange and
substitution for and upon cancellation of the mutilated Warrant Certificate, or
in lieu of and substitution for the Warrant Certificate lost, stolen or
destroyed, a new Warrant Certificate of like tenor and representing an
equivalent number of Warrants, but only upon receipt of evidence reasonably
satisfactory to the Company and the Warrant Agent of such loss, theft or
destruction of such Warrant Certificate and indemnity, if requested, also
reasonably satisfactory to them. Applicants for such substitute Warrant
Certificates shall also comply with such other reasonable regulations and pay
such other reasonable charges as the Company or the Warrant Agent may prescribe.
Section 11. RESERVATION OF WARRANT SHARES. The Company will at all
times reserve and keep available, free from preemptive rights, out of the
aggregate of its authorized but unissued Common Stock or its authorized and
issued Common Stock held in its treasury, for the purpose of enabling it to
satisfy any obligation to issue Warrant Shares upon exercise of Warrants, the
maximum number of shares of Common Stock which may then be deliverable upon the
exercise of all outstanding Warrants.
The transfer agent for the Common Stock (the "Transfer Agent") and
every subsequent transfer agent for any shares of the Company's capital stock
issuable upon the exercise of any of the rights of purchase aforesaid will be
irrevocably authorized and directed at all times to reserve such number of
authorized shares as shall be required for such purpose. The Company will keep
a copy of this Agreement on file with the Transfer Agent and with every
subsequent transfer agent for any shares of the Company's capital stock issuable
upon the exercise of the rights of purchase represented by the Warrants. The
Warrant Agent is hereby irrevocably authorized to requisition from time to time
from such Transfer Agent the stock certificates required to honor outstanding
Warrants upon exercise thereof in accordance with the terms of this Agreement.
The Company will supply such Transfer Agent with duly executed certificates for
such purposes and will provide or otherwise make available any cash which may be
payable as provided in Section 15. The Company will furnish such Transfer Agent
a copy of all notices of adjustments and certificates related thereto,
transmitted to each holder of the Warrants pursuant to Section 16 hereof. Prior
to the initial Public Equity Offering of the Company, the Company may act as
Transfer Agent for the Common Stock.
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<PAGE>
Before taking any action which would cause an adjustment pursuant to
Section 13 hereof that would reduce the Exercise Price below the then par value
(if any) of the Warrant Shares, the Company will take any corporate action which
may, in the opinion of its counsel (which may be counsel employed by the
Company), be necessary in order that the Company may validly and legally issue
fully paid and nonassessable Warrant Shares at the Exercise Price as so
adjusted.
The Company covenants that all Warrant Shares which may be issued upon
exercise of Warrants in accordance with the terms of this Agreement (including
the payment of the Exercise Price) will, upon issue, be duly and validly issued,
fully paid, nonassessable, free of preemptive rights and free from all taxes,
liens, charges and security interests with respect to the issue thereof.
Section 12. OBTAINING STOCK EXCHANGE LISTINGS. The Company will
from time to time take all action which may be necessary so that the Warrant
Shares, immediately upon their issuance upon the exercise of Warrants, will be
listed on the principal securities exchanges and markets (including, without
limitation, the Nasdaq National Market) within the United States of America, if
any, on which other shares of Common Stock are then listed. Upon the listing of
such Warrant Shares, the Company shall promptly notify the Warrant Agent in
writing. The Company will obtain and keep all required permits and records in
connection with such listing.
Section 13. ADJUSTMENT OF EXERCISE PRICE AND NUMBER OF WARRANT
SHARES ISSUABLE. The number and kind of shares purchasable upon the exercise of
Warrants and the Exercise Price shall be subject to adjustment from time to time
as follows:
(a) STOCK SPLITS, COMBINATIONS, etc. In case the Company shall
hereafter (A) pay a dividend or make a distribution on its Common Stock in
shares of its capital stock (whether shares of Common Stock or of capital stock
of any other class), (B) subdivide its outstanding shares of Common Stock, (C)
combine its outstanding shares of Common Stock into a smaller number of shares,
or (D) issue by reclassification of its shares of Common Stock any shares of
capital stock of the Company, the Exercise Price in effect and the number of
Warrant Shares issuable upon exercise of each Warrant immediately prior to such
action shall be adjusted so that the holder of any Warrant thereafter exercised
shall be entitled to receive the number of shares of capital stock of the
Company which such holder would have owned immediately following such action had
such Warrant been exercised immediately prior thereto. An adjustment made
pursuant to this paragraph shall become effective immediately after the record
date in the case of a dividend and shall become effective immediately after the
effective date in the case of a subdivision, combination or reclassification.
If, as a result of an adjustment made pursuant to this paragraph, the holder of
any Warrant thereafter exercised shall become entitled to receive shares of two
or more classes of capital stock of the Company, the Board of Directors of the
Company (whose determination shall be conclusive) shall determine the allocation
of the adjusted Exercise Price between or among shares of such classes of
capital stock.
(b) RECLASSIFICATION, COMBINATIONS, MERGERS, ETC. In case of any
reclassification or change of outstanding shares of Common Stock issuable upon
exercise of the Warrants (other than as set forth in paragraph (a) above and
other than a change in par value, or
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<PAGE>
from par value to no par value, or from no par value to par value or as a result
of a subdivision or combination), or in case of any consolidation or merger of
the Company with or into another corporation (other than a merger or acquisition
in which the Company is the continuing corporation and which does not result in
any reclassification or change of the then outstanding shares of Common Stock or
other capital stock issuable upon exercise of the Warrants) or in case of any
sale or conveyance to another corporation of the property of the Company as an
entirety or substantially as an entirety, then, as a condition of such
reclassification, change, consolidation, merger, sale or conveyance, the Company
or such a successor or purchasing corporation, as the case may be, shall
forthwith make lawful and adequate provision whereby the holder of each Warrant
then outstanding shall have the right thereafter to receive on exercise of such
Warrant the kind and amount of shares of stock and other securities and property
receivable upon such reclassification, change, consolidation, merger, sale or
conveyance equivalent in value to the number of shares of Common Stock issuable
upon exercise of such Warrant immediately prior to such reclassification,
change, consolidation, merger, sale or conveyance and enter into a supplemental
warrant agreement so providing. Such provisions shall include provision for
adjustments which shall be as nearly equivalent as may be practicable to the
adjustments provided for in this Section 13. If the issuer of securities
deliverable upon exercise of Warrants under the supplemental warrant agreement
is an Affiliate of the formed, surviving or transferee corporation, that issuer
shall join in the supplemental warrant agreement. The above provisions of this
paragraph (b) shall similarly apply to successive reclassifications and changes
of shares of Common Stock and to successive consolidations, mergers, sales or
conveyances.
(c) ISSUANCE OF OPTIONS OR CONVERTIBLE SECURITIES. In the event the
Company shall, at any time or from time to time after the date hereof, issue,
sell, distribute or otherwise grant in any manner (including by assumption) to
all holders of the Common Stock any rights to subscribe for or to purchase, or
any warrants or options for the purchase of, Common Stock or any stock or
securities convertible into or exchangeable for Common Stock (any such rights,
warrants or options being herein called "Options" and any such convertible or
exchangeable stock or securities being herein called "Convertible Securities")
or any Convertible Securities (other than upon exercise of any Option), whether
or not such Options or the rights to convert or exchange such Convertible
Securities are immediately exercisable, and the price per share at which Common
Stock is issuable upon the exercise of such Options or upon the conversion or
exchange of such Convertible Securities (determined by dividing (i) the
aggregate amount, if any, received or receivable by the Company as consideration
for the issuance, sale, distribution or granting of such Options or any such
Convertible Security, plus the minimum aggregate amount of additional
consideration, if any, payable to the Company upon the exercise of all such
Options or upon conversion or exchange of all such Convertible Securities, plus,
in the case of Options to acquire Convertible Securities, the minimum aggregate
amount of additional consideration, if any, payable upon the conversion or
exchange of all such Convertible Securities, by (ii) the total maximum number of
shares of Common Stock issuable upon the exercise of all such Options or upon
the conversion or exchange of all such Convertible Securities or upon the
conversion or exchange of all Convertible Securities issuable upon the exercise
of all such Options) shall be less than the current market price per share of
Common Stock on the record date for the issuance, sale, distribution or granting
of such Options or Convertible Securities (any such event being herein called a
"Distribution"), then, effective upon such Distribution, (I) the Exercise Price
shall
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<PAGE>
be reduced to the price (calculated to the nearest 1/1,000 of one cent)
determined by multiplying the Exercise Price in effect immediately prior to such
Distribution by a fraction, the numerator of which shall be the sum of (i) the
number of shares of Common Stock outstanding (exclusive of any treasury shares)
immediately prior to such Distribution multiplied by the current market price
per share of Common Stock on the date of such Distribution plus (ii) the
consideration, if any, received by the Company upon such Distribution, and the
denominator of which shall be the product of (A) the total number of shares of
Common Stock outstanding (exclusive of any treasury shares) immediately after
such Distribution multiplied by (B) the current market price per share of Common
Stock on the record date for such Distribution and (II) the number of shares of
Common Stock purchasable upon the exercise of each Warrant shall be increased to
a number determined by multiplying the number of shares of Common Stock so
purchasable immediately prior to the record date for such Distribution by a
fraction, the numerator of which shall be the Exercise Price in effect
immediately prior to the adjustment required by clause (I) of this sentence and
the denominator of which shall be the Exercise Price in effect immediately after
such adjustment. For purposes of the foregoing, the total maximum number of
shares of Common Stock issuable upon exercise of all such Options or upon
conversion or exchange of all such Convertible Securities or upon the conversion
or exchange of the total maximum amount of the Convertible Securities issuable
upon the exercise of all such Options shall be deemed to have been issued as of
the date of such Distribution and thereafter shall be deemed to be outstanding
and the Company shall be deemed to have received as consideration therefor such
price per share, determined as provided above. Except as provided in paragraphs
(j) and (k) below, no additional adjustment of the Exercise Price shall be made
upon the actual exercise of such Options or upon conversion or exchange of the
Convertible Securities or upon the conversion or exchange of the Convertible
Securities issuable upon the exercise of such Options.
(d) DIVIDENDS AND DISTRIBUTIONS. In the event the Company shall, at
any time or from time to time after the date hereof, distribute to all the
holders of Common Stock any dividend or other distribution of cash, evidences of
its indebtedness, other securities or other properties or assets (in each case
other than (i) dividends payable in Common Stock, Options or Convertible
Securities and (ii) any cash dividend that, when added to all other cash
dividends paid in the one year prior to the declaration date of such dividend
(excluding any such other dividend included in a previous adjustment of the
Exercise Price pursuant to this paragraph (d) and excluding any cash dividends
or other cash distributions from current or retained earnings), does not exceed
5% of the current market price per share of Common Stock on such declaration
date) or any options, warrants or other rights to subscribe for or purchase any
of the foregoing, then (A) the Exercise Price shall be decreased to a price
determined by multiplying the Exercise Price then in effect by a fraction, the
numerator of which shall be the current market price per share of Common Stock
on the record date for such distribution less the sum of (X) the cash portion,
if any, of such distribution per share of Common Stock outstanding (exclusive of
any treasury shares) on the record date for such distribution plus (Y) the then
fair market value (as determined in good faith by the Board of Directors of the
Company) per share of Common Stock outstanding (exclusive of any treasury
shares) on the record date for such distribution of that portion, if any, of
such distribution consisting of evidences of indebtedness, other securities,
properties, assets, options, warrants or subscription or purchase rights, and
the denominator of which shall be such current market price per share of Common
Stock and (B) the number of
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<PAGE>
shares of Common Stock purchasable upon the exercise of each Warrant shall be
increased to a number determined by multiplying the number of shares of Common
Stock so purchasable immediately prior to the record date for such distribution
by a fraction, the numerator of which shall be the Exercise Price in effect
immediately prior to the adjustment required by clause (A) of this sentence and
the denominator of which shall be the Exercise Price in effect immediately after
such adjustment. The adjustments required by this paragraph (d) shall be made
whenever any such distribution occurs retroactive to the record date for the
determination of stockholders entitled to receive such distribution.
(e) ISSUANCE OF COMMON STOCK BELOW CURRENT MARKET PRICE. In case the
Company shall, in a transaction to which Sections 13(a)-(d) are inapplicable,
issue or sell shares of Common Stock, or rights, options, warrants or
convertible or exchangeable securities containing the right to subscribe for or
purchase shares of Common Stock, at a price per share of Common Stock
(determined, in the case of such rights, options, warrants or convertible or
exchangeable securities, by dividing (A) the total amount receivable by the
Company in consideration of the issuance and sale of such rights, options,
warrants or convertible or exchangeable securities, plus the total
consideration, if any, payable to the Company upon exercise, conversion or
exchange thereof, by (B) the total number of shares of Common Stock covered by
such rights, options, warrants or convertible or exchangeable securities) that
is lower than the then current market price per share of the Common Stock in
effect immediately prior to such sale or issuance, then the number of shares of
Common Stock thereafter issuable upon the exercise of all Warrants then
outstanding shall be determined by adding the number of shares of Common Stock
theretofore issuable upon exercise of all Warrants then outstanding to the
product of (x) the Cheap Stock Issued, multiplied by (y) the Ownership Ratio.
Such adjustment shall be made successively whenever any such sale or issuance is
made.
For purposes of this Section 13(e)(i) the "Cheap Stock Issued" shall
be the number of additional shares of any Common Stock issued or offered by the
Company for subscription or purchase as described above minus the number of
shares of Common Stock that the aggregate offering price of the total number of
shares of Common Stock so offered would purchase at the then current market
price per share of Common Stock and (ii) the "Ownership Ratio" shall be a
fraction, the numerator of which shall be the number of shares of Common Stock
theretofore issuable upon exercise of all Warrants then outstanding, and the
denominator of which shall be the number of shares of Common Stock then
outstanding (on a fully diluted basis) on the date of issuance or sale of such
Common Stock or such rights, options, warrants or convertible or exchangeable
securities. For purposes of such adjustments, the shares of Common Stock which
the holder of any such rights, options, warrants or convertible or exchangeable
securities shall be entitled to subscribe for or purchase shall be deemed to be
issued and outstanding as of the date of the sale and issuance of the rights,
warrants or convertible or exchangeable securities.
Any adjustment to the number of shares of Common Stock issuable upon
exercise of all Warrants then outstanding made pursuant to this Section 13(e)
shall be allocated among each Warrant then outstanding on a pro rata basis.
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(f) CURRENT MARKET PRICE For the purpose of any computation of
current market price under this Section 13 and Section 15, the current market
price per share of Common Stock at any date shall be (x) for purposes of
Section 15, the closing price on the business day immediately prior to the
exercise of the applicable Warrant pursuant to Section 8 and (y) in all other
cases, the average of the daily closing prices for the shorter of (i) the 20
consecutive trading days ending on the last full trading day on the exchange or
market specified in the second succeeding sentence prior to the Time of
Determination (as defined below) and (ii) the period commencing on the date next
succeeding the first public announcement of the issuance, sale, distribution or
granting in question through such last full trading day prior to the Time of
Determination. The term "Time of Determination" as used herein shall be the
time and date of the earlier to occur of (A) the date as of which the current
market price is to be computed and (B) the last full trading day on such
exchange or market before the commencement of "ex-dividend" trading in the
Common Stock relating to the event giving rise to the adjustment required by
paragraph (a), (b), (c) or (d). The closing price for any day shall be the last
reported sale price regular way or, in case no such reported sale takes place on
such day, the average of the closing bid and asked prices regular way for such
day, in each case (1) on the principal national securities exchange on which the
shares of Common Stock are listed or to which such shares are admitted to
trading or (2) if the Common Stock is not listed or admitted to trading on a
national securities exchange, in the over-the-counter market as reported by
Nasdaq National Market or any comparable system or (3) if the Common Stock is
not listed on Nasdaq National Market or a comparable system, as furnished by two
members of the NASD selected from time to time in good faith by the Board of
Directors of the Company for that purpose. In the absence of all of the
foregoing, or if for any other reason the current market price per share cannot
be determined pursuant to the foregoing provisions of this paragraph (f), the
current market price per share shall be the fair market value thereof as
determined in good faith by the Board of Directors of the Company.
(g) CERTAIN DISTRIBUTIONS. If the Company shall pay a dividend or
make any other distribution payable in Options or Convertible Securities, then,
for purposes of paragraph (c) above, such Options or Convertible Securities
shall be deemed to have been issued or sold without consideration.
(h) CONSIDERATION RECEIVED. If any shares of Common Stock, Options
or Convertible Securities shall be issued, sold or distributed for a
consideration other than cash, the amount of the consideration other than cash
received by the Company in respect thereof shall be deemed to be the then fair
market value of such consideration (as determined in good faith by the Board of
Directors of the Company). If any Options shall be issued in connection with
the issuance and sale of other securities of the Company, together comprising
one integral transaction in which no specific consideration is allocated to such
Options by the parties thereto, such Options shall be deemed to have been issued
without consideration; PROVIDED, HOWEVER, that if such Options have an exercise
price equal to or greater than the current market price of the Common Stock on
the date of issuance of such Options, then such Options shall be deemed to have
been issued for consideration equal to such exercise price.
(i) DEFERRAL OF CERTAIN ADJUSTMENTS. No adjustment to the Exercise
Price (including the related adjustment to the number of shares of Common Stock
purchasable upon
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the exercise of each Warrant) shall be required hereunder unless such
adjustment, together with other adjustments carried forward as provided below,
would result in an increase or decrease of at least one percent of the Exercise
Price; PROVIDED that any adjustments which by reason of this paragraph (i) are
not required to be made shall be carried forward and taken into account in any
subsequent adjustment. No adjustment need be made for a change in the par value
of the Common Stock. All calculations under this Section 13 shall be made to
the nearest 1/1,000 of one cent or to the nearest 1/1,000 of a share, as the
case may be.
(j) CHANGES IN OPTIONS AND CONVERTIBLE SECURITIES. If the exercise
price provided for in any Options referred to in paragraph (c) above, the
additional consideration, if any, payable upon the conversion or exchange of any
Convertible Securities referred to in paragraph (c) or (e) above, or the rate at
which any Convertible Securities referred to in paragraph (c) or (e) above are
convertible into or exchangeable for Common Stock shall change at any time
(other than under or by reason of provisions designed to protect against
dilution upon an event which results in a related adjustment pursuant to this
Section 13), the Exercise Price then in effect and the number of shares of
Common Stock purchasable upon the exercise of each Warrant shall forthwith be
readjusted (effective only with respect to any exercise of any Warrant after
such readjustment) to the Exercise Price and number of shares of Common Stock so
purchasable that would then be in effect had the adjustment made upon the
issuance, sale, distribution or granting of such Options or Convertible
Securities been made based upon such changed purchase price, additional
consideration or conversion rate, as the case may be, but only with respect to
such Options and Convertible Securities as then remain outstanding.
(k) EXPIRATION OF OPTIONS AND CONVERTIBLE SECURITIES. If, at any
time after any adjustment to the number of shares of Common Stock purchasable
upon the exercise of each Warrant shall have been made pursuant to paragraph
(c), (e) or (j) above or this paragraph (k), any Options or Convertible
Securities shall have expired unexercised, the number of such shares so
purchasable shall, upon such expiration, be readjusted and shall thereafter be
such as they would have been had they been originally adjusted (or had the
original adjustment not been required, as the case may be) as if (i) the only
shares of Common Stock deemed to have been issued in connection with such
Options or Convertible Securities were the shares of Common Stock, if any,
actually issued or sold upon the exercise of such Options or Convertible
Securities and (ii) such shares of Common Stock, if any, were issued or sold for
the consideration actually received by the Company upon such exercise plus the
aggregate consideration, if any, actually received by the Company for the
issuance, sale, distribution or granting of all such Options or Convertible
Securities, whether or not exercised; PROVIDED that no such readjustment shall
have the effect of decreasing the number of such shares so purchasable by an
amount (calculated by adjusting such decrease to account for all other
adjustments made pursuant to this Section 13 following the date of the original
adjustment referred to above) in excess of the amount of the adjustment
initially made in respect of the issuance, sale, distribution or granting of
such Options or Convertible Securities.
(l) OTHER ADJUSTMENTS. In the event that at any time, as a result of
an adjustment made pursuant to this Section 13, the holders shall become
entitled to receive any securities of the Company other than shares of Common
Stock, thereafter the number of such other securities so receivable upon
exercise of the Warrants and the Exercise Price applicable to
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such exercise shall be subject to adjustment from time to time in a manner and
on terms as nearly equivalent as practicable to the provisions with respect to
the shares of Common Stock contained in this Section 13.
(m) NO ADJUSTMENT. Without limiting any other exception contained in
this Section 13, and in addition thereto, no adjustment will be made for:
(i) exercises or conversions of any Options or Convertible
Securities outstanding on the date hereof;
(ii) issuances of Options, Convertible Securities or Common
Stock to employees, directors or consultants of the Company or any of
its subsidiaries pursuant to a plan approved by the Board of Directors
of the Company or the exercise or conversion of such Options or
Convertible Securities;
(iii) issuances of rights to purchase Common Stock pursuant to a
Company plan for reinvestment of dividends or interest;
(iv) issuances of Options, Convertible Securities or Common
Stock in bona fide public offerings or private placements pursuant to
Section 4(2) of the Securities Act, Regulation D thereunder or
Regulation S, involving at least one investment bank of national
reputation;
(v) issuances of Options, Convertible Securities or Common
Stock in connection with the establishment of commercial bank
facilities, capital lease obligations or other issuances of primarily
debt obligations or securities; or
(vi) issuances of Excluded Securities.
Section 14. STATEMENT ON WARRANTS. Irrespective of any adjustment
in the number or kind of shares issuable upon the exercise of the Warrants or
the Exercise Price, Warrants theretofore or thereafter issued may continue to
express the same number and kind of shares as are stated in the Warrants
initially issuable pursuant to this Agreement.
Section 15. FRACTIONAL INTEREST. The Company shall not be required
to issue fractional shares of Common Stock on the exercise of Warrants. If more
than one Warrant shall be presented for exercise in full at the same time by the
same holder, the number of full shares of Common Stock which shall be issuable
upon such exercise shall be computed on the basis of the aggregate number of
shares of Common Stock acquirable on exercise of the Warrants so presented. If
any fraction of a share of Common Stock would, except for the provisions of this
Section 15, be issuable on the exercise of any Warrant (or specified portion
thereof), the Company shall direct the Transfer Agent to pay an amount in cash
calculated by it to equal the then current market price per share multiplied by
such fraction computed to the nearest whole cent. The holders, by their
acceptance of the Warrant Certificates, expressly waive any and all rights to
receive any fraction of a share of Common Stock or a stock certificate
representing a fraction of a share of Common Stock.
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Section 16. NOTICES TO WARRANT HOLDERS. Upon any adjustment of the
Exercise Price (and number of shares of Common Stock purchasable upon the
exercise of each Warrant) pursuant to Section 13, the Company shall promptly
thereafter (i) cause to be filed with the Warrant Agent a certificate of a firm
of independent public accountants of recognized standing selected by the Board
of Directors of the Company (who may be the regular auditors of the Company)
setting forth the Exercise Price after such adjustment and setting forth in
reasonable detail the method of calculation and the facts upon which such
calculations are based and setting forth the number of Warrant Shares (or
portion thereof) issuable after such adjustment in the Exercise Price, upon
exercise of a Warrant and payment of the adjusted Exercise Price, which
certificate shall be conclusive evidence of the correctness of the matters set
forth therein, and (ii) cause to be given to each of the registered holders of
the Warrant Certificates at his address appearing on the Warrant register
written notice of such adjustments by first-class mail, postage prepaid. The
Warrant Agent shall be entitled to rely on the above-referenced accountant's
certificate and shall be under no duty or responsibility with respect to any
such certificate, except to exhibit the same from time to time to any holder
desiring an inspection thereof during reasonable business hours. The Warrant
Agent shall not at any time be under any duty or responsibility to any holder to
determine whether any facts exist that may require any adjustment of the number
of shares of Common Stock or other stock or property issuable on exercise of the
Warrants or the Exercise Price, or with respect to the nature or extent of any
such adjustment when made, or with respect to the method employed in making such
adjustment or the validity or value (or the kind or amount) of any shares of
Common Stock or other stock or property which may be issuable on exercise of the
Warrants. The Warrant Agent shall not be responsible for any failure of the
Company to make any cash payment or to issue, transfer or deliver any shares of
Common Stock or stock certificates or other common stock or property upon the
exercise of any Warrant.
In case:
(i) the Company shall authorize the issuance to all holders of
shares of Common Stock of rights, options or warrants to subscribe for
or purchase shares of Common Stock or of any other subscription rights
or warrants; or
(ii) the Company shall authorize the distribution to all
holders of shares of Common Stock of evidence of its indebtedness or
assets (other than cash dividends or cash distributions payable out of
consolidated earnings or earned surplus or dividends payable in shares
of Common Stock or distributions referred to in Section 13 hereof); or
(iii) of any consolidation or merger to which the Company is a
party and for which approval of any shareholders of the Company is
required (other than a merger of the Company into a subsidiary
effected for the primary purpose of changing the Company's state of
incorporation), or of the conveyance or transfer of the properties and
assets of the Company substantially as an entirety, or of any
reclassification or change of Common Stock issuable upon exercise of
the Warrants (other than a change in par value, or from par value to
no par value, or
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from no par value to par value, or as a result of a subdivision or
combination), or a tender offer or exchange offer for shares of
Common Stock; or
(iv) of the voluntary or involuntary dissolution, liquidation
or winding up of the Company; or
(v) a Change of Control (as defined in the Indenture) occurs;
then the Company shall cause to be filed with the Warrant Agent and shall cause
to be given to each of the registered holders of the Warrant Certificates at
such holder's address appearing on the Warrant register, at least 20 days (or 10
days in any case specified in clauses (a) or (b) above) prior to the applicable
record date hereinafter specified, or promptly in the case of events for which
there is no record date, by first class mail, postage prepaid, a written notice
stating (i) the date as of which the holders of record of shares of Common Stock
to be entitled to receive any such rights, options, warrants or distribution are
to be determined, or (ii) the initial expiration date set forth in any tender
offer or exchange offer for shares of Common Stock, or (iii) the date on which
any such consolidation, merger, conveyance, transfer, dissolution, liquidation
or winding up or Change of Control is expected to become effective or
consummated, and, if applicable, the date as of which it is expected that
holders of record of shares of Common Stock shall be entitled to exchange such
shares for securities or other property, if any, deliverable upon such
reclassification, consolidation, merger, conveyance, transfer, dissolution,
liquidation or winding up or Change of Control. The failure to give the notice
required by this Section 16 or any defect therein shall not affect the legality
or validity of any distribution, right, option, warrant, consolidation, merger,
conveyance, transfer, dissolution, liquidation or winding up, or Change of
Control or the vote upon any action. Nothing contained in this Agreement or in
any of the Warrant Certificates shall be construed as conferring upon the
holders thereof the right to vote or to consent or to receive notice as
shareholders in respect of the meetings of shareholders or the election of
Directors of the Company or any other matter, or any rights whatsoever as
shareholders of the Company.
Section 17. MERGER, CONSOLIDATION OR CHANGE OF NAME OF WARRANT
AGENT. Any corporation into which the Warrant Agent may be merged or with which
it may be consolidated, or any corporation resulting from any merger or
consolidation to which the Warrant Agent shall be a party, or any corporation
succeeding to the business of the Warrant Agent, shall be the successor to the
Warrant Agent hereunder without the execution or filing of any paper or any
further act on the part of any of the parties hereto, provided that such
corporation would be eligible for appointment as a successor warrant agent under
the provisions of Section 19. Any such successor Warrant Agent shall promptly
cause notice of its succession as Warrant Agent to be mailed (by first class
mail, postage prepaid) to each holder at such holder's last address as shown on
the register maintained by the Warrant Agent pursuant to this Agreement. In
case at the time such successor to the Warrant Agent shall succeed to the agency
created by this Agreement, and in case at that time any of the Warrant
Certificates shall have been countersigned but not delivered, any such successor
to the Warrant Agent may adopt the countersignature of the original Warrant
Agent; and in case at that time any of the Warrant Certificates shall not have
been countersigned, any successor to the Warrant Agent may countersign such
Warrant Certificates either in the name of the predecessor Warrant Agent or in
the name of the successor
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to the Warrant Agent; and in all such cases such Warrant Certificates shall have
the full force and effect provided in the Warrant Certificates and in this
Agreement.
In case at any time the name of the Warrant Agent shall be changed and
at such time any of the Warrant Certificates shall have been countersigned but
not delivered, the Warrant Agent whose name has been changed may adopt the
countersignature under its prior name, and in case at that time any of the
Warrant Certificates shall not have been countersigned, the Warrant Agent may
countersign such Warrant Certificates either in its prior name or in its changed
name, and in all such cases such Warrant Certificates shall have the full force
and effect provided in the Warrant Certificates and in this Agreement.
Section 18. WARRANT AGENT. The Warrant Agent undertakes the duties
and obligations imposed by this Agreement upon the following terms and
conditions, by all of which the Company and the holders of Warrants, by their
acceptance thereof, shall be bound:
(i) The statements contained herein and in the Warrant
Certificates shall be taken as statements of the Company and the
Warrant Agent assumes no responsibility for the correctness of any of
the same except such as describe the Warrant Agent or action taken or
to be taken by it. The Warrant Agent assumes no responsibility with
respect to the distribution of the Warrant Certificates except as
herein otherwise provided.
(ii) The Warrant Agent shall not be responsible for any failure
of the Company to comply with any of the covenants contained in this
Agreement or in the Warrant Certificates to be complied with by the
Company.
The Warrant Agent may consult at any time with counsel satisfactory to
it (who may be counsel for the Company) and the Warrant Agent shall incur no
liability or responsibility to the Company or to any holder of any Warrant
Certificate in respect of any action taken, suffered or omitted by it hereunder
in good faith and in accordance with the opinion or the advice of such counsel.
The Warrant Agent shall incur no liability or responsibility to the
Company or to any holder of any Warrant Certificate for any action taken in
reliance on any Warrant Certificate, certificate of shares, notice, resolution,
waiver, consent, order, certificate, or other paper, document or instrument,
whether in its original or facsimile form, believed by it to be genuine and to
have been signed, sent or presented by the proper party or parties.
The Company agrees to pay to the Warrant Agent such compensation for
all services rendered by the Warrant Agent in the execution of this Agreement as
the parties shall agree from time to time, to reimburse the Warrant Agent for
all expenses, taxes and governmental charges and other charges of any kind and
nature reasonably incurred by the Warrant Agent in the execution of this
Agreement and to indemnify each of the Warrant Agent and any predecessor Warrant
Agent and save it harmless against any and all claims, damages, losses, expenses
and liabilities, including judgments, costs and counsel fees, for anything done
or omitted by the Warrant Agent in the execution of this Agreement except as a
result of its gross
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negligence or willful misconduct. The indemnity described in the previous
sentence shall survive the termination of this Agreement or resignation of the
Warrant Agent.
The Warrant Agent shall be under no obligation to institute any
action, suit or legal proceeding or to take any other action likely to involve
expense unless the Company or one or more holders of Warrant Certificates shall
furnish the Warrant Agent with security and indemnity satisfactory to the
Warrant Agent for any costs and expenses which may be incurred, but this
provision shall not affect the power of the Warrant Agent to take such action as
it may consider proper, whether with or without any such security or indemnity.
All rights of action under this Agreement or under any of the Warrants may be
enforced by the Warrant Agent without the possession of any of the Warrant
Certificates or the production thereof at any trial or other proceeding relative
thereto, and any such action, suit or proceeding instituted by the Warrant Agent
shall be brought in its name as Warrant Agent and any recovery of judgment shall
be for the ratable benefit of the holders of the Warrants, as their respective
rights or interests may appear. No provision of this Agreement shall require
the Warrant Agent to expend or risk its own funds.
The Warrant Agent, and any stockholder, director, officer or employee
of it, may buy, sell or deal in any of the Warrants or other securities of the
Company or become pecuniarily interested in any transaction in which the Company
may be interested, or contract with or lend money to the Company or otherwise
act as fully and freely as though it were not Warrant Agent under this
Agreement. Nothing herein shall preclude the Warrant Agent from acting in any
other capacity for the Company or for any other legal entity.
The Warrant Agent shall act hereunder solely as agent for the Company,
and its duties shall be determined solely by the provisions hereof. The Warrant
Agent shall not be liable for anything which it may do or refrain from doing in
connection with this Agreement except for its own negligence or willful
misconduct.
The Warrant Agent shall not at any time be under any duty or
responsibility to any holder of any Warrant Certificate to make or cause to be
made any adjustment of the Exercise Price or number of the Warrant Shares or
other securities or property deliverable as provided in this Agreement, or to
determine whether any facts exist which may require any of such adjustments, or
with respect to the nature or extent of any such adjustments, when made, or with
respect to the method employed in making the same. The Warrant Agent shall not
be accountable with respect to the validity or value or the kind or amount of
any Warrant Shares or of any securities or property which may at any time be
issued or delivered upon the exercise of any Warrant or with respect to whether
any such Warrant Shares or other securities will when issued be validly issued
and fully paid and nonassessable, and makes no representation with respect
thereto.
Section 19. RESIGNATION AND REMOVAL OF WARRANT AGENT; APPOINTMENT
OF SUCCESSOR. No resignation or removal of the Warrant Agent and no appointment
of a successor warrant agent shall become effective until the acceptance of
appointment by the successor warrant agent as provided herein. The Warrant
Agent may resign its duties and be discharged from all further duties and
liability hereunder (except liability arising as a result of the Warrant
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Agent's own negligence or willful misconduct) after giving written notice to the
Company. The Company may remove the Warrant Agent upon written notice, and the
Warrant Agent shall thereupon in like manner be discharged from all further
duties and liabilities hereunder, except as aforesaid. The Warrant Agent shall,
at the Company's expense, cause to be mailed (by first class mail, postage
prepaid) to each holder of a Warrant at such holder's last address as shown on
the register of the Company maintained by the Warrant Agent a copy of said
notice of resignation or notice of removal, as the case may be. Upon such
resignation or removal, the Company shall appoint in writing a new warrant
agent. If the Company shall fail to make such appointment within a period of 30
days after it has been notified in writing of such resignation by the resigning
Warrant Agent or after such removal, then the Company shall become Warrant Agent
until a successor Warrant Agent has been appointed, and the resigning Warrant
Agent or the holder of any Warrant may, at the expense of the Company, apply to
any court of competent jurisdiction for the appointment of a new warrant agent.
Any new warrant agent, whether appointed by the Company or by such a court,
shall be a corporation doing business under the laws of the United States or any
state thereof, in good standing and having a combined capital and surplus of not
less than $50,000,000. The combined capital and surplus of any such new warrant
agent shall be deemed to be the combined capital and surplus as set forth in the
most recent annual report of its condition published by such warrant agent prior
to its appointment, provided that such reports are published at least annually
pursuant to law or to the requirements of a federal or state supervising or
examining authority. After acceptance in writing of such appointment by the new
warrant agent, it shall be vested with the same powers, rights, duties and
responsibilities as if it had been originally named herein as the Warrant Agent,
without any further assurance, conveyance, act or deed; but if for any reason it
shall be necessary or expedient to execute and deliver any further assurance,
conveyance, act or deed, the same shall be done at the expense of the Company
and shall be legally and validly executed and delivered by the resigning or
removed Warrant Agent. Not later than the effective date of any such
appointment, the Company shall give notice thereof to the resigning or removed
Warrant Agent. Failure to give any notice provided for in this Section 19,
however, or any defect therein, shall not affect the legality or validity of the
resignation of the Warrant Agent or the appointment of a new warrant agent, as
the case may be.
Section 20. REGISTRATION. The Company and the Warrant Agent
acknowledge that holders shall have the registration rights set forth in the
Warrant Registration Rights Agreement.
Section 21. REPORTS.
(a) Whether or not required by the rules and regulations of the
Commission, so long as any Warrants are outstanding, the Company will furnish to
the holders of Warrants upon request (i) all quarterly and annual financial
information that would be required to be contained in a filing with the
Commission on Forms 10-Q and 10-K if the Company were required to file such
forms and (ii) all current reports that would be required to be filed with the
Commission on Form 8-K if the Company were required to file such reports, in
each case within the time periods specified in the Commission's rules and
regulations (the information and reports in clauses (i) and (ii), collectively,
"SEC Reports").
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(b) The Company shall provide the Warrant Agent with a sufficient
number of copies of all SEC Reports that the Warrant Agent may be required to
deliver to the holders of the Warrants under this Section 21.
(c) Delivery of such reports, information and documents to the
Warrant Agent is for informational purposes only and the Warrant Agent's receipt
of such shall not constitute constructive notice of any information contained
therein or determinable from information contained therein, including the
Company's compliance with any of its covenants hereunder (as to which the
Warrant Agent is entitled to rely exclusively on Officer's Certificates).
Section 22. RULE 144A. The Company hereby agrees with each holder,
for so long as any Registrable Securities remain outstanding, to make available,
upon request of any holder of Registrable Securities, to any holder or
beneficial owner of Registrable Securities in connection with any sale thereof
and any prospective purchaser of such Registrable Securities designated by such
holder or beneficial owner, the information required by Rule 144A(d)(4) under
the Securities Act in order to permit resales of such Registrable Securities
pursuant to Rule 144A.
Section 23. NOTICES TO COMPANY AND WARRANT AGENT. Any notice or
demand authorized by this Agreement to be given or made by the Warrant Agent or
by the holder of any Warrant Certificate to or on the Company shall be
sufficiently given or made when and if deposited in the mail, first class or
registered, postage prepaid, addressed (until another address is filed in
writing by the Company with the Warrant Agent) as follows:
FirstWorld Communications, Inc.
9333 Genesee Avenue
Suite 200
San Diego, California 92121
Telecopy: (619) 552-8006
Telephone: (619) 552-8010
Attention: Chief Financial Officer
with copies to:
Latham & Watkins
701 B Street, Suite 2100
San Diego, California 92101-8197
Telecopy: (619) 696-7419
Telephone: (619) 236-1234
Attention: David A. Hahn, Esq.
In case the Company shall fail to maintain such office or agency or
shall fail to give such notice of the location or of any change in the location
thereof, presentations may be made and notices and demands may be served at the
principal office of the Warrant Agent.
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Any notice pursuant to this Agreement to be given by the Company or by
the holder(s) of any Warrant Certificate to the Warrant Agent shall be
sufficiently given when and if deposited in the mail, first-class or registered,
postage prepaid, addressed (until another address is filed in writing by the
Warrant Agent with the Company) to the Warrant Agent as follows:
The Bank of New York
101 Barclay Street, Floor 21 West
New York, New York 10286
Telecopy: (212) 815-5915
Telephone: (212) 815-6285
Attention: Corporate Trust Trustee Administration
Section 24. SUPPLEMENTS AND AMENDMENTS. The Company and the
Warrant Agent may from time to time supplement or amend this Agreement without
the approval of any holders of Warrant Certificates in order to cure any
ambiguity or to correct or supplement any provision contained herein which may
be defective or inconsistent with any other provision herein, or to make any
other provisions in regard to matters or questions arising hereunder which the
Company and the Warrant Agent may deem necessary or desirable and which shall
not in any way materially adversely affect the interests of the holders of
Warrant Certificates. Any amendment or supplement to this Agreement that has a
material adverse effect on the interests of holders shall require the written
consent of holders representing a majority of the then outstanding Warrants.
The consent of each holder of a Warrant affected shall be required for any
amendment pursuant to which the Exercise Price would be increased or the number
of Warrant Shares purchasable upon exercise of Warrants would be decreased
(other than pursuant to adjustments provided for in Section 13 hereof or
amendments to Section 13 which can be made by the written consent of holders
representing a majority of the then outstanding Warrants). The Warrant Agent
shall be entitled to receive and, subject to Section 18, shall be fully
protected in relying upon, an officers' certificate and opinion of counsel as
conclusive evidence that any such amendment or supplement is authorized or
permitted hereunder, that it is not inconsistent herewith, and that it will be
valid and binding upon the Company in accordance with its terms. Notwithstanding
any other provision hereof, the Warrant Agent's consent must be obtained
regarding any supplement or amendment pursuant to this Section which alters the
Warrant Agent's rights or duties.
Section 25. SUCCESSORS. All the covenants and provisions of this
Agreement by or for the benefit of the Company or the Warrant Agent shall bind
and inure to the benefit of their respective successors and assigns hereunder.
Section 26. TERMINATION. This Agreement (other than any party's
obligations with respect to Warrants previously exercised and with respect to
indemnification under Section 18) shall terminate at 5:00 p.m., New York City
time on the Expiration Date.
Section 27. GOVERNING LAW. THIS AGREEMENT AND EACH WARRANT
CERTIFICATE ISSUED HEREUNDER SHALL BE DEEMED TO BE A CONTRACT MADE UNDER THE
LAWS OF THE STATE OF NEW YORK AND FOR ALL PURPOSES SHALL
28
<PAGE>
BE CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF SAID STATE, WITHOUT GIVING
EFFECT TO THE CONFLICT OF LAWS PROVISIONS THEREOF.
Section 28. BENEFITS OF THIS AGREEMENT.
(a) Nothing in this Agreement shall be construed to give to any
Person other than the Company, the Warrant Agent and the holders of the Warrant
Certificates any legal or equitable right, remedy or claim under this Agreement;
but this Agreement shall be for the sole and exclusive benefit of the Company,
the Warrant Agent and the holders of the Warrant Certificates.
(b) Prior to the exercise of the Warrants, no holder of a Warrant
Certificate, as such, shall be entitled to any rights of a stockholder of the
Company, including, without limitation, the right to receive dividends or
subscription rights, the right to vote, to consent, to exercise any preemptive
right, to receive any notice of meetings of stockholders for the election of
directors of the Company or any other matter or to receive any notice of any
proceedings of the Company, except as may be specifically provided for herein.
The holders of the Warrants are not entitled to share in the assets of the
Company in the event of the liquidation, dissolution or winding up of the
Company's affairs.
(c) All rights of action in respect of this Agreement are vested in
the holders of the Warrants, and any holder of any Warrant, without the consent
of the Warrant Agent or the holder of any other Warrant, may, on such holder's
own behalf and for such holder's own benefit, enforce, and may institute and
maintain any suit, action or proceeding against the Company suitable to enforce,
or otherwise in respect of, such holder's rights hereunder, including the right
to exercise, exchange or surrender for purchase such holder's Warrants in the
manner provided in this Agreement.
Section 29. COUNTERPARTS. This Agreement may be executed in any
number of counterparts and each of such counterparts shall for all purposes be
deemed to be an original, and all such counterparts shall together constitute
but one and the same instrument.
[Signature Page Follows]
29
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be duly executed, as of the day and year first above written.
FIRSTWORLD COMMUNICATIONS, INC.
By: /s/ Andrew B. Taubman
----------------------------
Name: Andrew B. Taubman
Title: Senior Vice President, Corporate
Finance and Administration
THE BANK OF NEW YORK, as Warrant Agent
By: /s/ Michael Culhane
----------------------------
Name: Michael Culhane
Title: Vice President
30
<PAGE>
EXHIBIT A
[Form of Warrant Certificate]
[Face]
EXERCISABLE ON OR AFTER THE EXERCISABILITY DATE (AS DEFINED HEREIN).
THE WARRANTS EVIDENCED BY THIS CERTIFICATE ARE INITIALLY ISSUED AS PART OF AN
ISSUANCE OF UNITS, EACH OF WHICH CONSIST OF ONE NOTE, $1,000 PRINCIPAL AMOUNT AT
MATURITY, AND ONE WARRANT INITIALLY ENTITLING THE HOLDER THEREOF TO PURCHASE
7.9002 SHARES OF SERIES B COMMON STOCK, NO PAR VALUE, OF THE COMPANY. THE NOTES
AND WARRANTS WILL BE AUTOMATICALLY SEPARATED (THE "SEPARATION DATE") UPON THE
EARLIEST TO OCCUR OF (i) 90 DAYS FROM THE DATE OF ISSUANCE, (ii) SUCH DATE AS
THE INITIAL PURCHASERS MAY, IN THEIR DISCRETION, DEEM APPROPRIATE, (iii) IN THE
EVENT OF A CHANGE OF CONTROL (AS DEFINED IN THE INDENTURE), THE DATE THE COMPANY
MAILS NOTICE THEREOF TO HOLDERS OF NOTES, (iv) THE DATE ON WHICH THE EXCHANGE
OFFER (AS DEFINED IN THE INDENTURE) IS CONSUMMATED AND (v) THE DATE ON WHICH THE
SHELF REGISTRATION STATEMENT (AS DEFINED IN THE INDENTURE) IS DECLARED
EFFECTIVE. THE WARRANTS EVIDENCED BY THIS CERTIFICATE MAY NOT BE TRANSFERRED OR
SEPARATED FROM, BUT MAY BE TRANSFERRED OR EXCHANGED ONLY TOGETHER WITH, THE
NOTES UNTIL THE SEPARATION DATE.
No. ______ ______ Warrants
This Warrant Certificate certifies that ________________, or
registered assigns, is the registered holder of ___________ Warrants (the
"Warrants") to purchase shares of Common Stock, no par value (the "Common
Stock"), of FIRSTWORLD COMMUNICATIONS, INC., a California corporation (the
"Company"). Each Warrant entitles the holder to purchase from the Company at any
time on or after the earliest to occur of (i) May 1, 1999, (ii) an initial
Public Equity Offering of the Company and (iii) in the event a Change of Control
(as defined in the Indenture dated April 13, 1998 between the Company and The
Bank of New York) occurs, the date the Company mails notice thereof to holders
of Notes and to the Holders (the earliest of such dates, the "Exercisability
Date") until 5:00 p.m., California time, on April 15, 2008 (the "Expiration
Date"), 7.9002 fully paid and non-assessable shares of Series B Common Stock (a
"Share," or, if adjusted, the "Shares," which may also include any other
securities or property purchasable upon exercise of a Warrant, such adjustment
and inclusion each as provided in the Warrant Agreement) at the exercise price
(the "Exercise Price") of $.01 per Share upon surrender of this Warrant
Certificate and payment of the Exercise Price at any office or agency maintained
for that purpose by the Company (the "Warrant Agent Office"), subject to the
conditions set forth herein and in the Warrant Agreement.
A-1
<PAGE>
No Warrant may be exercised before the Exercisability Date. Except in
certain circumstances, no warrant may be exercised after 5:00 p.m., New York
City Time on April 15, 2008, and to the extent not exercised by such time such
Warrants shall become void.
Reference is hereby made to the further provisions on the reverse
hereof which provisions shall for all purposes have the same effect as though
fully set forth at this place.
This Warrant Certificate shall not be valid unless countersigned by
the Warrant Agent, as such term is used in the Warrant Agreement.
THIS WARRANT CERTIFICATE SHALL BE CONSTRUED IN ACCORDANCE WITH THE
LAWS OF THE STATE OF NEW YORK WITHOUT GIVING EFFECT TO THE CONFLICT OF LAWS
PROVISIONS THEREOF.
2
<PAGE>
WITNESS the facsimile seal of the Company and facsimile signatures of
its duly authorized officers.
Dated April 13, 1998:
FIRSTWORLD COMMUNICATIONS, INC.
[Seal]
By:
----------------------------
Name:
Title:
Attest:
By:
----------------------------
Name:
Title:
Certificate of Countersignature:
This is one of the Warrants referred
to in the within mentioned Warrant
Agreement:
THE BANK OF NEW YORK
as Warrant Agent
By:
-----------------------
Authorized Signatory
3
<PAGE>
[FORM OF WARRANT CERTIFICATE]
[REVERSE]
[Unless and until it is exchanged in whole or in part for Warrants in
certificated form, this Warrant may not be transferred except as a whole by the
Depositary to a nominee of the Depositary or by a nominee of the Depositary to
the Depositary or another nominee of the Depositary or by the Depositary or any
such nominee to a successor Depositary or a nominee of such successor
Depositary. Unless this certificate is presented by an authorized representative
of The Depository Trust Company, a New York corporation ("DTC"), to the issuer
or its agent for registration of transfer, exchange or payment, and any
certificate issued is registered in the name of Cede & Co. or such other name as
requested by an authorized representative of DTC (and any payment is made to
Cede & Co. or such other entity as is requested by an authorized representative
of DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR
TO ANY PERSON IS WRONGFUL inasmuch as the registered owner hereof, Cede & Co.,
has an interest herein.](1)
THE SECURITY (OR ITS PREDECESSOR) EVIDENCED HEREBY WAS ORIGINALLY ISSUED IN A
TRANSACTION EXEMPT FROM REGISTRATION UNDER SECTION 5 OF THE UNITED STATES
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND THE SECURITY
EVIDENCED HEREBY MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED IN THE
ABSENCE OF SUCH REGISTRATION OR AN APPLICABLE EXEMPTION THEREFROM. EACH
PURCHASER OF THE SECURITY EVIDENCED HEREBY IS HEREBY NOTIFIED THAT THE SELLER
MAY BE RELYING ON THE EXEMPTION FROM THE PROVISIONS OF SECTION 5 OF THE
SECURITIES ACT PROVIDED BY RULE 144A THEREUNDER. THE HOLDER OF THE SECURITY
EVIDENCED HEREBY AGREES FOR THE BENEFIT OF THE COMPANY THAT (A) SUCH SECURITY
MAY BE RESOLD, PLEDGED OR OTHERWISE TRANSFERRED, ONLY (1)(a) INSIDE THE
UNITED STATES TO A PERSON WHO THE SELLER REASONABLY BELIEVES IS A QUALIFIED
INSTITUTIONAL BUYER (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT), IN A
TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A, (b) IN A TRANSACTION MEETING
THE REQUIREMENTS OF RULE 144 UNDER THE SECURITIES ACT, (c) OUTSIDE THE UNITED
STATES TO A FOREIGN PERSON IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 904
UNDER THE SECURITIES ACT, (d) TO AN INSTITUTIONAL "ACCREDITED INVESTOR" (AS
DEFINED IN RULE 501(a)(1), (2), (3) OR (7) OF THE SECURITIES ACT (AN
"INSTITUTIONAL ACCREDITED INVESTOR"), THAT PRIOR TO SUCH TRANSFER, FURNISHED THE
WARRANT AGENT A SIGNED LETTER CONTAINING CERTAIN REPRESENTATIONS AND AGREEMENTS
(THE FORM OF WHICH CAN BE OBTAINED FROM THE WARRANT AGENT) AND, IF THE COMPANY
SO REQUESTS, AN OPINION OF COUNSEL THAT SUCH TRANSFER IS IN COMPLIANCE WITH THE
SECURITIES ACT, OR (e) IN ACCORDANCE WITH ANOTHER EXEMPTION FROM THE
REGISTRATION REQUIREMENTS OF THE
- -------------------------
(1) This paragraph is to be included only if the Warrant is in global form.
4
<PAGE>
SECURITIES ACT (AND, IN THE CASE OF CLAUSE (b), (c), (d) OR (e), BASED UPON AN
OPINION OF COUNSEL IF THE COMPANY SO REQUESTS), (2) TO THE COMPANY OR (3)
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT AND, IN EACH CASE, IN ACCORDANCE
WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES OR ANY
OTHER APPLICABLE JURISDICTION AND (B) THE HOLDER WILL, AND EACH SUBSEQUENT
HOLDER IS REQUIRED TO, NOTIFY ANY PURCHASER FROM IT OF THE SECURITY EVIDENCED
HEREBY OF THE RESALE RESTRICTIONS SET FORTH IN (A) ABOVE.
The Warrants evidenced by this Warrant Certificate are part of a duly
authorized issue of Warrants, each of which represents the right to purchase at
any time on or after, the earliest to occur of (i) May 1, 1999, (ii) an initial
Public Equity Offering of the Company and (iii) in the event a Change of Control
(as defined in the Indenture dated April 13, 1998 between the Company and The
Bank of New York) occurs, the date the Company mails notice thereof to holders
of Notes and to the Holders (the earliest of such dates, the "Exercisability
Date"), until 5:00 p.m., New York City time, on April 15, 2008, 7.9002 shares
of Series B common stock, no par value per share ("Common Stock"), of the
Company, subject to adjustment as set forth in the Warrant Agreement. The
Warrants are issued pursuant to a Warrant Agreement dated as of April 13, 1998
(the "Warrant Agreement"), duly executed and delivered by the Company to The
Bank of New York, as Warrant Agent (the "Warrant Agent"), which Warrant
Agreement is hereby incorporated by reference in and made a part of this
instrument and is hereby referred to for a description of the rights, limitation
of rights, obligations, duties and immunities thereunder of the Warrant Agent,
the Company and the holders (the words "holders" or "holder" meaning the
registered holders or registered holder) of the Warrants. A copy of the Warrant
Agreement may be obtained by the holder hereof upon written request to the
Company. Capitalized terms used herein without definition shall have the
meanings ascribed to them in the Warrant Agreement.
Warrants may be exercised at any time from 9:00 a.m. on or after the
Exercisability Date and until 5:00 p.m., New York City time, on April 15, 2008.
The holder of Warrants evidenced by this Warrant Certificate may exercise them
by surrendering this Warrant Certificate, with the form of election to purchase
set forth hereon properly completed and executed, together with payment of the
Exercise Price in lawful money of the United States of America at the office of
the Warrant Agent. In the alternative, each Holder may exercise its right to
receive Warrant Shares on a net basis, such that without the exchange of any
funds, the Holder receives that number of Warrant Shares otherwise issuable upon
exercise of its Warrants less that number of Warrant Shares having a fair market
value equal to the aggregate Exercise Price that would otherwise have been paid
by the Holder for the Warrant Shares being issued. In the event that upon any
exercise of Warrants evidenced hereby the number of Warrants exercised shall be
less than the total number of Warrants evidenced hereby, there shall be issued
to the holder hereof or his assignee a new Warrant Certificate evidencing the
number of Warrants not exercised. No adjustment shall be made for any dividends
on any Common Stock issuable upon exercise of this Warrant.
The Warrant Agreement provides that upon the occurrence of certain
events the Exercise Price set forth on the face hereof and/or the number of
shares of Common Stock issuable upon the exercise of each Warrant shall, subject
to certain conditions, be adjusted. No
5
<PAGE>
fractions of a share of Common Stock will be issued upon the exercise of any
Warrant, but the Company will pay the cash value thereof determined as provided
in the Warrant Agreement.
The Warrant Agreement provides that the Company shall be bound by
certain registration obligations with respect to the Common Stock issuable upon
exercise of the Warrants as set forth in the Warrant Registration Rights
Agreement (as defined in the Warrant Agreement).
Warrant Certificates, when surrendered at any office or agency
maintained by the Company for that purpose by the registered holder thereof in
person or by legal representative or attorney duly authorized in writing, may be
exchanged for a new Warrant Certificate or new Warrant Certificates evidencing
in the aggregate a like number of Warrants, in the manner and subject to the
limitations provided in the Warrant Agreement, without charge except for any tax
or other governmental charge imposed in connection therewith.
Upon due presentment for registration of transfer of this Warrant
Certificate at any office or agency maintained by the Company for that purpose,
a new Warrant Certificate evidencing in the aggregate a like number of Warrants
shall be issued to the transferee in exchange for this Warrant Certificate,
subject to the limitations provided in the Warrant Agreement, without charge
except for any tax or other governmental charge imposed in connection therewith.
The Company and the Warrant Agent may deem and treat the registered
holder hereof as the absolute owner of this Warrant Certificate (notwithstanding
any notation of ownership or other writing hereon made by anyone) for the
purpose of any exercise hereof and for all other purposes, and neither the
Company nor the Warrant Agent shall be affected by any notice to the contrary.
The term "Business Day" shall mean any day on which (i) banks in New
York City, (ii) the principal national securities exchange or market on which
the Common Stock is listed or admitted to trading and (iii) the principal
national securities exchange or market on which the Warrants are listed or
admitted to trading are open for business.
6
<PAGE>
(FORM OF ELECTION TO EXERCISE)
(To be executed upon exercise of Warrants on the Exercise Date)
The undersigned hereby irrevocably elects to exercise ______ of the
Warrants represented by this Warrant Certificate and purchase the whole number
of Warrant Shares issuable upon the exercise of such Warrants and herewith
tenders payment for such Warrant Shares in the amount of $_________ in cash or
by certified or official bank check, in accordance with the terms hereof. The
undersigned requests that a certificate representing such Warrant Shares be
registered in the name of ___________________________ whose address is
______________________________ and that such certificate be delivered to
___________________________ whose address is __________________________________.
Any cash payments to be paid in lieu of a fractional Share should be made to
__________________________________ whose address is
________________________________ and the check representing payment thereof
should be delivered to ____________________________ whose address is
___________________________.
Dated ,
------------- -----
Name of holder of Warrant Certificate:
(Please Print)
Tax Identification or Social Security Number:
------------------------
Address:
-----------------------------
-----------------------------
-----------------------------
-----------------------------
Signature:
---------------------------
Note: The above signature must correspond with the name as written upon the
face of this Warrant Certificate in every particular, without alteration or
enlargement or any change whatever.
Dated ,
------------- -----
7
<PAGE>
[FORM OF ASSIGNMENT]
For value received ________________________ hereby sells, assigns and
transfers unto _________________________ the within Warrant Certificate,
together with all right, title and interest therein, and does hereby irrevocably
constitute and appoint _________________________________ attorney, to transfer
said Warrant Certificate on the books of the within-named Company, with full
power of substitution in the premises.
Dated ,
------------- -----
Signature:
---------------------
Note: The above signature must correspond with the name as written upon the
face of this Warrant Certificate in every particular, without alteration or
enlargement or any change whatever.
8
<PAGE>
SCHEDULE OF EXCHANGES OF GLOBAL WARRANTS(2)
The following exchanges of a part of this Global Warrant for
certificated Warrants have been made:
<TABLE>
<CAPTION>
Number of
Warrants of this Signature
Amount of increase Global Warrant of
Date of Amount of decrease in in Number of following such authorized
officer of Number of Warrants of Warrants of this decrease (or Warrant
Exchange this Global Warrant Global Warrant increase) Agent
- ---------- --------------------- ------------------ ----------------- ----------
<S> <C> <C> <C> <C>
</TABLE>
- -------------------------
(2) This is to be included only if the Warrant is in global form.
9
<PAGE>
EXHIBIT B
CERTIFICATE TO BE DELIVERED UPON EXCHANGE
OR REGISTRATION OF TRANSFER OF WARRANTS
Re: WARRANTS TO PURCHASE COMMON STOCK (THE "WARRANTS") OF FIRSTWORLD
COMMUNICATIONS, INC.
This Certificate relates to ______ Warrants held in* / / book-entry or* / /
certificated form by __________________ (the "Transferor").
The Transferor confirms that if it is transferring Warrants prior to the
Separation Date it will transfer such Warrants only together with the Notes with
which they were issued.
The Transferor:*
/ / has requested the Warrant Agent by written order to deliver in
exchange for its beneficial interest in the Global Warrant held by the
Depositary a Warrant or Warrants in definitive, registered form of
authorized denominations and an aggregate number equal to its beneficial
interest in such Global Warrant (or the portion thereof indicated above);
or
/ / has requested the Warrant Agent by written order to exchange or
register the transfer of a Warrant or Warrants.
In connection with such request and in respect of each such Warrant, the
Transferor does hereby certify that the Transferor is familiar with the Warrant
Agreement relating to the above captioned Warrants and the restrictions on
transfers thereof as provided in Section 7 of such Warrant Agreement, and that
the transfer of this Warrant does not require registration under the Securities
Act of 1933, as amended (the "Act") because*:
/ / Such Warrant is being acquired for the Transferor's own account,
without transfer.
/ / Such Warrant is being transferred to a qualified institutional
buyer (as defined in Rule 144A under the Act), in reliance on Rule 144A
under the Act.
/ / Such Warrant is being transferred in accordance with Rule 144
under the Act.
/ / Such Warrant is being transferred in reliance on and in
compliance with an exemption from the registration requirements of the Act,
other than Rule 144A or Rule 144 under the Act. An opinion of counsel to
the effect that such transfer does not require registration under the Act
accompanies this Certificate.
(Name of Transferor)
By:
Date:
*Check applicable box.
B-1
<PAGE>
EXHIBIT C
Transferee Letter of Representation
FirstWorld Communications, Inc.
9333 Genesee Avenue, Suite 200
San Diego, California 92121
Ladies and Gentlemen:
In connection with our proposed purchase of warrants to purchase
Series B Common Stock, no par value (the "Securities") of FirstWorld
Communications, Inc. (the "Company") we confirm that:
1. We understand that the Securities have not been registered under
the Securities Act of 1933, as amended (the "Securities Act") and, unless so
registered, may not be sold except as permitted in the following sentence. We
agree on our own behalf and on behalf of any investor account for which we are
purchasing Securities to offer, sell or otherwise transfer such Securities prior
to the date which is two years after the later of the date of original issue and
the last date on which the Company or any affiliate of the Company was the owner
of such Securities, or any predecessor thereto (the "Resale Restriction
Termination Date") only (a) to the Company, (b) pursuant to a registration
statement which has been declared effective under the Securities Act, (c) so
long as the Securities are eligible for resale pursuant to Rule 144A, under the
Securities Act, to a person we reasonably believe is a qualified institutional
buyer under Rule 144A (a "QIB") that purchases for its own account or for the
account of a QIB and to whom notice is given that the transfer is being made in
reliance on Rule 144A, (d) pursuant to offers and sales that occur outside the
United States within the meaning of Regulation S under the Securities Act, (e)
to an institutional "accredited investor" within the meaning of subparagraph
(a)(l), (2), (3) or (7) of Rule 501 under the Securities Act (an "IAI") that is
purchasing for his own account or for the account of such an IAI, or (f)
pursuant to any other available exemption from the registration requirements of
the Securities Act, subject in each of the foregoing cases to any requirement of
law that the disposition of our property or the property of such investor
account or accounts be at all times within our or their control and to
compliance with any applicable state securities laws. The foregoing restrictions
on resale will not apply subsequent to the Resale Restriction Termination Date.
If any resale or other transfer of the Securities is proposed to be made
pursuant to clause (e) above prior to the Resale Restriction Termination Date,
the transferor shall deliver a letter from the transferee substantially in the
form of this letter to the warrant agent under the Warrant Agreement pursuant to
which the Securities were issued (the "Warrant Agent") which shall provide,
among other things, that the transferee is an IAI and that it is acquiring such
Securities for investment purposes and not for distribution in violation of the
Securities Act. The Warrant Agent and the Company reserve the right prior to any
offer, sale or other transfer prior to the Resale Restriction Termination Date
of the Securities pursuant to clause (e) or (f) above to require the delivery of
a written opinion of counsel, certifications, and/or other information
satisfactory to the Company and the Warrant Agent.
2. We are an IAI purchasing for our own account or for the account
of such an institutional "accredited investor," and we are acquiring the
Securities for investment purposes and not with a view to, or for offer or sale
in connection with, any distribution in violation of the Securities Act and we
have such knowledge and experience in financial and business matters as to be
capable of evaluating the merits and risks of our investment in the Securities,
and we and any accounts for which we are acting are each able to bear the
economic risk of our or its investment for an indefinite period.
C-1
<PAGE>
3. We are acquiring the Securities purchased by us for our own
account or for one or more accounts as to each of which we exercise sole
investment discretion.
4. You, the Warrant Agent and your respective counsel are entitled
to rely upon this letter and you are irrevocably authorized to produce this
letter or a copy hereof to any interested party in any administrative or legal
proceeding or official inquiry with respect to the matters covered hereby.
Very truly yours,
(Name of Purchaser)
By:
-------------------------
Date: ,
---------- -----
Upon transfer the Securities would be registered in the name of the new
beneficial owner as follows:
Name:
-------------------
Address:
----------------
Taxpayer ID Number:
-------------------
2
<PAGE>
EXECUTION COPY
WARRANT REGISTRATION RIGHTS AGREEMENT
Dated April 13, 1998
By and Among
FIRSTWORLD COMMUNICATIONS, INC.
BEAR, STEARNS & CO. INC.
ING BARING (U.S.) SECURITIES, INC.
J.P. MORGAN SECURITIES INC.
and
MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
- ----
<S> <C>
Section 1. Definitions. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 2. Registration Rights. . . . . . . . . . . . . . . . . . . . . . . . 4
2.1. (a) Demand Registration After Public Equity Offering. . . . . . . 5
(b) Effective Registration. . . . . . . . . . . . . . . . . . . . 5
(c) Restrictions on Sale by Holders . . . . . . . . . . . . . . . 6
(d) Underwritten Registrations. . . . . . . . . . . . . . . . . . 6
(e) Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . 6
(f) Priority in Demand Registration . . . . . . . . . . . . . . . 7
2.2. (a) Piggy-Back Registration . . . . . . . . . . . . . . . . . . . 7
(b) Priority in Piggy-Back Registration . . . . . . . . . . . . . 8
2.3. Limitations, Conditions and Qualifications to Obligations
Under Registration Covenants . . . . . . . . . . . . . . . . . . .10
2.4. Restrictions on Sale by the Company and Others . . . . . . . . . .11
2.5. Rule 144 and Rule 144A . . . . . . . . . . . . . . . . . . . . . .12
Section 3. "Market Stand-Off" Agreement . . . . . . . . . . . . . . . . . . .12
Section 4. Registration Procedures. . . . . . . . . . . . . . . . . . . . . .12
Section 5. Indemnification and Contribution . . . . . . . . . . . . . . . . .18
Section 6. Miscellaneous. . . . . . . . . . . . . . . . . . . . . . . . . . .21
(a) No Inconsistent Agreements. . . . . . . . . . . . . . . . . .21
(b) Amendments and Waivers. . . . . . . . . . . . . . . . . . . .21
(c) Notices . . . . . . . . . . . . . . . . . . . . . . . . . . .21
(d) Successors and Assigns. . . . . . . . . . . . . . . . . . . .22
(e) Counterparts. . . . . . . . . . . . . . . . . . . . . . . . .22
(f) Headings. . . . . . . . . . . . . . . . . . . . . . . . . . .22
(g) Governing Law; Jurisdiction . . . . . . . . . . . . . . . . .22
(h) Severability. . . . . . . . . . . . . . . . . . . . . . . . .22
(i) Entire Agreement. . . . . . . . . . . . . . . . . . . . . . .22
(j) Attorneys' Fees . . . . . . . . . . . . . . . . . . . . . . .23
(k) Securities Held by the Company or Its Affiliates. . . . . . .23
(l) Remedies. . . . . . . . . . . . . . . . . . . . . . . . . . .23
</TABLE>
i
<PAGE>
WARRANT REGISTRATION RIGHTS AGREEMENT
THIS WARRANT REGISTRATION RIGHTS AGREEMENT (the "Agreement") is made
and entered into April 13, 1998, by and among FIRSTWORLD COMMUNICATIONS, INC., a
California corporation (the "Company"), and BEAR, STEARNS & CO. INC., ING BARING
(U.S.) SECURITIES, INC., J.P. MORGAN SECURITIES INC. and MERRILL LYNCH, PIERCE,
FENNER & SMITH INCORPORATED (each an "Initial Purchaser" and collectively, the
"Initial Purchasers"). Bear, Stearns & Co. is acting as the representative (the
"Representative") of the Initial Purchasers.
This Agreement is made pursuant to the Purchase Agreement dated as of
April 6, 1998 among the Company and the Initial Purchasers (the "Purchase
Agreement"), relating to, among other things, the sale by the Company to the
Initial Purchasers of an aggregate of 470,000 Units, each Unit consisting of
$1,000 principal amount at maturity of 13% Senior Discount Notes due April 15,
2008 and one Warrant, each initially exercisable for 7.9002 shares of Common
Stock, no par value, of the Company. In order to induce the Initial Purchasers
to enter into the Purchase Agreement, the Company has agreed to provide to the
Initial Purchasers and the Holders (as defined herein), among other things, the
registration rights for the Warrant Shares (as defined herein) set forth in this
Agreement. The execution and delivery of this Agreement is a condition to the
obligations of the Initial Purchasers under the Purchase Agreement.
In consideration of the foregoing, the parties hereto agree as
follows:
Section 1. DEFINITIONS. As used in this Agreement, the following
defined terms shall have the following meanings:
"Advice" has the meaning ascribed to such term in the last paragraph
of Section 4 hereof.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), 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, by agreement or otherwise; PROVIDED, HOWEVER,
that beneficial ownership of 10% or more of the Voting Stock (as defined in the
Indenture) of a Person shall be deemed to be control.
"Amended and Restated Investor Rights Agreement" means the agreement
dated as of the date hereof among the Company and certain holders of securities
of the Company.
"Business Day" means any day other than a Legal Holiday.
"Capital Stock" means, with respect to the Company, any and all
shares, interests, rights to purchase, warrants, options, participations, or
other equivalents of, or interests (however designated) in stock issued by the
Company.
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"Common Stock" means the Series B Common Stock, no par value, of the
Company.
"Company" shall have the meaning ascribed to that term in the preamble
of this Agreement and shall also include the Company's permitted successors and
assigns.
"Credit Facility Lender Warrant" means the warrant dated the date
hereof issued to Foothill Capital Corporation to purchase 800,000 shares of
Common Stock issued to a lender under the Company's former credit facility.
"Demand Registration" has the meaning ascribed to such term in
Section 2.1(a) hereof.
"DTC" has the meaning ascribed to such term in Section 4(i) hereof.
"Exchange Act" means the Securities Exchange Act of 1934, as amended
from time to time.
"Holder" means each of the Initial Purchasers, for so long as it owns
any Warrant Shares, and each of its successors, assigns and direct and indirect
transferees who become registered owners of such Warrant Shares.
"Included Securities" has the meaning ascribed to such term in
Section 2.1(a) hereof.
"indemnified party" has the meaning ascribed to such term in
Section 5(c) hereof.
"indemnifying party" has the meaning ascribed to such term in
Section 5(c) hereof.
"Indenture" means the Indenture dated as of April 13, 1998, as amended
or supplemented from time to time, between the Company and The Bank of New York
as Trustee, pursuant to which the Notes are issued.
"Initial Purchasers" has the meaning ascribed to such term in the
preamble hereof.
"Legal Holiday" means a Saturday, a Sunday or a day on which banking
institutions in the City of New York or at a place of payment are authorized by
law, regulation or executive order to remain closed. If a payment date is a
Legal Holiday at a place of payment, payment may be made at that place on the
next succeeding day that is not a Legal Holiday, and no interest shall accrue on
such payment for the intervening period.
"Notes" means the aggregate of $470,000,000 principal amount at
maturity of 13% Senior Discount Notes due April 13, 2008 of the Company issued
under the Indenture.
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"Person" means any individual, corporation, partnership, joint
venture, association, joint-stock company, trust, unincorporated organization or
government or agency or political subdivision thereof.
"Piggy-Back Registration" has the meaning ascribed to such term in
Section 2.2(a) hereof.
"Prospectus" means the prospectus included in any Registration
Statement (including, without limitation, any prospectus subject to completion
and a prospectus that includes any information previously omitted from a
prospectus filed as part of an effective registration statement in reliance upon
Rule 430A promulgated under the Securities Act), as amended or supplemented by
any prospectus supplement, and all other amendments and supplements to the
Prospectus, including post-effective amendments, and all material incorporated
by reference or deemed to be incorporated by reference in such Prospectus.
"Public Equity Offering" means an underwritten offering of Common
Stock pursuant to a registration statement that has been declared effective by
the SEC pursuant to the Securities Act (other than a registration statement on
Form S-8 or otherwise relating to equity securities issuable under any employee
benefit plan of the Company).
"Purchase Agreement" has the meaning ascribed to such term in the
preamble hereof.
"Registrable Securities" means any of (i) the Warrant Shares and
(ii) any other securities issued or issuable with respect to any Registrable
Securities by way of stock dividend or stock split or in connection with a
combination of shares, recapitalization, merger, consolidation or other
reorganization or otherwise; PROVIDED, HOWEVER, that any particular Registrable
Securities shall cease to be Registrable Securities when (i) a Registration
Statement with respect to the offering of such securities by the Holder thereof
shall have been declared effective under the Securities Act and such securities
shall have been disposed of by such Holder pursuant to such Registration
Statement, (ii) such securities may at the time of determination be sold to the
public pursuant to Rule 144 without any restriction on the amount of securities
which may be sold by such Holder or Rule 144(k) (or any similar provision then
in force, but not Rule 144A) promulgated under the Securities Act without the
lapse of any further time or the satisfaction of any condition, (iii) such
securities shall have been otherwise transferred by such Holder and new
certificates for such securities not bearing a legend restricting further
transfer shall have been delivered by the Company or its transfer agent and
subsequent disposition of such securities shall not require registration or
qualification under the Securities Act or any similar state law then in force or
(iv) such securities shall have ceased to be outstanding.
"Registration Expenses" means all expenses incident to the Company's
performance of or compliance with this Agreement, including, without limitation,
all SEC and stock exchange or National Association of Securities Dealers, Inc.
registration and filing fees and expenses, fees and expenses of compliance with
securities or blue sky laws (including, without limitation, reasonable fees and
disbursements of counsel for the underwriters in connection with blue sky
qualifications of the Registrable Securities), printing expenses, messenger,
telephone
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and delivery expenses, fees and disbursements of counsel for the Company and all
independent certified public accountants, the fees and disbursements of
underwriters customarily paid by issuers or sellers of securities (but not
including any underwriting discounts or commissions or transfer taxes, if any,
attributable to the sale of Registrable Securities by Holders of such
Registrable Securities) and other reasonable out-of-pocket expenses of Holders
(it being understood that Registration Expenses shall not include, as to the
fees and expenses of counsel, the fees and expenses of more than one counsel for
the Holders).
"Registration Statement" means any appropriate registration statement
of the Company filed with the SEC pursuant to the Securities Act which covers
any of the Registrable Securities pursuant to the provisions of this Agreement
and all amendments and supplements to any such Registration Statement, including
post-effective amendments, in each case including the Prospectus contained
therein, all exhibits thereto and all material incorporated by reference
therein.
"Requisite Securities" means a number of Registrable Securities equal
to not less than 25% of the Registrable Securities then outstanding held in the
aggregate by all Holders; PROVIDED, HOWEVER, that with respect to any action to
be taken at the request of the Holders of the Registrable Securities prior to
such time as the Warrants have expired pursuant to the terms thereof and of the
Warrant Agreement, each Warrant outstanding shall be deemed to represent that
number of Registrable Securities for which such Warrant would be then
exercisable.
"Rule 144" means Rule 144 promulgated under the Securities Act.
"Rule 144A" means Rule 144A promulgated under the Securities Act.
"SEC" means the Securities and Exchange Commission or any successor.
"Securities Act" means the Securities Act of 1933, as amended.
"Selling Holder" means a Holder who is selling Registrable Securities
in accordance with the provisions of Section 2.1 or 2.2.
"Warrant Agent" means The Bank of New York and any successor warrant
agent for the Warrants pursuant to the Warrant Agreement.
"Warrant Agreement" means the Warrant Agreement dated April 13, 1998
between the Company and The Bank of New York, as Warrant Agent, as amended or
supplemented from time to time in accordance with the terms thereof.
"Warrants" means the warrants of the Company issued pursuant to the
Warrant Agreement.
"Warrant Shares" means the shares of Common Stock deliverable upon
exercise of the Warrants.
Section 2. REGISTRATION RIGHTS.
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2.1. (a) DEMAND REGISTRATION AFTER PUBLIC EQUITY OFFERING.
Commencing on the earlier of April 15, 2003 or 180 days after an initial Public
Equity Offering, Holders owning, individually or in the aggregate, not less than
the Requisite Securities may make a written request for one registration under
the Securities Act of their Registrable Securities (a "Demand Registration").
Within 120 days of the receipt of such written request for a Demand
Registration, the Company shall file with the SEC and use its best efforts to
cause to become effective under the Securities Act a Registration Statement with
respect to such Registrable Securities. Any such request will specify the
number of Registrable Securities proposed to be sold and will also specify the
intended method of disposition thereof. The Company shall give written notice
of such registration request to all other Holders of Registrable Securities
within 20 days after the receipt thereof. Within 30 days after the date of such
notice from the Company, any Holder may request in writing that such Holder's
Registrable Securities be included in such Registration Statement and the
Company shall include in such Registration Statement the Registrable Securities
of any such Holder requested to be so included (the "Included Securities").
Each such request by such other Holders shall specify the number of Included
Securities proposed to be sold and the intended method of disposition thereof.
Subject to Sections 2.1(b) and 2.1(f) hereof, the Company shall be required to
register Registrable Securities pursuant to this Section 2.1(a) only once.
Subject to Section 2.1(f) hereof, no other securities of the Company
except (i) Registrable Securities held by any Holder, (ii) equity securities to
be offered and sold for the account of the Company and (iii) any equity
securities of the Company held by any Person having "piggy-back" registration
rights pursuant to any contractual obligation of the Company shall be included
in a Demand Registration; PROVIDED, HOWEVER, that no such securities for the
account of the Company or any other Person shall be so included unless, in
connection with any underwritten offering, the managing underwriter or
underwriters confirm to the Holders of Registrable Securities to be included in
such Demand Registration that the inclusion of such other securities will not be
likely to affect the price at which the Registrable Securities may be sold. The
inclusion of any such securities for the account of the Company or any other
Person, shall be on the same terms as that of the Registrable Securities.
(b) EFFECTIVE REGISTRATION. A Registration Statement will not be
deemed to have been effected as a Demand Registration unless it has been
declared effective by the SEC and the Company has complied in a timely manner
and in all material respects with all of its obligations under this Agreement
with respect thereto; PROVIDED, HOWEVER, that if, after such Registration
Statement has become effective, the offering of Registrable Securities pursuant
to such Registration Statement is or becomes the subject of any stop order,
injunction or other order or requirement of the SEC or any other governmental or
administrative agency or court that prevents, restrains or otherwise limits the
sale of Registrable Securities pursuant to such Registration Statement for any
reason not attributable to any Holder participating in such registration and
such Registration Statement has not become effective within a reasonable time
period thereafter (not to exceed 45 days), such Registration Statement will be
deemed not to have been effected. If (i) a registration requested pursuant to
this Section 2.1 is deemed not to have been effected or (ii) a Demand
Registration does not remain effective under the Securities Act until at least
the earlier of (A) an aggregate of 180 days after the effective date thereof or
(B) the consummation of the distribution by the Holders of all of the
Registrable Securities covered
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thereby, then such registration shall not count towards determining if the
Company has satisfied its obligation to effect one Demand Registration pursuant
to this Section 2.1. For purposes of calculating the 180-day period referred to
in the preceding sentence, any period of time during which such Registration
Statement was not in effect shall be excluded. The Holders of Registrable
Securities shall be permitted to withdraw all or any part of the Registrable
Securities from a Demand Registration at any time prior to the effective date of
such Demand Registration.
(b) RESTRICTIONS ON SALE BY HOLDERS. Each Holder of Registrable
Securities whose Registrable Securities are covered by a Registration Statement
filed pursuant to this Section 2.1 and are to be sold thereunder agrees, if and
to the extent reasonably requested by the managing underwriter or underwriters
in an underwritten offering, not to effect any public sale or distribution of
Registrable Securities or of securities of the Company of the same class as any
securities included in such Registration Statement, including a sale pursuant to
Rule 144 (except as part of such underwritten offering), during the 180 day
period beginning on the closing date of each underwritten offering made pursuant
to such Registration Statement, to the extent timely notified in writing by the
Company or such managing underwriter or underwriters.
The foregoing provisions of Section 2.1(c) shall not apply to any
Holder of Registrable Securities if such Holder is prevented by applicable
statute or regulation from entering into any such agreement; PROVIDED, HOWEVER,
that any such Holder shall undertake, in its request to participate in any such
underwritten offering, not to effect any public sale or distribution of any
Registrable Securities commencing on the date of sale of such Registrable
Securities unless it has provided 45 days' prior written notice of such sale or
distribution to the underwriter or underwriters.
(d) UNDERWRITTEN REGISTRATIONS. If any of the Registrable Securities
covered by a Demand Registration are to be sold in an underwritten offering, the
investment banker or investment bankers and manager or managers that will manage
the offering will be selected by the Company.
No Holder of Registrable Securities may participate in any
underwritten registration pursuant to a Registration Statement filed under this
Agreement unless such Holder (a) agrees to (i) sell such Holder's Registrable
Securities on the basis provided in and in compliance with any underwriting
arrangements approved by the Holders of not less than a majority of the
Registrable Securities to be sold thereunder and (ii) comply with Regulation M
under the Exchange Act and (b) completes and executes all questionnaires, powers
of attorney, indemnities, underwriting agreements and other documents reasonably
required under the terms of such underwriting arrangements; PROVIDED, HOWEVER,
that no Holder of Registrable Securities shall be required to enter into a
custody or escrow agreement or power of attorney with respect to Registrable
Securities to be sold in connection with such underwriting arrangements.
(e) EXPENSES. The Company will pay all Registration Expenses in
connection with the registrations requested pursuant to Section 2.1(a) hereof.
Each Holder of Registrable Securities shall pay all underwriting discounts and
commissions and transfer taxes, if any, relating to the sale or disposition of
such Holder's Registrable Securities pursuant to a Registration Statement
requested pursuant to this Section 2.1.
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<PAGE>
(f) PRIORITY IN DEMAND REGISTRATION. In a registration pursuant to
Section 2.1 hereof involving an underwritten offering, if the managing
underwriter or underwriters of such underwritten offering have informed, in
writing, the Company and the Selling Holders who have requested such Demand
Registration or who have sought inclusion therein that in such underwriter's or
underwriters' opinion the total number of securities which the Selling Holders
and any other Person desiring to participate in such registration intend to
include in such offering is such as to affect adversely the success of such
offering, including the price at which such securities can be sold, then the
Company will be required to include in such registration only the amount of
securities which it is so advised should be included in such registration. In
such event, securities shall be registered in such registration in the following
order of priority: (i) FIRST, the securities which have been requested to be
included in such registration by the Holders of Registrable Securities pursuant
to this Agreement, pro rata among such Holders according to the number of
securities requested to be included by each such Holder (or as they may
otherwise agree), (ii) SECOND, securities requested to be included in such
registration by the holders of the Credit Facility Lender Warrant, pro rata
among such holders according to the number of securities requested to be
included by each such holder (or as they may otherwise agree), (iii) THIRD,
Demand Shares (as defined in the Amended and Restated Investor Rights Agreement)
requested to be included therein by Demand Holders under the Amended and
Restated Investor Rights Agreement, pro rata among such Demand Holders according
to the number of securities requested to be included by each such Demand Holder
(or as they may otherwise agree), (iv) FOURTH, any securities the Company
proposes to include therein, and (v) FIFTH, the securities of other Persons
entitled to exercise "piggy-back" registration rights pursuant to contractual
commitments of the Company, pro rata among such Persons based on the amount of
securities requested to be included by each such Person (or as they may
otherwise agree).
If any securities of a Holder have been excluded from a registration
statement pursuant to the provisions of the foregoing paragraph, then such
registration shall not count towards determining whether the Company has
satisfied its obligation to effect one Demand Registration pursuant to
Section 2.1 hereof.
2.2. (a) PIGGY-BACK REGISTRATION. If at any time the Company
proposes to file a Registration Statement under the Securities Act with respect
to an offering by the Company for its own account or for the account of any of
its security holders of Common Stock (other than (i) a Registration Statement on
Form S-4 or S-8 (or any substitute form that may be adopted by the SEC), (ii) a
Registration Statement filed in connection with an offering of securities solely
to the Company's existing security holders or any offer of debt securities or
convertible debt securities or (iii) a Demand Registration), then the Company
shall give written notice of such proposed filing to the Holders of Registrable
Securities as soon as practicable (but in no event fewer than 15 days before the
anticipated filing date or 10 days if the Company is subject to filing reports
under the Exchange Act and able to use Form S-3 under the Securities Act), and
such notice shall offer such Holders the opportunity to register such number of
shares of Registrable Securities as each such Holder may request in writing not
later than 15 days prior to the anticipated effective date of the Registration
Statement (or eight days of the notice of the proposed filing if the Company is
subject to filing reports under the Exchange Act and able to use Form S-3 under
the Securities Act) after receipt of such written notice from the Company (which
request shall specify the Registrable Securities intended to be disposed of by
such Selling
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Holder and the intended method of distribution thereof) (a "Piggy-Back
Registration"). The Company shall use its best efforts to keep such Piggy-Back
Registration continuously effective under the Securities Act until at least the
earlier of (A) 90 days after the effective date thereof or (B) the consummation
of the distribution by the Holders of all of the Registrable Securities covered
thereby. Subject to Section 2.2(b), the Company shall cause the managing
underwriter or underwriters, if any, of such proposed offering to permit the
Registrable Securities requested to be included in a Piggy-Back Registration to
be included on the same terms and conditions as any similar securities of the
Company or any other security holder included therein and to permit the sale or
other disposition of such Registrable Securities in accordance with the intended
method of distribution thereof. Any Selling Holder shall have the right to
withdraw its request for inclusion of its Registrable Securities in any
Registration Statement pursuant to this Section 2.2 by giving written notice to
the Company of its request to withdraw. The Company may withdraw a Piggy-Back
Registration at any time prior to the time it becomes effective or the Company
may elect to delay the registration; PROVIDED, HOWEVER, that the Company shall
give prompt written notice thereof to participating Selling Holders. The
Piggy-Back Registration right of holders of Warrants and Warrant Shares shall
not apply to any Public Equity Offering that is the initial Public Equity
Offering of the Company unless the securities of other Selling Holders are to be
included therein. The Company will pay all Registration Expenses in connection
with each registration of Registrable Securities requested pursuant to this
Section 2.2, and each Holder of Registrable Securities shall pay all
underwriting discounts and commissions and transfer taxes, if any, relating to
the sale or disposition of such Holder's Registrable Securities pursuant to a
Registration Statement effected pursuant to this Section 2.2.
No registration effected under this Section 2.2, and no failure to
effect a registration under this Section 2.2, shall relieve the Company of its
obligation to effect a registration upon the request of Holders of Registrable
Securities pursuant to Section 2.1 hereof, and no failure to effect a
registration under this Section 2.2 and to complete the sale of securities
registered thereunder in connection therewith shall relieve the Company of any
other obligation under this Agreement.
(b) PRIORITY IN PIGGY-BACK REGISTRATION. In a registration pursuant
to Section 2.2 hereof involving an underwritten offering, if the managing
underwriter or underwriters of such underwritten offering have informed, in
writing, the Company and the Selling Holders requesting inclusion in such
offering that in such underwriter's or underwriters' opinion the total number of
securities which the Company, the Selling Holders and any other Persons desiring
to participate in such registration intend to include in such offering is such
as to materially and adversely affect the success of such offering, including
the price at which such securities can be sold, then the Company will be
required to include in such registration only the amount of securities which it
is so advised should be included in such registration. In such event: (w) in
cases other than those covered by clause (x), (y) or (z) below, securities shall
be registered in such offering in the following order of priority: (i) FIRST,
if the registration is for the sale of securities for the Company's own account
(other than pursuant to the exercise of "piggy-back" rights herein and in other
such contractual commitments of the Company), the securities which the Company
proposes to register, (ii) SECOND, those securities requested to be included in
such registration by the holders of the Credit Facility Lender Warrant, pro rata
among such holders according to the number of securities requested to be
included by each such holder (or as they
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<PAGE>
may otherwise agree), (iii) THIRD, the securities which have been requested
to be included in such registration by the Holders of Registrable Securities
pursuant to this Agreement and Demand Shares (as defined in the Amended and
Restated Investor Rights Agreement) requested to be included in such
registration by the Demand Holders under the Amended and Restated Investor
Rights Agreement pro rata among such Holders and such Demand Holders based
upon the number of securities requested to be included by each such Holder
and Demand Holder requesting inclusion therein (or as they may otherwise
agree), (iv) FOURTH, securities requested to be included by other holders
under the Amended and Restated Investor Rights Agreement, on a pro rata basis
according to the number of such securities requested to be included by each
such holder (or as they may otherwise agree), and (v) FIFTH, the securities
of other Persons entitled to exercise "piggy-back" registration rights
pursuant to contractual commitments of the Company, pro rata based on the
amount of securities sought to be registered by such Persons (or as they may
otherwise agree); (x) in cases involving the registration for sale of
securities pursuant to a demand registration under the Credit Facility Lender
Warrant, securities shall be registered in such offering in the following
order of priority: (i) FIRST, those securities requested to be included in
such registration by the Initiating Securityholders under the Credit Facility
Lender Warrant, pro rata among such Initiating Securityholders according to
the number of securities requested to be included by each such Initiating
Securityholder (or as they may otherwise agree), (ii) SECOND, the securities
requested to be included in such registration by other Securityholders under
the Credit Facility Lender Warrant, pro rata among such Securityholders
according to the number of securities requested to be included by each such
Securityholder (or as they may otherwise agree), (iii) THIRD, securities
requested to be included in such registration by the Holders of Registrable
Securities pursuant to this Agreement and Demand Shares (as defined in the
Amended and Restated Investor Rights Agreement) requested to be included in
such registration by Demand Holders under the Amended and Restated Investor
Rights Agreement, pro rata among such Holders and Demand Holders according to
the number of such securities requested to be included by each such Holder
and Demand Holder (or as they may otherwise agree), (iv) FOURTH, any
securities the Company proposes to include therein, and (v) FIFTH, the
securities of any other Person entitled to exercise "piggy-back" registration
rights pursuant to contractual commitments of the Company, pro rata among
such Persons according to the number of securities requested to be included
by each such Person (or as they may otherwise agree); and (y) in cases
involving the registration for sale of securities pursuant to a Qualified
Holder Demand (as defined in the Amended and Restated Investor Rights
Agreement) under the Amended and Restated Investor Rights Agreement,
securities shall be registered in such offering in the following order of
priority: (i) FIRST, all of the Demand Shares (as defined in the Amended and
Restated Investor Rights Agreement) requested to be included in such
registration by Demand Holders under the Amended and Restated Investor Rights
Agreement, pro rata among such Demand Holders according to the number of
securities requested to be included by each such Demand Holder (or as they
may otherwise agree), (ii) SECOND, those securities requested to be included
in such registration by holders of the Credit Facility Lender Warrant, pro
rata among such holders according to the number of securities requested to be
included by each such holder (or as they may otherwise agree), (iii) THIRD,
the securities which have been requested to be included in such registration
by the Holders of Registrable Securities pursuant to this Agreement pro rata
among such Holders based upon the aggregate amount of securities requested to
be included by each such Holder (or as they may otherwise agree), (iv) FOURTH,
any securities the Company proposes
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to include therein, and (v) FIFTH, securities of other Persons entitled to
exercise "piggy-back" registration rights pursuant to contractual
commitments, pro rata among such Persons based on the amount of securities
requested to be included by each such Person (or as they may otherwise
agree); and (z) in cases involving the registration for sale of securities
pursuant to notices delivered to the Company on the same date requesting
demand registration under the Credit Facility Lender Warrant and a Qualified
Holder Demand under the Amended and Restated Investor Rights Agreement,
securities shall be registered in such offering in the following order of
priority: (i) first, all of the securities requested to be included therein
by the Initiating Securityholders (as defined in the Credit Facility Lender
Warrant) under the Credit Facility Lender Warrant, pro rata among such
holders according to the number of securities requested to be included by
each such holder requesting inclusion therein (or as they may otherwise
agree); (ii) second, the Demand Shares (as defined in the Amended and
Restated Investor Rights Agreement) requested to be included therein by the
Demand Holders under the Amended and Restated Investor Rights Agreement and
the securities requested to be included therein by the other Securityholders
(as defined in the Credit Facility Lender Warrant), pro rata among such
holders according to the number of Demand Shares and Securityholders'
securities requested to be included by each such holder requesting inclusion
therein (or as they may otherwise agree); (iii) third, the securities
requested to be included in such registration by the Holders of Registrable
Securities pursuant to this Agreement, pro rata among such Holders based upon
the number of securities requested to be included by each such Holder
requesting inclusion therein (or as they may otherwise agree); (iv) fourth,
any securities the Company proposes to include therein; and (v) fifth, any
other securities proposed to be included therein, pro rata among the holders
of such other securities according to the number of securities requested to
be included by each such holder proposed to be included therein (or as they
may otherwise agree).
If, as a result of the provisions of this Section 2.2(b), any Selling
Holder shall not be entitled to include all Registrable Securities in a
Piggy-Back Registration that such Selling Holder has requested to be included,
such Selling Holder may elect to withdraw his request to include Registrable
Securities in such registration.
2.3. LIMITATIONS, CONDITIONS AND QUALIFICATIONS TO OBLIGATIONS UNDER
REGISTRATION COVENANTS. The obligations of the Company set forth in Sections
2.1 and 2.2 hereof are subject to each of the following limitations, conditions
and qualifications:
(a) Subject to the next sentence of this paragraph, the Company shall
be entitled to postpone, for a reasonable period of time, the filing or
effectiveness of, or suspend the rights of any Holders to make sales pursuant
to, any Registration Statement otherwise required to be prepared, filed and made
and kept effective by it hereunder; PROVIDED, HOWEVER, that the duration of such
postponement or suspension may not exceed the earlier to occur of (A) 15 days
after the cessation of the circumstances described in the next sentence of this
paragraph on which such postponement or suspension is based or (B) 90 days after
the date of the determination of the Board of Directors referred to in the next
sentence, and the duration of such postponement or suspension shall be excluded
from the calculation of the 180-day period described in Section 2.1(b) hereof.
Such postponement or suspension may be effected only if the Board of Directors
of the Company determines reasonably and in good faith that the filing or
effectiveness of, or sales pursuant to, such Registration Statement would
materially impede, delay or interfere
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with any financing, offer or sale of securities, acquisition, corporate
reorganization or other significant transaction involving the Company or any of
its Affiliates or require disclosure of material information which the Company
has a bona fide business purpose for preserving as confidential, which
financing, offer or sale of securities, acquisition, corporate reorganization or
other significant transaction had been initiated at the time of the filing of
such Registration Statement; PROVIDED, HOWEVER, that the Company shall not be
entitled to such postponement or suspension more than twice in any twelve-month
period. If the Company shall so postpone the filing of a Registration Statement
it shall, as promptly as possible, deliver a certificate signed by the Chief
Executive Officer of the Company to the Selling Holders as to such
determination, and the Selling Holders shall (y) have the right, in the case of
a postponement of the filing or effectiveness of a Registration Statement, upon
the affirmative vote of the Holders of not less than a majority of the
Registrable Securities to be included in such Registration Statement, to
withdraw the request for registration by giving written notice to the Company
within 10 days after receipt of such notice or (z) in the case of a suspension
of the right to make sales, receive an extension of the registration period
equal to the number of days of the suspension. Any Demand Registration as to
which the withdrawal election referred to in the preceding sentence has been
effected shall not be counted for purposes of the single Demand Registration the
Company may be required to effect pursuant to Section 2.1 hereof.
(b) The Company shall not be required by this Agreement to effect a
Demand Registration within 90 days immediately following the effective date of
any registration statement pertaining to a firmly underwritten offering of
equity securities of the Company for its own account; PROVIDED, HOWEVER, that
this clause (ii) shall not apply if the underwriter of such offering consents to
the request for such Demand Registration pursuant to Section 2.1(a).
(c) The Company shall not be required by this Agreement to effect a
Demand Registration within 60 days immediately following the effective date of
any registration statement pertaining to a firmly underwritten offering of
equity securities of the Company for the account of any security holder of the
Company; PROVIDED, HOWEVER, that this clause (ii) shall not apply if the
underwriter of such offering consents to the request for such Demand
Registration pursuant to Section 2.1(a).
(d) The Company's obligations shall be subject to the obligations
of the Selling Holders, which the Selling Holders acknowledge, to furnish all
information and materials and to take any and all actions as may be required
under applicable federal and state securities laws and regulations to permit
the Company to comply with all applicable requirements of the SEC and to
obtain any acceleration of the effective date of such Registration Statement.
(e) The Company shall not be obligated to cause any special audit to
be undertaken in connection with any registration pursuant to this Agreement
unless such audit is required by the SEC or requested by the underwriters with
respect to such registration.
2.4. RESTRICTIONS ON SALE BY THE COMPANY AND OTHERS. The Company
covenants and agrees that (i) it shall not, and that it shall not cause or
permit any of its subsidiaries to, effect any public sale or distribution of any
securities of the same class as any of the Registrable Securities or any
securities convertible into or exchangeable or exercisable for such securities
(or
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any option or other right for such securities) during the 30-day period prior
to, and during the 90-day period beginning on, the commencement of any
underwritten offering of Registrable Securities pursuant to a Demand
Registration which has been requested pursuant to this Agreement prior to the
Company or any of its subsidiaries publicly announcing its intention to effect
any such public sale or distribution; and (ii) that it shall use its reasonable
best efforts to secure the written agreement of each of its officers and
directors to not effect any public sale or distribution of any securities of the
same class as the Registrable Securities (or any securities convertible into or
exchangeable or exercisable for any such securities), or any option or right for
such securities during the period described in clause (i) of this Section 2.4.
2.5. RULE 144 AND RULE 144A. The Company covenants that it will file
the reports required to be filed by it under the Securities Act and the Exchange
Act and the rules and regulations adopted by the SEC thereunder in a timely
manner and, if at any time the Company is not required to file such reports, it
will, upon the request of any Holder or beneficial owner of Registrable
Securities, make available the information required by Rule 144A(a)(4) under the
Securities Act in order to permit resales of such Registrable Securities
pursuant to Rule 144A under the Securities Act and the information required
under Rule 144(c) to permit resales under Rule 144. Upon the request of any
Holder of Registrable Securities, the Company will in a timely manner deliver to
such Holder a written statement as to whether it has complied with such
information requirements.
Section 3. "MARKET STAND-OFF" AGREEMENT.
(a) If the Company has complied with all its obligations with respect
to a Demand Registration or a Piggy-Back Registration relating to an
underwritten public offering, all holders of Warrants and Warrant Shares, upon
request of the lead managing underwriter with respect to such underwritten
public offering, will be required to not sell or otherwise dispose of any
Warrants and Warrant Shares owned by them for a period not to exceed 180 days
from the consummation of such underwritten public offering: PROVIDED, HOWEVER,
that except for the initial Public Equity Offering of the Company, such
requirement shall apply to Warrant Shares not sold in a Demand Registration or
Piggy-Back Registration due to a reduction pursuant to Section 2.2(b) hereof for
a period not to exceed 90 days from such date of consummation.
(b) In order to enforce the foregoing covenant, the Company shall
have the right to place restrictive legends on the certificates representing the
shares subject to this Section 3 and to impose stop transfer instructions with
respect to the Registrable Securities and such other shares of stock of each
Holder (and the shares or securities of every other Person subject to the
foregoing restriction) until the end of such period. The provisions of this
Section 3 shall be binding upon any transferee of any Registrable Securities.
Section 4. REGISTRATION PROCEDURES. In connection with the
obligations of the Company with respect to any Registration Statement pursuant
to Sections 2.1 and 2.2 hereof, the Company shall, except as otherwise provided:
(a) Prepare and file with the SEC as soon as practicable each such
Registration Statement (but in any event on or prior to the date of filing
thereof required under
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this Agreement) and cause such Registration Statement to become effective and
remain effective as provided herein; PROVIDED, HOWEVER, that before filing any
such Registration Statement or any Prospectus (for registrations pursuant to
Sections 2.1 and 2.2 hereof) or any amendments or supplements thereto (only for
registrations pursuant to Section 2.1 hereof) (including, at any time the
Company is preparing a Registration Statement for a registration pursuant to
Section 2.1 or 2.2 hereof, documents that would be incorporated or deemed to be
incorporated therein by reference, including such documents filed under the
Exchange Act that would be incorporated therein by reference), the Company
shall, upon request, afford promptly to the Holders of the Registrable
Securities covered by such Registration Statement, their counsel and the
managing underwriter or underwriters, if any, an opportunity to review copies of
all such documents proposed to be filed a reasonable time prior to the proposed
filing thereof. The Company shall not file any Registration Statement or
Prospectus (for registrations pursuant to Sections 2.1 and 2.2 hereof) or any
amendments or supplements thereto (only for registrations pursuant to
Section 2.1 hereof) if the Holders of a majority of the Registrable Securities
covered by such Registration Statement, their counsel, or the managing
underwriter or underwriters, if any, shall reasonably object in writing unless
the Company reasonably believes that failure to file any such amendment or
supplement would involve a violation of the Securities Act or other applicable
law.
(b) Prepare and file with the SEC such amendments and post-effective
amendments to the Registration Statement as may be necessary to keep such
Registration Statement continuously effective for the time periods prescribed
hereby; cause the related Prospectus to be supplemented by any required
prospectus supplement, and as so supplemented to be filed pursuant to Rule 424
(or any similar provisions then in force) promulgated under the Securities Act;
and comply with the provisions of the Securities Act, the Exchange Act and the
rules and regulations of the SEC promulgated thereunder applicable to it with
respect to the disposition of all securities covered by such Registration
Statement as so amended or in such prospectus as so supplemented.
(c) Notify the Holders of Registrable Securities, their counsel and
the managing underwriter or underwriters, if any, promptly (but in any event
within two (2) Business Days), and confirm such notice in writing, (i) when a
Prospectus or any prospectus supplement or post-effective amendment has been
filed, and, with respect to a Registration Statement or any post-effective
amendment, when the same has become effective (including in such notice a
written statement that any Holder may, upon request, obtain, without charge, one
conformed copy of such Registration Statement or post-effective amendment
including financial statements and schedules and exhibits), (ii) of the issuance
by the SEC of any stop order suspending the effectiveness of such Registration
Statement or of any order preventing or suspending the use of any preliminary
prospectus or the initiation or threatening of any proceedings for that purpose,
(iii) if at any time when a prospectus is required by the Securities Act to be
delivered in connection with sales of the Registrable Securities the
representations and warranties of the Company contained in any agreement
(including any underwriting agreement) contemplated by Section 4(l) below, to
the knowledge of the Company, cease to be true and correct in any material
respect, (iv) of the receipt by the Company of any notification with respect to
(A) the suspension of the qualification or exemption from qualification of the
Registration Statement or any of the Registrable Securities covered thereby for
offer or sale in any jurisdiction, or (B) the initiation of
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any proceeding for such purpose, (v) of the happening of any event, the
existence of any condition or information becoming known that requires the
making of any changes in such Registration Statement, Prospectus or documents so
that, in the case of such Registration Statement, it will conform in all
material respects with the requirements of the Securities Act and it will not
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements therein
not misleading, and that in the case of the Prospectus, it will conform in all
material respects with the requirements of the Securities Act and it will not
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading, and
(vi) of the Company's reasonable determination that a post-effective amendment
to such Registration Statement would be appropriate.
(d) Use every reasonable effort to prevent the issuance of any order
suspending the effectiveness of the Registration Statement or of any order
preventing or suspending the use of a Prospectus or suspending the qualification
(or exemption from qualification) of any of the Registrable Securities covered
thereby for sale in any jurisdiction, and, if any such order is issued, to
obtain the withdrawal of any such order as soon as practicable.
(e) If requested by the managing underwriter or underwriters, if any,
or the Holders of a majority of the Registrable Securities being sold in
connection with an underwritten offering (only for registrations pursuant to
Section 2.1 hereof), (i) promptly incorporate in a prospectus supplement or
post-effective amendment such information as the managing underwriter or
underwriters, if any, or such Holders reasonably request to be included therein
to comply with applicable law, (ii) make all required filings of such prospectus
supplement or such post-effective amendment as soon as practicable after the
Company has received notification of the matters to be incorporated in such
prospectus supplement or post-effective amendment, and (iii) supplement or make
amendments to such Registration Statement.
(f) Furnish to each Holder of Registrable Securities who so requests
and to counsel for the Holders of Registrable Securities and each managing
underwriter, if any, without charge, upon request, one conformed copy of the
Registration Statement and each post-effective amendment thereto, including
financial statements and schedules, and of all documents incorporated or deemed
to be incorporated therein by reference and all exhibits (including exhibits
incorporated by reference).
(g) Deliver to each Holder of Registrable Securities, their counsel
and each underwriter, if any, without charge, as many copies of each Prospectus
(including each preliminary prospectus) and each amendment or supplement thereto
as such Persons may reasonably request; and, subject to the last paragraph of
this Section 4, the Company hereby consents to the use of such Prospectus and
each amendment or supplement thereto by each of the Holders of Registrable
Securities and the underwriter or underwriters or agents, if any, in connection
with the offering and sale of the Registrable Securities covered by such
Prospectus and any amendment or supplement thereto.
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(h) Prior to any offering of Registrable Securities, to register or
qualify, and cooperate with the Holders of Registrable Securities, the
underwriter or underwriters, if any, and their respective counsel in connection
with the registration or qualification (or exemption from such registration or
qualification) of, such Registrable Securities for offer and sale under the
securities or blue sky laws of such jurisdictions within the United States as
the managing underwriter or underwriters reasonably request in writing, or, in
the event of a non-underwritten offering, as the Holders of a majority of the
Registrable Securities may request; PROVIDED, HOWEVER, that where Registrable
Securities are offered other than through an underwritten offering, the Company
agrees to cause its counsel to perform blue sky investigations and file
registrations and qualifications required to be filed pursuant to this
Section 4(h); keep each such registration or qualification (or exemption
therefrom) effective during the period such Registration Statement is required
to be kept effective hereunder and do any and all other acts or things necessary
or advisable to enable the disposition in such jurisdictions of the securities
covered thereby; PROVIDED, HOWEVER, that the Company will not be required to (A)
qualify generally to do business in any jurisdiction where it is not then so
qualified, (B) take any action that would subject it to general service of
process in any such jurisdiction where it is not then so subject or (C) become
subject to taxation in any jurisdiction where it is not then so subject.
(i) Cooperate with the Holders of Registrable Securities and the
managing underwriter or underwriters, if any, to facilitate the timely
preparation and delivery of certificates representing Registrable Securities to
be sold, which certificates shall not bear any restrictive legends whatsoever
and shall be in a form eligible for deposit with The Depository Trust Company
("DTC"); and enable such Registrable Securities to be in such denominations and
registered in such names as the managing underwriter or underwriters, if any, or
Holders may reasonably request at least two Business Days prior to any sale of
Registrable Securities in a firm commitment underwritten public offering.
(j) Upon the occurrence of any event contemplated by
Section 4(c)(v) or 4(c)(vi) above, as promptly as practicable prepare a
supplement or post-effective amendment to the Registration Statement or a
supplement to the related Prospectus or any document incorporated or deemed to
be incorporated therein by reference and, subject to Section 4(a) hereof, file
such with the SEC so that, as thereafter delivered to the purchasers of
Registrable Securities being sold thereunder, such Prospectus will not contain
an untrue statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading.
(k) Prior to the effective date of a Registration Statement,
(i) provide the registrar for the Registrable Securities with certificates for
such securities in a form eligible for deposit with DTC and (ii) provide a CUSIP
number for such securities.
(l) In an underwritten offering, enter into an underwriting agreement
in form, scope and substance as is customary in underwritten offerings and take
all such other actions as are reasonably requested by the managing underwriter
or underwriters in order to expedite or facilitate the registration or
disposition of such Registrable Securities in any underwritten offering to be
made of the Registrable Securities in accordance with this Agreement, and in
such connection, (i) make such representations and warranties to the underwriter
or underwriters, with
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respect to the business of the Company and the subsidiaries of the Company, and
the Registration Statement, Prospectus and documents, if any, incorporated or
deemed to be incorporated by reference therein, in each case, in form, substance
and scope as are customarily made by issuers to underwriters in underwritten
offerings, and confirm the same if and when requested; (ii) use reasonable
efforts to obtain opinions of counsel to the Company and updates thereof,
addressed to the underwriter or underwriters covering the matters customarily
covered in opinions requested in underwritten offerings and such other matters
as may be reasonably requested by underwriters; (iii) use reasonable efforts to
obtain "cold comfort" letters and updates thereof from the independent certified
public accountants of the Company (and, if applicable, the subsidiaries of the
Company) and, if necessary, any other independent certified public accountants
of any subsidiary of the Company or of any business acquired by the Company for
which financial statements and financial data are, or are required to be,
included in the Registration Statement, addressed to each of the underwriters,
such letters to be in customary form and covering matters of the type
customarily covered in "cold comfort" letters in connection with underwritten
offerings and such other matters as reasonably requested by the managing
underwriter or underwriters and as permitted by the Statement of Auditing
Standards No. 72; and (iv) if an underwriting agreement is entered into, the
same shall contain customary indemnification provisions and procedures (or such
other provisions and procedures acceptable to Holders of a majority of
Registrable Securities covered by such Registration Statement and the managing
underwriter or underwriters or agents) with respect to all parties to be
indemnified pursuant to such agreement. The above shall be done at each closing
under such underwriting agreement, or as and to the extent required thereunder.
(m) Make available for inspection by a representative of the Holders
of Registrable Securities being sold, any underwriter participating in any such
disposition of Registrable Securities, if any, and any attorney or accountant
retained by such representative of the Holders or underwriter, at the offices
where normally kept, during reasonable business hours, all financial and other
records, pertinent corporate documents and properties of the Company and the
subsidiaries of the Company, and cause the officers, directors and employees of
the Company and the subsidiaries of the Company to supply all information in
each case reasonably requested by any such Person in connection with such
Registration Statement; PROVIDED, HOWEVER, that all material non-public
information shall be kept confidential by such Person, except to the extent that
(i) the disclosure of such information is necessary or advisable to avoid or
correct a misstatement or omission in the Registration Statement or in any
Prospectus; PROVIDED, HOWEVER, that prior notice is given to the Company, and
the Company's legal counsel and such Holder's legal counsel concur that
disclosure is required, (ii) the release of such information is ordered pursuant
to a subpoena or other order from a court of competent jurisdiction,
(iii) disclosure of such information is necessary in connection with any action,
claim, suit or proceeding, directly or indirectly, involving or potentially
involving such Person and arising out of, based upon, relating to or involving
this Agreement or any of the transactions contemplated hereby or arising
hereunder; PROVIDED, HOWEVER, that prior notice shall be provided as soon as
practicable to the Company of the potential disclosure of any information by
such Person pursuant to clauses (ii) or (iii) of this sentence to permit the
Company to obtain a protective order (or waive the provisions of this paragraph
(m)) and that such Person shall take all actions as are reasonably necessary to
protect the confidentiality of such information (if practicable) to the extent
such action is
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otherwise not inconsistent with, an impairment of or in derogation of the rights
and interests of the Holder or any such Person, or (iv) such information has
been made generally available to the public.
(n) Comply with all applicable rules and regulations of the SEC and
make generally available to its security holders as soon as practicable
following the effective date of each Registration Statement filed hereunder an
earnings statement satisfying the provisions of Section 11(a) of the Securities
Act and Rule 158 thereunder (or any similar rule promulgated under the
Securities Act).
(o) Use its best efforts to cause all Registrable Securities relating
to such Registration Statement to be listed on each securities exchange, if any,
on which similar securities issued by the Company are then listed.
(p) Cooperate with the Selling Holders to facilitate the timely
preparation and delivery of certificates representing Registrable Securities to
be sold and not bearing any restrictive legends and registered in such names as
the Selling Holders may reasonably request at least two Business Days prior to
the closing of any sale of Registrable Securities.
(q) Each Selling Holder agrees, as a condition to the registration
obligations with respect to such Selling Holder provided herein, to furnish to
the Company such information regarding such Selling Holder and the distribution
of such Registrable Securities as the Company may, from time to time, reasonably
request in writing to comply with the Securities Act and other applicable law.
The Company may exclude from such registration the Registrable Securities of any
Selling Holder for so long as such Selling Holder fails to furnish such
information within a reasonable time after receiving such request.
(r) Each Holder of Registrable Securities agrees by acquisition of
such Registrable Securities that, upon receipt of any notice from the Company of
the happening of any event of the kind described in Section 4(c)(ii), 4(c)(iv),
4(c)(v), or 4(c)(vi) hereof, such Holder will forthwith discontinue disposition
of such Registrable Securities covered by the Registration Statement or
Prospectus until such Holder's receipt of the copies of the supplemented or
amended Prospectus contemplated by Section 4(j) hereof), or until it is advised
in writing (the "Advice") by the Company that the use of the applicable
prospectus may be resumed, and has received copies of any amendments or
supplements thereto, and, if so directed by the Company, such Holder will, at
the Company's expense, deliver to the Company all copies, other than permanent
file copies, then in such Holder's actual possession of the Prospectus covering
such Registrable Securities current at the time of receipt of such notice;
PROVIDED, HOWEVER, that nothing herein shall create any obligation on the part
of any Holder to undertake to retrieve or return any such Prospectus not within
the actual possession of such Holder. In the event the Company shall give any
such notice, the period of time for which a Registration Statement is required
hereunder to be effective shall be extended by the number of days during such
periods from and including the date of the giving of such notice to and
including the date when each Selling Holder shall have received (x) the copies
of the supplemented or amended Prospectus contemplated by Section 4(j) hereof or
(y) the Advice.
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Section 5. INDEMNIFICATION AND CONTRIBUTION.
(a) The Company agrees to indemnify and hold harmless each Holder and
each Person, if any, who controls such Holder within the meaning of either
Section 15 of the Securities Act or Section 20 of the Exchange Act, or is under
common control with, or is controlled by, such Holder, from and against all
losses, claims, damages and liabilities (including, without limitation, and
subject to clause (c) of this Section 5 below, the reasonable legal fees and
other reasonable out-of-pocket expenses actually incurred by any Holder or any
such controlling or affiliated Person in connection with any suit, action or
proceeding or any claim asserted), caused by, arising out of or based upon any
untrue statement or alleged untrue statement of a material fact contained in any
Registration Statement (or any amendment thereto) pursuant to which Registrable
Securities were registered under the Securities Act, or caused by any omission
or alleged omission to state in any such Registration Statement a material fact
required to be stated therein or necessary to make the statements therein not
misleading, or caused by any untrue statement or alleged untrue statement of a
material fact contained in any preliminary prospectus or Prospectus (as amended
or supplemented if the Company shall have furnished any amendments or
supplements thereto), or caused by any omission or alleged omission to state in
any such preliminary prospectus or Prospectus a material fact required to be
stated in any such preliminary prospectus or Prospectus or necessary to make the
statements in any such preliminary prospectus or Prospectus in light of the
circumstances under which they were made not misleading, except insofar as such
losses, claims, damages or liabilities are caused by any such untrue statement
or omission or alleged untrue statement or omission made in reliance upon and in
conformity with information relating to any Holder furnished to the Company in
writing by such Holder expressly for use in any such Registration Statement, or
Prospectus; PROVIDED, HOWEVER, that the Company shall not be required to
indemnify any such Person if such untrue statement or omission or alleged untrue
statement or omission was contained or made in any preliminary prospectus and
corrected in the Prospectus, or any amendment or supplement thereto and the
Prospectus does not contain any other untrue statement or omission or alleged
untrue statement or omission of a material fact that was the subject matter of
the related proceeding and any such loss, liability, claim, damage or expense
suffered or incurred by such indemnified Person resulted from any action, claim
or suit by any Person who purchased Registrable Securities which are the subject
thereof from such indemnified Person and it is established in the related
proceeding that such indemnified Person failed to deliver or provide a copy of
the Prospectus (as amended or supplemented) to such Person with or prior to the
confirmation of the sale of such Registrable Securities sold to such Person if
required by applicable law, unless such failure to deliver or provide a copy of
the Prospectus (as amended or supplemented) was a result of noncompliance by the
Company with Section 4 hereof or as a result of the failure of the Company to
provide such Prospectus.
(b) Each Holder agrees, severally and not jointly, to indemnify
and hold harmless the Company, its directors, its officers who sign any
Registration Statement and each Person, if any, who controls the Company
within the meaning of either Section 15 of the Securities Act or Section 20
of the Exchange Act to the same extent as the foregoing indemnity from the
Company to such Holder, but only with reference to information relating to
such Holder furnished to the Company in writing by such Holder expressly for
use in any Registration Statement (or any amendment thereto) or any
Prospectus, as the case may be (or any amendment
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or supplement thereto). The liability of any Holder under
this paragraph shall in no event exceed the proceeds received by such Holder
from sales of Registrable Securities giving rise to such obligations.
(c) In case any suit, action, proceeding (including any governmental
or regulatory investigation), claim or demand shall be instituted involving any
Person in respect of which indemnity may be sought pursuant to either paragraph
(a) or (b) above, such Person (the "indemnified party") shall promptly notify
the Person against which such indemnity may be sought (the "indemnifying party")
in writing and the indemnifying party, upon request of the indemnified party,
shall retain counsel reasonably satisfactory to the indemnified party to
represent the indemnified party and any others the indemnifying party may
reasonably designate in such proceeding and shall pay the reasonable fees and
expenses actually incurred of such counsel relating to such proceeding;
PROVIDED, HOWEVER, that the failure to so notify the indemnifying party shall
not relieve it of any obligation or liability under paragraph (a) or (b) above
unless and to the extent that it did not otherwise learn of such action and such
failure results in the forfeiture by the indemnifying party of substantial
rights and defenses and will not, in any event, relieve the indemnifying party
from any obligations to any indemnified party other than the indemnification
obligation provided in paragraph (a) or (b) above. In any such proceeding, any
indemnified party shall have the right to retain its own counsel, but the fees
and expenses of such counsel shall be at the expense of such indemnified party
unless (i) the indemnifying party and the indemnified party shall have mutually
agreed to the contrary, (ii) the indemnifying party shall have failed to retain
within a reasonable period of time counsel reasonably satisfactory to such
indemnified party or parties or (iii) the named parties to any such proceeding
(including any impleaded parties) include both such indemnified party or parties
and the indemnifying parties or an Affiliate of the indemnifying parties or such
indemnified parties and representation of both parties by the same counsel would
be inappropriate due to actual or potential differing interests between the
indemnifying party or parties and the indemnified party or parties. It is
understood that the indemnifying parties shall not, in connection with any one
such proceeding or separate but substantially similar or related proceedings in
the same jurisdiction, arising out of the same general allegations or
circumstances, be liable for the reasonable fees and expenses of more than one
separate firm of attorneys (together with appropriate local counsel) at any time
for such indemnified party or parties and that all such fees and expenses shall
be reimbursed within reasonable time of the request after the incurrence
thereof. Any such separate firm for the Holders and such control Persons of the
Holders shall be designated in writing by Holders who sold a majority in
interest of Registrable Securities sold by all such Holders in the transaction
that is the subject of such proceeding and reasonably acceptable to the Company
and any such separate firm for the Company, its directors, its officers and such
control Persons of the Company shall be designated in writing by the Company and
reasonably acceptable to the Holders. The indemnifying party shall not be
liable for any settlement of any proceeding effected without its prior written
consent (which consent shall not be unreasonably withheld or delayed) but if
settled with such consent or if there be a final judgment for the plaintiff, the
indemnifying party agrees to indemnify and hold harmless the indemnified party
from and against any loss or liability by reason of such settlement or judgment.
No indemnifying party shall, without the prior written consent of the
indemnified party (which consent shall not be unreasonably withheld), effect any
settlement of any pending or threatened
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proceeding in respect of which any indemnified party is or could have been a
party, or indemnity could have been sought hereunder by such indemnified party,
unless such settlement includes an unconditional written release of such
indemnified party in form and substance reasonably satisfactory to such
indemnified party from all liability on claims that are the subject matter of
such proceeding.
(d) To the extent the indemnification provided for in paragraph (a)
or (b) of this Section 5 is unavailable to, or insufficient to hold harmless, an
indemnified party in respect of any losses, claims, damages or liabilities, then
each indemnifying party under such paragraph, in lieu of indemnifying such
indemnified party thereunder and in order to provide for just and equitable
contribution, shall contribute to the amount paid or payable by such indemnified
party as a result of such losses, claims, damages or liabilities in such
proportion as is appropriate to reflect (i) the relative benefits received by
the Company on the one hand and the Holders on the other hand from the offering
of such Registrable Securities or (ii) if the allocation provided by clause
(i) above is not permitted by applicable law, not only such relative benefits
but also the relative fault of the Company on the one hand and the Holders on
the other hand in connection with the statements or omissions or alleged
statements or omissions that resulted in such losses, claims, damages or
liabilities (or actions in respect thereof), as well as any other relevant
equitable considerations. The relative benefits received by the Company on the
one hand and the Holders on the other shall be deemed to be in the same
proportion as the total proceeds from the offering (net of discounts and
commissions but before deducting expenses) of the Warrants sold pursuant to the
Purchase Agreement received by the Company bears to the total proceeds received
by such Holder from the sale of Registrable Securities, as the case may be. The
relative fault of the Company on the one hand and the Holders on the other hand
shall be determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission or alleged omission
to state a material fact relates to information supplied by the Company or by
the Holders and the parties' relative intent, knowledge, access to information
and opportunity to correct or prevent such statement or omission, and any other
equitable considerations appropriate in the circumstances.
(e) The Company and each Holder agree that it would not be just or
equitable if contribution pursuant to this Section 5 were determined by pro rata
allocation or by any other method of allocation that does not take account of
the equitable considerations referred to in Section 5(d) above. The amount paid
or payable by an indemnified party as a result of the losses, claims, damages
and liabilities referred to in Section 5(d) above shall be deemed to include,
subject to the limitations set forth above, any reasonable legal or other
expenses actually incurred by such indemnified party in connection with
investigating or defending any such action or claim. Notwithstanding the
provisions of this Section 5, in no event shall a Holder be required to
contribute any amount in excess of the amount by which proceeds received by such
Holder from sales of Registrable Securities exceeds the amount of any damages
that such Holder has otherwise been required to pay or has paid by reason of
such untrue or alleged untrue statement or omission or alleged omission. No
Person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the Securities Act) shall be entitled to contribution from any
Person who was not guilty of such fraudulent misrepresentation. The remedies
provided for in this Section 5 are not exclusive and shall not limit any rights
or remedies which may otherwise be available to any indemnified party at law or
in equity.
20
<PAGE>
(f) Any losses, claims, damages, liabilities or expenses for which an
indemnified party is entitled to indemnification or contribution under this
Section 5 shall be paid by the indemnifying party to the indemnified party as
such losses, claims, damages, liabilities or expenses are incurred. The
indemnity and contribution agreements contained in this Section 5 and the
representations and warranties of the Company set forth in this Agreement shall
remain operative and in full force and effect, regardless of (i) any
investigation made by or on behalf of any Initial Purchaser or any Person who
controls an Initial Purchaser, the Company, their respective directors or
officers or any Person controlling the Company and (ii) any termination of this
Agreement.
Section 6. MISCELLANEOUS.
(a) NO CONFLICTING AGREEMENTS. The Company represents and warrants
to the Holders that it has not entered into nor will the Company on or after the
date of this Agreement enter into, or cause or permit any of its subsidiaries to
enter into, any agreement which conflicts with the rights granted to the Holders
of Registrable Securities in this Agreement or otherwise conflicts with the
provisions hereof.
(b) AMENDMENTS AND WAIVERS. The provisions of this Agreement may not
be amended, modified or supplemented, and waivers or consents to departures from
the provisions hereof may not be given unless the Company has obtained the prior
written consent of Holders of not less than a majority of the outstanding
Registrable Securities affected by such amendment, modification, supplement,
waiver or consent; PROVIDED, HOWEVER, that Section 5 hereof and this
Section 6(b) may not be amended, modified or supplemented without the prior
written consent of each Holder (including any Person who was a Holder of
Registrable Securities disposed of pursuant to any Registration Statement)
affected by such amendment, modification or supplement. Notwithstanding the
foregoing, a waiver or consent to departure from the provisions hereof that
relates exclusively to the rights of Holders of Registrable Securities whose
securities are being sold pursuant to a Registration Statement and that does not
directly or indirectly affect, impair, limit or compromise the rights of other
Holders of Registrable Securities may be given by the Holders of not less than a
majority of the Registrable Securities proposed to be sold by such Holders
pursuant to such Registration Statement.
(c) NOTICES. All notices and other communications provided for or
permitted hereunder shall be made in writing by hand delivery, registered
first-class mail, telex, telecopier, or any courier guaranteeing overnight
delivery (i) if to a Holder, at the most current address of Holder as set forth
in the register for the Warrants or the Warrant Shares, which address initially
is, with respect to the Initial Purchasers, the address set forth in the
Purchase Agreement; and (ii) if to the Company, initially at the address set
forth below the Company's name on the signature pages hereto and thereafter at
such other address, notice of which is given in accordance with the provisions
of this Section 6(c), with a copy to Latham & Watkins, 701 B Street, Suite 2100,
San Diego, California 92101-8197, Attention: David A. Hahn, Esq., and
thereafter at such other address notice of which is given in accordance with the
provisions of this Section 6(c).
21
<PAGE>
All such notices and communications shall be deemed to have been duly
given: at the time delivered by hand, if personally delivered; five Business
Days after being deposited in the mail, postage prepaid, if mailed; when
answered back, if telexed; when receipt is acknowledged, if telecopied; and on
the next Business Day, if timely delivered to an air courier guaranteeing
overnight delivery.
(d) SUCCESSORS AND ASSIGNS. This Agreement shall inure to the
benefit of and be binding upon the successors, assigns and transferees of each
of the parties, including, without limitation and without the need for an
express assignment, subsequent Holders. If any transferee of any Holder shall
acquire Warrants and/or Registrable Securities, in any manner, whether by
operation of law or otherwise, such Warrants and/or Registrable Securities shall
be held subject to all of the terms of this Agreement, and by taking and holding
such Warrants and/or Registrable Securities such Person shall be conclusively
deemed to have agreed to be bound by and to perform all of the terms and
provisions of this Agreement and such Person shall be entitled to receive the
benefits hereof.
(e) COUNTERPARTS. This Agreement may be executed in any number of
counterparts and by the parties hereto in separate counterparts, each of which
when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement.
(f) HEADINGS. The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.
(g) GOVERNING LAW; JURISDICTION. THIS AGREEMENT SHALL BE GOVERNED BY
AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, AS APPLIED
TO CONTRACTS MADE AND PERFORMED WHOLLY WITHIN THE STATE OF NEW YORK, WITHOUT
REGARD TO PRINCIPLES OF CONFLICTS OF LAW.
(h) SEVERABILITY. If any term, provision, covenant or restriction of
this Agreement is held by a court of competent jurisdiction to be invalid,
illegal, void or unenforceable, the remainder of the terms, provisions,
covenants and restrictions set forth herein shall remain in full force and
effect and shall in no way be affected, impaired or invalidated, and the parties
hereto shall use their best efforts to find and employ an alternative means to
achieve the same or substantially the same result as that contemplated by such
term, provision, covenant or restriction. It is hereby stipulated and declared
to be the intention of the parties that they would have executed the remaining
terms, provisions, covenants and restrictions without including any of such that
may be hereafter declared invalid, illegal, void or unenforceable.
(i) ENTIRE AGREEMENT. This Agreement, together with the Purchase
Agreement and the Warrant Agreement, is intended by the parties as a final
expression of their agreement, and is intended to be a complete and exclusive
statement of the agreement and understanding of the parties hereto in respect of
the subject matter contained herein and therein. This Agreement, the Purchase
Agreement and the Warrant Agreement supersede all prior agreements and
understandings between the parties with respect to such subject matter.
22
<PAGE>
(j) ATTORNEYS' FEES. As between the parties to this Agreement, in
any action or proceeding brought to enforce any provision of this Agreement, or
where any provision hereof is validly asserted as a defense, the successful
party shall be entitled to recover reasonable attorneys' fees in addition to its
costs and expenses and any other available remedy.
(k) SECURITIES HELD BY THE COMPANY OR ITS AFFILIATES. Whenever the
consent or approval of Holders of a specified percentage of Registrable
Securities or Warrants is required hereunder, Registrable Securities or Warrants
held by the Company or by any of its affiliates (as such term is defined in Rule
405 under the Securities Act) shall not be counted (in either the numerator or
the denominator) in determining whether such consent or approval was given by
the Holders of such required percentage.
(l) REMEDIES. In the event of a breach by the Company of any of its
obligations under this Agreement, each Holder, in addition to being entitled to
exercise all rights provided herein, in the Purchase Agreement or granted by
law, including recovery of damages, will be entitled to specific performance of
its rights under this Agreement. The Company agrees that monetary damages would
not be adequate compensation for any loss incurred by reason of a breach by it
of any of the provisions of this Agreement.
[Remainder of Page Intentionally Left Blank]
23
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
FIRSTWORLD COMMUNICATIONS, INC.
By: /s/ Andrew B. Taubman
---------------------------
Name: Andrew B. Taubman
Title: Senior Vice President,
Corporate Finance and
Administration
Address for Notices:
9333 Genesee Avenue, Suite 200
San Diego, California 92121
Telecopier: (619) 552-8006
Telephone: (619) 552-8010
BEAR, STEARNS & CO. INC.
By: /s/ Phil Berney
---------------------------
Name:
Title:
For itself and the
other Initial Purchasers
named in the preamble hereto
24
<PAGE>
SPECTRANET INTERNATIONAL
COMMON STOCK PURCHASE AGREEMENT
DECEMBER 30, 1997
9333 GENESEE AVENUE, SUITE 200
SAN DIEGO, CALIFORNIA 92121
<PAGE>
TABLE OF CONTENTS
PAGE
----
SECTION 1. AUTHORIZATION AND SALE AND ISSUANCE OF SHARES AND WARRANTS . . . .2
A. AUTHORIZATION.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
B. SALE OF THE SERIES A SHARES AND ISSUANCE OF WARRANTS. . . . . . . . . . . .2
C. SALE OF SERIES B SHARES AND ISSUANCE OF WARRANTS PURSUANT TO OPTION.. . . .2
SECTION 2. CLOSING DATE; DELIVERIES . . . . . . . . . . . . . . . . . . . . .3
A. INITIAL CLOSING.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
B. OPTIONAL CLOSINGS.. . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
C. DELIVERIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
SECTION 3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. . . . . . . . . . .3
A. ORGANIZATION AND STANDING; ARTICLES OF INCORPORATION AND BYLAWS.. . . . . .3
B. CORPORATE POWER.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4
C. SUBSIDIARIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4
D. CAPITALIZATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4
E. AUTHORIZATION.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5
F. FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . .6
G. LIABILITIES.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6
H. MATERIAL CONTRACTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . .6
I. INTERESTED PARTY TRANSACTIONS.. . . . . . . . . . . . . . . . . . . . . . .6
J. CHANGES.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7
K. TAX MATTERS.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8
L. TITLE TO PROPERTIES AND ASSETS; LIENS, ETC. . . . . . . . . . . . . . . . .8
M. COMPLIANCE WITH OTHER INSTRUMENTS.. . . . . . . . . . . . . . . . . . . . .9
N. LITIGATION, ETC.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9
O. EMPLOYEES.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
P. PATENTS, TRADEMARKS, AND TRADE SECRETS. . . . . . . . . . . . . . . . . . 10
Q. REGISTRATION RIGHTS.. . . . . . . . . . . . . . . . . . . . . . . . . . . 11
R. GOVERNMENTAL CONSENT, ETC.. . . . . . . . . . . . . . . . . . . . . . . . 11
S. OFFERING. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
T. BROKERS OR FINDERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
U. PERMITS.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
V. ENVIRONMENTAL AND SAFETY LAWS.. . . . . . . . . . . . . . . . . . . . . . 11
W. MINUTE BOOKS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
X. PROJECT STATUS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Y. FULL DISCLOSURE.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
SECTION 4. REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS . . . . . . . . 12
A. REQUISITE POWER AND AUTHORITY.. . . . . . . . . . . . . . . . . . . . . . 12
B. ACCREDITED INVESTOR; EXPERIENCE.. . . . . . . . . . . . . . . . . . . . . 12
C. INVESTMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
D. RULE 144. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
E. NO PUBLIC MARKET. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
F. ACCESS TO DATA.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
G. RESIDENCE.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
SECTION 5. CONDUCT AND AGREEMENTS PENDING CLOSING . . . . . . . . . . . . . 13
A. CONDUCT OF BUSINESS.. . . . . . . . . . . . . . . . . . . . . . . . . . . 13
B. ACCESS, INFORMATION, DOCUMENTS. . . . . . . . . . . . . . . . . . . . . . 14
C. COOPERATION.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
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D. NO SOLICITATION.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
E. SHAREHOLDER APPROVALS AND OTHER CONSENTS. . . . . . . . . . . . . . . . . 14
F. PUBLIC ANNOUNCEMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . 14
G. FINANCIAL ADVISOR AGREEMENTS. . . . . . . . . . . . . . . . . . . . . . . 15
H. BOARD OF DIRECTORS. . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
I. EMPLOYEE SEVERANCE PROGRAM. . . . . . . . . . . . . . . . . . . . . . . . 15
J. AMENDMENTS TO EMPLOYEE STOCK OPTIONS. . . . . . . . . . . . . . . . . . . 15
SECTION 6. CONDITIONS TO CLOSING OF PURCHASERS. . . . . . . . . . . . . . . 15
A. REPRESENTATIONS AND WARRANTIES CORRECT. . . . . . . . . . . . . . . . . . 15
B. COVENANTS.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
C. BLUE SKY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
D. OPINIONS OF COMPANY'S COUNSELS. . . . . . . . . . . . . . . . . . . . . . 15
E. SHAREHOLDER APPROVALS; OTHER CONSENTS.. . . . . . . . . . . . . . . . . . 15
F. FILING OF RESTATED ARTICLES; ADOPTION OF RESTATED BYLAWS. . . . . . . . . 16
G. RESERVATION OF SERIES B COMMON STOCK.. . . . . . . . . . . . . . . . . . 16
H. COMPLIANCE CERTIFICATE. . . . . . . . . . . . . . . . . . . . . . . . . . 16
I. INVESTOR RIGHTS AGREEMENT.. . . . . . . . . . . . . . . . . . . . . . . . 16
J. HART-SCOTT-RODINO FILING. . . . . . . . . . . . . . . . . . . . . . . . . 16
K. CONTEMPORANEOUS INVESTMENT BY SPECTRA 3 AND ENRON.. . . . . . . . . . . . 16
L. CORPORATE DOCUMENTS.. . . . . . . . . . . . . . . . . . . . . . . . . . . 16
M. BOARD OF DIRECTORS. . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
N. MANAGEMENT SERVICES AGREEMENTS. . . . . . . . . . . . . . . . . . . . . . 16
O. BUSINESS OPPORTUNITY AGREEMENT. . . . . . . . . . . . . . . . . . . . . . 17
P. FINANCIAL ADVISOR AGREEMENTS. . . . . . . . . . . . . . . . . . . . . . . 17
Q. STURM WARRANT AMENDMENT.. . . . . . . . . . . . . . . . . . . . . . . . . 17
R. PAYMENT OF TRANSACTION FEES AND EXPENSES. . . . . . . . . . . . . . . . . 17
S. PROCEEDINGS AND DOCUMENTS.. . . . . . . . . . . . . . . . . . . . . . . . 17
SECTION 7. CONDITIONS TO CLOSING OF COMPANY . . . . . . . . . . . . . . . . 17
A. REPRESENTATIONS.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
B. BLUE SKY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
C. LEGAL MATTERS.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
D. PERFORMANCE OF OBLIGATIONS. . . . . . . . . . . . . . . . . . . . . . . . 17
E. FILING OF RESTATED ARTICLES.. . . . . . . . . . . . . . . . . . . . . . . 17
F. INVESTOR RIGHTS AGREEMENT.. . . . . . . . . . . . . . . . . . . . . . . . 18
G. SHAREHOLDER APPROVALS; OTHER CONSENTS.. . . . . . . . . . . . . . . . . . 18
H. HART-SCOTT-RODINO FILING. . . . . . . . . . . . . . . . . . . . . . . . . 18
I. CONTEMPORANEOUS INVESTMENT BY SPECTRA 3 AND ENRON.. . . . . . . . . . . . 18
J. STURM WARRANT AMENDMENT.. . . . . . . . . . . . . . . . . . . . . . . . . 18
SECTION 8. INDEMNIFICATION. . . . . . . . . . . . . . . . . . . . . . . . . 18
A. INDEMNIFICATION.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
B. INDEMNIFICATION PROCEDURES. . . . . . . . . . . . . . . . . . . . . . . . 18
SECTION 9. MISCELLANEOUS. . . . . . . . . . . . . . . . . . . . . . . . . . 19
A. GOVERNING LAW.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
B. SURVIVAL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
C. SUCCESSORS AND ASSIGNS. . . . . . . . . . . . . . . . . . . . . . . . . . 19
D. ENTIRE AGREEMENT; AMENDMENT.. . . . . . . . . . . . . . . . . . . . . . . 19
E. NOTICES, ETC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
F. DELAYS OR OMISSIONS.. . . . . . . . . . . . . . . . . . . . . . . . . . . 20
G. EXPENSES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
H. SEVERABILITY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
I. TITLES AND SUBTITLES. . . . . . . . . . . . . . . . . . . . . . . . . . . 20
ii
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J. FINDERS.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
K. COUNTERPARTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
L. TERMINATION.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
M. ADDITIONAL FEES.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
iii
<PAGE>
EXHIBITS
<TABLE>
<CAPTION>
<S> <C>
Exhibit A Schedule of Purchasers
Exhibit B Amended and Restated Articles of Incorporation
Exhibit C Form of Warrant
Exhibit D Schedule of Exceptions
Exhibit E Amended and Restated Bylaws
Exhibit F Amended and Restated Investor Rights Agreement
Exhibit G Securityholders Agreement
Exhibit H Business Opportunity Agreement
Exhibit I-1 Management Consulting Services Agreement - Corporate Managers L.L.C.
Exhibit I-2 Management Consulting Services Agreement - Enron
Exhibit J Sturm Warrant Amendment
Exhibit K Definition of Accredited Investor
Exhibit L Employee Severance Program
Exhibit M-1 Form of Opinion of Company Counsel
Exhibit M-2 Form of Opinion of Company Regulatory Counsel
</TABLE>
i
<PAGE>
SPECTRANET INTERNATIONAL
COMMON STOCK PURCHASE AGREEMENT
This Common Stock Purchase Agreement (the "Agreement") is made as of
December 30, 1997 among SpectraNet International, a California corporation (the
"Company"), Colorado Spectra 3, L.L.C., a Colorado limited liability company
("Spectra 3"), Enron Capital & Trade Resources Corp., a Delaware corporation
("Enron"), and the holders of the Company's outstanding convertible notes listed
on the Schedule of Purchasers attached hereto as Exhibit A (the "Noteholders").
Spectra 3, Enron and each Noteholder is referred to herein as a "Purchaser" and
collectively as the "Purchasers." Spectra 3, Colorado Spectra 1, L.L.C.
("Spectra 1") and Colorado Spectra 2, L.L.C. ("Spectra 2") are referred to
herein as the "Sturm Entities."
RECITALS
WHEREAS, in connection with the transactions contemplated by this
Agreement, the Company is seeking approval from its existing shareholders for
the conversion of all shares of its existing preferred stock, no par value per
share (the "Preferred Stock"), into shares of the Company's common stock, no par
value per share (the "Common Stock"), and approval of an Amended and Restated
Articles of Incorporation in the form attached hereto as Exhibit B (the
"Restated Articles"), to be filed following such conversion, which among other
things would classify the Common Stock into two series -- "Series A Common
Stock" and "Series B Common Stock" -- with all then outstanding shares of Common
Stock to be classified as Series B Common Stock;
WHEREAS, the Company has authorized the sale and issuance to the
Purchasers following the foregoing shareholder approvals of an aggregate of Ten
Million One Hundred Thirty Five Thousand One Hundred Sixty Four (10,135,164)
shares of its Series A Common Stock (the "Series A Shares") and warrants to
purchase Ten Million One Hundred Thirty Five Thousand One Hundred Sixty Four
(10,135,164) shares of its Series B Common Stock (subject to adjustment), such
warrants to be in substantially the form attached hereto as Exhibit C (the
"Warrants");
WHEREAS, the Company has authorized the sale and issuance to Enron of Five
Million (5,000,000) Series A Shares and Warrants to purchase Five Million
(5,000,000) Shares of its Series B Common Stock (subject to adjustment);
WHEREAS, the Company has authorized the sale and issuance to Spectra 3 of
Five Million (5,000,000) Series A Shares and Warrants to purchase Five Million
(5,000,000) Shares of its Series B Common Stock (subject to adjustment);
WHEREAS, pursuant to certain convertible note and warrant purchase
agreements the Noteholders made loans to the Company in the amounts set forth on
Exhibit A and were issued convertible notes (the "Notes") which in accordance
with their terms automatically convert into Series A Shares and Warrants upon
the closing of the sale and issuance to Enron and Spectra 3;
WHEREAS, the Noteholders have agreed to convert all of the unpaid
principal amount of the Notes into Series A Shares and Warrants and to become
parties to this Agreement on the same terms and conditions as Spectra 3 and
Enron;
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<PAGE>
WHEREAS, the Purchasers desire to purchase the Series A Shares and the
Warrants on the terms and conditions set forth herein;
WHEREAS, the Company desires to issue and sell the Series A Shares and the
Warrants to the Purchasers on the terms and conditions set forth herein; and
WHEREAS, the Company has authorized the sale and issuance to Enron and
Spectra 3 of an aggregate of up to Six Million Six Hundred Sixty Six Thousand
Six Hundred Sixty Six (6,666,666) shares of its Series B Common Stock (the
"Series B Shares") and Warrants to purchase an aggregate of up to Six Million
Six Hundred Sixty Six Thousand Six Hundred Sixty Six (6,666,666) shares of its
Series B Common Stock, upon the exercise by Enron and/or Spectra 3 of an option
granted herein;
NOW, THEREFORE, in consideration of the foregoing recitals and the mutual
promises hereinafter set forth, the parties hereto agree as follows:
SECTION 1.
AUTHORIZATION AND SALE AND ISSUANCE OF
SHARES AND WARRANTS
a. AUTHORIZATION. The Company has (i) authorized the sale and
issuance of the Series A Shares and Warrants upon the Initial Closing (as
hereinafter defined) and (ii) authorized the sale and issuance, upon the
exercise of the option granted herein, of the Series B Shares and Warrants at
one or more Optional Closings (as hereinafter defined). The Series A Shares and
the Series B Shares will have the rights and privileges set forth in the
Restated Articles. The Series A Shares and Series B Shares, if any, are
sometimes referred to herein as the "Shares."
b. SALE OF THE SERIES A SHARES AND ISSUANCE OF WARRANTS. Subject to
the terms and conditions hereof, at the Initial Closing (as hereinafter defined)
the Company (i) will severally issue and sell to each of the Purchasers and the
Purchasers will severally buy from the Company the total number of Series A
Shares specified opposite each Purchaser's name on Exhibit A, at a purchase
price of $3.00 per share, and (ii) will severally issue to each Purchaser, for
no additional consideration, warrants to purchase that number of shares of
Series B Common Stock as set forth on Exhibit A beside such Purchaser's name.
The Company's agreements with each of the Purchasers are separate agreements,
and the sales of the Series A Shares and the issuance of the Warrants to each of
the Purchasers are separate sales.
c. SALE OF SERIES B SHARES AND ISSUANCE OF WARRANTS PURSUANT TO OPTION.
Subject to the terms and conditions hereof, Spectra 3 and enron shall severally
have the option, exercisable in their sole discretion, to purchase the Series B
Shares and Warrants at one or more Optional Closings (as hereinafter defined).
As between Spectra 3 and Enron, unless they otherwise agree, each will have the
right to purchase up to Three Million Three Hundred Thirty Three Thousand Three
Hundred Thirty Three (3,333,333) Series B Shares; provided, however, that to the
extent Spectra 3 or Enron elects not to exercise such option (or elects to
exercise such option with respect to fewer than all of the Series B Shares that
it is entitled to purchase thereunder), the other such party shall have the
right to purchase all or any portion of the number of Series B Shares allocated
to but not purchased by such party. The option granted hereby shall be
exercisable at any time following the Initial Closing and prior to the date that
is 45 days after the Initial Closing by delivering written notice of such
exercise to the Company, provided that such option may be exercised until the
date that is 60 days after the initial Closing by a party that has elected to
exercise its option with respect to the full number of Series B
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Shares allocated to such party with respect to any Series B Shares allocated to
but not purchased by the other party. To the extent such option is exercised by
Spectra 3 and/or Enron pursuant to the foregoing provisions, the Company (i)
will severally issue and sell to each party exercising such option and each
party exercising such option will severally buy from the Company the total
number of Series B Shares to which such option exercise relates, at a purchase
price of $3.00 per share, and (ii) will severally issue to each party exercising
such option, for no additional consideration, Warrants to purchase a number of
shares of Series B Common stock equivalent to the number of Series B Shares so
purchased.
SECTION 2.
CLOSING DATE; DELIVERIES
a. INITIAL CLOSING. The closing of the purchase and sale of the
Series A Shares and the issuance of the Warrants hereunder (the "Initial
Closing") shall be held at the offices of Latham & Watkins, 701 B Street, Suite
2100, San Diego, California at 10:00 a.m., local time, on the second business
day following the satisfaction or waiver of the conditions to the Closing set
forth in Sections 6 and 7 hereof or at such other time and place upon which the
Company, Spectra 3 and Enron shall agree.
b. OPTIONAL CLOSINGS. The closing(s) of the purchase and sale of the
Series B Shares and the issuance of the related Wsrrants hereunder (each such
closing is referred to herein as an "Optional Closing" and all such closings as
the "Optional Closings") shall take place at such time, date and place as are
mutually agreed upon by the party or parties exercising the option contemplated
by Section 1.c. above and the Company. The Initial Closing and such Optional
Closing(s), if any, are sometimes referred to herein as the "Closings" and the
dates of such Closings are sometimes referred to herein as the "Closing Dates"
or "Closing Date," as applicable.
c. DELIVERIES. At the applicable Closing, subject to the terms and
conditions hereof, the Company will deliver to each purchaser certificates,
registered in each Purchaser's name, representing the shares and the warrants to
be purchased by such purchaser at such Closing, against payment of the Purchase
price for such Shares, in the case of Spectra 3 and enron, by wire transfer to
the account of the Company of immediately available funds per the Company's
instructions, and in the case of each noteholder, by surrender and conversion of
the unpaid principal amount of notes held by such Noteholder. The Company shall
issue a check payable to each Noteholder in the amount of any unpaid interest
accrued on the Notes held by such Noteholder as of the date of the Initial
Closing. The Company and the Purchasers will deliver receipts with respect to
the delivery of the purchase price and the certificates at the Closing.
SECTION 3.
REPRESENTATIONS AND WARRANTIES
OF THE COMPANY
Except as set forth on the Schedule of Exceptions attached hereto as
Exhibit D with respect to the specific representation or warranty referenced
therein, the Company hereby represents and warrants to the Purchasers as
follows:
a. ORGANIZATION AND STANDING; ARTICLES OF INCORPORATION AND BYLAWS.
The Company is a corporation duly organized, validly existing and in good
standing under the laws of the State of California. The Company has the
requisite corporate power and authority to own and operate its properties and
assets, and to carry on its business as presently conducted and as presently
proposed to be
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conducted. The Company is qualified to do business as a foreign corporation and
is in good standing in Texas and each other jurisdiction in which the conduct of
its business or its ownership or leasing of property requires such qualification
(except where the failure to be so qualified, individually or in the aggregate,
would not have a material adverse effect on the Company, its business or its
properties). The Company has furnished Spectra 3 and Enron, and their
respective counsel, with copies of its Amended and Restated Articles of
Incorporation, as in effect as of the date hereof (the "Existing Charter"), the
Restated Articles which have been approved by the Company's shareholders and
will be filed with the Secretary of State of California and become effective
prior to the Closing , its Bylaws as in effect as of the date hereof (the
"Existing Bylaws") and the Amended and Restated Bylaws attached hereto as
Exhibit E (the "Restated Bylaws") which have been approved by the Company's
shareholders and will become effective prior to the Closing. Said copies are
true, correct and complete and contain all amendments through the Closing Date.
b. CORPORATE POWER. The Company has all requisite legal and corporate
power and authority (i) to execute and deliver this Agreement, the Warrants, the
Amended and Restated Investor Rights Agreement in the form attached hereto as
Exhibit F (the "Investor Rights Agreement"), the Securityholders Agreement in
the form attached as Exhibit G (the "Securityholders Agreement"), the Business
Opportunity Agreement in the form attached as Exhibit H (the "Business
Opportunity Agreement"), the Management Consulting Services Agreements in the
forms attached as Exhibits I-1 and I-2 (the "Management Services Agreements"),
and the Amendment to Warrant Purchase/Right to Maintain Agreement (including the
form of warrant attached thereto) in the form of Exhibit J (the "Sturm Warrant
Amendment," and together with the Investor Rights Agreement, Securityholders
Agreement, Business Opportunity Agreement and Management Services Agreements,
the "Other Transaction Documents"), (ii) to sell and issue the Series A Shares
and Warrants at the Initial Closing and Series B Shares and Warrants at the
Optional Closing(s) and (iii) to carry out and perform its obligations under the
terms of this Agreement, the Warrants, the Other Transaction Documents and the
Restated Articles and Restated Bylaws.
c. SUBSIDIARIES. Each of the Subsidiaries listed in the Schedule of
Exceptions (the "Subsidiaries") (i) is a corporation duly organized, validly
existing and in good standing under the laws of the State of California and (ii)
has the requisite corporate power and authority to own and operate its
properties and assets, and to carry on its business as presently conducted and
as presently proposed to be conducted. Except for the Subsidiaries, the Company
has no subsidiaries and does not otherwise own or control, directly or
indirectly, any equity interest in any corporation, association, partnership or
business entity, nor has the Company made any commitment or subscribed for the
purchase of any such equity interest. All of the capital stock of each of the
Subsidiaries is owned by the Company, free and clear of any liens or
encumbrances except as described in the Schedule of Exceptions. There are no
options, warrants or other rights outstanding to purchase or acquire, or any
securities convertible into, nor has any Subsidiary agreed to issue or reissue,
any of the authorized and unissued capital stock of any Subsidiary.
d. CAPITALIZATION. The authorized capital stock of the Company, as of
the date of this Agreement under the Existing Charter, consists of (i) Fifteen
Million (15,000,000) shares of Common Stock, of which Three Million Five Hundred
Twenty Nine Thousand (3,529,000) shares are issued and outstanding at the date
hereof; and (ii) Five Million One Hundred Sixty Thousand Three Hundred Thirty
Five (5,160,335) shares of Preferred Stock, of which (A) One Hundred Thirty Four
Thousand Two Hundred (134,200) shares are designated Series A Preferred Stock,
One Hundred Eighteen Thousand Six Hundred Sixty Seven (118,667) of which are
issued and outstanding, (B) Two Million Four Hundred Twenty Six Thousand One
Hundred Thirty Five (2,426,135) shares are designated Series B Preferred Stock,
Two Million Sixteen Thousand Six Hundred Thirty Eight (2,016,638) of which are
issued and outstanding, and (C) Two Million Six Hundred Thousand (2,600,000)
shares are
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designated Series C Preferred Stock, all of which are issued and outstanding.
The authorized capital stock of the Company, immediately following the Initial
Closing under the Restated Articles, will consist of (i) One Hundred Million
(100,000,000) shares of Common Stock, of which (A) Ten Million One Hundred
Thirty-Five Thousand One Hundred Sixty Four (10,135,164) shares have been
designated as Series A Common Stock, all of which will be issued and
outstanding, and (B) Eighty Nine Million Eight Hundred Sixty Four Thousand Eight
Hundred Thirty Six (89,864,836) shares have been designated as Series B Common
Stock, Nine Million One Hundred Seventy Eight Thousand Six Hundred Twenty Five
(9,178,625) shares of which will be issued and outstanding, and (ii) Ten Million
(10,000,000) shares of Preferred Stock, none of which will be issued or
outstanding. The Schedule of Exceptions includes a schedule of the Company's
equity capitalization both before and after the issuance of the Series A Shares
and Warrants to the Purchasers hereunder, including all anti-dilution
adjustments resulting therefrom, and the other transactions contemplated hereby.
All issued and outstanding shares of the Company's Common Stock and Preferred
Stock have been duly authorized and validly issued, are fully paid and
nonassessable, and were issued in compliance with all applicable federal and
state securities laws. The Company has reserved (i) Ten Million One Hundred
Thirty Five Thousand One Hundred Sixty Four (10,135,164) shares of Series B
Common Stock for issuance upon conversion of the Series A Shares pursuant to the
Restated Articles, (ii) Ten Million One Hundred Thirty Five Thousand One Hundred
Sixty Four (10,135,164) shares of Series B Common Stock for issuance upon
exercise of the Warrants to be issued to the Purchasers at the Initial Closing,
(iii) Six Million Six Hundred Sixty Six Thousand Six Hundred Sixty Six
(6,666,666) shares of Series B Common Stock for issuance upon the exercise of
the option contemplated by Section 1.c. above, (iv) Six Million Six Hundred
Sixty Six Thousand Six Hundred Sixty Six (6,666,666) shares of Series B Common
Stock for issuance upon exercise of Warrants which may be issued pursuant to the
option contemplated by Section 1.c. above and (v) 6,398,253 shares of Series B
Common Stock for issuance upon exercise of other outstanding options and
warrants or pursuant to options which may be granted under the Company's stock
option plans. The Series A Shares shall have the rights and privileges set
forth in the Restated Articles. Except as described in the Schedule of
Exceptions, there are no options, warrants or other rights outstanding to
purchase or acquire, or any securities convertible into, nor has the Company
agreed to issue or reissue, other than pursuant to this Agreement, any of the
Company's authorized and unissued capital stock. Except as provided in the
Restated Articles or the Securityholders Agreement, there are no agreements or
understandings that affect or relate to the voting or giving of written consent
in lieu of meeting with respect to any of the Company's outstanding securities.
Except as provided in the Investor Rights Agreement or as described in the
Schedule of Exceptions, there are no preemptive rights with respect to the
issuance or sale of the Company's capital stock. Except as described in the
Schedule of Exceptions, there are no restrictions on the transfer of the
Company's capital stock other than those arising from federal and state
securities laws, this Agreement or the Other Transaction Documents.
e. AUTHORIZATION. All corporate action on the part of the Company,
its directors and shareholders necessary for the authorization, execution,
delivery and performance of this Agreement, the Warrants and the Other
Transaction Documents, the authorization, sale, issuance and delivery of the
Series A Shares and Warrants and Series B Shares and Warrants (and the Series B
Common Stock issuable upon conversion of the Series A Shares and upon exercise
of the Warrants), and the performance of all of the Company's obligations
hereunder and thereunder has been taken, including, without limitation, the
approval by the requisite vote of the Company's shareholders of each of the
proposals submitted for shareholder approval in the Information Statement dated
December 17, 1997 and the approval of the amendment and restatement of the
Investor Rights Agreement by the requisite consent of the parties thereto. This
Agreement constitutes and the Other Transaction Documents, when executed and
delivered by the Company, shall constitute valid and binding obligations of the
Company, enforceable in accordance with their respective terms, except as
limited by (i) applicable bankruptcy, insolvency, reorganization, moratorium or
other laws of general application affecting enforcement of
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creditors' rights, (ii) general principles of equity that restrict the
availability of equitable remedies, and (iii) to the extent that the
enforceability of the indemnification provisions of Section 2.9 of the
Investor Rights Agreement may be limited by applicable laws. The Series A
Shares, the Series B Shares, the shares of Series B Common Stock issuable
upon the conversion of the Series A Shares and the shares of Series B Common
Stock issuable upon exercise of the Warrants, when issued in compliance with
the provisions of this Agreement, the Restated Articles (with respect to the
Series B Common Stock issuable upon conversion of the Series A Shares), and
the Warrants (with respect to the Series B Common Stock issuable upon
exercise of the Warrants), will be validly issued, will be fully paid and
nonassessable, will have the rights and privileges described in the Restated
Articles and will be free of any liens or encumbrances, other than any liens
or encumbrances created by or imposed upon the holders through no action of
the Company. The Warrants, when issued in compliance with the provisions of
this Agreement, will have the rights and privileges described in the
Warrants, and will be free of any liens or encumbrances, other than liens or
encumbrances created by or imposed upon the holders through no action of the
Company. The sale of the Series A Shares and Series B Shares, the issuance
of the Warrants, and the issuance of shares of Series B Common Stock upon
conversion of the Series A Shares and upon exercise of the Warrants are not
and will not be subject to any preemptive rights or rights of first refusal
that have not been properly waived or complied with.
f. FINANCIAL STATEMENTS. The Company has delivered to each Purchaser
the Company's unaudited consolidated balance sheet as at September 30, 1997 (the
"Statement Date") and unaudited consolidated statements of income and cash flows
for the twelve-month period ending on the Statement Date (collectively, the
"Financial Statements"). The Financial Statements are complete and correct in
all material respects, have been prepared in accordance with generally accepted
accounting principles applied on a consistent basis throughout the periods
indicated, except as disclosed therein, and present fairly the financial
condition and position of the Company and its Subsidiaries as of the Statement
Date and operating results of the Company and its Subsidiaries for the periods
indicated; provided, however, that the Financial Statements are subject to
normal recurring year-end audit adjustments (which are not expected to be
material), and do not contain the footnotes required under generally accepted
accounting principles.
g. LIABILITIES. Except as disclosed in the Schedule of Exceptions,
neither the Company nor any of its Subsidiaries has any material liability or
obligation, absolute or contingent, that is not reflected in the Financial
Statements, other than obligations and liabilities incurred after the Statement
Date in the ordinary course of business which taken individually or in the
aggregate would not have a material adverse effect on the assets, liabilities,
condition (financial or otherwise), operating results, business or prospects of
the Company and its Subsidiaries, taken as a whole.
h. MATERIAL CONTRACTS. All contracts, agreements, leases or other
commitments, written or oral, absolute or contingent, to which the Company or
any of its Subsidiaries is a party are listed in the Schedule of Exceptions
other than (i) contracts for the purchase of supplies or services entered into
in the ordinary and usual course of business, involving the expenditure of no
more than $25,000 and extending for no more than one year beyond the date
hereof; (ii) sales contracts entered into in the ordinary course of business
involving no more than $25,000; and (iii) contracts terminable by the Company or
such Subsidiary on no more than thirty (30) days' written notice without cost or
liability to the Company.
i. INTERESTED PARTY TRANSACTIONS. Except as described in the Schedule
of Exceptions, no employee, shareholder, officer or director of the Company is
indebted (or committed to make loans or extend or guarantee credit) to the
Company or any of its Subsidiaries nor is the Company or any of its Subsidiaries
indebted (or committed to make loans or extend or guarantee credit) to any of
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them. Except as described in the Schedule of Exceptions, neither the Company
nor any of its Subsidiaries is a guarantor or indemnitor of any indebtedness of
any other person, firm or corporation. Except as contemplated or otherwise
disclosed by this Agreement or in the Schedule of Exceptions, no shareholder,
officer, director or employee of the Company or any of its Subsidiaries, nor any
"affiliate" or "associate" of such persons (as such terms are defined in the
rules and regulations promulgated under the Securities Act), is now a party to
any transaction with the Company or any of its Subsidiaries, including, without
limitation, any contract, agreement or other arrangement providing for the
employment of, furnishing of services by, rental of real or personal property
from, or otherwise requiring payments to, any such person or entity.
j. CHANGES. Since the Statement Date, there has not been:
(1) Any change in the assets, liabilities, condition
(financial or otherwise), operating results, business or prospects of the
Company or any of its Subsidiaries from that reflected in the Financial
Statements, EXCEPT changes in the ordinary course of business that have not
been, individually or in the aggregate, materially adverse to the assets,
liabilities, condition (financial or otherwise), operating results, business or
prospects of the Company and its Subsidiaries, taken as a whole;
(2) Any material change in the contingent obligations of
the Company or any of its Subsidiaries by way of guaranty, endorsement,
indemnity, warranty or otherwise;
(3) Any damage, destruction or loss, whether or not covered
by insurance, materially and adversely affecting the assets, liabilities,
condition (financial or otherwise), operating results, business or prospects of
the Company and its Subsidiaries, taken as a whole;
(4) Any waiver by the Company or any of its Subsidiaries of
a valuable right or of a material debt owed to it;
(5) Any direct or indirect loans made by the Company or any
of its Subsidiaries to any shareholder, employee, officer or director of the
Company or any of its Subsidiaries, other than advances made in the ordinary
course of business;
(6) Any material change in any compensation arrangement or
agreement with any employee, officer, director or shareholder of the Company or
any of its Subsidiaries;
(7) Any declaration or payment of any dividend or other
distribution of the assets of the Company;
(8) Any labor organization activity;
(9) Any debt, obligation or liability incurred, assumed or
guaranteed by the Company or any of its Subsidiaries, other than current
liabilities incurred in the ordinary course of business and reflected in the
Schedule of Exceptions;
(10) Any sale, assignment or transfer of any patents, trademarks,
copyrights, trade secrets or other intangible assets;
(11) Any change in any agreement to which the Company or any of
its Subsidiaries is a party or by which it is bound which materially and
adversely affects the assets, liabilities, condition
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(financial or otherwise), operating results, business or prospects of the
Company and its Subsidiaries, taken as a whole;
(12) Any other event or condition of any character that, either
individually or cumulatively, has materially and adversely affected the assets,
liabilities, condition (financial or otherwise), operating results, business or
prospects of the Company and its Subsidiaries, taken as a whole;
(13) Any resignation or termination of employment or, to the
Company's best knowledge, any impending resignation or termination of employment
of any officer or key employee of the Company or any of its Subsidiaries;
(14) Receipt of any notice that there has been a loss of, or
material order cancellation by, any major customer of the Company or any of its
Subsidiaries;
(15) Any mortgage, pledge, transfer of a security interest in, or
lien, created by the Company or any of its Subsidiaries with respect to any of
its material properties or assets, except liens for taxes not yet due or
payable;
(16) Any direct or indirect redemption, purchase or other
acquisition by the Company of any shares of its capital stock; or
(17) Any agreement or commitment by the Company or any of its
Subsidiaries to do any of the things described in this Section 3.j.
k. TAX MATTERS. The Company and each of its Subsidiaries has filed
all necessary federal and state property, income and franchise tax returns and
has paid all taxes shown as due thereon or otherwise owed by it to any taxing
authority except those contested in good faith and for which appropriate amounts
have been reserved in accordance with generally accepted accounting principles;
and there is no tax deficiency which has been, or to the best knowledge of the
Company might be, asserted against the Company or any of its Subsidiaries which
would materially affect the assets, liabilities, condition (financial or
otherwise), operating results, business or prospects of the Company and its
Subsidiaries, taken as a whole. The provision for taxes of the Company and its
Subsidiaries as shown in the Financial Statements is adequate for taxes due or
accrued as of the Statement Date thereof. The Company has not made any
elections pursuant to the Internal Revenue Code of 1986, as amended (the
"Code"), other than elections that relate solely to methods of accounting,
depreciation or amortization, that would have a material effect on the assets,
liabilities, condition (financial or otherwise), operating results, business or
prospects of the Company and its Subsidiaries, taken as a whole. Since the
Statement Date, the Company and its Subsidiaries has made adequate provisions on
its books of account for all taxes, assessments and governmental charges with
respect to its business, properties and operations for such period. The Company
and its Subsidiaries have withheld or collected from each payment made to each
of its employees, the amount of all taxes (including, but not limited to,
federal income taxes, Federal Insurance Contribution Act taxes and Federal
Unemployment Tax Act taxes) required to be withheld or collected therefrom, and
has paid the same to the proper tax receiving officers or authorized
depositories. The Company is not a real property holding company within the
meaning of Section 897 of the Code. To the best of the Company's knowledge, the
Company is a "qualified small business" within the meaning of Section 1202(d) of
the Code.
l. TITLE TO PROPERTIES AND ASSETS; LIENS, ETC. Set forth in the
Schedule of Exceptions is a list which includes all material assets and
properties of the Company and its Subsidiaries
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as of September 30, 1997. The Company and each of its Subsidiaries have good
title to all of their respective properties and assets, both real and personal,
tangible and intangible, reflected on the balance sheets included in the
Financial Statements or acquired after the date thereof (except inventory or
other personal property disposed of in the ordinary course of business
subsequent to the date thereof), and such properties and assets are not subject
to any mortgage, pledge, lien, security interest, encumbrance or charge other
than (i) liens for current taxes not yet due and payable, (ii) liens and
encumbrances that do not materially detract from the value of the property
subject thereto or materially impair the operations of the Company or any of its
Subsidiaries, and (iii) liens securing obligations reflected in the Financial
Statements. With respect to properties or assets it leases or holds pursuant to
a license, the Company and each of its Subsidiaries are in compliance with such
leases and licenses (except for such defaults or breaches that would not have a
material adverse affect on the Company and its Subsidiaries, taken as a whole)
and holds valid leasehold interests or licenses free of any liens, claims or
encumbrances except for those described in subsections (i) through (iii) hereof.
All properties and assets owned, leased or licensed by the Company or any of its
Subsidiaries are in good operating condition and repair and are reasonably fit
and usable for the purposes for which they are used.
m. COMPLIANCE WITH OTHER INSTRUMENTS. Neither the Company nor any of
its Subsidiaries is in violation or default of (i) any term of its articles of
incorporation or bylaws, (ii) any term or provision of any mortgage, indenture,
contract, agreement, instrument, or contract to which it is a party or by which
it is bound or (iii) any order, judgment, decree, statute, rule or regulation
applicable to the Company or any of its Subsidiaries, except for such violations
or defaults that, either individually or in the aggregate, would not materially
adversely affect the assets, liabilities, condition (financial or otherwise),
operating results, business or prospects of the Company and its Subsidiaries,
taken as a whole. The execution, delivery and performance of and compliance
with this Agreement and the Other Transaction Documents, the issuance of the
Shares and Warrants pursuant hereto, and the issuance of the Series B Common
Stock upon conversion of the Series A Shares and upon exercise of the Warrants
(i) will not with or without the passage of time or giving of notice, result in
any violation of, or conflict with, or constitute a default under, (A) the
articles of incorporation or bylaws of the Company or any of its Subsidiaries or
(B) any material term or provision of any mortgage, indebtedness, indenture,
contract, agreement, instrument, judgment or decree to which the Company is a
party or by which it is bound, or (ii) result in the creation of any mortgage,
pledge, lien, encumbrance or charge upon any of the properties or assets of the
Company, except in the case of (i)(B) and (ii) above, for such violations,
conflicts, defaults, liens, encumbrances and charges that would not, either
individually or in the aggregate, materially and adversely affect the assets,
liabilities, condition (financial or otherwise), operating results, business or
prospects of the Company and its Subsidiaries, taken as a whole.
n. LITIGATION, ETC. There are no actions, suits, proceedings or
investigations pending or, to the Company's best knowledge, currently threatened
against the Company or any of its Subsidiaries (i) that question the validity of
this Agreement, the Warrants or any Other Transaction Agreement, or the right of
the Company to enter into any such agreement, or to consummate the transactions
contemplated hereby or thereby, or (ii) which might result, individually or in
the aggregate, in any material adverse change in the assets, liabilities,
condition (financial or otherwise), operating results, business or prospects of
the Company and its Subsidiaries, taken as a whole, or any change in the current
equity ownership of the Company or any of its Subsidiaries, nor is the Company
aware that there is any basis for the foregoing. The foregoing includes,
without limitation, actions pending or threatened (or any basis therefor known
to the Company) involving the prior employment of any of the employees of the
Company or any of its Subsidiaries, their use in connection with the business of
the Company or any of its Subsidiaries of any information or techniques
allegedly proprietary to any of their former employers, or their obligations
under any agreements with prior employers. Neither the Company nor any of its
Subsidiaries is a party or subject to the provisions of any order, writ,
injunction, judgment or decree of
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any court or government agency or instrumentality. There is no action, suit,
proceeding or investigation by the Company or any of its Subsidiaries currently
pending or which the Company or any of its Subsidiaries intends to initiate.
o. EMPLOYEES. Neither the Company nor any of its Subsidiaries has any
collective bargaining agreements with any of its employees. There is no labor
union organizing activity pending or, to the Company's best knowledge,
threatened with respect to the Company or any of its Subsidiaries. No employee
has any agreement or contract, written or oral, regarding his employment. To
the Company's knowledge, no employee of the Company, nor any consultant with
whom the Company or any of its Subsidiaries has contracted, is in violation of
any term of any employment contract, proprietary information agreement or any
other contract or agreement relating to the relationship of such employee with
the Company or any other party because of the nature of the business presently
conducted or presently proposed to be conducted by the Company or any of its
Subsidiaries; and to the Company's knowledge, the continued employment by the
Company and its Subsidiaries of their present employees, and the performance of
the contracts of the Company and its Subsidiaries with its independent
contractors, will not result in any such violation. The Company has not
received any notice alleging that any such violation has occurred. No employee
of the Company or any of its Subsidiaries has been granted the right to
continued employment by the Company or any of its Subsidiaries or to any
material compensation following termination of employment with the Company or
such Subsidiary. The Company is not aware that any officer or key employee, or
that any group of key employees, intends to terminate their employment with the
Company or any of its Subsidiaries, nor does the Company or any of its
Subsidiaries have a present intention to terminate the employment of any
officer, key employee or group of key employees. Each employee and contractor
of the Company or any of its Subsidiaries who has access to confidential or
proprietary information has executed an Employee Confidentiality and Invention
Agreement. Neither the Company nor any of its Subsidiaries has any Employee
Benefit Plan as defined in the Employee Retirement Income Security Act of 1974.
The Company and its Subsidiaries have complied in all material respects with all
applicable state and federal equal employment opportunity and other laws related
to employment.
p. PATENTS, TRADEMARKS, AND TRADE SECRETS. To the Company's best
knowledge, it and its Subsidiaries own or has sufficient legal rights to all
patents, patent rights, licenses, trade secrets, trademarks, service marks,
trademark rights, trade names or trade name rights, copyrights, inventions and
intellectual property rights necessary for their business as now operated and as
proposed to be operated without any known conflict with or infringement of the
rights of others. There are no outstanding options, licenses or agreements of
any kind relating to the foregoing, nor is the Company or any of its
Subsidiaries bound by or a party to any options, licenses or agreements of any
kind with respect to the patents, trademarks, service marks, trade names,
copyrights, trade secrets, licenses, information and other proprietary rights
and processes of any other person or entity other than such licenses or
agreements arising from the purchase of "off the shelf" or standard products.
The Company has not received any communications alleging that the Company or any
of its Subsidiaries has violated or, by conducting its business as presently
conducted or as proposed, would violate any of the patents, trademarks, service
marks, trade names, copyrights or trade secrets or other proprietary rights of
any other person or entity. The Company is not aware that any of the employees
of the Company and its Subsidiaries is obligated under any contract (including
licenses, covenants or commitments of any nature) or other agreement, or subject
to any judgment, decree or order of any court or administrative agency, that
would interfere with their duties to the Company or that would conflict with the
Company's business as proposed to be conducted. Neither the execution nor
delivery of this Agreement, nor the carrying on of the Company's business by the
employees of the Company and its Subsidiaries, nor the conduct of the Company's
business as proposed, will, to the Company's best knowledge, conflict with or
result in a breach of the terms, conditions or provisions of, or constitute a
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default under, any contract, covenant or instrument under which any employee is
now obligated. The Company does not believe it is or will be necessary to
utilize any inventions, trade secrets or proprietary information of any of its
employees made prior to their employment, except for inventions, trade secrets
or proprietary information that have been assigned to the Company. The Schedule
of Exceptions lists all patents and registered trademarks of the Company and its
Subsidiaries. The Company has paid all maintenance fees and made all required
filings with respect to such patents and registered trademarks.
q. REGISTRATION RIGHTS. Except as provided for by the Investor Rights
Agreement or described in the Schedule of Exceptions, the Company is not under
any contractual obligation to register the offer or sale of any of its presently
outstanding securities or any of its securities which may hereafter be issued
under the Securities Act or applicable state securities laws.
r. GOVERNMENTAL CONSENT, ETC. No consent, approval or authorization
of or designation, declaration or filing with any governmental authority on the
part of the Company is required in connection with (i) the valid execution and
delivery of this Agreement, the Warrants or the Other Transaction Documents,
(ii) the offer, sale or issuance of the Shares or the Warrants, and the issuance
of the Series B Common Stock upon conversion of the Series A Shares and upon
exercise of the Warrants or (iii) the consummation of any other transaction
contemplated hereby, except (a) the filing of the Restated Articles in the
office of the California Secretary of State, and (b) the filing of a Notice on
Form D with the Securities Exchange Commission and applicable state securities
authorities that have been made or will be made in a timely manner following the
applicable Closing.
s. OFFERING. Assuming the accuracy of the representations and
warranties of the Purchasers contained in Section 4 hereof, the offer, sale and
issuance of the Shares and the Warrants and the issuance of the Series B Common
Stock upon conversion of the Series A Shares and upon exercise of the Warrants
will be exempt from the registration requirements of Section 5 of the Securities
Act of 1933, as amended (the "Securities Act") and will have been registered or
qualified (or are exempt from registration and qualification) under the
registration, permit or qualification requirements of all applicable state
securities laws.
t. BROKERS OR FINDERS. Except as described in the Schedule of
Exceptions, the Company has not incurred, and will not incur, directly or
indirectly, as a result of any action taken by the Company, any liability for
brokerage or finders' fees or commissions or any similar charges in connection
with this Agreement.
u. PERMITS. The Company and its Subsidiaries have all permits,
licenses, orders and approvals, certificates of public convenience and
necessity, and tariffs of any federal, state, local or foreign governmental or
regulatory body, including, without limitation, under the rules of the Federal
Communication Commission and the California Public Utility Commission
(collectively, the "Permits") that are material to or necessary in the conduct
of their business as now conducted; all such Permits are in full force and
effect; no violations have been recorded in respect of any such Permits; and no
proceeding is pending or, to the best knowledge of the Company, threatened to
revoke or limit any such Permits. The Schedule of Exceptions contains a true,
accurate and complete list of all of the Permits.
v. ENVIRONMENTAL AND SAFETY LAWS. To the best of the Company's
knowledge, neither the Company nor any of the Company's Subsidiaries is in
violation of any applicable statute, law or regulation relating to the
environment or occupational health and safety which could materially and
adversely affect the business, properties, prospects, or financial condition of
the Company and its
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Subsidiaries, taken as a whole. To the best of the Company's knowledge, no
material expenditures are or will be required in order to comply with any such
existing statute, law or regulation.
w. MINUTE BOOKS. The minute books of the Company and its Subsidiaries
have been made available for inspection to Spectra 3 and Enron, and the
respective counsel of each, and contain a summary of all meetings of directors
and shareholders since the time of incorporation and reflect all transactions
referred to in such minutes accurately in all material respects.
x. PROJECT STATUS. The Schedule of Exceptions contains a fair and
accurate description of the status of the Company's negotiations and/or other
arrangements with The Irvine Company and the cities of Orange and Santa Ana,
California as of the date of this Agreement.
y. FULL DISCLOSURE. This Agreement, the Warrants, the Exhibits
hereto, the Other Transaction Documents, and all other documents delivered by
the Company to Spectra 3 and Enron or their counsel or agents in connection
therewith or with the transactions contemplated hereby or thereby, do not
contain any untrue statement of material fact nor, to the Company's best
knowledge, omit to state a material fact necessary in order to make the
statements contained herein or therein not misleading.
SECTION 4.
REPRESENTATIONS AND WARRANTIES OF
THE PURCHASERS
Each Purchaser hereby severally represents and warrants to the Company as
follows:
a. REQUISITE POWER AND AUTHORITY. Such Purchaser has all requisite
corporate, partnership or limited liability company (as applicable) power and
authority to execute and deliver this Agreement and the Other Transaction
Documents to which it is a party and to carry out the provisions hereof and
thereof. All action on such Purchaser's part required for the lawful execution
and delivery of this Agreement and the Other Transaction Documents to which it
is a party have been taken. Upon their execution and delivery, this Agreement
and the Other Transaction Documents to which it is a party will be valid and
binding obligations of such Purchaser, enforceable in accordance with their
respective terms, except as limited by (i) applicable bankruptcy, insolvency,
reorganization, moratorium or other laws of general application affecting
enforcement of creditors' rights, (ii) general principles of equity that
restrict the availability of equitable remedies, and (iii) to the extent that
the enforceability of the indemnification provisions of Section 2.9 of the
Investor Rights Agreement may be limited by applicable laws.
b. ACCREDITED INVESTOR; EXPERIENCE. Such Purchaser is an "accredited
investor" as defined in Rule 501(a) under the Securities Act (as set forth on
Exhibit K). Such Purchaser has substantial experience in evaluating and
investing in private placement transactions of securities in companies similar
to the Company so that it is capable of evaluating the merits and risks of its
investment in the Company and has the capacity to protect its own interests.
Such Purchaser must bear the economic risk of this investment indefinitely
unless the Shares or Warrants are registered pursuant to the Securities Act, or
an exemption from registration is available for the disposition of such Shares
and Warrants. Such Purchaser understands that the Company has no present
intention of registering the Shares or the Warrants. Such Purchaser also
understands that there is no assurance that any exemption from registration
under the Securities Act will be available and that, even if available, such
exemption may not allow such Purchaser to transfer all or any portion of the
Shares or Warrants under the circumstances, in the amounts or at the times such
Purchaser might propose.
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c. INVESTMENT. Such Purchaser is acquiring the Shares and Warrants
for such Purchaser's own account for investment only, and not with the view to,
or for resale in connection with, any distribution thereof. Such Purchaser
understands that the Shares and Warrants to be purchased have not been, and will
not be, registered under the Securities Act by reason of a specific exemption
from the registration provisions of the Securities Act, the availability of
which depends upon, among other things, the bona fide nature of the investment
intent and the accuracy of such Purchaser's representations as expressed herein.
d. RULE 144. Such Purchaser acknowledges that the Shares and Warrants
must be held indefinitely unless subsequently registered under the Securities
Act or unless an exemption from such registration is available. Such Purchaser
has been advised and is aware of the provisions of Rule 144 promulgated under
the Securities Act, which permit limited resale of shares purchased in a private
placement subject to the satisfaction of certain conditions, including (except
as otherwise provided in Rule 144(k)), among other things, the existence of a
public market for the shares, the availability of certain current public
information about the Company, the resale occurring not less than one year after
a party has purchased and paid for the security to be sold, the sale being
effected through a "broker's transaction" or in transactions directly with a
"market maker" and the number of shares being sold during any three-month period
not exceeding specified limitations.
e. NO PUBLIC MARKET. Such Purchaser understands that no public market
now exists for any of the securities issued by the Company and that the Company
has made no assurances that a public market will ever exist for the Company's
securities.
f. ACCESS TO DATA. Such Purchaser has received and read the
Financial Statements and has had an opportunity to discuss the Company's
business, management and financial affairs with its management. Such Purchaser
has also had an opportunity to ask questions of and receive answers from
officers of the Company regarding the terms and conditions of this investment,
which questions were answered to such Purchaser's satisfaction.
g. RESIDENCE. The office of such Purchaser in which its respective
investment decision was made is located at the address of such Purchaser as set
forth on the signature page hereto.
SECTION 5.
CONDUCT AND AGREEMENTS PENDING CLOSING
a. CONDUCT OF BUSINESS. From the date of this Agreement until the
Closing, the Company will (i) carry on its business only in the ordinary course
in substantially the same manner as heretofore; (ii) maintain and keep its
properties and equipment in good repair, working order and condition, except for
ordinary wear and tear; (iii) keep in full force and effect insurance comparable
in amount and scope of coverage to that now maintained by it; (iv) perform in
all material respects all of its obligations under all contracts and commitments
applicable to its business or properties; (v) use its best efforts to maintain
and preserve its business organization intact; (vi) maintain its books of
account and records in the usual and regular manner; (vii) comply in all
material respects with all laws and regulations applicable to it and to the
conduct of its business; (viii) not amend its Existing Charter or Existing
Bylaws; (ix) not enter into or assume any contract, agreement or commitment
outside the ordinary course of business; (x) not merge or consolidate with, or
agree to merge or consolidate with, or purchase substantially all of the assets
of, or otherwise acquire, any business of any corporation,
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partnership, association or other business organization or division thereof; and
(xi) promptly advise the Purchasers in writing of any materially adverse change
in its business, prospects or financial condition.
b. ACCESS, INFORMATION, DOCUMENTS. The Company will (i) give to the
Purchasers and their counsel and other representatives full and free access at
all reasonable times to all of its properties, books, contracts, commitments and
records and (ii) furnish to the Purchasers all such other information with
respect to its properties, business and affairs as the Purchasers from time to
time may reasonably request. The Purchasers shall treat such information as
confidential, and if this Agreement is terminated prior to the Closing, all such
information in documentary form shall be returned upon request.
c. COOPERATION. The Company and the Purchasers shall cooperate and
use their commercially reasonable efforts with respect to all steps required to
effect the transactions contemplated by the Agreement, including promptly
furnishing the information required in connection with (i) the preparation of
all necessary documents, (ii) the preparation of all filings and obtaining all
approvals required under the Hart-Scott-Rodino Antitrust Improvements Act of
1976, and (iii) all other consents and approvals which are required in order to
consummate the transactions.
d. NO SOLICITATION. Prior to the Closing (or the earlier termination
of this Agreement in accordance with its terms), neither the Company nor any of
its affiliates, directors, officers, employees, representatives or agents,
shall, directly or indirectly, solicit or initiate any discussions, submissions
of proposals or offers or negotiations with, or, subject to any fiduciary
obligations under applicable law after taking into account the advice of counsel
with respect thereto, participate in any negotiation or discussions with, or
provide any information or data of any nature whatsoever to, or otherwise
cooperate in any other way with, or assist or participate in, facilitate or
encourage any effort or attempt by, any corporation, partnership, person or
other entity or group, other than the Purchasers and their representatives,
agents and affiliates, concerning any sale of shares of capital stock or other
equity securities, debt financing or similar transaction involving the Company
or any subsidiary that would provide funding for the Company in lieu of, or that
would adversely affect, the transactions contemplated by this Agreement (all
such transactions being referred to herein as "Alternative Transactions"). The
Company shall immediately notify Spectra 3 and Enron if any proposal, offer,
inquiry or other contact is received by, any information is requested from, or
any discussions or negotiations are sought to be initiated or continued with,
the Company in respect of any Alternative Transaction, and shall, in any such
notice to Spectra 3 and Enron, indicate the identity of the offeror and the
terms and conditions of any proposals or offers or the nature of any inquiries
or contacts. This Section 5.d. shall not, however, prohibit the Company from
pursuing high-yield debt financing as previously discussed with Spectra 3 and
Enron.
e. SHAREHOLDER APPROVALS AND OTHER CONSENTS. The Company shall use all
commercially reasonable efforts to obtain all consents, permits and waivers
necessary or appropriate in connection with the authorization, execution and
delivery of this Agreement by the Company and the consummation by it of the
transactions contemplated hereby, including, without limitation, the consent of
Foothill Capital Corporation to the transactions contemplated hereby and (i) the
conversion of all outstanding shares of the Company's Preferred Stock into
Common Stock, (ii) approval of the Restated Articles, including classification
of all outstanding Common Stock as "Series B Common Stock," (iii) approval of
the Restated Bylaws, (iv) approval of the terms of the transactions contemplated
by this Agreement, including the Business Opportunity Agreement, and (v)
approval of the Investor Rights Agreement and related consents (all such
required approvals being the "Shareholder Approvals").
f. PUBLIC ANNOUNCEMENTS. The Company, Spectra 3 and Enron shall
consult with each other before issuing any press release with respect to this
Agreement or the transactions
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contemplated hereby and shall not issue any such press release or make any such
public statement without the prior written consent of the others, except as
required by law.
g. FINANCIAL ADVISOR AGREEMENTS. The Company, the Sturm Entities and
Enron shall consult with each other and use their reasonable best efforts to
amend or terminate the Company's existing agreements with J.P. Morgan, ING
Capital and Fredericks & Shields to the reasonable satisfaction of Spectra 3 and
Enron, including, without limitation, reaching agreements with respect to the
fees payable by the Company to such entities in connection with the sale of
Shares and Warrants to the Purchasers under this Agreement.
h. BOARD OF DIRECTORS. The Company shall take all such action as is
necessary to cause (i) three designees of the Sturm Entities, (ii) two designees
of Enron, (iii) Robert E. Randall, as a management representative, and (iv) John
C. Stiska, to be elected to serve as directors of the Company immediately
following the Closing. The Sturm Entities and Enron shall notify the Company of
the names of its designees no later than two business days prior to the Closing.
i. EMPLOYEE SEVERANCE PROGRAM. The Company shall take all action
necessary to approve the employee severance program set forth on Exhibit L
hereto.
j. AMENDMENTS TO EMPLOYEE STOCK OPTIONS. The Company shall take all
action necessary to approve amendments to all outstanding Company employee stock
options to provide that in the event that the Company terminates the employment
of an employee without "cause" within six (6) months following the Closing all
options held by such employee would become immediately vested and exercisable.
For this purpose, "cause" shall exist in any of the following circumstances:
(i) the employee's conviction of a felony or conduct involving dishonesty, fraud
or breach of trust, (ii) the employee's willful misconduct or gross negligence
in the performance of his duties to the Company, or (iii) the employee's willful
and substantiated nonperformance of his assigned duties, which continues for
more than ten (10) days after written notice from the Company and an opportunity
to cure.
SECTION 6.
CONDITIONS TO CLOSING OF PURCHASERS
The obligation of each Purchaser to purchase the Shares and the Warrants
at the applicable Closing is, at the option of such Purchaser, subject to the
fulfillment of the following conditions:
a. REPRESENTATIONS AND WARRANTIES CORRECT. The representations and
warranties made by the Company in Section 3 hereof shall be true and correct in
all material respects as of the Closing Date with the same force and effect as
if they had been made as of the Closing Date.
b. COVENANTS. All covenants, agreements and conditions contained in
this Agreement to be performed or complied with by the Company on or prior to
the Closing Date shall have been performed or complied with.
c. BLUE SKY. The Company shall have obtained all necessary blue sky
law permits and qualifications, or have the availability of exemptions
therefrom, required by any state for the offer and sale of the Shares and the
Warrants to the Purchasers.
d. OPINIONS OF COMPANY'S COUNSELS. The Purchasers shall have received
from the Company's counsel an opinion addressed to them, dated the Closing Date,
substantially in the form of
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Exhibit M-1 hereto. The Purchasers shall also have received from the Company's
regulatory counsel an opinion addressed to them, dated the Closing Date,
substantially in the form of Exhibit M-2 hereto.
e. SHAREHOLDER APPROVALS; OTHER CONSENTS. The Company shall have
obtained the Shareholder Approvals and any and all other consents, permits and
waivers necessary or appropriate for consummation of the transactions
contemplated by this Agreement (except for such as may be properly obtained
subsequent to the Closing), and shall have provided Spectra 3 and Enron with all
documentation thereof as they may reasonably request.
f. FILING OF RESTATED ARTICLES; ADOPTION OF RESTATED BYLAWS. The
Restated Articles shall have been filed with the Secretary of State of
California and shall be in full force and effect. The Restated Bylaws shall
have been adopted and shall be in full force and effect.
g. RESERVATION OF SERIES B COMMON STOCK. The shares of Series B
Common Stock issuable upon exercise of the Warrants and conversion of the Series
A Shares shall have been duly authorized and reserved for issuance upon
exercise.
h. COMPLIANCE CERTIFICATE. The Company shall have delivered to the
Purchasers a compliance certificate, executed by such officers of the Company as
the Purchasers shall request and dated as of the date of the Closing, to the
effect that the conditions specified in the subsections of this Section 6 have
been satisfied.
i. INVESTOR RIGHTS AGREEMENT. The Investor Rights Agreement,
substantially in the form attached hereto as Exhibit F shall have been executed
and delivered by the parties thereto.
j. HART-SCOTT-RODINO FILING. The applicable waiting period, including
any extension thereof, under the Hart-Scott-Rodino Act shall have expired or the
parties shall have been granted early termination with respect thereto.
In addition, the respective obligations of each of Spectra 3 and Enron to
purchase the shares and warrants at the applicable Closing is, at the option of
each, subject to the fulfillment of the following additional conditions:
k. CONTEMPORANEOUS INVESTMENT BY SPECTRA 3 AND ENRON. The purchase of
Series A Shares and Warrants by Spectra 3 and Enron at the Initial Closing
pursuant to this Agreement shall close contemporaneously with each other.
l. CORPORATE DOCUMENTS. The Company shall have delivered to Spectra 3
and Enron or their respective counsel copies of all corporate documents of the
Company as they shall reasonably request.
m. BOARD OF DIRECTORS. The Company and its Board of Directors
shall have taken all necessary steps such that the Board of Directors
immediately upon Closing shall be comprised as set forth in Section 5.h. hereof.
n. MANAGEMENT SERVICES AGREEMENTS. The Company, Corporate Managers,
L.L.C. and Enron shall have executed the Management Services Agreements
substantially in the forms of Exhibits I-1 and I-2, hereto, respectively,
pursuant to which Corporate Managers, L.L.C. and Enron will provide management
services to the Company for three years following the Closing for an annual
management fee of $500,000 each, plus out-of-pocket expenses.
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o. BUSINESS OPPORTUNITY AGREEMENT. The Company, the Sturm Entities
and Enron shall have executed the Business Opportunity Agreement substantially
in the form of Exhibit H hereto.
p. FINANCIAL ADVISOR AGREEMENTS. The Company shall have amended or
terminated the agreements with J.P. Morgan, ING Capital and Fredericks & Shields
as provided in Section 5.g. hereof.
q. STURM WARRANT AMENDMENT. The Company shall have executed the Sturm
Warrant Amendment substantially in the form of Exhibit J hereto.
r. PAYMENT OF TRANSACTION FEES AND EXPENSES. The Company shall have
paid to each of Spectra 3 and Enron, or such of their affiliates as they may
designate, a transaction fee of six percent (6%) of the gross amount of the
purchase price paid by such party at the applicable Closing. The transaction
fee payable at the Initial Closing shall consist of $900,000 payable to Spectra
3 or its designated affiliate(s) and $900,000 payable to Enron or its designated
affiliate(s).
s. PROCEEDINGS AND DOCUMENTS. All corporate and other proceedings in
connection with the transactions contemplated at the Closing hereby and all
documents and instruments incident to such transactions shall be reasonably
satisfactory in substance and form to Spectra 3 and Enron and the respective
counsel of each, and Spectra 3 and Enron and the respective counsel of each
shall have received all such counterpart originals or certified or other copies
of such documents as they may reasonably request.
SECTION 7.
CONDITIONS TO CLOSING OF COMPANY
The Company's obligation to sell and issue the Shares and the Warrants at
the applicable Closing Date is, at the option of the Company, subject to the
fulfillment as of the Closing Date of the following conditions:
a. REPRESENTATIONS. The representations and warranties made by the
Purchasers in Section 4 hereof shall be true and correct in all material
respects as of the Closing Date, with the same force and effect as if they had
been made on and as of the Closing Date.
b. BLUE SKY. The Company shall have obtained all necessary blue sky
law permits and qualifications, or have the availability of exemptions
therefrom, required by any state for the offer and sale of the Shares and the
Warrants at such Closing.
c. LEGAL MATTERS. All material matters of a legal nature which
pertain to this Agreement, and the transactions contemplated hereby, shall have
been reasonably approved by counsel to the Company.
d. PERFORMANCE OF OBLIGATIONS. Each Purchaser shall have performed
and complied with all agreements and conditions herein required to be performed
or complied with by it on or before the Closing.
e. FILING OF RESTATED ARTICLES. The Restated Articles shall have been
filed with the Secretary of State of California and shall be in full force and
effect.
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f. INVESTOR RIGHTS AGREEMENT. The Investor Rights Agreement
substantially in the form attached hereto as Exhibit F shall have been executed
and delivered by the purchasers.
g. SHAREHOLDER APPROVALS; OTHER CONSENTS. The Company shall have
obtained the Shareholder Approvals. In addition, the Company shall have
obtained any and all other consents, permits and waivers necessary or
appropriate for consummation of the transactions contemplated by the Agreement
(except for such as may be properly obtained subsequent to the Closing).
h. HART-SCOTT-RODINO FILING. The applicable waiting period, including
any extension thereof, under the Hart-Scott-Rodino Act shall have expired or the
parties shall have been granted early termination with respect thereto.
i. CONTEMPORANEOUS INVESTMENT BY SPECTRA 3 AND ENRON. The purchase of
Series A Shares and Warrants by Spectra 3 and Enron at the Initial Closing
pursuant to this Agreement shall close contemporaneously with each other.
j. STURM WARRANT AMENDMENT. Spectra 1 and Spectra 2 shall have
executed the Sturm Warrant Amendment substantially in the form of Exhibit J
hereto.
SECTION 8.
INDEMNIFICATION
a. INDEMNIFICATION. The Company agrees to indemnify, defend and hold
harmless each Purchaser, and its officers, directors, managers, members,
shareholders, agents, employees, attorneys, affiliates, successors and assigns,
from and against, and pay or reimburse each of them for, any and all claims,
losses, damages (including any diminution in value of any equity held in the
Company by Purchaser), judgments, amounts paid in settlement, costs and legal,
accounting or other expenses (collectively, "Losses") that any of them may
sustain or incur as a result of any misrepresentation, any inaccuracy in, or any
breach of, any warranty or representation or any non-performance of any covenant
or other obligation on the part of the Company contained in this Agreement.
b. INDEMNIFICATION PROCEDURES.
(i) Promptly after receipt by a party entitled to
indemnification hereunder (an "Indemnified Party") of notice of any claim or of
the commencement of any action, investigation, suit or proceeding ("Proceeding")
with respect to which such party may make a claim for indemnification hereunder,
the Indemnified Party will notify the party against whom indemnification is
sought (the "Indemnifying Party") in writing of such claim or Proceeding, and
the Indemnifying Party may in his or its discretion assume the defense of such
claim or Proceeding, in which case he or it shall employ counsel reasonably
satisfactory to the Indemnified Party and shall pay the fees and expenses of
such counsel. Notwithstanding the preceding sentence, an Indemnified Party will
be entitled to employ counsel separate from counsel to the Indemnifying Party
and to participate in the defense of such claim or Proceeding at the Indemnified
Party's expense. No settlement or compromise of any claim or Proceeding shall
give rise to liability of the Indemnifying Party unless such party shall have
been notified of any proposed settlement or compromise and shall have consented
thereto. The Indemnifying Party shall obtain the written consent of the
Indemnified Party, which consent shall not be unreasonably withheld, prior to
ceasing to defend, settling or otherwise disposing of any such claim or
Proceeding.
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(ii) In the event that any Indemnified Party suffers a Loss or
otherwise becomes entitled to indemnification hereunder from an Indemnifying
Party in a situation that does not involve a Proceeding being instituted by a
third party, the Indemnified Party shall send notice as it would pursuant to
Section 8.b.(i) in order to provide reasonable notice to the Indemnifying Party
as to the nature and extent of the Loss.
(iii) Any notice of a claim or Proceeding or a claim for indemnity
provided for herein shall be in writing and shall specify, to the extent known
by the Indemnified Party, the nature and extent of the claim or Proceeding and
the amount being asserted as damages or Losses, as the case may be.
Notwithstanding the foregoing, the failure to so provide notice on a timely and
adequate basis shall not relieve the Indemnifying Party of its obligations to
indemnify hereunder except to the extent that such Indemnifying Party can
establish prejudice to it by the lack of timely or adequate notice.
SECTION 9.
MISCELLANEOUS
a. GOVERNING LAW. This Agreement shall be governed in all respects by
the internal laws of the State of California.
b. SURVIVAL. The representations, warranties, covenants and
agreements made herein shall survive, and shall in no way be affected by, any
investigation made by any Purchaser of the subject matter thereof and the
closing of the transactions contemplated hereby.
c. SUCCESSORS AND ASSIGNS. Except as otherwise provided herein, the
provisions hereof shall inure to the benefit of, and be binding upon, the
successors, assigns, heirs, executors and administrators of the parties hereto;
provided, however, that the rights of a Purchaser to purchase the Series A
Shares and the Warrants shall not be assignable without the consent of the
Company and provided further that the Company may not assign its rights
hereunder.
d. ENTIRE AGREEMENT; AMENDMENT. This Agreement, the Exhibits and
Schedules hereto, and the other documents delivered pursuant hereto constitute
the full and entire understanding and agreement between the parties with regard
to the subjects hereof and thereof, and no party shall be liable or bound to any
other party in any manner by any warranties, representations or covenants except
as specifically set forth herein or therein. Without limiting the generality of
the foregoing, this Agreement supersedes the letter of understanding dated
November 25, 1997 among the Company, Spectra 1 and Spectra 2 and Enron, which
shall be of no further force or effect. Except as expressly provided herein,
neither this Agreement nor any term hereof may be amended, waived, discharged or
terminated other than by a written instrument signed by the party against whom
enforcement of any such amendment, waiver, discharge or termination is sought.
e. NOTICES, ETC. All notices and other communications required or
permitted hereunder shall be in writing and shall be mailed by registered or
certified mail, postage prepaid, or otherwise delivered by hand or by messenger,
addressed (a) if to a Purchaser, at such Purchaser's address as set forth on the
signature page herein, or at such other address as the Purchaser shall have
furnished to the Company in writing or (b) if to the Company, one copy should be
sent to its address as set forth on the cover page of this Agreement and
addressed to the attention of the Corporate Secretary, or at such other address
as the Company shall have furnished to the Purchasers.
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Each such notice or other communication shall for all purposes of this
Agreement be treated as effective or having been given when delivered if
delivered personally or by messenger, or, if sent by mail, at the earlier of its
receipt or seventy two (72) hours after the same has been deposited in a
regularly maintained receptacle for the deposit of the United States mail,
addressed and mailed as aforesaid.
f. DELAYS OR OMISSIONS. Except as expressly provided herein, no
delay or omission to exercise any right, power or remedy accruing to the
Purchasers upon any breach or default of the Company under this Agreement shall
impair any such right, power or remedy of the Purchasers nor shall it be
construed to be a waiver of any such breach or default or an acquiescence
therein, or of or in any similar breach or default thereafter occurring; nor
shall any waiver of any single breach or default be deemed a waiver of any other
breach or default theretofore or thereafter occurring. Any waiver, permit,
consent or approval of any kind or character on the part of the Purchasers of
any breach or default under this Agreement, or any waiver on the part of the
Purchasers of any provisions or conditions of this Agreement, must be in writing
and shall be effective only to the extent specifically set forth in such
writing. All remedies, either under this Agreement or by law or otherwise
afforded to any holder, shall be cumulative and not alternative.
g. EXPENSES. The Company shall bear its own expenses incurred with
respect to this Agreement and the transactions contemplated hereby. In
addition, the Company shall reimburse all reasonable costs and expenses of the
Sturm Entities and Enron incurred from September 10, 1997 through January 15,
1998 with respect to this Agreement and the transactions contemplated hereby
(including, without limitation, (a) (i) legal fees and customary reimbursable
expenses of Enron's and the Sturm Entities' outside legal counsel and (ii) all
out-of-pocket fees, taxes (except income taxes), assessments, duties and other
expenses in connection with the due diligence review and assessment,
negotiation, preparation and review, execution, delivery, performance,
collection and enforcement of this Agreement) up to a maximum of One Hundred
Thousand Dollars ($100,000.00) for the Sturm Entities and Enron in the
aggregate, of which up to Fifty Thousand Dollars ($50,000.00) shall be
reimbursed to the Sturm Entities and up to Fifty Thousand Dollars ($50,000.00)
shall be reimbursed to Enron, unless the Sturm Entities and Enron agree to a
different allocation of such expense limits, plus (b) all required filing fees
under the Hart-Scott-Rodino Act.
h. SEVERABILITY. In the event that any provision of this Agreement
becomes or is declared by a court of competent jurisdiction to be illegal,
unenforceable or void, this Agreement shall continue in full force and effect
without said provision.
i. TITLES AND SUBTITLES. The titles and subtitles used in this
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
j. FINDERS.
(1) The Company represents and warrants to the Purchasers that,
except as set forth in the Schedule of Exceptions, no person is entitled,
directly or indirectly, to compensation from the Company by reason of any
contract or understanding or contact with the Company as a finder or broker in
connection with the sale and purchase of the Series A Shares or Warrants
contemplated by this Agreement. The Company agrees to indemnify and hold each
Purchaser harmless against and in respect of any claim for brokerage or other
commissions or similar fees relative to this Agreement or the transactions
contemplated hereby which arises as a result of a contract or understanding made
by the
20
<PAGE>
Company with any such broker or finder in connection with the sale and purchase
of the Series A Shares or Warrants contemplated by this Agreement.
(2) Each Purchaser severally represents and warrants to the
Company that no person is entitled, directly or indirectly, to compensation from
such Purchaser by reason of any contract or understanding or contact with such
Purchaser as a finder or broker in connection with the sale and purchase of the
Series A Shares or Warrants contemplated by this Agreement. Each Purchaser
severally agrees to indemnify and hold the Company harmless against and in
respect of any claim for brokerage or other commissions or similar fees relative
to this Agreement or the transactions contemplated hereby which arises as a
result of a contract or understanding made by such Purchaser with any such
broker or finder in connection with the sale and purchase of the Series A Shares
or Warrants contemplated by this Agreement.
k. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be enforceable against the parties actually
executing such counterparts, and all of which together shall constitute one
instrument.
l. TERMINATION. This Agreement may be terminated (i) at any time by
the mutual written consent of the Company, the Sturm Entities and Enron, or (ii)
by the Company, the Sturm Entities or Enron upon written notice to the others if
the Closing shall not have occurred by January 16, 1998. Termination shall not
affect any rights a party hereto may have by reason of any breach of this
Agreement by another party prior to termination.
m. ADDITIONAL FEES. In the event that (i) the Closing does not occur
on or before January 16, 1998 for any reason other than a breach of this
Agreement by the Sturm Entities or Enron, and (ii) on or prior to June 30, 1998,
the Company obtains debt and/or equity financing (either individually or in the
aggregate) of at least $15,000,000, then the Company shall pay a fee of $500,000
to the Sturm Entities and $500,000 to Enron. Notwithstanding the foregoing,
however, no such fee shall be payable in the event that all conditions to the
Closing set forth in Sections 6 and 7 have been satisfied on or before January
16, 1998, other than (a) the condition regarding the financial advisor
agreements in Section 6.p. hereof (unless the Sturm Entities and Enron have
agreed to waive such condition) and (b) the conditions that this Agreement and
the Other Transaction Documents be approved by the Managers of Spectra 3 or the
Board of Directors of Enron. The parties acknowledge and agree that the
determination of the damages suffered by Spectra 3 and Enron under such
circumstances are difficult to calculate. The fees provided for by this Section
9.m. are intended to reflect the reasonable expectations of the parties with
respect to such damages incurred by Spectra 3 and Enron, and not as a penalty.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
21
<PAGE>
The foregoing agreement is hereby executed as of the date first above written.
"COMPANY"
SPECTRANET INTERNATIONAL
a California corporation
By: /s/ Renney E. Senn
----------------------------------
Renney E. Senn, President
"PURCHASERS"
ENRON CAPITAL & TRADE RESOURCES CORP.,
a Delaware corporation
If by mail:
P.O. Box 1188
Houston, Texas 77251-1188
Attn: Kevin Garland
If by personal delivery:
1400 Smith Street
Houston, Texas 7702
Attn: Kevin Garland
Telecopier: (713) 646-4043
By: /s/ Stephen R. Horn
----------------------------------
Title: Vice President
-------------------------------
COLORADO SPECTRA 3, L.L.C., a Colorado
limited liability company
3033 East First Avenue, Suite 200
Denver, Colorado 80206
By: /s/ Donald L. Sturm
----------------------------------
Donald L. Sturm, Manager
"NOTEHOLDERS"
John J. Barnard
1717 E. Yalecrest Avenue
Salt Lake City, Utah 84108
/s/ John J. Barnard
-------------------------------------
John J. Barnard
22
<PAGE>
John H. Barnard
908 E. So. Temple #7E
Salt Lake City, Utah 84102
/s/ John H. Barnard
-------------------------------------
John H. Barnard
Mary Coldesina
5025 So. Wander Lane
Salt Lake City, Utah 84117
/s/ Mary Coldesina
-------------------------------------
Mary Coldesina
William Linden
P.O. Box 55810
Houston, Texas 77255-5810
/s/ William Linden
-------------------------------------
William Linden
H. David Lunger
Acct 1 M
102 Fairville Road
Chadds Ford, Pennsylvania 19317-9401
/s/ H. David Lunger
-------------------------------------
H. David Lunger
23
<PAGE>
Prof. Admin. Services
3444 Camino Del Rio, #200
San Diego, CA 92108
By: /s/ Robert B. Kahn
---------------------------------
Its: President
---------------------------------
Kristina Weller
3614 Bayside Walk
San Diego, California 92109
/s/ Kristina Weller
-------------------------------------
Kristina Weller
Donald S. Clurman
455 Linden Street
Laguna Beach, California 92651
/s/ Donald S. Clurman
-------------------------------------
Donald S. Clurman
Ken Kaplan
401 Pinecrest Drive
Laguna Beach, California 92651
/s/ Ken Kaplan
-------------------------------------
Ken Kaplan (or authorized signatory)
Howard Dixon (CNA Trust Corporation)
3080 S. Bristol St., 2nd Floor
Costa Mesa, California 92626
/s/ Howard Dixon
-------------------------------------
Howard Dixon (or authorized signatory)
24
<PAGE>
FIRST AMENDMENT TO SPECTRANET INTERNATIONAL
COMMON STOCK PURCHASE AGREEMENT
This First Amendment to SpectraNet International Common Stock Purchase
Agreement (the "AMENDMENT") is entered into as of February 9, 1998, by and among
FirstWorld Communications, Inc., a California corporation (previously known as
SpectraNet International (the "COMPANY"), 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 3, Enron and the other parties set forth on
the signature pages thereto entered into that certain SpectraNet International
Common Stock Purchase Agreement, dated as of December 30, 1997 (the "STOCK
PURCHASE AGREEMENT"); and
WHEREAS, the Stock Purchase Agreement provides that unless they otherwise
agree, each of Spectra 3 and Enron have an option to purchase up to Three
Million Three Hundred Thirty Three Thousand Three Hundred Thirty Three
(3,333,333) shares of the Company's Series B Common Stock (the "OPTION"),
provided that the Option is exercised within 45 days of the Initial Closing (as
defined in the Stock Purchase Agreement); and
WHEREAS, pursuant to the terms of the Stock Purchase Agreement, the Stock
Purchase Agreement may only be amended by a written instrument signed by the
party against whom enforcement of such amendment is sought; and
WHEREAS, the parties hereto desire to amend the Stock Purchase 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 1 c. of the Stock Purchase Agreement is hereby deleted and
replaced in its entirety by the following:
"Subject to the terms and conditions hereof, Spectra 3 and Enron shall
severally have the option, exercisable in their sole discretion, to purchase the
Series B Shares and Warrants at one or more Optional Closings (as hereinafter
defined). As between Spectra 3 and Enron, unless they otherwise agree, each
will have the right to purchase up to Three Million Three Hundred Thirty Three
Thousand Three Hundred Thirty Three (3,333,333) Series B Shares; provided,
however, that to the extent Spectra 3 or Enron elects not to exercise such
option (or elects to exercise such option with respect to fewer than all of the
Series B Shares that it is entitled to purchase thereunder), the other such
party shall have the right to purchase all or any portion of the number of
Series B Shares allocated to but not purchased by such party. The option
granted hereby shall be exercisable at any time following the Initial Closing
and prior to the earlier of (i) June 9, 1998 and (ii) the closing of a high
yield debt offering by the Company, by delivering written notice of such
exercise to the Company, provided that such option may be
<PAGE>
exercised for an additional fifteen (15) days beyond the earlier of (i) and (ii)
above by a party that has elected to exercise its option with respect to the
full number of Series B Shares allocated to such party with respect to any
Series B Shares allocated to but not purchased by the other party. The Company
agrees to provide Enron and Spectra 3 with at least three business days' written
notice prior to the closing of the high yield debt offering, and shall include
in such notice the anticipated proceeds to the Company resulting from the
offering. To the extent such option is exercised by Spectra 3 and/or Enron
pursuant to the foregoing provisions, the Company (i) will severally issue and
sell to each party exercising such option and each party exercising such option
will severally buy from the Company the total number of Series B Shares to which
such option exercise relates, at a purchase price of $3.00 per share, and (ii)
will severally issue to each party exercising such option, for no additional
consideration, Warrants to purchase a number of shares of Series B Common Stock
equivalent to the number of Series B Shares so purchased."
2. Except as modified in this Amendment, the Stock Purchase Agreement shall
continue in full force and effect in accordance with its terms.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
The foregoing agreement is hereby executed in counterparts as of the date
first above written.
FIRSTWORLD COMMUNICATIONS, INC.,
a California corporation
By: /s/ Robert E. Randall
--------------------------------------------
Robert E. Randall, Chief Operating Officer
ENRON CAPITAL & TRADE RESOURCES CORP.,
a Delaware corporation
By: /s/ Gene E. Humphrey
--------------------------------------------
Vice Chairman
COLORADO SPECTRA 3, LLC,
a Colorado limited liability company
By: /s/ Donald L. Sturm
--------------------------------------------
Donald L. Sturm, Manager
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT
This Amended and Restated Investor Rights Agreement (the "AGREEMENT") is
entered into as of the 13th day of April, 1998, by and among FirstWorld
Communications, Inc., a California corporation formerly known as SpectraNet
International (the "COMPANY"), the purchasers of the Company's Series B
Preferred Stock ("SERIES B PREFERRED") set forth on EXHIBIT A; the purchasers of
the Company's Series C Preferred Stock ("SERIES C PREFERRED") and warrants set
forth on EXHIBIT A; the holders of certain warrants issued to financial advisors
of the Company in connection with the Company's Series C financing set forth on
EXHIBIT B (the "WARRANTHOLDERS"); the holders of certain warrants issued in
connection with financing transactions completed in August, September and
December 1997 (the "NEW WARRANTHOLDERS") set forth on EXHIBIT C; Colorado
Spectra 3, LLC, an entity controlled by Donald L. Sturm ("SPECTRA 3" and
together with Colorado Spectra 1, LLC and Colorado Spectra 2, LLC, the "STURM
ENTITIES"), Enron Capital & Trade Resources Corp. ("ENRON") the other purchasers
of Series A Common Stock, Series B Common Stock and warrants set forth on
EXHIBIT D (collectively, including Spectra 3 and Enron, the "NEW
EQUITYHOLDERS"). The purchasers of the Series B and Series C Preferred, the
Warrantholders, the New Warrantholders and the New Equityholders shall be
referred to hereinafter as the "INVESTORS" and each individually as an
"INVESTOR."
RECITALS
WHEREAS, the Company, holders of the Series B Preferred and Series C
Preferred and the Warrantholders previously entered into an Investor Rights
Agreement dated as of January 17, 1997 (the "ORIGINAL AGREEMENT"), which
provided such holders with registration rights, information rights and other
rights as set forth therein; and
WHEREAS, the Company, holders of the Series B Preferred and Series C
Preferred, the Warrantholders and the New Warrantholders previously entered into
an Amended and Restated Investor Rights Agreement dated as of September 17, 1997
(the "FIRST AMENDED AGREEMENT"), which provided such holders with registration
rights, information rights and other rights as set forth therein and terminated
the Original Agreement; and
WHEREAS, the Company and the Investors previously entered into an Amended
and Restated Investor Rights Agreement dated as of December 30, 1997 (the
"EXISTING AGREEMENT"), which provided such holders with registration rights,
information rights and other rights as set forth therein and terminated the
First Amended Agreement; and
WHEREAS, the Company proposes to sell and issue warrants to purchase shares
of Series B Common Stock as part of units being sold to Bear, Stearns & Co.,
Inc., ING Baring (U.S.) Securities, Inc., J.P. Morgan Securities, Inc. and
Merrill Lynch, Pierce, Fenner & Smith Incorporated (the "INITIAL PURCHASERS")
pursuant to that certain Purchase Agreement dated as of April 6, 1998 by and
among the Company and the Initial Purchasers; and
<PAGE>
WHEREAS, as a condition of purchasing such warrants and entering into
related transactions, the Initial Purchasers have requested that the Company
extend to them (and their permitted assigns) certain registration rights
pursuant to a Warrant Registration Rights Agreement (as defined herein), which
rights require modifications, and conforming changes, to the Existing Agreement;
and
WHEREAS, pursuant to Section 2.11 of the Existing Agreement, the Company
has sought and obtained the required consent to amend and restate the Existing
Agreement and pursuant to Section 2.12 of the Existing Agreement has obtained
the required consents to enter into the Warrant Registration Rights Agreement
and that certain Registration Rights Agreement dated the date hereof with
respect to the Company's Senior Discount Notes and to revise the registration
rights in the Foothill Warrant (as defined in Section 2.2(b)(ii) hereof).
WHEREAS, the Company and the Investors desire to amend and restate the
Existing Agreement in order to allow for, and coordinate with, the registration
rights granted under the Warrant Registration Rights Agreement and to make
certain other revisions to the Existing Agreement.
NOW, THEREFORE, in consideration of the mutual promises, representations,
warranties, covenants and conditions set forth in this Agreement, the parties
mutually agree as follows:
SECTION 1. GENERAL.
1.1 DEFINITIONS. As used in this Agreement the following terms shall
have the following respective meanings:
"AFFILIATE" of a Person means any Person controlling, controlled
by, or under common control with such Person, with "control" and its correlative
terms meaning the possession, directly or indirectly, of the power to direct or
cause the direction of management or policies (whether through ownership of
securities or any partnership or other ownership interest, by contract or
otherwise) of a Person. For the purposes of this Agreement, control shall
include the possession, directly or indirectly, through one or more
intermediaries, of (a) in the case of a corporation, 50% or more of the
outstanding voting securities thereof; (b) in the case of a limited liability
company, partnership, limited partnership or venture, the right to 50% or more
of the distributions therefrom (including liquidating distributions); and (c) in
the case of any other Person, 50% or more of the economic or beneficial interest
therein. For the purposes of this Agreement, control shall also include serving
as manager or general partner of a Person or performing similar functions for a
Person.
"COMMON STOCK" means shares of the Company's Series A Common
Stock and the Company's Series B Common Stock.
2
<PAGE>
"COMMON WARRANTS" means warrants for the Company's Series B
Common Stock issued to purchasers of the Company's Series C Preferred set forth
on EXHIBIT A.
"COMMON WARRANT SHARES" means Series B Common Stock issued or
issuable upon exercise of the Common Warrants.
"DEMAND HOLDERS" means holders of Demand Shares.
"DEMAND SHARES" means Registrable Securities which are (i) Series
C Conversion Shares, (ii) Common Warrant Shares, (iii) Series A Conversion
Shares, (iv) New Equityholder Warrant Shares and (v) shares of Series B Common
Stock purchased by Spectra 3 or Enron pursuant to Section 1.c. of the Common
Stock Purchase Agreement dated as of December 30, 1997, as amended, by and among
the Company and the New Equityholders.
"DEMAND SHARES THEN OUTSTANDING" shall be the number of shares
determined by calculating the total number of shares of Series B Common Stock
that are Demand Shares and either (i) are then issued and outstanding or (ii)
are issuable pursuant to then exercisable or convertible securities, including
the Common Warrants, the Series A Common Stock and the New Equityholder
Warrants.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
"FINANCIAL ADVISOR WARRANTS" means warrants for the Company's
Series B Common Stock issued to financial advisors of the Company in connection
with the Company's Series C financing set forth on EXHIBIT B.
"FINANCIAL ADVISOR WARRANT SHARES" means Common Stock issued or
issuable upon exercise of the Financial Advisor Warrants.
"FORM S-3" means such form under the Securities Act as in effect
on the date hereof or any successor registration form under the Securities Act
subsequently adopted by the SEC which permits inclusion or incorporation of
substantial information by reference to other documents filed by the Company
with the SEC.
"HOLDER" means an Investor and any holder of record of
Registrable Securities to whom registration rights granted under this Agreement
have been assigned in accordance with Section 2.10 hereof.
"INITIAL OFFERING" means the Company's first firm commitment
underwritten public offering of its Common Stock registered under the Securities
Act.
"INITIATING HOLDERS" has the meaning set forth in Section 2.2
below.
"NEW EQUITYHOLDER WARRANTS" means warrants to purchase the
Company's Series B Common Stock issued to the New Equityholders as set forth on
EXHIBIT D or pursuant to Section
3
<PAGE>
1.c. of the Common Stock Purchase Agreement dated as of December 30, 1997, as
amended, by and among the Company and the New Equityholders.
"NEW EQUITYHOLDER WARRANT SHARES" means Series B Common Stock
issued or issuable upon exercise of the New Equityholder Warrants.
"NEW WARRANTS" means warrants for the Company's Series B Common
Stock issued to certain entities in connection with financing transactions
completed in August and September 1997 as set forth on EXHIBIT C.
"NEW WARRANT SHARES" means Series B Common Stock issued or
issuable upon exercise of the New Warrants.
"PERSON" means any natural person, corporation, limited
partnership, limited liability company, general partnership, joint stock
company, joint venture, association, company, trust, bank, trust company, land
trust, business trust or other organization, whether or not a legal entity, and
any governmental entity, public power authority, municipality or agency.
"PREFERRED STOCK" means shares of the Company's Preferred Stock,
no par value per share.
"QUALIFIED PUBLIC OFFERING" has the meaning set forth in Section
2.2 below.
"REGISTER," "REGISTERED," and "REGISTRATION" refer to a
registration effected by preparing and filing a registration statement in
compliance with the Securities Act, and the declaration or ordering of
effectiveness of such registration statement.
"REGISTRABLE SECURITIES" means (i) the Common Warrant Shares,
(ii) the Financial Advisor Warrant Shares (iii) the New Warrant Shares (iv)
Series B Conversion Shares, (v) Series C Conversion Shares, (vi) the Series A
Conversion Shares, (vii) shares of Series B Common Stock issued or issuable upon
exercise of the New Equityholder Warrants, (viii) any shares of Series B Common
Stock purchased by Spectra 3 or Enron pursuant to Section 1.c. of the Common
Stock Purchase Agreement dated as of December 30, 1997, and (ix) any Series B
Common Stock of the Company issued as (or issuable upon the conversion or
exercise of any warrant, right or other security which is issued as) a dividend
or other distribution with respect to, or in exchange for or in replacement of
such above-described securities. Notwithstanding the foregoing, Registrable
Securities shall not include any securities which have previously been sold by a
person to the public either pursuant to a registration statement or Rule 144
under the Securities Act ("Rule 144") or sold in a private transaction in which
the transferor's rights under Article II of this Agreement are not assigned.
"REGISTRABLE SECURITIES THEN OUTSTANDING" shall be the number of
shares determined by calculating the total number of shares of the Company's
Series B Common Stock that are Registrable Securities and either (1) are then
issued and outstanding or (2) are issuable
4
<PAGE>
pursuant to then exercisable or convertible securities, including the Common
Warrants, the Financial Advisor Warrants, the New Warrants, the Series A Common
Stock and the New Equityholder Warrants.
"REGISTRATION EXPENSES" shall mean all expenses incurred by the
Company in complying with Sections 2.2., 2.3 and 2.4 hereof including, without
limitation, all registration and filing fees, printing expenses, fees and
disbursements of counsel for the Company, reasonable fees and disbursements of a
single special counsel for the Holders, blue sky fees and expenses and the
expense of any special audits incident to or required by any such registration
(but excluding the compensation of regular employees of the Company which shall
be paid in any event by the Company).
"SEC" or "COMMISSION" means the Securities and Exchange
Commission.
"SECURITIES ACT" shall mean the Securities Act of 1933, as
amended.
"SELLING EXPENSES" shall mean all underwriting discounts and
selling commissions applicable to the sale.
"SENIOR DISCOUNT NOTES" means $470,000,000 in aggregate principal
amount at maturity of the Company's 13 % Senior Discount Notes due 2008.
"SERIES A COMMON STOCK" means shares of the Company's Series A
common stock.
"SERIES A CONVERSION SHARES" means shares of the Company's Series
B Common Stock issued or issuable upon conversion of the Series A Common Stock.
"SERIES B COMMON STOCK" means shares of the Company's Series B
common stock.
"SERIES B CONVERSION SHARES" means Series B Common Stock of the
Company issued on conversion of the Series B Preferred.
"SERIES B HOLDERS" means the holders of Series B Conversion
Shares.
"SERIES C CONVERSION SHARES" means Series B Common Stock of the
Company issued on conversion of the Series C Preferred.
"SERIES C HOLDERS" means holders of Series C Conversion Shares or
Common Warrants issued in connection with the issuance of the Series C Preferred
or Common Warrant Shares issued upon exercise of such Common Warrants.
5
<PAGE>
"UNIT WARRANTS" means warrants to purchase the Company's Series B
Common Stock originally issued to the Initial Purchasers pursuant to that
certain Purchase Agreement dated as of April 6, 1998 among the Company and the
Initial Purchasers.
"UNIT WARRANT HOLDERS" means holders of the Unit Warrants.
"UNIT WARRANT SHARES" means Registrable Securities (as defined in
the Warrant Registration Rights Agreement).
"WARRANT REGISTRATION RIGHTS AGREEMENT" means that certain
Warrant Registration Rights Agreement dated the date hereof by and among the
Company and the Initial Purchasers.
SECTION 2. RESTRICTIONS ON TRANSFER; REGISTRATION.
2.1 RESTRICTIONS ON TRANSFER.
(a) Each holder of Registrable Securities agrees not to make any
disposition of all or any portion of such securities unless and until:
(i) There is then in effect a registration statement
under the Securities Act covering such proposed disposition and such disposition
is made in accordance with such registration statement,
(ii) (A) The transferee has agreed in writing to be bound
by the terms of this Agreement, (B) such holder shall have notified the Company
of the proposed disposition and shall have furnished the Company with a detailed
statement of the circumstances surrounding the proposed disposition, and (C) if
reasonably requested by the Company, such holder shall have furnished the
Company with an opinion of counsel, reasonably satisfactory to the Company, that
such disposition will not require registration of such securities under the
Securities Act, or
(iii) The transfer is made pursuant to the provisions of
Rule 144 and the holder furnishes the Company with (A) an opinion of counsel,
reasonably satisfactory to the Company, that such disposition will not require
registration of such securities under the Securities Act or (B) seller and
broker representation letters that reasonably satisfy the Company that such
disposition will not require registration of such securities under the
Securities Act.
Notwithstanding the provisions of paragraphs (i), (ii) and (iii) above, no such
registration statement or opinion of counsel shall be necessary for a transfer
by a holder which is (A) a partnership, to its partners or former partners in
accordance with partnership interests, (B) a corporation, to its shareholders in
accordance with their interest in the corporation, (C) a limited liability
company, to its members or former members in accordance with their interest in
the limited liability company, or (D) to the holder's family member or trust for
the benefit of an
6
<PAGE>
individual holder and his or her family members, provided the transferee will be
subject to the terms of this Agreement to the same extent as if he were an
original holder hereunder.
(b) Each certificate representing Registrable Securities shall
(unless otherwise permitted by the provisions of this Agreement) be stamped or
otherwise imprinted with a legend substantially similar to the following (in
addition to any legend required under applicable state securities laws or as
provided elsewhere in this Agreement):
THE SECURITIES REPRESENTED HEREBY HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933 (THE "ACT") AND MAY NOT BE OFFERED, SOLD
OR OTHERWISE TRANSFERRED, ASSIGNED, PLEDGED,
HYPOTHECATED OR OTHERWISE DISPOSED OF UNLESS
AND UNTIL REGISTERED UNDER THE ACT OR UNLESS
THE COMPANY HAS RECEIVED AN OPINION OF
COUNSEL SATISFACTORY TO THE COMPANY AND ITS
COUNSEL THAT SUCH REGISTRATION IS NOT
REQUIRED.
In addition to the foregoing, each certificate representing
shares of Series A Common Stock shall be stamped or otherwise imprinted with the
following legend:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE AUTOMATICALLY
CONVERT INTO THE SAME NUMBER OF SHARES OF SERIES B COMMON
STOCK OF THE CORPORATION UPON ANY SALE OR TRANSFER TO ANY
PERSON OR ENTITY OTHER THAN CERTAIN PERMITTED TRANSFEREES,
AN AFFILIATE OF DONALD L. STURM OR ENRON CAPITAL & TRADE
RESOURCES CORP. OR, WITH RESPECT TO SHARES HELD BY COLORADO
SPECTRA 3, LLC, UPON THE TRANSFER OF A CONTROLLING INTEREST
IN COLORADO SPECTRA 3, LLC TO ANY PERSON OR ENTITY OTHER
THAN ENRON CAPITAL & TRADE RESOURCES CORP., DONALD L. STURM,
A PERMITTED TRANSFEREE OR ONE OF THEIR AFFILIATES, AS
PROVIDED IN THE CORPORATION'S AMENDED AND RESTATED ARTICLES
OF INCORPORATION.
(c) The Company shall be obligated to reissue promptly
unlegended certificates or warrants at the request of any holder thereof if the
holder shall have obtained an opinion of
7
<PAGE>
counsel (which counsel may be counsel to the Company) reasonably acceptable to
the Company to the effect that the securities proposed to be disposed of may
lawfully be so disposed of without registration, qualification or legend.
(d) Any legend endorsed on an instrument pursuant to applicable
state securities laws and the stop-transfer instructions with respect to such
securities shall be removed upon receipt by the Company of an order of the
appropriate blue sky authority authorizing such removal.
2.2 DEMAND REGISTRATION.
(a) Subject to the conditions of this Section 2.2, if the
Company shall receive a written request (a "DEMAND REGISTRATION REQUEST") from
the holders of not less than twenty-five percent (25%) of the aggregate number
of Demand Shares then outstanding (the "INITIATING HOLDERS") that the Company
file a registration statement under the Securities Act covering the registration
(a "DEMAND REGISTRATION") of at least ten percent (10%) of the aggregate number
of the Demand Shares then outstanding (a "QUALIFIED PUBLIC OFFERING"), then the
Company shall, within fifteen (15) days of the receipt thereof, give written
notice of such request to all Demand Holders which hold Registrable Securities,
and subject to the limitations of this Section 2.2, use its best efforts to
effect, as soon as practicable, the Demand Registration under the Securities Act
of all the Demand Shares that such holders request to be registered. Each
Demand Holder desiring to include in any such registration statement all or any
part of the Registrable Securities held by it shall, within fifteen (15) days
after the above-described notice from the Company, so notify the Company in
writing. If a Holder decides not to include all of its Registrable Securities
in any registration statement thereafter filed by the Company, such Holder shall
nevertheless continue to have the right to include any Registrable Securities in
any subsequent Demand Registration or other registration statement or
registration statements as may be filed by the Company with respect to offerings
of its securities, all upon the terms and conditions set forth herein.
(b) (i) If the Initiating Holders intend to distribute such
Demand Shares covered by their request by means of an underwriting, they shall
so advise the Company as a part of their request made pursuant to this Section
2.2 and the Company shall include such information in the written notice
referred to in Section 2.2(a). In such event, the right of any Demand Holder to
include Demand Shares in such Demand Registration shall be conditioned upon such
holder's participation in such underwriting and the inclusion of such holder's
Demand Shares, which are Registrable Securities, in the underwriting (unless
otherwise mutually agreed by a majority in interest of the Initiating Holders
and such holder) to the extent provided herein. All holders proposing to
distribute their securities through such underwriting shall enter into an
underwriting agreement in customary form with the underwriter or underwriters
selected for such underwriting by a majority in interest of the Initiating
Holders (which underwriter or underwriters shall be reasonably acceptable to the
Company). Notwithstanding any other provision of this Section 2.2 and except as
set forth in Section 2.2(b)(ii) below, if the underwriter advises the Company in
writing (a "CUTBACK NOTICE") that marketing factors require a limitation of the
number of securities
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to be underwritten (including Registrable Securities) then the Company shall so
advise all Demand Holders that have requested to have Demand Shares included in
the registration, and the number of shares that may be included in the
underwriting shall be allocated to the holders of such Demand Shares on a pro
rata basis based on the number of Demand Shares held by all such holders
(including the Initiating Holders); provided that no securities proposed to be
included by the Company or requested to be included by any other holder of
securities shall be included in such registration unless all of the Demand
Shares requested to be included in such registration are included. Any Demand
Shares excluded or withdrawn from such underwriting shall be withdrawn from the
registration. If a person who has requested inclusion in such registration as
provided above does not agree to the terms of any such underwriting, such person
shall be excluded therefrom by written notice from the Company, the underwriter
or the Initiating Holders. Any Registrable Securities or other securities
excluded or withdrawn from such underwriting shall also be withdrawn from such
registration. If shares are so withdrawn from the registration and if the
number of shares to be included in such registration was previously reduced as a
result of marketing factors pursuant to this Section 2.2(b)(i), then the Company
shall offer to all Holders who have retained rights to include securities in the
registration the right to include additional securities in the registration in
an aggregate amount equal to the number of shares so withdrawn, with such shares
to be allocated among such Holders requesting additional inclusion in accordance
with the priorities set forth in this Section 2.2(b)(i).
(ii) In the event that the Initiating Securityholders (as
defined in that certain Warrant to Purchase Shares of Common Stock dated April
13, 1998, issued by the Company to Foothill Capital Corporation (the "FOOTHILL
WARRANT")) have requested registration pursuant to Section 9.1 of the Foothill
Warrant by a notice delivered to the Company on the same date as a Demand
Registration Request pursuant to this Section 2.2, then, in the event of a
Cutback Notice, the securities to be included in such registration shall be
included in the following order: (i) first, all of the securities requested to
be included therein by the Initiating Securityholders under the Foothill
Warrant, pro rata among such holders according to the number of securities
requested to be included by each such holder requesting inclusion therein (or as
they may otherwise agree); (ii) second, the Demand Shares requested to be
included therein by the Demand Holders and the securities requested to be
included therein by the other Securityholders (as defined in the Foothill
Warrant), pro rata among such holders according to the number of Demand Shares
and Securityholders' securities requested to be included by each such holder
requesting inclusion therein (or as they may otherwise agree); (iii) third, the
Unit Warrant Shares requested to be included therein by the Unit Warrant
Holders, pro rata among such Unit Warrant Holders according to the number of
Unit Warrant Shares requested to be included by each such Unit Warrant Holder
(or as they may otherwise agree); (iv) fourth, any securities the Company
proposes to include therein; and (v) fifth, any other securities proposed to be
included therein, pro rata among the holders of such other securities according
to the number of securities requested to be included by each such holder
proposed to be included therein (or as they may otherwise agree). All decisions
to be made by holders regarding whether the offering should be underwritten,
selection of underwriters and other transaction mechanics in a registration
governed by this
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Section 2.2(b)(ii) shall be controlled by a majority of the Demand Shares and
Securityholders' securities to be included therein.
(c) The Company shall not be required to effect a registration
pursuant to this Section 2.2:
(i) prior to the earlier of (i) January 31, 2000, or (ii)
the Initial Offering of the Company's Series B Common Stock; or
(ii) after the Company has effected three (3)
registrations pursuant to this Section 2.2, and such registrations have been
declared or ordered effective; or
(iii) during the period starting with the date of filing
of, and ending on the date one hundred eighty (180) days following the effective
date of, any registration statement; provided that the Company makes reasonable
good faith efforts to cause such registration statement to become effective; or
(iv) if within fifteen (15) days of receipt of a written
request from Initiating Holders pursuant to Section 2.2(a), the Company gives
notice to the Initiating Holders of the Company's intention to file a
registration statement covering the Company's Series B Common Stock within sixty
(60) days and does so file within such sixty-day period and makes reasonable
good faith efforts to cause such registration to become effective; or
(v) if the Company shall furnish to the Initiating
Holders requesting a registration statement pursuant to this Section 2.2 and the
other Demand Holders, a certificate signed by the Chairman of the Board stating
that in the good faith judgment of the Board of Directors of the Company, it
would be seriously detrimental to the Company and its shareholders for such
registration statement to be effected at such time, in which event the Company
shall have the right to defer such filing for a period of not more than ninety
(90) days after receipt of the request of the Initiating Holders; provided that
such right to delay a request shall be exercised by the Company not more than
once in any twelve (12) month period; or
(vi) in any particular jurisdiction in which the Company
would be required to qualify to do business or to execute a general consent to
service of process in effecting such registration, qualification or compliance.
2.3 PIGGYBACK REGISTRATIONS.
(a) The Company shall notify all Holders of Registrable
Securities in writing at least thirty (30) days prior to the filing of any
registration statement under the Securities Act for purposes of a public
offering of securities of the Company (including, but not limited to,
registration statements relating to secondary offerings of securities of the
Company, but excluding registration statements relating to employee benefit
plans or with respect to corporate reorganizations or other transactions under
Rule 145 of the Securities Act or otherwise on Form S-
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4 or any successor or similar form) and, subject to the terms of this Section
2.3, will afford each such Holder an opportunity to include in such registration
statement all or part of such Registrable Securities held by such Holder. Each
Holder desiring to include in any such registration statement all or any part of
the Registrable Securities held by it shall, within fifteen (15) days after the
above-described notice from the Company, so notify the Company in writing. Each
Holder shall agree to a method of disposition of the Registrable Securities of
such Holder included in such registration statement that is consistent with the
method of disposition described in the applicable registration statement. If a
Holder decides not to include all of its Registrable Securities in any
registration statement thereafter filed by the Company, such Holder shall
nevertheless continue to have the right to include any Registrable Securities in
any subsequent registration statement or registration statements as may be filed
by the Company with respect to offerings of its securities, all upon the terms
and conditions set forth herein.
(b) UNDERWRITING. (i) If the registration statement under
which the Company gives notice under this Section 2.3 is for an underwritten
offering, the Company shall so advise the Holders of Registrable Securities. In
such event, the right of any such Holder to be included in a registration
pursuant to this Section 2.3 shall be conditioned upon such Holder's
participation in such underwriting and the inclusion of such Holder's
Registrable Securities in the underwriting to the extent provided herein. All
Holders proposing to distribute their Registrable Securities through such
underwriting shall enter into an underwriting agreement in customary form with
the underwriter or underwriters selected for such underwriting by the Company.
Notwithstanding any other provision of the Agreement, if the underwriter
determines in good faith that marketing factors require a limitation of the
number of shares to be underwritten, other than a registration requested
pursuant to Section 2.2 hereof, pursuant to Section 9.1 of the Foothill Warrant
or Section 2.1 of the Warrant Registration Rights Agreement, the number of
shares that may be included in the underwriting shall be allocated as follows:
(v) first, (so long as the registration is a primary
underwritten offering on behalf of the Company) to the Company; (w) second,
to the Securityholders under the Foothill Warrant with respect to their
securities requested to be included therein, on a pro rata basis according
to the number of securities requested to be included therein by each such
Securityholder requesting inclusion therein (or as they may otherwise
agree); (x) third, to the Demand Holders with respect to the Demand Shares
requested to be included therein and to the Unit Warrant Holders with
respect to the Unit Warrant Shares requested to be included therein, pro
rata among such holders according to the total number of Demand Shares and
Unit Warrant Shares requested to be included by each such holder requesting
inclusion therein (or as they may otherwise agree); (y) fourth, to the
remaining Holders on a pro rata basis based on the total number of
Registrable Securities held by such Holders (or as they may otherwise
agree); and (z) fifth, any other shareholder of the Company (other than a
Holder) on a pro rata basis based on the number of shares of Common Stock
(including securities convertible into Common Stock on an as-converted to
Common Stock basis) (or as they may otherwise agree).
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If a person who has requested inclusion in such registration as provided
above does not agree to the terms of any such underwriting, such person shall
be excluded therefrom by written notice from the Company, the underwriter or
the Initiating Holders. Any Registrable Securities or other securities
excluded or withdrawn from such underwriting shall also be withdrawn from
such registration. If shares are so withdrawn from the registration and if
the number of shares to be included in such registration was previously
reduced as a result of marketing factors pursuant to this Section 2.3(b)(i),
then the Company shall offer to all Holders who have retained rights to
include securities in the registration the right to include additional
securities in the registration in an aggregate amount equal to the number of
shares so withdrawn, with such shares to be allocated among such Holders (and
the Securityholders under the Foothill Warrant and the Unit Warrant Holders
under the Warrant Registration Rights Agreement) requesting additional
inclusion in accordance with the priorities set forth in this Section
2.3(b)(i).
So long as the registration is a primary underwritten offering on
behalf of the Company, no such reduction shall reduce the securities being
offered by the Company for its own account to be included in the registration
and underwriting, except in no event shall the amount of securities of the
selling Holders included in the registration, together with the Securityholders
under the Foothill Warrant and the Unit Warrant Holders under the Warrant
Registration Rights Agreement, be reduced below ten percent (10%) of the total
amount of securities included in such registration, unless such offering is the
Initial Offering and such registration does not include shares of any other
selling shareholders, in which event any or all of the Registrable Securities of
the Holders, together with the Securityholders under the Foothill Warrant and
the Unit Warrant Holders under the Warrant Registration Rights Agreement, may be
excluded in accordance with the immediately preceding paragraph.
(ii) In the event of (A) a registration pursuant to
Section 9.1 of the Foothill Warrant (a "QUALIFIED FOOTHILL DEMAND"), (B) a
registration pursuant to Section 2.2 hereof (a "QUALIFIED HOLDER DEMAND") or (C)
a registration pursuant to Section 2.1 of the Warrant Registration Rights
Agreement (a "QUALIFIED WARRANTHOLDER DEMAND"), then, in addition to any notices
required pursuant to the terms of those sections, the Company shall give written
notice of such proposed filing to (i) all Securityholders under the Foothill
Warrant and all Unit Warrant Holders under the Warrant Registration Rights
Agreement, in the case of a Qualified Holder Demand, (ii) to all Demand Holders
and Unit Warrant Holders under the Warrant Registration Rights Agreement, in the
case of a Qualified Foothill Demand and (iii) to all Demand Holders and
Securityholders under the Foothill Warrant, in the case of a Qualified
Warrantholder Demand, promptly (and in any event at least twenty (20) days
before the anticipated filing date), offering the Securityholders, the Demand
Holders and/or the Unit Warrant Holders, as the case may be, the opportunity to
include in such registration statement such number of securities as they may
request and which could be included in a registration covered by Section 2.3
hereof, Section 9.2 of the Foothill Warrant or Section 2.2 of the Warrant
Registration Rights Agreement. Except as provided below, the inclusion of
securities pursuant hereto shall be on the same terms and conditions as for
inclusion in a registration under Section 2.3 hereof, Section 9.2 of the
Foothill Warrant or Section 2.2 of the Warrant Registration Rights Agreement.
Notwithstanding the terms
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of Section 2.2 hereof, Section 9.1 of the Foothill Warrant or Section 2.1 of the
Warrant Registration Rights Agreement, in an underwritten public offering
pursuant to a Qualified Foothill Demand, a Qualified Holder Demand or a
Qualified Warrantholder Demand where the managing underwriter advises that not
all securities requested to be included can reasonably be sold in the
contemplated distribution, then the securities to be included shall be included
in the following order:
(a) in a Qualified Foothill Demand, (v) first, all
of the securities requested to be included in the registration by the Initiating
Securityholders under the Foothill Warrant, pro rata among such Initiating
Securityholders according to the number of securities requested to be included
by each such Initiating Securityholder requesting inclusion therein (or as they
may otherwise agree); (w) second, the securities requested to be included
therein by the other Securityholders under the Foothill Warrant, pro rata among
such Securityholders according to the number of securities requested to be
included by each such Securityholder (or as they may otherwise agree); (x)
third, the Demand Shares requested to be included therein by the Demand Holders
pursuant to this Section 2.3(b)(ii) and the Unit Warrant Shares requested to be
included therein by the Unit Warrant Holders pursuant to this Section
2.3(b)(ii), pro rata among such Demand Holders and Unit Warrant Holders
according to the number of securities requested to be included by each such
Demand Holder or Unit Warrant Holder requesting inclusion therein (or as they
may otherwise agree); (y) fourth, any securities the Company proposes to include
therein; and (z) fifth, any other securities proposed to be included therein,
pro rata among the holders of such other securities according to the number of
securities requested to be included by each such holder proposing inclusion
therein (or as they may otherwise agree);
(b) in a Qualified Holder Demand, (v) first, all of
the Demand Shares requested to be included therein by Demand Holders, pro rata
among such Demand Holders according to the number of Registrable Securities
requested to be included by each such Demand Holder (or as they may otherwise
agree); (w) second, the securities requested to be included by the
Securityholders under the Foothill Warrant pursuant to this Section 2.3(b)(ii),
pro rata among such Securityholders according to the number of securities
requested to be included by each such Securityholder requesting inclusion
therein (or as they may otherwise agree); (x) third, the Unit Warrant Shares
requested to be included therein by Unit Warrant Holders pursuant to this
Section 2.3(b)(ii), pro rata among such Unit Warrant Holders according to the
number of Unit Warrant Shares requested to be included by each such Unit Warrant
Holder (or as they may otherwise agree); (y) fourth, any securities the Company
proposes to include therein; and (z) fifth, any other securities proposed to be
included therein, pro rata among the holders of such other securities according
to the number of securities requested to be included by each such holder
proposing inclusion therein (or as they may otherwise agree); and
(c) in a Qualified Warrantholder Demand, (v) first,
all of the Unit Warrant Shares requested to be included therein by Unit Warrant
Holders, pro rata among such Unit Warrant Holders according to the number of
Unit Warrant Shares requested to be included by each such Unit Warrant Holder
(or as they may otherwise agree); (w) second, the
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<PAGE>
securities requested to be included by the Securityholders under the Foothill
Warrant pursuant to this Section 2.3(b)(ii), pro rata among such Securityholders
according to the number of securities requested to be included by each such
Securityholder requesting inclusion therein (or as they may otherwise agree);
(x) third, the Demand Shares requested to be included therein by Demand Holders
pursuant to this Section 2.3(b)(ii), pro rata among such Demand Holders
according to the number of Registrable Securities requested to be included by
each such Demand Holder (or as they may otherwise agree); (y) fourth, any
securities the Company proposes to include therein; and (z) fifth, any other
securities proposed to be included therein, pro rata among the holders of such
other securities according to the number of securities requested to be included
by each such holder proposing inclusion therein (or as they may otherwise
agree).
(c) RIGHT TO TERMINATE REGISTRATION. The Company shall have the
right to terminate or withdraw any registration initiated by it under this
Section 2.3 prior to the effectiveness of such registration whether or not any
Holder has elected to include securities in such registration. The Registration
Expenses of such withdrawn registration shall be borne by the Company in
accordance with Section 2.5 hereof.
2.4 FORM S-3 REGISTRATION. In case the Company shall receive from
any Demand Holder or Series B Holder a written request or requests that the
Company effect a registration on Form S-3 and any related qualification or
compliance with respect to all or a part of the Registrable Securities owned by
such Holders, the Company will:
(a) promptly give written notice of the proposed registration,
and any related qualification or compliance, to all Demand Holders and Series B
Holders which hold Registrable Securities; and
(b) the Company shall keep such Form S-3 registration effective
for a period of at least ninety (90) days or until the Holder or Holders have
completed the distribution described in the Form S-3 registration statement
relating thereto, whichever first occurs; and
(c) as soon as practicable, effect such registration and all
such qualifications and compliances as may be so requested and as would permit
or facilitate the sale and distribution of all or such portion of such holders'
Registrable Securities as are specified in such request, together with all or
such portion of the Demand Shares and Series B Conversion Shares, which are
Registrable Securities, of any other Demand Holder or Series B Holder joining in
such request as are specified in a written request given within fifteen (15)
days after receipt of such written notice from the Company; provided, however,
that the Company shall not be obligated to effect any such registration,
qualification or compliance pursuant to this Section 2.4:
(i) if Form S-3 is not available for such offering by
the Holders, or
(ii) if the Demand Holders or Series B Holders, together
with the holders of any other securities of the Company entitled to inclusion in
such registration, propose to
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<PAGE>
sell Registrable Securities, and such other securities (if any) at an aggregate
price to the public of less than $500,000, or
(iii) if the Company shall furnish to such holders a
certificate signed by the Chairman of the Board of Directors of the Company
stating that in the good faith judgment of the Board of Directors of the
Company, it would be seriously detrimental to the Company and its shareholders
for such Form S-3 registration to be effected at such time, in which event the
Company shall have the right to defer the filing of the Form S-3 registration
statement for a period of not more than ninety (90) days after receipt of the
initial request of the Demand Holder or Series B Holder under this Section 2.4;
provided, that such right to delay a request shall be exercised by the Company
not more than once in any twelve (12) month period, or
(iv) if the Company has, within the twelve (12) months
prior to such request, already effected two registrations on Form S-3 pursuant
to this Section 2.4, or
(v) in any particular jurisdiction in which the Company
would be required to qualify to do business or to execute a general consent to
service of process in effecting such registration, qualification or compliance,
or
(vi) if within thirty (30) days of receipt of a written
request from a Demand Holder or a Series B Holder pursuant to this Section 2.4,
the Company gives notice to the Demand Holders and Series B Holders, which hold
Registrable Securities, of the Company's intention to file a registration
statement covering the Company's Series B Common Stock within ninety (90) days
and does so file within said 90-day period and makes reasonable good faith
efforts to cause such registration to become effective.
(d) Subject to the foregoing, the Company shall file a Form S-3
registration statement covering the Registrable Securities and other securities
so requested to be registered as soon as practicable after receipt of the
request or requests of such holders. All such Registration Expenses incurred in
connection with registrations requested pursuant to this Section 2.4 after the
first two (2) registrations shall be paid by the selling holders pro rata in
proportion to the number of shares sold by each.
(e) If a Form S-3 registration hereunder is to be an
underwritten offering, then such underwritten Form S-3 offering must comply with
the requirements of Section 2.2 hereof.
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2.5 EXPENSES OF REGISTRATION. Except as specifically provided
herein, all Registration Expenses incurred in connection with any registration,
qualification or compliance pursuant to Section 2.2, any registration under
Section 2.3 and the first two (2) registrations under Section 2.4 herein shall
be borne by the Company. All Selling Expenses incurred in connection with any
registrations hereunder shall be borne by the holders of the securities so
registered and by the Company, if it participates in the registration, pro rata
on the basis of the number of shares so registered. The Company shall not,
however, be required to pay for expenses of any registration proceeding begun
pursuant to Section 2.2 or 2.4, the request of which has been subsequently
withdrawn by the Holders unless (a) the withdrawal is based upon material
adverse information concerning the Company of which the Holders were not aware
at the time of such request or (b) the Holders of a majority of Registrable
Securities agree to forfeit their right to one requested registration pursuant
to Section 2.2 or Section 2.4, as applicable, in which event such right shall be
forfeited by all Holders. If the holders are required to pay the Registration
Expenses, such expenses shall be borne by the Holders of Registrable Securities
and any other securities requesting such registration in proportion to the
number of shares for which registration was requested. If the Company is
required to pay the Registration Expenses of a withdrawn offering pursuant to
clause (a) above, then the Holders shall not forfeit their rights pursuant to
Section 2.2 or Section 2.4.
2.6 OBLIGATIONS OF THE COMPANY. Whenever required to effect the
registration of any Registrable Securities, the Company shall, as expeditiously
as reasonably possible:
(a) Prepare and file with the SEC a registration statement with
respect to such Registrable Securities and use all reasonable efforts to cause
such registration statement to become effective, and keep such registration
statement effective for up to ninety (90) days or, if earlier, until the Holder
or Holders have completed the distribution related thereto.
(b) Prepare and file with the SEC such amendments and
supplements to such registration statement and the prospectus used in connection
with such registration statement as may be necessary to comply with the
provisions of the Securities Act with respect to the disposition of all
securities covered by such registration statement.
(c) Furnish to the Holders such number of copies of a
prospectus, including a preliminary prospectus, in conformity with the
requirements of the Securities Act, and such other documents as they may
reasonably request in order to facilitate the disposition of Registrable
Securities owned by them.
(d) Use its best efforts to register and qualify the securities
covered by such registration statement under such other securities or Blue Sky
laws of such jurisdictions as shall be reasonably requested by the Holders,
provided that the Company shall not be required in connection therewith or as a
condition thereto to qualify to do business or to file a general consent to
service of process in any such states or jurisdictions.
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(e) In the event of any underwritten public offering, enter into
and perform its obligations under an underwriting agreement, in usual and
customary form, with the managing underwriter(s) of such offering. Each Holder
participating in such underwriting shall also enter into and perform its
obligations under such an agreement.
(f) Notify each Holder of Registrable Securities covered by such
registration statement at any time when a prospectus relating thereto is
required to be delivered under the Securities Act of the happening of any event
as a result of which the prospectus included in such registration statement, as
then in effect, includes an untrue statement of a material fact or omits to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading in the light of the circumstances then
existing.
(g) Furnish, at the request of a majority of the Holders
participating in the registration, on the date that such Registrable Securities
are delivered to the underwriters for sale, if such securities are being sold
through underwriters, or, if such securities are not being sold through
underwriters, on the date that the registration statement with respect to such
securities becomes effective, (i) an opinion, dated as of such date, of the
counsel representing the Company for the purposes of such registration, in form
and substance as is customarily given to underwriters in an underwritten public
offering and reasonably satisfactory to a majority in interest of the Holders
requesting registration, addressed to the underwriters, if any, and to the
Holders requesting registration of Registrable Securities and (ii) a letter
dated as of such date, from the independent certified public accountants of the
Company, in form and substance as is customarily given by independent certified
public accountants to underwriters in an underwritten public offering and
reasonably satisfactory to a majority in interest of the Holders requesting
registration, addressed to the underwriters, if any, and if permitted by
applicable accounting standards, to the Holders requesting registration of
Registrable Securities.
2.7 TERMINATION OF REGISTRATION RIGHTS. All registration rights
granted under this Article II shall terminate and be of no further force and
effect nine (9) years after the date of the Company's Initial Offering. In
addition, a Holder's registration rights shall expire if all Registrable
Securities held by and issuable to such Holder may be sold under Rule 144 (i) by
complying with the volume restriction contained in Rule 144(e)(1)(i) during any
ninety (90) day period, (ii) by complying with the volume restriction contained
in any other section of Rule 144 during any ninety (90) day period following the
expiration of the first 90 day period in which the Holder would have been able
to sell all Registrable Securities held by and issuable to such Holder pursuant
to Rule 144, or (iii) pursuant to Rule 144(k).
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2.8 DELAY OF REGISTRATION; FURNISHING INFORMATION.
(a) No Holder shall have any right to obtain or seek an
injunction restraining or otherwise delaying any such registration as the result
of any controversy that might arise with respect to the interpretation or
implementation of this Article II.
(b) It shall be a condition precedent to the obligations of the
Company to take any action pursuant to Section 2.2, 2.3 or 2.4 that the selling
Holders shall furnish to the Company such information regarding themselves, the
Registrable Securities held by them and the intended method of disposition of
such securities as shall be required to effect the registration of their
Registrable Securities.
(c) The Company shall have no obligation with respect to any
registration requested pursuant to Section 2.2 or Section 2.4 if the number of
shares or the anticipated aggregate offering price of the Registrable Securities
to be included in the registration does not equal or exceed the number of shares
or the anticipated aggregate offering price required to originally trigger the
Company's obligation to initiate such registration as specified in Section 2.2
or Section 2.4, whichever is applicable.
2.9 INDEMNIFICATION. In the event any Registrable Securities are
included in a registration statement under Sections 2.2, 2.3 OR 2.4:
(a) To the extent permitted by law, the Company will indemnify,
defend and hold harmless each Holder, the partners, members, officers, directors
and legal counsel of each Holder, any underwriter (as defined in the Securities
Act) for such Holder and each person, if any, who controls such Holder or
underwriter within the meaning of the Securities Act or the Exchange Act,
against any losses, claims, damages, or liabilities (joint or several) to which
they may become subject under the Securities Act, the Exchange Act or other
federal or state law, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon any of the following
statements, omissions or violations (collectively a "VIOLATION") by the Company:
(i) any untrue statement or alleged untrue statement of a material fact
contained in such registration statement, including any preliminary prospectus
or final prospectus contained therein or any amendments or supplements thereto,
(ii) the omission or alleged omission to state therein a material fact required
to be stated therein, or necessary to make the statements therein not
misleading, or (iii) any violation or alleged violation by the Company of the
Securities Act, the Exchange Act, any state securities law or any rule or
regulation promulgated under the Securities Act, the Exchange Act or any state
securities law in connection with the offering covered by such registration
statement; and the Company will reimburse each such Holder, partner, member,
officer or director, underwriter or controlling person for any legal or other
expenses reasonably incurred by them in connection with investigating or
defending any such loss, claim, damage, liability or action; provided, however,
that the indemnity agreement contained in this Section 2.9(a) shall not apply to
amounts paid in settlement of any such loss, claim, damage, liability or action
if such settlement is effected without the consent of the Company, which consent
shall not
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be unreasonably withheld, nor shall the Company be liable in any such case for
any such loss, claim, damage, liability or action to the extent that it arises
out of or is based upon a Violation which occurs in reliance upon and in
conformity with written information furnished expressly for use in connection
with such registration by such Holder, partner, member, officer, director,
underwriter or controlling person of such Holder.
(b) To the extent permitted by law, each Holder will, if
Registrable Securities held by such Holder are included in the securities as to
which such registration, qualification or compliance is being effected,
indemnify, defend and hold harmless the Company, each of its directors, its
officers, and legal counsel and each person, if any, who controls the Company
within the meaning of the Securities Act, any underwriter and any other Holder
selling securities under such registration statement or any of such other
Holder's partners, members, directors or officers or any person who controls
such Holder, against any losses, claims, damages or liabilities (joint or
several) to which the Company or any such director, officer, controlling person,
underwriter or other such Holder, or partner, member, director, officer or
controlling person of such other Holder may become subject under the Securities
Act, the Exchange Act or other federal or state law, insofar as such losses,
claims, damages or liabilities (or actions in respect thereto) arise out of or
are based upon any Violation, in each case to the extent (and only to the
extent) that such Violation occurs in reliance upon and in conformity with
written information furnished by such Holder under an instrument duly executed
by such Holder and stated to be specifically for use in connection with such
registration; and each such Holder will reimburse any legal or other expenses
reasonably incurred by the Company or any such director, officer, controlling
person, underwriter or other Holder, or partner, member, officer, director or
controlling person of such other Holder in connection with investigating or
defending any such loss, claim, damage, liability or action if it is judicially
determined that there was such a Violation; provided, however, that the
indemnity agreement contained in this Section 2.9(b) shall not apply to amounts
paid in settlement of any such loss, claim, damage, liability or action if such
settlement is effected without the consent of the indemnifying Holder, which
consent shall not be unreasonably withheld; provided further, that in no event
shall any indemnity under this Section 2.9 exceed the net proceeds from the
offering received by such indemnifying Holder.
(c) Promptly after receipt by an indemnified party under this
Section 2.9 of notice of the commencement of any action (including any
governmental action), such indemnified party will, if a claim in respect thereof
is to be made against any indemnifying party under this Section 2.9, deliver to
the indemnifying party a written notice of the commencement thereof and the
indemnifying party shall have the right to participate in, and, to the extent
the indemnifying party so desires, jointly with any other indemnifying party
similarly noticed, to assume the defense thereof with counsel mutually
satisfactory to the parties; provided, however, that an indemnified party shall
have the right to retain its own counsel, with the fees and expenses to be paid
by the indemnifying party, if representation of such indemnified party by the
counsel retained by the indemnifying party would be inappropriate due to actual
or potential differing interests between such indemnified party and any other
party represented by such counsel in such proceeding. The failure to deliver
written notice to the indemnifying party within a reasonable time of the
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commencement of any such action, if materially prejudicial to its ability to
defend such action, shall relieve such indemnifying party of any liability to
the indemnified party under this Section 2.9, but the omission so to deliver
written notice to the indemnifying party will not relieve it of any liability
that it may have to any indemnified party otherwise than under this Section 2.9.
(d) If the indemnification provided for in this Section 2.9 is
held by a court of competent jurisdiction to be unavailable to an indemnified
party with respect to any losses, claims, damages or liabilities referred to
herein, the indemnifying party, in lieu of indemnifying such indemnified party
thereunder, shall to the extent permitted by applicable law contribute to the
amount paid or payable by such indemnified party as a result of such loss,
claim, damage or liability such proportion as is appropriate to reflect the
relative fault of the indemnifying party on the one hand and of the indemnified
party on the other in connection with the Violation(s) that resulted in such
loss, claim, damage or liability, as well as any other relevant equitable
considerations. The relative fault of the indemnifying party and of the
indemnified party shall be determined by a court of law by reference to, among
other things, whether the untrue or alleged untrue statement of a material fact
or the omission to state a material fact relates to information supplied by the
indemnifying party or by the indemnified party and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission; provided, that in no event shall any contribution by a
Holder hereunder exceed the net proceeds from the offering received by such
Holder.
(e) The obligations of the Company and Holders under this
Section 2.9 shall survive completion of any offering of Registrable Securities
in a registration statement. No indemnifying party, in the defense of any such
claim or litigation, shall, except with the consent of each indemnified party,
consent to entry of any judgment or enter into any settlement which does not
include as an unconditional term thereof the giving by the claimant or plaintiff
to such indemnified party of a release from all liability in respect to such
claim or litigation.
2.10 ASSIGNMENT OF REGISTRATION RIGHTS. The rights to cause the
Company to register Registrable Securities pursuant to this Article II may be
assigned by a Holder to a transferee or assignee of Registrable Securities which
(i) is an Affiliate of a Holder, (ii) is a subsidiary, parent, shareholder,
member, general partner, limited partner or retired partner of a Holder, (iii)
is a Holder's family member or trust for the benefit of an individual Holder or
his or her family members, or (iv) acquires at least one hundred thousand
(100,000) shares of Registrable Securities (as adjusted for stock splits and
combinations); provided, however, (A) the transferor shall, within ten (10) days
after such transfer, furnish to the Company written notice of the name and
address of such transferee or assignee and the securities with respect to which
such registration rights are being assigned and (B) such transferee shall agree
to be subject to all restrictions set forth in this Agreement.
2.11 AMENDMENT OF REGISTRATION RIGHTS. Any provision of this Article
II may be amended and the observance thereof may be waived (either generally or
in a particular instance and either retroactively or prospectively), only with
the written consent of the Company, Spectra
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3, Enron and the Holders of at least a majority of the Registrable Securities
then outstanding. Any amendment or waiver effected in accordance with this
Section 2.11 shall be binding upon each Holder and the Company. By acceptance
of any benefits under Sections 2.1 to 2.14, Holders of Registrable Securities
hereby agree to be bound by the provisions hereunder.
2.12 LIMITATION ON SUBSEQUENT REGISTRATION RIGHTS. After the date of
this Agreement, the Company shall not, without the prior written consent of the
Company, Spectra 3 and Enron, enter into any agreement with any holder or
prospective holder of any securities of the Company that would grant such holder
registration rights senior or equal to those granted to the Holders hereunder.
2.13 "MARKET STAND-OFF" AGREEMENT. If requested by the representative
of the underwriters of Common Stock (or other securities) of the Company, each
Holder shall not sell or otherwise transfer or dispose of any Common Stock (or
other securities) of the Company held by such Holder (other than those included
in the registration) for a period specified by the representative of the
underwriters not to exceed (i) one hundred eighty (180) days following the
effective date of the Initial Offering, and (ii) ninety days (90) following the
effective date of any such subsequent registration statement of the Company
filed under the Securities Act, provided that all officers and directors of the
Company enter into similar agreements.
The obligations described in this Section 2.13 shall not apply to
non-underwritten "shelf registrations." In addition, the obligations described
in this Section 2.13 shall not apply to a registration relating solely to
employee benefit plans on Form S-8 or similar forms that may be promulgated in
the future, or a registration relating solely to a Commission Rule 145
transaction on Form S-4 or similar forms that may be promulgated in the future.
The Company may impose stop-transfer instructions with respect to the shares of
Common Stock (or other securities) subject to the foregoing restriction until
the end of said periods.
2.14 RULE 144 REPORTING. With a view to making available to the
Holders the benefits of certain rules and regulations of the SEC which may
permit the sale of the Registrable Securities to the public without
registration, the Company agrees to use its best efforts to:
(a) Make and keep public information available, as those terms
are understood and defined in SEC Rule 144 or any similar or analogous rule
promulgated under the Securities Act, at all times after the effective date of
the first registration filed by the Company for an offering of its securities to
the general public;
(b) File with the SEC, in a timely manner, all reports and other
documents required of the Company under the Exchange Act; and
(c) So long as a Holder owns any Registrable Securities, furnish
to such Holder forthwith upon request: a written statement by the Company as to
its compliance with the reporting requirements of said Rule 144 of the
Securities Act, and of the Exchange Act (at any
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time after it has become subject to such reporting requirements); a copy of the
most recent annual or quarterly report of the Company; and such other reports
and documents as a Holder may reasonably request in availing itself of any rule
or regulation of the SEC allowing it to sell any such securities without
registration.
SECTION 3. COVENANTS OF THE COMPANY.
3.1 BASIC FINANCIAL INFORMATION AND REPORTING.
(a) The Company will maintain true books and records of account
in which full and correct entries will be made of all its business transactions
pursuant to a system of accounting established and administered in accordance
with generally accepted accounting principles consistently applied, and will set
aside on its books all such proper accruals and reserves as shall be required
under generally accepted accounting principles consistently applied.
(b) As soon as practicable after the end of each fiscal year of
the Company, and in any event within one hundred twenty (120) days thereafter,
the Company will furnish each Demand Holder a consolidated balance sheet of the
Company, as at the end of such fiscal year, and a consolidated statement of
income and a consolidated statement of cash flows of the Company for such year,
all prepared in accordance with generally accepted accounting principles
consistently applied and setting forth in each case in comparative form the
figures for the previous fiscal year, all in reasonable detail. Such financial
statements shall be accompanied by a report and opinion thereon by independent
auditors selected by the Company's Board of Directors.
(c) The Company will furnish each Demand Holder, as soon as
practicable after the end of the first, second and third quarterly accounting
periods in each fiscal year of the Company, and in any event within ninety (90)
days thereafter, a consolidated balance sheet of the Company as of the end of
each such quarterly period, and a consolidated statement of income and a
consolidated statement of cash flows of the Company for such period and for the
current fiscal year to date, prepared in accordance with generally accepted
accounting principles, with the exception that no notes need be attached to such
statements and year-end audit adjustments may not have been made.
3.2 CONFIDENTIALITY OF RECORDS. Each Investor agrees to use, and to
use its best efforts to insure that its authorized representatives use, the same
degree of care as such Investor uses to protect its own confidential information
to keep confidential any information furnished to it which the Company
identifies as being confidential or proprietary (so long as such information is
not in the public domain), except that such Investor may disclose such
proprietary or confidential information to any Affiliate, partner, member,
subsidiary or parent of such Investor for the purpose of evaluating its
investment in the Company as long as such partner, member, subsidiary or parent
is advised of the confidentiality provisions of this Section 3.2.
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3.3 TERMINATION OF COVENANTS. All covenants of the Company contained
in Section 3.1 of this Agreement shall expire and terminate as to each Investor
on the effective date of the registration statement pertaining to the Initial
Offering.
SECTION 4. RIGHTS OF FIRST REFUSAL.
4.1 SUBSEQUENT OFFERINGS. 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
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.
4.2 EXERCISE OF RIGHTS. If the Company proposes to issue any Equity
Securities, it shall give each Eligible Holder written notice of its intention,
describing the Equity Securities, the price and the terms and conditions upon
which the Company proposes to issue the same. Each Eligible Holder shall have
fifteen (15) days from the giving of such notice to agree to purchase its pro
rata share of the Equity Securities for the price and upon the terms and
conditions specified in the notice by giving written notice to the Company and
stating therein the quantity of Equity Securities to be purchased.
Notwithstanding the foregoing, the Company shall not be required to offer or
sell such Equity Securities to any Eligible Holder who would cause the Company
to be in violation of applicable federal securities laws by virtue of such offer
or sale.
4.3 ISSUANCE OF EQUITY SECURITIES TO OTHER PERSONS. If not all of
the Eligible Holders elect to purchase their pro rata share of the Equity
Securities; then the Company shall promptly notify in writing the Eligible
Holders who do so elect and shall offer such Eligible Holders the right to
acquire such unsubscribed shares. The Eligible Holders shall have five (5) days
after receipt of such notice to notify the Company of its election to purchase
all or a portion thereof of the unsubscribed shares. If the Eligible Holders
fail to exercise in full the rights of first refusal, the Company shall have one
hundred eighty (180) days thereafter to sell the Equity Securities in respect of
which the Eligible Holders' rights were not exercised, at a price and upon
general terms and conditions which, in the reasonable judgment of the Board of
Directors, are reasonably similar or more favorable for the Company than those
offered to the Eligible Holders. If the Company has not sold such Equity
Securities within one hundred eighty (180) days of the notice provided
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pursuant to Section 4.2, the Company shall not thereafter issue or sell any
Equity Securities, without first offering such securities to the Eligible
Holders in the manner provided above.
4.4 TERMINATION OF RIGHTS OF FIRST REFUSAL. The rights of first
refusal established by this Article IV shall not apply to, and shall terminate
upon the earlier of (i) January 31, 2004, or (ii) the day immediately prior to
the closing of a public offering of the Company's securities pursuant to an
effective registration statement under the Securities Act with an aggregate
offering price of at least $20,000,000.
4.5 TRANSFER OF RIGHTS OF FIRST REFUSAL. The rights of first refusal
of each Eligible Holder under this Article IV may be transferred to the same
parties and subject to the same restrictions as any transfer of registration
rights pursuant to Section 2.10.
4.6 EXCLUDED SECURITIES. The rights of first refusal established by
this Article IV shall have no application to any of the following Equity
Securities:
(a) shares of Common Stock (and/or options, warrants or other
Common Stock purchase rights issued pursuant to such options, warrants or other
rights) issued or to be issued to employees, officers or directors of, or
consultants or advisors to, the Company or any subsidiary, pursuant to stock
purchase or stock option plans that are approved by the Board of Directors;
(b) stock issued pursuant to any rights or agreements
outstanding as of the date of this Agreement, options and warrants outstanding
as of the date of this Agreement; and stock issued pursuant to any such rights
or agreements granted after the date of this Agreement, provided that the rights
of first refusal established by this Article IV applied with respect to the
initial sale or grant by the Company of such rights or agreements;
(c) any Equity Securities issued pursuant to a merger,
consolidation, acquisition or similar business combination;
(d) shares of Common Stock issued in connection with any stock
split, stock dividend or recapitalization by the Company;
(e) any Equity Securities issued pursuant to any equipment
leasing arrangement, or debt financing from a bank or similar financial
institution approved by the Board of Directors;
(f) any Equity Securities that are issued by the Company
pursuant to a registration statement filed under the Securities Act; and
(g) shares of the Company's Series B Common Stock or Preferred
Stock issued in connection with strategic transactions involving the Company and
other entities, including (A) joint ventures, manufacturing, marketing or
distribution arrangements or (B) technology transfer or development
arrangements; provided that such strategic transactions and the issuance of
shares
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therein, have been approved by the Company's Board of Directors and the Board
makes a determination in good faith that the primary purpose of such transaction
is not to raise capital for the Company.
SECTION 5. MISCELLANEOUS.
5.1 GOVERNING LAW. This Agreement shall be governed by and construed
under the laws of the State of California, without reference to the conflicts of
law principles thereof.
5.2 SURVIVAL. The representations, warranties, covenants, and
agreements made herein shall survive any investigation made by any Holder and
the closing of the transactions contemplated hereby. All statements as to
factual matters contained in any certificate or other instrument delivered by or
on behalf of the Company pursuant hereto in connection with the transactions
contemplated hereby shall be deemed to be representations and warranties by the
Company hereunder solely as of the date of such certificate or instrument.
5.3 SUCCESSORS AND ASSIGNS. Except as otherwise expressly provided
herein, the provisions hereof shall inure to the benefit of, and be binding
upon, the successors, assigns, heirs, executors, and administrators of the
parties hereto and shall inure to the benefit of and be enforceable by each
person who shall be a holder of Registrable Securities from time to time;
provided, however, that prior to the receipt by the Company of adequate written
notice of the transfer of any Registrable Securities specifying the full name
and address of the transferee, the Company may deem and treat the person listed
as the holder of such shares in its records as the absolute owner and holder of
such shares for all purposes, including the payment of dividends or any
redemption price.
5.4 SEVERABILITY. In case any provision of the Agreement shall be
invalid, illegal, or unenforceable, the validity, legality, and enforceability
of the remaining provisions shall not in any way be affected or impaired
thereby.
5.5 AMENDMENT AND WAIVER.
(a) Except as otherwise expressly provided, this Agreement may
be amended or modified only upon the written consent of the Company, Spectra 3,
Enron and the holders of at least a majority of the Registrable Securities.
(b) Except as otherwise expressly provided, the obligations of
the Company and the rights of the Holders under this Agreement may be waived
only with the written consent of the Company, Spectra 3, Enron and the holders
of at least a majority of the Registrable Securities.
5.6 DELAYS OR OMISSIONS. It is agreed that no delay or omission to
exercise any right, power, or remedy accruing to any Holder, upon any breach,
default or noncompliance of the Company under this Agreement shall impair any
such right, power, or remedy, nor shall it be construed to be a waiver of any
such breach, default or noncompliance, or any acquiescence
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therein, or of any similar breach, default or noncompliance thereafter
occurring. It is further agreed that any waiver, permit, consent, or approval
of any kind or character on any Holder's part of any breach, default or
noncompliance under the Agreement or any waiver on such Holder's part of any
provisions or conditions of this Agreement must be in writing and shall be
effective only to the extent specifically set forth in such writing. All
remedies, either under this Agreement, by law, or otherwise afforded to Holders,
shall be cumulative and not alternative.
5.7 NOTICES. All notices required or permitted hereunder shall be in
writing and shall be deemed effectively given: (i) upon personal delivery to the
party to be notified, (ii) when sent by confirmed telex or facsimile if sent
during normal business hours of the recipient; if not, then on the next business
day, (iii) five (5) days after having been sent by registered or certified mail,
return receipt requested, postage prepaid, or (iv) one (1) day after deposit
with a nationally recognized overnight courier, specifying next day delivery,
with written verification of receipt. All communications shall be sent to the
party to be notified at the address maintained in the records of the Company, or
at such other address as such party may designate by ten (10) days advance
written notice to the other parties hereto.
5.8 ATTORNEYS' FEES. In the event that any dispute among the parties
to this Agreement should result in litigation, the prevailing party in such
dispute shall be entitled to recover from the losing party all fees, costs and
expenses of enforcing any right of such prevailing party under or with respect
to this Agreement, including without limitation, such reasonable fees and
expenses of attorneys and accountants, which shall include, without limitation,
all fees, costs and expenses of appeals.
5.9 TITLES AND SUBTITLES. The titles of the sections and subsections
of this Agreement are for convenience of reference only and are not to be
considered in construing this Agreement.
5.10 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be an original, but all of which together
shall constitute one instrument.
5.11 EXISTING AGREEMENT. The Existing Agreement is hereby terminated
and of no further force and effect.
[THIS SPACE INTENTIONALLY LEFT BLANK]
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IN WITNESS WHEREOF, the parties hereto have executed this Amended and
Restated Investor Rights Agreement as of the date set forth in the first
paragraph hereof.
COMPANY: INVESTORS:
FIRSTWORLD COMMUNICATIONS, INC.
-----------------------------------
BY: /s/ Robert E. Randall BY:
--------------------------- --------------------------------
ROBERT E. RANDALL,
EXECUTIVE VICE PRESIDENT
[SIGNATURE PAGE FOR INVESTOR RIGHTS AGREEMENT]
<PAGE>
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SECURITYHOLDERS AGREEMENT
AMONG
ENRON CAPITAL & TRADE RESOURCES CORP.,
COLORADO SPECTRA 1, L.L.C.,
COLORADO SPECTRA 2, L.L.C.,
COLORADO SPECTRA 3, L.L.C.
AND
SPECTRANET INTERNATIONAL
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DATED AS OF DECEMBER 30, 1997
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<PAGE>
SECURITYHOLDERS AGREEMENT
THIS SECURITYHOLDERS AGREEMENT, dated as of December 30, 1997, is
entered into by and among SPECTRANET INTERNATIONAL, a California corporation
(the "CORPORATION"), ENRON CAPITAL & TRADE RESOURCES CORP., a Delaware
corporation ("ECT"), and COLORADO SPECTRA 1, L.L.C. ("COLORADO SPECTRA 1"),
COLORADO SPECTRA 2, L.L.C. ("COLORADO SPECTRA 2"), and COLORADO SPECTRA 3,
L.L.C. ("COLORADO SPECTRA 3"), each of which is a Colorado limited liability
company.
WITNESSETH:
WHEREAS, the Holders (as hereinafter defined) own respectively the
number of shares of capital stock and/or warrants to acquire shares of capital
stock in the Corporation indicated below their respective names on the signature
pages hereof; and
WHEREAS, the Corporation and the Holders believe that it is in their
respective best interests to restrict transfers of Securities (as hereinafter
defined) in order to, among other things, (a) minimize the likelihood of discord
and deadlocks and (b) otherwise assure the orderly continuity of management, the
non-attainment of any of which may result in adverse consequences to the
Corporation;
NOW, THEREFORE, in consideration of the mutual agreements contained
herein and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Corporation and the Holders do
hereby bind themselves and their successors and assigns, and agree as follows:
ARTICLE I
DEFINITIONS AND INTERPRETATION
Section 1.01. CERTAIN DEFINED TERMS. Capitalized terms used in this
Agreement shall have the following respective meanings, except as otherwise
provided herein or as the context shall otherwise require:
"AFFILIATE" means, with respect to any Person, any other Person that
directly or indirectly, through one or more intermediaries, controls, is
controlled by or is under common control with such Person. The term
"CONTROL" (including, with correlative meaning, the terms "CONTROLLING",
"CONTROLLED BY" and "UNDER COMMON CONTROL WITH") means the possession,
directly or indirectly, of the power to direct or cause the direction of
the management and policies of a Person, whether through the ownership of
voting securities, by contract or otherwise. Without limiting the
foregoing, Donald L. Sturm, Susan Sturm (the spouse of Donald L. Sturm),
James Spitzenberger, Melanie Sturm (the daughter of Donald L. Sturm), and,
if applicable, such other natural persons whose addition to the foregoing
individuals shall have been approved in writing
<PAGE>
by ECT (each, a "Spectra-Affiliated Individual"), and the members of their
respective immediate families (I.E., spouses, children, parents,
grandparents, grandchildren and siblings) to the extent one or more
Spectra-Affiliated Individuals retains the power (by voting agreement,
irrevocable proxy or otherwise) to direct the voting of the Series A Shares
of such Person with respect to any matter submitted to a vote of the
Corporation's shareholders, shall be deemed to be Affiliates of the Sturm
Group.
"AGREEMENT" means this Securityholders Agreement.
"BOARD" means the Board of Directors of the Corporation.
"COLORADO SPECTRA 1" has the meaning specified in the introductory
paragraph of this Agreement.
"COLORADO SPECTRA 2" has the meaning specified in the introductory
paragraph of this Agreement.
"COLORADO SPECTRA 3" has the meaning specified in the introductory
paragraph of this Agreement.
"COMMON STOCK" means Series A Common and/or Series B Common.
"CONTINUING HOLDER" means (i) ECT, with respect to an offer or deemed
offer to sell Securities pursuant to Articles II, III or IV or a Proposed
Significant Transfer by a member of the Sturm Group (including any of their
Affiliates or Transferees), and (ii) the Sturm Group, with respect to an
offer or deemed offer to sell Securities pursuant to Articles II, III or IV
or a Proposed Significant Transfer by ECT (including any of its Affiliates
or Transferees).
"CORPORATION" has the meaning specified in the introductory paragraph
of this Agreement.
"CURRENT VALUE" means, with respect to a share of Common Stock, as of
any date (the "COMPUTATION DATE"), (i) the average of the closing per share
sales prices of Common Stock during the ten consecutive trading days ending
on the computation date, in each case, on the Composite Tape of the New
York Stock Exchange, or, if shares of Common Stock are not then listed on
the New York Stock Exchange, on the principal United States securities
exchange registered under the Exchange Act on which shares of Common Stock
are then listed, or (ii) if shares of Common Stock are not then listed on
any such stock exchange, the average of the average closing bid and ask
quotations with respect to a share of Common Stock during such trading
days, in each case, on The Nasdaq Stock Market or any successor system then
in use, or (iii) if no such quotations are then available, the average of
the bid and asked prices with respect to a share of Common Stock during
such trading days, as furnished by a member of the New York Stock Exchange
regularly making a market in shares of Common Stock selected by the Board,
or (iv) if no such member firm is then making a market in shares of Common
Stock,
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the fair market value on the computation date of a share of Common Stock as
determined in accordance with Section 4.02 hereof.
"DEEMED OFFER PERIOD" has the meaning specified in Section 4.01
hereof.
"DEEMED SELLING HOLDER" means a Triggered Holder that has been deemed
to offer his or its Securities to the Continuing Holder pursuant to Section
2.03 or Section 2.05.
"DESIGNEES" has the meaning specified in Section 5.01 hereof.
"ECT" has the meaning specified in the introductory paragraph of this
Agreement.
"EFFECTIVE DATE" means January 1, 1998.
"ENRON" means Enron Corp., an Oregon corporation.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended,
and the rules and regulations promulgated thereunder.
"EXCLUSIVE PERIOD" has the meaning specified in Section 3.01 hereof.
"HOLDERS" means ECT, Colorado Spectra 1, Colorado Spectra 2, Colorado
Spectra 3 and any of their respective Affiliates or Transferees which
become Holders pursuant to the terms of this Agreement.
"LAWS" means all laws, statutes, rules, regulations, ordinances,
orders, writs, injunctions or decrees and other pronouncements having the
effect of law of any governmental authority.
"LIABILITY" means, with respect to any Person, any indebtedness,
obligation and other liability of such Person, whether absolute, accrued,
contingent, fixed or otherwise, or whether due or to become due.
"OFFERED INTEREST" has the meaning specified in Section 2.02 hereof.
"PARTICIPATING HOLDER" has the meaning specified in Section 6.01(d)
hereof.
"PARTICIPATING SECURITIES" has the meaning specified in
Section 6.01(c) hereof.
"PARTIES" means the Corporation and the Holders.
"PERMITTED TRANSFER" has the meaning specified in Section 2.04 hereof.
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<PAGE>
"PERSON" means any individual, firm, corporation, trust, association,
company, limited liability company, joint stock company, partnership, joint
venture, governmental authority or other entity or enterprise.
"PROPOSED SIGNIFICANT TRANSFER" has the meaning specified in
Section 6.01(a) hereof.
"PROPOSED TRANSFEREE" has the meaning specified in Section 2.02(ii)
hereof.
"PUBLIC OFFERING" means a public offering of any shares of Common
Stock of the Corporation registered under the Securities Act; PROVIDED,
HOWEVER, that the term "PUBLIC OFFERING" shall not include any registration
of shares of Common Stock of the Corporation (i) relating to any shares of
Common Stock of the Corporation or options, warrants or other rights to
acquire any shares of Common Stock of the Corporation issued or to be
issued primarily to directors, officers or employees of the Corporation or
any of its subsidiaries, (ii) relating to any employee benefit plan or
interests therein or (iii) filed pursuant to Rule 145 under the Securities
Act or any successor or similar provision.
"PURCHASE PRICE" means (i) with respect to each share of Common Stock,
the Current Value of such share of Common Stock, in the case of a purchase
of such share of Common Stock by the Continuing Holder, as of the date on
which an offer to sell such share of Common Stock is deemed to have been
made to the Continuing Holder by a Deemed Selling Holder pursuant to this
Agreement, and (ii) with respect to each Warrant, (A) the Current Value of
the shares of Common Stock which would be received by the holder of such
Warrant upon the exercise thereof, in the case of a purchase of such
Warrant by the Continuing Holder, as of the date on which an offer to sell
such Warrant is deemed to have been made to the Continuing Holder by a
Deemed Selling Holder pursuant to this Agreement, MINUS (B) the exercise
price for such Warrant.
"SECURITIES" means (i) all Warrants and all shares of Common Stock
owned by any of the Holders on the Effective Date, (ii) all Warrants and
all shares of Common Stock and other capital stock, equity securities or
debt securities convertible into or exercisable for shares of capital stock
of the Corporation hereafter issued by the Corporation to, or otherwise
acquired by, any Holder or any of its Affiliates, whether in connection
with a purchase, issuance, grant, stock split, stock dividend,
reorganization, warrant, option, convertible security, right to acquire, or
otherwise, (iii) all securities of the Corporation or any other Person
which any of the Holders or any of their respective Affiliates acquires in
respect of his or its Warrants or shares of Common Stock in connection with
any exchange, merger, consolidation, recapitalization, reorganization or
other transaction to which the Corporation is a party and (iv) all Warrants
and all shares of Common Stock owned by any Person who becomes subject to
this Agreement pursuant to the terms of this Agreement.
"SECURITIES ACT" means the Securities Act of 1933, as amended, and the
rules and regulations promulgated thereunder.
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"SELLING HOLDER" has the meaning specified in Section 2.02 hereof.
"SERIES A COMMON" means the Series A Common Stock, no par value, of
the Corporation, and any securities issued or issuable with respect to such
common stock by way of stock dividend or stock split or in connection with
a combination of shares, recapitalization, merger, consolidation or other
reorganization or otherwise.
"SERIES A SHARES" means all Securities consisting of Series A Common.
"SERIES B COMMON" means the Series B Common Stock, no par value, of
the Corporation, and any securities issued or issuable with respect to such
common stock by way of stock dividend or stock split or in connection with
a combination of shares, recapitalization, merger, consolidation or other
reorganization or otherwise.
"STURM GROUP" means, collectively, Colorado Spectra 1, Colorado
Spectra 2 and Colorado Spectra 3. References herein to "A MEMBER OF THE
STURM GROUP" mean Colorado Spectra 1, Colorado Spectra 2 or Colorado
Spectra 3, and shall not be deemed to refer to the respective members of
any such limited liability company.
"TAG-ALONG NOTICE" has the meaning specified in Section 6.01(c)
hereof.
"TRANSFER" means any sale, exchange, gift, hypothecation, assignment,
encumbrance, pledge, grant of a security interest in, transfer by will or
intestacy or other disposition of any Securities (or any interest therein)
or of all or part of the voting power (other than the granting of a
revocable proxy) associated with any Securities (or any interest therein)
whatsoever, or any other transfer of beneficial ownership of any
Securities, whether voluntary or involuntary, including any such
disposition or transfer as a part of any liquidation of a Holder's assets
or any reorganization of a Holder pursuant to the United States or any
other bankruptcy law or other similar debtor relief laws.
"TRANSFER NOTICE" has the meaning specified in Section 2.02 hereof.
"TRANSFEREE" has the meaning specified in Section 2.06 hereof.
"TRIGGERED HOLDER" has the meaning specified in Section 2.03 hereof.
"TRIGGERING EVENT" has the meaning specified in Section 2.03 hereof.
"VOTING SECURITIES" means, with respect to any entity, all securities
of such entity then outstanding and normally entitled to vote in the
election of directors or similar management or governing body.
"WARRANTS" means warrants to acquire shares of Series B Common.
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Section 1.02. INTERPRETATION. In this Agreement, unless a clear
contrary intention appears:
(a) the words "HEREOF," "HEREIN" and "HEREUNDER" and words of
similar import refer to this Agreement as a whole and not to any particular
provision of this Agreement;
(b) reference to any gender includes each other gender and the
neuter;
(c) all terms defined in the singular shall have the same meanings
in the plural and VICE VERSA;
(d) reference to any Person includes such Person's heirs,
executors, personal representatives, administrators, successors and
assigns; PROVIDED, HOWEVER, that nothing contained in this clause (d) is
intended to authorize any assignment not otherwise permitted by this
Agreement;
(e) reference to a Person in a particular capacity or capacities
excludes such Person in any other capacity;
(f) reference to any contract or agreement means such contract or
agreement as amended, supplemented or modified from time to time in
accordance with the terms thereof;
(g) all references to Articles and Sections shall be deemed to be
references to the Articles and Sections of this Agreement;
(h) the word "INCLUDING" (and with correlative meaning "INCLUDE")
means including, without limiting the generality of any description
preceding such term;
(i) with respect to the determination of any period of time, the
word "FROM" means "from and including" and the words "TO" and "UNTIL" each
means "to but excluding";
(j) the captions and headings contained in this Agreement shall not
be considered or given any effect in construing the provisions hereof if
any question of intent should arise;
(k) reference to any Law means such Law as amended, modified,
codified, reenacted, supplemented or superseded in whole or in part, and in
effect from time to time;
(l) where any provision of this Agreement refers to action to be
taken by any Person, or which such Person is prohibited from taking, such
provision shall be applicable whether such action is taken directly or
indirectly by such Person; and
(m) no provision of this Agreement shall be interpreted or
construed against any Party solely because that Party or its legal
representative drafted such provision.
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ARTICLE II
TRANSFER RESTRICTIONS
Section 2.01. RESTRICTIONS ON TRANSFER. No Holder may Transfer any
Securities to any Person unless such Transfer is consummated in accordance with
the terms of this Agreement.
Section 2.02. VOLUNTARY TRANSFERS. (a) In the event that a Holder
desires to Transfer all or any of his or its Securities (a "SELLING HOLDER")
consisting of Series A Shares, such Selling Holder shall immediately deliver
written notice (a "TRANSFER NOTICE") to the Corporation and the Continuing
Holder indicating such Selling Holder's desire to Transfer such Series A Shares
and, if such Transfer is not a Permitted Transfer, offer such Series A Shares
(the "OFFERED INTEREST") to the Continuing Holder on the following terms and
conditions:
(i) the offer shall be made in accordance with Article III; and
(ii) the offer shall be included in the Transfer Notice and shall
state (A) the name and address of the Selling Holder, (B) the number of
Series A Shares included in the Offered Interest, (C) the name and address
of the proposed transferee (the "PROPOSED TRANSFEREE") and (D) the price
and all other pertinent terms of the proposed Transfer to the Proposed
Transferee.
Upon any Transfer of Series A Shares by a Holder to a Person other than any
other Holder, the Selling Holder shall give notice to the Corporation and the
Continuing Holder that such Transfer has been consummated.
(b) In the event that a Holder desires to Transfer all or any of
his or its Securities, such Holder shall cause the compliance with the
provisions of Section 2.06 as a condition to such Transfer.
Section 2.03. TRIGGERING EVENTS. Upon the occurrence of a Triggering
Event (as defined below) with respect to any Holder, such Holder (the "TRIGGERED
HOLDER") shall immediately notify the Corporation and the Continuing Holder of
such Triggering Event in writing, and such Triggering Event shall be deemed an
irrevocable offer by the Triggered Holder to sell all of his or its Series A
Shares to the Continuing Holder for the Purchase Price in accordance with
Article IV, and such Triggered Holder shall be obligated to sell such Series A
Shares to the Continuing Holder for the Purchase Price. "TRIGGERING EVENT"
means:
(i) with respect to any Holder, (A) such Holder shall be
adjudicated insolvent or shall have made a general assignment for the
benefit of creditors, or any proceeding shall have been instituted by such
Holder seeking to adjudicate himself or itself insolvent, seeking
liquidation, winding-up, reorganization, arrangement, adjustment,
protection, relief or composition of him or it or his or its Liabilities
under any Law relating to bankruptcy, insolvency or reorganization or
relief of debtors, or seeking the entry of an order for relief or the
appointment of a receiver, trustee or other similar official for him or it
or for any substantial part of his or its assets or
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properties, or such Holder shall have taken any action in furtherance of
any of such actions, or (B) any proceeding of the type referred to in
clause (A) is filed or commenced against such Holder or such Holder by any
act indicates his or its approval thereof, consents thereto or acquiesces
therein, or an order for relief is entered in an involuntary case under the
bankruptcy Law of the United States, or an order, judgment or decree is
entered appointing a trustee, receiver, custodian, liquidator or similar
official or adjudicating such Holder insolvent, or approving the petition
in any such proceedings, and such order, judgment or decree remains in
effect and unstayed for 60 days;
(ii) with respect to ECT or any Transferee of ECT (including any
subsequent Transferee), (A) any "person" or "group" (as such terms are
defined in Sections 13(d) and 14(d) of the Exchange Act) other than Enron
and its Affiliates shall become the "beneficial owner" (as defined in Rules
13d-3 and 13d-5 under the Exchange Act), directly or indirectly, of greater
than 50% of the total voting power of the Voting Securities of such Holder,
or (B) any "person" or "group" (as such terms are defined in Sections 13(d)
and 14(d) of the Exchange Act) shall become the "beneficial owner" (as
defined in Rules 13d-3 and 13d-5 under the Exchange Act), directly or
indirectly, of greater than 50% of the total voting power of the Voting
Securities of Enron; and
(iii) with respect to Colorado Spectra 3 or any Transferee of
Colorado Spectra 3 (including any subsequent Transferee), one or more
Spectra-Affiliated Individuals shall cease to hold the power (by ownership,
voting agreement, irrevocable proxy or otherwise), either individually or
collectively, to direct the voting of the Series A Shares of such Holder
with respect to any matter submitted to a vote of the Corporation's
shareholders.
Section 2.04. PERMITTED TRANSFERS. Unless such Transfer is otherwise
prohibited by the terms of this Agreement, any Holder may make any of the
following Transfers of any of his or its Series A Shares without offering to
sell such Series A Shares to the Continuing Holder (each, a "PERMITTED
TRANSFER"):
(a) to any Affiliate of such Holder;
(b) by any Holder to a bank or other financial institution for the
purpose of securing a loan to such Holder to purchase Series A Shares and
the delivery of certificates evidencing such Series A Shares to such bank
or other financial institution for perfecting the security interest
therein; PROVIDED, HOWEVER, that such bank or financial institution may not
foreclose or otherwise realize on the pledge of or security interest in
such Series A Shares without first offering such Series A Shares to the
Continuing Holder in accordance with this Agreement; or
(c) pursuant to a Public Offering or, following a Public Offering,
pursuant to Rule 144 under the Securities Act.
If any Series A Shares are pledged to a bank or other financial institution as
permitted under clause (b) above, and such Series A Shares are to be sold by
such bank or financial institution to the
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Continuing Holder, then the Holder that is the transferor of such Series A
Shares authorizes (i) such bank or other financial institution to deliver
certificates representing such Series A Shares to the Continuing Holder against
receipt of the purchase price therefor, (ii) the Continuing Holder to make
payment of the purchase price to such bank or other financial institution for
application to any debt secured by any such Series A Shares and (iii) such bank
or other financial institution to apply the proceeds thereof against the
repayment of any such debt.
Section 2.05. TRANSFER IN VIOLATION OF THE AGREEMENT.
Notwithstanding anything contained in this Agreement to the contrary, no
Transfer of any Securities may be made by a Holder or shall be effective if the
Transfer is not in strict compliance with this Agreement; PROVIDED, HOWEVER,
that all or any portion of this Agreement may be waived with the written consent
of the Continuing Holder (including the written consent of all of the members of
the Sturm Group if the Sturm Group is the Continuing Holder) if such Securities
were offered to the Continuing Holder pursuant to the terms of this Agreement.
Any attempted or purported Transfer of any Securities in violation of this
Agreement shall be null and void and of no force and effect. Any Holder
attempting or purporting to Transfer Series A Shares in violation of this
Agreement shall be deemed a Triggered Holder and shall be deemed to have offered
to sell such Series A Shares to the Continuing Holder in accordance with Article
IV. Any Holder making a Transfer of his or its Securities in violation of any
of the terms of this Agreement will retain beneficial ownership of such
Securities, including the right to vote such Securities and to receive all
distributions with respect to such Securities. The Continuing Holder shall have
the right and the Corporation shall have the obligation to treat any Transfer in
violation of any of the terms of this Agreement as void and, in enforcing such
obligation, the Corporation shall, in addition and without prejudice to any and
all other rights which may be available to the Corporation or the Continuing
Holder, hold and refuse to Transfer any Securities or any certificate therefor
presented to it for Transfer. If the Corporation receives notice of any
attempted Transfer which would be in violation of the terms of this Agreement,
it shall notify the Continuing Holder.
Section 2.06. APPLICATION TO TRANSFEREES. All assignees,
transferees, trustees, receivers or others who obtain any Securities, whether by
attachment, execution, bankruptcy law, receivership law or otherwise by
operation of law, and all assignees, transferees, secured parties, creditors and
others who obtain any Securities, including pursuant to any Permitted Transfer
other than a Public Offering or, following a Public Offering, pursuant to Rule
144 under the Securities Act (in each case, a "TRANSFEREE"), shall take such
Securities subject to the terms and conditions of this Agreement. Each
Transferee shall be required to become a party to this Agreement by executing an
Adoption Agreement in the form of Exhibit A attached hereto, whereupon such
Person shall become a "Holder" and shall have all of the rights and obligations
of a "Holder" under this Agreement, and such Securities shall continue to be
subject to the provisions of this Agreement. Each Holder hereby grants the
Corporation an irrevocable power of attorney for the limited purpose of
executing any such Adoption Agreement to evidence the approval of a Transfer of
the Securities and the Transferee's agreement to be bound hereby. Such power of
attorney granted herein is coupled with an interest and shall survive the death,
disability or bankruptcy of such Holder.
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ARTICLE III
PROCEDURES FOR VOLUNTARY TRANSFERS OF SERIES A SHARES
Section 3.01. FIRST RIGHT OF NEGOTIATION. Upon receipt by the
Corporation and the Continuing Holder of a Transfer Notice from a Selling Holder
pursuant to Section 2.02 of an offer to sell Series A Shares related to a
proposed Transfer, the Continuing Holder shall have the exclusive right to
negotiate with the Selling Holder to purchase all of the Offered Interest for a
period of 30 days following receipt of such notice (the "EXCLUSIVE PERIOD").
Section 3.02. TRANSFER TO THE CONTINUING HOLDER. Any Transfer of
Series A Shares from the Selling Holder to the Continuing Holder pursuant to the
provisions of this Article III shall be purchased and paid for at such price, at
such time and on such terms and conditions as the Selling Holder and the
Corporation and/or the Continuing Holder shall agree.
Section 3.03. TRANSFER TO PROPOSED TRANSFEREE. In the event that the
Selling Holder and the Continuing Holder are unable to negotiate mutually
acceptable terms for the sale of the Offered Interest by the Selling Holder to
the Continuing Holder during the Exclusive Period, the Selling Holder may
Transfer the Offered Interest to the Proposed Transferee, subject to the
provisions of Article VI and PROVIDED THAT:
(i) the Proposed Transferee purchases 100% of the Offered Interest;
(ii) the price and the terms of the Transfer to the Proposed
Transferee are not more favorable to the Proposed Transferee than the last
offer made by the Continuing Holder during the Exclusive Period or, if no
such offer has been made, the purchase price stipulated by the Selling
Holder in the Transfer Notice delivered by the Selling Holder to the
Corporation and the Continuing Holder pursuant to Section 2.02; and
(iii) the Transfer to the Proposed Transferee is consummated within
120 days after the expiration of the Exclusive Period.
If the Selling Holder does not complete the Transfer to the Proposed Transferee
within 120 days after the expiration of the Exclusive Period in accordance with
the terms of this Article III, the Selling Holder may not Transfer the Offered
Interest to the Proposed Transferee or any other Person without first again
offering the Offered Interest to the Continuing Holder in accordance with this
Article III. The options and rights of the Continuing Holder under this Article
III shall be continuing rights.
Section 3.04. DELIVERY OF CERTIFICATES. In connection with any
Transfer of Series A Shares to the Continuing Holder pursuant to this Article
III, each Selling Holder shall deliver to the Corporation and/or the Continuing
Holder, as the case may be, the certificates representing the Series A Shares to
be transferred by such Selling Holder, in proper form for Transfer or
accompanied by
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stock powers executed by such Selling Holder in blank. Such delivery shall
constitute a representation and warranty by such Selling Holder that (a) the
Series A Shares are owned by such Selling Holder free and clear of any lien,
security interest, pledge, claim, voting agreement or other encumbrance and (b)
such Selling Holder has the right and authority to Transfer such Series A Shares
pursuant to this Agreement.
ARTICLE IV
PROCEDURES FOR OTHER TRANSFERS
Section 4.01. CONTINUING HOLDER'S OPTION IN DEEMED OFFER. Upon any
deemed offer to sell Series A Shares from a Deemed Selling Holder pursuant to
Section 2.03 or Section 2.05, the Continuing Holder shall have the option, but
not the obligation, to purchase all or any portion of the Offered Interest. The
Continuing Holder shall have a period of 30 days following written notice of
such deemed offer (the "DEEMED OFFER PERIOD") within which to elect to purchase
all or any portion of the Offered Interest, such election to be made by
providing written notice of such election to the Deemed Selling Holder prior to
the expiration of the Deemed Offer Period. The failure of the Continuing Holder
to make an election prior to the expiration of the Deemed Offer Period shall be
deemed to be an election by the Continuing Holder to not purchase any of the
Offered Interest.
Section 4.02. DETERMINATION OF CURRENT VALUE WHEN NO MARKET EXISTS
FOR COMMON STOCK. If at any time for the determination of the Current Value of
the Common Stock for purposes of determining the Purchase Price at which Series
A Shares of a Deemed Selling Holder may be purchased by a Continuing Holder, (i)
the Common Stock is not listed on the New York Stock Exchange, any other United
States securities exchange registered under the Exchange Act, or The Nasdaq
Stock Market or any successor system then in use, and (ii) no quotations are
then furnished by a member of the New York Stock Exchange regularly making a
market in shares of Common Stock, the Deemed Selling Holder and the Continuing
Holder shall negotiate in good faith to reach an agreement with respect to such
Current Value. If the Deemed Selling Holder and the Continuing Holder are
unable to reach an agreement with respect to such Current Value within 30 days
of the commencement of the relevant Deemed Offer Period, the Deemed Selling
Holder and the Continuing Holder shall each select an independent investment
banking firm of national standing to serve as an appraiser to determine such
Current Value. The appraisers so selected shall proceed to promptly determine
such Current Value. If the appraisers selected by the Deemed Selling Holder and
the Continuing Holder agree upon such Current Value within 60 days of the
commencement of the relevant Deemed Offer Period, the Deemed Selling Holder and
the Continuing Holder shall be bound by such agreed-upon determination of such
Current Value. If the appraisers selected by the Deemed Selling Holder and the
Continuing Holder are unable to agree upon such Current Value within 60 days of
the commencement of the relevant Deemed Offer Period, the two appraisers shall
select an independent investment banking firm of national standing to serve as a
third appraiser who shall determine such Current Value (which shall not be
greater than the higher of or less than the lower of the values attributed to
such Current Value by the appraisers selected by the Deemed Selling Holder and
the Continuing Holder), and the Deemed Selling Holder and the Continuing
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Holder shall be bound by such determination of such Current Value. The fee
and expenses of the appraiser selected by each Party shall be borne by such
Party, and the fee and expenses of the appraiser selected by the two
appraisers, if any, shall be split evenly between the Deemed Selling Holder
and the Continuing Holder. In the event the Current Value is determined in
accordance with this Section 4.02, the Deemed Offer Period shall be extended
until the expiration of 15 days following the determination of the Current
Value as provided herein.
Section 4.03. ACCEPTANCE OF DEEMED OFFER. An offer of Series A
Shares from a Deemed Selling Holder which is accepted by the Continuing Holder
pursuant to the provisions of Section 4.01 shall be purchased and paid for at
the Purchase Price. The closing of the purchase of such Series A Shares shall
occur at the offices of the Corporation within 60 days after the first date on
which the Continuing Holder elects to purchase any portion of the Offered
Interest.
Section 4.04. REJECTION OF DEEMED OFFER. If the Continuing Holder
does not elect to purchase all or any portion of the Offered Interest pursuant
to the provisions of Section 4.01, the Continuing Holder shall be deemed to have
rejected the portion of the Offered Interest as to which no election to purchase
is made and, subject to the other terms and conditions of this Agreement, the
Deemed Selling Holder shall be entitled to retain or Transfer the Offered
Interest; PROVIDED, HOWEVER, that the Series A Shares which comprised the
Offered Interest shall continue to be subject to the terms of this Agreement.
Section 4.05. DELIVERY OF CERTIFICATES. In connection with any
Transfer of Series A Shares to the Continuing Holder pursuant to this Article
IV, the Deemed Selling Holder shall deliver to the Continuing Holder the
certificates representing the Series A Shares to be transferred, in proper form
for Transfer or accompanied by stock powers executed by the Deemed Selling
Holder, as applicable, in blank. Such delivery shall constitute a
representation and warranty by the Deemed Selling Holder, as the case may be,
that (a) the Series A Shares are owned by the Deemed Selling Holder, free and
clear of any lien, security interest, pledge, claim, voting agreement or other
encumbrance, and (b) the Deemed Selling Holder has the right and authority to
Transfer such Series A Shares pursuant to this Agreement.
ARTICLE V
VOTING AGREEMENT
Section 5.01. DESIGNATION OF AND VOTING FOR DIRECTORS. Throughout the
term of this Agreement, each Holder shall vote all of its Series A Shares and
take all other necessary or desirable actions (in its capacity as a stockholder
of the Corporation), and the Corporation will take all necessary or desirable
actions, to cause the Corporation's Board of Directors to consist of seven
persons and to cause the following persons ("DESIGNEES") to be elected to the
Corporation's Board of Directors, whether such election occurs at an annual or
special meeting of the shareholders, or by written consent in lieu thereof, and
whether or not such election shall occur because of the existence of a vacancy
on such Board arising for any reason whatsoever:
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(i) Three Designees shall be designated by Colorado Spectra 3. The
initial Designees designated by Colorado Spectra 3 shall be Donald L.
Sturm, James Spitzenberger and Melanie Sturm;
(ii) Two Designees shall be designated by ECT. The initial
Designees designated by ECT shall be Kevin Garland and Rodney D. Malcolm;
(iii) One Designee shall be elected by the holders of the Series B
Common. Until the Corporation's Board of Directors determines to effect
the election of such Designee (which it shall do on or before July 1,
1998), Robert E. Randall shall serve in lieu of an initial Designee elected
by the holders of the Series B Common; and
(iv) One Designee shall be a director designated by the Board of
Directors who shall be an independent director (and who shall not be the
same Person as the Designee provided for by clause (iii) above). The
initial independent director Designee shall be John Stiska.
Section 5.02. PROCEDURES FOR NOMINATION AND REMOVAL OF DIRECTORS.
(a) No less than 30 days in advance of each annual meeting of stockholders of
the Corporation, and no less than five days in advance of any meeting of the
Board of Directors at which a director will be elected to fill a vacancy on the
Board of Directors resulting from the death, disability, retirement, resignation
or removal of the Designee of a Holder, the Corporation shall give written
notice to each Holder entitled to designate a Designee for election to the Board
of Directors and such Holder shall, within three days of such written notice,
provide written notice to the Corporation and the other Holder of the individual
or individuals designated by him or it to be elected as directors at such
meeting. The Corporation shall include the individuals so designated on the
ballot for election at such meeting.
(b) Any vacancy on the Board of Directors resulting from the death,
disability, retirement, resignation or removal of a Designee designated by a
Holder in accordance with this Article V shall be filled by a new director
designated by such Holder. In the event that any such Holder shall fail or
refuse to designate such director, (i) such position shall not be filled and
shall remain vacant unless and until such designation shall be made as herein
provided, unless otherwise agreed in writing by the Corporation, Colorado
Spectra 3 and ECT and (ii) the Holder entitled to designate such director shall
have the right, at any time during which it has elected not to designate such
director, to designate a non-voting representative (an "Advisor to the Board")
who shall be entitled to attend each meeting of the Board of Directors of the
Corporation (and of any committee thereof) and to participate in all discussions
during any such meeting, but who shall not be a director and who shall have no
right to vote at any such meeting. The Corporation shall send to each such
Advisor to the Board, if any, the notice of the time and place of each meeting
of the Board of Directors (and of any committee thereof) in the same manner and
at the same time as it shall send such notice to its directors. The Corporation
shall also provide to each such Advisor to the Board, if any, copies of all
notices, reports, minutes and consents (proposed and adopted) at the time and in
the manner as they are provided to the Board of Directors.
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(c) Each Holder shall vote all of his or its Series A Shares and
take all other necessary or desirable actions (in its capacity as a stockholder
of the Corporation), and the Corporation will take all necessary or desirable
actions, to prevent the removal, without cause, of any Designee without the
prior written consent of the Holder which designated said Designee. A Holder
shall have the exclusive right (except as otherwise provided by applicable law)
to remove or replace any of such Holder's Designees. If a Holder desires to
remove a director designated by him or it in accordance with this Article V,
such Holder shall give written notice of such removal to the Corporation and to
the other Holder which shall thereupon be obligated forthwith to vote all Series
A Shares owned (beneficially or of record) by him or it in favor of the removal
of the director named in such notice and to elect a successor director
designated by such Holder in accordance with this Article V.
Section 5.03. VOTING RIGHTS WITH RESPECT TO CHANGES TO CHARTER OR
BYLAWS. During the term of this Agreement, any amendment to the articles of
incorporation or bylaws of the Corporation shall require the approval of ECT and
Colorado Spectra 3, in addition to any approvals required by law. Throughout
the term of this Agreement, each Holder shall vote all of its Series A Shares
and take all other necessary or desirable actions (in its capacity as a
stockholder of the Corporation) to prevent the approval of any amendment to the
articles of incorporation or bylaws of the Corporation that has not received the
approvals required by this Section 5.03.
Section 5.04. VOTING RIGHTS WITH RESPECT TO TRANSACTIONS WITH
AFFILIATES. During the term of this Agreement, any merger, consolidation or sale
of all or substantially all of the assets of the Corporation to or with an
Affiliate of a Holder shall require the approval of ECT and Colorado Spectra 3,
in addition to any approvals required by law. Throughout the term of this
Agreement, each Holder shall vote all of its Series A Shares and take all other
necessary or desirable actions (in its capacity as a stockholder of the
Corporation) to prevent the approval of any merger, consolidation or sale of all
or substantially all of the assets of the Corporation to or with an Affiliate of
a Holder that has not received the approvals required by this Section 5.04.
Section 5.05. VOTING RIGHTS RETAINED WITH RESPECT TO OTHER MATTERS.
Each Holder will retain at all times the right to vote his Series A Shares in
his or its sole discretion on all matters presented to the Corporation's
stockholders for a vote other than the matters set forth in this Article V,
except as otherwise limited or controlled by the Corporation's articles of
incorporation, as amended from time to time.
Section 5.06. ENFORCEMENT OF VOTING RIGHTS. Based on the structure of
the acquisition of Securities in the Corporation consummated effective as of the
date of this Agreement among the Corporation, Colorado Spectra 3, ECT and
certain other parties, and the transactions related thereto, the Parties do not
believe that the agreements made in this Article V require the prior approval of
the Federal Communications Commission ("FCC") or the California Public Utility
Commission ("CPUC") as a prerequisite to the enforceability thereof. However,
the Parties acknowledge and agree that, promptly following the execution of this
Agreement, the Parties will undertake to confirm whether the provisions of this
Article V will require the approval of the FCC and/or CPUC as a prerequisite to
the enforceability thereof and shall use all good faith reasonable efforts to
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<PAGE>
procure any and all such approvals in a manner consistent with the desire to
enforce the provisions of this Article V. The enforceability of the provisions
of this Article V shall be conditioned upon the Parties obtaining all necessary
approvals of the FCC and CPUC, or alternatively, an indication by legal counsel,
the FCC or the CPUC that no such approvals are required.
ARTICLE VI
PARTICIPATION IN CERTAIN SALES OF SECURITIES
Section 6.01. TAG-ALONG RIGHTS. (a) In the event that, at any time
during the term of this Agreement, any Selling Holder proposes to Transfer to
any Person other than an Affiliate of such Selling Holder, in a single
transaction or series of related transactions, Securities (i) that represent
(together with all Securities previously Transferred by such Selling Holder and
its Affiliates and Transferees to Person(s) other than Affiliates of such
Selling Holder) more than 10% of the Securities (assuming the exercise or
conversion into Common Stock of the Securities so Transferred) held by such
Selling Holder and its Affiliates on the date of this Agreement or (ii) that
would result in any "person" or "group" (as such terms are defined in Sections
13(d) and 14(d) of the Exchange Act), other than the Sturm Group, ECT or any
Person which is an Affiliate of the Sturm Group or ECT on the date of this
Agreement (or which thereafter becomes an Affiliate of such Party with the
written approval of the other Party), becoming the "beneficial owner" (as
defined in Rules 13d-3 and 13d-5 under the Exchange Act), directly or
indirectly, of greater than 30% of the total voting power of the Voting
Securities of the Corporation (assuming the exercise or conversion into Common
Stock of the Securities held by such person or group), such Selling Holder shall
give, or cause to be given, a written Transfer Notice to the Continuing Holder
of such proposed Transfer (a "PROPOSED SIGNIFICANT TRANSFER").
(b) Each Transfer Notice relating to a Proposed Significant
Transfer shall (i) specify that it relates to a Proposed Significant Transfer
and indicate whether the Proposed Significant Transfer falls within clause (i)
or (ii) of Section 6.01(a) and (ii) specify the information contemplated by
Section 2.02 with respect to Transfer Notices generally.
(c) The Continuing Holder shall have the right to participate in
the Proposed Significant Transfer described in the Transfer Notice on a PRO RATA
basis and at the same price per share and on the same economic terms and
conditions applicable to the Selling Holder; PROVIDED, HOWEVER, that such
Continuing Holder gives the Selling Holder written notice of such Continuing
Holder's desire to participate in the Proposed Significant Transfer within 30
days after receipt of the applicable Transfer Notice by such Holder (a
"TAG-ALONG NOTICE"). The failure of the Continuing Holder to provide the
Selling Holder with a Tag-Along Notice within such 30-day period shall be deemed
for all purposes of this Agreement to be an irrevocable election by such
Continuing Holder to not participate in the Proposed Significant Transfer. Each
Tag-Along Notice shall (A) specify the number of Securities owned by the
Continuing Holder which such Continuing Holder desires to include in the
relevant Proposed Significant Transfer (the "PARTICIPATING SECURITIES"), (B)
contain an irrevocable agreement of such Continuing Holder to sell the
Participating Securities to the Proposed Transferee
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<PAGE>
pursuant to the terms of the Transfer Notice and this Agreement and (C) contain
a representation of such Continuing Holder to the effect that the agreement
referred to in the foregoing clause (B) constitutes a legal, valid and binding
obligation of such Continuing Holder, enforceable against such Continuing Holder
in accordance with its terms.
(d) If the Continuing Holder shall have given a Tag-Along Notice in
accordance with paragraph (c) above (a "PARTICIPATING HOLDER"), the Selling
Holder shall not Transfer any Securities to the Proposed Transferee as
contemplated by the relevant Transfer Notice unless the Participating Holder is
permitted to include the Participating Securities in the Proposed Significant
Transfer, on the same terms as those applicable to the Selling Holder, up to the
number of each type of Securities (E.G., Series B Common or Warrants) equal to
the product obtained by multiplying (i) the number of the Securities of such
type proposed to be Transferred to the Proposed Transferee as specified in the
Transfer Notice by (ii) a fraction (A) having a numerator equal to the total
number of the Securities of such type then owned by the Participating Holder and
its Affiliates and (B) a denominator equal to the sum of the total number of the
Securities of such type then owned by the Participating Holder and its
Affiliates and the total number of the Securities of such type then owned by the
Selling Holder and its Affiliates; PROVIDED that for purposes of the foregoing
calculation, any shares of Series A Shares owned by the Participating Holder,
the Selling Holder or their respective Affiliates shall be deemed also to
represent ownership of the number of shares of Series B Common into which such
shares of Series A Shares may then be converted.
(e) Any Transfer of Securities pursuant to this Section 6.01 shall
be made at the same price per share with respect to each type of Security and on
the same terms and conditions as are set forth in the applicable Transfer
Notice. Each Transfer of Securities by a Participating Holder pursuant to this
Section 6.01 shall be closed concurrently with the Transfer by the Selling
Holder to the Proposed Transferee of the Securities described in the Transfer
Notice.
(f) All reasonable costs and expenses incurred in connection with
any Transfer made pursuant to this Section 6.01, including all costs and
disbursements, finders' fees or brokerage commissions and the fees and
disbursements of a single counsel representing all Securities to be transferred
in connection therewith, shall be allocated PRO RATA between the Selling Holder
and the Participating Holder based on the aggregate proceeds received by the
Selling Holder and the Participating Holder in the Proposed Significant
Transfer.
ARTICLE VII
CERTIFICATES
Section 7.01. LEGENDS. All certificates for Securities of the
Corporation issued or transferred on or after the Effective Date shall be
endorsed conspicuously as follows:
SEE REFERENCE TO RESTRICTIONS ON REVERSE SIDE.
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<PAGE>
The reverse side of each certificate shall bear the following legend:
BY THE TERMS OF A SECURITYHOLDERS AGREEMENT, CERTAIN RESTRICTIONS HAVE
BEEN PLACED ON THE TRANSFER AND VOTING 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.
Each Holder agrees to surrender all Securities issued prior to the Effective
Date for endorsement as indicated above.
Section 7.02. TRANSFER OF CERTIFICATES. In the event that any
Securities are purchased by a Continuing Holder or a Transferee in accordance
with the provisions of this Agreement, the Selling Holder shall surrender the
certificates for the Securities being transferred to the Corporation in proper
form for Transfer or accompanied by stock powers executed by the Selling Holder
in blank. New certificates for such Securities (subject to the provisions of
the Company's Amended and Restated Articles of Incorporation regarding automatic
conversion of Series A Common to Series B Common, if applicable) shall be issued
in the name of any Continuing Holder or Transferee who purchased such Securities
bearing the legend provided in Section 7.01.
ARTICLE VIII
TERMINATION
If any Holder Transfers all of such Holder's Securities in accordance
with the terms of this Agreement, such Holder shall cease to be a "Holder" under
this Agreement and shall have no further rights or obligations hereunder. This
Agreement shall automatically terminate as to all Holders and the Corporation on
the earliest to occur of (a) the occurrence of any event which reduces the
number of Holders to one in accordance with the terms of this Agreement, (b) the
second anniversary of the consummation of a Public Offering, (c) completion of a
merger, consolidation or sale of all or substantially all of the capital stock
or assets of the Corporation following which the holders of Voting Securities of
the Corporation immediately prior to such transaction hold less than 30% of the
Voting Securities of the surviving company, (d) the written approval of all of
the Holders and (e) the expiration of ten years after the Effective Date.
ARTICLE IX
MISCELLANEOUS
Section 9.01. WAIVER OF CONSEQUENTIAL AND PUNITIVE DAMAGES.
NOTWITHSTANDING ANYTHING TO THE CONTRARY IN THIS AGREEMENT, IN NO EVENT SHALL
ANY PARTY HEREUNDER BE
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<PAGE>
LIABLE TO THE OTHER PARTIES FOR ANY EXEMPLARY, PUNITIVE, SPECIAL, INDIRECT,
CONSEQUENTIAL, REMOTE OR SPECULATIVE DAMAGES, WHETHER ARISING UNDER CONTRACT,
TORT, STATUTE OR OTHERWISE.
Section 9.02. DEPOSIT WITH THE CORPORATION. A counterpart of this
Agreement shall be deposited with the Corporation at its principal office.
Section 9.03. COMMUNITY PROPERTY. The signature of a Spouse to this
Agreement indicates that such Spouse has read and understands this Agreement and
agrees that its terms are fair and in such Spouse's best interest and, by his or
her signature, such Spouse agrees (a) to bind his or her community interest, if
any, in any Securities and such Spouse's heirs, beneficiaries, legal
representatives and assigns to the terms of this Agreement and (b) that the
termination of his or her marital relationship with any individual Holder for
any reason shall not have the effect of removing any Securities otherwise
subject to this Agreement from the coverage hereof. By execution of this
Agreement, each Holder (i) represents and warrants to the Corporation and each
other Holder that all Persons having a community interest in his or her
Securities are parties or signatories to this Agreement and (ii) covenants that
he or she will cause any Person acquiring a community interest in his or her
Securities to execute a counterpart of this Agreement or a document containing
substantially the same restrictions on transferability upon the acquisition of
such interest.
Section 9.04. NOTICES. Any and all notices, requests or other
communications hereunder shall be given in writing and delivered by (a) regular,
overnight or registered or certified mail (return receipt requested), with first
class postage prepaid, (b) hand delivery, (c) facsimile transmission or (d)
overnight courier service, (i) if to the Holders, at the addresses and facsimile
numbers indicated below their signatures on signature pages hereof, and (ii) if
to the Corporation, to SpectraNet International, 9333 Genesee Avenue, Suite 200,
San Diego, California 92121, attention: Chairman, facsimile number: (619)
552-8006, or at such other address or number as shall be designated by any of
the Parties in a notice to the other Parties given in accordance with this
Section 9.04. Except as otherwise provided in this Agreement, all such
communications shall be deemed to have been duly given, (A) in the case of a
notice sent by regular mail, on the third day following the date such notice is
mailed, (B) in the case of a notice sent by registered or certified mail, on
the date receipted for (or refused) on the return receipt, (C) in the case of a
notice delivered by hand, when personally delivered, (D) in the case of a notice
sent by facsimile, upon transmission subject to telephone confirmation of
receipt, and (E) in the case of a notice sent by overnight mail or overnight
courier service, the date delivered at the designated address, in each case
given or addressed as aforesaid.
Section 9.05. BENEFIT AND BURDEN. This Agreement shall inure to the
benefit of, and shall be binding upon, the Parties and their respective
executors, administrators, personal representatives, heirs, legatees, successors
and permitted assigns.
Section 9.06. NO THIRD PARTY RIGHTS. Nothing in this Agreement shall
be deemed to create any right in any creditor or other Person not a party hereto
and this Agreement shall not be construed in any respect to be a contract in
whole or in part for the benefit of any third party.
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<PAGE>
Section 9.07. AMENDMENTS AND WAIVER. No amendment, modification,
restatement or supplement of this Agreement shall be valid unless the same is in
writing and signed by the Parties. No waiver of any provision of this Agreement
shall be valid unless in writing and signed by the Party against whom that
waiver is sought to be enforced. No failure or delay on the part of any of the
Parties in exercising any right, power or privilege hereunder, and no course of
dealing between or among any of the Parties, shall operate as a waiver of any
right, power or privilege hereunder. No single or partial exercise of any
right, power or privilege hereunder shall preclude any other or further exercise
thereof or the exercise of any other right, power or privilege hereunder.
Section 9.08. ASSIGNMENTS. Neither this Agreement nor any right,
interest or obligation hereunder may be assigned by any of the Parties without
the prior written consent of the other Parties and any attempt to do so shall be
null and void; PROVIDED, HOWEVER, that no assignment by any of the Parties of
any of his or its rights, interests or obligations hereunder shall relieve such
Party of its obligations under this Agreement.
Section 9.09. COUNTERPARTS. This Agreement may be executed in
counterparts and by the different parties in separate counterparts, each of
which when so executed shall be deemed an original and all of which taken
together shall constitute one and the same agreement.
Section 9.10. SEVERABILITY. Should any clause, sentence, paragraph,
subsection, Section or Article of this Agreement be judicially declared to be
invalid, unenforceable or void, such decision will not have the effect of
invalidating or voiding the remainder of this Agreement, and the Parties agree
that the part or parts of this Agreement so held to be invalid, unenforceable or
void will be deemed to have been stricken herefrom as if such stricken part or
parts had never been included herein.
Section 9.11. REMEDIES. The Parties agree that the covenants and
obligations contained in this Agreement relate to special, unique and
extraordinary matters and that a violation of any of the terms hereof would
cause irreparable injury in an amount which would be impossible to estimate or
determine and for which any remedy at law would be inadequate. As such, the
Parties agree that if any of the Parties fails or refuses to fulfill any of his
or its obligations under this Agreement or to make any payment or deliver any
instrument required hereunder, then the other Parties shall have the remedy of
specific performance, which remedy shall be cumulative and nonexclusive and
shall be in addition to any other rights and remedies otherwise available under
any other contract or at law or in equity and to which such Party might be
entitled.
Section 9.12. APPLICABLE LAW. THIS AGREEMENT AND THE RIGHTS AND
OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE, WITHOUT GIVING EFFECT TO THE
CONFLICT OF LAW PRINCIPLES THEREOF.
Section 9.13. EXPENSES. Except as otherwise provided herein, each of
the Parties shall pay his or its own expenses in performance of this Agreement
and the transactions contemplated hereby, including all legal and accounting
fees and disbursements.
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<PAGE>
Section 9.14. PREVAILING PARTY COSTS. If any Party commences an
action against any other Party to enforce any of the terms, covenants,
conditions or provisions of this Agreement, or because of a breach by a Party of
his or its obligations under this Agreement, the prevailing Party in any such
action shall be entitled to recover its losses, costs and expenses, including
court costs, reasonable fees of attorneys, accountants and other experts,
incurred in connection with the prosecution or defense of such action, from the
losing Party.
Section 9.15. ENTIRE AGREEMENT. This Agreement sets forth all of the
promises, agreements, conditions, understandings, warranties and representations
among the Parties with respect to the transactions contemplated hereby, and
supersedes all prior agreements, arrangements and understandings among the
Parties, whether written, oral or otherwise. There are no promises, agreements,
conditions, understandings, warranties or representations, oral or written,
express or implied, among the Parties concerning the subject matter hereof
except as set forth herein.
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<PAGE>
IN WITNESS WHEREOF, the Parties have duly executed this Agreement as
of the Effective Date.
SPECTRANET INTERNATIONAL
By:/s/ Robert E. Randall
-----------------------------------
Printed Name: Robert E. Randall
-------------------------
Title: C.O.O.
--------------------------------
HOLDERS:
ENRON CAPITAL & TRADE RESOURCES CORP.
By: /s/ Stephen R. Horn
-----------------------------------
Printed Name: Stephen R. Horn
--------------------------
Title: Vice President
--------------------------------
Number of Shares:
Series A Common: 5,000,000
-----------------
Series B Common: -0-
-----------------
Number of Warrants: 5,000,000
-------------------
Address: If by personal delivery:
1400 Smith Street
----------------------------------
Houston, Texas 77002
----------------------------------
If by mail:
P.O. BOX 1188
----------------------------------
Houston, Texas 77251-1188
----------------------------------
Telephone Number: (713) 853-7301
----------------------
Facsimile Number: (713) 646-4043
----------------------
Signature Pages - Page 1 of 3
<PAGE>
COLORADO SPECTRA 1, L.L.C.
By: /s/ Donald L. Sturm
-----------------------------------
Printed Name: Donald L. Sturm
-------------------------
Title: Manager
--------------------------------
Number of Shares:
Series A Common: -0-
-----------------
Series B Common: 1,392,757
-----------------
Number of Warrants: 267,379
-------------------
Address: 3033 East First Avenue,
------------------------------
SUITE 200
------------------------------
Denver, Colorado 80206
------------------------------
Telephone Number: (303) 394-5105
---------------------
Facsimile Number: (303) 321-4444
---------------------
COLORADO SPECTRA 2, L.L.C.
By: /s/ Donald L. Sturm
------------------------------------
Printed Name: Donald L. Sturm
-------------------------
Title: Manager
--------------------------------
Number of Shares:
Series A Common: -0-
-----------------
Series B Common: -0-
-----------------
Number of Warrants: 2,110,140
--------------------
Address:
3033 EAST FIRST AVENUE, SUITE 200
----------------------------------
DENVER, COLORADO 80206
----------------------------------
----------------------------------
Telephone Number: (303) 394-5105
---------------------
Facsimile Number: (303) 321-4444
---------------------
Signature Pages - Page 2 of 3
<PAGE>
COLORADO SPECTRA 3, L.L.C.
By: /s/ Donald L. Sturm
-----------------------------------
Printed Name: Donald L. Sturm
--------------------------
Title: Manager
---------------------------------
Number of Shares:
Series A Common: 5,000,000
-----------------
Series B Common: -0-
-----------------
Number of Warrants: 5,000,000
--------------------
Address:
3033 EAST FIRST AVENUE, SUITE 200
----------------------------------
DENVER, COLORADO 80206
----------------------------------
Telephone Number: (303) 394-5105
---------------------
Facsimile Number: (303) 321-4444
---------------------
Signature Pages - Page 3 of 3
<PAGE>
EXHIBIT A
ADOPTION AGREEMENT
This Adoption Agreement (this "ADOPTION") is executed pursuant to the
terms of that certain Securityholders Agreement dated as of December 30, 1997
(the "AGREEMENT"), by the transferee ("TRANSFEREE") executing this Adoption. By
the execution of this Adoption, the Transferee agrees as follows:
Section 1. ACKNOWLEDGMENT. Transferee acknowledges that Transferee
is acquiring certain shares of and/or securities exercisable for or convertible
into shares of the capital stock of SpectraNet International, a California
corporation (the "CORPORATION"), subject to the terms and conditions of the
Agreement.
Section 2. AGREEMENT. Transferee (a) agrees that the securities of
the Corporation acquired by Transferee shall be bound by and subject to the
terms of the Agreement and (b) hereby adopts the Agreement with the same force
and effect as if Transferee were originally a party thereto.
Section 3. NOTICE. Any notice required or permitted by the Agreement
shall be given to Transferee at the address listed under Transferee's signature
below.
Section 4. JOINDER. The spouse of the undersigned Transferee, if
applicable, executes this Adoption to acknowledge its fairness and that it is in
such spouse's best interests and to bind such spouse's community interest, if
any, in any securities of the Corporation to the terms of the Agreement.
A-i
<PAGE>
Executed and Dated this ______ day of ___________________,_________.
TRANSFEREE:
By:
-----------------------------------
Printed Name:
-------------------------
Title:
--------------------------------
Number of Shares:
Series A Common:
-----------------
Series B Common:
-----------------
Number of Warrants:
Address:
------------------------------
------------------------------
------------------------------
Telephone Number:
---------------------
Facsimile Number:
---------------------
SPOUSE:
--------------------------
Printed Name:
--------------------
AGREED TO on behalf of the Corporation and all Holders pursuant to
Section 2.06 of the Agreement.
SPECTRANET INTERNATIONAL (for itself and
as Attorney-in-Fact for the Holders)
By:
-----------------------------------
Printed Name:
-------------------------
Title:
--------------------------------
A-ii
<PAGE>
BUSINESS OPPORTUNITY AGREEMENT
This Business Opportunity Agreement (this "Agreement"), dated as of
December 30, 1997, is entered into by and among Enron Capital & Trade Resources
Corp., a Delaware corporation ("ECT"), Colorado Spectra 1, L.L.C. ("Spectra 1"),
Colorado Spectra 2, L.L.C. ("Spectra 2"), and Colorado Spectra 3, L.L.C.
("Spectra 3"), each Colorado limited liability companies controlled directly or
indirectly by Donald L. Sturm (collectively the "Spectra Investors"), and
SpectraNet International, a California corporation ("SpectraNet").
W I T N E S S E T H:
WHEREAS, ECT, SpectraNet and the Spectra Investors are parties to certain
definitive agreements, dated effective the date hereof, providing for the
investment by ECT and the additional investment by one or more of the Spectra
Investors in SpectraNet in the aggregate of Thirty Million Dollars ($30,000,000)
in cash (collectively, the "Proposed Transaction");
WHEREAS, ECT and the Spectra Investors expect to derive significant
benefits from their ownership interest in SpectraNet following consummation of
the Proposed Transaction;
WHEREAS, SpectraNet expects to derive significant benefits from the
investment by ECT and the Spectra Investors upon consummation of the Proposed
Transaction;
WHEREAS, ECT is a wholly-owned subsidiary of Enron Corp., an Oregon
corporation ("Enron"), and Enron owns controlling and other interests in a
number of other entities (Enron, ECT and any other Affiliate of Enron other than
SpectraNet are referred to herein individually as an "Enron Entity" and
collectively as the "Enron Entities");
WHEREAS, the Spectra Investors are controlled by Donald L. Sturm, who owns
controlling and other interests in a number of other entities (the Spectra
Investors and any other Affiliate of the Spectra Investors or Donald L. Sturm
other than SpectraNet are referred to herein individually as a "Sturm Entity"
and collectively as the "Sturm Entities");
WHEREAS, as a condition to consummation of the Proposed Transaction, ECT
and the Spectra Investors will take certain actions, including representation by
ECT and the Spectra Investors on the Board of Directors of SpectraNet and
participation in the management thereof;
<PAGE>
WHEREAS, the Enron Entities and the Sturm Entities own interests in a
number of corporations, partnerships and other entities engaged in energy and
telecommunications related businesses and may from time to time acquire
additional interests in such businesses or other businesses;
WHEREAS, ECT has advised SpectraNet and the Spectra Investors that
FirstPoint Communications, Inc. and its affiliates ("FirstPoint"), which are
Enron Entities, (a) are engaged in the business of providing telecommunication
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 SpectraNet (including, without limitation, those
that compete in SpectraNet's markets in California) and (b) are, concurrently
with the proposed investment by ECT in SpectraNet, pursuing a financing,
acquisition or investment opportunity in a competitor or potential competitor of
SpectraNet;
WHEREAS, the Enron Entities from time to time purchase properties or
entities and engage in trading, marketing, lending and other activities,
including, but not limited to, those related to gas, electricity, water, paper,
metals, plastics and telecommunications;
WHEREAS, ECT Securities Corp., an Enron Entity, is a registered
broker-dealer that arranges transactions in securities for others and may in the
future engage in securities underwriting activities, including, without
limitation, for Persons who are or may be in competition with SpectraNet;
WHEREAS, ECT and the Spectra Investors are unwilling to make an investment
in SpectraNet and consummate the Proposed Transaction without assurances from
SpectraNet and each other that the Enron Entities and the Sturm Entities will be
permitted to continue to conduct their business following the Proposed
Transaction without undue risk of liability or damage to business relationships
with customers; and but for this Agreement ECT and the Spectra Investors would
be unwilling to take such actions because of the unacceptable risk of liability
to ECT, other Enron Entities, the Spectra Investors and other Sturm Entities
resulting from uncertainties regarding their obligations;
WHEREAS, the parties hereto desire to provide for more certainty regarding
the circumstances in which SpectraNet will have an obligation to offer Business
Opportunities to ECT, to provide for other agreements intended to permit the
Enron Entities and the Sturm Entities to continue to conduct their business
activities without undue risk of liability to SpectraNet or its shareholders or
each other following consummation of the Proposed Transaction or undue risk of
damage to the Enron Entities' or the Sturm Entities' business relationships, and
to enter into other agreements aimed at providing, to the extent practicable,
more certainty regarding the obligations of the Enron Entities, the Sturm
Entities and SpectraNet;
2
<PAGE>
WHEREAS, ECT and the Spectra Investors have relied on the fact that this
Agreement would be executed and enforceable and in the future will rely on this
Agreement and the commitments herein made by SpectraNet, ECT and the Spectra
Investors; and ECT, other Enron Entities, the Spectra Investors and other Sturm
Entities that are beneficiaries of this Agreement will, in taking the steps
required of them to cause or permit the Proposed Transaction to occur and in
continuing to conduct their business following consummation of the Proposed
Transaction, rely on this Agreement and the commitments herein made by each
other as set forth herein and in the definitive agreements; and
WHEREAS, in order to induce ECT, other Enron Entities, the Spectra
Investors and other Sturm Entities to enter into, or to cause other Enron
Entities or Sturm Entities to enter into, definitive agreements relating to the
Proposed Transaction, to enable ECT, other Enron Entities, the Spectra Investors
and other Sturm Entities to take the other actions required to be taken by them
in order for the Proposed Transaction to be consummated, to provide more
certainty regarding the obligations of the parties to this Agreement to each
other following consummation of the Proposed Transaction, and to permit the
Enron Entities and the Sturm Entities to avoid undue risk of litigation, the
parties hereto desire to enter into this Agreement; and each party agrees that
this Agreement is a material inducement to the other parties hereto to enter
into the agreements relating to the Proposed Transaction and to consummate the
Proposed Transaction;
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
and obligations hereinafter set forth, and as a material inducement to ECT and
the Spectra Investors in entering into the Proposed Transaction, the parties
hereto, intending to be legally bound, hereby agree as follows:
SECTION 1. CERTAIN DEFINITIONS. When used in this Agreement, the
following terms shall have the meanings indicated:
"AFFILIATE" of a Person means any Person controlling, controlled by, or
under common control with such Person, with "control" and its correlative terms
meaning the possession, directly or indirectly, of the power to direct or cause
the direction of management or policies (whether through ownership of securities
or any partnership or other ownership interest, by contract or otherwise) of a
Person. For the purposes of this Agreement, control shall include the
possession, directly or indirectly, through one or more intermediaries, of
(a) in the case of a corporation, 50% or more of the outstanding voting
securities thereof; (b) in the case of a limited liability company, partnership,
limited partnership or venture, the right to 50% or more of the distributions
therefrom (including liquidating distributions); and (c) in the case of any
other Person, 50% or more of the economic or beneficial interest therein. For
the purposes of this Agreement, control shall also include serving as manager or
general partner of a Person or performing similar functions for a Person.
3
<PAGE>
"BUSINESS OPPORTUNITY" means any opportunity for a Person (a) to enter into
any transaction pursuant to which such Person would acquire (whether by
purchase, lease, or other transaction), own, invest in, finance, lend funds to,
contribute capital to, manage, operate or otherwise participate in any Person,
asset or transaction or (b) to act as a broker, finder, financial adviser or
investment banker with respect to any such transaction by any other Person.
"CLAIMS" has the meaning set forth in Section 6 hereof.
"COMPANY" means SpectraNet and all Affiliates of SpectraNet in which
SpectraNet owns an interest, directly or indirectly, unless the context
otherwise requires.
"ECT ELECTION NOTICE" has the meaning set forth in Section 2(a)(ii) hereof.
"ENRON" means Enron Corp., an Oregon corporation.
"EXCLUSIVITY PERIOD" has the meaning set forth in Section 2(a) hereof.
"JOINT APPLICATION OPPORTUNITY" has the meaning set forth in Section 2(a)
hereof.
"NOTICE" has the meaning set forth in Section 7(f) hereof.
"PARTLY-OWNED AFFILIATE" has the meaning set forth in Section 3(b) hereof.
"PERSON" means any natural person, corporation, limited partnership,
limited liability company, general partnership, joint stock company, joint
venture, association, company, trust, bank, trust company, land trust, business
trust or other organization, whether or not a legal entity, and any governmental
entity, public power authority, municipality or agency.
"TELECOMMUNICATIONS APPLICATIONS" means the provision of communication
services, including, but not limited to, the following: telecommunication
services, services over fiber optic communications networks, digital switched
networks, copper networks or any other communication media; the provision of
video and/or high speed data transmission; communications consulting services;
and wide-area and local-area network services.
"UTILITY APPLICATIONS" means the marketing of one or more of natural gas,
electricity or water and the provision of all related services and includes,
without limitation, the provision of the commodity, the provision of
transmission, transportation or distribution, the provision of financial and
risk management services and products, demand-side management services, the
provision of customer care functions (E.G., meter, billing and collection
functions) and the provision of all other utility services.
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SECTION 2. GRANT OF EXCLUSIVITY TO ECT FOR JOINT APPLICATION
OPPORTUNITIES.
(a) SpectraNet hereby grants to ECT and to its Affiliates, for the term
(the "Exclusivity Period") beginning on the date of this Agreement and
continuing until the EARLIER OF (i) the third anniversary of the date hereof or
(ii) the date upon which ECT and/or any of its Affiliates hold less than five
percent (5%) of the capital stock or warrants of SpectraNet (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), the exclusive
right to pursue jointly with SpectraNet any Business Opportunity that includes
both Telecommunications Applications and Utility Applications (the "Joint
Application Opportunity"). The term Joint Application Opportunity shall
include, without limitation, any formal or informal invitation, request for
proposals, bids or expressions of interest from any Person for
Telecommunications Applications and Utility Applications, and whether or not
such invitation, request for proposals, bids or expressions of interest permits
the offered party to respond to all or any portion of the Telecommunications
Applications and Utility Applications. During the Exclusivity Period,
SpectraNet and ECT agree as follows:
(i) SpectraNet will agree to promptly provide written notice to ECT
of any Joint Application Opportunity anywhere in the United States for
which SpectraNet desires to pursue the Telecommunications Applications.
The Chairman of SpectraNet (or another officer of SpectraNet under his
direction) will promptly notify ECT of each Joint Application Opportunity
for which SpectraNet desires to pursue the Telecommunications Applications,
and in connection with such notice, SpectraNet will furnish to ECT all
information regarding the Joint Application Opportunity that is material to
ECT's decision regarding whether or not to participate in the Joint
Application Opportunity. Within thirty (30) days of receipt of such notice
and information, ECT will notify SpectraNet whether ECT desires to
participate in the Joint Application Opportunity.
(ii) If ECT notifies SpectraNet that it desires to participate in the
Joint Application Opportunity (the "ECT Election Notice"), SpectraNet will
as promptly as practicable furnish to ECT any additional information in
SpectraNet's possession regarding the Joint Application Opportunity and,
from and after the date of such notice (and except as otherwise provided in
this Section 2(a)(ii)), SpectraNet shall not pursue the Joint Application
Opportunity with any other Person or in any manner detrimental to the
rights of ECT as provided for in this Section 2, and shall keep ECT fully
informed with respect to SpectraNet's efforts in such regard. From and
after the date of the ECT Election Notice, ECT and SpectraNet shall work
together to develop the Joint Application Opportunity and shall, within
sixty (60) days following the ECT Election Notice, use commercially
reasonable efforts to negotiate and enter into a written agreement
respecting the rights and obligations of the parties with respect to such
Joint Application Opportunity. During such sixty (60) day period, ECT
agrees that it will not pursue the Joint Application
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Opportunity directly or with a competitor of SpectraNet. In the event that
ECT and SpectraNet fail to enter into a written agreement with respect to
such Joint Application Opportunity within such sixty (60) day period (or
such later period as may be mutually agreed by ECT and SpectraNet in
writing), then the provisions of Section 2(a)(iii) hereof shall apply and
such failure shall be treated as if ECT elected not to participate in the
Joint Application Opportunity.
(iii) In the event that ECT fails to provide the ECT Election Notice
within the time prescribed above or otherwise elects not to participate
in the Joint Application Opportunity, then SpectraNet shall be free to
pursue the Telecommunications Applications on a subcontract basis only
with respect to such Joint Application Opportunity, or independently on
its own with respect to the Telecommunications Applications, but not the
Utility Applications, and ECT or any other Enron Entity will be free to
pursue the Joint Application Opportunity (including the Utility
Applications and/or the Telecommunications Applications) on its own or
with any Person other than SpectraNet. In this regard, SpectraNet shall
be precluded from participating in the Joint Application Opportunity
with any other Person for the provision of Utility Applications.
(iv) ECT and SpectraNet acknowledge and agree that any confidential
information of a party furnished to the other party pursuant to Sections
2(a)(i) and (ii) hereof will only be utilized by the receiving party to
evaluate the Joint Application Opportunity in conjunction with the
receiving party's pursuit of the Joint Application Opportunity with the
furnishing party.
(b) SPECTRANET ACKNOWLEDGES AND AGREES THAT AT ANY TIME DURING THE
EXCLUSIVITY PERIOD OR THEREAFTER NEITHER ECT NOR ANY OTHER ENRON ENTITIES SHALL
HAVE ANY OBLIGATION TO NOTIFY SPECTRANET OF ANY BUSINESS OPPORTUNITY, WHETHER OR
NOT IT HAS UTILITY APPLICATIONS AND/OR TELECOMMUNICATIONS APPLICATIONS.
SECTION 3. NO REQUIREMENT THAT ENRON ENTITIES OR STURM ENTITIES OFFER
BUSINESS OPPORTUNITIES TO SPECTRANET.
SpectraNet, ECT and the Spectra Investors agree that any Business
Opportunity developed by an Enron Entity or a Sturm Entity is not required to be
offered to SpectraNet and may be pursued by such Enron Entity or Sturm Entity,
and hereby waive the right to claim that any such Business Opportunity should be
offered to SpectraNet. The foregoing Business Opportunities developed by an
Enron Entity or a Sturm Entity could include, without limitation, the following:
(a) the Business Opportunity consists of the acquisition of publicly
traded securities whether or not such acquisition is effected for the purpose of
investment, for
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trading purposes or for the purpose of obtaining control of the issuer or of any
of its assets; or
(b) the Business Opportunity is developed by Enron Entities or Sturm
Entities which are not wholly-owned by Enron or Donald L. Sturm, respectively
("Partly-Owned Affiliates"), including, without limitation, Enron Oil & Gas
Company; or
(c) the Business Opportunity is developed by FirstPoint or any other Enron
Entity or any Sturm Entity without use of any confidential or proprietary
information of SpectraNet.
SECTION 4. PURSUIT OF BUSINESS OPPORTUNITIES BY ENRON ENTITIES AND
STURM ENTITIES.
ECT, other Enron Entities, the Spectra Investors and other Sturm Entities
and their respective affiliates own, have agreements with and otherwise
participate in, telecommunications and other 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 SpectraNet. SpectraNet agrees that the Enron
Entities and the Sturm Entities may continue to conduct their respective and
prospective businesses, even if doing so will have a competitive impact on
SpectraNet and/or would otherwise constitute a SpectraNet Business Opportunity.
In that connection, and except as otherwise expressly set forth in this
Agreement, SpectraNet agrees that (a) neither the Enron Entities, the Sturm
Entities nor any of their respective affiliates will have any obligation to
pursue any Business Opportunity jointly with SpectraNet or to offer any Business
Opportunity to SpectraNet, and any Enron Entity or Sturm Entity representative
on the Board of Directors of SpectraNet or otherwise participating in the
management of SpectraNet will have no obligation to offer any Business
Opportunity to SpectraNet; (b) the Enron Entities, the Sturm Entities and their
respective Affiliates will be free to pursue Business Opportunities jointly with
Persons other than SpectraNet, including opportunities that have
telecommunications applications; and (c) the Enron Entities, the Sturm Entities
and their respective Affiliates will be free to compete with SpectraNet and will
have no obligation to SpectraNet to refrain from engaging in any business.
SpectraNet, ECT and the Spectra Investors hereby consent to such activities,
even if they have a competitive impact on SpectraNet.
SECTION 5. CONSENT BY SPECTRANET.
At any time, ECT or the Spectra Investors may request that SpectraNet
furnish to ECT or the Spectra Investors, as the case may be, a consent in
writing to any action or inaction by any Enron Entity or Sturm Entity that ECT
or the Spectra Investors believes such Person is entitled under this Agreement
to take or refrain from taking. In the event that SpectraNet fails or refuses
to furnish such consent, ECT or the Spectra Investors, as the case may be, shall
have the right to submit the matter to arbitration. If SpectraNet furnishes
such consent, such consent will also contain an agreement by SpectraNet that, in
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the absence of a material misstatement or omission by ECT or the Spectra
Investors in connection with its request for such consent, SpectraNet will not
thereafter claim that the action or inaction covered by such consent is a breach
of this Agreement or any obligation owed by ECT or any other Enron Entity, or
the Spectra Investors or any other Sturm Entity, to SpectraNet or its Board of
Directors. Nothing herein shall be deemed to require ECT, the Spectra Investors
or SpectraNet to submit any matter to arbitration.
SECTION 6. ARBITRATION.
Any and all claims, demands, causes of action, disputes, controversies and
other matters in question arising out of or relating to this Agreement, the
alleged breach thereof, or in any way relating to the subject matter of this
Agreement ("Claims"), even though some or all of such Claims allegedly are
extra-contractual in nature, whether such Claims sound in contract, tort or
otherwise, at law or in equity, under state or federal law, whether provided by
statute or the common law, for damages or any other relief, shall be resolved
and decided exclusively by binding arbitration pursuant to the Federal
Arbitration Act in accordance with the Commercial Arbitration Rules then in
effect with the American Arbitration Association. The arbitration proceeding
shall be conducted in Wilmington, Delaware. The arbitration shall be before a
panel of (a) three arbitrators in the event that the Claim is between ECT and
SpectraNet or between the Spectra Investors and SpectraNet or (b) five
arbitrators (unless the parties otherwise agree to three arbitrators) in the
event that the Claim is among ECT, the Spectra Investors and SpectraNet. Each
party to such dispute shall select one arbitrator (with the Spectra Investors
being entitled to one arbitrator for all such companies), and the arbitrators
selected by the parties shall select the remaining arbitrator(s). The
arbitrators are authorized to issue subpoenas for depositions and other
discovery mechanisms, as well as trial subpoenas, in accordance with the Federal
Rules of Civil Procedure. Either party may initiate a proceeding in the
appropriate United States District Court to enforce this provision. This
agreement to arbitrate shall be enforceable in either federal or state court.
Judgment upon any award rendered in any such arbitration proceeding may be
entered by any federal or state court having jurisdiction. The enforcement of
this agreement to arbitrate and all procedural aspects of this agreement to
arbitrate, including the construction and interpretation of this agreement to
arbitrate, the scope of the arbitrable issues, allegations of waiver, delay or
defenses to arbitrability, and the rules governing the conduct of the
arbitration, shall be governed by and construed pursuant to the Federal
Arbitration Act. THE ARBITRATORS SHALL HAVE NO AUTHORITY TO AWARD PUNITIVE
(INCLUDING, WITHOUT LIMITATION, ANY EXEMPLARY DAMAGES, TREBLE DAMAGES OR ANY
OTHER PENALTY OR PUNITIVE TYPE OF DAMAGES), CONSEQUENTIAL, INCIDENTAL OR
INDIRECT DAMAGES (IN TORT, CONTRACT, BY STATUTE OR OTHERWISE) UNDER ANY
CIRCUMSTANCES, REGARDLESS OF WHETHER SUCH DAMAGES MAY BE AVAILABLE UNDER
APPLICABLE LAW OR OTHERWISE, THE PARTIES HERETO HEREBY WAIVING THEIR RIGHT, IF
ANY, TO RECOVER SUCH DAMAGES IN CONNECTION WITH ANY CLAIMS. The arbitrators
shall be entitled to award costs of the arbitration and attorney's fees as they
deem appropriate. Prior to any Person instituting a Claim under this Agreement,
such Person shall provide to the other
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party hereto a written notice specifying the nature and basis of the Claim. The
Persons who are the subject of any Claim shall be given thirty (30) days to cure
any breach before any Claim is filed.
SECTION 7. MISCELLANEOUS
(a) CONTRACTS AND AGREEMENTS. SpectraNet agrees not to enter into any
contracts or agreements that will prevent it from performing its duties and
obligations hereunder or prevent the other parties to this Agreement from
realizing the benefits hereof.
(b) THIRD PARTY BENEFICIARIES. This Agreement is also intended for the
benefit of each member of the Board of Directors of SpectraNet and each Enron
Entity and each Sturm Entity, each of which will be considered a third party
beneficiary of this Agreement.
(c) CONFIDENTIALITY. The provisions of this Agreement and all information
regarding Business Opportunities and Joint Application Opportunities, and all
other information exchanged by the parties pursuant to this Agreement, shall not
be disclosed by any party to this Agreement unless otherwise publicly disclosed
and except as otherwise required by law. Each party will keep confidential any
information supplied to them by another party under this Agreement and will not
disclose such information to other Persons except that they may disclose it to
any officer, director or employee of their respective companies if in their
reasonable judgment such Person has the need to know such information in order
to discharge his or her duties.
(d) AMENDMENT; WAIVERS. This Agreement may only be altered, supplemented,
amended or waived by the written consent of each party hereto.
(e) ASSIGNMENT. The terms and conditions of this Agreement shall inure to
the benefit of and be binding upon the parties hereto and their permitted
successors and assigns; provided, however, that no party hereto shall have the
right to assign this Agreement without the consent of the other parties hereto.
SpectraNet agrees that SpectraNet will not issue any additional shares of
capital stock of SpectraNet (other than with respect to warrants or stock
options outstanding on the date hereof) to any Person unless it obtains from
such Person an agreement to be bound by this Agreement and an agreement that
such Person will not assign its shares of capital stock of SpectraNet or any
portion thereof to any other Person unless it obtains from such Person an
agreement to be bound by this Agreement.
(f) NOTICES. Any and all notices, designations, consents, offers,
acceptances, or other communications provided for herein (each a "Notice") shall
be given in writing by personal delivery, overnight courier, telegram, or
telecopy which shall be addressed, or sent, to the respective addresses or
telecopy numbers as follows (or such other address or telecopy number as any
party hereto may specify for itself by Notice given in accordance with this
Section 7(f)):
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ECT: Enron Capital & Trade Resources Corp.
1400 Smith Street
Houston, Texas 77002
Attention: Kevin Garland
Telecopy No. 713/646-4043
Telephone No. 713/853-7301
WITH A COPY TO:
Enron Capital & Trade Resources Corp.
1400 Smith Street
Houston, Texas 77002
Attention: General Counsel
Telecopy No. 713/646-3490
Telephone No. 713/853-6544
SpectraNet SpectraNet International
9333 Genesee Avenue, Suite 200
San Diego, California 92121
Attention: Chief Executive Officer
Telecopy No. 619/552-8006
Telephone No. 619/552-8010
Spectra 1 Colorado Spectra 1, L.L.C.
3033 East First Avenue, Suite 200
Denver, Colorado 80206
Attention: Chief Executive Officer
Telecopy No. 303/321-4444
Telephone No. 303/394-5105
Spectra 2 Colorado Spectra 2, L.L.C.
3033 East First Avenue, Suite 200
Denver, Colorado 80206
Attention: Chief Executive Officer
Telecopy No. 303/321-4444
Telephone No. 303/394-5105
Spectra 3 Colorado Spectra 3, L.L.C.
3033 East First Avenue, Suite 200
Denver, Colorado 80206
Attention: Chief Executive Officer
Telecopy No. 303/321-4444
Telephone No. 303/394-5105
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All Notices shall be deemed effective, delivered and received (a) if given
by personal delivery, when such Notice is personally delivered at the address
specified above; (b) if given by telecopy, when such telecopy is transmitted to
the telecopy number specified above and receipt thereof is confirmed; (c) if
given by overnight courier, on the business day immediately following the day on
which such Notice is delivered to a reputable overnight courier service; or (d)
if given by telegram, when such Notice is delivered at the address specified
above.
(g) COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which counterparts shall be deemed to be an original and
which counterparts together shall constitute one and the same agreement of the
parties hereto.
(h) CHOICE OF LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA, WITHOUT REGARD TO THE
PRINCIPLES OF CONFLICTS OF LAWS THEREOF.
(i) ENTIRE AGREEMENT; EXHIBITS. This Agreement contains the entire
understanding of the parties hereto respecting the subject matter hereof and
supersedes all prior agreements, discussions and understandings with respect
thereto. Any and all Exhibits referred to in this Agreement are, by such
reference, incorporated herein and made a part hereof for all purposes.
(j) NO PARTNERSHIP. No term or provision of this Agreement shall be
construed to establish any relationship of partnership, agency or joint venture
among the parties hereto.
(k) INVALIDITY. In the event that any one or more of the provisions
contained in this Agreement is, for any reason, held invalid, illegal or
unenforceable in any respect, such invalidity, illegality or unenforceability
will not affect any other provision of this Agreement.
(l) CONTRACTUAL OBLIGATIONS. Nothing herein shall require any Enron
Entity, Sturm Entity or SpectraNet to fail to perform any contractual obligation
to which it is subject, including any obligation under any standstill agreement
or confidentiality agreement with any entity that may be the subject of a
Business Opportunity.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
effective as of the date first written above.
SPECTRANET INTERNATIONAL
By: /s/ Robert E. Randall
------------------------------------
Name: Robert E. Randall
----------------------------------
Title: C.O.O.
---------------------------------
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ENRON CAPITAL & TRADE RESOURCES CORP.
By: /s/ Stephen R. Horn
------------------------------------
Name: Stephen R. Horn
----------------------------------
Title: Vice President
---------------------------------
COLORADO SPECTRA 1, L.L.C.
By: /s/ Donald L. Sturm
------------------------------------
Name:
----------------------------------
Title:
---------------------------------
COLORADO SPECTRA 2, L.L.C.
By: /s/ Donald. L. Sturm
------------------------------------
Name:
----------------------------------
Title:
---------------------------------
COLORADO SPECTRA 3, L.L.C.
By: /s/ Donald L. Sturm
------------------------------------
Name:
----------------------------------
Title:
---------------------------------
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Exhibit 10.11
MANAGEMENT
CONSULTING SERVICES AGREEMENT
This Management Consulting Services Agreement ("Agreement") is entered into
by and between Corporate Managers, LLC, a Colorado limited liability company
("Consultant"), and SpectraNet International, a California corporation (the
"Company"). Consultant and the Company are sometimes referred to herein
individually as a "Party" and collectively as the "Parties".
W I T N E S S E T H:
WHEREAS, contemporaneously with the execution of this Agreement, the
Company, Enron Capital & Trade Resources Corp., a Delaware corporation ("ECT"),
and Colorado Spectra 3, L.L.C., an affiliate of Consultant ("Spectra 3"), have
entered into certain definitive agreements, including that certain Common Stock
Purchase Agreement, providing for (a) the investment by ECT and Spectra 3 in the
Company in the amount of $30 million cash and (b) the execution and delivery of
this Agreement;
WHEREAS the Company is engaged in the development, installation and
operation of city-wide, broadband, fiber-optic telecommunication networks that
are designed to replace local exchange carriers and provide voice, data, and
video services to all end-users within such city, and desires to engage
Consultant to render general management consulting services to the Company in
connection with its business;
WHEREAS, Consultant desires to accept such engagement upon the terms and
conditions set forth in this Agreement; and
WHEREAS, the Company will, contemporaneously with the execution of this
Agreement, enter into a management consulting services agreement with ECT
containing terms substantially similar to the terms of this Agreement and by
which ECT also will provide management consulting services to the Company as
therein set forth;
NOW, THEREFORE, in consideration of the premises, the investment by
Consultant in the Company, and the mutual covenants and promises contained
herein, and with the intention of being bound hereby, Consultant and the Company
hereby agree as follows:
1. TERM.
The performance of the Services (as hereinafter defined) by Consultant
under this Agreement shall commence on January 1, 1998 and shall continue until
January 1, 2001 unless earlier terminated by Consultant as provided herein (the
"Term"). Consultant may terminate this Agreement at any time with or without
cause by providing ten (10) days prior written notice to the Company. The
provisions in Sections 3, 4, 5, 6 and 7 hereof shall survive any termination of
this Agreement.
<PAGE>
2. SERVICES.
(a) In consideration of the compensation being paid to Consultant
hereunder, Consultant shall (i) familiarize itself, to the extent necessary,
with the business, operations, management, properties, financial condition, and
prospects of the Company necessary to perform the services required by this
Agreement; (ii) provide general management consulting and advisory services to
the Company in connection with the performance of the Company's business; (iii)
coordinate the foregoing services with the Board of Directors of the Company and
ECT so as to promote the efficient delivery and use of such Services; and
(iv) provide other consulting services as may from time to time be agreed by
Consultant and the Board of Directors of the Company (the foregoing
collectively, the "Services").
(b) When requested by the Company, Consultant will consult with the
officers and employees of the Company concerning matters relating to this
engagement. Consultant agrees to provide such manpower and technical expertise
to the performance of the Services as it deems reasonably necessary in order to
perform the Services hereunder. The particular amount of time Consultant may
spend in fulfilling its obligations under this Agreement may vary from day to
day or week to week.
(c) Consultant shall secure, at its sole cost and expense, any and all
licenses, permits, and registrations necessary for performance of the Services.
Consultant also shall control the means and methods of work necessary for
performance of the Services.
(d) The Company has advised Consultant that the Company also has engaged
ECT to perform management consulting services for the Company. Consultant
acknowledges and agrees that its engagement hereunder is not exclusive. The
Company acknowledges and agrees that Consultant and its Representatives (as
hereinafter defined) may provide management consulting, advisory or other
services similar or identical to those to be provided by Consultant to the
Company pursuant to this Agreement to other persons or entities at any time
during the Term. The Company hereby agrees that nothing set forth in this
Agreement, or in any other oral or written agreement to which the Company and
Consultant are parties, shall prohibit or in any way affect the right of
Consultant and its Representatives to provide any management consulting,
advisory or other services whatsoever to any third party or for the benefit of
any third party.
(e) At all times during the term of this Agreement the Company shall
retain ownership and control of, and operational responsibility with respect to,
all of its properties and assets, both tangible and intangible. The Parties
agree that the Services to be provided by Consultant to the Company hereunder
will be strictly recommendations and of an advisory nature only, and that the
Company may, in its sole discretion, reject or accept any such recommendations
or advice.
3. PAYMENT AND REIMBURSEMENT TO CONSULTANT.
(a) During each calendar year during the Term, the Company shall pay
Consultant an annual consulting fee of Six Hundred Twenty Thousand Dollars
($620,000) in cash, which fee shall be paid in arrears in equal quarterly
installments of $155,000 on March 31st, June 30th, September 30th and
December 31st of each year commencing March 31, 1998. All consulting fees
payable by the Company to Consultant hereunder shall be prorated for any
partial Term.
(b) The Company shall reimburse Consultant for all reasonable out-of-
pocket expenses incurred by Consultant in performance of the Services requested
by the Company under this Agreement. On or before the thirtieth (30th) day of
each calendar month during the Term, Consultant shall submit to the Company a
monthly statement setting forth reimbursable expenses incurred during the prior
calendar month.
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Consultant shall furnish to the Company with such statement all records,
receipts or other evidence in substantiation of Consultant's reimbursable
expense statement as may be requested by the Company. The Company shall
reimburse Consultant in cash within thirty (30) days of the Company's receipt of
such statement.
4. CONFIDENTIALITY AND PROPRIETARY INFORMATION.
(a) In conjunction with the performance of this Agreement, Consultant and
the Company may, from time to time, furnish the other Party or its
Representatives (as defined below) with Confidential Information of the
furnishing Party or its Representatives. Each Party agrees that it shall not
disclose the other Party's Confidential Information without such other Party's
prior written consent; PROVIDED, HOWEVER, a Party may disclose: (i) the other
Party's Confidential Information to the receiving Party's directors, officers,
employees, advisors, representatives, agents and affiliates, and their
respective directors, officers, employees, advisors, representatives, agents and
affiliates (collectively, "Representatives"), who need to know the Confidential
Information for performance or coordination of the Services hereunder and who
agree to maintain the confidentiality of such Confidential Information in
accordance with the terms hereof; and (ii) any of the other Party's Confidential
Information that: (A) becomes generally available to the public; (B) which a
Party can demonstrate is already known to such Party or its Representatives at
the time of disclosure by the furnishing Party or its Representatives; (C) is
acquired from a third party whom such receiving Party does not reasonably
believe is prohibited from making disclosure; (D) is independently developed by
a Party or its Representatives without use of any of the Confidential
Information; or (E) subject to Section 5 hereof, is required to be disclosed to
comply with any applicable law, order, regulation or ruling (collectively,
"Law").
(b) A Party shall not use the other Party's Confidential Information other
than for the purpose of providing or coordinating the Services under this
Agreement. Each Party shall be responsible for any breach of this Agreement by
it or any of its Representatives. Upon a Party's request, the other Party shall
return all written Confidential Information of the requesting Party, except for
that portion of such Confidential Information that may be found in analyses,
compilations, studies or other documents prepared by, or for, the returning
Party, and the returning Party and its Representatives shall not retain any
copies of such written Confidential Information. The portion of written
Confidential Information that may be found in analyses, compilations, studies or
other documents prepared by, or for, the returning Party, and any written
Confidential Information furnished by the requesting Party not so requested or
returned, will be destroyed. Any oral Confidential Information furnished to a
Party shall be kept confidential subject to the terms of this Agreement.
Notwithstanding any provision in this Agreement to the contrary, neither Party
shall be required to return, destroy or alter any of its computer archival and
computer backup tapes and files ("Computer Tapes"), PROVIDED that such Computer
Tapes shall be kept confidential in accordance with the terms of this Agreement.
If requested by a Party, the other Party shall deliver a certificate duly
executed by an authorized officer of such Party certifying as to the return or
destruction of such Confidential Information. Notwithstanding the provisions of
this Section 4(b), however, the receiving Party may retain in the possession of
its legal counsel one copy of the analyses, compilations, studies or other
documents prepared by or for the receiving Party solely to substantiate the
Services rendered or coordinated under this Agreement.
(c) The provisions of this Section 4 shall survive the termination of this
Agreement. Money damages would not be sufficient remedy for any breach of this
Section 4 by a Party, and the non-breaching Party shall be entitled to specific
performance and injunctive relief as remedies for such breach or any threatened
breach. Such remedies shall not be deemed the exclusive remedies for a breach
of this Section 4 by a Party, but shall be in addition to all remedies available
at Law or in equity to such Party.
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5. NOTICE PRECEDING COMPELLED DISCLOSURE.
If a Party is requested or required (by oral question, interrogatories,
requests for information or documents, subpoena, civil investigative demand or
similar process) to disclose any Confidential Information of the other Party
contemplated by Section 4 hereof, such Party will promptly notify the other
Party of such request or requirement so that the other Party may seek an
appropriate protective order or waiver in compliance with the provisions of this
Agreement. If, in the absence of a protective order or the receipt of a waiver
hereunder, such Party is, in the opinion of its counsel, compelled to disclose
any Confidential Information, such Party may disclose only such of the
information to the person compelling disclosure as is required by Law, and will
exercise reasonable efforts to obtain a protective order or other reliable
assurance that confidential treatment will be accorded the Confidential
Information.
6. RELIANCE BY CONSULTANT ON COMPANY SUPPLIED INFORMATION.
The Company acknowledges and agrees that Consultant may rely on information
and data supplied by or on behalf of the Company in the performance of the
Services and, except for any breach by Consultant of the provisions of Section 4
hereof with respect to Confidential Information of the Company, neither
Consultant nor any Representative of Consultant shall have any liability to the
Company resulting from the use of any such information or data.
7. INDEMNIFICATION; LIMITATION OF LIABILITY.
(a) The Company hereby agrees to indemnify, defend (at the request of
Consultant) and hold harmless Consultant and its officers, directors, employees,
representatives, agents and affiliates (collectively, the "Indemnified Parties")
from and against any and all claims, demands, causes of actions, losses,
damages, liabilities, costs and expenses (including reasonable attorneys' fees
and expenses) of any and every kind or nature whatsoever asserted against or
incurred by any of the Indemnified Parties by reason of, arising out of, or in
any way related to the properties and businesses of the Company and the
performance of the Services hereunder, except to the extent caused by the gross
negligence or willful misconduct of the Indemnified Parties, IT BEING THE
INTENTION OF THE COMPANY TO INDEMNIFY THE INDEMNIFIED PARTIES FOR THEIR OWN
ORDINARY NEGLIGENCE.
(b) IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE OTHER PARTY FOR
INCIDENTAL, CONSEQUENTIAL, SPECIAL OR PUNITIVE DAMAGES INCURRED BY EITHER PARTY
IN CONNECTION WITH THE PERFORMANCE OF ANY OF ITS OBLIGATIONS HEREUNDER, WHETHER
ARISING UNDER CONTRACT, TORT, STATUTE OR OTHERWISE.
8. INDEPENDENT CONTRACTOR.
(a) The Parties agree that the Services rendered by Consultant in the
fulfillment of the terms and obligations of this Agreement shall be as an
independent contractor and not as an employee. Further, Consultant is not an
agent, partner, or joint venturer of the Company. Consultant shall not offer or
agree to incur or assume any obligations or commitments in the name of the
Company or for the Company without the prior written consent and authorization
of the Company. Consultant shall not subcontract or assign any of the Services
to be performed hereunder without obtaining the prior written consent of the
Company.
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<PAGE>
(b) Consultant shall be responsible for payment of all taxes, including
Federal, State and local taxes, arising out of the Consultant's activities in
accordance with this Agreement, including, but not limited to, Federal and State
income tax, Social Security tax, Unemployment Insurance taxes, and any other
taxes or business license fees as required.
9. NOTICES.
Any and all notices or other communications required or permitted under
this Agreement shall be given in writing and delivered in person or sent by
United States certified or registered mail, postage prepaid, return receipt
requested, or by overnight express mail, or by telex, facsimile or telecopy to
the address of such Party set forth below. Any such notice shall be effective
upon receipt or three days after placed in the mail, whichever is earlier.
IF TO CONSULTANT: Corporate Managers, LLC
3033 East First Avenue, Suite 200
Denver, Colorado 80206
Attn: Chief Executive Officer
Telecopy No.: 303/321-4444
IF TO THE COMPANY: SpectraNet International
9333 Genesee Avenue, Suite 200
San Diego, California 92121
Attn: Chairman
Telecopy No.: 619/552-8006
Any Party may, by notice so delivered, change its address for notice
purposes hereunder.
10. WAIVER.
Failure of either Party at any time to require performance by the
other Party of any provision of this Agreement shall in no way affect the right
of the other Party hereafter to enforce the same. Nor shall any waiver by a
Party of any breach of any provision of this Agreement be taken or held to be a
waiver of any succeeding breach of such provision or as a waiver of this
provision itself.
11. APPLICABLE LAW.
THIS AGREEMENT SHALL BE GOVERNED BY AND BE CONSTRUED IN ACCORDANCE WITH THE
LAWS OF THE STATE OF DELAWARE, WITHOUT GIVING EFFECT TO PRINCIPLES OF CONFLICTS
OF LAWS.
12. SEVERABILITY.
It is the desire and intent of the Parties that the terms, provisions and
covenants contained in this Agreement shall be enforceable to the fullest extent
permitted by Law. If any such term, provision or covenant or the application
thereof to any person or circumstances shall, to any extent, be construed to be
invalid or unenforceable in whole or in part, then such term, provision or
covenant shall be construed in a manner as to permit its enforceability under
the applicable Law to the fullest extent permitted by Law. In any case, the
remaining provisions of this Agreement or the application thereof to any person
or
5
<PAGE>
circumstances, other than those to which they have been held invalid or
unenforceable, shall remain in full force and effect.
13. SUCCESSORS AND ASSIGNMENT.
This Agreement shall not be assigned, in whole or in part, by either Party
without the prior written consent of the other Party. Any assignment of this
Agreement or the rights or obligations of a Party hereunder without such consent
shall be null and void and of no force and effect.
14. OTHER AGREEMENTS / MODIFICATIONS.
(a) This Agreement modifies and supersedes all other prior or
contemporaneous agreements between the Parties regarding the performance of the
Services and constitutes the entire agreement of the Parties regarding the
performance of Services by Consultant to the Company.
(b) This Agreement may be amended, modified, superseded, canceled, renewed
or extended and the terms and conditions hereof may be waived only by a written
instrument executed by both Parties hereto or, in the case of a waiver, by the
Party waiving compliance.
IN WITNESS WHEREOF, the Parties have caused this Agreement to be executed
as of the 30th day of December, 1997.
"CONSULTANT"
CORPORATE MANAGERS, LLC
By: /s/ Donald L. Sturm
-----------------------------------
Name: Donald L. Sturm
-----------------------------------
Title: Manager
-----------------------------------
"COMPANY"
SPECTRANET INTERNATIONAL
By: /s/ Renney. E Senn
-----------------------------------
Name: Renney E. Senn
-----------------------------------
Title: CEO
-----------------------------------
6
<PAGE>
MANAGEMENT
CONSULTING SERVICES AGREEMENT
This Management Consulting Services Agreement ("Agreement") is entered into
by and between Enron Capital & Trade Resources Corp., a Delaware corporation
("Consultant"), and SpectraNet International, a California corporation (the
"Company"). Consultant and the Company are sometimes referred to herein
individually as a "Party" and collectively as the "Parties".
W I T N E S S E T H:
WHEREAS, contemporaneously with the execution of this Agreement, the
Company, Consultant and Colorado Spectra 3, L.L.C. ("Spectra 3") have entered
into certain definitive agreements, including that certain Common Stock Purchase
Agreement, providing for (a) the investment by Consultant and Spectra 3 in the
Company in the amount of $30 million cash and (b) the execution and delivery of
this Agreement;
WHEREAS the Company is engaged in the development, installation and
operation of city-wide, broadband, fiber-optic telecommunication networks that
are designed to replace local exchange carriers and provide voice, data, and
video services to all end-users within such city, and desires to engage
Consultant to render general management consulting services to the Company in
connection with its business;
WHEREAS, Consultant desires to accept such engagement upon the terms and
conditions set forth in this Agreement; and
WHEREAS, the Company will, contemporaneously with the execution of this
Agreement, enter into a management consulting services agreement with Corporate
Managers, L.L.C. ("Corporate Managers"), a Colorado limited liability company
and an affiliate of Spectra 3, containing terms substantially similar to the
terms of this Agreement and by which Corporate Managers also will provide
management consulting services to the Company as therein set forth;
NOW, THEREFORE, in consideration of the premises, the investment by
Consultant in the Company, and the mutual covenants and promises contained
herein, and with the intention of being bound hereby, Consultant and the Company
hereby agree as follows:
1. TERM.
The performance of the Services (as hereinafter defined) by Consultant
under this Agreement shall commence on January 1, 1998 and shall continue until
January 1, 2001 unless earlier terminated by Consultant as provided herein (the
"Term"). Consultant may terminate this Agreement at any time with or without
cause by providing ten (10) days prior written notice to the Company. The
provisions in Sections 3, 4, 5, 6 and 7 hereof shall survive any termination of
this Agreement.
<PAGE>
2. SERVICES.
(a) In consideration of the compensation being paid to Consultant
hereunder, Consultant shall (i) familiarize itself, to the extent necessary,
with the business, operations, management, properties, financial condition, and
prospects of the Company necessary to perform the services required by this
Agreement; (ii) provide general management consulting and advisory services to
the Company in connection with the performance of the Company's business; (iii)
coordinate the foregoing services with the Board of Directors of the Company and
Corporate Managers so as to promote the efficient delivery and use of such
Services; and (iv) provide other consulting services as may from time to time be
agreed by Consultant and the Board of Directors of the Company (the foregoing
collectively, the "Services").
(b) When requested by the Company, Consultant will consult with the
officers and employees of the Company concerning matters relating to this
engagement. Consultant agrees to provide such manpower and technical expertise
to the performance of the Services as it deems reasonably necessary in order to
perform the Services hereunder. The particular amount of time Consultant may
spend in fulfilling its obligations under this Agreement may vary from day to
day or week to week.
(c) Consultant shall secure, at its sole cost and expense, any and all
licenses, permits, and registrations necessary for performance of the Services.
Consultant also shall control the means and methods of work necessary for
performance of the Services.
(d) The Company has advised Consultant that the Company also has engaged
Corporate Managers to perform management consulting services for the Company.
Consultant acknowledges and agrees that its engagement hereunder is not
exclusive. The Company acknowledges and agrees that Consultant and its
Representatives (as hereinafter defined) may provide management consulting,
advisory or other services similar or identical to those to be provided by
Consultant to the Company pursuant to this Agreement to other persons or
entities at any time during the Term. The Company hereby agrees that nothing
set forth in this Agreement, or in any other oral or written agreement to which
the Company and Consultant are parties, shall prohibit or in any way affect the
right of Consultant and its Representatives to provide any management
consulting, advisory or other services whatsoever to any third party or for the
benefit of any third party.
(e) At all times during the term of this Agreement the Company shall
retain ownership and control of, and operational responsibility with respect to,
all of its properties and assets, both tangible and intangible. The Parties
agree that the Services to be provided by Consultant to the Company hereunder
will be strictly recommendations and of an advisory nature only, and that the
Company may, in its sole discretion, reject or accept any such recommendations
or advice.
3. PAYMENT AND REIMBURSEMENT TO CONSULTANT.
(a) During each calendar year during the Term, the Company shall pay
Consultant an annual consulting fee of Five Hundred Thousand Dollars ($500,000)
in cash, which fee shall be paid in advance in equal quarterly installments of
$125,000 on March 31st, June 30th, September 30th and December 31st of each year
commencing March 31, 1998. All consulting fees payable by the Company to
Consultant under this Agreement shall be prorated for any partial Term.
(b) The Company shall reimburse Consultant for all reasonable
out-of-pocket expenses incurred by Consultant in performance of the Services
requested by the Company under this Agreement. On or before the thirtieth
(30th) day of each calendar month during the Term, Consultant shall submit to
the
2
<PAGE>
Company a monthly statement setting forth reimbursable expenses incurred during
the prior calendar month. Consultant shall furnish to the Company with such
statement all records, receipts or other evidence in substantiation of
Consultant's reimbursable expense statement as may be requested by the Company.
The Company shall reimburse Consultant in cash within thirty (30) days of the
Company's receipt of such statement.
4. CONFIDENTIALITY AND PROPRIETARY INFORMATION.
(a) In conjunction with the performance of this Agreement, Consultant and
the Company may, from time to time, furnish the other Party or its
Representatives (as defined below) with Confidential Information of the
furnishing Party or its Representatives. Each Party agrees that it shall not
disclose the other Party's Confidential Information without such other Party's
prior written consent; PROVIDED, HOWEVER, a Party may disclose: (i) the other
Party's Confidential Information to the receiving Party's directors, officers,
employees, advisors, representatives, agents and affiliates, and their
respective directors, officers, employees, advisors, representatives, agents and
affiliates (collectively, "Representatives"), who need to know the Confidential
Information for performance or coordination of the Services hereunder and who
agree to maintain the confidentiality of such Confidential Information in
accordance with the terms hereof; and (ii) any of the other Party's Confidential
Information that: (A) becomes generally available to the public; (B) which a
Party can demonstrate is already known to such Party or its Representatives at
the time of disclosure by the furnishing Party or its Representatives; (C) is
acquired from a third party whom such receiving Party does not reasonably
believe is prohibited from making disclosure; (D) is independently developed by
a Party or its Representatives without use of any of the Confidential
Information; or (E) subject to Section 5 hereof, is required to be disclosed to
comply with any applicable law, order, regulation or ruling (collectively,
"Law").
(b) A Party shall not use the other Party's Confidential Information other
than for the purpose of providing or coordinating the Services under this
Agreement. Each Party shall be responsible for any breach of this Agreement by
it or any of its Representatives. Upon a Party's request, the other Party shall
return all written Confidential Information of the requesting Party, except for
that portion of such Confidential Information that may be found in analyses,
compilations, studies or other documents prepared by, or for, the returning
Party, and the returning Party and its Representatives shall not retain any
copies of such written Confidential Information. The portion of written
Confidential Information that may be found in analyses, compilations, studies or
other documents prepared by, or for, the returning Party, and any written
Confidential Information furnished by the requesting Party not so requested or
returned, will be destroyed. Any oral Confidential Information furnished to a
Party shall be kept confidential subject to the terms of this Agreement.
Notwithstanding any provision in this Agreement to the contrary, neither Party
shall be required to return, destroy or alter any of its computer archival and
computer backup tapes and files ("Computer Tapes"), PROVIDED that such Computer
Tapes shall be kept confidential in accordance with the terms of this Agreement.
If requested by a Party, the other Party shall deliver a certificate duly
executed by an authorized officer of such Party certifying as to the return or
destruction of such Confidential Information. Notwithstanding the provisions of
this Section 4(b), however, the receiving Party may retain in the possession of
its legal counsel one copy of the analyses, compilations, studies or other
documents prepared by or for the receiving Party solely to substantiate the
Services rendered or coordinated under this Agreement.
(c) The provisions of this Section 4 shall survive the termination of this
Agreement. Money damages would not be sufficient remedy for any breach of this
Section 4 by a Party, and the non-breaching Party shall be entitled to specific
performance and injunctive relief as remedies for such breach or any
3
<PAGE>
threatened breach. Such remedies shall not be deemed the exclusive remedies for
a breach of this Section 4 by a Party, but shall be in addition to all remedies
available at Law or in equity to such Party.
5. NOTICE PRECEDING COMPELLED DISCLOSURE.
If a Party is requested or required (by oral question, interrogatories,
requests for information or documents, subpoena, civil investigative demand
or similar process) to disclose any Confidential Information of the other
Party contemplated by Section 4 hereof, such Party will promptly notify the
other Party of such request or requirement so that the other Party may seek
an appropriate protective order or waiver in compliance with the provisions
of this Agreement. If, in the absence of a protective order or the receipt of
a waiver hereunder, such Party is, in the opinion of its counsel, compelled
to disclose any Confidential Information, such Party may disclose only such
of the information to the person compelling disclosure as is required by Law,
and will exercise reasonable efforts to obtain a protective order or other
reliable assurance that confidential treatment will be accorded the
Confidential Information.
6. RELIANCE BY CONSULTANT ON COMPANY SUPPLIED INFORMATION.
The Company acknowledges and agrees that Consultant may rely on
information and data supplied by or on behalf of the Company in the
performance of the Services and, except for any breach by Consultant of the
provisions of Section 4 hereof with respect to Confidential Information of
the Company, neither Consultant nor any Representative of Consultant shall
have any liability to the Company resulting from the use of any such
information or data.
7. INDEMNIFICATION; LIMITATION OF LIABILITY.
(a) The Company hereby agrees to indemnify, defend (at the request of
Consultant) and hold harmless Consultant and its officers, directors,
employees, representatives, agents and affiliates (collectively, the
"Indemnified Parties") from and against any and all claims, demands, causes
of actions, losses, damages, liabilities, costs and expenses (including
reasonable attorneys' fees and expenses) of any and every kind or nature
whatsoever asserted against or incurred by any of the Indemnified Parties by
reason of, arising out of, or in any way related to the properties and
businesses of the Company and the performance of the Services hereunder,
except to the extent caused by the gross negligence or willful misconduct of
the Indemnified Parties, IT BEING THE INTENTION OF THE COMPANY TO INDEMNIFY
THE INDEMNIFIED PARTIES FOR THEIR OWN ORDINARY NEGLIGENCE.
(b) IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE OTHER PARTY FOR
INCIDENTAL, CONSEQUENTIAL, SPECIAL OR PUNITIVE DAMAGES INCURRED BY EITHER
PARTY IN CONNECTION WITH THE PERFORMANCE OF ANY OF ITS OBLIGATIONS HEREUNDER,
WHETHER ARISING UNDER CONTRACT, TORT, STATUTE OR OTHERWISE.
8. INDEPENDENT CONTRACTOR.
(a) The Parties agree that the Services rendered by Consultant in the
fulfillment of the terms and obligations of this Agreement shall be as an
independent contractor and not as an employee. Further, Consultant is not an
agent, partner, or joint venturer of the Company. Consultant shall not offer
or agree to incur or assume any obligations or commitments in the name of the
Company or for the Company without the prior written consent and authorization
of the Company. Consultant shall not subcontract or assign any of the Services
to be performed hereunder without obtaining the prior written consent of the
Company.
4
<PAGE>
(b) Consultant shall be responsible for payment of all taxes, including
Federal, State and local taxes, arising out of the Consultant's activities in
accordance with this Agreement, including, but not limited to, Federal and
State income tax, Social Security tax, Unemployment Insurance taxes, and any
other taxes or business license fees as required.
9. NOTICES.
Any and all notices or other communications required or permitted under
this Agreement shall be given in writing and delivered in person or sent by
United States certified or registered mail, postage prepaid, return receipt
requested, or by overnight express mail, or by telex, facsimile or telecopy
to the address of such Party set forth below. Any such notice shall be
effective upon receipt or three days after placed in the mail, whichever is
earlier.
IF TO CONSULTANT: Enron Capital & Trade Resources Corp.
1400 Smith Street
Houston, Texas 77002
Attn: Kevin Garland
Telecopy No.: 713/646-4043
IF TO THE COMPANY: SpectraNet International
9333 Genesee Avenue, Suite 200
San Diego, California 92121
Attn: Chairman
Telecopy No.: 619/552-8006
Any Party may, by notice so delivered, change its address for notice
purposes hereunder.
10. WAIVER.
Failure of either Party at any time to require performance by the
other Party of any provision of this Agreement shall in no way affect the right
of the other Party hereafter to enforce the same. Nor shall any waiver by a
Party of any breach of any provision of this Agreement be taken or held to be a
waiver of any succeeding breach of such provision or as a waiver of this
provision itself.
11. APPLICABLE LAW.
THIS AGREEMENT SHALL BE GOVERNED BY AND BE CONSTRUED IN ACCORDANCE WITH THE
LAWS OF THE STATE OF DELAWARE, WITHOUT GIVING EFFECT TO PRINCIPLES OF CONFLICTS
OF LAWS.
12. SEVERABILITY.
It is the desire and intent of the Parties that the terms, provisions and
covenants contained in this Agreement shall be enforceable to the fullest extent
permitted by Law. If any such term, provision or covenant or the application
thereof to any person or circumstances shall, to any extent, be construed to be
invalid or unenforceable in whole or in part, then such term, provision or
covenant shall be construed in a manner as to permit its enforceability under
the applicable Law to the fullest extent permitted by Law. In any case, the
remaining provisions of this Agreement or the application thereof to any person
or
5
<PAGE>
circumstances, other than those to which they have been held invalid or
unenforceable, shall remain in full force and effect.
13. SUCCESSORS AND ASSIGNMENT.
This Agreement shall not be assigned, in whole or in part, by either Party
without the prior written consent of the other Party. Any assignment of this
Agreement or the rights or obligations of a Party hereunder without such consent
shall be null and void and of no force and effect.
14. OTHER AGREEMENTS / MODIFICATIONS.
(a) This Agreement modifies and supersedes all other prior or
contemporaneous agreements between the Parties regarding the performance of the
Services and constitutes the entire agreement of the Parties regarding the
performance of Services by Consultant to the Company.
(b) This Agreement may be amended, modified, superseded, canceled, renewed
or extended and the terms and conditions hereof may be waived only by a written
instrument executed by both Parties hereto or, in the case of a waiver, by the
Party waiving compliance.
IN WITNESS WHEREOF, the Parties have caused this Agreement to be executed
as of the 30th day of December, 1997.
"CONSULTANT"
ENRON CAPITAL & TRADE
RESOURCES CORP.
By: /s/ Stephen R. Horn
---------------------------------------
Name: Stephen R. Horn
--------------------------------------
Title: Vice President
-------------------------------------
"COMPANY"
SPECTRANET INTERNATIONAL
By: /s/ Renney E. Senn
--------------------------------------
Name: Renney E. Senn
-------------------------------------
Title: CEO
------------------------------------
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<PAGE>
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933 AS AMENDED (THE "ACT") AND MAY NOT BE OFFERED, SOLD OR OTHERWISE
TRANSFERRED, ASSIGNED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF UNLESS AND
UNTIL REGISTERED UNDER THE ACT OR UNLESS THE COMPANY HAS RECEIVED AN OPINION OF
COUNSEL SATISFACTORY TO THE COMPANY AND ITS COUNSEL THAT SUCH REGISTRATION IS
NOT REQUIRED.
SPECTRANET INTERNATIONAL
WARRANT TO PURCHASE SERIES B COMMON STOCK
No. S/E-__ Date: December 30, 1997
This Warrant ("Warrant") entitles _________________ or its transferees and
assigns (collectively the "Holder"), for value received, to purchase from
SpectraNet International, a California corporation (the "Company"), during the
period commencing as of the date hereof and ending on the Expiration Date (as
defined in Section 12 herein) _________ shares of Series B Common Stock, no par
value, of the Company (the "Shares") (subject to adjustment as set forth herein)
at a price of $3.00 per share (as adjusted, the "Exercise Price").
The Holder of this Warrant agrees with the Company that this Warrant is
issued and all rights hereunder shall be held subject to all of the conditions,
limitations and provisions set forth herein.
1. EXERCISE OF WARRANT. The Warrant shall be exercised as follows:
1.1. EXERCISE. The Holder may exercise this Warrant at any time or from
time to time on any business day prior to or on the Expiration Date (as defined
herein), for the full or any lesser number of Shares of Series B Common Stock
purchasable hereunder, by surrendering this Warrant to the Company at its
principal office, together with a duly executed Notice of Exercise (in
substantially the form attached hereto as EXHIBIT A), and payment in cash or by
certified or cashier's check of the aggregate Exercise Price then in effect for
the number of Shares for which this Warrant is being exercised. Promptly after
such exercise, the Company shall issue and deliver to the Holder a certificate
or certificates representing the number of Shares of Series B Common Stock
issuable upon such exercise. Upon issuances by the Company in accordance with
the terms of this Warrant, all such Shares of Series B Common Stock shall be
validly issued, fully paid and non-assessable, and free from all taxes, liens
and encumbrances with respect to the issuance thereof, except as set forth in
the Company's Articles of Incorporation (as amended and restated, the
"Articles") or bylaws, any applicable restrictions on sale set forth therein or
pursuant to federal or state securities laws and any restrictions on transfer
set forth herein or in that certain Amended and Restated Investor Rights
Agreement, dated as of the date of original issuance of this Warrant (the
"Original Issue Date"), as amended, supplemented or restated (the "Investor
Rights Agreement") or in that certain Securityholders Agreement dated as of the
Original Issue Date (the "Securityholders Agreement"). To the extent permitted
by law, this Warrant shall be deemed to have been exercised immediately prior to
the close of business on the date of its surrender for exercise as provided
herein, even if the Company's stock transfer
<PAGE>
books are at that time closed, and the Holder shall be treated for all purposes
as the holder of record of the Shares to be issued upon such exercise as of the
close of business on such date. Upon any exercise of this Warrant for fewer
than all Shares represented by this Warrant, the Company shall cancel this
Warrant and execute and deliver a new Warrant or Warrants in substantially
identical form for the remaining Shares covered hereby.
1.2. NET ISSUE EXERCISE. Notwithstanding any provisions herein to the
contrary, if the Quoted Price (as defined in Section 2.5 hereof) of one Share of
Series B Common Stock is greater than the Exercise Price (at the date of
calculation as set forth below), in lieu of exercising this Warrant by payment
with cash or by certified or cashier's check, the Holder may elect to make a
cash-free exercise of this Warrant and thereby receive Shares equal to the value
(as determined below) of this Warrant (or the portion thereof being exercised)
by surrender of this Warrant at the principal office of the Company together
with the properly endorsed Notice of Exercise and notice of such election, in
which event the Company shall issue to the Holder a number of Shares of Series B
Common Stock computed using the following formula:
X = Y (A-B)
-----
A
Where X = the number of Shares of Series B Common Stock to be issued
to the Holder
Y = the gross number of Shares of Series B Common Stock
purchasable under this Warrant or, if only a portion of this
Warrant is being exercised, the gross number of Shares under
this Warrant being exercised (at the date of such
calculation)
A = the Quoted Price (as defined under Section 2.5 hereof) of
one Share of Series B Common Stock (at the date of such
calculation)
B = Exercise Price (as adjusted to the date of such calculation)
2. ADJUSTMENT OF EXERCISE PRICE AND NUMBER OF WARRANT SHARES. The
Exercise Price and the number of Shares subject to this Warrant shall be subject
to adjustment from time to time as follows:
2.1. SUBDIVISION OR COMBINATION OF STOCK.
(a) If at any time or from time to time after the Original Issue
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.
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<PAGE>
(b) Upon each adjustment of the Exercise Price as provided in
Section 2.1(a), the Holder thereafter shall be entitled to purchase, at the
Exercise Price resulting from such adjustment, the number of Shares of Series B
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.
2.2. OTHER DISTRIBUTIONS.
(a) In case the Company shall after the Original Issue 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 2.1 above), then in each such case the
Exercise Price in effect thereafter shall be determined by multiplying the
Exercise Price in 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 Quoted Price per share of Common Stock (as defined in
Section 2.5 below), less the fair market value (as determined by the Company's
Board of Directors) 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 such Quoted Price per share of Common Stock. 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
shareholders entitled to receive such distribution.
(b) Upon each adjustment of the Exercise Price as provided in
this Section 2.2, the Holder thereafter shall be entitled to purchase, at the
Exercise Price resulting from such adjustment, the number of Shares of Series B
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.
2.3. MINIMAL ADJUSTMENTS. No adjustment in the Exercise Price and/or
the number of Shares subject to this Warrant 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 this Warrant 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 such time as (a) the
aggregate amount of all such adjustments is at least equal to the Adjustment
Threshold Amount or (b) this Warrant is exercised.
2.4. CERTIFICATE AS TO ADJUSTMENTS. Upon the occurrence of each
adjustment or readjustment of the Exercise Price pursuant to this Section 2, the
Company promptly shall compute such adjustment or readjustment in accordance
with the terms hereof and prepare and furnish to the Holder a certificate
setting forth such adjustment or readjustment, showing in detail the facts upon
which such adjustment or readjustment is based.
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<PAGE>
2.5. QUOTED PRICE. The "Quoted Price" of the Series B Common Stock is
the last reported sales price of the Series B Common Stock as reported by the
Nasdaq National Market ("NMS"), or the primary national securities exchange on
which the Series B Common Stock is then quoted; PROVIDED, HOWEVER, that if the
Series B Common Stock is neither traded on the NMS nor on a national securities
exchange, the price referred to above shall be the price reflected on Nasdaq, or
if the Series B Common Stock is not then traded on Nasdaq, the price reflected
in the over-the-counter market as reported by the National Quotation Bureau,
Inc. or any organization performing a similar function, and PROVIDED, FURTHER,
that if the Series B Common Stock is not publicly traded, the Quoted Price of
the Series B Common Stock shall be the fair market value as determined in good
faith by the Board of Directors of the Company.
2.6. REORGANIZATION OF COMPANY. Subject to Section 12 hereof, if the
Company consolidates or merges with or into, any person, upon consummation of
such transaction the Warrant shall automatically become exercisable for the kind
and amount of securities, cash or other assets which the Holder would have owned
immediately after the consolidation or merger, if the Holder had exercised the
Warrant immediately before the effective date of the transaction. Concurrently
with the consummation of such transaction, the corporation formed by or
surviving any such consolidation or merger if other than the Company, shall
enter into a supplemental Warrant so providing and further providing for
adjustments which shall be as nearly equivalent as may be practical to the
adjustments provided for in this Section.
3. RIGHTS OF THE HOLDER. The Holder shall not, by virtue hereof, be
entitled to any rights of a shareholder in the Company, either at law or equity,
and the rights of the Holder are limited to those expressed in this Warrant.
Nothing contained in this Warrant shall be construed as conferring upon the
Holder the right to vote or to consent or to receive notice as a shareholder of
the Company on any matters or with respect to any rights whatsoever as a
shareholder of the Company. No dividends or interest shall be payable or
accrued in respect of this Warrant or the interest represented hereby or the
shares of Series B Common Stock purchasable hereunder until, and only to the
extent that, this Warrant shall have been exercised in accordance with its
terms. The Holder shall have those registration rights and obligations as
defined in the applicable provisions of the Investor Rights Agreement.
4. NO IMPAIRMENT. The Company will not, by any voluntary action,
avoid or seek to avoid the observance or performance of any of the terms of this
Warrant, but shall at all times in good faith assist in effecting the terms of
this Warrant and in taking all actions necessary or appropriate in order to
protect the rights of the Holder against dilution or other impairment of its
rights hereunder.
5. NO FRACTIONAL SHARES. No fractional shares shall be issued upon
exercise of this Warrant. In lieu of issuing any fractional share, the Company
shall pay the Holder entitled to such fraction a sum in cash equal to the fair
market value of such fraction on the date of exercise.
6. RESERVATION OF STOCK ISSUABLE ON EXERCISE OF WARRANT. The Company
covenants and agrees that during the period of time during which this Warrant is
exercisable, it will at all times have authorized and reserved solely for
issuance and delivery upon the exercise of this Warrant, all such Shares of
Series B Common Stock and other stock, securities and
4
<PAGE>
property as from time to time are receivable upon the exercise of this Warrant.
If at any time the number of authorized but unissued Shares of Series B Common
Stock shall not be sufficient to effect the exercise of this Warrant, the
Company will use its best efforts to take such corporate action as may, in the
opinion of its counsel, be necessary to increase its authorized but unissued
shares of Series B Common Stock to such number of shares as shall be sufficient
for such purposes. The Company further covenants that all Shares issuable upon
exercise of this Warrant and payment of the Exercise Price, all as set forth
herein, will be free from all taxes, liens and charges in respect of the issue
of such Shares (other than taxes in respect of any transfer occurring
contemporaneously with such exercise and payment or otherwise specified herein).
The Company agrees that its issuance of this Warrant shall constitute full
authority to its officers who are charged with the duty of executing stock
certificates to execute and issue the necessary certificates for Shares of
Series B Common Stock upon the exercise of this Warrant and covenants that all
such Shares, when issued, sold and delivered in accordance with the terms of
this Warrant for the consideration expressed herein, will be duly and validly
issued, fully paid and nonassessable, and will be free of restrictions on
transfer other than restrictions on transfer set forth in this Warrant, the
Investor Rights Agreement, the Securityholders Agreement (as applicable) and
applicable state and federal securities laws.
7. ISSUE TAX. The issuance of certificates for Shares of Series B
Common Stock upon the exercise of this Warrant shall be made without charge to
the Holder of this Warrant for any issue tax (other than applicable income
taxes) in respect thereof; provided, however, that the Company shall not be
required to pay any tax that may be payable in respect of any transfer involved
in the issuance and delivery of any certificate in a name other than that of the
then Holder of this Warrant being exercised.
8. TRANSFER RESTRICTIONS. This Warrant may be transferred only in
whole or in part in increments of at least 100,000 Shares. Any transfer of this
Warrant permitted under this Section 8 shall be made only upon surrender for
exchange of this Warrant (in negotiable form, if not surrendered by the Holder
named on the face hereof) to the Company at its principal office, in which event
the Company will issue and deliver a new Warrant or Warrants in substantially
identical form representing, in the aggregate, the same number of Shares of
Series B Common Stock, in the denomination or denominations requested, to or on
the order of such Holder upon payment by such Holder of any applicable transfer
taxes; and provided further that all reasonable expenses incurred in connection
with such re-issuance and delivery shall be borne by the Holder. The terms of
this Warrant shall be binding upon the executors, administrators, heirs,
successors and assigns of the Holder.
9. REPLACEMENT OF WARRANT. Upon receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Warrant, and (in the case of loss, theft or destruction) upon delivery of
an indemnity agreement in such reasonable amount as the Company may determine,
or (in the case of mutilation) upon surrender and cancellation hereof, the
Company, at its expense, shall issue a new Warrant in substantially identical
form in replacement hereof.
10. NOTICES. All notices and other communications required or
permitted hereunder shall be in writing and shall be mailed by registered or
certified mail, postage prepaid, or
5
<PAGE>
otherwise delivered by hand or by messenger, addressed (a) if to the Holder, at
the Holder's address set forth on the signature page of this Warrant, or at such
other address as the Holder shall have furnished to the Company in writing or
(b) if to any other Holder of any of the Shares, at such address as such Holder
shall have furnished the Company in writing, or, until any such Holder so
furnishes an address to the Company, then to and at the address of the last
Holder of such Shares who has so furnished an address to the Company or (c) if
to the Company, to its address as set forth on the signature page of this
Warrant and addressed to the attention of the Corporate Secretary, or at such
other address as the Company shall have furnished to the Holder.
Each such notice or other communication shall for all purposes of this
Agreement be treated as effective or having been given when delivered if
delivered personally or by messenger, or, if sent by mail, at the earlier of its
receipt or three days after the same has been deposited in a regularly
maintained receptacle for the deposit of the United States mail, addressed and
mailed as aforesaid.
11. GOVERNING LAW. This Warrant shall be construed in accordance with
and governed by the laws of the State of California.
12. EXPIRATION DATE. This Warrant will be wholly void and of no effect
after 5:00 p.m. (California time) on the first to occur of (i) the seventh
anniversary of the Original Issue Date, (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 fifty percent (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 (the "Expiration Date");
provided that, if the last day on which this Warrant may be exercised, or on
which it may be exercised at a particular Exercise Price, is a Saturday, Sunday
or a legal holiday or a day on which banking institutions doing business in the
City and County of San Diego are authorized by law to close, this Warrant may be
exercised prior to 5:00 p.m. (San Diego time) on the next full business day with
the same force and effect and at the same Exercise Price as if exercised on such
last day specified herein.
13. MODIFICATION AND WAIVER. The terms of this Warrant may be changed,
waived, discharged or terminated only by the written consent of the parties
hereto.
14. HEADINGS. The descriptive headings in this Warrant are included
for convenience only, and do not constitute a part hereof.
6
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant to be duly executed
and delivered on the date first set forth above.
SPECTRANET INTERNATIONAL,
a California corporation
9333 Genessee Avenue, Suite 200
San Diego, CA 92121
By:
-----------------------------------
Name:
------------------------------
Title:
------------------------------
ACCEPTED AND AGREED:
[HOLDER]
a
-----------------------------------
----------------------------------------
----------------------------------------
By:
-----------------------------------
Name:
------------------------------
Title:
------------------------------
7
<PAGE>
EXHIBIT A
NOTICE OF EXERCISE
(To be signed only upon exercise of Warrant)
To: SpectraNet International
9333 Genessee Avenue
Suite 200
San Diego, CA 92121
Attn: Secretary
The undersigned, Holder of the attached Warrant, hereby irrevocably
elects to exercise the purchase right represented by this Warrant as follows:
/ / The undersigned elects to purchase for cash or check ___________ full
shares of Series B Common Stock of SpectraNet International and herewith
makes payment of $_________ for those shares;
/ / The undersigned elects to effect a net exercise of this Warrant,
exercising this Warrant [ ] in full or [ ] as to the following GROSS
number of shares: __________. The undersigned understands that the
actual number of shares issuable will be determined in accordance with
Sections 1 and 2 of this Warrant.
The undersigned requests that the certificates for the shares be issued
in the name of, and delivered to, ____________________*, whose address is
____________________.
Dated: ,
------------- ----
(Signature must conform in all respects to
name of Holder as specified on the face of
the attached Warrant.)
---------------------------------------------
Signature
---------------------------------------------
Address:
-----------------------------------
---------------------------------------------
---------------------------------------------
- -------------------------
* If the stock is to be issued to anyone other than the registered Holder
of this Warrant, this Notice of Exercise must be accompanied by an opinion of
counsel to the effect that such transfer may be effected without compliance with
the registration and prospectus delivery requirements of the Securities Act of
1933, as amended.
A-1
<PAGE>
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933 (THE "ACT") AND MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED,
ASSIGNED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF UNLESS AND UNTIL
REGISTERED UNDER THE ACT OR UNLESS THE COMPANY HAS RECEIVED AN OPINION OF
COUNSEL SATISFACTORY TO THE COMPANY AND ITS COUNSEL THAT SUCH REGISTRATION IS
NOT REQUIRED.
SPECTRANET INTERNATIONAL
WARRANT TO PURCHASE SERIES B COMMON STOCK
No. S/E-3 December 30, 1997
This Warrant ("Warrant") entitles Colorado Spectra 2, L.L.C. (the
"Holder"), for value received, to purchase from SpectraNet International, a
California corporation (the "Company") during the period commencing as of the
date hereof and ending on the Expiration Date (as defined in Section 13 herein)
2,110,140 shares of Series B Common Stock, no par value, of the Company (the
"Shares") (subject to adjustment as set forth herein). The per share exercise
price of the Shares subject to this Warrant shall be One Dollar and Eighty Cents
($1.80) per Share (as adjusted, the "Exercise Price").
The Holder of this Warrant agrees with the Company that this Warrant is
issued and all rights hereunder shall be held subject to all of the conditions,
limitations and provisions set forth herein.
1. EXERCISE OF WARRANT. The Holder may exercise this Warrant on any
business day in the State of California prior to or on the Expiration Date as
defined herein, for the full or any lesser number of Shares purchasable
hereunder, by surrendering this Warrant to the Company at its principal office,
together with a duty executed Notice of Exercise (in substantially the form
attached hereto as EXHIBIT A), and payment in cash or by check of the aggregate
Exercise Price then in effect for the number of Shares for which this Warrant is
being exercised. Promptly after such exercise, the Company shall issue and
deliver to the Holder a certificate or certificates representing the number of
Shares issuable upon such exercise. Upon issuances by the Company in accordance
with the terms of this Warrant, all such Shares shall be validly issued, fully
paid and non-assessable, and free from all taxes, liens and encumbrances with
respect to the issuance thereof, except as set forth in the Company's Articles
of Incorporation (as amended and restated, the "Articles") or bylaws and any
applicable restrictions on sale set forth therein or pursuant to federal or
state securities laws and any restrictions on transfer set forth herein or in
that certain Amended and Restated Investor Rights Agreement, dated as of the
date of original issuance of this Warrant (the "Original Issue Date") as
amended, supplemented or restated (the "Investor Rights Agreement") or in that
certain Securityholders Agreement dated as of the Original Issue Date (the
"Securityholders Agreement"). To the extent permitted by law, this Warrant
shall be deemed to have been exercised immediately prior to the close of
business on the date of its surrender for exercise as provided herein, even if
the Company's stock transfer books are at that time closed, and the holder shall
be treated for all purposes as the holder of record of the Series B Common Stock
to be issued upon such exercise as of the close of business
1
<PAGE>
on such date. Upon any exercise of this Warrant for fewer than all Shares
represented by this Warrant, the Company shall cancel this Warrant and execute
and deliver a new Warrant in substantially identical form for the remaining
Shares covered hereby.
2. NET ISSUE EXERCISE.
(a) Notwithstanding any provisions herein to the contrary, if the
Quoted Price (as defined in Section 2(b) below) of one Share of the Series B
Common Stock is greater than the Exercise Price (at the date of calculation as
set forth below), in lieu of exercising this Warrant by payment with cash, or by
certified or cashier's check, the Holder may elect to make a cash-free exercise
of this Warrant and thereby to receive Shares equal to the value (as determined
below) of the portion of this Warrant being canceled by surrender of this
Warrant at the principal office of the Company together with the properly
endorsed Notice of Exercise and notice of such election, in which event the
Company shall issue to the Holder a number of Shares computed using the
following formula:
X = Y (A-B)
-------
A
Where X = the number of Shares of Series B Common Stock to be issued
to the Holder upon the cash-free exercise
Y = the total number of Shares of Series B Common Stock to be
exercised, assuming no cash-free exercise (at the date of
such calculation)
A = the Quoted Price (as defined under Section 2(b) hereof) of
one Share of Series B Common Stock (at the date of such
calculation)
B = the Exercise Price (as adjusted to the date of such
calculation)
(b) The "Quoted Price" of the Series B Common Stock is the last
reported sales price of the Series B Common Stock as reported by the Nasdaq
National Market ("NMS"), or the primary national securities exchange on which
the Series B Common Stock is then quoted, PROVIDED, HOWEVER, that if the Series
B Common Stock is neither traded on the NMS nor on a national securities
exchange, the price referred to above shall be the price reflected on Nasdaq, or
if the Series B Common Stock is not then traded on Nasdaq, the price reflected
in the over-the-counter market as reported by the National Quotation Bureau,
Inc. or any organization performing a similar function; and PROVIDED, FURTHER,
that if the Series B Common Stock is not publicly traded, the Quoted Price of
the Series B Common Stock shall be the fair market value as determined in good
faith by the Board of Directors of the Company.
(c) Upon exercise of a portion of this Warrant in accordance with
this Section 2, the number of shares subject to this Warrant shall be reduced by
the number of shares included under "Y" in the calculation described in 2(a)
above.
3. ADJUSTMENT OF EXERCISE PRICE AND WARRANT SHARES.
2
<PAGE>
The Exercise Price and the number of Shares subject to this Warrant shall
be subject to adjustment from time to time as follows:
3.1 SUBDIVISION OR COMBINATION OF STOCK.
(a) If at any time or from time to time after the Original Issue 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
3.1(a), the Holder thereafter shall be entitled to purchase, at the Exercise
Price resulting from such adjustment, the number of Shares of Series B 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.
3.2 MINIMAL ADJUSTMENTS. No adjustment in the Exercise Price and/or
the number of Shares subject to this Warrant 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 this Warrant 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 such time as (a) the
aggregate amount of all such adjustments is equal to at least the Adjustment
Threshold Amount or (b) this Warrant is exercised.
3.3 CERTIFICATE AS TO ADJUSTMENTS. Upon the occurrence of each
adjustment or readjustment of the Exercise Price pursuant to this Section 3, the
Company promptly shall compute such adjustment or readjustment in accordance
with the terms hereof and prepare and furnish to the Holder a certificate
setting forth such adjustment or readjustment, showing in detail the facts upon
which such adjustment or readjustment is based.
3
<PAGE>
3.4 REORGANIZATION OF COMPANY. Subject to Section 13 hereof, if the
Company consolidates or merges with or into, any person, upon consummation of
such transaction the Warrant shall automatically become exercisable for the kind
and amount of securities, cash or other assets which the Holder would have owned
immediately after the consolidation or merger, if the Holder had exercised the
Warrant immediately before the effective date of the transaction. Concurrently
with the consummation of such transaction, the corporation formed by or
surviving any such consolidation or merger if other than the Company, shall
enter into a supplemental Warrant so providing and further providing for
adjustments which shall be as nearly equivalent as may be practical to the
adjustments provided for in this Section.
4. RIGHTS OF THE HOLDER. The Holder shall not, by virtue hereof, be
entitled to any rights of a shareholder in the Company, either at law or equity,
and the rights of the Holder are limited to those expressed in this Warrant.
Nothing contained in this Warrant shall be construed as conferring upon the
Holder the right to vote or to consent or to receive notice as a shareholder of
the Company on any matters or with respect to any rights whatsoever as a
shareholder of the Company. No dividends or interest shall be payable or
accrued in respect of this Warrant or the interest represented hereby or the
shares of Series B Common Stock purchasable hereunder until, and only to the
extent that, this Warrant shall have been exercised in accordance with its
terms.
5. NO IMPAIRMENT. The Company will not, by any voluntary action, avoid
or seek to avoid the observance or performance of any of the terms of this
Warrant, but shall at all times in good faith assist in effecting the terms of
this Warrant and in taking all actions necessary or appropriate in order to
protect the rights of the Holder against dilution or other impairment of its
rights hereunder.
6. NO FRACTIONAL SHARES. No fractional shares shall be issued upon
exercise of this Warrant. In lieu of issuing any fractional share, the
Company shall pay the Holder entitled to such fraction a sum in cash equal to
the fair market value of such fraction on the date of exercise.
7. RESERVATION OF STOCK ISSUABLE ON EXERCISE OF WARRANT. The Company
covenants and agrees that during the period of time during which this Warrant is
exercisable, it will at all times have authorized and reserved solely for
issuance and delivery upon the exercise of this Warrant, all such Shares of
Series B Common Stock and other stock, securities and property as from time to
time are receivable upon the exercise of this Warrant. If at any time the
number of authorized but unissued Shares of Series B Common Stock shall not be
sufficient to effect the exercise of this Warrant, the Company will use its best
efforts to take such corporate action as may, in the opinion of its counsel, be
necessary to increase its authorized but unissued Shares of Series B Common
Stock to such number of shares as shall be sufficient for such purposes. The
Company further covenants that all Shares issuable upon exercise of this Warrant
and payment of the Exercise Price, all as set forth herein, will be free from
all taxes, liens and charges in respect of the issue of such shares (other than
taxes in respect of any transfer occurring contemporaneously with such exercise
and payment or otherwise specified herein). The Company agrees that its
issuance of this Warrant shall constitute full authority to its officers who are
charged with the duty of executing stock certificates to execute and issue the
necessary certificates for Shares of Series B Common Stock upon the exercise of
this Warrant and covenants that all such Shares, when issued, sold and delivered
in accordance with the terms of
4
<PAGE>
this Warrant for the consideration expressed herein, will be duly and validly
issued, fully paid and nonassessable, and will be free of restrictions on
transfer other than restrictions on transfer set forth in this Warrant, the
Investor Rights Agreement, the Securityholders Agreement and applicable state
and federal securities laws.
8. ISSUE TAX. The issuance of certificates for shares of Series B Common
Stock upon the exercise of this Warrant shall be made without charge to the
Holder of this Warrant for any issue tax (other than applicable income taxes) in
respect thereof, provided, however, that the Company shall not be required to
pay any tax that may be payable in respect of any transfer involved in the
issuance and delivery of any certificate in a name other than that of the then
Holder of this Warrant being exercised.
9. TRANSFER RESTRICTIONS. This Warrant may be transferred only in whole.
Any transfer of this Warrant permitted under this Section 9 shall be made only
upon surrender for exchange of this Warrant (in negotiable form, if not
surrendered by the Holder named on the face hereof) to the Company at its
principal office, in which event the Company will issue and deliver a new
Warrant or Warrants in substantially identical form representing, in the
aggregate, the same number of Shares of Series B Common Stock, in the
denomination or denominations requested, to or on the order of such Holder upon
payment by such Holder of any applicable transfer taxes; and provided further
that all reasonable expenses incurred in connection with such re-issuance and
delivery shall be borne by the Holder. The terms of this Warrant shall be
binding upon the executors, administrators, heirs, successors and assigns of the
Holder.
10. REPLACEMENT OF WARRANT. Upon receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Warrant, and (in the case of loss, theft or destruction) upon delivery of
an indemnity agreement in such reasonable amount as the Company may determine,
or (in the case of mutilation) upon surrender and cancellation hereof, the
Company, at its expense, shall issue a new Warrant in substantially identical
form in replacement hereof.
11. NOTICES. All notices and other communications required or permitted
hereunder shall be in writing and shall be mailed by registered or certified
mail, postage prepaid, or otherwise delivered by hand or by messenger, addressed
(a) if to the Holder, at the Holder's address set forth on the signature page of
this Warrant, or at such other address as the Holder shall have furnished to the
Company in writing or (b) if to any other Holder of any of the Shares, at such
address as such Holder shall have furnished the Company in writing, or, until
any such Holder so furnishes an address to the Company, then to and at the
address of the last Holder of such Shares who has so furnished an address to the
Company or (c) if to the Company, to its address as set forth on the signature
page of this Warrant and addressed to the attention of the Corporate Secretary,
or at such other address as the Company shall have furnished to the Holder.
Each such notice or other communication shall for all purposes of this
Agreement be treated as effective or having been given when delivered if
delivered personally or by messenger, or, if sent by mail, at the earlier of its
receipt or 3 days after the same has been deposited in a regularly maintained
receptacle for the deposit of the United States mail, addressed and mailed as
aforesaid.
5
<PAGE>
12. GOVERNING LAW. This Warrant shall be construed in accordance with and
governed by the laws of the State of California.
13. EXPIRATION DATE. This Warrant will be wholly void and of no effect
after 5:00 p.m. (California time) on January 31, 2002 (the "Expiration Date");
provided that, if the last day on which this Warrant may be exercised is a
Saturday, Sunday or a legal holiday or a day on which banking institutions doing
business in the City and County of San Diego are authorized by law to close,
this Warrant may be exercised prior to 5:00 p.m. (San Diego time) on the next
full business day with the same force and effect as if exercised on such last
day specified herein.
14. MODIFICATION AND WAIVER. Neither this Warrant nor any term hereof may
be changed, waived, discharged or terminated orally, but only by an instrument
in writing signed by the party against which enforcement of such change, waiver,
discharge or termination is sought.
15. HEADINGS. The descriptive headings in this Warrant are included for
convenience only, and do not constitute a part hereof.
6
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant to be duly executed
and delivered on the date first set forth above.
SPECTRANET INTERNATIONAL
9333 Genesee Avenue, Suite 200
San Diego, CA 92121
By:/s/ Renney E. Senn
------------------------------------------
Renney E. Senn
President and Chief Executive Officer
ACCEPTED AND AGREED:
COLORADO SPECTRA 2, L.L.C.
3033 E. First Avenue, Suite 200
Denver, CO 80206
By:/s/ Donald L. Sturm
------------------------------------------
Donald L. Sturm
Manager
[Warrant signature page]
7
<PAGE>
EXHIBIT A
NOTICE OF EXERCISE
(To be signed only upon exercise of Warrant)
To: SpectraNet International
9333 Genesee Avenue
Suite 200
San Diego, CA 92121
Attn.: Secretary
The undersigned, Holder of the attached Warrant, hereby irrevocably elects
to exercise the purchase right represented by this Warrant as follows:
[ ] The undersigned elects to purchase for cash or check _________ full shares
of Series B Common Stock of SpectraNet International and herewith makes
payment of $_________ for those shares;
[ ] The undersigned elects to effect a net exercise of this Warrant, exercising
this Warrant [ ] in full or [ ] as to the following GROSS number of shares:
__________. The undersigned understands that the actual number of shares
issuable will be determined in accordance with Sections 1, 2 and 3 of this
Warrant.
The undersigned requests that the certificates for the shares be issued in
the name of, and delivered to _____________________________*, whose address is
____________________.
Dated:________, ________
(Signature must conform in all respects to name of
Holder as specified on the face of the attached
Warrant.)
---------------------------------------------
Signature
---------------------------------------------
Address
* If the stock is to be issued to anyone other than the registered Holder of
this Warrant, this Notice of Exercise must be accompanied by an opinion of
counsel to the effect that such transfer may be effected without compliance
with the registration and prospective delivery requirements of the
Securities Act of 1933, as amended.
A-1
<PAGE>
AGREEMENT FOR USE OF OPERATING PROPERTY
BY AND BETWEEN
THE CITY OF ANAHEIM
AND
SPECTRANET ANAHEIM
DATE: February 25, 1997
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
----
<S> <C>
Article 1 Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Article 2 Demise Of Leased Property . . . . . . . . . . . . . . . . . . . . . 2
2.1 Demise of Leased Property . . . . . . . . . . . . . . . . . . . . . 2
2.2 Delivery of As-Built Drawings . . . . . . . . . . . . . . . . . . . 2
2.3 Correction of Defects; Payment of Claims. . . . . . . . . . . . . . 2
2.4 Assignment of Contract Rights and Warranties. . . . . . . . . . . . 3
2.5 Negotiation Concerning City's Reserved Fibers . . . . . . . . . . . 3
2.6 Use of the City's Reserved Fibers . . . . . . . . . . . . . . . . . 4
2.7 Return of Leased Property . . . . . . . . . . . . . . . . . . . . . 4
Article 3 Term. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
3.1 Initial Term. . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
3.2 Extension of Term . . . . . . . . . . . . . . . . . . . . . . . . . 4
3.3 Failure to Extend Term. . . . . . . . . . . . . . . . . . . . . . . 4
Article 4 Rent. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
4.1 Guaranteed Rent . . . . . . . . . . . . . . . . . . . . . . . . . . 4
4.2 Rent for City's Reserved Fibers . . . . . . . . . . . . . . . . . . 5
4.3 Means of Payment. . . . . . . . . . . . . . . . . . . . . . . . . . 5
Article 5 Additional Payments By SNA; Impositions . . . . . . . . . . . . . . 5
5.1 City's Net Return . . . . . . . . . . . . . . . . . . . . . . . . . 5
5.2 Impositions . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
5.3 Assessments in Installments . . . . . . . . . . . . . . . . . . . . 6
5.4 Direct Payment by the City. . . . . . . . . . . . . . . . . . . . . 7
5.5 Right to Contest. . . . . . . . . . . . . . . . . . . . . . . . . . 7
5.6 Utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Article 6 Use . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Article 7 Compliance With Applicable Law. . . . . . . . . . . . . . . . . . . 8
Article 8 Maintenance and Alterations . . . . . . . . . . . . . . . . . . . . 9
8.1 Obligation to Maintain. . . . . . . . . . . . . . . . . . . . . . . 9
8.2 SNA's Right to Perform Alterations. . . . . . . . . . . . . . . . . 9
8.3 Responsibility for Costs of Maintenance and Repair. . . . . . . . . 9
8.4 Negligence. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
8.5 City's Reserved Rights. . . . . . . . . . . . . . . . . . . . . . . 10
Article 9 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
9.1 SNA to Insure . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Article 10 Damage Or Destruction . . . . . . . . . . . . . . . . . . . . . . . 11
10.1 Notice; No Rent Abatement . . . . . . . . . . . . . . . . . . . . . 11
10.2 Adjustment of Claims; Use of Insurance Proceeds . . . . . . . . . . 12
Article 11 Condemnation. . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
11.1 Condemnation. . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
11.2 Temporary Condemnation. . . . . . . . . . . . . . . . . . . . . . . 12
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11.3 Other Governmental Action . . . . . . . . . . . . . . . . . . . . . 12
11.4 Settlement or Compromise. . . . . . . . . . . . . . . . . . . . . . 13
11.5 Prompt Notice . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Article 12 Transfers By SNA. . . . . . . . . . . . . . . . . . . . . . . . . . 13
12.1 SNA's Right to Assign . . . . . . . . . . . . . . . . . . . . . . . 13
Article 13 Mortgages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
13.1 SNA's Rights. . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
13.2 Effect of a Leasehold Mortgage. . . . . . . . . . . . . . . . . . . 14
13.3 Sale and Leaseback. . . . . . . . . . . . . . . . . . . . . . . . . 14
13.4 Modifications Required by Leasehold Mortgagee . . . . . . . . . . . 15
13.5 Further Assurances. . . . . . . . . . . . . . . . . . . . . . . . . 15
13.6 Foreclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Article 14 Notice To The City Of Leasehold Mortgages . . . . . . . . . . . . . 16
14.1 Initial Notice. . . . . . . . . . . . . . . . . . . . . . . . . . . 16
14.2 The City's Acknowledgment of Leasehold Mortgagee. . . . . . . . . . 16
14.3 Change of Address . . . . . . . . . . . . . . . . . . . . . . . . . 16
14.4 Termination of Leasehold Mortgagee's Rights . . . . . . . . . . . . 17
Article 15 Protection Of Leasehold Mortgagees. . . . . . . . . . . . . . . . . 17
15.1 Cancellation, Surrender, Amendment, Etc . . . . . . . . . . . . . . 17
15.2 Copies of Notices . . . . . . . . . . . . . . . . . . . . . . . . . 17
15.3 SNA's Cure Period Expiration Notice . . . . . . . . . . . . . . . . 17
15.4 Right to Perform Covenants and Agreements . . . . . . . . . . . . . 18
15.5 Transfer of SNA's Rights. . . . . . . . . . . . . . . . . . . . . . 18
15.6 Notice of Default and Leasehold Mortgagee's Cure Rights . . . . . . 18
15.7 Effect of Cure. . . . . . . . . . . . . . . . . . . . . . . . . . . 20
15.8 Quiet Enjoyment . . . . . . . . . . . . . . . . . . . . . . . . . . 21
15.9 Subordinate Liens Affecting Leasehold Estate. . . . . . . . . . . . 21
15.10 Leasehold Mortgagee's Right to Enter Leased Property. . . . . . . . 21
15.11 Rights of Leasehold Mortgagee Upon Acquiring Control. . . . . . . . 22
15.12 Options to Renew or Extend. . . . . . . . . . . . . . . . . . . . . 22
15.13 Payments Made by Leasehold Mortgagee. . . . . . . . . . . . . . . . 22
15.14 Escrow Deposits, Bonds and Security . . . . . . . . . . . . . . . . 23
15.15 Obligations of Leasehold Mortgagee in Control of
the Leased Property . . . . . . . . . . . . . . . . . . . . . . . . 23
Article 16 Leasehold Mortgagee's Right To A New Operating
Property Agreement. . . . . . . . . . . . . . . . . . . . . . . . . 23
16.1 New Operating Property Agreement. . . . . . . . . . . . . . . . . . 23
16.2 Form and Priority . . . . . . . . . . . . . . . . . . . . . . . . . 25
16.3 Pendency of Dispute . . . . . . . . . . . . . . . . . . . . . . . . 25
16.4 Assignment of Certain Items . . . . . . . . . . . . . . . . . . . . 25
Article 17 Interaction Of Mortgages With Other Estates And Parties . . . . . . 25
17.1 Leasehold Mortgages and Other Estates . . . . . . . . . . . . . . . 25
17.2 Leasehold Mortgagee's Agent . . . . . . . . . . . . . . . . . . . . 25
17.3 Interaction Between Operating Property Agreement and Leasehold
Mortgage. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
17.4 Conflicts Between Mortgagees. . . . . . . . . . . . . . . . . . . . 26
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Article 18 Bankruptcy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
18.1 Affecting SNA . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
18.2 Affecting the City. . . . . . . . . . . . . . . . . . . . . . . . . 27
Article 19 Quiet Enjoyment . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Article 20 Representations And Warranties. . . . . . . . . . . . . . . . . . . 28
20.1 Title to Leased Property. . . . . . . . . . . . . . . . . . . . . . 28
20.2 No Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
20.3 General Order Compliance. . . . . . . . . . . . . . . . . . . . . . 29
Article 21 Force Majeure . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Article 22 Default; Remedies . . . . . . . . . . . . . . . . . . . . . . . . . 29
22.1 Events of Default . . . . . . . . . . . . . . . . . . . . . . . . . 29
22.2 Waiver. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
22.3 Remedies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Article 23 No Broker . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Article 24 Waivers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
24.1 No Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
24.2 No City Lien. . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Article 25 Memorandum Of Operating Property Agreement. . . . . . . . . . . . . 32
Article 26 Estoppel Certificates . . . . . . . . . . . . . . . . . . . . . . . 32
26.1 Rights of Each Party. . . . . . . . . . . . . . . . . . . . . . . . 32
26.2 Failure to Execute Estoppel Certificate . . . . . . . . . . . . . . 33
Article 27 Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
27.1 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
27.2 Reasonableness. . . . . . . . . . . . . . . . . . . . . . . . . . . 34
27.3 Documents in Recordable Form. . . . . . . . . . . . . . . . . . . . 34
27.4 Further Assurances. . . . . . . . . . . . . . . . . . . . . . . . . 34
27.5 Performance Under Protest . . . . . . . . . . . . . . . . . . . . . 34
27.6 No Third Party Beneficiaries. . . . . . . . . . . . . . . . . . . . 35
27.7 Interpretation. . . . . . . . . . . . . . . . . . . . . . . . . . . 35
27.8 Delivery of Drafts. . . . . . . . . . . . . . . . . . . . . . . . . 35
27.9 Captions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
27.10 Cumulative Remedies . . . . . . . . . . . . . . . . . . . . . . . . 35
27.11 Entire Agreement. . . . . . . . . . . . . . . . . . . . . . . . . . 36
27.12 Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
27.13 Partial Invalidity. . . . . . . . . . . . . . . . . . . . . . . . . 36
27.14 Successors and Assigns. . . . . . . . . . . . . . . . . . . . . . . 36
27.15 Governing Applicable Law. . . . . . . . . . . . . . . . . . . . . . 36
27.16 Obligation to Perform . . . . . . . . . . . . . . . . . . . . . . . 37
27.17 Counterparts. . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
27.18 Time Periods. . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
27.19 Negation of Partnership . . . . . . . . . . . . . . . . . . . . . . 37
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TABLE OF APPENDICES
Appendix 1: Glossary of Defined Terms
Appendix 2: Description of Leased Property
Appendix 3: Maintenance Standards
Appendix 4: Maintenance Procedures
Appendix 5: Permitted Title Exceptions
</TABLE>
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AGREEMENT FOR USE OF OPERATING PROPERTY
THIS AGREEMENT FOR USE OF OPERATING PROPERTY (the "Operating Property
Agreement") is made as of February 25, 1997 by and between the CITY OF ANAHEIM,
a charter city organized under the laws of the State of California ("the City")
and SPECTRANET ANAHEIM, a California corporation ("SNA"), individually each a
"Party" and collectively the "Parties."
R E C I T A L S:
A. The City promulgated a request for proposals relating to the
development of a telecommunications system consisting of a neutral broadband
telecommunications pathway which shall be available to all competing
telecommunication service providers on a non-discriminatory basis and will be
inter-operable with the incumbent local telephone carrier within the City's
jurisdiction (the "UTS"). SNA has been selected to develop, own and operate the
UTS.
B. The City constructed a 96-strand fiber optic cable and related
facilities, a portion of which the City desires to lease to SNA along with space
on City-owned utility poles and other property all as specified herein, so that
SNA can incorporate the same into the UTS. In addition, the City will grant a
license or licenses to SNA to install facilities over other City property in
order to construct and operate the UTS.
NOW, THEREFORE, in consideration of the mutual agreements contained herein,
and other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties hereto agree as follows:
ARTICLE 1
DEFINITIONS
Initially capitalized terms used herein as defined terms shall have the
meanings given to them in the Glossary of Defined Terms attached hereto as
APPENDIX 1 (such definitions to be equally applicable to both the singular and
plural forms of the terms defined).
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ARTICLE 2
DEMISE OF LEASED PROPERTY
2.1 DEMISE OF LEASED PROPERTY. The City hereby leases to SNA and SNA
hereby takes and hires from the City, the following property (collectively, the
"Leased Property"):
2.1.1 The exclusive right and title to sixty (60) strands of that
certain ninety-six (96)-strand fiber-optic cable more particularly described on
the map and as-built drawings attached (or to be attached) hereto as APPENDIX 2
(the "Cable").
2.1.2 The non-exclusive right to utilize space within the
communications grade of the City-owned Utility Poles maintained by the City as
more particularly described in APPENDIX 2 (the "Utility Poles").
2.1.3 Subject to the provisions of Section 3.10 of the UTS
Participation Agreement, the non-exclusive right to utilize all of the City's
other easements, licenses, permits or other rights or interests appurtenant or
related to the Cable and necessary to allow SNA to incorporate the Cable into
the UTS, to utilize the Cable in place, and to access, repair, maintain, replace
and augment the Cable, including without limitation the right to use Utility
Poles that are jointly owned by the City and others and which the City has the
right to use as a member of a joint pole authority ("JPA Poles"). SNA agrees to
be bound by the terms and conditions of said easements, licenses, permits and
other rights, insofar as they pertain to SNA's utilization of the Cable.
2.2 DELIVERY OF AS-BUILT DRAWINGS. The City shall deliver to SNA a
complete set of as-built drawings with respect to the Cable as soon as the City
obtains and accepts the same from the contractor who constructed the Cable.
Upon receipt of said as-built drawings, the parties will amend APPENDIX 2 to
incorporate a description of the as-built drawings therein.
2.3 CORRECTION OF DEFECTS; PAYMENT OF CLAIMS. The City shall deliver to
SNA a complete set of all available test reports with respect to each segment of
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each fiber strand comprising the Cable (which reports shall at a minimum cover
the City's Reserved Fibers). SNA may, at its expense, prepare additional test
reports. The City shall be responsible for expeditiously correcting, at the
City's expense, any defects in the Cable revealed by such test reports and
validated by the City (including without limitation the known defects relating
to strand no. 54), such that all segments of the Cable perform according to the
specifications established in the Contract Documents and Specifications for the
Digital Telecommunications System (DTS) prepared by Burns & McDonnell
Engineering Company and in City of Anaheim Specification E-109-93 dated
November, 1993. In addition, the City shall pay or compromise, at the City's
expense, all claims or disputes relating to the City's construction of the
Cable, such that SNA's leasehold estate is unencumbered and free of any liens or
other encumbrances or monetary claims concerning the construction of the Cable.
Other liens or encumbrances, if any, are subject to the provisions of Section
5.13 of the UTS Participation Agreement.
2.4 ASSIGNMENT OF CONTRACT RIGHTS AND WARRANTIES. Without limiting the
City's right to assert warranty claims in connection with its correction of
defects pursuant to Section 2.3, the City hereby assigns to SNA, for the Term of
this Operating Property Agreement, all of the City's rights under any and all
contracts relating to the construction and installation of the Cable, including
without limitation all express or implied warranties of manufacturers,
fabricators, contractors and subcontractors.
2.5 NEGOTIATION CONCERNING CITY'S RESERVED FIBERS. The Cable as
constructed by the City has ninety-six (96) fiber optic strands within the Cable
sheath. The City reserves for its own use thirty-six (36) of the fiber optic
strands (the "City's Reserved Fibers"), subject to the limitations set forth in
Section 2.6, which are not part of the Leased Property. If at any time and from
time to time the City determines it no longer needs to reserve for the City's
own use some or all of the City's Reserved Fibers, then the City and SNA shall
negotiate in good faith the
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terms and conditions upon which that portion of the City's Reserved Fibers shall
be added to the Leased Property.
2.6 USE OF THE CITY'S RESERVED FIBERS. The City agrees that the City's
Reserved Fibers shall be utilized only for Municipal Services.
2.7 RETURN OF LEASED PROPERTY. Upon termination of this Operating
Property Agreement, SNA shall return the Leased Property to City in its original
condition, subject to reasonable wear and tear, except for any splices and other
alterations, enhancements or improvements made by SNA as provided herein.
ARTICLE 3
TERM
3.1 INITIAL TERM. The initial Term of this Operating Property Agreement
shall commence on the date hereof and shall terminate on December 31, 2027,
unless terminated sooner as provided herein or unless extended as provided in
Section 3.2.
3.2 EXTENSION OF TERM. Commencing January 1, 2011, and for a total
period of one (1) year, the City, SNI and SNA shall negotiate in good faith
concerning the terms and conditions of a fifteen (15) year extension of the Term
of this Operating Property Agreement (to December 31, 2042) which are acceptable
to all Parties.
3.3 FAILURE TO EXTEND TERM. If the Parties do not agree to extend the
Term of this Operating Property Agreement during the period referred to in
Section 3.2, then the obligation of the Parties to negotiate an extension of the
Term of this Operating Property Agreement shall cease.
ARTICLE 4
RENT
4.1 GUARANTEED RENT. Commencing on the later to occur of (a) April 1,
1997, or (b) the date on which the City issues building permits with respect to
the construction of the components of the UTS reflected on the building permit
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applications with respect to Phase IA submitted by SNA on February 14, 1997, and
thereafter on the corresponding date of every third month thereafter during the
Term of this Operating Property Agreement, SNA shall pay to the City, as
"Guaranteed Rent" for all of the Leased Property (excluding the City's Reserved
Fibers) for the entire Term of this Operating Property Agreement, without notice
or demand, in lawful money of the United States of America, the sum of
$113,861.62 per quarter. (To illustrate the foregoing, if said building permits
are issued on April 10, 1997, then quarterly installments of Guaranteed Rent in
the amount of $113,861.62 would be payable on each April 10, July 10, October 10
and January 10 during the Term.)
4.2 RENT FOR CITY'S RESERVED FIBERS. Any rent payable with respect to
additional fibers relinquished by the City to SNA pursuant to Section 2.5 shall
be paid by SNA to the City as and when agreed by the Parties pursuant to Section
2.5.
4.3 MEANS OF PAYMENT. Subject to the provisions of Section 5.13 of the
Universal Telecommunications System Participation Agreement between the City,
SNA and SpectraNet International dated as of February 25, 1997 (the "UTS
Participation Agreement"), payment of installments of the Guaranteed Rent and
any additional rent agreed to pursuant to Section 4.2 shall be made by wire
transfer to the City's account at a financial institution specified by the City
or another payment method agreed to by the City.
ARTICLE 5
ADDITIONAL PAYMENTS BY SNA; IMPOSITIONS
5.1 CITY'S NET RETURN. The Parties intend that the rent payable by SNA
shall provide the City with net return for the Term, free of any expenses or
charges with respect to the Leased Property, except as specifically provided in
this Operating Property Agreement. Accordingly, subject to the provisions of
Section 5.13 of the UTS Participation Agreement, SNA shall pay as additional
rent and discharge, before failure to pay the same shall create a material risk
of forfeiture or give rise to a penalty, each and every item of expense, of
every kind and nature whatsoever,
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related to or arising from the Leased Property, or by reason of or in any manner
connected with or arising from the development, leasing, insuring, operation,
management, maintenance, repair, use or occupancy of the Leased Property or any
portion of the Leased Property, excluding any condition in existence prior to
the date of this Operating Property Agreement. Notwithstanding anything to the
contrary in this Operating Property Agreement, SNA shall not be required to pay
any of the following incurred by the City: (a) depreciation, amortization,
brokerage commissions or financing or refinancing costs incurred by the City
with respect to the construction of the Cable, the Utility Poles or the Leased
Property; (b) any costs arising from or pursuant to any instrument or agreement
affecting the Leased Property that is not a Permitted Exception and to which the
City is a party and SNA is not a party; and (c) any cost or expense arising
directly or indirectly from any conditions existing on, at or with respect to
the Leased Property before the date of this Operating Property Agreement.
5.2 IMPOSITIONS. Subject to the provisions of Section 5.13 of the UTS
Participation Agreement, for any period within the Term of this Operating
Property Agreement (with daily proration for periods partially within the Term
and partially outside the Term), SNA shall pay and discharge, before failure to
pay the same shall create a material risk of forfeiture or give rise to a
penalty, all Impositions. SNA shall also pay all interest and penalties
assessed by any Governmental Authority on account of late payment of any
Imposition, unless such late payment was caused by the City's failure to remit
an Imposition (paid to the City by SNA) in accordance with SNA's reasonable
instructions or the City's failure to promptly forward SNA a copy of a tax bill
received by the City, in which case the City shall pay such interest and
penalties.
5.3 ASSESSMENTS IN INSTALLMENTS. To the extent permitted by Applicable
Law, SNA shall have the right to apply for conversion of any assessment or
Imposition to cause it to be payable in installments. After such conversion,
SNA
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shall pay and discharge only such installments of such assessment or Imposition
as shall become due and payable during the Term.
5.4 DIRECT PAYMENT BY THE CITY. If any Person entitled to receive
payment of an Imposition refuses to accept it from SNA, then SNA shall give the
City notice of such fact and shall remit payment of such Imposition to the City
in a timely manner accompanied by reasonable instructions as to the further
remittance of such payment. The City shall with reasonable promptness comply
with SNA's reasonable instructions.
5.5 RIGHT TO CONTEST. Notwithstanding anything to the contrary in this
Operating Property Agreement, SNA shall have the right to contest, at its sole
expense, by appropriate legal proceedings diligently conducted in good faith,
the amount or validity of any tax or fee; the valuation, assessment or
reassessment (whether proposed or final) of the Leased Property for purposes of
real estate taxes; or the validity of any Applicable Law or the application of
any Applicable Law to the Leased Property. SNA may defer payment of the
contested amount or compliance with the contested Applicable Law or performance
of any other contested obligation pending the outcome of such contest, provided
that such deferral does not subject the Leased Property to any material risk of
imminent forfeiture or the City to any material risk of criminal liability. The
City shall not be required to join in any such contest proceedings unless an
Applicable Law shall require that such proceedings be brought in the name of the
City. In such case, subject to the approval of the City Council, the City shall
cooperate with SNA so as to permit to such proceedings to be brought in the
City's name. SNA shall pay all reasonable costs and expenses (including
reasonable attorneys' fees) incident to such proceedings. SNA shall be entitled
to any refund of any contested amount (and penalties and interest paid by SNA)
based upon SNA's prior overpayment of such contested amount, whether such refund
is made during or after the Term of this Operating Property Agreement. Upon
termination of SNA's contest of any amount, SNA shall pay the amount (if
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any) as has been finally determined in such proceedings to be due, together with
any costs, interest, penalties or other liabilities in connection with such
Imposition. Upon final termination of SNA's contest of an Applicable Law, SNA
shall comply with such final determination. SNA's right to contest any amount
or the valuation, assessment or reassessment of the Leased Property for tax
purposes shall be to the exclusion of the City, and the City shall have no right
to contest the foregoing without SNA's consent, not to be unreasonably withheld.
5.6 UTILITIES. SNA shall pay all fuel, gas, light, power, water,
sewage, garbage disposal, telephone and other utility charges, and the expenses
of installation, maintenance, use and service in connection with the foregoing,
relating to the Leased Property during the Term of this Operating Property
Agreement.
ARTICLE 6
USE
SNA may use the Leased Property in any lawful manner in connection with the
development and operation of the UTS as permitted pursuant to the UTS
Participation Agreement.
ARTICLE 7
COMPLIANCE WITH APPLICABLE LAW
During the Term of this Operating Property Agreement, SNA shall, at its own
expense, observe and comply with all Applicable Laws affecting the Leased
Property. Except as is otherwise provided in Section 5.13 of the UTS
Participation Agreement, SNA shall procure every Permit or other authorization
required in connection with the lawful and proper maintenance, operation, use
and occupancy of the Leased Property or required in connection with any
improvements erected on the Leased Property and comply with all such Permits and
other authorizations. Notwithstanding the foregoing, SNA shall have the right
to contest any such Applicable Law in accordance with this Operating Property
Agreement. SNA's right to contest Applicable Law shall not excuse SNA (or any
Leasehold Mortgagee who
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elects, following a Bona Fide Foreclosure Transaction, to assume SNA's rights
and obligations under the UTS Participation Agreement) from its obligation to
make payments to the City as provided in Section 6.2 of the UTS Participation
Agreement.
ARTICLE 8
MAINTENANCE AND ALTERATIONS
8.1 OBLIGATION TO MAINTAIN. During the Term, SNA shall make, or cause
to be made, in a timely manner all repairs (whether minor or not) required to
maintain, at all times, (a) the Leased Property, and (b) the City's Reserved
Fibers (except those portions of the City's Reserved Fibers that are on City
property and are on the City's side of the Patch Panels, which for purposes of
this Operating Property Agreement are agreed to be the point of demarcation for
maintenance purposes), in good operating condition and repair, and, in any
event, substantially in conformity to the specifications set forth in APPENDIX 3
attached hereto. All repairs and maintenance performed by SNA pursuant to this
Section 8.1 shall be performed in accordance with the procedures set forth in
APPENDIX 4 attached hereto.
8.2 SNA'S RIGHT TO PERFORM ALTERATIONS. Subject to the provisions of
Section 3.4.1 of the UTS Participation Agreement and the Restoration Process
described in APPENDIX 4, SNA shall be entitled to make and from time to time
alter, modify or reconstruct, any improvements, repairs or alterations to the
Leased Property, as SNA shall consider necessary or appropriate; PROVIDED that
such improvements, repairs, alterations or modifications thereto do not
unreasonably adversely affect the City's Reserved Fibers.
8.3 RESPONSIBILITY FOR COSTS OF MAINTENANCE AND REPAIR. Notwithstanding
the provisions of Section 5.1, the City shall reimburse SNA for the City's PRO
RATA share of (a) the cost of procuring property insurance, maintaining and
repairing the City's Reserved Fibers, including without limitation costs
described in Section 5.1, (b) all Impositions paid by SNA as provided in Section
5.2, and (c) payments for the use of JPA Poles. For purposes of this Section
8.3, the City's PRO RATA share shall
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be the percentage computed by dividing the total number of the City's Reserved
Fibers (as adjusted from time to time as provided in Article 2) by 96. Such
reimbursement shall be made quarterly in arrears upon the submission or
reasonable support documentation. SNA may offset amounts due from the City
pursuant to this Section 8.3 against rent payable by SNA pursuant to Article 4
hereof. In the event the City performs repair or maintenance of the Cable at
SNA's request or in the case of an emergency, SNA will reimburse the City for
SNA' PRO RATA share of the cost of such work.
8.4 NEGLIGENCE. Notwithstanding the provisions of Section 8.3, to the
extent that the negligence of either SNA or the City results in the need for SNA
to repair the Leased Property and/or the City's Reserved Fibers, the Party whose
negligence is responsible for the damage shall bear the full cost of all
necessary repairs.
8.5 CITY'S RESERVED RIGHTS.
8.5.1 The City reserves the right to require SNA to move or
reroute the Cable in the vaults and on poles at the City's sole election and
cost and with proper scheduling between SNA and the City to avoid or minimize
service disruption. In addition, the City reserves the right to replace sections
of the City's Reserved Fibers that are on City property and on the City's side
of the Patch Panels. The City shall reimburse SNA for all costs reasonably
incurred by SNA in connection with any such relocation. SNA may offset amounts
due from the City pursuant to this Section 8.5 against rent payable by SNA
pursuant to Article 4 hereof.
8.5.2 Notwithstanding the provisions of Section 8.5.1, the cost of
any undergrounding of the Cable required as a result of any ordinance adopted by
the City that is generally applicable to all telecommunications services
providers within the City shall be borne by the City and SNA PRO RATA, with
their respective shares being computed as provided in Section 8.3
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8.5.3 Any relocation of the Cable at the City's election pursuant
to Section 8.5.1 or as required pursuant to Section 8.5.2 shall be accomplished
by SNA according to the relocation procedures specified in Appendix 5 to the UTS
Participation Agreement.
ARTICLE 9
INSURANCE
9.1 SNA TO INSURE. SNA shall, at SNA's sole cost and expense, procure
and maintain in force throughout the Term of this Operating Property Agreement
the insurance required pursuant to Article 14 of the UTS Participation
Agreement. Notwithstanding the foregoing, the cost of insurance procured by SNA
as required pursuant to Section 14.1.5 of the UTS Participation Agreement shall
be borne by the City and SNA PRO RATA, with their respective shares being
computed as provided in Section 8.3.
ARTICLE 10
DAMAGE OR DESTRUCTION
10.1 NOTICE; NO RENT ABATEMENT. SNA shall promptly give the City Notice
of damage or loss to the Leased Property and/or the City's Reserved Fibers.
There shall be no abatement or reduction of rent on account of such damage or
loss. SNA shall, with reasonable promptness restore the damage to the Leased
Property and the City's Reserved Fibers (except those portions of the City's
Reserved Fibers that are on City property and on the City's side of the Patch
Panels) as nearly as may be practicable to its condition, quality, and class
immediately prior to such damage or loss, with such changes or alterations
(including demolition) as SNA shall elect to make in conformity with this
Operating Property Agreement, PROVIDED that if the damage or loss occurs within
the last five (5) years of the Term of this Operating Property Agreement, then
SNA may instead terminate this Operating Property Agreement by at least thirty
(30) days' advance Notice to the City and assign to the City all of SNA's rights
with respect to any insurance proceeds with respect to the
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Leased Property and/or the City's Reserved Fibers arising from the damage or
loss.
10.2 ADJUSTMENT OF CLAIMS; USE OF INSURANCE PROCEEDS. SNA shall be
solely responsible for the adjustment of any insurance claim with respect to any
damage or loss to the Leased Property and/or the City's Reserved Fibers, (except
those portions of the City's Reserved Fibers that are on City property and on
the City's side of the Patch Panels) which the City may separately insure for
its own account except that, to the extent permitted by its Leasehold Mortgage,
each Leasehold Mortgagee is expressly authorized and empowered to participate in
any settlements, adjustments, arbitrations or proceedings with respect to any
insurance claim. All proceeds of casualty or hazard insurance shall be paid to
SNA, subject to rights of Leasehold Mortgagees.
ARTICLE 11
CONDEMNATION
11.1 CONDEMNATION. If a Condemnation of any portion of the Leased
Property or the City's Reserved Fibers (except those portions of the City's
Reserved Fibers that are on City property and on the City's side of the Patch
Panels) shall occur, then any award or awards shall be applied first to repair,
restoration or reconstruction of any remaining part of the Leased Property and
City's Reserved Fibers not so taken. SNA shall perform such repair, restoration
or reconstruction in accordance with applicable requirements of this Operating
Property Agreement. The balance of any such award or awards remaining after the
repair, restoration or reconstruction shall be distributed to SNA.
11.2 TEMPORARY CONDEMNATION. If a temporary Condemnation shall occur
with respect to use or occupancy of the Leased Property, then all proceeds of
such temporary Condemnation (to the extent attributable to periods within the
Term of this Operating Property Agreement) shall be paid to SNA and SNA's
obligations under this Operating Property Agreement shall not be affected in any
way.
11.3 OTHER GOVERNMENTAL ACTION. In the event of any action by any
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Governmental Authority not resulting in a Condemnation but creating a right to
compensation, such as the changing of the grade of any street, then this
Operating Property Agreement shall continue in full force and effect without
reduction or abatement of rent and SNA shall be entitled to receive the award or
payment made in connection with such action.
11.4 SETTLEMENT OR COMPROMISE. The City shall not settle or compromise
any Condemnation award with respect to the Leased Property without consent by
SNA and by any Leasehold Mortgagee whose Leasehold Mortgage provides for such a
right of consent. SNA shall be entitled to appear in such proceedings and claim
such share of the award as it is entitled to receive pursuant to this Operating
Property Agreement and Applicable Law. Subject to the term of its Leasehold
Mortgage, any Leasehold Mortgagee shall also be entitled to appear in such
proceedings and empowered to participate in any settlement, arbitration or other
proceeding involving any such Condemnation.
11.5 PROMPT NOTICE. If either Party becomes aware of any Condemnation or
threatened or contemplated Condemnation with respect to the Leased Property,
then such Party shall promptly give Notice thereof to the other Party.
ARTICLE 12
TRANSFERS BY SNA
12.1 SNA'S RIGHT TO ASSIGN. SNA may assign this Operating Property
Agreement pursuant to the provisions of Article 13 of the UTS Participation
Agreement.
ARTICLE 13
MORTGAGES
13.1 SNA'S RIGHTS. Notwithstanding anything in this Operating Property
Agreement to the contrary, SNA shall have the right, consistent with the Project
Agreements, without the City's consent, to execute and deliver Leasehold
Mortgage(s) encumbering this Operating Property Agreement and SNA's interest in
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the Leased Property at any time and from time to time during the Term of this
Operating Property Agreement.
13.2 EFFECT OF A LEASEHOLD MORTGAGE. SNA's making of a Leasehold
Mortgage shall not be deemed to constitute an assignment or transfer of the
Leased Property, nor shall any Leasehold Mortgagee, as such, or in the exercise
of its rights under this Operating Property Agreement, be deemed to be an
assignee or transferee or mortgagee in possession of the Leased Property so as
to require such Leasehold Mortgagee, as such, to assume or otherwise be
obligated to perform any of SNA's obligations under this Operating Property
Agreement except when, and then only for so long as, such Leasehold Mortgagee
has entered into possession of the Leased Property in the exercise of its
remedies under its Leasehold Mortgage (as distinct from its rights under this
Operating Property Agreement to cure Defaults or exercise Leasehold Mortgagee's
Cure Rights). No Leasehold Mortgagee (or purchaser at a foreclosure sale held
pursuant to a Leasehold Mortgage) shall be liable under this Operating Property
Agreement unless and until such time as it becomes, and then only for so long as
it remains, the owner of the Leasehold Estate, and in any event subject to the
provisions of Section 15.15 hereof. Leasehold Mortgagees and Leasehold
Mortgagees' Agents shall be entitled to the benefit of Section 22.3.1 of this
Operating Property Agreement, except that as against a Leasehold Mortgagee or
Leasehold Mortgagee's Agent the term "Recourse Claims" shall be limited to
claims arising on account of misapplication of insurance or condemnation
proceeds or refunds of Impositions. This provision shall not be deemed a waiver
of any rights of the City against any other Party liable under this Operating
Property Agreement, subject in all cases to Section 22.3.1 of this Operating
Property Agreement.
13.3 SALE AND LEASEBACK. If SNA sells, assigns, transfers or otherwise
conveys the Leased Property to a third party and SNA or any SNA Affiliate
substantially concurrently enters into or reserves, retains or receives a
Sublease of
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the Leased Property or similar interest (i.e., a transaction commonly referred
to as a sale-leaseback), then: (a) such third party shall be deemed to be a
"Leasehold Mortgagee" and the Sublease shall be deemed to be a "Leasehold
Mortgage"; and (b) such third party shall not be deemed to have assumed or
become liable under this Operating Property Agreement except to the extent that
such third party has exercised remedies against SNA under SNA's Sublease
functionally equivalent to foreclosure under a Leasehold Mortgage or acceptance
of an assignment in lieu thereof.
13.4 MODIFICATIONS REQUIRED BY LEASEHOLD MORTGAGEE. If any Leasehold
Mortgagee or prospective Leasehold Mortgagee shall require any modification(s)
of this Operating Property Agreement (including clarifications and
supplementations to Leasehold Mortgagee's Cure Rights), then the City shall, at
SNA's request, promptly execute and deliver to SNA such instruments in
recordable form effecting such modification(s) as such Leasehold Mortgagee or
prospective Leasehold Mortgagee shall require, provided that such
modification(s): (i) do not materially adversely affect any of the City's rights
or materially increase any of the City's obligations under this Operating
Property Agreement; and (ii) are consistent with the customary requirements of
institutional lenders, or are required by banking, insurance or similar
Applicable Law and regulations setting forth provisions that must appear in a
lease in order for such lease to be accepted as security by the Leasehold
Mortgagee or prospective Leasehold Mortgagee requesting the change.
13.5 FURTHER ASSURANCES. Upon request by SNA or by any existing or
prospective Leasehold Mortgagee, the City shall deliver to the requesting party
a separate written instrument in recordable form signed and acknowledged by an
authorized official of the City setting forth and confirming the rights of
Leasehold Mortgagees under this Operating Property Agreement.
13.6 FORECLOSURE. Notwithstanding anything to the contrary in this
Operating Property Agreement, any sale of this Operating Property Agreement and
of SNA's
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interest in the Leased Property in any proceedings for the foreclosure of any
Leasehold Mortgage, or any assignment, transfer or conveyance in lieu of such
foreclosure, shall not be deemed to violate this Operating Property Agreement.
ARTICLE 14
NOTICE TO THE CITY OF LEASEHOLD MORTGAGES
14.1 INITIAL NOTICE. If SNA enters into any Leasehold Mortgage(s), then
the Leasehold Mortgagee(s) thereunder shall be entitled to the Leasehold
Mortgagee protections provided for under this Operating Property Agreement only
from and after such time as SNA or such Leasehold Mortgagee has: (a) given the
City written notice of the name and address of such Leasehold Mortgagee,
accompanied by a copy of the executed Leasehold Mortgage; and (b) recorded or
caused to be recorded an instrument (which may be the Leasehold Mortgage itself)
giving notice of such Leasehold Mortgage and the name and address of the
Leasehold Mortgagee.
14.2 THE CITY'S ACKNOWLEDGMENT OF LEASEHOLD MORTGAGEE. The City shall,
upon request, acknowledge receipt of the name and address of any Leasehold
Mortgagee (or proposed Leasehold Mortgagee) and confirm to such Leasehold
Mortgagee that such Leasehold Mortgagee is (or would be, upon closing of its
loan) a Leasehold Mortgagee and has (or would have) all the rights of a
Leasehold Mortgagee under this Operating Property Agreement. Such
acknowledgment shall, if requested, be in recordable form. If the City
reasonably determines that any purported Leasehold Mortgagee does not or would
not qualify as such, then the City shall promptly give written notice of such
determination to SNA and the purported Leasehold Mortgagee, which Notice shall
specify the reasonable basis for such determination.
14.3 CHANGE OF ADDRESS. Any Leasehold Mortgagee shall be free to change
its name and address from time to time by written notice to the City. In the
event of a change of name, such notice may be provided either by the original
Leasehold
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Mortgagee or by the Leasehold Mortgagee under its new name, without proof of any
kind confirming the change of name. Notice of any change of a Leasehold
Mortgagee's identity or address, or of a transfer of a Leasehold Mortgage, may
be made by any means permitted for the original notice of the Leasehold
Mortgagee's original name and address.
14.4 TERMINATION OF LEASEHOLD MORTGAGEE'S RIGHTS. If a Leasehold
Mortgagee is entitled to the Leasehold Mortgagee protections provided for under
this Operating Property Agreement, then such entitlement shall not terminate
unless and until such time, if any, as the Leasehold Mortgage shall have been
satisfied and discharged of record.
ARTICLE 15
PROTECTION OF LEASEHOLD MORTGAGEES
If SNA at any time or from time to time enters into any Leasehold
Mortgage(s), then the Leasehold Mortgagee(s) are entitled to the following
protections provided for under this Operating Property Agreement:
15.1 CANCELLATION, SURRENDER, AMENDMENT, ETC. No voluntary cancellation,
termination, surrender, acceptance of surrender, abandonment, amendment, or
modification of this Operating Property Agreement shall bind a Leasehold
Mortgagee if done without the prior written consent of such Leasehold Mortgagee.
15.2 COPIES OF NOTICES. If the City shall give any notice to SNA
(including any notice of default and a notice of termination of this Operating
Property Agreement for any reason), then the City shall (provided that the City
has received notice of such Leasehold Mortgage pursuant to Section 14.1 hereof)
at the same time and by the same means give a copy of such notice to each
Leasehold Mortgagee, which notice shall describe in reasonable detail the
alleged default.
15.3 SNA'S CURE PERIOD EXPIRATION NOTICE. If SNA is in default under
this Operating Property Agreement and the cure period applicable to SNA expires
without cure of SNA's default, then the City shall promptly give written notice
of such
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fact to each Leasehold Mortgagee, which notice shall describe in reasonable
detail SNA's default (a "Cure Period Expiration Notice").
15.4 RIGHT TO PERFORM COVENANTS AND AGREEMENTS. Any Leasehold Mortgagee
shall have the right, but not the obligation, to perform any obligation of SNA
under this Operating Property Agreement and to remedy any default by SNA. The
City shall accept performance by or at the instigation of a Leasehold Mortgagee
in fulfillment of SNA's obligations, for the account of SNA and with the same
force and effect as if performed by SNA. No such performance by a Leasehold
Mortgagee shall cause such Leasehold Mortgagee to become a "mortgagee in
possession" or otherwise cause such Leasehold Mortgagee to be deemed to be in
possession of the Leased Property or bound by this Operating Property Agreement.
15.5 TRANSFER OF SNA'S RIGHTS. SNA may assign or otherwise transfer to a
Leasehold Mortgagee any or all of SNA's rights under this Operating Property
Agreement, but no such assignment or transfer shall bind the City unless and
until the City shall have received a copy of a written instrument effecting such
assignment accompanied by a photocopy of the Leasehold Mortgagee's fully
executed Leasehold Mortgage. Such assignment or transfer of authority may be
effected by the terms of the Leasehold Mortgage itself, in which case service
upon the City of an executed counterpart or certified copy of such Leasehold
Mortgage, together with a written notice specifying the provisions of such
Leasehold Mortgage that assign or transfer such authority to the Leasehold
Mortgagee, shall be sufficient to bind the City to such assignment or transfer
of rights.
15.6 NOTICE OF DEFAULT AND LEASEHOLD MORTGAGEE'S CURE RIGHTS. Upon
receiving any notice of a default, any Leasehold Mortgagee shall have the same
cure period granted to SNA under this Operating Property Agreement, plus the
additional time provided for below, within which to take (if such Leasehold
Mortgagee so elects) whichever of the actions set forth below shall apply with
respect to the default described in such notice of default (such actions,
"Mortgagee's
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Cure," and a Leasehold Mortgagee's rights to take such actions, "Mortgagee's
Cure Rights"):
15.6.1 In the case of a monetary default, or a non-monetary default
that a Leasehold Mortgagee is reasonably capable of curing (without obtaining
possession of the Leased Property) within the cure period allowed to SNA under
this Operating Property Agreement, the Leasehold Mortgagee shall be entitled
(but not required) to cure such default within a cure period consisting of SNA's
cure period under this Operating Property Agreement extended through the date
thirty (30) days after such Leasehold Mortgagee shall have received a Cure
Period Expiration Notice as to such default. If the amount of any monetary
default has not been finally determined, then in place of curing such monetary
default a Leasehold Mortgagee shall be entitled instead to (a) cure such
monetary default to the extent the amount thereof is not in dispute and
(b) undertake in writing that such Leasehold Mortgagee shall cure the remaining
disputed portion of such monetary default within thirty (30) days after the
dispute shall have been resolved (and the Parties shall then cooperate to
resolve such dispute promptly in accordance with Article 11 of the UTS
Participation Agreement).
15.6.2 In the case of any other non-monetary default (other than a
non-monetary default that is not reasonably susceptible of being cured by a
Leasehold Mortgagee, such as a bankruptcy of SNA or a default that cannot be
cured without having possession of the Leased Property), the Leasehold Mortgagee
shall be entitled, but not required, to: (a) within a period consisting of SNA's
cure period for the default, extended through the date sixty (60) days after
receipt of the SNA's Cure Period Expiration Notice as to such default, advise
the City of Leasehold Mortgagee's intention to take all reasonable steps
necessary to remedy such non-monetary default, (b) duly commence the cure of
such non-monetary default within such extended period, and thereafter diligently
prosecute to completion the remedy of such non-monetary default, subject to
Unavoidable Delay,
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and (c) complete such remedy within a reasonable time under the circumstances,
subject to Unavoidable Delay.
15.6.3 In the case of a non-monetary default that is not reasonably
susceptible of being cured by a Leasehold Mortgagee, the Leasehold Mortgagee
shall be entitled (but not required) to do the following, so long as, with
respect to any defaults other than those referred to in this Section 15.6.3,
such Leasehold Mortgagee has exercised or is exercising the applicable
Mortgagee's Cure Rights as defined in this Operating Property Agreement:
(a) At any time during the cure period (if any) that applies to
SNA, extended through the date sixty (60) days after such Leasehold Mortgagee's
receipt of the SNA's Cure Period Expiration Notice as to such default, or if no
cure period applies to SNA, then within sixty (60) days after receiving written
notice of the non-monetary default, Leasehold Mortgagee shall be entitled to
institute proceedings, and (subject to any stay in any proceedings involving the
bankruptcy, insolvency, or reorganization of SNA or the like, or any injunction,
unless such stay or injunction is lifted), diligently prosecute the same to
completion subject to Unavoidable Delay, to obtain possession of the Leased
Property as mortgagee (including possession by a receiver), or acquire the
Leased Property by foreclosure proceedings or otherwise, including delivery of
an assignment in lieu of foreclosure (the obtaining of such possession or the
completion of such acquisition shall be considered to be "Control of the Leased
Property").
(b) Upon obtaining Control of the Leased Property (before or
after expiration of any otherwise applicable cure period), Leasehold Mortgagee
shall be entitled (but not required) to proceed with reasonable diligence and
reasonable continuity to cure such non-monetary defaults as are then reasonably
susceptible of being cured by such Leasehold Mortgagee, subject to Unavoidable
Delay.
15.7 EFFECT OF CURE. A Leasehold Mortgagee shall not be required to
continue to exercise Mortgagee's Cure Rights or otherwise proceed to obtain or
to
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exercise Control of the Leased Property if and when the default that such
Leasehold Mortgagee was attempting to cure shall have been cured. Upon such
cure and the cure of any other defaults in accordance with this Operating
Property Agreement, this Operating Property Agreement shall continue in full
force and effect as if no default(s) had occurred.
15.8 QUIET ENJOYMENT. So long as the time period for a Leasehold
Mortgagee to exercise Mortgagee's Cure Rights with respect to a non-monetary
default by SNA has not expired (and provided that all monetary defaults are
cured within Leasehold Mortgagee's cure period provided for under this Operating
Property Agreement), the City shall not (i) retake the Leased Property,
(ii) serve a notice of election to terminate this Operating Property Agreement
or (iii) bring a proceeding on account of such default to (A) dispossess SNA
and/or other occupants of the Leased Property, (B) terminate this Operating
Property Agreement, or (C) otherwise exercise any other rights or remedies under
this Operating Property Agreement by reason of such default. Nothing in the
Leasehold Mortgagee protections provided for in this Operating Property
Agreement shall be construed to either (i) extend the Term beyond the expiration
date provided for in this Operating Property Agreement (including the Renewal
Term) that would have applied if no default had occurred or (ii) require any
Leasehold Mortgagee to cure any default by SNA that is not reasonably capable of
being cured by the Leasehold Mortgagee (such as a bankruptcy of SNA).
15.9 SUBORDINATE LIENS AFFECTING LEASEHOLD ESTATE. A Leasehold Mortgagee
shall in no event be required to cure or commence to cure any default (if such
default is provided for in this Operating Property Agreement) consisting of
SNA's failure to satisfy or discharge any lien, charge, or encumbrance affecting
the Leased Property Estate junior in priority to the lien of the Leasehold
Mortgage held by such Leasehold Mortgagee.
15.10 LEASEHOLD MORTGAGEE'S RIGHT TO ENTER LEASED PROPERTY. The City and
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SNA authorize each Leasehold Mortgagee to take possession of the Leased Property
as necessary to effect Mortgagee's Cure and take any action(s) reasonably
necessary to effect Mortgagee's Cure. A Leasehold Mortgagee's rights under this
Section 15.10 shall not constitute Control of the Leased Property or otherwise
be construed to mean that such Leasehold Mortgagee has possession of the Leased
Property.
15.11 RIGHTS OF LEASEHOLD MORTGAGEE UPON ACQUIRING CONTROL. If any
Leasehold Mortgagee or a purchaser at a foreclosure sale shall acquire Control
of the Leased Property and shall cure all monetary defaults and proceed and
continue to exercise Mortgagee's Cure Rights, then (i) any defaults by SNA that
are not reasonably susceptible to being cured by the Leasehold Mortgagee (such
as a bankruptcy of SNA) shall no longer be deemed defaults; and (ii) the City
shall recognize any purchaser of the Leasehold Estate pursuant to a foreclosure
sale under a Leasehold Mortgage, or any transferee of the Leasehold Estate under
an assignment in lieu of foreclosure, or, if the Leasehold Mortgagee should be
such purchaser or assignee, the Leasehold Mortgagee and any assignee of the
Leasehold Mortgagee.
15.12 OPTIONS TO RENEW OR EXTEND. Notwithstanding anything in this
Operating Property Agreement to the contrary, if the time for SNA's exercise of
any right, option or privilege under this Operating Property Agreement to extend
or renew the Term shall have expired without SNA's exercise of such right,
option or privilege, then the City shall provide written notice of such fact to
each Leasehold Mortgagee, who shall have thirty (30) days from receipt of such
notice to exercise such right, option or privilege, in SNA's name or in the name
of Leasehold Mortgagee.
15.13 PAYMENTS MADE BY LEASEHOLD MORTGAGEE. Any payment made by a
Leasehold Mortgagee to the City to cure any claimed default shall be deemed to
have been made "under protest" and without prejudice to SNA's or the Leasehold
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Mortgagee's recovery of such payment if the City's claim of a default shall be
determined to have been erroneous.
15.14 ESCROW DEPOSITS, BONDS AND SECURITY. Notwithstanding anything in
this Operating Property Agreement to the contrary, no escrow deposits, bonds or
security (to the extent otherwise required under this Operating Property
Agreement) shall be required pursuant to this Operating Property Agreement with
respect to the performance of any obligation being undertaken or performed by
any Leasehold Mortgagee (or a Leasehold Mortgagee's Agent). Nothing in this
Section 15.14 shall be deemed to require any Party to deliver escrow deposits,
bond or security except to the extent, if any, expressly required by this
Operating Property Agreement.
15.15 OBLIGATIONS OF LEASEHOLD MORTGAGEE IN CONTROL OF THE LEASED
PROPERTY. Notwithstanding anything to the contrary contained herein, in the
event that a Leasehold Mortgagee gains Control of the Leased Property or
possession of the Leased Property or becomes the owner of SNA's leasehold estate
in the Leased Property, such Leasehold Mortgagee shall have the right, but not
the obligation, to terminate its obligations under Articles 8, 9 and 10 hereof
with respect to the maintenance and restoration of the City's Reserved Fibers.
In the event of such an election by the Leasehold Mortgagee, the City shall
succeed to such obligations with respect to the maintenance and restoration of
the City's Reserved Fibers, the City's obligation to reimburse its pro rata
share of maintenance and insurance costs pursuant to Section 8.3 shall
terminate, and the City and the Leasehold Mortgage shall cooperate in good faith
to enter into a mutually acceptable agreement for joint maintenance of the
Cable.
ARTICLE 16
LEASEHOLD MORTGAGEE'S RIGHT TO A NEW OPERATING PROPERTY AGREEMENT
16.1 NEW OPERATING PROPERTY AGREEMENT. If this Operating Property
Agreement shall terminate before its stated expiration date (including the
Renewal Term, except to the extent that SNA elects in accordance with this
Operating
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Property Agreement not to exercise the Renewal Option) for any reason (including
SNA's default or bankruptcy), then (in addition to any other or previous notice
required to be given by the City to a Leasehold Mortgagee) the City shall,
within thirty (30) days, give written notice of such termination to each
Leasehold Mortgagee entitled to Leasehold Mortgagee protections under this
Operating Property Agreement. The City shall, upon a Leasehold Mortgagee's
request given within thirty (30) days after such Leasehold Mortgagee's receipt
of such notice, enter into (and if the City fails to do so, shall be deemed to
have entered into) a new lease of the Leased Property, effective as of the
Termination Date, for the remainder of the Term (and the Renewal Term, if, when
and as the Renewal Option shall have been or shall subsequently be exercised) on
the same terms and provisions contained in this Operating Property Agreement,
including all rights, options, or privileges of SNA under this Operating
Property Agreement, but excluding any requirements that have already been
performed or no longer apply (a "New Operating Property Agreement"), provided
such Leasehold Mortgagee shall, at the time of execution and delivery of such
New Operating Property Agreement, pay to the City any and all sums then due
under this Operating Property Agreement as if this Operating Property Agreement
had not been terminated. In no event, however, shall any Leasehold Mortgagee be
required to cure a default of SNA that is not reasonably susceptible of being
cured by the Leasehold Mortgagee. If a Leasehold Mortgagee enters into a New
Operating Property Agreement, then such Leasehold Mortgagee shall pay all
reasonable expenses, including reasonable attorneys' fees, court costs and
disbursements, incurred by the City in connection with SNA's default and the
termination of this Operating Property Agreement, the recovery of possession of
the Leased Property, and the preparation, execution and delivery of the New
Operating Property Agreement. The City's execution of such new Operating
Property Agreement shall not be construed as a compromise or waiver of the
City's position, as set forth in Section 6.2 of the UTS Participation Agreement,
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that the City has the authority to require the new tenant under the new
Operating Property Agreement (the "New Tenant") to obtain a franchise from the
City.
16.2 FORM AND PRIORITY. Any New Operating Property Agreement shall be in
recordable form. Such New Operating Property Agreement shall not be subject to
any rights, liens, or interests other than those to which this Operating
Property Agreement was subject at the time of its termination. The provisions
of the immediately preceding sentence shall be self-executing.
16.3 PENDENCY OF DISPUTE. If the City and the New Tenant disagree
regarding any payment due the City in connection with execution of a New
Operating Property Agreement, then New Tenant shall be deemed to have performed
its payment obligation if such New Tenant: (a) pays the City the full amount not
in controversy and (b) agrees to pay any additional sum ultimately determined to
be due promptly upon such determination with interest at the Prime Rate. The
parties shall cooperate to determine any disputed amount promptly in accordance
with Article 11 of the UTS Participation Agreement.
16.4 ASSIGNMENT OF CERTAIN ITEMS. Upon execution of a New Operating
Property Agreement, the City shall assign to New Tenant all of the City's right,
title and interest in and to all moneys (including insurance proceeds and
Condemnation awards), if any, then held by, or payable to, the City that SNA
would have been entitled to receive but for termination of this Operating
Property Agreement.
ARTICLE 17
INTERACTION OF MORTGAGES WITH OTHER ESTATES AND PARTIES
17.1 LEASEHOLD MORTGAGES AND OTHER ESTATES. A Leasehold Mortgage shall
not encumber or in any other way affect the City's reversionary interest in the
Leased Property or limit or restrict the City's rights and remedies under this
Operating Property Agreement except as expressly provided in this Operating
Property Agreement.
17.2 LEASEHOLD MORTGAGEE'S AGENT. Any Leasehold Mortgagee may
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exercise its rights under this Operating Property Agreement, or perform any
action permitted to be taken by a Leasehold Mortgagee under this Operating
Property Agreement, through a Leasehold Mortgagee's Agent. A Leasehold
Mortgagee's Agent shall be entitled to all the rights, privileges, and
protections of Leasehold Mortgagees under this Operating Property Agreement.
17.3 INTERACTION BETWEEN OPERATING PROPERTY AGREEMENT AND LEASEHOLD
MORTGAGE. If a Leasehold Mortgagee's Leasehold Mortgage limits such Leasehold
Mortgagee's exercise of any rights and protections provided for in this
Operating Property Agreement, then as between SNA and such Leasehold Mortgagee
the terms of such Leasehold Mortgage shall govern. SNA's default as mortgagor
under a Leasehold Mortgage shall not constitute a default under this Operating
Property Agreement except to the extent that SNA's actions or failure to act in
and of itself constitutes a breach of this Operating Property Agreement.
17.4 CONFLICTS BETWEEN MORTGAGEES. If more than one Leasehold Mortgagee
desires to exercise Mortgagee's Cure Rights or the right to obtain a New
Operating Property Agreement, or if more than one Leasehold Mortgagee desires to
exercise any other right or privilege provided for Mortgagees under this
Operating Property Agreement, then the party against whom such rights or
privileges are to be exercised shall be required to recognize either: (a) only
the Leasehold Mortgagee that desires to exercise such right or privilege and
whose Leasehold Mortgage is most senior in lien (as against other Leasehold
Mortgages of its type) or (b) such other Leasehold Mortgagee, as has been
designated in writing by all Leasehold Mortgagees, to exercise such right or
privilege. Priority of Leasehold Mortgages shall be conclusively evidenced
either by (a) the report or certificate of a title insurance company licensed to
do business in California or (b) joint written instructions of all Leasehold
Mortgagees.
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ARTICLE 18
BANKRUPTCY
18.1 AFFECTING SNA. If SNA (as debtor in possession) or a trustee in
bankruptcy for SNA rejects this Operating Property Agreement in connection with
any proceeding involving SNA under the United States Bankruptcy Code or any
similar state or federal statute for the relief of debtors (a "Bankruptcy
Proceeding"), then the City agrees for the benefit of each and every Leasehold
Mortgagee that such rejection shall be deemed SNA's assignment of the Operating
Property Agreement to SNA's Leasehold Mortgagee(s), in the nature of an
assignment in lieu of foreclosure. Upon such deemed assignment, this Operating
Property Agreement shall not terminate and each Leasehold Mortgagee shall
continue to have all the rights of a Leasehold Mortgagee under this Operating
Property Agreement as if the Bankruptcy Proceeding had not occurred. If any
court of competent jurisdiction shall determines that this Operating Property
Agreement shall have been terminated notwithstanding the deemed assignment
provided for in place of rejection of this Operating Property Agreement, then
SNA's Leasehold Mortgagees shall continue to be entitled to a New Operating
Property Agreement as provided in this Operating Property Agreement.
18.2 AFFECTING THE CITY. If the City (as debtor in possession) or a
trustee in bankruptcy for the City rejects this Operating Property Agreement in
connection with any Bankruptcy Proceeding involving the City, then:
18.2.1 SNA shall not have the right to elect to treat this
Operating Property Agreement as terminated except with the prior written consent
of each and every Leasehold Mortgagee whose recorded Leasehold Mortgage requires
such consent by the applicable Leasehold Mortgagee.
18.2.2 If SNA does not properly elect to treat this Operating
Property Agreement as terminated, then this Operating Property Agreement shall
continue in effect without change upon all the same terms and conditions as are
set forth in this
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Operating Property Agreement, including provisions relating to rent, options and
New Operating Property Agreements. Thereafter, SNA and its successors
(including Leasehold Mortgagees) shall be entitled to offset against Rent any
damages arising from such rejection, in accordance with applicable law governing
the Bankruptcy Proceeding, and any such offset properly made shall not be a
default.
18.2.3 The lien of any Leasehold Mortgage that was in effect before
the rejection of this Operating Property Agreement shall extend to SNA's
continuing possessory rights with respect to the Leased Property following such
rejection, with the same priority as it would have enjoyed had such rejection
not taken place.
ARTICLE 19
QUIET ENJOYMENT
The City covenants that, so long as this Operating Property
Agreement has not been terminated, SNA shall and may peaceably and quietly have,
hold and enjoy the Leased Property for the Term without molestation or
disturbance by or from the City or anyone claiming by or through the City or
having title to the Leased Property paramount to the City, and free of any
encumbrance created or suffered by the City, except Permitted Exceptions.
ARTICLE 20
REPRESENTATIONS AND WARRANTIES
The City represents and warrants to SNA the following:
20.1 TITLE TO LEASED PROPERTY. The City owns good and marketable title
to the Leased Property, free and clear of any mortgages, debts, liens or other
encumbrances, except for the liens, encumbrances and other matters to be
approved by SNA according to the criteria, and upon the completion of the City's
activities, as described in Section 5.13 of the UTS Participation Agreement (the
"Permitted Exceptions"). The Parties shall attach as APPENDIX 5 to this
Operating Property Agreement a list of the Permitted Exceptions as soon as they
are
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determined. To the knowledge of the City, the Leased Property conforms in all
material respects to Applicable Law and to the description contained in APPENDIX
2 attached hereto, and meets the test and performance specifications described
in APPENDIX 3 attached hereto. The Leased Property and the rights therein being
leased to SNA as provided herein are sufficient to permit SNA to use, access,
repair, maintain and replace the Cable as a continuous and contiguous loop as
contemplated pursuant to the UTS Participation Agreement, and SNA's intended use
of the Cable will not constitute an overburdening of any easement, license or
other similar right or interest of the City with respect to the Leased Property.
20.2 NO LITIGATION. There is no existing or, to the City's knowledge,
pending or threatened litigation, suit, action or proceeding, including
condemnation proceedings, before any court or administrative agency affecting
the City, any constituent entity or individual of the City, or the Leased
Property that would, if adversely determined, adversely affect the City or the
Leased Property or SNA's ability to develop, own and operate the UTS.
20.3 GENERAL ORDER COMPLIANCE. The Cable was constructed by the City in
compliance with all applicable laws and regulations, including without
limitation California Public Utilities Commission General Orders 95 and 128.
ARTICLE 21
FORCE MAJEURE
SNA's obligation to perform or observe any term, condition, covenant
or agreement on SNA's part to be performed or observed pursuant to this
Operating Property Agreement (other than SNA's obligation to pay any item of
Rent when due) shall be suspended during such time as such performance or
observance is prevented or delayed by reason of any Unavoidable Delay.
ARTICLE 22
DEFAULT; REMEDIES
22.1 EVENTS OF DEFAULT. The occurrence of any one or more of the
following
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shall be deemed to be an event of default ("Event of Default") by a Party in the
performance of its duties and obligations arising under this Operating Property
Agreement.
22.1.1 A Party becomes insolvent or unable to pay its debts as they
mature, or makes an assignment for the benefit of creditors, or suffers or fails
to pay and discharge within ninety (90) days of entry any final judgment (after
exhaustion of any period of appeals) by any court in an amount of One Hundred
Thousand Dollars ($100,000.00) or more.
22.1.2 A Party files, or there is filed against a Party, a petition
to have such Party adjudicated a bankrupt, or a petition for a reorganization or
arrangement under any law relating to bankruptcy or insolvency, unless the same
is dismissed within ninety (90) days after the date on which the same is
instituted.
22.1.3 A Person (other than the other Party) obtains an order or
decree in any court of competent jurisdiction enjoining or prohibiting a Party
from performing under this Operating Property Agreement, and such decree is not
vacated within ninety (90) days after the granting thereof.
22.1.4 The assets of a Party are assumed by a trustee or other
person pursuant to a judicial proceeding, unless possession or control of its
assets is returned to such Party within ninety (90) days.
22.1.5 A Party breaches or defaults in the performance of any of
such Party's material duties or obligations arising under this Operating
Property Agreement involving the payment of money, and after receiving written
notice thereof from the other Party, fails within thirty (30) days from receipt
of such notice to have fully cured and corrected such breach or default.
22.1.6 A Party breaches or defaults in the performance of any of
such Party's material duties or obligations arising under this Operating
Property Agreement that do not involve the payment of money, and after receiving
written notice thereof from the other Party, fails within sixty (60) days from
receipt of such
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notice to have fully cured and corrected such breach or default.
22.1.7 Any representation, warranty, certification or statement
made by a Party in this Operating Property Agreement shall prove to have been
incorrect in any material respect when made.
22.2 WAIVER. No waiver of any Event of Default shall be valid or
effective unless in writing and signed by the waiving Party. Any waiver of any
one Event of Default shall not constitute, or be construed as creating, a waiver
of any other Event of Default.
22.3 REMEDIES. Upon the occurrence of an Event of Default, but subject
to the requirement that disputes be arbitrated, as set forth in Article 11 of
the UTS Participation Agreement, the non-defaulting Party shall have all
remedies available at law or in equity, except as specifically provided herein.
22.3.1 The City's sole remedies for SNA's default shall be the
recovery of actual damages, specific performance, or injunctive relief. The
City shall not be entitled to recover consequential, special, exemplary or
punitive damages.
22.3.2 Notwithstanding anything to the contrary contained in this
Operating Property Agreement, the City agrees that it shall look solely to the
estate and property of SNA for the enforcement of any judgment (or other
judicial decree) requiring the payment of money by SNA, or any shareholder,
partner, director, officer, employee or agent of SNA to the City by reason of
any default or breach by SNA in the performance of its obligations under this
Operating Property Agreement.
ARTICLE 23
NO BROKER
The City and SNA each represents and warrants that it did not engage any
broker or finder in connection with this Operating Property Agreement and that
no Person is entitled to any commission or finder's fee on account of any
agreements or arrangements made by such Party with any broker or finder. Each
Party shall indemnify the other Party against any breach of the foregoing
representation by the
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indemnitor.
ARTICLE 24
WAIVERS
24.1 NO WAIVER. Failure of either Party to complain of any act or
omission on the part of the other Party shall not be deemed a waiver by the
noncomplaining Party of any of its rights under this Operating Property
Agreement. No waiver by either Party at any time, express or implied, of any
breach of any provisions of this Operating Property Agreement shall be a waiver
of a breach of any other provision of this Operating Property Agreement or a
consent to any subsequent breach of the same or any other provision. No
acceptance by the City of any partial payment shall constitute an accord or
satisfaction but shall only be deemed a part payment on account.
24.2 NO CITY LIEN. The City confirms and acknowledges that the City has
no lien or security interest in any personal property of SNA located in, on or
about the Leased Property, and that such personal property shall not constitute
security for payment of any Rent.
ARTICLE 25
MEMORANDUM OF OPERATING PROPERTY AGREEMENT
The parties shall promptly execute, acknowledge and record a
memorandum of this Operating Property Agreement.
ARTICLE 26
ESTOPPEL CERTIFICATES
26.1 RIGHTS OF EACH PARTY. At any time and from time to time, upon not
less than ten (10) Business Days' prior written request (an "Estoppel
Certificate Request") by either Party to this Operating Property Agreement (the
"Requesting Party"), the other Party to this Operating Property Agreement (the
"Certifying Party") shall execute, acknowledge and deliver to the Requesting
Party (or directly to a third party whose name and address are provided by the
Requesting Party) (a "Third
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Party") up to four (4) original counterparts of an Estoppel Certificate. An
Estoppel Certificate Request shall not be valid unless accompanied by: (a) up
to four (4) counterparts of a proposed form of Estoppel Certificate reflecting
present facts and circumstances at the time of the Estoppel Certificate Request;
and (b) a certificate by the Requesting Party that to the best of the Requesting
Party's knowledge the proposed form of Estoppel Certificate is substantially
correct and omits no material information required to be disclosed in such
Estoppel Certificate. Any Estoppel Certificate may be relied upon by any Third
Party to whom an Estoppel Certificate is required to be directed.
26.2 FAILURE TO EXECUTE ESTOPPEL CERTIFICATE. If (i) the Requesting
Party delivers an Estoppel Certificate Request to the Certifying Party in
accordance with the notice provisions of this Operating Property Agreement and
(ii) ten (10) Business Days have elapsed from the effectiveness of such Estoppel
Certificate Request and during such period the Certifying Party has failed to
execute and deliver to the Requesting Party (or its attorneys or the Third
Party(ies) designated by such Requesting Party) the Estoppel Certificate
counterpart(s) provided by the Requesting Party, setting forth with reasonable
specificity any alleged exceptions to the statements required to be contained in
such Estoppel Certificate, then the Certifying Party shall be deemed for all
purposes, whether or not this Operating Property Agreement has been terminated
or is otherwise in full force and effect, to have executed and delivered to the
Third Party and the Requesting Party an Estoppel Certificate, dated as of the
effective date of the Estoppel Certificate Request, in the form submitted by the
Requesting Party to the Certifying Party.
ARTICLE 27
MISCELLANEOUS
27.1 NOTICES. All notices permitted or required to be given to SNA or
the City pursuant to this Operating Property Agreement shall be given in the
manner described in Section 18.1 of the UTS Participation Agreement.
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27.2 REASONABLENESS. Wherever this Operating Property Agreement states
that approval by either Party shall not be unreasonably withheld: (a) such
approval shall not be unreasonably delayed or conditioned; and (b) no
withholding of approval shall be deemed reasonable unless withheld by notice
specifying reasonable grounds, in reasonable detail, for such withholding of
approval, and indicating specific reasonable changes in the proposal under
consideration that would cause such proposal to be acceptable.
27.3 DOCUMENTS IN RECORDABLE FORM. Wherever this Operating Property
Agreement requires either Party to deliver to the other a document in recordable
form, both Parties shall be deemed to have consented to the recording of such
document, at the sole expense of the Party that elects to record it.
27.4 FURTHER ASSURANCES. Each Party agrees to execute and deliver such
further documents, and perform such further acts, as may be reasonably necessary
to achieve the intent of the Parties with respect to SNA's leasing of the Leased
Property from the City, as set forth in this Operating Property Agreement.
Without limiting the generality of this Section, upon request at any time or
from time to time any Party shall execute and deliver to the other: (a)
additional counterparts of this Operating Property Agreement or any related
documents, provided such additional counterparts are prepared at the expense of
the Party requesting them; and (b) such documentation as any title insurance
company shall require to evidence such matters as due formation, authorization
and execution of the Operating Property Agreement on the part of the Party of
whom the request is made.
27.5 PERFORMANCE UNDER PROTEST. If at any time a dispute shall arise as
to the amount of any payment to be made by a Party to the other under this
Operating Property Agreement, then the Party against whom the obligation to pay
is asserted shall pay the entire amount billed, but shall have the right to make
payment "under protest." Such payment shall not be regarded as a voluntary
payment. The Party making the payment shall continue to have the right to seek
recovery of such sum.
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To the extent that it shall be determined that the Party making the payment
"under protest" was not required to make such payment, such Party shall be
entitled to recover such sum or so much of such sum as such Party was not
legally required to pay pursuant to this Operating Property Agreement, together
with interest on such overpayment at 6.65% per annum.
27.6 NO THIRD PARTY BENEFICIARIES. Nothing in this Operating Property
Agreement shall be deemed to confer upon any Person (other than the City, SNA or
Leasehold Mortgagees) any right to insist upon, or to enforce against the City
or SNA, the performance or observance by either Party of its obligations under
this Operating Property Agreement.
27.7 INTERPRETATION. No inference in favor of or against any Party shall
be drawn from the fact that such Party has drafted any portion of this Operating
Property Agreement. The Parties have both participated substantially in the
negotiation, drafting and revision of this Operating Property Agreement with
representation by counsel and such other advisers as they have deemed
appropriate. The words "include" and "including" shall be construed to be
followed by the words: "without limitation."
27.8 DELIVERY OF DRAFTS. Neither the City nor SNA shall be bound by this
Operating Property Agreement unless and until each Party shall have executed at
least one counterpart of this Operating Property Agreement and delivered such
executed counterpart to the other Party. The submission of draft(s) of this
Operating Property Agreement or comment(s) on such drafts shall not bind either
Party in any way and such draft(s) and comment(s) shall not be considered in
interpreting this Operating Property Agreement.
27.9 CAPTIONS. The captions of this Operating Property Agreement are for
convenience and reference only and in no way affect this Operating Property
Agreement.
27.10 CUMULATIVE REMEDIES. Subject to the requirement that all disputes
be
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arbitrated as provided in Article 11 of the UTS Participation Agreement and
subject to the express limitations set forth in this Operating Property
Agreement, the remedies to which either Party may resort under this Operating
Property Agreement are cumulative and are not intended to be exclusive of any
other remedies to which such Party may lawfully be entitled in the event of any
breach or threatened breach by the other Party of any provision of this
Operating Property Agreement.
27.11 ENTIRE AGREEMENT. This Operating Property Agreement contains all
the terms, covenants and conditions relating to SNA's leasing of the Leased
Property.
27.12 AMENDMENT. Any modification or amendment to this Operating Property
Agreement must be in writing signed by the City and SNA and consented to by any
Leasehold Mortgagee(s) having the right to consent to amendments or
modifications of this Operating Property Agreement pursuant to the terms of this
Operating Property Agreement.
27.13 PARTIAL INVALIDITY. If any term or provision of this Operating
Property Agreement or the application of such term or provision to any Party or
circumstance shall to any extent be invalid or unenforceable, then the remainder
of this Operating Property Agreement, or the application of such term or
provision to Persons or circumstances other than those as to which it is invalid
or unenforceable, shall not be affected by such invalidity, and each remaining
term and provision of this Operating Property Agreement shall be valid and be
enforced to the fullest extent permitted by Applicable Law.
27.14 SUCCESSORS AND ASSIGNS. This Operating Property Agreement shall
bind and benefit the City and SNA and their successors and assigns, but the
foregoing shall not limit or supersede any transfer restrictions contained in
this Operating Property Agreement.
27.15 GOVERNING APPLICABLE LAW. This Operating Property Agreement and its
interpretation and performance shall be governed, construed and regulated by the
Applicable Law of the State of California, without regard to principles of
conflict of
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Applicable Law.
27.16 OBLIGATION TO PERFORM. Wherever this Operating Property Agreement
requires any Party to perform any obligation, such Party shall be entitled to
discharge such obligation by causing it to be performed by some other Person,
but the foregoing shall in no way limit, restrict or excuse the City's or SNA's
obligations under this Operating Property Agreement or the restrictions on
assignment, conveyance or transfer contained in this Operating Property
Agreement.
27.17 COUNTERPARTS. This Operating Property Agreement may be executed in
counterparts.
27.18 TIME PERIODS. Whenever this Operating Property Agreement requires
either Party to perform any action within a specified period, or requires that a
particular event occur within a specified period, if the last day of such period
is not a Business Day, then the period shall be deemed extended through the
close of business on the first Business Day following such period as initially
specified. This paragraph shall in no event delay or defer the effective date of
any Rent adjustment or the commencement of any period with respect to which
interest on a payment shall accrue.
27.19 NEGATION OF PARTNERSHIP. The covenants, obligations and liabilities
of the Parties intended to be several and not joint or collective and nothing
herein contained shall ever be construed to create an association, joint
venture, trust or partnership, or to impose a trust or partnership covenant,
obligation or liability on or with regard to the Parties. Each Party shall be
individually responsible for its own covenants, obligations and liabilities as
herein provided. No Party shall be under
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the control of or power to bind to any other Party without its express written
consent, except as expressly provided in this Operating Property Agreement.
SNA:
SPECTRANET ANAHEIM, a California corporation
By: /s/ Renney E. Senn
-------------------------------------------
Name: Renney E. Senn
-------------------------------------------
Title: CEO
-------------------------------------------
THE CITY OF ANAHEIM, a municipal corporation
By: /s/ Edward K. Aghjayan
-------------------------------------------
Name: Edward K. Aghjayan
-------------------------------------------
Title: General Manager
-------------------------------------------
ATTEST:
/s/ Leonora N. Sohl
- ---------------------------
City Clerk
APPROVED AS TO FORM:
/s/ Lucina Lea Moses
- ---------------------------
Assistant City Attorney
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APPENDIX 1
GLOSSARY OF DEFINED TERMS
<PAGE>
APPENDIX NO. 1
GLOSSARY OF DEFINED TERMS
1. "ADMINISTRATIVE COMMITTEE" is defined in Section 9.1.1 of the UTS
Participation Agreement.
2. "AFFILIATE" means, with respect to any Person, any other Person
that directly, or indirectly through one or more intermediaries, controls, is
controlled by or is under common control with the Person specified, or who
holds or beneficially owns ten percent (10%) or more of the equity interest
in the Person specified or ten percent (10%) or more of any class of voting
securities of the Person specified.
3. "AGREEMENT CONCERNING NON-DISCLOSURE OF CONFIDENTIAL INFORMATION"
means that certain Agreement Concerning Non-Disclosure of Confidential
Information dated as of February 25, 1997 by and between the City, SNI and
SNA, relating to the protection of confidential and proprietary information,
as the same may be amended, modified or supplemented from time to time.
4. "AGREEMENT FOR USE OF OPERATING PROPERTY" means that certain
Agreement for Use of Operating Property dated as of February 25, 1997 by and
between the City and SNA, relating to the Cable, as the same may be amended,
modified or supplemented from time to time.
5. "ANNUAL COMPLIANCE AUDIT" means an annual review to be performed by
the City's staff for purposes of determining whether the operations of the
UTS conform to the requirements of the Project Agreements.
6. "ANNUAL OPERATIONS AUDIT" means an annual audit of the operations
of the UTS to be prepared by the Independent Accountant in a form sufficient
to satisfy the requirements of each of SNA, the City, SNI, any Governmental
Authorities with regulatory jurisdiction over the UTS and any Lenders.
7. "APPLICABLE LAW" means any law, statute, ordinance, regulation,
rule, notice requirement, court decision, agency guideline, principle of law
and order of any Governmental Authority, including without limitation, those
related to energy, the environment, motor vehicle safety, public utility,
zoning, building and health codes, occupational safety and health and laws
respecting employment practices, employee documentation, terms and conditions
of employment, and wages and hours.
8. "APPRAISED VALUE" means the appraised value of all of the issued
and outstanding stock of SNA, determined as provided in Section 12.2 of the
UTS Participation Agreement.
9. "AUDIT COMMITTEE" is defined in Section 9.1.2 of the UTS
Participation Agreement.
10. "BANKRUPTCY PROCEEDINGS" is defined in Section 18.1 of the
Agreement for Use of Operating Property.
11. "BONA FIDE FORECLOSURE TRANSACTION" means a judicial or nonjudicial
foreclosure, or
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a conveyance in lieu of foreclosure, or other similar action, proceeding or
transaction undertaken by a Lender to enforce its rights and remedies
following a default by SNA, SNI or any of their Affiliates under any Credit
Document or with respect to any Debt, and not undertaken merely for the
purpose of terminating the City's rights to receive payments under one or
more of the Project Agreements. A Bona Fide Foreclosure Transaction would
terminate any ownership interest in the UTS of SNA, SNI or any of their
Affiliates.
12. "BUSINESS DAY" means any weekday on which banks in California are
generally open for the conduct, with bank personnel, of regular banking
business.
13. "CABLE" is defined in Section 2.1.1 of the Agreement for Use of
Operating Property.
14. "CAPITAL IMPROVEMENTS" means a change in or replacement of a
partially completed or completed portion of the UTS, or the enlargement or
betterment of the UTS or any portion thereof, or any other addition to or
improvement of the UTS or any portion thereof, which change, replacement,
enlargement, betterment, addition or improvement would be capitalized in
accordance with GAAP.
15. "CITY" means the City of Anaheim, a charter city organized under
the laws of the State of California.
16. "CITY'S BACKBONE LOOP" is defined in Section 5.13 of the UTS
Participation Agreement.
17. "CONDEMNATION" means any taking of property by condemnation or by
exercise of any right of eminent domain, or by any similar proceeding or act
of any Governmental Authority.
18. "CONSTRUCTION DRAWINGS AND SPECIFICATIONS" means final drawings and
specifications containing sufficient detail to support the issuance of
required building permits by the City and any other Governmental Authority
with jurisdiction.
19. "CONSTRUCTION WORK" means all engineering, design, contract
preparation, purchasing, construction, supervision, negotiation, preparation
and performance of construction agreements, acquisition of land rights,
expediting, inspection, accounting, testing and start-up for each Phase of
the UTS and preparation of operating and equipment manuals, quality assurance
manuals, all reports required by Governmental Authorities and the conduct of
hearings, conferences and other activities incidental to obtaining all
necessary Permits for the design, construction, development and operation of
each Phase.
20. "CONSUMER PRICE INDEX" means the United States Department of Labor,
Bureau of Labor Statistics, Consumer Price Index, All Items, Urban Wager
Earners, Los Angeles-Anaheim-Riverside (1982-84 = 100), as published monthly.
If at any time said Consumer Price Index shall not exist, the Parties shall
substitute the official index published by the United States Department of
Labor, Bureau of Labor Statistics or any successor or similar governmental
agency as may then be in existence which is most nearly equivalent thereto.
21. "CREDIT DOCUMENTS" means any credit documents now existing or
hereinafter entered into by SNA for the purpose of evidencing or securing
loans or other Debt from Lenders to SNA that are related to the design,
construction, development or operation of the UTS.
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22. "CUSTOMER" means any Person who executes a Service Agreement with
SNA as a retail purchaser of UTS services.
23. "DEBT" means, with respect to any Person, without duplication, (a)
all obligations of such Person for borrowed money, (b) all obligations of
such Person evidenced by bonds, debentures, notes or other similar
instruments, (c) all obligations of such Person to pay the deferred purchase
price of property or services, except trade accounts payable in the ordinary
course of business, (d) all obligations of such Person under leases which are
or should be, in accordance with GAAP, recorded as capital leases in respect
of which such Person is liable, (e) all obligations of such Person to
purchase securities (or other property) which arise out of or in connection
with the sale of the sale or substantially similar securities (or property),
(f) all deferred obligations of such Person to reimburse any bank or other
Person in respect of amounts paid or advances under a letter of credit or
other instrument, (g) all Debt of others secured by a lien or other
encumbrance on any asset of such Person, whether or not such Debt is assumed
by such Person, and (h) all Debt of others guaranteed directly or indirectly
by such Person or as to which such Person has an obligation substantially the
economic equivalent of a guarantee.
24. "DEBT SERVICE" means, for any period, all fees, principal and
interest payments payable pursuant to any Debt.
25. "DEFINED SERVICE AREA" means, for each Phase, the geographic area
that will be served by the UTS upon substantial completion of that Phase, as
shown on Appendix 4 to the UTS Participation Agreement.
26. "DESIGNATED REPRESENTATIVE" means the person designated from time
to time by the City, SNA and SNI, as applicable, as having the right to grant
or withhold approvals, receive notices and information and act on behalf of
the designating party. The City's initial Designated Representative is
_____________. SNA's initial Designated Representative is G. Bradford
Saunders. SNI's initial Designated Representative is G. Bradford Saunders.
Any Party may change its Designated Representative from time to time by
written notice to the other Parties given as provided in the UTS
Participation Agreement.
27. "DEVELOPMENT FEE AGREEMENT" means that certain Development Fee
Agreement dated as of February 25, 1997 by and between SNI and the City.
28. "ESTOPPEL CERTIFICATE" means a statement in writing containing all
(or, at the option of the Requesting Party, only some) of the statements set
forth in the form attached to the Agreement for Use of Operating Property and
containing such additional information relating to the Agreement for Use of
Operating Property and the Leased Property as the Requesting Party shall
reasonably specify.
29. "ETHERNET CONNECTION" means a local area network and data-link
protocol based on a packet frame, operating at 10Mbps, with multiple devices
sharing access to the link.
30. "EVENT OF DEFAULT" is defined in Section 10.1 of the UTS
Participation Agreement.
31. "FINANCING" means any mortgage financing, project financing,
refinancing or borrowing, whether secured or unsecured, to finance the cost
of the design, construction or operation of the UTS.
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32. "GAAP" means generally accepted accounting principles set forth in
the opinions and pronouncements of the Accounting Principles Board of the
American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as have been approved by a significant
segment of the accounting profession, which are in effect as of the date of
the UTS Participation Agreement.
33. "GOVERNMENTAL AUTHORITY" means any national, state or local
government (whether domestic or foreign), any political subdivision thereof
or any other governmental, quasi-governmental, judicial, public or statutory
instrumentality, authority, body, agency, bureau or entity.
34. "GOVERNMENTAL RATE" means the rate for UTS services that is equal
to the lowest rate charged in the City by SNA or any other competitive
provider of universal telecommunications services to the largest volume
private customers purchasing a comparable package of telecommunications
services, but not be less than SNA's actual cost of providing such UTS
services to the City.
35. "GROSS REVENUES" means, for any period, all revenues accrued by SNA
with respect to the operation of the UTS during such period that are
attributable to (a) fees for access rights and other services sold by SNA to
UTS Customers located within the City, (b) installation charges paid by UTS
Customers located within the City, (c) interconnection charges paid to SNA by
Users to access customers of said Users located within the City, (d) the
lease or re-sale of lines or circuit paths to Users to access customers of
said Users located within the City or to utilize the UTS to traverse the
City, and (e) the lease to Customers located within the City of Customer
premises equipment which is not generally available and which is required by
SNA as a condition of service. "Gross Revenues" excludes any revenues
collected on behalf of Users as collections or billing agent, interest
earned, bad debts, revenues collected on behalf of other service providers,
and the proceeds of any Financing.
36. "HIGH LEVEL DESIGN DOCUMENTS" means schematic drawings depicting,
by reference to streets or other geographic elements, service area
boundaries, all overhead fiber optic cable, all underground ductbanks of
fiber optic cable, all backbone splice points, all central control points,
all distribution enclosures, all access enclosures and all
splice/distribution boxes.
37. "IMPOSITIONS" means all taxes, special and general assessments,
pole usage fees, right-of-way fees, rates and charges and other impositions
and charges of every kind and nature whatsoever with respect to the Leased
Property, that may be assessed, levied, confirmed, imposed or become a lien
on the Leased Property (other than on account of any actions or omissions of
the City or conditions existing on, at or with respect to the Leased Property
before the date of the Agreement for Use of Operating Property) by or for the
benefit of any Governmental Authority with respect to any period during the
term of the Agreement for Use of Operating Property, together with any taxes
and assessments that may be levied, assessed or imposed by the State of
California or by any political or taxing subdivision of the State of
California upon the gross income arising from any rent or in lieu of or as a
substitute, in whole or in part, for taxes and assessments imposed upon or
related to the Leased Property and commonly known as real estate taxes. The
term "Impositions" shall, however, not include any of the following, all of
which the City shall pay before delinquent or payable only with a penalty:
(a) if any portion of the Leased Property is taxed or assessed together with
other property, any taxes and other Impositions reasonably allocable to any
portion of such property other than the Leased Property, in accordance with
the applicable provisions of the Agreement for Use of Operating Property, (b)
any charges that would not have been payable but for
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any act or omission of the City or conditions existing on, at or with respect
to the Leased Property before the date of the Agreement for Use of Operating
Property, (c) any charges that are levied, assessed or imposed against the
Leased Property during the term of the Agreement for Use of Operating
Property based on the recapture or reversal of any previous tax abatement or
tax subsidy, or compensating for any previous tax deferral or reduced
assessment or valuation, or based on a miscalculation or misdetermination of
any charge(s) of any kind imposed or assessed with respect to the Leased
Property, relating to any period(s) before the date of the Agreement for Use
of Operating Property, and (d) interest, penalties and other charges with
respect to items (a) through (c).
38. "INCOME TAX EXPENSE" means, for each of SNA's fiscal years, SNA's
federal and state income tax expense on SNA's income for such fiscal year,
computed in accordance with GAAP and calculated on a stand-alone basis.
39. "INITIAL IMPLEMENTATION PROGRAM" means the general procedures for
the design and construction of Phase IA, as set forth on Appendix 6 attached
to the UTS Participation Agreement.
40. "LEASED PROPERTY" is defined in Section 2.1 of the Agreement for
Use of Operating Property.
41. "LEASEHOLD ESTATE" means SNA's leasehold estate arising under the
Agreement for Use of Operating Property, upon and subject to all the terms
and conditions of the Agreement for Use of Operating Property, or any part of
such leasehold estate or any direct or indirect interest in such leasehold
estate.
42. "LEASEHOLD MORTGAGE" means any mortgage, deed of trust, deed to
secure debt, assignment, security interest, pledge, financing statement or
any other instrument(s) or agreement(s) intended to grant security for any
obligation (including a purchase-money or other promissory note) encumbering
the Leasehold Estate, as entered into, renewed, modified, consolidated,
amended, extended or assigned from time to time during the Term. A
"Leasehold Mortgage" also includes certain agreements entered into in
connection with a "sale and leaseback" transaction, as described in the text
of the Agreement for Use of Operating Property.
43. "LEASEHOLD MORTGAGEE" means the holder of a Leasehold Mortgage. A
"Leasehold Mortgagee" also includes certain parties to "sale and leaseback"
transactions, as described in the text of the Agreement for Use of Operating
Property.
44. "LEASEHOLD MORTGAGEE'S AGENT" means any agent, designee or nominee
of a Leasehold Mortgagee, provided that such agent, designee or nominee is a
wholly owned subsidiary, full time employee, or legal counsel of the
Leasehold Mortgagee. A Leasehold Mortgagee that is not an Institutional
Lender shall not be entitled to designate a Leasehold Mortgagee's Agent.
45. "LENDER" means any Person(s), including bondholder(s) and
Affiliates, providing debt financing for the design, construction or
operation of the UTS or any matter related thereto, including without
limitation, any trustee or collateral agent appointed by any such Lender to
represent its interests, and including the Lenders in connection with the
Phase IA Financing and the Project Financing.
46. "LICENSE AGREEMENT" means any license agreement which is executed
by the City and SNA as contemplated pursuant to Section 8.1 of the UTS
Participation Agreement.
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47. "MINIMUM RESERVE" means a reserve in the amount of $6,000,000 to be
used to fund Debt Service shortfalls and to fund Capital Improvements
approved by the Administrative Committee pursuant to Article 9 of the UTS
Participation Agreement.
48. "MUNICIPAL SERVICES" means all current and future applications for
the City's own use, including energy management, automated meter reading,
demand side management, geographic information systems, computer networks,
voice, data and video applications and other similar applications which are
not competitive with SNA's commercial operation of the UTS.
49. "NET REVENUE" means, for any period, all Gross Revenues for such
period minus Operating Expenses for such period and the other amounts
described in Sections 6.4.1 through 6.4.4 of the UTS Participation Agreement.
50. "OFF-UTS SERVICE" means service provided by SNA using the
facilities of third party carriers.
51. "OPERATING EXPENSES" means, for any period, an amount equal to the
reasonable and necessary costs of repairing, maintaining administering and
operating the UTS during such period, calculated on an accrual basis
(including principal amortization payments with respect to Debt but excluding
depreciation), including without limitation each of the following:
(a) Amounts payable to the City pursuant to Sections 6.1, 6.2 and
6.3.2 of the UTS Participation Agreement;
(b) the cost of the Annual Compliance Audit and the Annual
Operations Audit;
(c) Debt Service;
(d) Taxes (other than Income Tax Expense);
(e) Insurance expenses;
(f) Employment expenses;
(g) SNI Reimbursable Costs;
(h) Funds necessary to create or replenish Reserve Accounts;
(i) Accumulated losses from previous periods, if any;
(j) Any costs or expenses associated with Capital Improvements, to
the extent not paid with Financing proceeds; and
(k) Selling, general and administrative expenses.
52. "OPTION EXERCISE NOTICE" is defined in Section 12.1 of the UTS
Participation Agreement.
53. "PARTIAL COMPLETION" means forty-four percent (44%) of Substantial
Completion.
54. "PATCH PANEL" means a panel where fiber optic cable strands from
different cables connect.
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55. "PAYMENT DATE" means each April 30, July 31, October 31 and January
31, or the next succeeding Regular Business Day if such date is not a Regular
Business Day.
56. "PERMITTED EXCEPTION" is defined in Section 20.1 of the Agreement
for Use of Operating Property.
57. "PERMITTED INVESTMENTS" means (a) direct obligations of the United
States of America (including obligations issued or held in book-entry form on
the books of the Department of the Treasury of the United States of America)
or obligations the timely payment of the principal of and interest on which
are fully guaranteed by the United States of America; (b) obligations,
debentures, notes or other evidence of indebtedness issued or guaranteed by
any agency or instrumentality of the United States; (c) interest-bearing
demand or time deposits (including certificates of deposit) which are either
(i) insured by the Federal Deposit Insurance Corporation, or (ii) held in
banks and savings and loan associations, having general obligations rated at
least "AA" or equivalent by S&P or Moody's, or if not so rated, secured at
all times, in the manner and to the extent provided by law, by collateral
security described in clauses (a) or (b) of this definition, of a market
value of no less than the amount of moneys so invested; or (d) commercial
paper rated (on the date of acquisition thereof) at least A-1 or P-1 or
equivalent by S&P or Moody's, respectively (or an equivalent rating by
another nationally recognized credit rating agency of similar standing if
neither of such corporations is then in the business of rating commercial
paper), maturing not more than ninety (90) days from the date of creation
thereof.
58. "PERSON" means any individual, corporation, partnership, limited
liability company, joint venture, association, joint-stock company, trust,
unincorporated organization, Governmental Authority or any agency or
political subdivision thereof or any other entity.
59. "PHASE" means any of Phase IA, Phase IB or Phase II.
60. "PHASE I" is defined in Section 3.1 of the UTS Participation
Agreement.
61. "PHASE IA" is defined in Section 3.1 of the UTS Participation
Agreement.
62. "PHASE IA FINANCING" is defined in Section 4.2 of the UTS
Participation Agreement.
63. "PHASE IB" is defined in Section 3.1 of the UTS Participation
Agreement.
64. "PHASE IB FINANCING" is defined Section 4.3 of the UTS
Participation Agreement.
65. "PHASE II" is defined in Section 3.1 of the UTS Participation
Agreement.
66. "PHASE II FINANCING" is defined in Section 4.4 of the UTS
Participation Agreement.
67. "PROJECT AGREEMENTS" means the UTS Participation Agreement, the
Agreement for Use of Operating Property, the Agreement Concerning
Non-Disclosure of Confidential Information, the License Agreement and the
Development Fee Agreement, and any other agreement hereafter executed by the
City and SNA and/or SNI that is designated by the parties as a Project
Agreement.
68. "RECOURSE CLAIMS" means only the following claims arising under the
Agreement for Use of Operating Property during the Term (or as otherwise
indicated): (a) liability for willful actual fraud; (b) liability for
misapplication of security deposits, insurance proceeds, condemnation awards
or refunds of Impositions that may come into a party's control whether during
or after the Term; (c) liability of the City on account of the City's failure
to remit Impositions in accordance with
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SNA's instructions when SNA has paid such Impositions to the City to be
remitted to the third party entitled to payment; (d) liability of the City on
account of the City's breach of its representations and warranties as to its
title to the Cable, the nonexistence of Cable Mortgages, the City's title to
the Leased Property or tenants of the Leased Property on the Commencement
Date; and (e) if the Leased Property is not a separate tax lot, then the
City's obligation to make Tax Reimbursement Payments.
69. "RENT" means all Guaranteed Rent and other amounts payable by SNA
to the City pursuant to the Agreement for Use of Operating Property.
70. "RESERVE ACCOUNTS" means the Minimum Reserve and any other reserve
accounts established pursuant to Section 9.2.13 of the UTS Participation
Agreement or as required by any of the Credit Documents.
71. "SCHEDULE OF PERFORMANCE" means the document attached to the UTS
Participation Agreement as Appendix 2 for the purpose of describing the
general schedule for the build-out of the UTS.
72. "SCOPE OF UTS" means the document attached to the UTS Participation
Agreement as Appendix 5 for the purpose of describing the general
specifications of the UTS.
73. "SERVICE AGREEMENT" means a written contract between SNA and a
Customer or User whereby the Customer or User subscribes for UTS services.
74. "SNA" means SpectraNet Anaheim, a California corporation.
75. "SNI" means SpectraNet International, a California corporation.
76. "SNI REIMBURSABLE COSTS" means the amount necessary to reimburse
SNI and its Affiliates (other than SNA) for actual allocated corporate
expenses directly attributable to the development and operation of the UTS,
including without limitation, the costs and expenses related to engineering,
marketing, negotiations with vendors and Users, and allocated staff time.
77. "SUBSEQUENT IMPLEMENTATION PROGRAM" means the general procedures
for the design and construction of components of the UTS facilities, as
created from time to time by SNA as construction of the UTS progresses, in
the form set forth on Appendix 7 attached to the UTS Participation Agreement.
78. "SUBSTANTIAL COMPLETION" means the substantial completion of the
Construction Work such that (a) the UTS is operational and achieving the
minimum performance specifications established in the Scope of UTS, and (b)
at least 90% of the UTS facilities depicted in the Scope of UTS (with
substitutions counted based on the linear footage of the modified facilities)
have been constructed.
79. "TELECOMMUNICATIONS ACCESS AND UTILIZATION FUND" means a financial
account established by the City into which SNA shall make payments pursuant
to Section 6.5.4 of the UTS Participation Agreement. The Telecommunications
Access and Utilization Fund will be administered at the City's sole
discretion and its purpose is to foster access to the local and national
information infrastructure.
80. "TELECOMMUNICATIONS ECONOMIC DEVELOPMENT FUND" means a financial
account established by the City into which SNA shall make payments pursuant
to Section 6.5.5 of the UTS
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Participation Agreement. The Telecommunications Economic Development Fund
will be administered at the City's sole discretion and its purpose is to
foster access to assist the City in its efforts at attracting and retaining
businesses with high-data and high-technology characteristics.
81. "UNAVOIDABLE DELAY" means any cause beyond the control of the party
affected, including without limitation, the following:
(a) failures of or threats of failure of facilities,
including any component of the UTS;
(b) floods, earthquakes, tornadoes, storms, fires, lightning,
epidemics or other casualties;
(c) acts of war, riots, civil disturbances or disobediences;
(d) labor disputes, labor or material shortages or acts of
sabotage;
(e) restraint by court order or Governmental Authority;
(f) action or non-action by or failure to obtain the
necessary Permits, authorizations or approvals from any Governmental
Authority, or
(g) the adoption, enactment or application of any law,
regulation or other legal requirement of any Governmental Authority not
existing or not applicable as of the date hereof, or any change in such law,
regulation or other legal requirement, but not including any such legal
requirement or interpretation or application thereof in existence as of the
date hereof which by its terms became or will become effective and applicable
after the date hereof.
82. "USER" means any Person who is a telecommunications services
provider and executes an interconnection or other similar agreement with SNA
or is otherwise authorized to utilize the UTS for providing
telecommunications services to its customers.
83. "UTS" is defined in Recital C of the UTS Participation Agreement.
84. "UTS PARTICIPATION AGREEMENT" means that certain Universal
Telecommunications System Participation Agreement dated as of February 25,
1997 by and between the City, SNI and SNA.
85. "UTS STANDARD AUDIT PROCEDURES" means the standard procedures for
conducting the Annual Compliance Audit, as set forth on Appendix 9 to the UTS
Participation Agreement.
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Exhibit 10.16
UNIVERSAL TELECOMMUNICATIONS SYSTEM PARTICIPATION AGREEMENT
BY AND BETWEEN
THE CITY OF ANAHEIM
AND
SPECTRANET ANAHEIM
AND
SPECTRANET INTERNATIONAL
DATE: February 25, 1997
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
ARTICLE 1 Definitions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
ARTICLE 2 Providing UTS Services to Anaheim. . . . . . . . . . . . . . . . . . . 3
ARTICLE 3 Development of the UTS . . . . . . . . . . . . . . . . . . . . . . . . 3
3.1 Phased Development of the UTS. . . . . . . . . . . . . . . . . . . . . 3
3.2 Design and Schedule for Construction of Phase IA . . . . . . . . . . . 4
3.3 Design and Schedule for Construction of Phase IB . . . . . . . . . . . 4
3.4 Construction of Phase IA and Phase IB. . . . . . . . . . . . . . . . . 5
3.5 Design of Phase II . . . . . . . . . . . . . . . . . . . . . . . . . . 7
3.6 Construction of Phase II . . . . . . . . . . . . . . . . . . . . . . . 7
3.7 Performance Specifications . . . . . . . . . . . . . . . . . . . . . . 8
3.8 UTS Demonstration Center . . . . . . . . . . . . . . . . . . . . . . . 8
3.9 Use of City Facilities . . . . . . . . . . . . . . . . . . . . . . . . 8
3.10 Utility Services . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
ARTICLE 4 Financing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
4.1 Financing Method . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
4.2 Phase IA Financing . . . . . . . . . . . . . . . . . . . . . . . . . . 9
4.3 Phase IB Financing . . . . . . . . . . . . . . . . . . . . . . . . . . 9
4.4 Phase II Financing . . . . . . . . . . . . . . . . . . . . . . . . . . 9
4.5 Lender Protective Provisions . . . . . . . . . . . . . . . . . . . . . 9
4.6 Cooperation by the City. . . . . . . . . . . . . . . . . . . . . . . . 10
ARTICLE 5 Operation of the UTS . . . . . . . . . . . . . . . . . . . . . . . . . 11
5.1 Operation and Maintenance. . . . . . . . . . . . . . . . . . . . . . . 11
5.2 Capital Improvements and UTS Upgrades. . . . . . . . . . . . . . . . . 11
5.3 Marketing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
5.4 Billing and Collections. . . . . . . . . . . . . . . . . . . . . . . . 12
5.5 Accounting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
5.6 Audit Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
5.7 Permits and Licensing. . . . . . . . . . . . . . . . . . . . . . . . . 12
5.8 Insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
5.9 Employment Matters . . . . . . . . . . . . . . . . . . . . . . . . . . 12
5.10 Customer Service Reports . . . . . . . . . . . . . . . . . . . . . . . 12
5.11 Capital Improvements . . . . . . . . . . . . . . . . . . . . . . . . . 12
5.12 Purchase of Utility Services . . . . . . . . . . . . . . . . . . . . . 13
5.13 Agreement for Use of Operating Property. . . . . . . . . . . . . . . . 13
ARTICLE 6 Payments to the City . . . . . . . . . . . . . . . . . . . . . . . . . 14
6.1 Rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
6.2 Payment in Lieu of Franchise Fee . . . . . . . . . . . . . . . . . . . 15
6.3 Expense Reimbursement. . . . . . . . . . . . . . . . . . . . . . . . . 16
6.4 Gross Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
6.5 Net Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
6.6 Investment of Reserves . . . . . . . . . . . . . . . . . . . . . . . . 17
6.7 Late Payments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
6.8 City Fees; Offset of Fees. . . . . . . . . . . . . . . . . . . . . . . 18
6.9 Construction Costs . . . . . . . . . . . . . . . . . . . . . . . . . . 18
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ARTICLE 7 City's Use of the UTS. . . . . . . . . . . . . . . . . . . . . . . . . 18
7.1 Use of the UTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
7.2 Public Utilities Department Use. . . . . . . . . . . . . . . . . . . . 20
7.3 World Wide Web Access; Interactive Community Bulletin
Board and Access Stations. . . . . . . . . . . . . . . . . . . . . . . 20
7.4 Establishment of Office. . . . . . . . . . . . . . . . . . . . . . . . 20
7.5 Program Participation. . . . . . . . . . . . . . . . . . . . . . . . . 20
7.6 Schools. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
ARTICLE 8 Contributions of City. . . . . . . . . . . . . . . . . . . . . . . . . 21
8.1 Use of City Property . . . . . . . . . . . . . . . . . . . . . . . . . 21
8.2 Customer Access Rights . . . . . . . . . . . . . . . . . . . . . . . . 21
8.3 Marketing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
8.4 Purchase of UTS Services . . . . . . . . . . . . . . . . . . . . . . . 21
ARTICLE 9 Administration . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
9.1 Establishment of Committees. . . . . . . . . . . . . . . . . . . . . . 22
9.2 Functions of the Administrative Committee. . . . . . . . . . . . . . . 22
9.3 Functions of the Audit Committee . . . . . . . . . . . . . . . . . . . 25
9.4 Voting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
9.5 Committee Records. . . . . . . . . . . . . . . . . . . . . . . . . . . 26
9.6 Limitation on Authority of the Committees. . . . . . . . . . . . . . . 26
9.7 Disputes Among Committee Members . . . . . . . . . . . . . . . . . . . 26
9.8 SNA's Actions During Dispute Among Committee Members . . . . . . . . . 26
9.9 Designation of Committee Members . . . . . . . . . . . . . . . . . . . 26
9.10 Meetings; Agenda . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
9.11 Right to Establish Other Committees. . . . . . . . . . . . . . . . . . 27
9.12 Committee Member Expenses. . . . . . . . . . . . . . . . . . . . . . . 27
ARTICLE 10 Defaults; Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . 27
10.1 Events of Default. . . . . . . . . . . . . . . . . . . . . . . . . . . 27
10.2 Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
10.3 Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
ARTICLE 11 Arbitration and Dispute Resolution . . . . . . . . . . . . . . . . . . 31
11.1 Disputes Under Projects Agreements Shall Be Arbitrated . . . . . . . . 31
11.2 Written Notice of Dispute. . . . . . . . . . . . . . . . . . . . . . . 31
11.3 Selection of Arbitrators . . . . . . . . . . . . . . . . . . . . . . . 31
11.4 Governing Rules. . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
11.5 Arbitral Findings. . . . . . . . . . . . . . . . . . . . . . . . . . . 32
11.6 Final Award Binding; Enforcement . . . . . . . . . . . . . . . . . . . 32
11.7 Fees and Expenses Borne By Each Party. . . . . . . . . . . . . . . . . 33
11.8 Standard of Review . . . . . . . . . . . . . . . . . . . . . . . . . . 33
ARTICLE 12 City's Option to Purchase SNA. . . . . . . . . . . . . . . . . . . . . 33
12.1 Purchase Option. . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
12.2 Determination of Appraised Value . . . . . . . . . . . . . . . . . . . 34
12.3 Closing of Purchase and Sale . . . . . . . . . . . . . . . . . . . . . 35
12.4 Management Contract. . . . . . . . . . . . . . . . . . . . . . . . . . 36
ARTICLE 13 Sale of the UTS or Stock . . . . . . . . . . . . . . . . . . . . . . . 36
13.1 Assignment Without Consent . . . . . . . . . . . . . . . . . . . . . . 36
13.2 Assignment With Consent. . . . . . . . . . . . . . . . . . . . . . . . 36
13.3 Sale of SNA Stock. . . . . . . . . . . . . . . . . . . . . . . . . . . 36
13.4 Sale of SNA's Assets . . . . . . . . . . . . . . . . . . . . . . . . . 37
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ARTICLE 14 Project Insurance; Indemnification . . . . . . . . . . . . . . . . . . 37
14.1 Required Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . 37
14.2 Form of Insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . 38
14.3 Bonds and Guaranties . . . . . . . . . . . . . . . . . . . . . . . . . 38
14.4 Form of Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
14.5 Indemnification. . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
ARTICLE 15 Term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
15.1 Initial Term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
15.2 Extension of Term. . . . . . . . . . . . . . . . . . . . . . . . . . . 41
ARTICLE 16 Representations and Warranties . . . . . . . . . . . . . . . . . . . . 42
16.1 Representations and Warranties of SNI. . . . . . . . . . . . . . . . . 42
16.2 Representations and Warranties of SNA. . . . . . . . . . . . . . . . . 43
16.3 Representations and Warranties of City . . . . . . . . . . . . . . . . 44
ARTICLE 17 Marks and Publicity. . . . . . . . . . . . . . . . . . . . . . . . . . 45
17.1 Exclusive Ownership of Marks . . . . . . . . . . . . . . . . . . . . . 45
17.2 References to Marks. . . . . . . . . . . . . . . . . . . . . . . . . . 46
17.3 Effect of Termination of the Project Agreements. . . . . . . . . . . . 46
ARTICLE 18 Miscellaneous Provisions . . . . . . . . . . . . . . . . . . . . . . . 46
18.1 Notices. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
18.2 Successors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
18.3 Waivers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
18.4 Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
18.5 Governing Law. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
18.6 Amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
18.7 Headings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
18.8 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
18.9 Nondedication of Facilities. . . . . . . . . . . . . . . . . . . . . . 48
18.10 Negation of Partnership. . . . . . . . . . . . . . . . . . . . . . . . 48
18.11 Force Majeure. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
</TABLE>
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<PAGE>
LIST OF APPENDICES
<TABLE>
<CAPTION>
APPENDIX NO. TOPIC REFERRED TO IN SECTION
- ------------ ----- ----------------------
<S> <C> <C>
1 Glossary of Defined Terms Article 1
2 Schedule of Performance 3.1
3 City Facilities Served in Phase IA 3.1.1
4 Phase I Defined Service Areas 3.1.2
5 Scope of UTS 3.2, 5.1
6 Initial Implementation Program 3.3
7 Form of Subsequent Implementation 3.3
Program
8 Form of License Agreement 3.9, 8.1
9 UTS Standard Audit Procedures 5.6
10 Form of Semi-Annual Report 5.10
</TABLE>
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<PAGE>
UNIVERSAL TELECOMMUNICATIONS SYSTEM PARTICIPATION AGREEMENT
This Universal Telecommunications System Participation Agreement (the
"UTS Participation Agreement"), dated as of February 25, 1997, is entered
into by and among SPECTRANET ANAHEIM, a California corporation ("SNA"),
SPECTRANET INTERNATIONAL, a California corporation ("SNI"), and the CITY OF
ANAHEIM, a charter city organized under the laws of the State of California
(the "City"), individually each a "Party" and collectively the "Parties".
R E C I T A L S:
A. The City promulgated a request for proposals relating to the
development of a telecommunications system consisting of a neutral broadband
universal telecommunications pathway to provide service to all businesses,
residents and government facilities which shall be available to all competing
telecommunications service providers on a non-discriminatory basis and will
be interoperable with the incumbent local telephone carrier within the City's
jurisdiction. In promulgating the request for proposals, the City endorsed
specific principles intended to guide the development and expansion of the
communications system and to maximize the benefits and minimize the
undesirable consequences to the City. Those principles are as follows:
(1) Minimize disruption of public property and ensure efficient use
of the City's streets;
(2) Ensure reliable telecommunications services at the lowest cost to
the City's residents and businesses;
(3) Ensure universal access and interconnectivity;
(4) Ensure maximum number and variety of telecommunications services;
(5) Enhance the City's economic development programs; and
(6) Receive fair compensation for the use of public property and the
City's participation.
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B. SNI was one of eighteen respondents to the request for proposals,
and on or about January 9, 1996, the City Council authorized City staff to
negotiate with SNI appropriate agreements concerning the development of the
communications system.
C. The City, SNI and SNA entered into an agreement titled "Business
Understanding" pursuant to which the Parties memorialized certain agreements
that had been reached and their expectations as to how those agreements would
be set forth in the definitive documents that will govern the planning,
construction, development, financing, management and operation and
maintenance of a neutral broadband telecommunications pathway to be
developed, owned and operated by SNA in accordance with the Project
Agreements (the "UTS"). This UTS Participation Agreement constitutes one of
those definitive documents, and together with the Agreement for Use of
Operating Property, the Development Fee Agreement, any License Agreement
executed from time to time, and any agreement hereafter executed by the City,
SNI and/or SNA that is designated as a Project Agreement (collectively, the
"Project Agreements") when executed will supersede the Business Understanding.
D. Concurrently with its approval of this UTS Participation Agreement,
the City adopted a Mitigated Negative Declaration and associated findings
with respect to the development of the entire UTS.
E. SNA is a wholly owned subsidiary of SNI. SNI is engaged in the
business of providing telecommunications network facilities and services to
municipalities and other users, both directly and through subsidiaries such
as SNA. SNA will develop, construct, own, finance, manage and operate and
maintain the UTS. In addition, SNA and SNI shall make payments to the City,
as provided in the Project Agreements.
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AGREEMENT:
NOW, THEREFORE, in consideration of the mutual covenants and promises
contained herein, the Parties hereto agree as follows.
ARTICLE 1
DEFINITIONS
The initially capitalized terms used herein as defined terms shall have
the meanings given to them in APPENDIX 1 (such definitions to be equally
applicable to both the singular and plural forms of the terms defined).
ARTICLE 2
PROVIDING UTS SERVICES TO ANAHEIM
SNA shall develop the UTS so that it is capable of providing UTS
services to all commercial, industrial, government, and residential Customers
within the City within six (6) months following the Customer's execution of a
Service Agreement, all on the terms and subject to the conditions set forth
in the Project Agreements. SNA shall be the owner and operator of the UTS,
the lessee of the "Leased Property," as defined in the Agreement for Use of
Operating Property, and the telecommunications services provider of the UTS
services pursuant to applicable local, state and federal laws and regulations.
ARTICLE 3
DEVELOPMENT OF THE UTS
3.1 PHASED DEVELOPMENT OF THE UTS. The UTS will be planned, designed
and constructed by SNA in two phases (respectively, "Phase I" and "Phase
II"). Phase I in turn may be planned, designed and constructed in two stages
(respectively, "Phase IA" and "Phase IB"). Each of such Phases shall be
planned, designed and constructed in accordance with the "Schedule of
Performance" attached hereto as APPENDIX 2.
3.1.1 Except as otherwise agreed, Phase IA of the UTS will provide
UTS services on mutually agreeable terms and conditions, as specified in
Service
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Agreements to be executed by SNA and the City, to those City facilities
identified on APPENDIX 3 attached hereto and to certain other commercial and
industrial Customers who execute Service Agreements with SNA.
3.1.2 Phase IB will extend the UTS so that, when Phase IB is
completed, service can be provided within six (6) months following execution
by the Customer of a Service Agreement, to all commercial, industrial and
governmental Customers located within the "Defined Service Areas" described
on APPENDIX 4 attached hereto. In addition, Phase IB of the UTS will allow
Off-UTS Service to be provided to those City and public school facilities who
are within the City but outside the Defined Service Areas. SNA will pursue
the construction of Phase I with diligence.
3.1.3 Phase II will extend the UTS so that, when Phase II is
completed, UTS services can be provided within six (6) months following
execution by the Customer of a Service Agreement, to all Customers in the
City, including residential users.
3.2 DESIGN AND SCHEDULE FOR CONSTRUCTION OF PHASE IA. SNA shall
construct Phase IA according to the plans and specifications described in the
"Scope of UTS" attached hereto as APPENDIX 5 and according to the Schedule of
Performance.
3.3 DESIGN AND SCHEDULE FOR CONSTRUCTION OF PHASE IB. The High Level
Design Documents for Phase IB are described in the Scope of UTS. SNA shall
cause Construction Drawings and Specifications for Phase IB to be prepared
and delivered to the City pursuant to the Schedule of Performance and the
"Initial Implementation Program" for the construction of Phase IA attached
hereto as APPENDIX 6 or a "Subsequent Implementation Program" in
substantially the form attached hereto as APPENDIX 7. The City acknowledges
that it is impracticable to create Construction Drawings and Specifications
for each and every component of Phase IB in advance, as the UTS, including
Phase IB, is a system that will expand
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<PAGE>
as and when new Customers and Users subscribe to UTS services. Consequently,
the Construction Drawings and Specifications for Phase IB will include
detailed designs and specifications for the components of the UTS that must
be completed in order to achieve Substantial Completion, plus drawings of
typical installations required to expand Phase IB as and when required to
meet Customer or User demand.
3.4 CONSTRUCTION OF PHASE IA AND PHASE IB.
3.4.1 SNA, pursuant to the Initial Implementation Program, shall
construct Phase IA. SNA shall, pursuant to the Schedule of Performance,
submit to the City Subsequent Implementation Programs with respect to the
construction of Phase IB and Phase II. Subsequent Implementation Programs
shall be substantially in conformance with the Scope of UTS. The City shall
have the right to review and comment upon any Subsequent Implementation
Program submitted by SNA as to conformance with the Scope of UTS and Schedule
of Performance, and may submit to SNA recommended changes to that Subsequent
Implementation Program. SNA may revise the Subsequent Implementation Program
by incorporating such City recommended changes into a revised Subsequent
Implementation Program. The City's recommended changes to a Subsequent
Implementation Program not incorporated into the revised Subsequent
Implementation Program by SNA shall be referred to the Administrative
Committee (referred to in Article 9) for action. The City shall have the
right to review, comment and approve or disapprove of any aspect of the
Subsequent Implementation Program that pertains to the interconnection of the
UTS and/or off-UTS facilities to any equipment or facilities owned by the
City or that pertain to the location of the UTS and/or off-UTS facilities on
property or facilities owned by the City.
3.4.2 Upon completion of the procedures set forth in Section
3.4.1, SNA shall obtain from the City and any other applicable agency, all
permits and approvals required to construct the UTS and off-UTS facilities
proposed for
5
<PAGE>
construction within the Initial Implementation Program or the Subsequent
Implementation Programs. SNA and the City shall cooperate in good faith in
an effort to devise and implement a mutually acceptable master utility permit
procedure, the purpose of which would be to expedite SNA's processing and
receipt of building permits and other similar permits and approvals that may
be required from the City or its departments from time to time in connection
with SNA's construction and operation of the UTS. The City, in its capacity
as a municipality, shall cooperate with and assist SNA to expedite the
processing and approval of all necessary permits, approvals, licenses and
other entitlements and authorizations, including compliance with all
applicable environmental laws; PROVIDED, HOWEVER, that the rights of SNA
under this Section shall not be interpreted to restrict or diminish the power
or authority of the City in the exercise of its police or other powers. The
City shall cooperate with and assist SNA to expedite the processing and
approval of all necessary permits, approvals, licenses and other entitlements
and authorizations, including any environmental report or study required by
any federal, state, county or other governmental or quasi-governmental agency
or authority, if any, in connection with development of the UTS.
3.4.3 In response to changes in technology and to Customer and
User requirements and to achieve operating efficiencies, SNA may revise the
Initial Implementation Program and Subsequent Implementation Programs,
subject to the City's rights as set forth in Section 3.4.1.
3.4.4 SNA shall construct Phase I pursuant to the Scope of UTS.
The schedule for the construction of Phase I may be revised by SNA from time
to time in response to changes in the Construction Drawings and
Specifications for Phase I and to the pace at which Customers and Users enter
into Service Agreements (which in turn may affect the availability of
financing proceeds). Nonetheless, subject to the provisions of Section
18.12, SNA agrees to achieve Partial Completion of the construction of Phase
I by April 1, 1998 and to achieve
6
<PAGE>
Substantial Completion of the construction of Phase I by December 31, 1998;
provided, however, that if the City's activities as described in Section
5.13.1 have not been completed by June 30, 1997, then said April 1, 1998 and
December 31, 1998 deadlines each shall be extended by one day for each day
beyond June 30, 1997 that the City requires to complete the activities
described in Section 5.13.1.
3.5 DESIGN OF PHASE II. Subject to the provisions of Sections 3.4 and
3.6, SNA shall prepare or cause to be prepared Subsequent Implementation
Programs for the construction of Phase II and deliver these programs to the
City pursuant to the Schedule of Performance.
3.6 CONSTRUCTION OF PHASE II. The Parties agree that the construction
of Phase II shall be commenced and completed pursuant to the Scope of UTS and
Subsequent Implementation Programs as expeditiously as possible following (a)
the completion of a feasibility study which validates the business plan for
Phase II, and (b) the funding of the Phase II financing described in Section
4.4. SNA shall commission a feasibility study for Phase II, and cause the
consultant preparing the feasibility study to complete the same, by no later
than January 1, 2000. In the event said feasibility study for Phase II does
not validate the business plan for Phase II, SNA thereafter will commission
additional feasibility studies, at intervals no longer than twelve (12)
months, to determine whether the business plan for Phase II subsequently can
be validated. All feasibility studies referred to in this Section shall be
prepared by a consultant selected by SNA and approved by the City. In the
event the initial feasibility study for Phase II does not validate the
business plan for Phase II, or in the event financing for Phase II is not
available, SNA will consider in good faith any proposals the City may have to
make Phase II feasible and financeable (E.G., a reduction in the amounts
payable to the City under the Project Agreements, or a capital contribution
by the City).
3.6.1 If SNA determines not to proceed with Phase II, or if SNA
for any reason has not closed the principal financing with respect to the
construction of
7
<PAGE>
Phase II or actually commenced the construction of Phase II by December 31,
2002, then (a) the City may proceed with the development of Phase II (either
for the City's own account, or in a business transaction involving one or
more third parties) without SNA's involvement, (b) when the City (or the
third parties with whom the City has entered into a business transaction)
closes the principal financing for or actually commences the construction of
Phase II, the restrictions limiting the City's use of the "City's Reserved
Fibers" to "Municipal Services," as provided in the Agreement for Use of
Operating Property, shall terminate, and (c) SNA shall allow the City (or
such third parties) to interconnect with the UTS on a non-discriminatory
basis in connection with the development and operation of Phase II.
3.7 PERFORMANCE SPECIFICATIONS. As each Phase of the UTS is developed
by SNA, it will achieve the minimum performance specifications described in
the Scope of UTS.
3.8 UTS DEMONSTRATION CENTER. Prior to January 1, 1998, SNA will
commence construction of, and prior to June 1, 1998, SNA will commence
operation of, a demonstration center in downtown Anaheim that will have the
capability of demonstrating the capabilities and benefits of the UTS to
prospective Customers and Users.
3.9 USE OF CITY FACILITIES. Subject to the Project Agreements,
including individual License Agreements in substantially the form of APPENDIX
8 attached hereto from time to time executed by SNA and the City, SNA shall
have the right to install components of the UTS, including all substations,
vaults, conduits, wires, structures and other facilities, in public
rights-of-way and on property owned by the City.
3.10 UTILITY SERVICES. SNA may use the City's rights to access the
premises of Customers to provide UTS access to Users relating to electric or
water services to such Customers upon the prior written consent of the City's
Public Utilities Department to use the City's rights to access the premises
of such Customers for
8
<PAGE>
such purpose.
ARTICLE 4
FINANCING
4.1 FINANCING METHOD. SNA may elect to finance the design and
construction of the UTS through non-recourse loans from third parties or
Affiliates secured primarily by the revenues generated from the operation of
the UTS, and secured also by other items of collateral, including equipment
utilized to provide UTS services, accounts, and SNA's interest under this UTS
Participation Agreement and the other Project Agreements. Phase IA, Phase IB
and Phase II each will be financed separately.
4.2 PHASE IA FINANCING. SNA has arranged a loan from SNI in the
principal amount of $5,500,000 to finance the cost of commencing the
construction of Phase IA (the "Phase IA Financing").
4.3 PHASE IB FINANCING. SNA anticipates that financing in the amount
of approximately $75,000,000 will be required to construct Phase IB and, if
possible, to repay the financing for Phase IA (the "Phase IB Financing").
4.4 PHASE II FINANCING. It is anticipated that financing in the amount
of approximately $175,000,000 will be required to construct Phase II (the
"Phase II Financing").
4.5 LENDER PROTECTIVE PROVISIONS. The Parties agree that the persons
or entities supplying the Phase IA Financing, the Phase IB Financing and/or
the Phase II Financing and the City may require, among other things, certain
protections, and agreements from SNA and the City which include, without
limitation, the following:
4.5.1 Security interests in all equipment, furniture, fixtures and
other tangible and intangible property owned by SNA and incorporated into or
used in connection with the UTS or UTS services; collateral assignments of
all of SNA's major construction and consulting contracts; collateral
assignments of all of SNA's contracts with Customers and Users and the rights
to receive revenue thereunder;
9
<PAGE>
collateral assignments of all bank accounts, accounts receivable and other
similar collateral relating to the UTS; and collateral assignments of SNA's
interests pursuant to the Project Agreements.
4.5.2 The creation of sinking funds and reserves, the maintenance
of specified financial ratios, the subordination of distributions and other
similar covenants with respect to the development and operation of the UTS
that would commonly be required in connection with non-recourse project
financing.
4.5.3 The subordination of the City's rights under the Project
Agreements to the Lenders' liens, such that a foreclosure by the Lenders
would terminate any of the Project Agreements that the Lenders do not
expressly elect to assume.
4.5.4 That the City agree (a) to recognize such Lenders and their
successors, following a foreclosure on the Lender's security interests, as
parties having the rights of SNA under this UTS Participation Agreement
and/or one or more of the other Project Agreements, in the event such Lenders
elect to assume SNA's rights and obligations thereunder, and (b) in the event
of such an assumption, that such Lenders and their successors, following a
foreclosure on the lender's security interests, will not be obligated to cure
any of SNA's defaults arising prior to the foreclosure.
4.5.5 That the City agrees to give the Lenders the right to
receive notice of SNA's defaults under any of the Project Agreements and to
have an opportunity to cure such defaults by SNA as a condition precedent to
the City's pursuit of its remedies for such defaults.
4.6 COOPERATION BY THE CITY. The City agrees to cooperate in good
faith with SNA's efforts to obtain the Phase IA Financing, the Phase IB
Financing and the Phase II Financing, and shall not unreasonably withhold its
consent to any aspect thereof that requires the City's consent. In
particular, the City agrees to enter into one or more commercially reasonable
agreements with such Lenders containing the
10
<PAGE>
provisions contemplated pursuant to Section 4.5, provided that such
agreements (a) shall contain a provision requiring the Lenders to give the
City notice of a default by SNA under the applicable Credit Document and at
least fifteen (15) calendar days following the expiration of any cure period
available to SNA to cure SNA's default by repaying (or purchasing) said
Lenders' loans in full, and (b) shall provide that the termination of one or
more of the Project Agreements as described in Section 4.5.3 shall occur only
in connection with a Bona Fide Foreclosure Transaction. The City shall not,
however, be required to consent to any provision that would obligate the full
faith and credit of the City to the repayment of any such financing. The
City's obligations under any such agreement with any lender shall be
considered material obligations of this UTS Participation Agreement
enforceable by SNA against the City as if fully set forth herein.
ARTICLE 5
OPERATION OF THE UTS
Subject to the provisions of Article 9 hereof, SNA shall provide UTS
Services as described in the Project Agreements and shall be the owner
(including the owner of a leasehold estate under the Agreement for Use of
Operating Property) and operator of the UTS, including without limitation the
following matters:
5.1 OPERATION AND MAINTENANCE. Operating, maintaining and repairing
all UTS facilities used to provide UTS services, in compliance with prudent
industry practice and the standards described in APPENDIX 5 and the Project
Agreements.
5.2 CAPITAL IMPROVEMENTS AND UTS UPGRADES. Making capital improvements
and enhancements to the UTS in order to respond to technological improvements
and Customer or User requirements. Capital improvements and enhancements may
be paid for out of the Gross Revenues of the UTS or from the proceeds of
Financings.
5.3 MARKETING. Diligently endeavoring to obtain as many Customers and
Users for UTS services as is reasonably possible, and to maximize the Gross
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Revenues derived by SNA from providing UTS services.
5.4 BILLING AND COLLECTIONS. Developing and implementing billing and
collection systems to collect revenues from Customers and Users of UTS
services.
5.5 ACCOUNTING. Performing all accounting functions associated with
developing and operating the UTS and providing UTS services, and preparing
and maintaining (or causing to be prepared and maintained) detailed operating
and financial records for the operations of the UTS and such other accounts,
books and records as may be necessary for proper financial management and
reporting by SNA. The City shall have the right to inspect such records at
any time, at its expense (subject to the requirement that the cost of the
Annual Compliance Audit and the Annual Operations Audit be paid as an
Operating Expense).
5.6 AUDIT PROCEDURES. SNA and SNI shall comply with the "UTS Standard
Audit Procedures" as set forth in APPENDIX 9 attached hereto.
5.7 PERMITS AND LICENSING. Obtaining all permits and approvals that
may be required from any Governmental Authority or other appropriate entity
in connection with developing and operating the UTS and providing the UTS
services.
5.8 INSURANCE. Procuring and maintaining insurance as required
pursuant to Article 14.
5.9 EMPLOYMENT MATTERS. Hiring, training, supervising and terminating
all employees and independent contractors and consultants necessary to
develop and operate the UTS and provide UTS services.
5.10 CUSTOMER SERVICE REPORTS. Pursuant to the Schedule of Performance,
SNA shall provide to the City a written report in the format and containing
the information set forth in APPENDIX 10, describing the operations of the
UTS for the preceding six months, and projecting the operations of the UTS
for the following six months.
5.11 CAPITAL IMPROVEMENTS. The Parties recognize that from time to time
it may be necessary or desirable for SNA to make Capital Improvements or that
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Capital Improvements may be required by Applicable Law or any Governmental
Authority with jurisdiction over the UTS or SNA. The Parties also hereby
agree to monitor technological advances made in the telecommunications
industry for purposes of identifying Capital Improvements to be made to the
UTS. SNA shall report the making of Capital Improvements to the
Administrative Committee.
5.12 PURCHASE OF UTILITY SERVICES. SNA will become and remain a
customer of the Public Utilities Department for its electric and water
service in the development and operation of the UTS during the term of this
UTS Participation Agreement or any extension thereof, in accordance with the
charter and ordinances of the City and the rates, rules and regulations of
the City's Public Utilities Department, as they may be amended from time to
time.
5.13 AGREEMENT FOR USE OF OPERATING PROPERTY. The City has constructed
and is the owner of an approximately fifty mile loop of 96-strand fiber optic
cable and related facilities (the "City's Backbone Loop"), all as described
in the Agreement for Use of Operating Property being executed by SNA and the
City concurrently herewith. The City has acquired or will acquire all
permits and approvals, or amendments to existing permits and approvals,
necessary to allow the City's Backbone Loop to be utilized by SNA as
described herein and in the Agreement for Use of Operating Property. In
connection therewith, the City and SNA agree as follows:
5.13.1 The City will diligently pursue, at its expense, all permits
and approvals, or amendments to existing permits and approvals, necessary to
allow the "Leased Property," as defined in the Agreement for Use of Operating
Property, to be leased to SNA, incorporated into the UTS and utilized by SNA
in the operation of the UTS. SNA acknowledges that certain of the permits
and approvals (E.G., railroad crossing rights) may be revocable on specified
terms and conditions and may require the payment of annual or periodic fees.
The City acknowledges that the foregoing limitations nonetheless must (a) be
commercially reasonable and
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customary and (b) not prevent the issuance of legal opinions required by the
Lenders providing the project financing. The parties acknowledge that the
criteria applied to the Leased Property would not be more stringent than the
criteria applied to the permits and approvals obtained by SNA for other parts
of the UTS. The City will keep SNA apprised of the progress of its
activities as described in this Section, and will not make any commitment for
the payment of monetary consideration to any permitting authority that would
be binding upon SNA without SNA's prior written consent, which shall not be
unreasonably withheld.
5.13.2 SNA's obligation to pay rent under the Agreement for Use of
Operating Property will be abated until the later to occur of (a) April 1,
1997, or (b) the City's issuance of building permits with respect to the
construction of Phase IA of the UTS.
5.13.3 Pending the City's completion of its activities as described
in Section 5.13.1, all rent payable by SNA pursuant to the Agreement for Use
of Operating Property shall be paid into an independent escrow account.
Subject to the provisions of Section 5.13.4, the escrowed rent would be
released to the City upon the City's successful completion of its activities
as described in Section 5.13.1.
5.13.4 If the City does not successfully complete its activities as
described in Section 5.13.1 prior to the Substantial Completion of Phase I,
then SNA may terminate the Agreement for Use of Operating Property, in which
case the escrowed rent would be returned to SNA.
ARTICLE 6
PAYMENTS TO THE CITY
6.1 RENT. SNA shall pay Rent to the City as and when required pursuant
to the Agreement for Use of Operating Property. Rent shall be payable
quarterly in advance commencing April 1, 1997, subject to the provisions of
Section 5.13. Rent Payable by SNA to the City pursuant to the Agreement for
Use of Operating Property includes "Guaranteed Rent" in the amount of
$113,861.62 per quarter.
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6.2 PAYMENT IN LIEU OF FRANCHISE FEE. As the holder of a Certificate
of Public Convenience and Necessity issued by the California Public Utilities
Commission, SNA believes that under applicable federal and state law,
including without limitation Section 7901 of the California Public Utilities
Code, SNA may develop, construct and operate the UTS and provide UTS services
within the City without having to obtain a franchise from the City. The City
believes that, under applicable federal and state law, including without
limitation Section 7901 of the California Public Utilities Code, the City has
the authority to require SNA to obtain a franchise from the City in order to
develop, own and operate the UTS and provide UTS services within the City.
The Parties have agreed to resolve this disagreement as follows:
6.2.1 The City agrees that SNA may develop, own and operate the
UTS and provide UTS services within the City without obtaining a franchise
from the City pursuant to Article XIV of the City's Charter, Chapter 1.02 of
the City's Municipal Code, or any other arguably applicable law, ordinance,
rule or regulation that currently is in effect. Such agreement is made by
the City in consideration of payments to be made by SNA as provided in
Section 6.2.2 and to resolve the disagreement of the Parties, and does not
imply or constitute an admission that the City does not have the authority to
require SNA to obtain a franchise.
6.2.2 SNA agrees that it will pay an annual fee to the City, in
lieu of franchise fees, in an amount equal to (a) five percent (5.0%) of
SNA's Gross Revenues for the period through and including June 30, 1999, and
(b) the greater of five percent (5.0%) of SNA's Gross Revenues or one million
dollars ($1,000,000) per year, for the period July 1, 1999 through and
including the date on which this UTS Participation Agreement expires or is
terminated. Such payments shall be made quarterly in arrears on each Payment
Date. Such agreement is made by SNA to resolve the disagreement of the
Parties, and does not imply or constitute an admission that the City has the
right to require SNA to obtain a franchise.
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6.2.3 If it is hereafter established by binding legislation, rule,
regulation or final court order that the City does have the authority to
require SNA to obtain a franchise, then (a) the City will consider SNA's
application for such a franchise in good faith and in a non-discriminatory
manner, and (b) any amounts paid by SNA pursuant to Section 6.2.2 will be
credited against any franchise fees payable by SNA under the franchise. If
it is hereafter established by binding legislation, rule, regulation or final
court order that the City does not have the authority to require SNA to
obtain a franchise, then SNA shall nonetheless remain obligated to make the
annual payments to the City described in Section 6.2.2.
6.3 EXPENSE REIMBURSEMENT. SNA shall pay to the City:
6.3.1 On July 1, 1997, an amount equal to the lesser of (a) five
hundred thousand dollars ($500,000), or (b) the actual out of pocket costs
incurred by the City to pay third party consultants engaged by the City to
assist the City with the evaluation of SNA's proposal to develop the UTS and
the negotiation and preparation of the Project Agreements.
6.3.2 On each Payment Date, as an operating expense of the UTS,
the amount necessary to reimburse the City in arrears for the actual costs
incurred (commencing July 1, 1997), not to exceed $87,500 per year (adjusted
annually to reflect changes in the Consumer Price Index) per full time
equivalent employee, to support up to two (2) full time equivalent employees
to support implementation and operation of the UTS and to further the goals
of the UTS; provided that when Phase II is commenced, the number of full time
equivalent employees may increase to four (4).
6.4 GROSS REVENUES. The Gross Revenues derived by SNA from operating
the UTS and providing UTS services shall be applied by SNA in the following
priority:
6.4.1 First, to pay the annual fee to the City as and when
required pursuant to the Section 6.2.2.
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6.4.2 Second, to pay all other Operating Expenses.
6.4.3 Third, to fund any additional Reserve Accounts agreed to by
SNA and the City pursuant to Section 9.2.13 hereof.
6.4.4 Fourth, to pay Income Tax Expense.
6.4.5 Fifth, the remainder, constituting "Net Revenues," as is
provided in Section 6.5.
6.5 NET REVENUES. On each Payment Date, the Net Revenues derived by
SNA from providing UTS services for the preceding calendar quarter (or
portion thereof for the initial quarter of operation) shall be distributed as
follows:
6.5.1 Up to 15% of the Net Revenues shall be used to fund or
replenish the Minimum Reserve. In the event that, on any Payment Date, there
shall be no required deposit into the Minimum Reserve or the deposit required
to fund the Minimum Reserve fully is less than fifteen percent (15%) of the
Net Revenues on such Payment Date, then that portion of the Net Revenues
otherwise payable to the Minimum Reserve shall be distributed pro rata as
provided in paragraphs 6.5.2 through 6.5.5.
6.5.2 Twenty-five percent (25%) to the City;
6.5.3 Fifty percent (50%) to SNI;
6.5.4 Five percent (5%) to the City's Telecommunications Access
and Utilization Fund; and
6.5.5 Five percent (5%) to the City's Telecommunications Economic
Development Fund.
6.6 INVESTMENT OF RESERVES. SNA will invest any money held in any
Reserve Account in such Permitted Investments as determined by the
Administrative Committee from time to time. Any income or gain realized as a
result of any such investment shall be held as part of the applicable Reserve
Account and reinvested as provided in this UTS Participation Agreement. SNA
shall have no liability for any loss resulting from any such investment other
than by reason of its negligence.
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Any such investment may be sold (without regard to maturity date) by SNA
whenever necessary, subject to approval by the Administrative Committee, to
make any distribution required by this UTS Participation Agreement.
6.7 LATE PAYMENTS. If payments by SNA to the City are not paid when
due, SNA shall pay interest to the City, accruing monthly, at a rate of ten
percent (10%) per annum. Interest will be computed from the due date to the
date SNA makes such payment to the City.
6.8 CITY FEES; OFFSET OF FEES. SNA shall pay all generally applicable
City fees related to the provision of UTS services. However, notwithstanding
anything to the contrary herein, and without limiting the provisions of
Sections 6.2.2 and 6.2.3, SNA may offset, on a cumulative basis, against all
amounts payable by SNA to the City pursuant to Section 6.5 of this UTS
Participation Agreement any amounts from time to time paid to the City by SNA
(a) for street deterioration fees or other similar fees hereafter imposed by
the City to mitigate the degradation of City streets, or (b) for other fees
or charges hereafter instituted by the City that are imposed upon, or are
intended to mitigate effects created by, telecommunications services
providers operating within the City who are not making payments to the City
similar to those being paid by SNA pursuant to Article 6.
6.9 CONSTRUCTION COSTS. From time to time the City may incur
construction costs at SNA's written request, such as costs associated with
the advance installation of underground conduit as requested by SNA as part
of the City's trenching and installation of underground utilities. SNA will
reimburse the City for such construction costs incurred by the City at SNA's
request, within thirty (30) days after receipt of an invoice and reasonable
support documentation.
ARTICLE 7
CITY'S USE OF THE UTS
7.1 USE OF THE UTS. Subject to the provisions of Article 3 hereof,
governing the phasing of the development, construction, operation and
maintenance
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of the UTS, for all current and future City facilities located within the
City, as Service Agreements are executed with respect to individual City
facilities, SNA shall provide to the City equipment at no cost, to be
specified in the Service Agreement, sufficient to support UTS or off-UTS
service procured from SNA. SNA and the City will negotiate in good faith
concerning the terms and conditions of individual Service Agreements,
including a schedule for providing service to each City facility that is
consistent with the phased development of the UTS, with a goal of completing
such negotiations by July 1, 1997. Such equipment shall be upgraded by SNA,
at no cost to the City, as necessary to support any expansion of the UTS
services to be procured by the applicable City facility. For access to the
UTS and UTS services, SNA shall charge and City shall pay, as follows:
7.1.1 For UTS services relating to point-to-point communications
among current and future City facilities located within the Defined Service
Areas of the UTS, such UTS services shall be provided free of charge.
7.1.2 For off-UTS services relating to point-to-point
communications among current and future City facilities located within the
City but outside the Defined Service Areas of the UTS, such service shall be
provided at the rate SNA is charged by the alternate carrier.
7.1.3 For UTS services relating to communications between current
and future City facilities located within the Defined Service Areas of the
UTS and third parties, such UTS services shall be provided to the City at the
Governmental Rate.
7.1.4 For off-UTS services relating to communications between City
facilities located within the City but outside the Defined Service Areas of
the UTS and third parties, such service shall provided at the Governmental
Rate, and the City shall reimburse SNA for access charges paid by SNA to the
alternate carrier.
7.1.5 SNA will provide service to the City at levels that meet or
exceed the standards set by the California Public Utilities Commission for
any regulated
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local exchange carrier.
7.2 PUBLIC UTILITIES DEPARTMENT USE. SNA shall provide the City's
Public Utilities Department with free UTS access to UTS Customers, and an
installed Ethernet Connection at the premises of each UTS Customer, for
Municipal Services. The capital costs for installing any equipment needed for
the Municipal Services, other than the cost of the Ethernet Connection
itself, are to be paid by the City.
7.3 WORLD WIDE WEB ACCESS; INTERACTIVE COMMUNITY BULLETIN BOARD AND
ACCESS STATIONS. SNA will pay to the City $20,000 per year (adjusted
annually to reflect changes in the Consumer Price Index) to support the
City's presence on the world wide web, an interactive community bulletin
board and bulletin board access stations. Said amount will be payable
quarterly in advance, commencing July 1, 1997.
7.4 ESTABLISHMENT OF OFFICE. Pursuant to the Schedule of Performance,
SNA shall establish an executive office, including Customer service
functions, in the Project Alpha area in downtown Anaheim.
7.5 PROGRAM PARTICIPATION. SNA shall participate in and commit the
participation of its personnel, including executive officers, to the Powerful
Partnership for Business and the Anaheim Business Partners programs and
implementation of the City's economic development programs, including,
without limitation, assisting the City with economic development strategies
to attract and retain businesses based on the advantages created by the UTS.
7.6 SCHOOLS. Subject to the provisions of Article 3 hereof, governing
the phasing of the development, construction, operation and maintenance of
the UTS, SNA shall offer UTS service or Off-UTS service to all public schools
located within the City. Public schools which are located within the Defined
Service Areas of the UTS, shall pay the Governmental Rate for such UTS
service. Public schools which are located within the City but outside the
Defined Service Areas shall pay for Off-UTS services at the Governmental Rate
plus reimbursement of access charges paid
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by SNA to the alternate carrier.
ARTICLE 8
CONTRIBUTIONS OF CITY
8.1 USE OF CITY PROPERTY. Subject to the Project Agreements, from time
to time and as construction of the UTS facilities may necessitate, the City
shall lease or license to SNA sites that are owned by the City and that the
City reasonably determines it may make available to SNA without adversely
impacting the City's use thereof, to construct and operate central control
points, distribution enclosures, access enclosures and other components of
the UTS facilities using a License Agreement in substantially the form
attached hereto as APPENDIX 8.
8.2 CUSTOMER ACCESS RIGHTS. To the extent legally permitted to do so,
and subject to the provisions of Section 3.10, the City shall allow SNA to
utilize the City's Public Utilities Department's customer access rights
(including easements) in order to allow SNA to access such customers'
premises for the purpose of installing and maintaining UTS connections,
provided that such access by SNA shall not adversely impact the Public
Utilities Department's use of its access rights.
8.3 MARKETING. The City shall cooperate with SNA in the marketing of
UTS services, as determined by the Administrative Committee.
8.4 PURCHASE OF UTS SERVICES. The City shall utilize SNA as its
telecommunications services provider for all of its telecommunications needs
(other than radio communications and other facilities used to provide
Municipal Services) at the rates and on the conditions of service described
in this UTS Participation Agreement and in the applicable Service Agreement,
except where (a) contracts existing as of the date hereof require the City to
purchase telecommunications services from other vendors (and then only until
the earliest date on which such contracts expire or can be terminated by the
City without penalty), or (b) due to the phased development of the UTS, SNA
is unable to provide such services or off-UTS alternatives because of their
specialized nature. SNA will offer to the City similar
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types and levels of features and services that are offered to SNA's five (5)
largest telecommunications customers in the City within six (6) months of the
City's request, except where major UTS enhancements are required, in which
case service will be delivered by SNA within one (1) year from the City's
request, as determined by mutual agreement.
ARTICLE 9
ADMINISTRATION
9.1 ESTABLISHMENT OF COMMITTEES. As a means of securing effective
cooperation and interchange of information and providing consultation on a
prompt and orderly basis among the Parties in connection with various
administrative and technical matters which may arise from time to time in
connection with the terms and conditions of the Project Agreements, the
Parties agree to establish the committees described in this Article 9. The
chair of each of such committees shall be a representative of SNA and shall
be responsible for calling meetings and establishing agendas, provided that
the chair shall call a meeting or put a matter on the agenda of the Committee
upon request of the City representative on such committee. The following
committees are hereby established and shall have the functions and
responsibilities described herein and in the Project Agreements:
9.1.1 ADMINISTRATIVE COMMITTEE. An administrative committee
comprised of five (5) members, three (3) of which shall be designated by SNA
and two (2) of which shall be designated by the City (the "Administrative
Committee"). Each member of the Administrative Committee designated by SNA
shall be an officer or senior manager of SNA. Each member of the
Administrative Committee designated by the City shall be designated by the
City Manager of the City.
9.1.2 AUDIT COMMITTEE. An Audit Committee comprised of three (3)
members, two (2) of which shall be designated by SNA and one (1) of which
shall be designated by the City (the "Audit Committee").
9.2 FUNCTIONS OF THE ADMINISTRATIVE COMMITTEE. The Administrative
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Committee shall have the following functions:
9.2.1 Provide a liaison between the Parties at the management level.
9.2.2 Provide the City with early and advance notice of any
possible defaults by SNA or SNI under applicable Credit Documents, including
without limitation notice of the occurrence of any of the following events
with respect to any Debt: (a) Principal and interest payment delinquencies,
(b) non-payment related defaults, (c) unscheduled draws on Reserve Accounts
reflecting financial difficulties, (d) unscheduled draws on credit
enhancement facilities reflecting financial difficulties, (e) substitution of
credit or liquidity providers, or their failure to perform, (f) modifications
to rights of security holders, and (g) the release, substitution or sale of
property securing repayment of Debt.
9.2.3 Provide the City with digests or summaries of the material
provisions of any Financing.
9.2.4 Provide the City with regular periodic information
concerning the financial performance of the UTS.
9.2.5 Exercise general supervision over the Audit Committee and
any other standing or ad hoc committees established pursuant to Section 9.11
hereof.
9.2.6 Consider and resolve matters referred to it by other
committees.
9.2.7 Perform such other functions and duties as may be assigned
to it in the Project Agreements.
9.2.8 Review, discuss and act upon disputes among the Parties
arising under the Project Agreements.
9.2.9 Provide a forum for discussion among the Parties with
respect to the development and operation of the UTS and the providing of UTS
services.
9.2.10 At least thirty (30) days before the commencement of each
calendar year, approve an annual operating and maintenance budget and an
annual capital improvements budget for the UTS to be proposed by SNA;
provided, however, that if the Administrative Committee is unable to approve
a proposed
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annual operating and maintenance budget or an annual capital improvements
budget, then the operating and maintenance budget or capital improvements
budget in effect at that time shall remain in effect during the following
year, or until the Administrative Committee approves such budgets, whichever
is later.
9.2.11 Approval of capital expenditures not covered in the annual
operating and maintenance budgets or the annual capital improvements budgets
described in Section 9.2.7, except in the case of any emergency, in which
event SNA shall have the right to make such Capital Improvements without
advance approval of the Administrative Committee.
9.2.12 Payment, extension, renewal, modification, adjustment,
submission to arbitration, prosecution, defense, settlement or compromise of
any debt, obligation, suit, liability, cause of action or claim, including
taxes, either in favor of or against the Parties, involving a potential
liability or recovery in excess of one hundred thousand dollars ($100,000)
and related to or arising out of the provision of UTS services.
9.2.13 Except for the Minimum Reserve and any Reserve Account
required by any Credit Document, approval of the establishment and
maintenance of Reserve Accounts.
9.2.14 Approval of any withdrawals from Reserve Accounts.
9.2.15 Changing the amount of, making withdrawals from, or
eliminating the requirement for, the Minimum Reserve.
9.2.16 Review and approval of the qualifications of any contractor
or major subcontractor selected by SNA to perform any portion of the
Construction Work.
9.2.17 Review and approval of the cost of any goods and services
which SNA proposes to procure from any Affiliate. SNA shall provide the
Administrative Committee with data which establishes that the cost of such
goods and services is equal to or less than the market value for similar goods
and
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services.
9.2.18 Review the pricing of UTS services and the rates therefor as
submitted by SNA.
9.2.19 Determine whether to implement technological upgrades of the
UTS.
9.2.20 Provide a liaison between the Parties with regard to the
Construction Work.
9.2.21 Subject to the provisions of Section 3.6, determine when to
proceed with the development of all or a portion of Phase II.
9.2.22 Review recommendations of SNA concerning the following items
related to the operation of the UTS or the making of Capital Improvements:
(a) the planned outages scheduled for maintenance and
the manner of selection of any maintenance contractor for contract
maintenance included in the annual operation and maintenance budget;
(b) the written statistical and administrative reports,
written budgets, and information and other similar records, and the form
thereof, to be kept and furnished by SNA (excluding accounting records used
internally by SNA for the purpose of accumulating financial and statistical
data, such as books of original entry, ledgers, work papers, and source
documents); and
(c) the policies, criteria and procedures for
performance and efficiency testing.
9.3 FUNCTIONS OF THE AUDIT COMMITTEE. The Audit Committee shall conduct
or cause to be conducted the Annual Operations Audit and the Annual
Compliance Audit.
9.4 VOTING. The actions or decisions of any committee shall be by
majority vote, provided, however, that actions or decisions taken pursuant to
Sections 9.2.8, 9.2.15, 9.2.17 and 9.2.21 shall be by a majority vote which
includes at least one (1) City member.
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9.5 COMMITTEE RECORDS. Each committee shall each keep written minutes,
and records of all meetings and all actions, agreements or determinations
made by any such committee shall be recorded in the minutes. Each committee
shall establish its rules of procedure, subject to the terms of this UTS
Participation Agreement.
9.6 LIMITATION ON AUTHORITY OF THE COMMITTEES. The committees
established hereunder shall have no authority to modify any of the terms,
covenants or conditions of the Project Agreements.
9.7 DISPUTES AMONG COMMITTEE MEMBERS. If the Audit Committee fails to
agree while performing the functions and duties delegated to it in this UTS
Participation Agreement or in the Project Agreements, then such disagreement
shall be referred to the Administrative Committee for determination. If the
Administrative Committee fails to reach agreement, the dispute shall be
referred to senior officials of the Parties for resolution. If such senior
officials do not resolve the dispute within thirty (30) days after the
dispute is referred to such senior officials, then the matter in dispute
shall be referred to arbitration as provided in Article 11 hereof.
9.8 SNA'S ACTIONS DURING DISPUTE AMONG COMMITTEE MEMBERS. In the event
any committee established in accordance with this Article 9 is unable or
fails to agree with respect to any matter which such committee is authorized
to determine, approve or otherwise act upon after a reasonable opportunity so
to do, then SNA is authorized and obligated to take such action in accord
with this UTS Participation Agreement as in its discretion is necessary,
pending the resolution of any such dispute by the senior officials of the
Parties or by arbitration pursuant to Article 11 hereof or otherwise.
9.9 DESIGNATION OF COMMITTEE MEMBERS. Pursuant to Section 9.1.1 and
the Schedule of Performance, each Party shall designate its representatives
on the committees hereby established, with notice thereof given to the other
Parties. Each Party shall notify the other Party promptly of any change in
the designation of its
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representatives on the committees. Each Party may designate an alternate to
act as its representative on any committee in the absence of the regular
member or to act on specified occasions with respect to specified matters.
Any alternate representative appearing at a committee meeting shall be deemed
to have authority to act on behalf of the Party he or she represents unless
the committee chair is furnished with written notice to the contrary. Each
of SNA and the City shall take such action as is internally required within
that Party to provide each of its representatives on each of the committees
sufficient authorization to bind and legally act on behalf of that Party so
long as his or her appointment remains in effect.
9.10 MEETINGS; AGENDA. The committees shall have regular meetings no
less frequently than quarterly and at such times as such committee may fix.
A majority of the members of any committee, or all of the City's designees on
any committee, may call special meetings on at least fourteen (14) days'
advance written notice to the other members, provided, however, that all
members of a committee may agree to meet on less than fourteen (14) days'
notice. An agenda for each general or special meeting of a committee shall
be distributed to each committee member with the notice of meeting. Any
member of any committee may submit proposals for action to such committee.
9.11 RIGHT TO ESTABLISH OTHER COMMITTEES. The Administrative Committee
shall have the right to establish standing or ad hoc committees. The
authority and duties of any such committee shall be set forth in writing and
shall be subject to the provisions of the Project Agreements.
9.12 COMMITTEE MEMBER EXPENSES. Each Party shall bear the expenses
incurred by its members on a committee.
ARTICLE 10
DEFAULTS; REMEDIES
10.1 EVENTS OF DEFAULT. The occurrence of any one or more of the
following shall be deemed to be an event of default ("Event of Default") by a
Party in the
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performance of its duties and obligations arising under this UTS
Participation Agreement.
10.1.1 A Party becomes insolvent or unable to pay its debts as they
mature, or makes an assignment for the benefit of creditors, or suffers or
fails to pay and discharge within ninety (90) days of entry any final
judgment (after exhaustion of any period of appeals) by any court in an
amount of one hundred thousand dollars ($100,000.00) or more.
10.1.2 A Party files, or there is filed against a Party, a petition
to have such Party adjudicated a bankrupt, or a petition for a reorganization
or arrangement under any law relating to bankruptcy or insolvency, unless the
same is dismissed within ninety (90) days after the date on which the same is
instituted.
10.1.3 A Person (other than the other Parties) obtains an order or
decree in any court of competent jurisdiction enjoining or prohibiting a
Party from performing under this UTS Participation Agreement, and such decree
is not vacated within ninety (90) days after the granting thereof.
10.1.4 The assets of a Party are assumed by a trustee or other
person pursuant to a judicial proceeding, unless possession or control of its
assets is returned to such Party within ninety (90) days.
10.1.5 A Party breaches or defaults in the performance of any of
such Party's material duties or obligations arising under any of the Project
Agreements involving the payment of money, and after receiving written notice
thereof from the other Party, fails within thirty (30) days from receipt of
such notice to have fully cured and corrected such breach or default.
10.1.6 Subject to the provisions of Section 10.1.7, a Party
breaches or defaults in the performance of any of such party's material
duties or obligations arising under any of the Project Agreements that do not
involve the payment of money, and after receiving written notice thereof from
the other Party, fails within one hundred eighty (180) days from receipt of
such notice to have fully cured and
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corrected such breach or default.
10.1.7 In the case of SNA, SNA fails to achieve Partial Completion
of Phase I by the deadline specified in Section 3.4.4 of this UTS
Participation Agreement, and fails within one hundred eighty (180) days from
receipt of notice of such default from the City to have achieved such Partial
Completion.
10.1.8 In the case of SNA, SNA fails to achieve Substantial
Completion of Phase I by the deadline specified in Section 3.4.4 of this UTS
Participation Agreement, and fails within one hundred eighty (180) days from
receipt of notice of such default from the City to have achieved such
Substantial Completion.
10.1.9 Any representation, warranty, certification or statement
made by a Party in any of the Project Agreements shall prove to have been
incorrect in any material respect when made.
10.2 WAIVER. No waiver of any Event of Default shall be valid or
effective unless in writing and signed by the waiving Party. Any waiver of
any one Event of Default shall not constitute, or be construed as creating, a
waiver of any other Event of Default.
10.3 REMEDIES. Upon the occurrence of an Event of Default, but subject
to the requirement that disputes be arbitrated, as set forth in Article 11,
the non-defaulting party shall have all remedies available at law or in
equity, except as specifically provided herein.
10.3.1 Subject to the provisions of Section 10.3.3, the City's sole
remedies for SNA's or SNI's default shall be the recovery of actual damages,
specific performance, or injunctive relief. The City shall not be entitled
to recover consequential, special, exemplary or punitive damages.
10.3.2 Notwithstanding anything to the contrary contained in the
Project Agreements, the City agrees that it shall look solely to the estate
and property of SNA for the enforcement of any judgment (or other judicial
decree)
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requiring the payment of money by SNA, or any shareholder, partner, director,
officer, employee or agent of SNA to the City by reason of any default or
breach by SNA in the performance of its obligations under this UTS
Participation Agreement, it being intended that no other assets of SNA or any
of SNA's Affiliates shall be subject to levy, execution, attachment or any
other legal process for the enforcement or satisfaction of the remedies
pursued by the City in the event of such default or breach.
10.3.3 Notwithstanding anything to the contrary contained in the
Project Agreements, the City's sole remedies for an Event of Default by SNA
as described in Sections 10.1.7 and 10.1.8, above, shall be as follows:
(a) The City may elect, within thirty (30) days after the
expiration of the cure period described in Section 10.1.7 or Section 10.1.8,
as applicable, to terminate the Agreement for Use of Operating Property. If
the City so elects, and if SNA thereafter returns possession of the "Leased
Property," as defined in the Agreement for Use of Operating Property, to the
City as and when required pursuant to the Agreement for Use of Operating
Property, then the City shall have no further remedy for such Event of
Default by SNA.
(b) If the City does not elect to terminate the Agreement
for Use of Operating Property, or if SNA fails to return possession of the
"Leased Property" to the City as and when required pursuant to the Agreement
for Use of Operating Property, then the City, as its sole remedy for such
Event of Default by SNA, may exercise its option to purchase all of the
issued and outstanding stock of SNA on the terms and conditions described in
Article 12 of this UTS Participation Agreement by giving SNA written notice
of the City's election to do so at any time within one hundred eighty (180)
days after the expiration of the cure period described in Section 10.1.7 or,
if applicable, SNA's failure to return possession of the "Leased Property."
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ARTICLE 11
ARBITRATION AND DISPUTE RESOLUTION
11.1 DISPUTES UNDER PROJECTS AGREEMENTS SHALL BE ARBITRATED. If a
dispute between any of the Parties should arise under the Project Agreements,
any party to such Project Agreement may, subject to Section 9.7, call for
submission of the dispute to arbitration which shall be binding upon all of
the other Parties to such Project Agreement.
11.2 WRITTEN NOTICE OF DISPUTE. The party calling for arbitration shall
give written notice to all other Parties to the Project Agreement under which
the dispute arose, setting forth in such notice in adequate detail the nature
of the dispute, the amount or amounts, if any, involved in such dispute, and
the remedy sought by such arbitration proceedings, and, within twenty (20)
days from receipt of such notice, any other Party(ies) involved may, by
written response to all other Parties to such Project Agreement, submit its
or their own statement of the matter at issue and set forth in adequate
detail additional related matters or issues to be arbitrated. Thereafter,
the Party first submitting its or their notice of the matter at issue shall
have ten (10) days in which to submit a written rebuttal statement, copies of
which shall be given to all other Parties.
11.3 SELECTION OF ARBITRATORS. Within twenty (20) days following
delivery of the written notice pursuant to Section 11.2 hereof, the Parties,
acting through their Designated Representatives, shall meet for the purpose
of selecting arbitrators. The City shall select a single arbitrator,
and SNA and/or SNI, as applicable, collectively shall select a single
arbitrator. The two arbitrators so selected shall meet within twenty (20)
days following their selection and shall select a third arbitrator. If the
arbitrators selected by the Parties, as herein provided, shall fail to select
such third arbitrator within said twenty (20) day period, then the
arbitrators shall request from the American Arbitration Association (or a
similar organization if the American Arbitration Association should not at
the time exist) a list of arbitrators
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who are qualified and eligible to serve as hereinafter provided. The
arbitrators selected by the Parties shall take turns striking names from the
list of arbitrators furnished by the American Arbitration Association, and
the last name remaining on said list shall be the third arbitrator. All
arbitrators shall be persons skilled and experienced in the field which gives
rise to the dispute, and no person shall be eligible for appointment as an
arbitrator who is or has been an officer or employee of any of the Parties to
the dispute or is otherwise interested in the matter to be arbitrated.
11.4 GOVERNING RULES. Except as otherwise provided in this Section
11.4, the arbitration shall be governed by the Commercial Arbitration Rules
of the American Arbitration Association (or the rules and practice of a
similar organization if the American Arbitration Association should not at
that time exist) from time to time in force, except that if such rules and
practice, as modified herein, shall conflict with state or federal law, as
the case may be, then in force which are specifically applicable to such
arbitration proceedings, such law shall govern. Included in the issues which
may be submitted to arbitration pursuant to this Article 11 is the issue of
whether the right to arbitrate a particular dispute is permitted under the
Project Agreements. The arbitrators shall hear evidence submitted by the
respective Parties and may call for additional information, which additional
information shall be furnished by the Party(ies) having such information.
The decision of a majority of the arbitrators shall be in accord with the
laws of the State of California and shall be binding upon all the Parties.
11.5 ARBITRAL FINDINGS. The award of the arbitrators shall contain
findings relative to the materiality of the default, the period of time
within which the defaulting Party must remedy the default or commence
remedial action, and the remedies which may be exercised by the
non-defaulting Parties in the event the default is not remedied within such
period of time.
11.6 FINAL AWARD BINDING; ENFORCEMENT. This agreement to arbitrate shall
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be specifically enforceable, and the award and findings of the arbitrators
shall be final and binding upon the Parties to the extent permitted by
applicable law. Any award may be filed with the clerk of any court having
jurisdiction over the Parties, or any of them, against whom the award is
rendered, and, upon such filing, such award, to the extent permitted by the
laws of the jurisdiction in which said award is filed, shall be specifically
enforceable or shall form the basis of a declaratory judgment or other
similar relief. In the event that any Party shall attempt to carry out the
provisions herein set forth in regard to arbitration, and such Party shall
not be able to obtain a valid and enforceable arbitration decree, such Party
shall be entitled to seek legal remedies in the courts having jurisdiction in
the premises, and the provisions of the Project Agreements referring to
decision of a board of arbitration, to the extent allowable by law, shall be
then deemed applicable to final decisions of such courts.
11.7 FEES AND EXPENSES BORNE BY EACH PARTY. The fees and expenses of
the arbitrators shall be shared by the Parties equally, unless the decision
of the arbitrators shall specify some other apportionment of such fees and
expenses. All other expenses and costs of the arbitration shall be borne by
the Party incurring the same.
11.8 STANDARD OF REVIEW. In any dispute involving the exercise of
business judgment by SNA, SNI or any committee established pursuant to
Article 9, the arbitrators shall uphold such judgment so long as they
determine the persons involved in exercising such judgment acted in good
faith or according to the advice of counsel.
ARTICLE 12
CITY'S OPTION TO PURCHASE SNA
12.1 PURCHASE OPTION. The City shall have the option, but not the
obligation, to purchase all of the issued and outstanding stock of SNA for
the Appraised Value at any time (a) following July 1, 2012, or (b) within the
one hundred
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eighty (180) day period described in Section 10.3.3(b), by delivering written
notice of its election to do so to SNA (the "Option Exercise Notice").
12.2 DETERMINATION OF APPRAISED VALUE. The appraised value of all of
the issued and outstanding stock of SNA (the "Appraised Value") shall be
determined as follows:
12.2.1 The City shall select a qualified appraiser and shall
identify such appraiser in its Option Exercise Notice.
12.2.2 SNA shall select a second qualified appraiser within thirty
(30) days after its receipt of the Option Exercise Notice and deliver notice
thereof to the City.
12.2.3 Within sixty (60) days after their appointment, the two
appraisers selected by the City and SNA shall determine the Appraised Value
according to the criteria described in Section 12.2.6. In the event the
Appraised Values derived by the two appraisers are within five percent (5%)
of each other, the Appraised Value shall be the average of such appraisals.
12.2.4 If, however, the Appraised Values derived by the two
appraisers selected by the City and SNA are not within five percent (5%) of
each other, within thirty (30) days thereafter, the two appraisers shall
select a third appraiser. In the event the two appraisers fail to agree on
the selection of a third appraiser, either SNA or the City may refer the
selection of the third appraiser to an arbitral tribunal in accordance with
Article 11. Within thirty (30) days after his or her appointment, the third
appraiser shall determine the Appraised Value according to the criteria
described in Section 12.2.6, and the average of the two appraisals that are
nearest in amount shall constitute the Appraised Value. However, if the
Appraised Value of one appraiser equals the average of the Appraised Values
of the other two appraisers, then the Appraised Value of such appraiser shall
constitute the Appraised Value.
12.2.5 Each appraiser selected by the Parties or their designated
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appraisers shall have a minimum of fifteen (15) years of experience in
appraising going concerns. SNA and the City each shall be responsible for
the fees of its appraiser, and SNA and the City shall share equally the fees
of the third appraiser.
12.2.6 All appraisers shall determine the Appraised Value by
ascertaining the fair market value of SNA's equity interest in the UTS as a
going concern, as of the date of the Closing. In conducting the appraisals,
the appraisers shall consider such factors as the book value of SNA's assets,
the age and condition of the physical plant and equipment, the discounted
future revenue stream to SNA from owning and operating the UTS, and the
discounted future revenue stream payable to the City pursuant to the Project
Agreements, discounted in accordance with customary appraisal practice.
12.3 CLOSING OF PURCHASE AND SALE. The closing of the purchase and sale
of the stock of SNA (the "Closing") shall be consummated on the later to
occur of (a) one hundred eighty (180) days after the date of the Option
Exercise Notice, or (b) thirty (30) days after the determination of the
Appraised Value. At the Closing, SNI will deliver certificates representing
all of the issued and outstanding stock of SNA to the City, the City shall
pay the Appraised Value to SNI in cash, and each Party shall execute such
documents and instruments as are reasonably necessary to consummate the
Closing and put the City in possession and operating control of the UTS and
facilities used to provide UTS services. Prior to the Closing, each Party
will use commercially reasonable efforts to obtain such consents and
approvals of third parties as are necessary to permit or expedite the
Closing, if any. Following the City's exercise of its option, and pending
the Closing, SNA will continue to operate the UTS and provide UTS services in
the ordinary course of business, according to its regular practices
prevailing at the time, and will not incur any new material obligations or
undertake any new material capital improvements without the City's consent,
which shall not be unreasonably withheld or delayed. All items of income and
expense with respect to the operations of the UTS will be prorated as of
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the Closing.
12.4 MANAGEMENT CONTRACT. SNA and the City shall negotiate in good
faith prior to the Closing to determine whether and under what conditions, if
any, SNA will manage the UTS on the City's behalf following the Closing. If
no agreement is reached prior to the Closing, then following the Closing SNA
will have no further rights pursuant to this UTS Participation Agreement.
ARTICLE 13
SALE OF THE UTS OR STOCK
13.1 ASSIGNMENT WITHOUT CONSENT. Any assignment by a Party of its
interest in the Project Agreements which is made without the written consent
of the other Parties shall not relieve the assigning Party from primary
liability for any of its duties and obligations thereunder, and in the event
of any such assignment, the assigning Party shall continue to remain
primarily liable for payment of any and all money due the other Parties
hereunder and for the performance and observance of all other covenants,
duties and obligations to be performed and observed hereunder by it to the
same extent as though no assignment had been made.
13.2 ASSIGNMENT WITH CONSENT. Whenever an assignment of a Party's
interest in the Project Agreements is made with the written consent of the
other Parties, the assigning Party's assignee shall expressly assume, in
writing, the duties and obligations hereunder and under the Project
Agreements of the assigning Party, and within thirty (30) days after any such
assignment and assumption of duties and obligations, the assigning Party
shall furnish, or cause to be furnished, to the other Parties a true and
correct copy of such assignment and assumption of duties and obligations.
13.3 SALE OF SNA STOCK. SNI may not sell the outstanding shares of
stock of SNA, or issue new shares of stock of SNA, unless such sale or
issuance in each case is expressly made subject to the City's option to
purchase said shares of stock pursuant to Article 12 hereof.
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13.4 SALE OF SNA'S ASSETS. SNA may not sell the UTS or all or
substantially all of its assets, unless (a) the net proceeds of the sale are
equitably allocated between SNA and the City so that the City receives
compensation for the termination of the future income stream to which the
City otherwise would be entitled pursuant to Section 6.5 hereof, or (b),
subject to the provisions of Section 13.1, the purchaser expressly agrees to
assume and be bound by the Project Agreements.
ARTICLE 14
PROJECT INSURANCE; INDEMNIFICATION
14.1 REQUIRED INSURANCE. Throughout the Term of this UTS Participation
Agreement, without limiting the City's right to indemnification, to the
extent the same is commercially available, SNA shall procure and maintain in
force, or cause to be procured and maintained in force, the following
insurance coverage from insurers and on policy forms satisfactory to the City:
14.1.1 Comprehensive General Liability Insurance, or Commercial
General Liability Insurance, including coverage for Premises and Operations,
Contractual Liability, Personal Injury Liability, Products/Completed
Operations Liability, Broad-Form Property Damage and Independent Contractors'
Liability (if applicable) in an amount of not less than ten million dollars
($10,000,000.00) per occurrence, written on an occurrence form. Such
insurance shall be in a form, by policy language or endorsement, satisfactory
to City, such that this coverage will respond in full for any third-party
liability actions brought against SNA, the City, their officials, officers,
employees or contract employees, for injury, or alleged injury, to any agent,
representative or employee of SNA, or any agent, representative, or employee
of any contractor or subcontractor of SNA, to the same extent that such
coverage would respond to a claim by a disinterested third party. Such
liability coverage shall also include a waiver of subrogation in favor of
City and its employees and contract employees.
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14.1.2 Comprehensive Automobile Liability coverage, including any
owned, non-owned and hired autos, in an amount of not less than five million
dollars ($5,000,000.00) per occurrence, combined single limit, written on an
occurrence form and including coverage, as applicable, for mobile equipment.
14.1.3 A Workers' Compensation and Employer's Liability policy
providing California statutory Workers' Compensation benefits, including
Employer's Liability with at least the following limits:
Bodily Injury by Accident: $1,000,000 each accident
Bodily Injury by Disease: $1,000,000 policy limit
Bodily Injury by Disease: $1,000,000 each employee
In addition, each Workers' Compensation and Employer's Liability policy shall
contain an insurer's waiver of subrogation in favor of the City.
14.1.4 An All-Risk Builder's Risk policy or a Course of
Construction policy covering the UTS during the course of construction
against loss or damage covered under a standard All-Risk Builder's Risk
Policy in an amount not less than the full replacement cost of the UTS.
14.1.5 Comprehensive All-Risk Property insurance coverage in an
amount not less than the full replacement cost of the UTS.
14.2 FORM OF INSURANCE. The insurance required hereunder may consist of
any combination of primary, umbrella and excess liability policies; provided
that any Excess Liability Insurance shall, when commercially available, be
written on a following form basis;
14.3 BONDS AND GUARANTIES. SNA may procure completion and performance
bonds or guaranties assuring the lien free completion of the UTS.
Performance bonds, if any, shall be written through sureties listed in the
United States Department of the Treasury Circular 570 dated no later than
that published by the most recent July publication of the FEDERAL REGISTER.
14.4 FORM OF POLICIES. The insurance policies required to be procured
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pursuant to Section 14.1 shall be written only with California admitted
insurance companies having (i) a Best rating of A7 or better for liability
and worker's compensation related coverages and (ii) a Best rating A10 or
better for property related coverages and shall contain the following
provisions:
14.4.1 Each policy shall contain a provision that the coverages
afforded thereby will not be canceled, reduced or materially changed
(compared to the requirements set forth herein) without at least thirty (30)
days' prior written notice to the City.
14.4.2 To the extent the City has an insurable interest in the UTS,
the property insurance policies shall name the City as a loss payee as its
interests may appear.
14.4.3 Each insurance policy required by this UTS Participation
Agreement shall contain the following clauses:
"This insurance shall be primary to, and not contribute with, any insurance
or self-insurance as may be maintained by the City; and the existence of
any such other insurance shall not reduce the company's liability or
obligation under this policy."
14.4.4 Each insurance policy required by this UTS Participation
Agreement, excepting policies for property and workers' compensation, shall
contain the following clause:
"The City of Anaheim, its officials, agents, employees, representatives
and contract employees are added as additional insureds."
14.4.5 Prior to the effective date of this UTS Participation
Agreement, SNA shall deliver to the City insurance certificates confirming
the existence of the insurance required by this UTS Participation Agreement,
and including the applicable clauses referenced above. Also, within thirty
(30) days after the effective date of this UTS Participation Agreement, SNA
shall provide to the City endorsements to the above-required policies, which
add to these policies the
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applicable clauses referenced above, and any other required language under
this UTS Participation Agreement. Said endorsements shall be signed by an
authorized representative of the insurance company and shall include the
signator's company affiliation and title. Should it be deemed necessary by
the City, it shall be SNA's responsibility to see that the City receives
documentation acceptable to City which sustains that the individual signing
said endorsements is indeed authorized to do so by the insurance company.
Also, in the event that a claim is presented against City for which the City
may have coverage under the insurance policies required herein, the City has
the right to demand, and to receive within a reasonable time period, copies
of such insurance policies.
14.4.6 Insurance required hereunder shall be written on a
first-dollar basis (or, in the case of excess or umbrella coverage, with no
gap between such coverage and the underlying coverage), unless the City
agrees in writing, in its reasonable and good faith discretion, to allow for
deductibles or self-insurance.
14.4.7 During the term of this UTS Participation Agreement, should
SNA believe that the limits of insurance coverage required in this Article 14
are not commercially available on an economically reasonable basis, SNA shall
issue a written request, with sufficient documentation, to the City to reduce
the amount of such limits for a set period of time. The City shall evaluate
such request and exercise reasonable and good-faith discretion in its
decision to grant or deny such request.
14.4.8 Nothing herein contained in Sections 14.1 through 14.4 shall
be construed as limiting in any way the extent to which SNA may be held
responsible for payments of damages to any persons resulting from SNA's or
its subcontractors acts, omissions, operations, or activities.
14.4.9 The City's Risk Manager is hereby authorized to revise the
requirements set forth above, if so requested by SNA, in the event he
determines, in his sole discretion that such revision is in City's best
interest.
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14.5 INDEMNIFICATION.
14.5.1 SNA hereby agrees to indemnify, defend, and hold harmless
the City (including its officers and employees) from and against any and all
claims of any kind or nature (including actions brought against the City by
the employees, or the dependents, heirs, assigns, or survivors of such
employees, of SNA, or SNA's agents, representatives, contractors,
subsidiaries, or subcontractors) presented against the City arising out of or
in connection with SNA's (including SNA's employees, representatives,
products, contractors, and subcontractors) performance, work, acts, or
omissions under this UTS Participation Agreement; excluding only such
liability actions as have been determined, by a court of competent
jurisdiction, to have arisen out of the sole negligence or willful misconduct
of the City of Anaheim. SNA's obligations under this Section 14.5.1 shall
survive the termination of this UTS Participation Agreement.
14.5.2 The City hereby agrees to indemnify, defend and hold
harmless SNI and SNA (including their officers and employees) from and
against any and all claims of any kind or nature presented against SNA and/or
SNI arising out of or in connection with the provisions of Section 3.10 of
this UTS Participation Agreement. The provisions of this Section 14.5.2 do
not apply to bodily or personal injury to any person, or to physical damage
to real or personal property. The City's obligations under this Section
14.5.2 shall survive the termination of this UTS Participation Agreement.
ARTICLE 15
TERM
15.1 INITIAL TERM. The term of this UTS Participation Agreement shall
commence on the date hereof and shall continue until December 31, 2027,
unless terminated sooner as provided herein or unless extended as provided in
Section 15.2.
15.2 EXTENSION OF TERM. Commencing on January 1, 2011, and if necessary
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continuing for as much as one year thereafter, the City, SNI and SNA shall
negotiate in good faith towards an agreement, the terms and conditions of
which are acceptable to all such Parties, pursuant to which the Term of the
Project Agreements shall be extended for an additional fifteen (15) years, to
December 31, 2042. If the Parties do not negotiate an extension of the term
of the Project Agreements during said period, then the obligation of the
Parties to negotiate an extension of the Project Agreements shall cease.
ARTICLE 16
REPRESENTATIONS AND WARRANTIES
16.1 REPRESENTATIONS AND WARRANTIES OF SNI.
16.1.1 SNI is a corporation duly organized and validly existing in
good standing under the laws of the State of California and has all necessary
power and authority to carry on its business as presently conducted, to own
or hold under lease its properties and to enter into and perform its
obligations under the Project Agreements and all other related documents and
agreements to which it is or shall be a party.
16.1.2 The execution, delivery and performance by SNI of the
Project Agreements have been duly authorized by all necessary action on the
part of SNI, do not require any approval, except as has been heretofore
obtained, of the shareholders of SNI or any consent of or approval from any
trustee, lessor or holder of any indebtedness or other obligation of SNI,
except for such as have been duly obtained, and do not contravene or
constitute a default under any Law, the Articles or bylaws of SNI or of any
agreement, judgment, injunction, order, decree or other instrument binding
upon SNI, or subject the UTS or any component part thereof to any lien other
than as contemplated or permitted by the Project Agreements. When the
Project Agreements to which SNI is a Party are executed and delivered, they
will be valid and binding obligations of SNI, enforceable against SNI in
accordance with their respective terms.
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16.1.3 There are no actions, suits, proceedings or investigations
pending or, to the knowledge of SNI, threatened against it at law or in
equity before any court or tribunal or before any court or tribunal which
individually or in the aggregate could result in any materially adverse
effect on its business, properties or assets or its condition, financial or
otherwise, or in any impairment of its ability to perform its obligations
under the Project Agreements. SNI has no knowledge of a violation or default
with respect to any order, writ, injunction or any decree of any court or
tribunal or any Governmental Authority which may result in any such
materially adverse effect or such impairment.
16.2 REPRESENTATIONS AND WARRANTIES OF SNA.
16.2.1 SNA is a corporation duly organized and validly existing in
good standing under the laws of the State of California and has all necessary
power and authority to carry on its business as presently conducted, to own
or hold under lease its properties and to enter into and perform its
obligations under the Project Agreements and all other related documents and
agreements to which it is or shall be a party.
16.2.2 The execution, delivery and performance by SNA of the
Project Agreements have been duly authorized by all necessary action on the
part of SNA, do not require any approval, except as has been heretofore
obtained, of the shareholders of SNA or any consent of or approval from any
trustee, lessor or holder of any indebtedness or other obligation of SNA,
except for such as have been duly obtained, and do not contravene or
constitute a default under any Law, the Articles or bylaws of SNA or of any
agreement, judgment, injunction, order, decree or other instrument binding
upon SNA, or subject to the UTS Services or any component part thereof to any
lien other than as contemplated or permitted by the Project Agreements. When
the Project Agreements to which SNA is a Party are executed and delivered,
they will be valid and binding obligations of SNA, enforceable against SNA in
accordance with their respective terms.
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16.2.3 SNA has all the required skills, experience and capacity
necessary to perform and shall diligently perform its obligations under the
Project Agreements in a timely and professional manner, utilizing sound
engineering principles, project management procedures and supervisory
procedures.
16.2.4 SNA has or will obtain all business, professional and
regulatory certifications required by Applicable Law to construct, own and
operate the UTS.
16.2.5 There are no actions, suits, proceedings or investigations
pending or, to the knowledge of SNA, threatened against it at law or in
equity before any court or tribunal or before any court or tribunal which
individually or in the aggregate could result in any materially adverse
effect on its business, properties or assets or its condition, financial or
otherwise, or in any impairment of its ability to perform its obligations
under the Project Agreements. SNA has no knowledge of a violation or default
with respect to any order, writ, injunction or any decree of any court or
tribunal or any Governmental Authority which may result in any such
materially adverse effect or such impairment.
16.2.6 The uts shall be designed and constructed in compliance with
the Schedule of Performance and the other requirements of the Project
Agreements.
16.3 REPRESENTATIONS AND WARRANTIES OF CITY.
16.3.1 The City is a charter city duly organized and validly
existing in good standing under the laws of the State of California and has
all necessary power and authority to carry on its business as presently
conducted, to own or hold under lease its properties and to enter into and
perform its obligations under the Project Agreements and all other related
documents and agreements to which it is or shall be a party.
16.3.2 The execution, delivery and performance by the City of the
Project Agreements have been duly authorized by all necessary action on the
part of the City, do not require any approval, except as has been heretofore
obtained, of the elected or appointed officials of the City or any consent of
or approval from any
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trustee, lessor or holder of any indebtedness or other obligation of the
City, except for such as have been duly obtained, and do not contravene or
constitute a default under any Law, the Charter, Ordinances or Regulations of
the City or of any agreement, judgment, injunction, order, decree or other
instrument binding upon the City, or subject the UTS or any component part
thereof to any lien other than as contemplated or permitted by the Project
Agreements. When the Project Agreements to which the City is a Party are
executed and delivered, they will be valid and binding obligations of the
City, enforceable against the City in accordance with their respective terms.
16.3.3 There are no actions, suits, proceedings or investigations
pending or, to the knowledge of the City, threatened against it at law or in
equity before any court or tribunal or before any court or tribunal which
individually or in the aggregate could result in any materially adverse
effect on its business, properties or assets or its condition, financial or
otherwise, or in any impairment of its ability to perform its obligations
under the Project Agreements. The City has no knowledge of a violation or
default with respect to any order, writ, injunction or any decree of any
court or tribunal or any Governmental Authority which may result in any such
materially adverse effect or such impairment.
ARTICLE 17
MARKS AND PUBLICITY
17.1 EXCLUSIVE OWNERSHIP OF MARKS. The City acknowledges and recognizes
the exclusive rights of SNI, SNA, and their Affiliates to the "SpectraNet"
name, the "FirstWorld" name and all other service marks, trademarks, names,
copyrights, logos, registrations and patents from time to time identified to
the City by SNA (collectively, the "Marks"). The City acknowledges that the
Marks are the exclusive property of SNI, SNA and their Affiliates. The City
disclaims any right, title or interest in or to any of the Marks by operation
of the Project Agreements. SNI, SNA and their Affiliates shall have the sole
right and (to the extent they determine
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appropriate) responsibility to institute and prosecute all disputes with
third parties concerning use of the name "SpectraNet," "FirstWorld" or any
other Mark.
17.2 REFERENCES TO MARKS. The City agrees not to use or directly or
indirectly refer to any Mark in any way or for any purpose without SNI's
prior written consent, which shall not be unreasonably withheld. The City
shall not use the word "SpectraNet," "FirstWorld" or any other Mark, or any
combination or variation of any of them, in the name of any partnership,
corporation or other entity.
17.3 EFFECT OF TERMINATION OF THE PROJECT AGREEMENTS. The City
acknowledges and agrees that in the event of any termination or cancellation
of the Project Agreements (including on account of an uncured default by SNA
or SNI): (a) neither SNA, SNI nor any of their Affiliates shall be under any
obligation, express or implied, to issue to the City or any subsequent
operator of the UTS a license (or commitment to issue a license) permitting
operation of the UTS under the "SpectraNet" or "FirstWorld" name; and (b) the
City shall not operate the UTS under the "SpectraNet" or "FirstWorld" name or
use the word "SpectraNet" or "FirstWorld" or any Mark in association with the
UTS.
ARTICLE 18
MISCELLANEOUS PROVISIONS
18.1 NOTICES. Any notice, request, demand, consent, approval or other
communication required or permitted hereunder or by law shall be given in
writing, addressed as follows:
If to the City: City of Anaheim
City Clerk
200 South Anaheim Boulevard
Anaheim, CA 92805
With a copy to:
Public Utilities General Manager
If to SNA: SpectraNet Anaheim
c/o SpectraNet International
9333 Genesee Avenue, Suite 200
San Diego, California 92121
Attn: Chief Executive Officer
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If to SNI: SpectraNet International
9333 Genesee Avenue, Suite 200
San Diego, California 92121
Attn: Chief Executive Officer
Any party may from time to time, by written notice to the other,
designate a different address which shall be substituted for the address
specified above. If personally delivered, notices shall be deemed received
at the time of delivery, If sent by certified mail, return receipt requested,
notices shall be deemed fully delivered and received three (3) business days
after the date of the postmark. Except as otherwise expressly provided
herein, notices shall be deemed fully delivered and received at the time of
actual receipt.
18.2 SUCCESSORS. This UTS Participation Agreement shall be binding upon
and inure to the benefit of the Parties hereto and their respective heirs,
executors, administrators, personal representatives, successors and permitted
assigns.
18.3 WAIVERS. The consent by one party to any act by another party
shall not be deemed to imply consent, or waiver of the necessity of obtaining
such consent, for the same or any similar acts in the future. No waiver or
consent shall be implied from silence or from any failure of a party to act,
except as otherwise specified in this UTS Participation Agreement.
18.4 ENTIRE AGREEMENT. The Project Agreements constitute the entire
agreement between the Parties hereto pertaining to the subject matter hereof,
and the final, complete and exclusive expression of the terms and conditions
thereof. All prior agreements, representations, negotiations and
understandings of the Parties hereto, oral or written, express or implied,
including without limitation the "Business Understanding" referred to in
Recital D hereof, are hereby superseded and merged therein.
18.5 GOVERNING LAW. This UTS Participation Agreement has been
negotiated and executed in the State of California and shall be governed by
and construed under the laws of the State of California.
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18.6 AMENDMENTS. No addition to or modification of any provision
contained in this UTS Participation Agreement shall be effective unless fully
set forth in a writing signed by the City, SNI and SNA.
18.7 HEADINGS. Article, Section and Subsection headings have been
inserted in this UTS Participation Agreement as a matter of convenience and
for reference only and it is agreed that such paragraph headings are not a
part of this UTS Participation Agreement and shall not be used in the
interpretation of any provision of this UTS Participation Agreement.
18.8 COUNTERPARTS. This UTS Participation Agreement may be executed in
one or more duplicate counterparts and when signed by all of the Parties
listed below shall constitute a single binding agreement.
18.9 NONDEDICATION OF FACILITIES. The Parties do not intend to dedicate
and nothing in this UTS Participation Agreement or the other Project
Agreements shall be construed as constituting a dedication by SNA of its
properties or facilities, or any part thereof, to the City or to the
customers of the City or any third-party vendor of services delivered by the
UTS.
18.10 NEGATION OF PARTNERSHIP. The covenants, obligations and
liabilities of the Parties are intended to be several and not joint or
collective, and nothing herein contained shall ever be construed to create an
association, joint venture, trust or partnership, or to impose a trust or
partnership covenant, obligation or liability on or with regard to the
Parties. Each party shall be individually responsible for its own covenants,
obligations and liabilities as herein provided. No party shall be under the
control of or shall be deemed to control the other party. No party shall be
the agent of or have a right or power to bind the other party without its
express written consent, except as expressly provided in this UTS
Participation Agreement or the other Project Agreements.
18.11 FORCE MAJEURE. No party shall be considered to be in
default in the performance of any of its obligations under any of the Project
Agreements (other
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than obligations of said party to pay costs and expenses) when a failure of
such performance shall be due to an Unavoidable Delay. Nothing contained
herein shall be construed so as to require any party to settle any strike or
labor dispute in which it may be involved. Any party rendered unable to
fulfill any of its obligations under any of the Project Agreements by reason
of an Unavoidable Delay shall give prompt written notice of such fact to the
other Parties to such Project Agreement and shall exercise due diligence to
remove such inability with all reasonable dispatch. If an Unavoidable Delay
shall have occurred, the Parties shall consult with one another as soon as
practicable concerning the effect of such delay upon their performance
hereunder. In the event that any of SNA's activity hereunder is delayed,
curtailed or prevented by any Unavoidable Delay, then anything herein to the
contrary notwithstanding, the time for carrying out the activity thereby
affected shall be extended for a period equal to the total number of days
during which such causes or
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their effects were operative, and for such additional time, if any, as shall
be necessary to make good the time lost as a result of any Unavoidable Delay.
SPECTRANET ANAHEIM, a California corporation
By: /s/ RENNEY E. SENN
------------------------------------------
Name: Renney E. Senn
------------------------------------------
Title: CEO
------------------------------------------
SPECTRANET INTERNATIONAL, a California corporation
By: /s/ RENNEY E. SENN
------------------------------------------
Name: Renney E. Senn
------------------------------------------
Title: CEO
------------------------------------------
CITY OF ANAHEIM, a charter city organized under the
laws of the State of California
By: /s/ EDWARD K. AGHJAYAN
------------------------------------------
Name: Edward K. Aghjayan
------------------------------------------
Title: General Manager
------------------------------------------
By: /s/ LEONORA N. SOHL
------------------------------------------
Name: Leonora N. Sohl
------------------------------------------
Title: City Clerk
------------------------------------------
APPROVED AS TO FORM:
/s/ LUCINA LEA MOSES
- ------------------------------------
Assistant City Attorney
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APPENDIX 1
GLOSSARY OF DEFINED TERMS
<PAGE>
APPENDIX NO. 1
GLOSSARY OF DEFINED TERMS
1. "ADMINISTRATIVE COMMITTEE" is defined in Section 9.1.1 of the UTS
Participation Agreement.
2. "AFFILIATE" means, with respect to any Person, any other Person
that directly, or indirectly through one or more intermediaries, controls, is
controlled by or is under common control with the Person specified, or who
holds or beneficially owns ten percent (10%) or more of the equity interest
in the Person specified or ten percent (10%) or more of any class of voting
securities of the Person specified.
3. "AGREEMENT CONCERNING NON-DISCLOSURE OF CONFIDENTIAL INFORMATION"
means that certain Agreement Concerning Non-Disclosure of Confidential
Information dated as of February 25, 1997 by and between the City, SNI and
SNA, relating to the protection of confidential and proprietary information,
as the same may be amended, modified or supplemented from time to time.
4. "AGREEMENT FOR USE OF OPERATING PROPERTY" means that certain
Agreement for Use of Operating Property dated as of February 25, 1997 by and
between the City and SNA, relating to the Cable, as the same may be amended,
modified or supplemented from time to time.
5. "ANNUAL COMPLIANCE AUDIT" means an annual review to be performed by
the City's staff for purposes of determining whether the operations of the
UTS conform to the requirements of the Project Agreements.
6. "ANNUAL OPERATIONS AUDIT" means an annual audit of the operations
of the UTS to be prepared by the Independent Accountant in a form sufficient
to satisfy the requirements of each of SNA, the City, SNI, any Governmental
Authorities with regulatory jurisdiction over the UTS and any Lenders.
7. "APPLICABLE LAW" means any law, statute, ordinance, regulation,
rule, notice requirement, court decision, agency guideline, principle of law
and order of any Governmental Authority, including without limitation, those
related to energy, the environment, motor vehicle safety, public utility,
zoning, building and health codes, occupational safety and health and laws
respecting employment practices, employee documentation, terms and conditions
of employment, and wages and hours.
8. "APPRAISED VALUE" means the appraised value of all of the issued
and outstanding stock of SNA, determined as provided in Section 12.2 of the
UTS Participation Agreement.
9. "AUDIT COMMITTEE" is defined in Section 9.1.2 of the UTS
Participation Agreement.
10. "BANKRUPTCY PROCEEDINGS" is defined in Section 18.1 of the
Agreement for Use of Operating Property.
11. "BONA FIDE FORECLOSURE TRANSACTION" means a judicial or nonjudicial
foreclosure, or
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a conveyance in lieu of foreclosure, or other similar action, proceeding or
transaction undertaken by a Lender to enforce its rights and remedies
following a default by SNA, SNI or any of their Affiliates under any Credit
Document or with respect to any Debt, and not undertaken merely for the
purpose of terminating the City's rights to receive payments under one or
more of the Project Agreements. A Bona Fide Foreclosure Transaction would
terminate any ownership interest in the UTS of SNA, SNI or any of their
Affiliates.
12. "BUSINESS DAY" means any weekday on which banks in California are
generally open for the conduct, with bank personnel, of regular banking
business.
13. "CABLE" is defined in Section 2.1.1 of the Agreement for Use of
Operating Property.
14. "CAPITAL IMPROVEMENTS" means a change in or replacement of a
partially completed or completed portion of the UTS, or the enlargement or
betterment of the UTS or any portion thereof, or any other addition to or
improvement of the UTS or any portion thereof, which change, replacement,
enlargement, betterment, addition or improvement would be capitalized in
accordance with GAAP.
15. "CITY" means the City of Anaheim, a charter city organized under
the laws of the State of California.
16. "CITY'S BACKBONE LOOP" is defined in Section 5.13 of the UTS
Participation Agreement.
17. "CONDEMNATION" means any taking of property by condemnation or by
exercise of any right of eminent domain, or by any similar proceeding or act
of any Governmental Authority.
18. "CONSTRUCTION DRAWINGS AND SPECIFICATIONS" means final drawings and
specifications containing sufficient detail to support the issuance of
required building permits by the City and any other Governmental Authority
with jurisdiction.
19. "CONSTRUCTION WORK" means all engineering, design, contract
preparation, purchasing, construction, supervision, negotiation, preparation
and performance of construction agreements, acquisition of land rights,
expediting, inspection, accounting, testing and start-up for each Phase of
the UTS and preparation of operating and equipment manuals, quality assurance
manuals, all reports required by Governmental Authorities and the conduct of
hearings, conferences and other activities incidental to obtaining all
necessary Permits for the design, construction, development and operation of
each Phase.
20. "CONSUMER PRICE INDEX" means the United States Department of Labor,
Bureau of Labor Statistics, Consumer Price Index, All Items, Urban Wager
Earners, Los Angeles-Anaheim-Riverside (1982-84 = 100), as published monthly.
If at any time said Consumer Price Index shall not exist, the Parties shall
substitute the official index published by the United States Department of
Labor, Bureau of Labor Statistics or any successor or similar governmental
agency as may then be in existence which is most nearly equivalent thereto.
21. "CREDIT DOCUMENTS" means any credit documents now existing or
hereinafter entered into by SNA for the purpose of evidencing or securing
loans or other Debt from Lenders to SNA that are related to the design,
construction, development or operation of the UTS.
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22. "CUSTOMER" means any Person who executes a Service Agreement with
SNA as a retail purchaser of UTS services.
23. "DEBT" means, with respect to any Person, without duplication, (a)
all obligations of such Person for borrowed money, (b) all obligations of
such Person evidenced by bonds, debentures, notes or other similar
instruments, (c) all obligations of such Person to pay the deferred purchase
price of property or services, except trade accounts payable in the ordinary
course of business, (d) all obligations of such Person under leases which are
or should be, in accordance with GAAP, recorded as capital leases in respect
of which such Person is liable, (e) all obligations of such Person to
purchase securities (or other property) which arise out of or in connection
with the sale of the sale or substantially similar securities (or property),
(f) all deferred obligations of such Person to reimburse any bank or other
Person in respect of amounts paid or advances under a letter of credit or
other instrument, (g) all Debt of others secured by a lien or other
encumbrance on any asset of such Person, whether or not such Debt is assumed
by such Person, and (h) all Debt of others guaranteed directly or indirectly
by such Person or as to which such Person has an obligation substantially the
economic equivalent of a guarantee.
24. "DEBT SERVICE" means, for any period, all fees, principal and
interest payments payable pursuant to any Debt.
25. "DEFINED SERVICE AREA" means, for each Phase, the geographic area
that will be served by the UTS upon substantial completion of that Phase, as
shown on Appendix 4 to the UTS Participation Agreement.
26. "DESIGNATED REPRESENTATIVE" means the person designated from time
to time by the City, SNA and SNI, as applicable, as having the right to grant
or withhold approvals, receive notices and information and act on behalf of
the designating party. The City's initial Designated Representative is
_____________. SNA's initial Designated Representative is G. Bradford
Saunders. SNI's initial Designated Representative is G. Bradford Saunders.
Any Party may change its Designated Representative from time to time by
written notice to the other Parties given as provided in the UTS
Participation Agreement.
27. "DEVELOPMENT FEE AGREEMENT" means that certain Development Fee
Agreement dated as of February 25, 1997 by and between SNI and the City.
28. "ESTOPPEL CERTIFICATE" means a statement in writing containing all
(or, at the option of the Requesting Party, only some) of the statements set
forth in the form attached to the Agreement for Use of Operating Property and
containing such additional information relating to the Agreement for Use of
Operating Property and the Leased Property as the Requesting Party shall
reasonably specify.
29. "ETHERNET CONNECTION" means a local area network and data-link
protocol based on a packet frame, operating at 10Mbps, with multiple devices
sharing access to the link.
30. "EVENT OF DEFAULT" is defined in Section 10.1 of the UTS
Participation Agreement.
31. "FINANCING" means any mortgage financing, project financing,
refinancing or borrowing, whether secured or unsecured, to finance the cost
of the design, construction or operation of the UTS.
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32. "GAAP" means generally accepted accounting principles set forth in
the opinions and pronouncements of the Accounting Principles Board of the
American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as have been approved by a significant
segment of the accounting profession, which are in effect as of the date of
the UTS Participation Agreement.
33. "GOVERNMENTAL AUTHORITY" means any national, state or local
government (whether domestic or foreign), any political subdivision thereof
or any other governmental, quasi-governmental, judicial, public or statutory
instrumentality, authority, body, agency, bureau or entity.
34. "GOVERNMENTAL RATE" means the rate for UTS services that is equal
to the lowest rate charged in the City by SNA or any other competitive
provider of universal telecommunications services to the largest volume
private customers purchasing a comparable package of telecommunications
services, but not be less than SNA's actual cost of providing such UTS
services to the City.
35. "GROSS REVENUES" means, for any period, all revenues accrued by SNA
with respect to the operation of the UTS during such period that are
attributable to (a) fees for access rights and other services sold by SNA to
UTS Customers located within the City, (b) installation charges paid by UTS
Customers located within the City, (c) interconnection charges paid to SNA by
Users to access customers of said Users located within the City, (d) the
lease or re-sale of lines or circuit paths to Users to access customers of
said Users located within the City or to utilize the UTS to traverse the
City, and (e) the lease to Customers located within the City of Customer
premises equipment which is not generally available and which is required by
SNA as a condition of service. "Gross Revenues" excludes any revenues
collected on behalf of Users as collections or billing agent, interest
earned, bad debts, revenues collected on behalf of other service providers,
and the proceeds of any Financing.
36. "HIGH LEVEL DESIGN DOCUMENTS" means schematic drawings depicting,
by reference to streets or other geographic elements, service area
boundaries, all overhead fiber optic cable, all underground ductbanks of
fiber optic cable, all backbone splice points, all central control points,
all distribution enclosures, all access enclosures and all
splice/distribution boxes.
37. "IMPOSITIONS" means all taxes, special and general assessments,
pole usage fees, right-of-way fees, rates and charges and other impositions
and charges of every kind and nature whatsoever with respect to the Leased
Property, that may be assessed, levied, confirmed, imposed or become a lien
on the Leased Property (other than on account of any actions or omissions of
the City or conditions existing on, at or with respect to the Leased Property
before the date of the Agreement for Use of Operating Property) by or for the
benefit of any Governmental Authority with respect to any period during the
term of the Agreement for Use of Operating Property, together with any taxes
and assessments that may be levied, assessed or imposed by the State of
California or by any political or taxing subdivision of the State of
California upon the gross income arising from any rent or in lieu of or as a
substitute, in whole or in part, for taxes and assessments imposed upon or
related to the Leased Property and commonly known as real estate taxes. The
term "Impositions" shall, however, not include any of the following, all of
which the City shall pay before delinquent or payable only with a penalty:
(a) if any portion of the Leased Property is taxed or assessed together with
other property, any taxes and other Impositions reasonably allocable to any
portion of such property other than the Leased Property, in accordance with
the applicable provisions of the Agreement for Use of Operating Property, (b)
any charges that would not have been payable but for
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any act or omission of the City or conditions existing on, at or with respect
to the Leased Property before the date of the Agreement for Use of Operating
Property, (c) any charges that are levied, assessed or imposed against the
Leased Property during the term of the Agreement for Use of Operating
Property based on the recapture or reversal of any previous tax abatement or
tax subsidy, or compensating for any previous tax deferral or reduced
assessment or valuation, or based on a miscalculation or misdetermination of
any charge(s) of any kind imposed or assessed with respect to the Leased
Property, relating to any period(s) before the date of the Agreement for Use
of Operating Property, and (d) interest, penalties and other charges with
respect to items (a) through (c).
38. "INCOME TAX EXPENSE" means, for each of SNA's fiscal years, SNA's
federal and state income tax expense on SNA's income for such fiscal year,
computed in accordance with GAAP and calculated on a stand-alone basis.
39. "INITIAL IMPLEMENTATION PROGRAM" means the general procedures for
the design and construction of Phase IA, as set forth on Appendix 6 attached
to the UTS Participation Agreement.
40. "LEASED PROPERTY" is defined in Section 2.1 of the Agreement for
Use of Operating Property.
41. "LEASEHOLD ESTATE" means SNA's leasehold estate arising under the
Agreement for Use of Operating Property, upon and subject to all the terms
and conditions of the Agreement for Use of Operating Property, or any part of
such leasehold estate or any direct or indirect interest in such leasehold
estate.
42. "LEASEHOLD MORTGAGE" means any mortgage, deed of trust, deed to
secure debt, assignment, security interest, pledge, financing statement or
any other instrument(s) or agreement(s) intended to grant security for any
obligation (including a purchase-money or other promissory note) encumbering
the Leasehold Estate, as entered into, renewed, modified, consolidated,
amended, extended or assigned from time to time during the Term. A
"Leasehold Mortgage" also includes certain agreements entered into in
connection with a "sale and leaseback" transaction, as described in the text
of the Agreement for Use of Operating Property.
43. "LEASEHOLD MORTGAGEE" means the holder of a Leasehold Mortgage. A
"Leasehold Mortgagee" also includes certain parties to "sale and leaseback"
transactions, as described in the text of the Agreement for Use of Operating
Property.
44. "LEASEHOLD MORTGAGEE'S AGENT" means any agent, designee or nominee
of a Leasehold Mortgagee, provided that such agent, designee or nominee is a
wholly owned subsidiary, full time employee, or legal counsel of the
Leasehold Mortgagee. A Leasehold Mortgagee that is not an Institutional
Lender shall not be entitled to designate a Leasehold Mortgagee's Agent.
45. "LENDER" means any Person(s), including bondholder(s) and
Affiliates, providing debt financing for the design, construction or
operation of the UTS or any matter related thereto, including without
limitation, any trustee or collateral agent appointed by any such Lender to
represent its interests, and including the Lenders in connection with the
Phase IA Financing and the Project Financing.
46. "LICENSE AGREEMENT" means any license agreement which is executed
by the City and SNA as contemplated pursuant to Section 8.1 of the UTS
Participation Agreement.
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47. "MINIMUM RESERVE" means a reserve in the amount of $6,000,000 to be
used to fund Debt Service shortfalls and to fund Capital Improvements
approved by the Administrative Committee pursuant to Article 9 of the UTS
Participation Agreement.
48. "MUNICIPAL SERVICES" means all current and future applications for
the City's own use, including energy management, automated meter reading,
demand side management, geographic information systems, computer networks,
voice, data and video applications and other similar applications which are
not competitive with SNA's commercial operation of the UTS.
49. "NET REVENUE" means, for any period, all Gross Revenues for such
period minus Operating Expenses for such period and the other amounts
described in Sections 6.4.1 through 6.4.4 of the UTS Participation Agreement.
50. "OFF-UTS SERVICE" means service provided by SNA using the
facilities of third party carriers.
51. "OPERATING EXPENSES" means, for any period, an amount equal to the
reasonable and necessary costs of repairing, maintaining administering and
operating the UTS during such period, calculated on an accrual basis
(including principal amortization payments with respect to Debt but excluding
depreciation), including without limitation each of the following:
(a) Amounts payable to the City pursuant to Sections 6.1, 6.2 and
6.3.2 of the UTS Participation Agreement;
(b) the cost of the Annual Compliance Audit and the Annual
Operations Audit;
(c) Debt Service;
(d) Taxes (other than Income Tax Expense);
(e) Insurance expenses;
(f) Employment expenses;
(g) SNI Reimbursable Costs;
(h) Funds necessary to create or replenish Reserve Accounts;
(i) Accumulated losses from previous periods, if any;
(j) Any costs or expenses associated with Capital Improvements, to
the extent not paid with Financing proceeds; and
(k) Selling, general and administrative expenses.
52. "OPTION EXERCISE NOTICE" is defined in Section 12.1 of the UTS
Participation Agreement.
53. "PARTIAL COMPLETION" means forty-four percent (44%) of Substantial
Completion.
54. "PATCH PANEL" means a panel where fiber optic cable strands from
different cables connect.
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55. "PAYMENT DATE" means each April 30, July 31, October 31 and January
31, or the next succeeding Regular Business Day if such date is not a Regular
Business Day.
56. "PERMITTED EXCEPTION" is defined in Section 20.1 of the Agreement
for Use of Operating Property.
57. "PERMITTED INVESTMENTS" means (a) direct obligations of the United
States of America (including obligations issued or held in book-entry form on
the books of the Department of the Treasury of the United States of America)
or obligations the timely payment of the principal of and interest on which
are fully guaranteed by the United States of America; (b) obligations,
debentures, notes or other evidence of indebtedness issued or guaranteed by
any agency or instrumentality of the United States; (c) interest-bearing
demand or time deposits (including certificates of deposit) which are either
(i) insured by the Federal Deposit Insurance Corporation, or (ii) held in
banks and savings and loan associations, having general obligations rated at
least "AA" or equivalent by S&P or Moody's, or if not so rated, secured at
all times, in the manner and to the extent provided by law, by collateral
security described in clauses (a) or (b) of this definition, of a market
value of no less than the amount of moneys so invested; or (d) commercial
paper rated (on the date of acquisition thereof) at least A-1 or P-1 or
equivalent by S&P or Moody's, respectively (or an equivalent rating by
another nationally recognized credit rating agency of similar standing if
neither of such corporations is then in the business of rating commercial
paper), maturing not more than ninety (90) days from the date of creation
thereof.
58. "PERSON" means any individual, corporation, partnership, limited
liability company, joint venture, association, joint-stock company, trust,
unincorporated organization, Governmental Authority or any agency or
political subdivision thereof or any other entity.
59. "PHASE" means any of Phase IA, Phase IB or Phase II.
60. "PHASE I" is defined in Section 3.1 of the UTS Participation
Agreement.
61. "PHASE IA" is defined in Section 3.1 of the UTS Participation
Agreement.
62. "PHASE IA FINANCING" is defined in Section 4.2 of the UTS
Participation Agreement.
63. "PHASE IB" is defined in Section 3.1 of the UTS Participation
Agreement.
64. "PHASE IB FINANCING" is defined Section 4.3 of the UTS
Participation Agreement.
65. "PHASE II" is defined in Section 3.1 of the UTS Participation
Agreement.
66. "PHASE II FINANCING" is defined in Section 4.4 of the UTS
Participation Agreement.
67. "PROJECT AGREEMENTS" means the UTS Participation Agreement, the
Agreement for Use of Operating Property, the Agreement Concerning
Non-Disclosure of Confidential Information, the License Agreement and the
Development Fee Agreement, and any other agreement hereafter executed by the
City and SNA and/or SNI that is designated by the parties as a Project
Agreement.
68. "RECOURSE CLAIMS" means only the following claims arising under the
Agreement for Use of Operating Property during the Term (or as otherwise
indicated): (a) liability for willful actual fraud; (b) liability for
misapplication of security deposits, insurance proceeds, condemnation awards
or refunds of Impositions that may come into a party's control whether during
or after the Term; (c) liability of the City on account of the City's failure
to remit Impositions in accordance with
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SNA's instructions when SNA has paid such Impositions to the City to be
remitted to the third party entitled to payment; (d) liability of the City on
account of the City's breach of its representations and warranties as to its
title to the Cable, the nonexistence of Cable Mortgages, the City's title to
the Leased Property or tenants of the Leased Property on the Commencement
Date; and (e) if the Leased Property is not a separate tax lot, then the
City's obligation to make Tax Reimbursement Payments.
69. "RENT" means all Guaranteed Rent and other amounts payable by SNA
to the City pursuant to the Agreement for Use of Operating Property.
70. "RESERVE ACCOUNTS" means the Minimum Reserve and any other reserve
accounts established pursuant to Section 9.2.13 of the UTS Participation
Agreement or as required by any of the Credit Documents.
71. "SCHEDULE OF PERFORMANCE" means the document attached to the UTS
Participation Agreement as Appendix 2 for the purpose of describing the
general schedule for the build-out of the UTS.
72. "SCOPE OF UTS" means the document attached to the UTS Participation
Agreement as Appendix 5 for the purpose of describing the general
specifications of the UTS.
73. "SERVICE AGREEMENT" means a written contract between SNA and a
Customer or User whereby the Customer or User subscribes for UTS services.
74. "SNA" means SpectraNet Anaheim, a California corporation.
75. "SNI" means SpectraNet International, a California corporation.
76. "SNI REIMBURSABLE COSTS" means the amount necessary to reimburse
SNI and its Affiliates (other than SNA) for actual allocated corporate
expenses directly attributable to the development and operation of the UTS,
including without limitation, the costs and expenses related to engineering,
marketing, negotiations with vendors and Users, and allocated staff time.
77. "SUBSEQUENT IMPLEMENTATION PROGRAM" means the general procedures
for the design and construction of components of the UTS facilities, as
created from time to time by SNA as construction of the UTS progresses, in
the form set forth on Appendix 7 attached to the UTS Participation Agreement.
78. "SUBSTANTIAL COMPLETION" means the substantial completion of the
Construction Work such that (a) the UTS is operational and achieving the
minimum performance specifications established in the Scope of UTS, and (b)
at least 90% of the UTS facilities depicted in the Scope of UTS (with
substitutions counted based on the linear footage of the modified facilities)
have been constructed.
79. "TELECOMMUNICATIONS ACCESS AND UTILIZATION FUND" means a financial
account established by the City into which SNA shall make payments pursuant
to Section 6.5.4 of the UTS Participation Agreement. The Telecommunications
Access and Utilization Fund will be administered at the City's sole
discretion and its purpose is to foster access to the local and national
information infrastructure.
80. "TELECOMMUNICATIONS ECONOMIC DEVELOPMENT FUND" means a financial
account established by the City into which SNA shall make payments pursuant
to Section 6.5.5 of the UTS
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Participation Agreement. The Telecommunications Economic Development Fund
will be administered at the City's sole discretion and its purpose is to
foster access to assist the City in its efforts at attracting and retaining
businesses with high-data and high-technology characteristics.
81. "UNAVOIDABLE DELAY" means any cause beyond the control of the party
affected, including without limitation, the following:
(a) failures of or threats of failure of facilities,
including any component of the UTS;
(b) floods, earthquakes, tornadoes, storms, fires, lightning,
epidemics or other casualties;
(c) acts of war, riots, civil disturbances or disobediences;
(d) labor disputes, labor or material shortages or acts of
sabotage;
(e) restraint by court order or Governmental Authority;
(f) action or non-action by or failure to obtain the
necessary Permits, authorizations or approvals from any Governmental
Authority, or
(g) the adoption, enactment or application of any law,
regulation or other legal requirement of any Governmental Authority not
existing or not applicable as of the date hereof, or any change in such law,
regulation or other legal requirement, but not including any such legal
requirement or interpretation or application thereof in existence as of the
date hereof which by its terms became or will become effective and applicable
after the date hereof.
82. "USER" means any Person who is a telecommunications services
provider and executes an interconnection or other similar agreement with SNA
or is otherwise authorized to utilize the UTS for providing
telecommunications services to its customers.
83. "UTS" is defined in Recital C of the UTS Participation Agreement.
84. "UTS PARTICIPATION AGREEMENT" means that certain Universal
Telecommunications System Participation Agreement dated as of February 25,
1997 by and between the City, SNI and SNA.
85. "UTS STANDARD AUDIT PROCEDURES" means the standard procedures for
conducting the Annual Compliance Audit, as set forth on Appendix 9 to the UTS
Participation Agreement.
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DEVELOPMENT FEE AGREEMENT
This Development Fee Agreement (the "Agreement") is made and entered into
as of February 25, 1997 by and between SPECTRANET INTERNATIONAL, a corporation
created and organized pursuant to the laws of the State of California ("SNI")
and the CITY OF ANAHEIM, a municipal corporation created and organized pursuant
to the laws of the State of California ("City").
RECITALS:
A. The City, SNI and SpectraNet Anaheim ("SNA"), the wholly owned
subsidiary of SNI, intend to enter into the Universal Telecommunications Service
Participation Agreement ("UTS Participation Agreement") and related agreements
pursuant to which SNI and SNA will construct, own, finance, manage and operate a
telecommunications system in the City.
B. In order to give appropriate recognition to the efforts of the City to
assist SNI and SNA in developing the telecommunications system in the City and
to support SNI's efforts to develop similar telecommunications systems in other
cities or public entities, the Parties desire to enter into this Agreement.
NOW, THEREFORE, in consideration of the mutual covenants, promises and
conditions contained herein and the City's agreement to support actively SNI's
efforts to develop telecommunications systems in other cities or public
entities, the Parties agree as follows:
1. SNI will pay the City a development fee ("Development Fee") as
described in this Agreement.
2. The Development Fee will be paid from SNI corporate funds within
thirty (30) days after the closing of the financing for the construction of each
"Additional Network," as defined herein, or the commencement of construction of
such Additional Network, whichever occurs first. As used herein, the term
"Additional Network" means (a) any expansion of the telecommunications system
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being developed by SNA in the City into one or more adjacent or nearby cities,
including without limitation the cities of Santa Ana and Orange, where SNA
enters into a revenue sharing agreement with any such city, and (b) any separate
telecommunications system developed by any other subsidiary of SNI that holds a
Certificate of Public Convenience and Necessity issued by the California Public
Utilities Commission and enters into a revenue sharing arrangement with one or
more public entities. Once a Development Fee is paid with respect to an
Additional Network, no further Development Fee will be payable in connection
with any expansion of that Additional Network.
3. SNI shall pay the City the following amounts for each Additional
Network as to which the financing closes within the indicated year (subject to
the provisions of Section 5):
<TABLE>
<CAPTION>
<S> <C>
First Year $300,000.00
Second Year $200,000.00
Third Year $100,000.00
Fourth Year $100,000.00
Fifth Year $100,000.00
</TABLE>
Thereafter, no Development Fee shall be paid.
4. The first year, as described in Section 3, shall commence with the
closing of the financing for the first Additional Network or the commencement of
construction of the first Additional Network, whichever occurs first.
5. In the event that a definitive agreement to develop, own and operate
an Additional Network is executed by SNI or its affiliate with a public entity
prior to the expiration of the Fifth Year, but the closing of the financing for
such Additional Network does not occur until after expiration of the Fifth Year,
then SNI shall nonetheless pay the Development Fee attributable to such
Additional Network to the City, provided that the closing of the financing for
such Additional Network occurs.
6. A failure by SNI to pay such amounts when due shall be deemed an
2
<PAGE>
Event of Default pursuant to the UTS Participation Agreement.
7. This Agreement may be executed in one or more duplicate counterparts
and when signed by both Parties shall constitute a binding agreement.
SPECTRANET INTERNATIONAL, a California
corporation
By: /s/ Renney E. Senn
--------------------------------
Title: Renney E. Senn, CEO
-----------------------------
CITY OF ANAHEIM, a municipal corporation
By: /s/ Edward K. Aghjayan
--------------------------------
Title: Edward K. Aghjayan, General Manager
-----------------------------
ATTEST:
/s/ Leonora N. Sohl
- ------------------------------
City Clerk
APPROVED AS TO FORM:
JACK L. WHITE, CITY ATTORNEY
By: /s/ Lucina Lea Moses
---------------------------
Assistant City Attorney
3
<PAGE>
CERTAIN MATERIAL (INDICATED BY AN ASTERISK) HAS BEEN
OMITTED FROM THIS DOCUMENT PURSUANT TO A REQUEST
FOR CONFIDENTIAL TREATMENT. THE OMITTED
MATERIAL HAS BEEN FILED SEPARATELY
WITH THE SECURITIES AND
EXCHANGE COMMISSION.
AGREEMENT FOR LEASE OF TELECOMMUNICATIONS CONDUIT
BY AND BETWEEN
THE IRVINE COMPANY
AND
FIRSTWORLD ORANGE COAST
DATE: MARCH 5, 1998
<PAGE>
TABLE OF CONTENTS
1. DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2. DEMISE OF LEASED PREMISES.. . . . . . . . . . . . . . . . . . . . . . 2
2.1 Demise of Leased Premises. . . . . . . . . . . . . . . . . . . 2
2.2 Audit of Leased Premises; Hazardous Materials. . . . . . . . . 2
2.3 Additional Spectrum. . . . . . . . . . . . . . . . . . . . . . 2
2.4 Additional Areas . . . . . . . . . . . . . . . . . . . . . . . 3
2.5 Marking and Reporting of Tubes.. . . . . . . . . . . . . . . . 4
2.6 Return of Leased Premises. . . . . . . . . . . . . . . . . . . 4
2.7 Assignment of Contract Rights and Warranties.. . . . . . . . . 4
2.8 Right of Entry . . . . . . . . . . . . . . . . . . . . . . . . 4
2.9 Obligation to Restore. . . . . . . . . . . . . . . . . . . . . 5
2.10 Installation of Network. . . . . . . . . . . . . . . . . . . . 5
2.11 Multiple Networks; Switch Service. . . . . . . . . . . . . . . 6
3. TERM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
4. RENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
4.1 Rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
4.2 Basic Percentage Rent. . . . . . . . . . . . . . . . . . . . . 8
4.3 Bonus Percentage Rent. . . . . . . . . . . . . . . . . . . . . 8
4.4 Audit Rights . . . . . . . . . . . . . . . . . . . . . . . . . 9
5. ADDITIONAL PAYMENTS BY FIRSTWORLD; IMPOSITION . . . . . . . . . . . . 10
5.1 Irvine's Net Return. . . . . . . . . . . . . . . . . . . . . . 10
5.2 Impositions. . . . . . . . . . . . . . . . . . . . . . . . . . 10
5.3 Assessments in Installments. . . . . . . . . . . . . . . . . . 10
5.4 Direct Payment by Irvine . . . . . . . . . . . . . . . . . . . 11
5.5 Right to Contest . . . . . . . . . . . . . . . . . . . . . . . 11
6. USE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
6.1 Use. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
6.2 Failure to Operate.. . . . . . . . . . . . . . . . . . . . . . 11
7. COMPLIANCE WITH APPLICABLE LAW. . . . . . . . . . . . . . . . . . . . 12
8. MAINTENANCE AND ALTERATIONS . . . . . . . . . . . . . . . . . . . . . 12
8.1 Obligation to Maintain.. . . . . . . . . . . . . . . . . . . . 12
8.2 Firstworld's Right to Perform Alterations. . . . . . . . . . . 12
8.3 Right to Enter Into Operations and Maintenance Agreements. . . 13
9. INDEMNITY; INSURANCE. . . . . . . . . . . . . . . . . . . . . . . . . 13
9.1 Firstworld Indemnity . . . . . . . . . . . . . . . . . . . . . 13
9.2 Exemption of Irvine from Liability.. . . . . . . . . . . . . . 13
9.3 Irvine Indemnity.. . . . . . . . . . . . . . . . . . . . . . . 14
9.4 Firstworld Insurance . . . . . . . . . . . . . . . . . . . . . 14
9.5 Form of Policies . . . . . . . . . . . . . . . . . . . . . . . 15
9.6 Increase in Liability Limits . . . . . . . . . . . . . . . . . 16
9.7 Release and Waiver of Subrogation. . . . . . . . . . . . . . . 16
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<PAGE>
10. DAMAGE OR DESTRUCTION . . . . . . . . . . . . . . . . . . . . . . . . 16
11. CONDEMNATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
11.1 Condemnation . . . . . . . . . . . . . . . . . . . . . . . . . 17
11.2 Temporary Condemnation.. . . . . . . . . . . . . . . . . . . . 17
11.3 Settlement or Compromise . . . . . . . . . . . . . . . . . . . 17
11.4 Prompt Notice. . . . . . . . . . . . . . . . . . . . . . . . . 17
12. TRANSFERS BY FIRSTWORLD . . . . . . . . . . . . . . . . . . . . . . . 18
12.1 Firstworld's Right to Assign . . . . . . . . . . . . . . . . . 18
12.2 Submittal for Consent. . . . . . . . . . . . . . . . . . . . . 18
12.3 Effect of Transfer.. . . . . . . . . . . . . . . . . . . . . . 18
12.4 Right of First Refusal . . . . . . . . . . . . . . . . . . . . 19
12.5 Permitted Transfers. . . . . . . . . . . . . . . . . . . . . . 19
12.6 Multiple Networks. . . . . . . . . . . . . . . . . . . . . . . 19
13. FINANCING BY FIRSTWORLD . . . . . . . . . . . . . . . . . . . . . . . 20
13.1 Financing Not Prohibited Transfer. . . . . . . . . . . . . . . 20
13.2 Cooperation with Lender Requirements.. . . . . . . . . . . . . 20
13.3 Notice of Financing. . . . . . . . . . . . . . . . . . . . . . 21
13.4 Notice of Default and Lender's Cure Rights . . . . . . . . . . 22
13.5 Obligations of Lender and Successors . . . . . . . . . . . . . 23
13.6 Lender Protections.. . . . . . . . . . . . . . . . . . . . . . 24
13.7 Reversionary Interest. . . . . . . . . . . . . . . . . . . . . 24
13.8 New Lease. . . . . . . . . . . . . . . . . . . . . . . . . . . 25
13.9 Concurrent Exercise. . . . . . . . . . . . . . . . . . . . . . 25
14. IRVINE CURE RIGHTS. . . . . . . . . . . . . . . . . . . . . . . . . . 25
14.1 Purpose. . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
14.2 Notice of Default. . . . . . . . . . . . . . . . . . . . . . . 25
14.3 Priority of Cure Rights. . . . . . . . . . . . . . . . . . . . 26
14.4 Irvine's Cure Rights . . . . . . . . . . . . . . . . . . . . . 26
14.5 Purchase of Financing Encumbrance; Subrogation . . . . . . . . 28
14.6 Right to Bid at Foreclosure Sale . . . . . . . . . . . . . . . 28
15. QUIET ENJOYMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
16. REPRESENTATIONS, WARRANTIES AND COVENANTS . . . . . . . . . . . . . . 29
16.1 Title to Leased Premises . . . . . . . . . . . . . . . . . . . 29
16.2 No Litigation. . . . . . . . . . . . . . . . . . . . . . . . . 29
17. FORCE MAJEURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
18. DEFAULTS; REMEDIES. . . . . . . . . . . . . . . . . . . . . . . . . . 30
18.1 Events of Default. . . . . . . . . . . . . . . . . . . . . . . 30
18.2 Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
18.3 Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
18.4 Late Payments. . . . . . . . . . . . . . . . . . . . . . . . . 32
18.5 Right to Perform.. . . . . . . . . . . . . . . . . . . . . . . 33
18.6 Waiver of Jury Trial . . . . . . . . . . . . . . . . . . . . . 33
18.7 Limitation . . . . . . . . . . . . . . . . . . . . . . . . . . 34
18.8 Damages Limitation . . . . . . . . . . . . . . . . . . . . . . 34
19. PROTECTION OF CONFIDENTIAL INFORMATION. . . . . . . . . . . . . . . . 34
19.1 Designation of Confidential Information. . . . . . . . . . . . 34
ii
<PAGE>
20. ARBITRATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
21. NO BROKER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
22. SUBORDINATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
23. WAIVERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
24. MEMORANDUM OF AGREEMENT; UCC FILING . . . . . . . . . . . . . . . . . 36
25. ESTOPPEL CERTIFICATES . . . . . . . . . . . . . . . . . . . . . . . . 37
26. MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
26.1 Notices. . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
26.2 Documents in Recordable Form.. . . . . . . . . . . . . . . . . 38
26.3 Further Assurances . . . . . . . . . . . . . . . . . . . . . . 38
26.4 Performance Under Protest. . . . . . . . . . . . . . . . . . . 38
26.5 No Third Party Beneficiaries.. . . . . . . . . . . . . . . . . 39
26.6 Interpretation . . . . . . . . . . . . . . . . . . . . . . . . 39
26.7 Delivery of Drafts . . . . . . . . . . . . . . . . . . . . . . 39
26.8 Headings.. . . . . . . . . . . . . . . . . . . . . . . . . . . 39
26.9 Cumulative Remedies. . . . . . . . . . . . . . . . . . . . . . 39
26.10 Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . 39
26.11 Amendments.. . . . . . . . . . . . . . . . . . . . . . . . . . 39
26.12 Partial Invalidity . . . . . . . . . . . . . . . . . . . . . . 39
26.13 Successors and Assigns . . . . . . . . . . . . . . . . . . . . 40
26.14 Governing Law. . . . . . . . . . . . . . . . . . . . . . . . . 40
26.15 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . 40
26.16 Time Periods . . . . . . . . . . . . . . . . . . . . . . . . . 40
26.17 Waivers. . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
26.18 Negation of Partnership. . . . . . . . . . . . . . . . . . . . 40
26.19 Attorneys' Fees. . . . . . . . . . . . . . . . . . . . . . . . 40
26.20 Relationships. . . . . . . . . . . . . . . . . . . . . . . . . 40
TABLE OF APPENDICES
APPENDIX 1: GLOSSARY OF DEFINED TERMS
APPENDIX 2: DEPICTION OF EXISTING SPECTRUM
APPENDIX 3: DEPICTION OF ADDITIONAL SPECTRUM
APPENDIX 4: EXISTING AVAILABLE SPECTRUM CONDUIT
APPENDIX 5: ADDITION MEMORANDUM
APPENDIX 6: PHASING PLAN
APPENDIX 7: MEMORANDUM OF LEASE
iii
<PAGE>
AGREEMENT FOR LEASE OF TELECOMMUNICATIONS CONDUIT
THIS AGREEMENT FOR LEASE OF TELECOMMUNICATIONS CONDUIT (this
"Agreement") is dated as of March 5, 1998 and made by and between THE IRVINE
COMPANY, a Delaware corporation, ("Irvine") and FIRSTWORLD ORANGE COAST, a
California corporation ("FirstWorld").
RECITALS
A. Irvine has constructed the Existing Available Spectrum Conduit
within the Existing Spectrum and will construct the Additional Available
Spectrum Conduit within the Additional Spectrum. Portions of the Additional
Spectrum and the Additional Available Spectrum Conduit may already be partially
developed or under development as of the date of this Agreement, but are not
being included within the Existing Spectrum or the Existing Available Spectrum
Conduit due to the Parties' desire to limit changes in the Existing Spectrum and
the Existing Available Spectrum Conduit during the negotiation of this
Agreement.
B. FirstWorld desires to build, own and operate within the Spectrum,
the Spectrum Network by installing Cable into the Available Spectrum Conduit.
For purposes of this Agreement, the Irvine Networks shall include all Cable
installed in Conduit or any portion thereof within the Spectrum or any
Additional Areas which may be incorporated into this Agreement in accordance
with the terms hereof, but shall exclude all Equipment installed by FirstWorld
to connect Cable to Buildings. The Irvine Networks will service properties
within the Spectrum, as well as such Additional Areas which are incorporated
into this Agreement in accordance with the terms hereof, including both
properties owned by Irvine and those not owned by Irvine, provided that
FirstWorld shall have the right to create additional Networks to service
portions of the Spectrum or Additional Areas in accordance with the terms and
provisions hereof.
C. Irvine desires to lease to FirstWorld and FirstWorld desires to
lease from Irvine the space within the Conduit so that FirstWorld can install
the Network and provide service to the Serviced Buildings, on the terms and
provisions set forth herein.
D. Upon installation of Available Other Conduit in Additional Areas,
all or any portion of such Additional Areas may, but need not be, incorporated
into this Agreement in accordance with the terms and provisions hereof.
NOW, THEREFORE, in consideration of the mutual agreements contained
herein, and other good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, the Parties hereto agree as follows:
<PAGE>
AGREEMENT
1.
DEFINITIONS
Initially capitalized terms used herein as defined terms shall have
the meanings given to them in the Glossary of Defined Terms attached hereto as
APPENDIX 1 (such definitions to be equally applicable to both the singular and
plural forms of the terms defined) or elsewhere in this Agreement.
2.
DEMISE OF LEASED PREMISES.
2.1 DEMISE OF LEASED PREMISES. Irvine hereby leases the Leased
Premises to FirstWorld and FirstWorld hereby takes and hires the Leased Premises
from Irvine for the purpose of installing, maintaining, operating, repairing,
replacing and augmenting the Cable necessary for the operation of the Irvine
Networks. The Leased Premises shall also include space within any additional
Conduit installed or constructed by FirstWorld within the Spectrum and any
Additional Areas, which additional Conduit shall upon construction thereof
become the property of Irvine and a portion of the Conduit. Irvine does not
currently anticipate that it will, and Irvine shall not be required to,
construct building entrance conduit systems as part of any Available Conduit.
2.2 AUDIT OF LEASED PREMISES; HAZARDOUS MATERIALS. FirstWorld hereby
acknowledges that the Existing Available Spectrum Conduit was installed by
Irvine over a period of years, and that portions of the same may have been
installed over ten (10) years ago. Prior to the date of this Agreement,
FirstWorld has undertaken a complete audit of the Existing Available Spectrum
Conduit and approved of the condition of the same. FirstWorld hereby accepts
the Leased Premises and the Existing Available Spectrum Conduit (as they exist
as of the date of this Agreement) in their as-is condition and acknowledges that
it has undertaken such reviews and investigations of the condition of the same
as it deems necessary or appropriate. From time to time after the date of this
Agreement, Irvine shall provide prompt notice to FirstWorld that Available
Conduit has been or is about to be constructed (except to the extent space
within such Available Conduit is already a part of the Leased Premises).
Notwithstanding the foregoing, FirstWorld shall have no obligation to remove or
remediate any Hazardous Materials located within the Leased Premises or
otherwise affecting any Conduit except to the extent caused, permitted or
contributed to by FirstWorld.
2.3 ADDITIONAL SPECTRUM. From time to time after the date of this
Agreement the Parties shall add to the Leased Premises, space within the
Additional Available Spectrum Conduit, as the same is constructed, by executing
an Addition Memorandum in the form of APPENDIX 5 attached hereto. The space
within a portion of any Additional Available Spectrum Conduit so added to the
Leased Premises shall be deemed to have been so added on the date which is
thirty (30) days after FirstWorld's receipt of notice that there is Additional
Available Spectrum Conduit. The Parties agree within ten (10) days after
receipt of notice to execute an
2
<PAGE>
Addition Memorandum, provided, however, that no failure by the Parties to
execute an Addition Memorandum shall invalidate any addition to the Leased
Premises effected by a notice that there is Additional Available Spectrum
Conduit. The Additional Available Spectrum Conduit shall be constructed by
Irvine in the Additional Spectrum without gaps and in a good and workmanlike
manner. Any Additional Available Spectrum Conduit shall be constructed so that
the portion of the same which is closest to any then existing Available Spectrum
Conduit is not more than 1,000 feet from a portion of such then existing
Available Spectrum Conduit. If Irvine constructs Additional Available Spectrum
Conduit which is more than 1,000 feet from any then existing Available Spectrum
Conduit, then the Parties shall review the location of such Additional Available
Spectrum Conduit together and Irvine will add space within the same to the
Leased Premises if FirstWorld determines that it can and will build or lease
facilities at its expense to connect such Additional Available Spectrum Conduit
to the Spectrum Network. If FirstWorld determines that it cannot or will not so
connect such Additional Available Spectrum Conduit, then Irvine shall add space
within such Additional Available Spectrum Conduit to the Leased Premises at a
later date when it can be added within 1,000 feet from a portion of the then
existing Available Spectrum Conduit. All Additional Available Spectrum Conduit
constructed after the date hereof shall include at least *** tubes to assure
FirstWorld that it will have *** tubes available to it in the Additional
Spectrum areas in which Conduit has not yet been constructed. FirstWorld
acknowledges that there may be Additional Available Spectrum Conduit which has
been constructed or is in the process of being constructed by Irvine as of the
date of this Agreement with less than *** and that construction of such
Additional Available Spectrum Conduit with less than *** tubes shall not
constitute a violation by Irvine of its obligations under the foregoing
sentence, nor shall Irvine be obligated to add additional tubes to the same.
2.4 ADDITIONAL AREAS. From time to time after the date of this
Agreement, Irvine may elect by written notice to FirstWorld to add to the Leased
Premises, space within Available Other Conduit, which notice shall also
designate the Additional Area to be serviced by such Available Other Conduit.
If Irvine elects to add space within Available Other Conduit to the Leased
Premises, such space within the Available Other Conduit shall be added to the
Leased Premises effective upon the date which is thirty (30) days after Irvine's
notice of such election, and the Parties shall, within thirty (30) days after
Irvine's notice of such election, or upon subsequent request by either Party,
execute an Addition Memorandum in the form of APPENDIX 5 attached hereto. After
the addition of space within any Available Other Conduit in a particular
Additional Area to the Leased Premises by Irvine, space within any Available
Other Conduit thereafter constructed in such Additional Area shall automatically
be added to the Leased Premises effective thirty (30) days after FirstWorld's
receipt of notice that the same has been constructed, and the Parties shall
execute an Addition Memorandum with regard to the space within such Available
Other Conduit within ten (10) days after request by either Party.
Notwithstanding the foregoing, no failure by the Parties to execute an Addition
Memorandum shall invalidate any addition to the Leased Premises in accordance
with this Section 2.4. Available Other Conduit to be added to this Agreement
shall be constructed by Irvine without gaps and in a good and workmanlike
manner. All Available Other Conduit to be added to this Agreement which
- ------------------------
*** CONFIDENTIAL TREATMENT REQUESTED
3
<PAGE>
is constructed after the date hereof shall include at least *** tubes to assure
FirstWorld that it will have *** tubes available to it in the Additional Areas
in which Conduit has not yet been constructed.
2.5 MARKING AND REPORTING OF TUBES. FirstWorld shall at its expense
mark all of the Conduit utilized by it to distinguish the Conduit tubes utilized
by FirstWorld from the other tubes within telecommunications conduit installed
by Irvine in the same cluster or trench as the Conduit. FirstWorld shall also
register or report to an Underground Agency, the location of the Conduit
utilized by FirstWorld, including all additions thereto constructed by
FirstWorld.
2.6 RETURN OF LEASED PREMISES. Upon the expiration or sooner
termination of this Agreement, FirstWorld shall return the Leased Premises to
Irvine in at least its original condition free and clear of all liens and
encumbrances caused or permitted by FirstWorld, subject to reasonable wear and
tear, and subject to the provisions of this Agreement, casualty, acts of God and
condemnation. Upon such surrender, FirstWorld shall leave in place all Cable
and all Conduit installed by it or on its behalf, including the Cable located in
any Building between the point at which such Cable enters the Building and the
MDF in such Building.
2.7 ASSIGNMENT OF CONTRACT RIGHTS AND WARRANTIES. Without limiting
Irvine's right to assert warranty claims in connection with defects in the
construction of any Conduit, Irvine hereby agrees to enforce or to permit
FirstWorld to enforce for the Term of this Agreement, all of Irvine's rights
under any and all contracts relating to the construction and installation of the
Conduit, including without limitation all express or implied warranties of
manufacturers, fabricators, contractors and subcontractors.
2.8 RIGHT OF ENTRY. In connection with FirstWorld's use of the
Leased Premises, Irvine hereby agrees to permit FirstWorld to enter upon such
portions of the real property owned by Irvine within the Spectrum from time to
time and not leased to third parties (unless FirstWorld obtains the consent of
such third parties to such entry), or into such easement areas as to which
easements are held by Irvine which permit Irvine to allow a third party access
over the same, as may be designated by Irvine from time to time upon request by
FirstWorld for such entry, for the purposes of installing, maintaining,
operating, repairing, replacing and augmenting the Conduit, the Cable and the
Irvine Networks. Irvine will not unreasonably withhold, condition or delay its
consent to any entry by FirstWorld upon real property owned by Irvine or into
easement areas held by Irvine, where such entry is required by FirstWorld as an
access route to allow FirstWorld to install the Irvine Networks. To the extent
that Irvine is permitting FirstWorld to utilize easement rights held by Irvine,
FirstWorld agrees to be bound by the terms and conditions of said easements,
insofar as they pertain to FirstWorld's utilization of the same, and Irvine
shall provide FirstWorld with a copy of the instrument creating such easement
upon FirstWorld's request. FirstWorld agrees that as to any real property which
Irvine permits FirstWorld to enter upon pursuant to this Section 2.8, FirstWorld
will not unreasonably interfere with the use of such real property by the owner,
lessee or occupant thereof. FirstWorld shall have the right to rely upon
Irvine's statement that it owns a parcel of real property or holds
- -----------------
*** CONFIDENTIAL TREATMENT REQUESTED
4
<PAGE>
particular easement rights. The right of entry contemplated in this Section
2.8, is not intended to address the facilities which FirstWorld anticipates it
will require for installation of Equipment at various points along the Irvine
Networks, and which FirstWorld refers to as its access nodes. The Parties
anticipate that any space or facilities required by FirstWorld on Irvine
property for the same will be leased by FirstWorld from Irvine separately from
this Agreement upon terms to be agreed to between the Parties.
2.9 OBLIGATION TO RESTORE. FirstWorld shall restore any real
property which it enters upon in accordance with Section 2.8, above, to
substantially the same condition as prior to FirstWorld's entry, which
restoration shall include, without limitation, restoration of the surface of any
trenched areas, recompaction of soil used to fill any trenches, and restoration
of any removed, damaged or destroyed landscape.
2.10 INSTALLATION OF NETWORK.
2.10.1 FirstWorld shall construct the portion of the Spectrum
Network that is located within the Existing Spectrum by FirstWorld's
installation of Cable in the Existing Available Spectrum Conduit, and
installation of additional Conduit to serve areas of the Existing Spectrum which
do not have Existing Available Spectrum Conduit and installation of Cable in
such additional Conduit, and connecting all of the same to a fully operational
telecommunications service or an operational switching facility according to the
Phasing Plan attached to this Agreement as APPENDIX 6, which Phasing Plan has
been prepared by FirstWorld and approved by Irvine, and according to
construction drawings that will be prepared by FirstWorld and submitted from
time to time to the City (if so required by the City) and to Irvine for
approval. Irvine's approval of such construction drawings shall not be
unreasonably withheld, conditioned or delayed. Notwithstanding any contrary
provision of this Agreement, if for any reason whatsoever and without regard to
any provisions of this Agreement as to Force Majeure or Unavoidable Delay,
FirstWorld fails to complete the construction of the portion of the Spectrum
Network that is located within the Existing Spectrum in accordance with this
Section 2.10.1 on or before the date which is eighteen (18) months after the
date of this Agreement (the "Initial Installation Date"), then upon notice from
Irvine given at any time after such date but prior to FirstWorld's completion of
such construction, Irvine may as its sole remedy for such failure terminate this
Agreement and the License Agreement.
2.10.2 Upon the addition of any space within Additional
Available Spectrum Conduit to the Leased Premises pursuant to Section 2.3,
FirstWorld shall prepare and submit to Irvine for its approval (which approval
shall not be unreasonably withheld, conditioned or delayed) a Phasing Plan for
the portion of the Additional Spectrum to be serviced by such Additional
Available Spectrum Conduit which provides for the completion of installation of
Cable within the main trunk line of such Additional Available Spectrum Conduit
not more than one hundred twenty (120) days after the addition of the same to
the Leased Premises (or, if such space within Additional Available Spectrum
Conduit is added prior to the Initial Installation Date, not later than one
hundred twenty (120) days after the Initial Installation Date), and shall
install Cable in such Additional Available Spectrum Conduit and cause the same
to be connected to (a) the Spectrum Network, (b) a fully operational
telecommunications service or (c) an operational switching facility, in
accordance with the approved Phasing Plan for the same and construction drawings
that will be prepared by FirstWorld and submitted from time to time to the City
(if so
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required by the City) and to Irvine for approval. Irvine's approval of such
construction drawings shall not be unreasonably withheld, conditioned or
delayed. Upon the addition of space within any Available Other Conduit to the
Leased Premises pursuant to Section 2.4, FirstWorld shall prepare and submit to
Irvine for its approval (which approval shall not be unreasonably withheld,
conditioned or delayed) a Phasing Plan for the Additional Area to be serviced by
such Available Other Conduit which provides for the completion of installation
of Cable within the main trunk line of such Available Other Conduit within one
hundred eighty (180) days after the addition of the same to the Leased Premises
(or, if such space within Available Other Conduit is added prior to the Initial
Installation Date, not later than one hundred eighty (180) days after the
Initial Installation Date), and shall install Cable in such Available Other
Conduit and cause any new Network established for the added Additional Area or
portion thereof to be connected to a fully operational telecommunications
service or an operational switching facility in accordance with the approved
Phasing Plan for the same and construction drawings that will be prepared by
FirstWorld and submitted from time to time to the City (if so required by the
City) and to Irvine for approval. Irvine's approval of such construction
drawings shall not be unreasonably withheld, conditioned or delayed.
Notwithstanding the foregoing sentence, once an initial Phasing Plan for an
Additional Area to be served by Available Other Conduit has been prepared by
FirstWorld and approved by Irvine, any further additions of Available Other
Conduit within the same Additional Area, or an expansion thereof into contiguous
real property, shall provide for the completion of installation of Cable within
the main trunk line of such Available Other Conduit within one hundred twenty
(120) days after the addition of the same to the Leased Premises (or, if such
space within Available Other Conduit is added prior to the Initial Installation
Date, not later than one hundred twenty (120) days after the Initial
Installation Date).
2.10.3 Completion of a phase shall mean the completion of
installation of all Cable necessary to provide service for that phase of a
Network and connection of such phase to a fully operational telecommunications
service line or an operational switching facility, such that service could be
provided to any property abutting the Conduit within not more than sixty (60)
days after request for service by an occupant of such property. FirstWorld shall
have the right to revise any Phasing Plan from time to time in order to respond
to changes in technology and to Customer and User requirements and to achieve
operating efficiencies, or in the case of any Additional Spectrum area or any
Additional Area, to reflect a change in Irvine's anticipated development
schedule for the area. Any material changes to any Phasing Plan shall be
subject to Irvine's approval, which shall not be unreasonably withheld,
conditioned or delayed, provided, that it shall be reasonable for Irvine to
withhold its approval to any change to a Phasing Plan which would materially
reduce or delay the potential Basic and Bonus Percentage Rent which could be
earned by Irvine pursuant to this Agreement, or which would materially reduce
the prompt provision of fiber optic service to Buildings.
2.11 MULTIPLE NETWORKS; SWITCH SERVICE.
2.11.1 FirstWorld shall have the right to provide service to
the Spectrum Service Area through a single Network or through multiple Networks,
and may provide service to any Additional Area as to which space in Available
Other Conduit has been added to this Agreement from the Spectrum Network or from
an Additional Network. FirstWorld may provide service to any areas not covered
by this Agreement utilizing the Spectrum Network or any Additional Network, so
long as: (a) there is at all times adequate capacity in the Spectrum
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Network or such Additional Network to provide service to Customers in the
Spectrum and the Additional Areas as to which space in Available Other Conduit
has then been added to the Leased Premises pursuant to this Agreement; (b) the
provision of service to such areas not covered by this Agreement (as to any
single area or in the aggregate) does not materially and adversely impact the
speed or quality of service provided to the Spectrum or such portions of the
Additional Areas; and (c) there will be at all times an alternative fiber optic
route to provide service to any such areas not covered by this Agreement without
use of the Spectrum Network or any Additional Network.
2.11.2 FirstWorld contemplates providing service to the
Spectrum Network from one of its Affiliate's switching facility in Anaheim or
any other switching facility which FirstWorld or any of its Affiliates may
hereafter control. Such facility is expected to be utilized in providing
service to multiple Networks, including Networks other than the Irvine Networks.
FWC may transfer such facility into a separate Affiliate after the date hereof,
and will enter into a separate agreement or agreements between such Affiliate
and FirstWorld with regard to the provision of service to the Irvine Networks
from such switching facility. No provision of this Agreement shall be construed
as causing such switching facility to be a part of the Spectrum Network or any
Additional Network, or requiring the transfer of such switching facility to a
separate Affiliate. In the event that Irvine succeeds to rights of FirstWorld
pursuant to the terms of this Agreement, including without limitation by
exercising any of its cure rights under Article 14 or its right of first refusal
under Section 12.4, Irvine shall have the option as to whether to assume any
agreement regarding the provision of service from such switching facility or to
terminate such agreement as to the Irvine Networks, and any such agreement
regarding any such switching facility shall acknowledge and affirm the rights of
Irvine under this Agreement as to agreements regarding switching facilities.
3.
TERM
The term of this Agreement shall commence on the date of this
Agreement (the "Commencement Date") and shall expire on December 31, 2027,
unless terminated sooner as provided herein.
4.
RENT
4.1 RENT. Commencing on the first Payment Date of the Term, and on
each Payment Date thereafter during the Term, FirstWorld shall pay the Rent to
Irvine, without notice or demand, in lawful money of the United States of
America. Rent shall be paid by FirstWorld to Irvine in arrears on each Payment
Date with respect to the immediately preceding calendar quarter at the address
for Irvine set forth in Section 26.1, below, or at such other address as Irvine
may from time to time specify by written notice in accordance with Section 26.1,
below. Concurrently with the payment of Rent, FirstWorld shall submit to Irvine
a report showing the information on which the amount of Rent paid by FirstWorld
was determined, and the calculation of Rent, each in reasonable detail to
provide Irvine a basis for verifying FirstWorld's determination of Rent.
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4.2 BASIC PERCENTAGE RENT. The Basic Percentage Rent shall equal
*** percent (***%) of the Adjusted Gross Revenue from operation of the Irvine
Networks, whether to buildings owned by Irvine or by any other Person.
4.3 BONUS PERCENTAGE RENT.
4.3.1 The Bonus Percentage Rent payable for any calendar
quarter shall equal the sum of: (a) *** percent ( *** %) of the amount by which
Adjusted Gross Combined Revenue for the calendar quarter preceding the Payment
Date in question exceeds *** Dollars ($ *** ) but is less than or equal to ***
Dollars ($ *** ); (b) *** percent ( *** %) of the amount by which Adjusted Gross
Combined Revenue earned by FirstWorld for the calendar quarter preceding the
Payment Date in question exceeds *** Dollars ($ *** ) but is less than or equal
to *** Dollars ($ *** ); and (c) *** percent ( *** %) of the amount by which
Adjusted Gross Combined Revenue collected by FirstWorld for the calendar quarter
preceding the Payment Date in question exceeds *** Dollars ($ *** ).
4.3.2 Within sixty (60) days after the expiration of each
Fiscal Year, FirstWorld shall deliver to Irvine, FirstWorld's calculation of its
Adjusted Gross Revenue and Adjusted Gross Combined Revenue for such Fiscal Year.
If the Bonus Percentage Rent payable for such Fiscal Year exceeds the sum of all
quarterly payments made by FirstWorld pursuant to Section 4.3.1 with respect to
such Fiscal Year, then FirstWorld shall pay Irvine the amount of such excess
concurrently with FirstWorld's delivery to Irvine of FirstWorld's calculation of
its Adjusted Gross Revenue earned for such Fiscal Year. If the Bonus Percentage
Rent payable for such Fiscal Year is less than the sum of all quarterly payments
made by FirstWorld pursuant to Section 4.3.1 with respect to such Fiscal Year
then FirstWorld may credit such excess against the Bonus Percentage Rent next
payable under this Agreement, provided, however, that for the Fiscal Year ending
at or after the end of the Term, such excess, if any, shall be paid to
FirstWorld by Irvine within thirty (30) days after Irvine receives FirstWorld's
calculation of its Adjusted Gross Revenue and Adjusted Gross Combined Revenue
for such Fiscal Year. Bonus Percentage Rent payable for any Fiscal Year shall
be calculated as the sum of: (a) *** percent ( *** %) of the amount by which
Adjusted Gross Combined Revenue earned by FirstWorld for each Fiscal Year
exceeds *** Dollars ($ *** ) but is less than or equal to *** Dollars ($ *** );
(b) *** percent ( *** %) of the amount by which Adjusted Gross Combined Revenue
earned by FirstWorld for each Fiscal Year exceeds *** Dollars ($ *** ) but is
less than or equal to *** Dollars ($ *** ); and (c) *** percent ( *** %) of the
amount by which Adjusted
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*** CONFIDENTIAL TREATMENT REQUESTED
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Gross Combined Revenue earned by FirstWorld for each Fiscal Year exceeds ***
Dollars ($***).
4.4 AUDIT RIGHTS. Irvine shall have the right from time to time, but
no more frequently than once every twelve (12) months, upon not less than three
(3) business days prior notice, during normal business hours, to undertake such
inspections and/or audits of FirstWorld's books and records as Irvine may deem
necessary or appropriate to audit FirstWorld's Gross Revenue, Adjusted Gross
Revenue, Adjusted Gross Combined Revenue, Basic Percentage Rent and/or Bonus
Percentage Rent, and any all revenues and expenses of FirstWorld related
thereto, including records of FirstWorld's affiliated, subsidiary or parent
entities to the extent necessary to understand any inter-company accounts shown
on the books and records of FirstWorld which would be relevant to such audit.
If it is ultimately determined in connection with any such audit that FirstWorld
has underpaid its Rent by more than *** ( *** ) percent, then FirstWorld shall
reimburse Irvine upon demand for Irvine's costs incurred in conducting such
audit. Irvine shall have the right to copy such books and records in connection
with such audit, provided, however, that Irvine hereby agrees that all
information obtained by Irvine in conducting any such audit shall constitute
Pre-Authorized Confidential Information, provided that the same may be disclosed
to the extent necessary: to enable Irvine to enforce its rights hereunder; or to
enable the review of such books and records by auditors and accountants retained
by Irvine in connection with such audit who will also treat such information as
Confidential Information. FirstWorld agrees to maintain good and accurate books
and records, and to maintain its accounting in accordance with generally
accepted accounting principles consistently applied. Any audit to be undertaken
by Irvine with regard to any Fiscal Year, or any calendar quarter within such
Fiscal Year, pursuant to this Section 4.4, shall be undertaken not later than
*** ( *** ) months following FirstWorld's delivery to Irvine of FirstWorld's
calculation of its Adjusted Gross Revenue and Adjusted Gross Combined Revenue
for such fiscal year pursuant to Section 4.3.2, above, and if Irvine does not
commence any such audit within such *** ( *** ) month period, Irvine shall
conclusively be deemed to have waived its right to an audit with respect to such
Fiscal Year, and any calendar quarter within any such Fiscal Year, and shall
thereafter be precluded from bringing any legal action or arbitration to compel
an audit for such Fiscal Year, or any calendar quarter during such Fiscal Year,
or to recover any amounts unpaid for such Fiscal Year or any calendar quarter
during such Fiscal Year. If any such audit discloses that FirstWorld has
underpaid its Rent, and FirstWorld disputes the results of such audit, then, to
the extent that the Parties cannot resolve such dispute between themselves
within a reasonable period of time, either Party may require such dispute to be
resolved by arbitration in accordance with the provisions of Article 20.
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*** CONFIDENTIAL TREATMENT REQUESTED
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ADDITIONAL PAYMENTS BY FIRSTWORLD; IMPOSITIONS
5.1 IRVINE'S NET RETURN. The Parties intend that the Rent payable by
FirstWorld shall provide Irvine with net return for the Term, free of any
expenses or charges with respect to the Leased Premises, except as specifically
provided in this Agreement. Accordingly, except as otherwise provided in this
Agreement, FirstWorld shall pay as additional rent and discharge, before failure
to pay the same shall create a material risk of forfeiture or give rise to a
penalty, each and every item of expense, of every kind and nature whatsoever,
related to or arising from the Leased Premises, or by reason of or in any manner
connected with or arising from the insuring, operation, maintenance, repair, use
or occupancy of the Leased Premises or any portion of the Leased Premises.
Notwithstanding anything to the contrary in this Agreement, FirstWorld shall not
be required: to pay any construction costs, depreciation, amortization, or
financing or refinancing costs incurred by Irvine with respect to Conduit
installed by it (except for obligations of FirstWorld under Article 9 to repair
damage caused by FirstWorld or to indemnify Irvine); to incur any expense
arising from Irvine's breach of its obligations under this Agreement or the
material inaccuracy of any representations or warranties of Irvine set forth in
this Agreement; to maintain, repair, insure or incur any other expense with
respect to conduit or tubes that are not part of the Leased Premises (except for
obligations of FirstWorld under Article 9 to repair damage caused by FirstWorld
or to indemnify Irvine).
5.2 IMPOSITIONS. For any period within the Term of this Agreement
(with daily proration for periods partially within the Term and partially
outside the Term), FirstWorld shall pay and discharge all Impositions, related
to the Cable, the Equipment and any Conduit, before the same are delinquent.
FirstWorld shall also pay all interest and penalties assessed by any
Governmental Authority on account of late payment of any Imposition, unless such
late payment was caused by Irvine's failure to remit an Imposition (paid to
Irvine by FirstWorld), in which case Irvine shall pay such interest and
penalties. To the extent that any Imposition is allocable to both the Leased
Premises and other property of Irvine, Irvine shall allocate such Imposition on
a reasonable basis as determined by Irvine, and shall notify FirstWorld of its
allocable share of such Imposition. Concurrently with such notice, Irvine shall
provide FirstWorld with a copy of the bill for the same and such reasonable
information regarding Irvine's method of allocation as to permit FirstWorld to
evaluate the same. If the bill for any Imposition which is FirstWorld's
obligation to pay hereunder is sent to Irvine by the Governmental Authority,
Irvine shall deliver such bill to FirstWorld as soon as reasonably possible
after Irvine's receipt of the same. FirstWorld hereby acknowledges that it has
been informed by Irvine that Irvine does not believe that the Conduit or any of
the easements within which the Conduit is located on real property owned by
parties other than Irvine, have ever been subjected to any separate Impositions,
and FirstWorld acknowledges that the installation of the Cable and/or the Irvine
Networks, may cause a Governmental Authority to assess Impositions upon the
Conduit and/or certain of the easements held by Irvine within which the Conduit
is located. FirstWorld acknowledges that in such event, all such Impositions
will be allocated to the Conduit and will be a part of the Impositions for which
FirstWorld will be responsible pursuant to this Section 5.2.
5.3 ASSESSMENTS IN INSTALLMENTS. To the extent permitted by
Applicable Law, FirstWorld shall have the right to apply for conversion of any
assessment or Imposition to cause it
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to be payable in installments. After such conversion, FirstWorld shall pay and
discharge only such installments of such assessment or Imposition as shall
become due and payable during the Term.
5.4 DIRECT PAYMENT BY IRVINE. If any Person entitled to receive
payment of an Imposition refuses to accept it from FirstWorld, then FirstWorld
shall give Irvine notice of such fact and shall remit payment of such Imposition
to Irvine in a timely manner, and Irvine shall thereafter be responsible for
remitting the same to such Person.
5.5 RIGHT TO CONTEST. Notwithstanding anything to the contrary in
this Agreement, FirstWorld shall have the right to contest, at its sole expense,
by appropriate legal proceedings diligently conducted in good faith, the amount
or validity of any Imposition or other tax or fee and the valuation, assessment
or reassessment (whether proposed or final) of the Leased Premises for purposes
of real estate and personal property taxes. FirstWorld may defer payment of the
contested amount pending the outcome of such contest, provided that such
deferral does not subject the Leased Premises or the Conduit or any other right
or asset of Irvine, to any risk of forfeiture or Irvine to any risk of criminal
liability. Irvine shall not be required to join in any such contest proceedings
unless such proceedings must be brought in the name of Irvine, provided however,
that Irvine shall have the right to participate in any such proceedings to the
extent it determines that such participation is necessary or appropriate to
protect its interests, and Irvine shall be entitled to be reimbursed by
FirstWorld upon demand for legal fees incurred by it in participating in any
such proceeding. If any such proceedings must be brought in Irvine's name,
Irvine shall cooperate with FirstWorld so as to permit such proceedings to be
brought in Irvine's name. FirstWorld shall pay all reasonable costs and
expenses (including reasonable attorneys' fees) incident to such proceedings.
FirstWorld shall be entitled to any refund of any contested amount (and
penalties and interest paid by FirstWorld) to the extent such refund is of
amounts previously paid by FirstWorld with regard to such contested amount,
whether such refund is made during or after the Term of this Agreement. Upon
termination of FirstWorld's contest of any amount, FirstWorld shall pay the
amount (if any) as has been finally determined in such proceedings to be due,
together with any costs, interest, penalties or other liabilities in connection
with such Imposition.
6.
USE
6.1 USE. FirstWorld may use the Leased Premises for the development,
construction, installation, operation, maintenance, repair, replacement,
augmentation, improvement and modification of the Irvine Networks.
6.2 FAILURE TO OPERATE. In the event that FirstWorld fails to
operate the Irvine Networks or otherwise provide fiber optic telecommunications
service on the Irvine Networks for a consecutive period of five (5) days or more
then, in addition to any other rights or remedies of Irvine hereunder and
subject to the rights and remedies of any Lender under Articles 13 and 14,
Irvine may until such failure is cured by FirstWorld (but shall not be obligated
to) either remedy such failure directly or cause another fiber optic service
provider to provide service, as an agent or contractor of Irvine, utilizing the
Irvine Networks. In either such case, FirstWorld shall upon Irvine's demand
bear all expenses for, or reimburse Irvine for, all costs incurred in connection
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with, Irvine's exercise of its rights under this Section 6.2. If Irvine elects
to exercise its rights under this Section 6.2, Irvine shall also have the right
during any period in which it is exercising such remedy to utilize or to permit
another fiber optic service provider as an agent or contractor of Irvine to
utilize FirstWorld's Equipment.
7.
COMPLIANCE WITH APPLICABLE LAW
During the Term of this Agreement, FirstWorld shall, at its own
expense, observe and comply with all Applicable Laws affecting FirstWorld's use
of the Leased Premises. FirstWorld shall procure every permit or other
authorization required in connection with FirstWorld's use of the Leased
Premises or required in connection with the installation of any Cable within the
Conduit and comply with all such permits and other authorizations.
Notwithstanding the foregoing, FirstWorld shall have the right to contest any
such Applicable Law, so long as such contest does not subject the Leased
Premises to any risk of forfeiture or Irvine to any risk of criminal liability.
8.
MAINTENANCE AND ALTERATIONS
8.1 OBLIGATION TO MAINTAIN. During the Term, FirstWorld shall make,
or cause to be made, in a timely manner all repairs, restorations and
replacements (whether minor or not) required to maintain, at all times, the
Leased Premises and the Conduit, in good operating condition and repair.
8.2 FIRSTWORLD'S RIGHT TO PERFORM ALTERATIONS. Subject to Irvine's
prior written consent as set forth below, which consent shall not be
unreasonably withheld or conditioned, FirstWorld shall be entitled from time to
time to make, alter, modify or reconstruct, such improvements, alterations or
additions to the Conduit or portions thereof, as FirstWorld shall consider
necessary or appropriate to enable the efficient functioning of the Irvine
Networks. If FirstWorld desires to make any reconstruction, improvements, or
additions FirstWorld shall submit plans for the same showing the proposed
location and materials to be utilized to Irvine prior to the commencement of the
same for Irvine's review and approval, which approval shall not be unreasonably
withheld or conditioned. If Irvine fails to approve or disapprove of such plans
within thirty (30) days after its receipt of the same, Irvine shall be deemed to
have approved the same. In performing any work pursuant to this Section 8.2, or
in performing any repairs to or maintenance of the Conduit, FirstWorld shall
keep the Leased Premises and the Conduit free and clear of all liens for work
performed and materials provided. At least fifteen (15) days prior to
commencing any work FirstWorld will give Irvine notice that work will be
performed to enable Irvine to file notices of non-responsibility. Any
alterations, modifications, reconstruction, improvements, repairs, or additions,
including any building entrance conduit systems installed by FirstWorld under
this Agreement or the License Agreement, shall become a part of the Conduit and
the property of Irvine upon the completion thereof (and the space therein shall
then be a portion of the Leased Premises) and shall be surrendered with the
Leased Premises upon the expiration of the Term, or any earlier termination of
this Agreement.
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8.3 RIGHT TO ENTER INTO OPERATIONS AND MAINTENANCE AGREEMENTS.
FirstWorld shall be entitled to enter into agreements with other Persons,
whether affiliated or non-affiliated, under which such other Persons may
undertake operational or maintenance duties associated with FirstWorld's rights
and/or obligations hereunder, including, without limitation, (a) sales, (b)
Conduit, Cable and/or Equipment installation, maintenance and repair, and (c)
other similar duties. Neither said agreements nor any performance thereunder
shall constitute a Transfer within the meaning of Section 12.1 hereof.
9.
INDEMNITY; INSURANCE
9.1 FIRSTWORLD INDEMNITY. FirstWorld shall indemnify, defend,
protect and hold harmless Irvine its principals, officers, directors, agents,
employees and servants from and against any and all losses, costs, expenses,
claims, liabilities and damages (including reasonable attorneys' fees) arising
directly or indirectly from (a) the use and operation of the Leased Premises and
the Conduit by FirstWorld or its employees, agents or contractors, (b) the
operation of the Networks, by FirstWorld or its employees, agents, or
contractors, (c) FirstWorld's breach of its obligations or representations under
this Agreement, (d) FirstWorld's exercise of any rights of entry periodically
provided to FirstWorld as contemplated by Section 2.8, above, or (e) the
construction, operation, maintenance and repair of Conduit and Cable, in each of
the above cases except to the extent ultimately proved to be caused by the sole
active negligence or willful misconduct of Irvine, its employees, agents or
contractors, or Irvine's breach of its obligations, representations or
warranties under this Agreement. In cases of alleged negligence, or any alleged
breach of an obligation, representation or warranty by Irvine under this
Agreement, asserted by third parties against Irvine which arise out of, are
occasioned by, or are in any way attributable to any of the matters specified in
clauses (a) through (e), above, FirstWorld shall accept any tender of defense
for Irvine and shall, notwithstanding any allegation of negligence or willful
misconduct on the part of Irvine, defend Irvine and pay all costs, expenses and
attorneys' fees incurred in connection with such litigation, provided that
FirstWorld shall not be liable for any such injury or damage, and Irvine shall
reimburse FirstWorld for the reasonable attorneys' fees and costs incurred by
FirstWorld, all to the extent and in the proportion that such injury or damage
is ultimately determined by a court of competent jurisdiction (or in connection
with any negotiated settlement agreed to by Irvine) to be attributable to the
sole active negligence or willful misconduct of Irvine, or Irvine's breach of
any its obligations, representations or warranties under this Agreement. The
provisions of this Section shall survive termination of this Agreement.
9.2 EXEMPTION OF IRVINE FROM LIABILITY. FirstWorld hereby agrees
that Irvine, including Irvine's officers, trustees, partners, affiliates,
directors, agents, management contractors and representatives (collectively
referred to as "Irvine's Affiliates"), shall not be liable for, and FirstWorld
hereby irrevocably waives any claim against such parties for, injury to
FirstWorld's business or loss of income therefrom or for damage to Cable and/or
Equipment or other property of FirstWorld, whether such damage or injury is
caused by or results from fire, steam, electricity, gas, water or rain, or from
the breakage, leakage, obstruction or other defects of pipes, sprinklers, wires,
appliances, plumbing, heating, ventilation, air conditioning or lighting
fixtures, or from any other cause; provided, however, that the foregoing shall
not limit Irvine's liability for a default by Irvine of an express
representation, warranty, covenant or obligation set
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forth in this Agreement or the License Agreement or from the sole active
negligence of Irvine or its employees, agents or contractors. Irvine and
Irvine's Affiliates shall not be liable for any damage arising from any act or
neglect of any other tenant of any Building.
9.3 IRVINE INDEMNITY. Irvine shall indemnify, protect and hold
harmless FirstWorld, its principals, officers, directors, agents, employees and
servants from and against any and all losses, costs, expenses, claims,
liabilities and damages (including reasonable attorneys' fees) arising directly
or indirectly from the sole active negligence or willful misconduct of Irvine,
its employees, agents or contractors, or Irvine's breach of its obligations,
representations or warranties under this Agreement. The provisions of this
Section shall survive termination of this Agreement.
9.4 FIRSTWORLD INSURANCE. FirstWorld shall procure and maintain in
force, or cause to be procured and maintained in force, throughout the Term of
this Agreement, the following insurance coverage:
9.4.1 A Commercial General Liability policy with a combined
single limit of at least *** Dollars ($ *** ) per occurrence and *** Dollars ($
*** ) in the aggregate. Such Comprehensive General Liability policy shall
include a Broad Form Endorsement including: Broad Form Property Damage;
Contractual Liability; Products and Completed Operations; and Explosion,
Collapse and Underground.
9.4.2 A Business Auto Policy providing a liability limit of
at least ***Dollars ($ *** ) for each accident and covering owned and non-owned
and hired automobiles.
9.4.3 A Workers' Compensation and Employer's Liability policy
providing California statutory Workers' Compensation benefits, including
Employer's Liability with at least the following limits:
Bodily Injury by Accident: $ *** each accident
Bodily Injury by Disease: $ *** policy limit
Bodily Injury by Disease: $ *** each employee
In addition, each Workers' Compensation and Employer's Liability policy shall
contain an insurer's waiver of subrogation in favor of Irvine.
9.4.4 A Builder's Risk policy or a Course of Construction
policy providing a liability limit of at least *** Dollars ($ *** ) covering the
Conduit during the
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*** CONFIDENTIAL TREATMENT REQUESTED
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course of construction (including, without limitation, installation of Cable
into the Conduit) against loss or damage caused by All Risk Builders Risk
perils.
9.4.5 Fire and All Risk insurance in an amount not less than
*** Dollars ($ *** ) per occurrence.
9.4.6 A Transmission and Distribution All Risk policy in an
amount not less than *** Dollars ($ *** ) with Replacement Cost Blanket
Endorsement and, for the Irvine Networks, an Agreed Amount Endorsement.
9.4.7 An All Risk Property Damage policy covering
FirstWorld's or its Affiliate's switching facility in Anaheim, as well as an
additional switching facilities in an amount not less than the full replacement
cost of the switching facilities and with an earthquake sublimit of not less
than *** ( *** ) percent of the replacement cost coverage amount.
9.4.8 Any combination of Primary, Umbrella and Excess
Liability policies which together provide total limits of at least *** Dollars
($ *** ) per occurrence and *** Dollars ($ *** ) in the aggregate.
9.4.9 As to any alterations, modifications, reconstruction,
improvements, or additions to the Conduit which involve a cost in excess of $
*** (which amount shall be increased from time to time by the same percentage
increase as the percentage increase in the CPI from and after the date of this
Agreement) and which involve construction of a building entrance link on real
property owned by Irvine, completion and performance bonds and guaranties
assuring the lien free completion of all improvements being installed or
constructed when improvements are under construction, if required by Irvine,
provided, however, that if at any time during the Term FirstWorld allows a lien
to be recorded on account of work performed by or on behalf of FirstWorld which
is not released within thirty (30) days after recordation of the same, then
Irvine may thereafter require bonds and guaranties for all work to be performed
by FirstWorld in connection with this Agreement.
9.5 FORM OF POLICIES. The insurance policies required to be procured
pursuant to paragraph 9.2 shall be written only with California admitted
insurance companies having a policyholder rating of *** and a financial rating
of *** or better in the Best's Key Rating Guide and shall contain the following
provisions:
9.5.1 Each policy shall contain a provision that the
coverages afforded thereby will not be canceled, reduced or materially changed
without at least thirty (30) days' prior written notice to Irvine.
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*** CONFIDENTIAL TREATMENT REQUESTED
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9.5.2 The Commercial General Liability and Umbrella/Excess
Liability policies shall name Irvine as an additional insured with the following
clauses added:
(i) The insurance afforded to the additional insureds
is primary insurance. If any of the additional insureds has other insurance
which is applicable to the loss, such other insurance shall be excess and
non-contributory with this insurance as respects claims or liability arising out
of or resulting from the acts or omissions of the named insured, or of others on
behalf of the named insured.
(ii) This insurance shall apply separately to each
insured except with respect to the limits of liability.
9.6 INCREASE IN LIABILITY LIMITS. Irvine may from time to time
require that the limits of liability for any insurance policy to be maintained
under this Article 9 be increased, provided that no such increase shall cause
the limits of liability to exceed the greater of: (a) the limits of liability
required by FirstWorld's Lenders; or (b) the limits of liability set forth in
this Article 9 increased by the same percentage increase as the percentage
increase in the CPI from and after the date of this Agreement.
9.7 RELEASE AND WAIVER OF SUBROGATION. Notwithstanding anything to
the contrary in this Agreement, the Parties release each other, and their
respective agents, employees and contractors, from any liability for damage to
the property of the waiving Party that arises out of or incident to any peril
covered by property insurance carried by the Parties or out of a peril of the
type to be covered by the property insurance required to be carried under the
terms of this Agreement, whether due to the negligence of Irvine or FirstWorld
or their respective agents, employees or contractors or any other cause. Each
Party shall cause each property insurance policy obtained by it to authorize the
foregoing waiver.
10.
DAMAGE OR DESTRUCTION
FirstWorld shall promptly give Irvine notice of any damage or loss to
the Irvine Networks. Except as may result from a decrease in Adjusted Gross
Revenue, there shall be no abatement or reduction of rent on account of such
damage or loss. Except to the extent of damage or loss caused by the sole
active negligence or willful misconduct of Irvine, its employees, agents or
contractors, FirstWorld shall, as soon as reasonably practicable, restore the
damage to the Irvine Networks as well as any damage to the Conduit as nearly as
may be practicable to its condition, quality, and class immediately prior to
such damage or loss, with such changes or alterations to the Irvine Networks as
FirstWorld may request that are approved by Irvine, which approval shall not be
unreasonably withheld, conditioned or delayed. If the damage or loss occurs
within the last three (3) years of the Term of this Agreement and the cost
reasonably estimated to repair the same exceeds ten (10) percent of the average
of the two prior years Adjusted Gross Revenue, and such damage or loss was not
caused by FirstWorld's sole active negligence, then FirstWorld may terminate
this Agreement by notice given in writing to Irvine on or before sixty (60) days
following the event causing the damage accompanied by the consent to such
termination of any Lender, which notice shall specify a termination date not
less than sixty (60) days nor more than one hundred eighty (180) days following
the event causing the damage. Notwithstanding the
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foregoing, pending any such termination, FirstWorld shall use its reasonable
efforts to perform repairs to the Irvine Networks so that FirstWorld can provide
basic broadband fiber optic telecommunications service to FirstWorld's Customers
in the Spectrum and any Additional Areas then added to this Agreement.
11.
CONDEMNATION
CONDEMNATION. If a Condemnation of any portion of the Leased Premises
shall occur, then any award or awards shall be applied first to repair,
restoration or reconstruction of any remaining part of the Conduit not so taken.
FirstWorld, subject to Irvine's approval, which approval shall not be
unreasonably withheld, conditioned or delayed, shall perform such repair,
restoration or reconstruction in accordance with applicable requirements of this
Agreement. The balance of any condemnation award or awards remaining after the
repair, restoration or reconstruction shall belong to Irvine. Notwithstanding
the foregoing, FirstWorld shall be entitled to pursue and upon any recovery may
retain a separate award for the relocation costs, the interruption of
FirstWorld's business, and lost goodwill and profits (provided that Irvine shall
be entitled to a percentage of any award for lost profits equal to the amount of
Rent which would have been due on the basis of the same amount of Adjusted Gross
Revenues on which such profits are based unless Irvine has separately received
such an award on account of its interest as lessor under this Agreement). If all
of the Leased Premises is taken, or if a portion of the Leased Premises is taken
rendering the balance of the Leased Premises unsuitable, in FirstWorld's
reasonable opinion, for the continued operation of the Irvine Networks,
FirstWorld may terminate this Agreement (without affecting its rights to the
foregoing award) by notice given to Irvine of its election to do so within sixty
(60) days following the date of the Condemnation accompanied by the consent to
such termination of any Lender.
11.2 TEMPORARY CONDEMNATION. If a temporary Condemnation shall
occur with respect to use or occupancy of the Leased Premises, then all proceeds
of such temporary Condemnation (to the extent attributable to periods within the
Term of this Agreement) shall be paid to the Parties as their interests may
appear, and FirstWorld's obligations under this Agreement shall not be affected
in any way.
11.3 SETTLEMENT OR COMPROMISE. Irvine shall not settle or
compromise any Condemnation award with respect to the Leased Premises without
consent by FirstWorld, and by any Lender to whom FirstWorld has delegated such
consent rights under a Financing Encumbrance. Both FirstWorld and Irvine shall
be entitled to appear in such proceedings and claim such share of the award as
each is entitled to receive pursuant to this Agreement and Applicable Law.
Subject to the terms of its Financing Encumbrance, any Lender shall also be
entitled to appear in such proceedings and empowered to participate in any
settlement, arbitration or other proceeding involving any such Condemnation.
11.4 PROMPT NOTICE. If either Party becomes aware of any
Condemnation or threatened or contemplated Condemnation with respect to the
Leased Premises, then such Party shall promptly give notice thereof to the other
Party.
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12.
TRANSFERS BY FIRSTWORLD
12.1 FIRSTWORLD'S RIGHT TO ASSIGN. FirstWorld shall not either
voluntarily or by operation of law, assign, encumber (except in accordance with
Article 13, below) or otherwise transfer its rights under this Agreement, or
sublet or otherwise permit the use of the Leased Premises by anyone other than
FirstWorld (any of the foregoing being a "Transfer") without the prior written
consent of Irvine, which consent shall not be unreasonably withheld or
conditioned. For purposes of this Agreement, any sale of a controlling
percentage of the shares of FirstWorld (except by or to a Lender which is not an
Affiliated Lender in connection with the enforcement by such Lender of its
remedies), shall be deemed to constitute a Transfer of this Agreement. Any
purported Transfer without Irvine's consent shall be void and of no force or
effect. Except to the extent permitted under Section 12.6 and Article 13,
below, in no event shall FirstWorld have the right to Transfer the Leased
Premises separately from the Irvine Networks and the License Agreement, and any
attempted Transfer of the Leased Premises separate from the Irvine Networks or
the License Agreement shall be void and of no force or effect.
12.2 SUBMITTAL FOR CONSENT. If FirstWorld desires to Transfer
this Agreement, then, unless Irvine's consent is not required hereunder for such
Transfer, FirstWorld shall notify Irvine at least thirty (30) days in advance of
the proposed Transfer and shall submit to Irvine concurrently with such notice:
(a) the name and address of the proposed transferee, (b) financial statements
for the proposed transferee, (c) a description of the proposed transferee's
business experience in the telecommunications industry, (d) a copy of the
proposed instrument effecting the Transfer and (e) such other information as
Irvine may reasonably request in connection with its review of the proposed
Transfer. Within thirty (30) days after Irvine's receipt of such information,
Irvine may consent to the proposed Transfer or disapprove of the proposed
Transfer. If Irvine disapproves of the proposed Transfer, Irvine's notice of
disapproval shall specify its reasons for disapproving of the same. Any failure
by Irvine to consent to or disapprove such Transfer within such thirty (30) day
period shall be deemed to constitute Irvine's consent to such Transfer.
FirstWorld acknowledges that this Agreement is being entered into by Irvine to
provide telecommunications service to the Spectrum, and any Additional Areas,
and that it shall be reasonable for Irvine to withhold its consent to a proposed
Transfer if Irvine reasonably determines that the proposed transferee will be
unable to provide such service at such level and quality as is then reasonably
expected by occupants of Spectrum and any Additional Areas.
12.3 EFFECT OF TRANSFER. No Transfer, even with the consent of
Irvine, shall relieve FirstWorld of its obligations under this Agreement.
Except as provided in Article 13, each transferee of FirstWorld, shall be deemed
to assume all obligations of FirstWorld under this Agreement and shall be liable
jointly and severally with FirstWorld for the payment of all rent, and for the
due performance of all of FirstWorld's obligations, under this Agreement, except
that in the case of a sublease such assumption shall be limited to the
obligations relating to the subleased portion of the Leased Premises. Except as
provided in Article 13, no Transfer shall be binding on Irvine unless a document
memorializing the Transfer is delivered to Irvine and both the
assignee/subtenant and FirstWorld deliver to Irvine an executed consent to
transfer instrument in a form reasonably required by Irvine and consistent with
the requirements of this Article. The acceptance by Irvine of any payment due
under this Agreement from any other Person shall not be
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deemed to be a waiver by Irvine of any provision of this Agreement or to be a
consent to any Transfer. Consent by Irvine to one or more Transfers shall not
operate as a waiver or estoppel to the future enforcement by Irvine of its
rights under this Agreement.
12.4 RIGHT OF FIRST REFUSAL. In the event that FirstWorld
desires to sell the Irvine Networks, or a direct controlling interest in
FirstWorld, Irvine shall have a continuing right of first refusal as to any such
transactions. FirstWorld agrees to provide Irvine with written notice of the
terms and provisions of any such proposed transaction. Irvine shall have
fifteen (15) days after its receipt of notice of such terms and provisions to
exercise its right of first refusal. If Irvine does not exercise the same
within such fifteen (15) day period, Irvine shall be deemed to have waived such
right as to the transaction for which notice was given, and FirstWorld shall
thereafter have the right for a period of one hundred eighty (180) days
thereafter to complete the proposed transaction at a price not less than
ninety-five (95) percent of that set forth in the notice given to Irvine and
with no material changes to other terms of the transaction which would
reasonably be considered to be monetary or financial terms of the transaction.
This right of first refusal shall not be construed to apply to any Financing, to
the pledge of FirstWorld's shares as security for a Financing, or to any
transfer by or to a Lender. Any information provided in connection with a
transaction to which this right of first refusal would apply shall be
Pre-Authorized Confidential Information, including, without limitation, any
notice of the terms and provisions of any proposed transaction. In the event
that FirstWorld intends to undertake a public offering of its shares, FirstWorld
shall have the right to notify Irvine prior to commencing efforts towards such
public offering and the parties shall for a period of thirty (30) days following
such notice attempt in good faith to negotiate a private transaction involving
the sale to Irvine of the shares of FirstWorld to be offered to the public. If
FirstWorld and Irvine are unable to negotiate such a transaction within such
thirty (30) day period, the Parties shall negotiate in good faith to establish a
procedure to apply the right of first refusal of Irvine set forth in this
Section 12.4 to the structure of the proposed public offering and shall use
their best efforts to conclude such negotiations within fifteen (15) days after
the end of such thirty (30) day period.
12.5 PERMITTED TRANSFERS. Notwithstanding any contrary provision
of Article 12, FirstWorld shall have the right, without obtaining the prior
consent of Irvine: (a) to assign this Agreement to an Affiliate, so long as such
assignment occurs concurrently with the assignment to such Affiliate of the
License Agreement and all of the Irvine Networks; (b) to assign this Agreement
in connection with a reorganization or merger, so long as concurrently with such
assignment the License Agreement and all of the Irvine Networks are assigned to
the same entity as this Agreement, and (c) to encumber its rights under this
Agreement in accordance with Article 13, below.
12.6 MULTIPLE NETWORKS. FirstWorld shall have the right to
provide service to the Spectrum Service Area through a single Network or through
multiple Networks, and may provide service to any Additional Area added to this
Agreement from the Spectrum Network or from an Additional Network. If
FirstWorld elects to provide service to any portion of the Spectrum Service Area
or any such Additional Area through more than one Network, FirstWorld may need
to assign or partially assign this Agreement to a separate Affiliate formed by
FirstWorld or by FWC for such purpose. In such event, the Parties shall work
together in good faith to determine a mutually satisfactory method for partially
assigning FirstWorld's rights under this Agreement to such Affiliate while
protecting both Parties rights and obligations hereunder. In
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connection with such provision of service by any Additional Network, FirstWorld
may sublet a portion of the Leased Premises to an Affiliate formed by FirstWorld
or FWC for such purpose, provided, however, that Irvine shall be provided a copy
of any proposed sublease prior to the execution thereof and shall have the right
to require both FirstWorld and the proposed sublessee/Affiliate to enter into
such further agreements with regard to such sublease as Irvine may determine are
reasonably necessary to protect its rights under this Agreement. FirstWorld
shall reimburse Irvine for Irvine's costs, including attorneys' fees, incurred
in connection with any assignment or sublease pursuant to this Section 12.6.
13.
FINANCING BY FIRSTWORLD
13.1 FINANCING NOT PROHIBITED TRANSFER. Subject to and in
accordance with the terms and provisions of this Article 13, and notwithstanding
anything in this Agreement to the contrary, FirstWorld shall have the right,
without Irvine's consent, to encumber the Cable, this Agreement and FirstWorld's
interest in the Leased Premises (or a portion of foregoing) as security for any
Financing and to record any Financing Encumbrance given by FirstWorld as
security for any Financing. None of the following shall be deemed to constitute
a Transfer of FirstWorld's rights under this Agreement or to otherwise violate
any provision of this Agreement prohibiting the assignment, encumbrance, or
other transfer of this Agreement or FirstWorld's rights hereunder: (a)
FirstWorld's making of a Financing Encumbrance as security for any Financing;
(b) any sale of this Agreement and of FirstWorld's interest in the Leased
Premises and/or the Cable in any proceedings for the foreclosure of any
Financing Encumbrance; (c) any assignment, transfer or conveyance to Lender in
lieu of such foreclosure (or to a Lender's designated purchaser or assignee
which is a Permitted Assignee); or (d) any sale of this Agreement and of
FirstWorld's interest in the Leased Premises by Lender following Lender's
acquisition of the same in any proceedings for the foreclosure of any Financing
Encumbrance, so long as such sale is to a Person (a "Permitted Assignee"): (i)
which is not insolvent or the subject of any bankruptcy proceeding for
reorganization or liquidation or (ii) with which Irvine does not have material
litigation pending. Irvine shall recognize any purchaser of FirstWorld's
interests under this Agreement pursuant to a foreclosure sale under a Financing
Encumbrance, any transferee of FirstWorld's interests under this Agreement under
an assignment in lieu of foreclosure, or, if the Lender should be such purchaser
or assignee, a direct transferee of Lender that is a Permitted Assignee.
13.2 COOPERATION WITH LENDER REQUIREMENTS.
13.2.1 Irvine acknowledges that any Lender may require, among
other things, certain protections and agreements from FirstWorld and Irvine,
anticipated to include, without limitation, the following:
(a) Security interests in all Cable, equipment,
furniture, fixtures and other tangible and intangible property owned by
FirstWorld and incorporated into or used in connection with the Irvine Networks;
collateral assignments of all major construction and consulting contracts;
collateral assignments of FirstWorld's contracts with Customers and Users
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and the rights to receive revenue thereunder; and collateral assignments of
FirstWorld's bank accounts, accounts receivable and other similar collateral
relating to the Irvine Networks.
(b) The creation of sinking funds and reserves, the
maintenance of specified financial ratios, and other similar covenants with
respect to the development and operation of the Irvine Networks that would
commonly be required in connection with non-recourse financing.
(c) That Irvine agree (i) to recognize such Lenders
and their successors, following a foreclosure on a Financing Encumbrance or a
transfer by deed in lieu of foreclosure, as parties having the rights and
obligations of FirstWorld under this Agreement, in the event such Lenders and
their successors elect to assume FirstWorld's rights and obligations hereunder,
and (ii) in the event of such an assumption, that such Lenders and their
successors, following a foreclosure on a Financing Encumbrance or a transfer by
deed in lieu of foreclosure, will not be obligated to cure any of FirstWorld's
non-monetary defaults arising prior to the foreclosure which are not reasonably
capable of being cured.
13.2.2 Irvine agrees to cooperate in good faith with
FirstWorld's efforts to obtain Financing. In particular, if required by a
Lender, Irvine agrees to enter into one or more commercially reasonable
agreements with one or more Lenders containing or permitting the provisions
contemplated pursuant to Section 13.2.1, and which may reflect that the Lenders
may succeed to the rights of FirstWorld hereunder and may thereby continue to
utilize the Cable and Conduit until termination of this Agreement in accordance
with the terms hereof. FirstWorld shall reimburse Irvine for Irvine's costs,
including attorney's fees, incurred in connection with the review and
negotiation of any such agreements with Lenders if Irvine is requested to review
more than one such agreement in any calendar year. Irvine shall not, however, be
required to consent to any provision that would obligate Irvine to repay or be
liable for any cost related to any Financing. Irvine's obligations under any
such agreement with any Lender shall be considered material obligations of this
Agreement enforceable by FirstWorld against Irvine as if fully set forth herein.
Irvine agrees that all information regarding the Lenders and their relationship
with FirstWorld shall constitute Pre-Authorized Confidential Information.
Irvine's failure to enter into any such agreement shall not limit or in any way
adversely affect the rights of any Lender pursuant to this Article 13.
13.2.3 Any Lender, by acceptance of any Financing Encumbrance,
agrees that it accepts the same subject to the rights of Irvine pursuant to
Article 14, below. Any agreements entered into with any Lenders pursuant to
Section 13.2.2., above, if any, shall contain provisions for the benefit of
Irvine acknowledging and confirming the rights of Irvine pursuant to the
provisions of Article 14, below, and that such Lender's rights in and to the
Conduit, including any Conduit installed by or on behalf of FirstWorld, and in
and to any Cable installed by or on behalf of FirstWorld pursuant to this
Agreement, shall be subordinate to Irvine's ownership of the Conduit and
Irvine's rights to the Cable as set forth in this Agreement upon the expiration
or any earlier termination of this Agreement.
13.3 NOTICE OF FINANCING. If FirstWorld enters into any Financing
Encumbrance(s), then the Lender(s) thereunder shall be entitled to the Lender
protections provided for under this Agreement only from and after such time as
FirstWorld or such Lender has given Irvine written notice of the name and
address of such Lender, accompanied by a copy of
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the executed Financing Encumbrance. Irvine shall, upon request, acknowledge
receipt of the name and address of any Lender (or proposed Lender). Any Lender
shall provide Irvine written notice of any change in its address.
13.4 NOTICE OF DEFAULT AND LENDER'S CURE RIGHTS. If Irvine
shall give any notice of default or breach under this Agreement, then Irvine
shall (provided that Irvine has received notice of a Financing Encumbrance
pursuant to Section 13.3) at the same time and by the same means give a copy of
such notice to the Lender, which notice shall describe in reasonable detail the
alleged default. Upon receiving any notice of a default, any Lender shall have
the same cure period granted to FirstWorld under this Agreement, plus (so long
as such Lender is not an Affiliated Lender) the additional time provided for
below, within which to take (if such Lender so elects) whichever of the actions
set forth below shall apply with respect to the default described in such notice
of default (such actions, "Lender's Cure," and a Lender's rights to take such
actions, "Lender's Cure Rights"):
13.4.1 In the case of a monetary default, the Lender
shall be entitled (but not required) to cure such default within a cure period
following notice of such default consisting of the cure period allowed to
FirstWorld under this Agreement plus (so long as such Lender is not an
Affiliated Lender) an additional period of twenty (20) days.
13.4.2 In the case of any non-monetary default that a
Lender is reasonably capable of curing without obtaining possession of the
Leased Premises (other than a non-monetary default that is not reasonably
susceptible of being cured by a Lender, such as a bankruptcy of FirstWorld), the
Lender shall be entitled, but not required, to: (a) within a period following
notice of such default consisting of the cure period allowed to FirstWorld under
this Agreement plus (so long as such Lender is not an Affiliated Lender) an
additional period of thirty (30) days, advise Irvine of Lender's intention to
take all reasonable steps necessary to remedy such non-monetary default; and (b)
cure the same within such period or; (c) if the same is not reasonably
susceptible of being cured within such period, duly commence the cure of such
non-monetary default within such extended period and thereafter diligently
prosecute to completion the cure of such non-monetary default and complete such
cure within a reasonable time under the circumstances, subject to Unavoidable
Delay (except an Unavoidable Delay that causes Lender to be unable to obtain
possession of the Leased Premises).
13.4.3 In the case of a non-monetary default that is not
reasonably susceptible of being cured by a Lender without obtaining possession
of the Leased Premises, the Lender shall be entitled (but not required) to do
the following, so long as, with respect to any defaults other than those
referred to in this Section 13.4.3, such Lender has exercised or is exercising
the applicable Lender's Cure Rights as defined in this Agreement:
(a) At any time within sixty (60) days after
notice of default, Lender shall be entitled to (i) institute proceedings to (A)
obtain possession of the Leased Premises as mortgagee (including possession by a
receiver), or (B) acquire the Leased Premises by foreclosure proceedings or
otherwise, or (ii) unless the Lender is an Affiliated Lender, commence
negotiations for an assignment in lieu of foreclosure, and (subject to any stay
in any proceedings involving the bankruptcy, insolvency, or reorganization of
FirstWorld or the like, or any injunction, unless such stay or injunction is
lifted), prosecute the same or any combination of
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the same to completion with commercially reasonable diligence subject to
Unavoidable Delay, for a period not to exceed a total of three hundred sixty
(360) days.
(b) Upon obtaining possession of the Leased
Premises (before or after expiration of any otherwise applicable cure period),
Lender shall be entitled (but not required) to commence and proceed with
reasonable diligence and reasonable continuity to cure such non-monetary
defaults as are then reasonably susceptible of being cured by such Lender,
subject to Unavoidable Delay.
13.4.4 In addition to the foregoing Lender's Cure Rights,
during any period following Irvine's notice of default, any Lender shall have an
additional period of ninety (90) days beyond the time in which FirstWorld would
be obligated to act, to take any action to install Cable or Conduit or to
provide service to any Additional Spectrum or any Additional Area as may then be
required under this Agreement. No provision of this Section 13.4.4 shall be
construed to relieve or delay FirstWorld's obligations hereunder to install
Cable or Conduit or provide service.
So long as the time period for a Lender to exercise Lender's Cure Rights with
respect to a non-monetary default by FirstWorld has not expired (and provided
that all monetary defaults are cured within Lender's cure period provided for
under this Agreement), Irvine shall not terminate this Agreement or such
Lender's right to cure a default or obtain title to the Leasehold Premises,
provided, however, that Irvine shall be permitted to proceed to seek damages on
account of such default from FirstWorld. A Lender shall not be required to
continue to exercise Lender's Cure Rights or otherwise proceed to obtain
possession if and when the default that such Lender was attempting to cure shall
have been cured. Upon such cure and the cure of any other defaults in
accordance with this Agreement, this Agreement shall continue in full force and
effect as if no default(s) had occurred. Nothing in the Lender protections
provided for in this Agreement shall be construed to either (i) extend the Term
beyond the expiration date provided for in this Agreement that would have
applied if no default had occurred or (ii) require any Lender to cure any
default by FirstWorld that is not reasonably capable of being cured by the
Lender (such as a bankruptcy of FirstWorld) in order to preserve its rights
under this Agreement.
13.5 OBLIGATIONS OF LENDER AND SUCCESSORS. No Lender, in the exercise
of its rights under this Agreement, shall solely on account of such exercise be
deemed to be an assignee or transferee or mortgagee in possession of the Leased
Premises so as to require such Lender to assume or otherwise be obligated to
perform any of FirstWorld's obligations under this Agreement except when, and
then only for matters accruing while, such Lender has entered into possession of
the Leased Premises in the exercise of its remedies under its Financing
Encumbrance (as distinct from its rights under this Agreement to cure any Events
of Default or exercise Lender's Cure Rights). Except for pre-existing uncured
monetary defaults of FirstWorld, which any Lender (or purchaser at foreclosure
sale) shall be obligated to cure upon becoming the owner of FirstWorld's rights
hereunder, no Lender (or purchaser at a foreclosure sale held pursuant to a
Financing Encumbrance) shall be liable under this Agreement unless and until
such time as it becomes, and in the case of the Lender only for matters accruing
while it remains, the owner of the interest of FirstWorld in and to the Leased
Premises under this Agreement after foreclosure or an assignment in lieu
thereof. During such time, and for matters accruing while any Lender is in
possession of the Leased Premises, Lender shall be fully liable and responsible
for all
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obligations under the terms and provisions of this Agreement. Except as to
pre-existing uncured monetary defaults of FirstWorld, which any purchaser shall
be obligated to cure, any purchaser from a Lender after the Lender's foreclosure
or acceptance of an assignment in lieu of foreclosure shall only be liable under
this Agreement from and after the time it becomes the owner of the interests of
FirstWorld in and to the Leased Premises under this Agreement.
13.6 LENDER PROTECTIONS.
13.6.1 No voluntary cancellation, termination, surrender,
acceptance of surrender, or abandonment, of this Agreement, nor any amendment or
modification adversely affecting a Lender's rights under this Article 13, shall
bind a Lender (other than an Affiliated Lender) if done without notice to and
the written consent of such Lender.
13.6.2 Any Lender shall have the right, but not the
obligation, to take possession of the Leased Premises and to perform any
obligation of FirstWorld under this Agreement and to remedy any default by
FirstWorld. Irvine shall accept performance by or at the instigation of a
Lender in fulfillment of FirstWorld's obligations, for the account of FirstWorld
and with the same force and effect as if performed by FirstWorld.
13.6.3 A Lender shall in no event be required to cure or
commence to cure any default (if such default is provided for in this Agreement)
consisting of FirstWorld's failure to satisfy or discharge any lien, charge, or
encumbrance affecting the Leased Premises junior in priority to the lien of the
Financing Encumbrance held by such Lender.
13.6.4 Any payment made by a Lender to Irvine to cure any
claimed default shall be deemed to have been made without prejudice to
FirstWorld's or the Lender's recovery of such payment if Irvine's claim of a
default shall be determined by a court of competent jurisdiction to have been
erroneous.
13.6.5 Any Lender may exercise its rights under this
Agreement, or perform any action permitted to be taken by a Lender under this
Agreement, through an agent.
13.6.6 If more than one Lender desires to exercise
Lender's Cure Rights or if more than one Lender desires to exercise any other
right or privilege provided for Lenders under this Agreement, then the Party
against whom such rights or privileges are to be exercised shall be required to
recognize either: (a) only the Lender that desires to exercise such right or
privilege and whose Financing Encumbrance is most senior in lien (as against
other Financing Encumbrances of Lenders desiring to exercise such rights) or (b)
such other Lender, as has been designated in writing by all Lenders, to exercise
such right or privilege. In such case, Irvine shall be provided notice of the
priority of Financing Encumbrances, which notice shall consist of either (a) the
report or certificate of a title insurance company licensed to do business in
California or (b) joint written instructions of all Lenders.
13.7 REVERSIONARY INTEREST. No Financing Encumbrance shall
encumber or in any other way affect Irvine's reversionary interest in the
Leased Premises, or in any Cable or any portion of the Conduit, or limit or
restrict Irvine's rights and remedies under this Agreement except as
expressly provided in this Agreement.
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13.8 NEW LEASE. In the event that this Agreement or any portion
hereof is irrevocably rejected by a trustee or debtor-in-possession in any
bankruptcy or insolvency proceeding, Irvine agrees that it will, upon the
request of the Lender whose Financing Encumbrance is most senior (as evidenced
by the notice required under Section 13.6.6, above) execute and deliver to such
senior Lender, a new agreement containing the same covenants, agreements, terms,
provisions and limitations set forth in this Agreement and for a term equal to
the then remaining Term hereof, so long as such Lender prior to or concurrently
with Irvine's execution and delivery of such new agreement: (a) executes and
delivers to Irvine a counterpart or counterparts of such new agreement and
agrees to be bound under the covenants, agreements, terms, provisions and
limitations thereof; (b) provides Irvine with such assurances as Irvine may
reasonably require confirming that this Agreement has been irrevocably rejected
and that no trustee in bankruptcy, debtor-in-possession, other Lender, or
FirstWorld or any of its Affiliates will assert the continuing effectiveness and
enforceability of this Agreement; (c) cures any then existing monetary defaults
under this Agreement through the effective date of such new agreement; (d)
agrees to indemnify Irvine or provide Irvine with such other assurances as may
be reasonably satisfactory to Irvine that such Lender is the Lender whose
Financing Encumbrance is most senior; and (e) reimburses Irvine for its
reasonable attorneys' fees in connection with entering into such new agreement.
13.9 CONCURRENT EXERCISE. Notwithstanding any contrary
provisions of this Article 13, any Lender exercising any of its rights under
this Article 13 with regard to any Financing Encumbrance, must concurrently
exercise its rights under Article 11 of the License Agreement with regard to the
same Financing Encumbrance, it being the intent of the Parties that in order to
succeed to the rights of FirstWorld under this Agreement, a Lender must also
succeed to the rights of FirstWorld under the License Agreement and that a
Lender may not receive the benefits of this Agreement separately from the
benefits and burdens of the License Agreement.
14.
IRVINE CURE RIGHTS
14.1 PURPOSE. Irvine desires to assure, to the extent feasible,
that (a) the Equipment installed by FirstWorld in connection with the Irvine
Networks remains in place and is not removed by Lender while Irvine exercises
its remedies for a default under a Financing Encumbrance or this Agreement in
the manner described in Section 14.4, or (b) that Irvine may effectively acquire
the Equipment by paying the outstanding obligations under the Financing to the
extent provided under Section 14.5, below, and thereafter foreclosing the
Financing Encumbrance.
14.2 NOTICE OF DEFAULT. Concurrently with the giving of any
notice of any default, breach or event of default under any Financing
Encumbrance (including, without limitation, any notice of acceleration of
foreclosure of the Financing Encumbrance for any reason) to FirstWorld, or to
the party obligated thereunder if it is not FirstWorld, the Lender shall at same
time and by the same means provide a copy of such notice to Irvine at Irvine's
address for notices set forth in this Agreement, which notice shall describe in
reasonable detail the alleged default. Irvine shall provide any Lender with
written notice of any change in its address. FirstWorld agrees to provide to
Irvine a copy of any notice of change of address received by FirstWorld from
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any Lender, provided, however, that no failure by FirstWorld to provide Irvine a
copy of such notice shall adversely affect the rights of a Lender pursuant to
Article 13, above.
14.3 PRIORITY OF CURE RIGHTS. In any case where FirstWorld is in
default, has breached or there is any Event of Default, under both this
Agreement and any Financing Encumbrance, and both Lender and Irvine would
therefore have the right to exercise their respective Cure Rights hereunder,
then, notwithstanding any contrary provision of this Agreement:
14.3.1 So long as the Lender is operating or causing
FirstWorld or a third party to operate the Irvine Networks and is exercising
Lender's Cure Rights pursuant to Section 13.4, above (a) Irvine shall not be
entitled to terminate this Agreement or to exercise any of Irvine's Cure Rights
and (b) the Lender's Cure Rights shall be absolutely and unconditionally prior
and superior to Irvine's Cure Rights and Lender shall be entitled to exercise
the Lender's Cure Rights and its rights and remedies under its Financing
Encumbrance and other loan documents without any direct or indirect delay,
interference, impairment or prohibition by Irvine.
14.3.2 If (a) the Lender is exercising the Lender's Cure
Rights under Section 13.4, above, and is acting diligently to prosecute the same
to completion, or (b) the time period for exercising Lender's Cure Rights or
commencing to exercise Lender's Cure Rights pursuant to Section 13.4 above, has
not yet expired, and (c) in either such case, the Lender is not operating or
causing FirstWorld or a third party to operate the Irvine Networks, then Irvine
shall not be entitled to terminate this Agreement, but may exercise Irvine's
Cure Rights, provided that in the event of any conflict or inconsistency between
Irvine's Cure Rights and the Lender's Cure Rights, the Lender's Cure Rights
shall be superior to Irvine's Cure Rights, but only to the extent of such
conflict or inconsistency. During any such period, the Lender shall be entitled
to exercise the Lender's Cure Rights and its rights and remedies under its
Financing Encumbrance and other loan documents without any direct or indirect
delay, interference, impairment or prohibition by Irvine, except to the extent
reasonably necessary to permit Irvine to exercise Irvine's Cure Rights.
14.3.3 If the Lender fails to commence to exercise the
Lender's Cure Rights within the time periods set forth in Section 13.4, above,
or after commencing the same fails to diligently prosecute the same (including
without limitation, the Lender's failure to diligently prosecute any proceeding
to obtain possession of the Leased Premises or to acquire the Leased Premises by
foreclosure, if applicable), then Irvine shall have the right upon five (5)
business days notice to Lender to exercise Irvine's Cure Rights or to enforce
against FirstWorld all of Irvine's rights and remedies for a default under this
Agreement, or both, as Irvine may elect in its sole and absolute discretion, and
without any direct or indirect delay, interference, impairment or prohibition by
Lender.
14.4 IRVINE'S CURE RIGHTS. Subject to and in accordance with the
terms and provisions of this Article 14, upon receiving any notice of a default
under a Financing Encumbrance, Irvine shall have the right, but not the
obligation, to cure FirstWorld's default within the same cure period granted to
FirstWorld under such Financing Encumbrance, plus the additional time provided
for below, and the Lender thereunder shall accept such cure (such actions,
"Irvine's Cure," and Irvine's rights to take such actions, "Irvine's Cure
Rights"):
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14.4.1 In the case of a monetary default, Irvine shall be
entitled (but not obligated) to cure such default within a cure period following
notice of such default consisting of the cure period allowed to FirstWorld (or
any other obligor under such Financing Encumbrance if FirstWorld is not the
obligor thereunder) plus an additional period of twenty (20) days; provided,
however, that if the Lender is in a position to conduct a foreclosure sale in
connection with such default prior to the expiration of said twenty (20) day
period, then Irvine's additional cure period (i.e., in addition to the cure
period allowed FirstWorld) shall be shortened from twenty (20) days to the
greater of ten (10) days or the number of days within said twenty (20) day
period prior to the date on which the Lender is in a position to conduct a
foreclosure sale.
14.4.2 In the case of any non-monetary default that
Irvine is reasonably capable of curing, Irvine shall be entitled (but not
obligated) to cure such default within a period following notice of such default
consisting of (a) the cure period allowed to FirstWorld (or any other obligor
under such Financing Encumbrance if FirstWorld is not the obligor thereunder)
under such Financing Encumbrance plus an additional thirty (30) days, or (b) if
the default is not reasonably susceptible of being cured within said thirty (30)
day period, to duly commence the cure of such non-monetary default within said
thirty (30) day period and thereafter diligently prosecute to completion the
cure of such non-monetary default and complete such cure within a reasonable
time under the circumstances, not to exceed a total of ninety (90) days after
the date a notice of such default was delivered to Irvine. Notwithstanding the
foregoing, if the Lender is in a position to conduct a foreclosure sale in
connection with such non-monetary default prior to the expiration of said thirty
(30) or ninety (90) day period, as applicable, then Irvine's additional cure
period (i.e., in addition to the cure period allowed FirstWorld) shall be
shortened from thirty (30) days or ninety (90) days, as applicable, to the
greater of ten (10) days or the number of days within said thirty (30) or ninety
(90) day period prior to the date on which the Lender is in a position to
conduct a foreclosure sale.
14.4.3 In the event that Irvine makes any payment to
Lender or otherwise expends any funds to cure any claimed default by FirstWorld
under a Financing, then FirstWorld shall be obligated upon Irvine's demand to
reimburse Irvine for all sums so expended by Irvine (including any premium over
par paid in connection with a partial release of the Irvine Network from the
lien of the Financing Encumbrance which affects any Networks in addition to
Irvine Networks, as provided in Section 14.5.1, but excluding amounts expended
in connection with Irvine's purchase of the Financing at par pursuant to Section
14.5), together with interest at an interest rate of *** percent ( *** %) per
annum, but in no event to exceed the maximum rate permitted by law, from the
date Irvine made any payment or otherwise expended funds through the date of
reimbursement.
14.4.4 Any payment made by Irvine to a Lender to cure any
claimed default shall be deemed to have been made without prejudice to
FirstWorld's or Irvine's recovery of such payment if such Lender's claim of a
default shall be determined by a court of competent jurisdiction to have been
erroneous.
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14.5 PURCHASE OF FINANCING ENCUMBRANCE; SUBROGATION. In addition to
Irvine's Cure Rights as described in Section 14.4, upon receiving a notice of
default under a Financing Encumbrance, Irvine shall have the right to pay the
Financing Encumbrance (or the portion thereof determined as provided in Section
14.5.1 where the Financing which is secured by the Financing Encumbrance is
secured by assets of the obligor in addition to the Irvine Networks) in full
(including, without limitation, unless Lender is an Affiliated Lender, any
premium over par payable for a partial release as provided in Section 14.5.1,
late charges, default interest, default costs, prepayment penalties, and other
fees and charges imposed by the Lender), and in connection therewith to be
subrogated to and receive an assignment by Lender to Irvine of the rights of the
Lender against FirstWorld, including the rights of the Lender under its
Financing Encumbrance. Thereafter, Irvine shall be free to enforce its remedies
as holder of the Financing, including foreclosure of the Financing Encumbrance.
14.5.1 Any Financing Encumbrance which is given by FirstWorld
after the date of this Agreement to secure Financing which encumbers any
Networks in addition to Irvine Networks shall contain provisions permitting the
release of the Irvine Network from the lien of the Financing Encumbrance upon
payment of not more than *** % of those portions of the Financing allocable to
the Irvine Networks.
14.5.2 Irvine shall have the right (but not the obligation) to
negotiate with any Lender for an intercreditor agreement which would contain
provisions allowing Irvine to obtain, or to cause a third party who will provide
telecommunication service on the Irvine Networks and to whom Irvine may assign
its cure rights as contemplated by this Article 14 to obtain, financing for
Irvine's or said third party's acquisition of the Financing Encumbrance (or the
portion thereof determined as provided in Section 14.5.1) pursuant to Section
14.5, so long as Irvine or such assignee of Irvine is approved by Lender based
upon Lender's completion of its normal underwriting procedures. In such event:
(a) FirstWorld does not represent, warrant or guarantee that such Lender will
negotiate with Irvine or accept any of Irvine's proposals; (b) successful
completion of such negotiations shall not be a condition precedent, condition
concurrent or condition subsequent to any rights of FirstWorld or obligations of
Irvine under this Agreement, nor shall Irvine's failure to reach agreement with
such Lender constitute a default, or entitle Irvine to any remedy, hereunder;
(c) Irvine shall negotiate in good faith and shall not interfere with or in any
manner delay the closing by FirstWorld or any affiliate of FirstWorld of any
Financing; and (d) if Irvine is unsuccessful in negotiating any intercreditor
agreement, then Irvine shall have only the rights set forth in this Agreement,
and no other rights.
14.6 RIGHT TO BID AT FORECLOSURE SALE. In the event of
foreclosure of a Financing Encumbrance, Irvine shall be entitled to bid at such
sale on the same terms as, and without any priority or preference over, any
other third person bidder.
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15.
QUIET ENJOYMENT
Irvine covenants that it has the right to lease the Leased Premises to
FirstWorld and that so long as this Agreement has not been terminated,
FirstWorld shall and may peaceably and quietly have, hold and enjoy the Leased
Premises for the Term without molestation or disturbance by or from Irvine or
anyone claiming by or through Irvine or having title to the Leased Premises or
any portion thereof paramount to Irvine. In the event any Person claiming
through Irvine attempts to disturb FirstWorld's quiet enjoyment of or right to
use or possess the Leased Premises, Irvine shall utilize its best efforts to
resolve any claims adverse to FirstWorld's rights hereunder.
16.
REPRESENTATIONS, WARRANTIES AND COVENANTS
Irvine represents, warrants and covenants to FirstWorld the following:
16.1 TITLE TO LEASED PREMISES. Irvine owns good and marketable title
to the Leased Premises, and has the right to allow FirstWorld to use the Conduit
and the Leased Premises in accordance with the terms and provisions of this
Agreement.
16.2 NO LITIGATION. There is no existing or, to Irvine's knowledge,
pending or threatened litigation, suit, action or proceeding, including
condemnation proceedings, before any court or administrative agency against
Irvine, or the Leased Premises that would, if adversely determined, adversely
affect the Leased Premises or FirstWorld's ability to develop, own and operate
the Network.
17.
FORCE MAJEURE
No Party shall be considered to be in default in the performance of
any of its obligations under this Agreement (other than obligations of said
Party to pay any monetary sums due hereunder) when a failure of such performance
shall be due to an Unavoidable Delay. Nothing contained herein shall be
construed so as to require any Party to settle any strike or labor dispute in
which it may be involved. Any Party rendered unable to fulfill any of its
obligations under this Agreement by reason of an Unavoidable Delay shall give
prompt written notice of such fact to the other Party and shall exercise
reasonable diligence to remove such inability with all reasonable dispatch. If
an Unavoidable Delay shall have occurred, the Parties shall consult with one
another as soon as practicable concerning the effect of such delay upon their
performance hereunder. In the event that any Party's activity hereunder is
delayed, curtailed or prevented by any Unavoidable Delay, the time for carrying
out the activity thereby affected shall be extended for a period equal to the
total number of days during which such causes or their effects were operative,
and for such additional time, if any, as shall be necessary to make good the
time lost as a result of any Unavoidable Delay.
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18.
DEFAULTS; REMEDIES
18.1 EVENTS OF DEFAULT. The occurrence of any one or more of the
following shall be deemed to be an event of default ("Event of Default") by a
Party in the performance of its duties and obligations arising under this
Agreement.
18.1.1 A Party breaches or defaults in the performance of any
of such Party's duties or obligations arising under this Agreement involving the
payment of money, and after receiving written notice thereof from the other
Party, fails within ten (10) days from receipt of such notice to have fully
cured and corrected such breach or default.
18.1.2 A Party breaches or defaults in the performance of any
of such Party's material duties or obligations arising under this Agreement that
do not involve the payment of money, and after receiving written notice thereof
from the other Party, fails within thirty (30) days from receipt of such notice
(or such longer time as may reasonably be required to cure the default so long
as the defaulting Party commences to cure such failure within such thirty (30)
day period and diligently prosecutes such cure to completion) to have fully
cured and corrected such breach or default;
18.1.3 A Party makes an assignment of its rights hereunder for
the benefit of its creditors.
18.1.4 The filing by or against a Party of a petition to have
a Party adjudged a Chapter 7 debtor under the Bankruptcy Code or to have debts
discharged or a petition for reorganization or arrangement under any law
relating to bankruptcy (unless, in the case of a petition filed against a Party,
the same is dismissed within thirty (30) days).
18.1.5 A Person (other than the other Party) obtains an order
or decree in any court of competent jurisdiction enjoining or prohibiting a
Party from substantially performing its obligations under this Agreement, and
such decree is not vacated within sixty (60) days after the granting thereof.
18.1.6 All or substantially all of the assets of a Party are
assumed by a trustee or other Person pursuant to a judicial proceeding, unless
possession or control of its assets is returned to such Party within sixty (60)
days.
18.1.7 Any representation, warranty, certification or
statement made in this Agreement by a Party shall prove to have been incorrect
in any material respect when made.
18.1.8 Any Event of Default by a Party of its obligations
under the License Agreement.
18.2 WAIVER. No waiver of any Event of Default shall be valid or
effective unless in writing and signed by the waiving Party. Any waiver of any
one Event of Default shall not constitute, or be construed as creating, a waiver
of any other Event of Default.
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18.3 REMEDIES. Upon the occurrence of an Event of Default, then,
subject to the rights of Lenders under Articles 13 and 14, the non-defaulting
Party shall have all remedies available at law or in equity, except as
specifically provided herein. Such remedies shall include, without limitation:
18.3.1 Irvine may terminate FirstWorld's right to possession
of the Leased Premises by any lawful means, in which case this Agreement shall
terminate and FirstWorld shall immediately surrender possession of the Leased
Premises to Irvine. Such termination shall not affect any accrued obligations
of FirstWorld under this Agreement. Upon termination, Irvine shall have the
right to retake possession of the Leased Premises. Irvine shall also be entitled
to recover from FirstWorld:
(a) The worth at the time of award of the unpaid rent
and additional rent which had been earned at the time of termination;
(b) The worth at the time of award of the amount by
which the unpaid rent and additional rent which would have been earned after
termination until the time of award exceeds the amount of such loss that
FirstWorld proves could have been reasonably avoided;
(c) The worth at the time of award of the amount by
which the unpaid rent and additional rent for the balance of the Term after the
time of award exceeds the amount of such loss that FirstWorld proves could be
reasonably avoided;
(d) Any other amount necessary to compensate Irvine
for all the detriment proximately caused by FirstWorld's failure to perform its
obligations under this Agreement or which in the ordinary course of things would
be likely to result from FirstWorld's default, including, but not limited to,
the cost of recovering possession of the Leased Premises, commissions and other
expenses of reletting, including necessary repair, reasonable attorneys' fees,
and any other reasonable costs; and
(e) At Irvine's election, all other amounts in
addition to or in lieu of the foregoing as may be permitted by law.
The term "rent" as used in this Agreement shall be deemed to mean the Rent and
all other sums required to be paid by FirstWorld to Irvine pursuant to the terms
of this Agreement. Any sum, other than Rent, shall be computed on the basis of
the average monthly amount accruing during the twenty-four (24) month period
immediately prior to default, except that if it becomes necessary to compute
such rental before the twenty-four (24) month period has occurred, then the
computation shall be on the basis of the average monthly amount during the
shorter period. As used in subparagraphs (a) and (b) above, the "worth at the
time of award" shall be computed by allowing interest at the rate of *** percent
( *** %) per annum. As used in subparagraph (c) above, the "worth at the time
of award" shall be computed by *** the amount at the ***
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rate of the Federal Reserve Bank of San Francisco at the time of award ***
percent ( *** %). For purposes of this Section 18.3.1, Rent shall be assumed to
equal, on a quarterly basis, the average of the quarterly Rent payments made by
FirstWorld hereunder for the two year period preceding FirstWorld's default.
18.3.2 Irvine may elect not to terminate FirstWorld's right
to possession of the Leased Premises, in which event Irvine may continue to
enforce all of its rights and remedies under this Agreement, including the
right to collect all rent as it becomes due. Efforts by Irvine to maintain,
preserve or relet the Leased Premises, or the appointment of a receiver to
protect the Irvine's interests under this Agreement, shall not constitute a
termination of the FirstWorld's right to possession of the Leased Premises.
In the event that Irvine elects to avail itself of the remedy provided by
this Section 18.3.2, Irvine shall not unreasonably withhold, condition or
delay its consent to an assignment or subletting of the Leased Premises
subject to the reasonable standards for and other provisions related to
Irvine's consent as are contained in this Agreement.
18.3.3 The non-defaulting Party shall not be under any
obligation to observe or perform any covenant of this Agreement on its part
to be observed or performed which accrues after the date of any default by
the other Party unless and until the default is cured by the defaulting
Party, other than those provisions which are for the benefit of any Lender.
18.3.4 No delay or omission of either Party to exercise any
right or remedy shall be construed as a waiver of the right or remedy or of
any default. The acceptance by Irvine of rent shall not be a (i) waiver of
any preceding breach or default by FirstWorld of any provision of this
Agreement, other than the failure of FirstWorld to pay the particular rent
accepted, regardless of Irvine's knowledge of the preceding breach or default
at the time of acceptance of rent, or (ii) a waiver of Irvine's right to
exercise any remedy available to Irvine by virtue of the breach or default.
The acceptance of any payment from a debtor in possession, a trustee, a
receiver or any other Person acting on behalf of a Party or its estate shall
not waive or cure a default under this Agreement. No payment by FirstWorld or
receipt by Irvine of a lesser amount than the rent required by this Agreement
shall be deemed to be other than a partial payment on account of the earliest
due rent, nor shall any endorsement or statement on any check or letter be
deemed an accord and satisfaction and Irvine shall accept the check or
payment without prejudice to Irvine's right to recover the balance of the
rent or pursue any other remedy available to it. No act or thing done or not
done by FirstWorld or Irvine or their agents during the Term shall be deemed
a surrender or an acceptance of a surrender of the Leased Premises, and no
agreement to accept a surrender shall be valid unless in writing and signed
by Irvine and consented to by each Lender.
18.4 LATE PAYMENTS. Any Rent or other sums due under this
Agreement that are not paid to Irvine within five (5) days of the date when due
shall bear interest at the rate of *** % per annum, but in no event to exceed
the maximum rate permitted by law, from the date
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due until fully paid. The payment of interest shall not cure any default by
FirstWorld under this Agreement. In addition, FirstWorld acknowledges that the
late payment by FirstWorld to Irvine of Rent or other sums will cause Irvine to
incur costs not contemplated by this Agreement, the exact amount of which will
be extremely difficult and impracticable to ascertain. Those costs may include,
but are not limited to, administrative, processing and accounting charges, and
late charges which may be imposed on Irvine by the terms of other agreements to
which Irvine is a party. Accordingly, if any rent due from FirstWorld shall not
be received by Irvine or Irvine's designee within five (5) days after the date
due, then FirstWorld shall pay to Irvine, in addition to the interest provided
above, a late charge in the amount of *** Dollars ($ *** ) for each delinquent
payment. Acceptance of a late charge by Irvine shall not constitute a waiver of
FirstWorld's default with respect to the overdue amount, nor shall it prevent
Irvine from exercising any of its other rights and remedies.
18.5 RIGHT TO PERFORM. All covenants and agreements to be
performed by either Party under this Agreement shall be performed at such
Party's sole cost and expense and without any abatement of rent or right of
set-off. If either Party fails to pay any sum of money, other than rent, or
fails to perform any other act on its part to be performed under this Agreement,
and the failure continues beyond any applicable grace period set forth in this
Agreement, then in addition to any other available remedies, the other Party
may, at its election make the payment or perform the other act on the part of
the Party which failed to pay or perform. Either Party's election to make a
payment or perform an act on the other Party's part shall not give rise to any
responsibility of the paying or performing Party to continue making the same or
similar payments or performing the same or similar acts. Any Party which fails
to pay any sum of money or perform any act required of it hereunder shall,
promptly upon demand by the other Party, reimburse the other Party for all sums
paid by the other Party, if any, and all necessary incidental costs, together
with interest at the rate of *** % per annum, but in no event to exceed the
maximum rate permitted by law, from the date of the payment by the other Party.
Each Party shall thereafter have the same rights and remedies for a failure to
pay those amounts as it would have in the event of a monetary default by the
other Party.
18.6 WAIVER OF JURY TRIAL. IRVINE AND FIRSTWORLD EACH
ACKNOWLEDGES THAT IT IS AWARE OF AND HAS HAD THE ADVICE OF COUNSEL OF ITS CHOICE
WITH RESPECT TO ITS RIGHTS TO TRIAL BY JURY, AND EACH PARTY DOES HEREBY
EXPRESSLY AND KNOWINGLY WAIVE AND RELEASE ALL SUCH RIGHTS TO TRIAL BY JURY IN
ANY ACTION, PROCEEDING OR COUNTERCLAIM BROUGHT BY EITHER PARTY HERETO AGAINST
THE OTHER (AND/OR AGAINST ITS OFFICERS, DIRECTORS, EMPLOYEES, AGENTS, OR
SUBSIDIARY OR AFFILIATED ENTITIES) ON ANY MATTERS WHATSOEVER ARISING OUT OF OR
IN ANY WAY CONNECTED WITH THIS AGREEMENT, FIRSTWORLD'S USE OR OCCUPANCY OF THE
LEASED PREMISES, AND/OR ANY CLAIM OF INJURY OR DAMAGE.
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18.7 LIMITATION. The obligations of Irvine hereunder do not
constitute the personal obligations of the individual partners, members,
trustees, directors, officers or shareholders of Irvine. Except for the
obligations of FWC pursuant to the Guaranty to be executed and delivered by FWC
in favor of Irvine concurrently with the execution and delivery of this
Agreement, the obligations of FirstWorld hereunder do not constitute the
personal obligations of the individual partners, members, trustees, directors,
officers or shareholders of FirstWorld.
18.8 DAMAGES LIMITATION. Neither Party shall be entitled to recover
from the other Party any award of punitive damages, or any award for profits
lost by such Party on account of the other Party's failure to perform its
obligations under this Agreement (other than the right of Irvine to recover
unpaid Rent due or Rent which would have become due under this Agreement after a
breach hereof by FirstWorld). Without limiting the generality of the foregoing,
the foregoing waiver of the right to recover lost profits shall apply (a) to any
claims by FirstWorld that it lost Customers or potential Customers due to a
breach by Irvine and (b) to any claims by Irvine that it lost tenants or
potential tenants for its properties due to a breach by FirstWorld. The
foregoing limitation shall not, however, be construed as a waiver of any rights
of Irvine to recover sums expended pursuant to Section 6.2, above.
19.
PROTECTION OF CONFIDENTIAL INFORMATION
19.1 DESIGNATION OF CONFIDENTIAL INFORMATION. Any Confidential
Information submitted to either Party by or on behalf of the other Party or its
Affiliates shall be labeled as "Proprietary" or "Confidential" by use of a
prominent legend, label or sticker, except that Pre-Authorized Confidential
Information need not be so labeled.
19.2 OBLIGATIONS OF CONFIDENTIALITY. Each Party shall treat and
hold the Confidential Information in confidence and shall undertake the
following obligations with respect thereto:
19.2.1 Each shall keep confidential all Confidential
Information disclosed to it, in accordance herewith, and to protect the
confidentiality thereof, in the same manner in which it protects the
confidentiality of similar information and data of its own (at all times
exercising at least a reasonable degree of care in the protection of
Confidential Information); provided, however, that neither shall have any
obligation with respect to the use or disclosure to others of any Confidential
Information that can be established to have: (a) been known publicly; (b) been
known generally in the industry before communication; (c) become known publicly,
without fault on the part of either Party; (d) been known otherwise before
communication; (e) been received without any obligation of confidentiality from
a source (other than a Party or its Affiliates) lawfully having possession of
such information; or (f) been required to be disclosed by law or court order;
(g) been reasonably necessary to disclose in connection with the enforcement of
a Party's rights under this Agreement; (h) been reasonably necessary to disclose
in connection with a Financing, a Transfer, a borrowing by FWC or FirstWorld,
the sale of shares of FirstWorld or FWC, or any similar transaction, whether of
FirstWorld, FWC or any Affiliate of either entity; or (i) been reasonably
necessary to disclose in connection with any
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financing, sale of shares, transfer of a substantial portion of the assets of,
or any similar transaction of Irvine or any of its Affiliates.
19.2.2 All Confidential Information which may be furnished to
a Party shall continue to be the property of the Party furnishing the same, or
the Affiliate submitting such Confidential Information on such Party's behalf.
19.2.3 No rights or licenses, express or implied, are hereby
granted to any Confidential Information, including without limitation, any
patents, trademarks, service marks, trade names, copyrights or trade secrets, as
a result of or related to this Agreement.
20.
ARBITRATION
Any dispute between Irvine and FirstWorld under this Agreement shall
be resolved by binding arbitration by JAMS/ENDISPUTE, or its successor, in
Orange, California ("JAMS") as provided in this paragraph; provided that either
Party shall retain the right to pursue any equitable remedy available to it by
filing a separate action in a court of competent jurisdiction. Within ten (10)
business days following submission of any such claim or dispute to JAMS, JAMS
shall designate three (3) arbitrators and each Party may, within five (5)
business days thereafter, veto one of the three persons so designated. If two
different designated arbitrators have been vetoed, the third arbitrator shall
hear and decide the matter. If the Parties both veto the same arbitrator, the
two remaining arbitrators shall choose a third arbitrator. Any arbitration
pursuant to this paragraph shall be decided within sixty (60) days of submission
to JAMS. The decision of the arbitrator shall be final and binding on all
Parties. The arbitrator shall have the right to order such discovery as the
arbitrator deems reasonable in connection with such arbitration. All costs
associated with arbitration (including, without limitation, reasonable
attorneys' fees) shall be awarded to the prevailing Party as determined by the
arbitrator. Notice of the demand for arbitration may be filed by either Party
to this Agreement. The award rendered by the arbitrators shall be final, and
judgment may be entered upon it in accordance with applicable law in any court
having jurisdiction thereof.
21.
NO BROKER
Irvine and FirstWorld each represents and warrants that it did not
engage any broker or finder in connection with this Agreement and that no Person
is entitled to any commission or finder's fee on account of any agreements or
arrangements made by such Party with any broker or finder. Each Party shall
indemnify the other Party against any breach of the foregoing representation by
the indemnitor.
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22.
SUBORDINATION
FirstWorld accepts the Leased Premises subject and subordinate to any
mortgage, deed of trust or other lien presently existing upon all or any portion
of the same, but FirstWorld agrees that the holder or beneficiary of any such
mortgage, deed of trust or lien shall have the right at any time to subordinate
such mortgage, deed of trust or other lien to this Agreement on such terms and
subject to such conditions as such holder or beneficiary may deem appropriate in
its discretion. This provision is hereby declared to be self-operative and no
further instrument shall be required to effect such subordination of this
Agreement, provided that FirstWorld shall upon request execute an instrument
submitted by Irvine confirming the same. FirstWorld agrees to subordinate its
rights under this Agreement to any mortgage, deed of trust or other lien created
after the effective date of this Agreement affecting the Leased Premises so long
as in connection with such subordination the holder of such mortgage, deed of
trust or other lien agrees in writing that in the event of the foreclosure
thereof this Agreement shall not be terminated as to any portion of the Leased
Premises affected and encumbered by such mortgage, deed of trust or other lien
and the holder thereof shall recognize the rights of FirstWorld created by this
Agreement as to the portion of the Leased Premises encumbered by such mortgage,
deed of trust or other lien, which recognition agreement shall be in a form
reasonably acceptable to FirstWorld and such holder.
23.
WAIVERS
Failure of either Party to complain of any act or omission on the part
of the other Party shall not be deemed a waiver by the noncomplaining Party of
any of its rights under this Agreement. No waiver by either Party at any time,
express or implied, of any breach of any provisions of this Agreement shall be a
waiver of a breach of any other provision of this Agreement or a consent to any
subsequent breach of the same or any other provision. No acceptance by Irvine
of any partial payment shall constitute an accord or satisfaction but shall only
be deemed a part payment on account.
24.
MEMORANDUM OF AGREEMENT; UCC FILING
Concurrently with the execution and delivery of this Agreement, the
Parties shall promptly execute, acknowledge and record a Memorandum of Lease in
the form of Appendix 7 attached hereto and made a part hereof. Upon the request
of either Party, the other Party shall promptly execute and deliver (and the
Parties shall file with the Secretary of State), a UCC statement in form
reasonably satisfactory to both Parties evidencing the rights and interests of
the Parties pursuant to this Agreement. Upon the request of either Party from
time to time, the other Party shall execute and deliver additional UCC
statements to be filed with the Secretary of State to cover space within
Additional Available Spectrum Conduit and Available Other Conduit which is added
to the Leased Premises pursuant to the terms of this Agreement.
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25.
ESTOPPEL CERTIFICATES
At any time and from time to time, upon not less than twenty (20)
days' prior written request (an "Estoppel Certificate Request") by either Party
to this Agreement or any Lender to FirstWorld (the "Requesting Party"), the
other Party to this Agreement (the "Certifying Party") shall execute,
acknowledge and deliver an Estoppel Certificate in reasonable form to the
Requesting Party (or directly to a third party whose name and address are
provided by the Requesting Party). Any Estoppel Certificate may be relied upon
by any third party (but not by the Requesting Party) to whom an Estoppel
Certificate is required to be directed. If the Certifying Party fails to execute
and deliver within such twenty (20) day period to the Requesting Party (or its
attorneys or the third party(ies) designated by such Requesting Party) an
Estoppel Certificate, setting forth with reasonable specificity any alleged
exceptions to the statements requested to be contained in such Estoppel
Certificate, then the Certifying Party shall be deemed for all purposes, whether
or not this Agreement has been terminated or is otherwise in full force and
effect, to have executed and delivered to the third party and the Requesting
Party an Estoppel Certificate, dated as of the effective date of the Estoppel
Certificate Request, certifying that this Agreement is in full force and effect,
that there are no amendments or modifications hereof and that the Requesting
Party is not in default under this Agreement.
26.
MISCELLANEOUS
26.1 NOTICES. Any notice, request, demand, consent, approval or other
communication required or permitted hereunder or by law shall be given in
writing, addressed as follows:
If to Irvine: The Irvine Company
550 Newport Center Drive
Newport Beach, CA 92660
Attn: Vice President, Industrial Operations
With a copy to: The Irvine Company
550 Newport Center Drive
Newport Beach, CA 92660
Attn: General Counsel - Office
If to FirstWorld: FirstWorld Orange Coast
9333 Genessee Avenue, Suite 200
San Diego, CA 92121
Attn: G. Bradford Saunders
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With a copy to: FirstWorld Communications
9333 Genessee Avenue, Suite 200
San Diego, CA 92121
Attn: General Counsel
Any Party may from time to time, by written notice to the other, designate a
different address which shall be substituted for the address specified above or
designate additional Parties to receive copies of notices. Any notice shall be
delivered either personally, by certified mail (return receipt requested), by
Federal Express or similar overnight courier or by facsimile transmission. If
personally delivered, notices shall be deemed received at the time of delivery.
If sent by certified mail, return receipt requested, notices shall be deemed
fully delivered and received upon delivery or refusal of delivery. If delivered
by Federal Express or similar overnight courier, notices shall be deemed fully
delivered and received upon receipt or two (2) Business Days after deposited
with such courier prior to its deadline for next Business Day delivery. If sent
by facsimile transmission, notices shall be deemed fully delivered and received
upon receipt provided that the transmission is by a facsimile machine which
confirms completed transmission, and a copy of the notice is simultaneously sent
by another method permitted under this Agreement. Except as otherwise expressly
provided herein, notices shall be deemed fully delivered and received at the
time of actual receipt.
26.2 DOCUMENTS IN RECORDABLE FORM. Wherever this Agreement
requires either Party to deliver to the other a document in recordable form,
both Parties shall be deemed to have consented to the recording of such
document, at the sole expense of the Party that elects to record it. For
purposes of this Agreement, FirstWorld shall be deemed to be the Party requiring
recordation of a memorandum of this Agreement and UCC statements contemplated
under Article 24.
26.3 FURTHER ASSURANCES. Each Party shall fully support and
cooperate with the other Party in giving effect to the purpose and intent of
this Agreement, including, without limitation, in a Party's efforts to obtain
from any Governmental Authority or any other Person any permit, entitlement,
approval, authorization or other right necessary or convenient in connection
with such Party's activities or operations, provided that the cooperation
required under this Section 26.3 shall be at no expense to the Party requested
to provide its cooperation. Without limiting the generality of the foregoing,
each Party agrees to execute and deliver such further documents, and perform
such further acts, as may be reasonably necessary to achieve the intent of the
Parties as set forth in this Agreement.
26.4 PERFORMANCE UNDER PROTEST. If at any time a dispute shall
arise as to the amount of any payment to be made by a Party to the other under
this Agreement, then the Party against whom the obligation to pay is asserted
shall pay the entire amount billed, but shall have the right to make payment
"under protest." The Party making the payment shall continue to have the right
to seek recovery of such sum. To the extent that it shall be determined that
the Party making the payment "under protest" was not required to make such
payment, such Party shall be entitled to recover such sum or so much of such sum
as such Party was not legally required to pay pursuant to this Agreement.
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26.5 NO THIRD PARTY BENEFICIARIES. Except as to the permitted
successors and assigns of each Party, nothing in this Agreement shall be deemed
to confer upon any Person (other than Irvine, FirstWorld or Lenders) any right
to insist upon, or to enforce against Irvine or FirstWorld, the performance or
observance by either Party of its obligations under this Agreement.
26.6 INTERPRETATION. No inference in favor of or against any
Party shall be drawn from the fact that such Party has drafted any portion of
this Agreement. The Parties have both participated substantially in the
negotiation, drafting and revision of this Agreement with representation by
counsel and such other advisors as they have deemed appropriate. The words
"include" and "including" shall be construed to be followed by the words:
"without limitation."
26.7 DELIVERY OF DRAFTS. Neither Irvine nor FirstWorld shall be
bound by this Agreement unless and until each Party shall have executed at least
one counterpart of this Agreement and delivered such executed counterpart to the
other Party. The submission of draft(s) of this Agreement or comment(s) on such
drafts shall not bind either Party in any way and such draft(s) and comment(s)
shall not be considered in interpreting this Agreement.
26.8 HEADINGS. Article and section headings have been inserted
in this Agreement as a matter of convenience and for reference only. Such
section headings are not a part of this Agreement and shall not be used in the
interpretation of any provision of this Agreement.
26.9 CUMULATIVE REMEDIES. Subject to the express limitations set
forth in this Agreement, the remedies to which either Party may resort under
this Agreement are cumulative and are not intended to be exclusive of any other
remedies to which such Party may lawfully be entitled in the event of any breach
or threatened breach by the other Party of any provision of this Agreement.
26.10 ENTIRE AGREEMENT. This Agreement, including all exhibits
and appendices hereto, together with the License Agreement, constitutes the
entire agreement between the Parties hereto pertaining to the subject matter
thereof, and the final, complete and exclusive expression of the terms and
conditions thereof. All prior agreements, representations, negotiations and
understandings of the Parties hereto, oral or written, express or implied, are
hereby superseded and merged herein.
26.11 AMENDMENTS. No addition to or modification of any provision
contained in this Agreement shall be effective unless fully set forth in a
writing signed by Irvine and FirstWorld.
26.12 PARTIAL INVALIDITY. If any term or provision of this
Agreement or the application of such term or provision to any Party or
circumstance shall to any extent be invalid or unenforceable, then the remainder
of this Agreement, or the application of such term or provision to Persons or
circumstances other than those as to which it is invalid or unenforceable, shall
not be affected by such invalidity or unenforceability, and each remaining term
and provision of this Agreement shall be valid and enforceable to the fullest
extent permitted by Applicable Law.
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26.13 SUCCESSORS AND ASSIGNS. This Agreement shall bind and
benefit Irvine and FirstWorld and their successors and assigns, but the
foregoing shall not limit or supersede any transfer restrictions contained in
this Agreement.
26.14 GOVERNING LAW. This Agreement and its interpretation and
performance shall be governed, construed and regulated by the Applicable Law of
the State of California, without regard to principles of conflict of Applicable
Law.
26.15 COUNTERPARTS. This Agreement may be executed in one or more
duplicate counterparts and when signed by all of the Parties listed below shall
constitute a single binding agreement.
26.16 TIME PERIODS. Whenever this Agreement requires either Party
to perform any action within a specified period, or requires that a particular
event occur within a specified period, if the last day of such period is not a
Business Day, then the period shall be deemed extended through the close of
business on the first Business Day following such period as initially specified.
This paragraph shall in no event delay or defer the effective date of any Rent
adjustment or the commencement of any period with respect to which interest on a
payment shall accrue or the date for payment of any Rent.
26.17 WAIVERS. The consent by one Party to any act by another
Party shall not be deemed to imply consent, or waiver of the necessity of
obtaining such consent, for the same or any similar acts in the future. No
waiver or consent shall be implied from silence or from any failure of a Party
to act, except as otherwise specified in this Agreement.
26.18 NEGATION OF PARTNERSHIP. The covenants, obligations and
liabilities of the Parties are intended to be several and not joint or
collective and nothing herein contained shall ever be construed to create an
association, joint venture, trust or partnership, or to impose a trust or
partnership covenant, obligation or liability on or with regard to the Parties.
Each Party shall be individually responsible for its own covenants, obligations
and liabilities as herein provided. No Party shall be under the control of or
shall be deemed to control the other Party. No Party shall be the agent of or
have a right or power to bind the other Party without its express written
consent, except as expressly provided in this Agreement.
26.19 ATTORNEYS' FEES. Each Party shall bear its own attorney's
fees incurred in relation to the negotiation and execution of this Agreement.
In the event of any action instituted between the Parties in connection with
this Agreement, the prevailing Party shall be entitled to recover from the
losing Party, the prevailing Party's costs and expenses, including reasonable
attorneys' fees. The prevailing Party for the purpose of this paragraph shall
be determined by the trier of the facts.
26.20 RELATIONSHIPS. Irvine and FirstWorld acknowledge and agree
that the relationship between them is solely that of independent contractors,
and nothing herein shall be construed to constitute the Parties as
employer/employee, partners, joint venturers, co-owners, or otherwise as
participants in a joint or common undertaking. Neither Party, nor its
employees, agents or representatives shall have any right, power or authority to
act or create any obligation, express or implied, on behalf of the other.
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IN WITNESS WHEREOF, the Parties have executed this Agreement as of the
day and year first above written.
FIRSTWORLD ORANGE COAST,
a California corporation
By: /s/ Robert E. Randall
-----------------------------------
Name: Robert E. Randall
Title: Executive Vice President & Chief
Operating Officer
By: /s/ G. Bradford Saunders
-----------------------------------
Name: G. Bradford Saunders
Title: Senior Vice President
THE IRVINE COMPANY,
a Delaware corporation
By: /s/ Richard G. Sim
----------------------------------
Richard G. Sim,
Executive Vice President
By: /s/ Clarence W. Barker
----------------------------------
Clarence W. Barker, President
of Irvine Industrial Company, a
division of The Irvine Company
41
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Appendix 1
GLOSSARY OF DEFINED TERMS
<PAGE>
Appendix 1
GLOSSARY OF DEFINED TERMS
(CONDUIT LEASE)
"Addition Memorandum" means a memorandum in the form of Appendix 5
adding space within Additional Available Spectrum Conduit or Available Other
Conduit to the Leased Premises under the Conduit Lease, or Additional Buildings
to the License Agreement.
"Additional Areas" means other areas which Irvine may develop within
the cities of Irvine, Newport Beach and Tustin and within certain unincorporated
areas of the County of Orange.
"Additional Area Buildings" means any additional commercial,
industrial and retail buildings which Irvine owns and develops within those
Additional Areas as to which Available Other Conduit is added to the Leased
Premises in accordance with the terms and provisions of the Conduit Lease.
"Additional Available Spectrum Conduit" means additional multi-tube
telecommunications conduit located within the Additional Spectrum of
substantially similar capacity and configuration to the Existing Available
Spectrum Conduit, or such other configuration as may be required under the
Conduit Lease.
"Additional Buildings" means all of the Additional Spectrum Buildings,
the Additional Area Buildings and the Additional Other Buildings, to the extent
added to this Agreement pursuant to the terms and provisions hereof.
"Additional License Fee Base" shall have the meaning set forth in
Section 6.1 of the License Agreement.
"Additional Networks" means any Networks established by FirstWorld to
service any Additional Areas.
"Additional Other Buildings" means any additional commercial,
industrial and retail buildings which Irvine owns and which are now existing or
are hereafter constructed, and which are located in the State of California but
not in the Spectrum or any Additional Areas as to which space within Available
Other Conduit is added to the Leased Premises in accordance with the terms and
provisions of the Conduit Lease.
"Additional Spectrum" means additional areas which Irvine intends to
develop within or as part of the Irvine Spectrum as more particularly shown on
the map attached hereto as Appendix 3 or located adjacent to the Existing
Spectrum.
"Additional Spectrum Buildings" means any additional commercial,
industrial and retail buildings which Irvine develops and owns within the
Additional Spectrum.
"Adjusted Gross Combined Revenue" means Adjusted Gross Revenue plus,
for the relevant period, the remainder, if any, of the Other Building Gross
Revenues for the relevant
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period less the sum of the following for the same period, to the extent
derived from Customers occupying the applicable Additional Other Buildings or
Users providing services through FirstWorld or one or more of its Affiliates
to the applicable Additional Other Buildings: (i) Service Provider Payments;
and (ii) FirstWorld Consulting Revenues.
"Adjusted Gross Revenue" means, for the relevant period, the
remainder, if any, of the Gross Revenues for the relevant period less the sum of
the following for the same period (a) Third Party Building Access Payments paid
with regard to buildings in the Spectrum and any Additional Areas as to which
space in Available Other Conduit has been added to the Leased Premises in
accordance with the terms and provisions of the Conduit Lease; and (b) to the
extent derived from Customers occupying buildings within the Spectrum and any
such Additional Areas or from Users providing services through the Irvine
Networks to such buildings: (i) Service Provider Payments; and (ii) FirstWorld
Consulting Revenues.
"Affiliate" means, with respect to Irvine, FirstWorld or any other
Person, any other Person that directly or indirectly through one or more
intermediaries controls, is controlled by or is under common control with the
Person specified, or who holds or beneficially owns fifty percent (50%) or more
of the equity interest in the Person specified or fifty percent (50%) or more of
any class of voting securities of the Person specified.
"Affiliated Lender" means any Lender which is also an Affiliate of
FirstWorld.
"Agreement" means this Conduit Lease.
"Applicable Law" means any applicable law, statute, ordinance,
regulation, rule, notice requirement, court decision, agency guideline,
principle of law and order of any Governmental Authority, including, without
limitation, those related to energy, the environment, motor vehicle safety,
public utility, zoning, building and health codes, occupational safety and
health and laws respecting employment practices, employee documentation, terms
and conditions of employment, and wages and hours.
"Available Conduit" means the Available Spectrum Conduit together with
the Available Other Conduit.
"Available Other Conduit" means telecommunications conduit which
Irvine installs in Additional Areas and as to which space within the same is
added to the Leased Premises in accordance with the terms and provisions of the
Conduit Lease.
"Available Spectrum Conduit" means the Existing Available Spectrum
Conduit together with the Additional Available Spectrum Conduit to the extent
constructed from time to time.
"Basic Percentage Rent" shall have the meaning set forth in Section
4.2 of the Conduit Lease.
"Bonus Percentage Rent" shall have the meaning set forth in Section
4.3 of the Conduit Lease.
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"Buildings" means the Existing Spectrum Buildings together with any
Additional Buildings to the extent added to the License Agreement pursuant to
the terms thereof.
"Business Day" means any day which is not a Saturday, a Sunday or a
day on which national banks are obligated by law, regulation or executive order
to be closed.
"Cable" means all fiber optic cable installed in the Available Conduit
by or on behalf of FirstWorld or any of its Affiliates whether installed within
Conduit or extending into a building to be connected to Equipment located
therein.
"Certifying Party" shall have the meaning set forth in Article 25 of
this Agreement.
"City" means the City of Irvine, provided, however, that with regard
to any Additional Areas, the City shall mean the city within which the
applicable Additional Area is located, or if such Additional Area is in an
unincorporated area of a county, the county within which the same is located.
"Commencement Date" is defined in Article 3 of this Agreement.
"Condemnation" means any action in eminent domain, brought with regard
to the Leased Premises or any portion thereof, or with regard to any Building or
any portion thereof, by any Governmental Authority, or any conveyance to a
Governmental Authority in lieu of, or in settlement of, a pending or threatened
action in eminent domain.
"Conduit" means ** tubes being a portion of the Available Conduit
together with the pull boxes serving such tubes within which FirstWorld utilizes
space, and together with all additional conduit which may be installed by
FirstWorld within the Spectrum and within any Additional Areas (including
building entrance conduit systems), and any alterations, repairs, modifications
and improvements of any of the same, provided, however, that for those portions
of the Available Conduit which include more than *** tube, the Conduit shall
consist of: (a) where the Available Conduit includes *** tubes, *** tube and ***
tube and (b) wherever the Available Conduit includes *** tubes, *** tubes.
"Conduit Lease" means that certain Agreement For Lease of
Telecommunications Conduit made and entered into by and between Irvine and
FirstWorld and dated as of March 5, 1998.
"Confidential Information" means all information and documents which
either party furnishes to the other on or after the date of this Agreement,
which such party designates as proprietary or confidential or which is
Pre-Authorized Confidential Information not required to be so designated.
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*** CONFIDENTIAL TREATMENT REQUESTED
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"CPI" means the Consumer Price Index, All Urban Consumers, Subgroup
"All Items" for the Los Angeles-Anaheim-Riverside Region (Base Period 1993-95 =
100), which is currently being published monthly by the United States Department
of Labor, Bureau of Labor Statistics. If, however, the CPI is changed, revised
or discontinued for any reason, there shall be substituted in lieu thereof, and
the term "CPI" shall thereafter refer to, the most nearly comparable official
price index of the United States Government so as to obtain substantially the
same result as would have been obtained had the original CPI not been changed,
revised or discontinued, which alternative index shall be selected by Irvine and
shall be subject to FirstWorld's written approval.
"Customers" means any Person who subscribes with FirstWorld for
Network services as an end user (as opposed to Users who contract for access to
a Network in order to provide telecommunications services to their own
customers).
"Equipment" means switches, connectors, amplifiers, and other
equipment located in a building and not within the Conduit and required to
connect Cable to a building and/or provide telecommunications services to the
occupants thereof.
"Equipment Space" means a reasonable amount of equipment room space in
each Building, not to exceed 100 square feet, that is sufficient to enable
FirstWorld to install the Cable and Equipment needed by FirstWorld to deliver
the services described by this Agreement, which Equipment Space shall be in a
reasonable configuration taking into account the size and shape of the equipment
room in which the same will be located and the number of service providers
requiring space within such equipment room. Once Equipment is installed in any
Building, Equipment Space shall exclude equipment room space not utilized by
FirstWorld.
"Estoppel Certificate Request" shall have the meaning set forth in
Article 25 of this Agreement.
"Event of Default" shall have the meaning set forth in Section 18.1 of
this Agreement.
"Existing Available Spectrum Conduit" means a multi-tube
telecommunications conduit which Irvine has constructed within the Existing
Spectrum at the approximate locations shown on Appendix 4 attached hereto.
"Existing Spectrum" means certain developed areas in the area commonly
referred to as the Irvine Spectrum and more particularly shown on the map
attached hereto as Appendix 2.
"Existing Spectrum Buildings" means the commercial, industrial and
retail buildings which are owned by Irvine within the Existing Spectrum and
which are listed on Appendix 4 attached to the License Agreement.
"Fair Market License Fee" shall have the meaning set forth in Section
6.1.4. of the License Agreement.
"Financing" means any mortgage financing, project financing,
refinancing or borrowing, or any sale and leaseback transaction in which
FirstWorld has the right to repurchase
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the Leased Premises, secured by a Financing Encumbrance, the proceeds of which
are utilized in whole or in part to finance the cost of the design,
construction, replacement, improvement, maintenance or operation of one or more
Irvine Networks.
"Financing Encumbrance" means any mortgage, deed of trust, assignment,
security agreement, pledge, financing statement, conveyance and lease (in the
case of a sale and leaseback transaction) or any other instrument(s) or
agreement(s) intended to grant security for any financing, that encumbers all of
the Leased Premises and FirstWorld's rights under the License Agreement and the
Conduit Lease (or any portion of the Leased Premises together with but not
separate from FirstWorld's rights under the License Agreement and the Conduit
Lease to the extent affecting Buildings and areas, respectively, served by the
portion of the Leased Premises encumbered by the applicable Financing
Encumbrance) (as well as such other assets or rights as may be encumbered by
such instruments) as the same may be renewed, modified, consolidated, amended,
extended or assigned from time to time.
"FirstWorld" means FirstWorld Orange Coast, a California corporation.
"FirstWorld Consulting Revenues" means payment for service related to
advice or other provision of consulting services which does not involve payment
for the transmission of information over a Network.
"FirstWorld Marks" shall have the meaning set forth in Section 19.1 of
the License Agreement.
"Fiscal Year" means the fiscal year of FirstWorld, ending on September
30, as the same may be changed from time to time.
"FWC" means FirstWorld Communications, Inc., a California corporation.
"Governmental Authority" means any national, state or local government
(whether domestic or foreign), any political subdivision thereof or any other
governmental, quasi-governmental, judicial, public or statutory instrumentality,
authority, body, agency, bureau or entity.
"Gross Revenues" means, for any period, all revenues received by
FirstWorld or any of its Affiliates, assignees or sublessees with respect to the
operation of the Irvine Networks during such period that are attributable to the
following derived from Customers occupying buildings within the Spectrum and any
Additional Areas, or from Users providing services through the Irvine Networks
to any Person in the Spectrum or any Additional Areas: (a) fees for access
rights and other services sold by FirstWorld to such Customers, (b) ***, (c) ***
, (d) the lease or re-sale of lines or circuit paths within the Irvine Networks
to Users to access customers of said Users, and (e) the lease to Customers of
Customer premises equipment which is not generally available and which is
required by FirstWorld as a condition of service.
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*** CONFIDENTIAL TREATMENT REQUESTED
6
<PAGE>
"Hazardous Materials" means all materials, substances and wastes,
variously designated as hazardous or toxic substances, materials or wastes
pursuant to all federal, state, and local laws, statutes, ordinances, rules and
regulations relating to the environment, including without limitation, the
federal Comprehensive Environmental Response Compensation and Liability Act, the
Resource Conservation and Recovery Act, the Superfund Amendment and
Reathorization Act and the California Health and Safety Code, and shall also
include, PCB's, asbestos, radon and fractions of petroleum, whether or not so
designated therein.
"Imposition" means the sum of all of the following to the extent
imposed on the Leased Premises, the Conduit, the Cable, the Irvine Networks, any
Equipment installed in connection therewith, or the services to be provided by
FirstWorld to Customers and Users; (i) all real estate taxes and assessments or
personal property taxes and assessments, as such property taxes may be assessed
or reassessed from time to time ; (ii) any and all other taxes, charges and
assessments which are levied with respect to this Agreement or to any of the
foregoing, other than general net income and franchise taxes of Irvine; (iv)
all charges, fees, taxes, surcharges or assessments of any kind or nature which
are in the future levied by any Governmental Authority, in lieu of, in addition
to or as a replacement for any other Imposition; and (iv) costs and expenses
incurred in contesting the amount or validity of any Imposition by appropriate
proceedings.
"Initial Installation Date" shall have the meaning set forth in
Section 2.10.1 of the Conduit Lease.
"Irvine" means The Irvine Company, a Delaware corporation.
"Irvine Marks" shall have the meaning set forth in Section 19.1 of the
License Agreement.
"Irvine Networks" means the Spectrum Network and any Additional
Networks.
"Irvine's Cure" shall have the meaning set forth in Section 14.4 of
this Agreement.
"Irvine's Cure Rights" shall have the meaning set forth in Section
14.4 of this Agreement.
"Leased Premises" means the space within the tubes of the Conduit
together with the non-exclusive right to use undivided space within the pull
boxes serving such tubes.
"Lender" means any Person(s), including bondholder(s), and any
Affiliate of FirstWorld providing Financing for the ownership, design,
construction, improvement, maintenance, replacement or operation of one or more
Networks or any matter related thereto, including, without limitation, any
trustee or collateral agent appointed by any such Lender to represent its
interests.
"Lender's Cure" shall have the meaning set forth in Section 13.4 of
this Agreement.
"Lender's Cure Rights" shall have the meaning set forth in Section
13.4 of this Agreement.
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"License Agreement" means that certain Telecommunications System
License Agreement dated as of March 5, 1998, by and between Irvine and
FirstWorld.
"License Fee" shall have the meaning set forth in Section 6.1.1 of the
License Agreement.
"Market Adjustment Date" shall have the meaning set forth in Section
6.1.4 of the License Agreement.
"Marks" means the FirstWorld Marks and the Irvine Marks.
"Memorandum of Lease" means a recordable memorandum of the Conduit
Lease in the form of Appendix 7 attached to the Conduit Lease to be executed
between the parties.
"Networks" means one or more neutral broadband fiber optic
telecommunications pathways which are available to all competing
telecommunication service providers for a fee on a non-discriminatory basis and
are inter-operable with an incumbent local telephone carrier, but excluding any
transport links between pathways and the applicable switching facility.
"Off Net" means that FirstWorld is providing service to the end user
over a third party's transport system.
"On Net" means that FirstWorld's Cable is connected to the applicable
building, and FirstWorld is providing service to the end user over such Cable.
"Other Building Gross Revenue" means, for any period, all revenues
received by FirstWorld or any of its Affiliates, assignees, or sublessees with
respect to services provided during such period that are attributable to the
following derived from Customers occupying Additional Other Buildings or Users
providing services to Persons occupying Additional Other Buildings: (a) fees for
access rights and other services sold by FirstWorld to such Customers, (b) ***,
(c) *** , (d) the lease or re-sale of lines or circuit paths to Users to access
customers of said Users in such Additional Other Buildings, and (e) the lease to
Customers of Customer premises equipment which is not generally available and
which is required by FirstWorld as a condition of service.
"Party" means Irvine or FirstWorld as a party to this Agreement.
"Payment Date" means each May 15, August 15, November 15 and February
15, or the next succeeding Business Day if such date is not a Business Day.
"Permitted Assignee" shall have the meaning set forth in Section 13.1
of this Agreement.
- ---------------------------
*** CONFIDENTIAL TREATMENT REQUESTED
8
<PAGE>
"Person" means any individual, corporation, partnership, limited
liability company, joint venture, association, joint-stock company, trust,
unincorporated organization, Governmental Authority or any agency or political
subdivision thereof or any other entity.
"Phasing Plan" means the plans showing the phasing for installation of
the Irvine Networks or portions thereof. The initial Phasing Plan for the
Network to be installed in the Existing Spectrum is attached to this Agreement
as Appendix 6. Additional Phasing Plans will be prepared for any Additional
Spectrum areas and for any Additional Areas, in accordance with the terms and
provisions of the Conduit Lease.
"Plans" shall have the meaning set forth in Section 8.1 of the License
Agreement.
"Pre-Authorized Confidential Information" means Confidential
Information which pursuant to this Agreement is identified as Pre-Authorized
Confidential Information, and which shall be Confidential Information but need
not be so designated.
"Rent" means the sum of the Basic Percentage Rent and the Bonus
Percentage Rent.
"Requesting Party" shall have the meaning set forth in Article 25 of
this Agreement.
"Service Provider Payments" means all sums collected by FirstWorld or
any of its Affiliates, assignees or sublessees, on behalf of any Users or other
service providers.
"Serviced Buildings" means all buildings and other facilities within
both the Spectrum and such Additional Areas as may be incorporated into this
Agreement.
"Spectrum" means the Existing Spectrum together with the Additional
Spectrum to the extent developed from time to time.
"Spectrum Network" means the Network to be installed by FirstWorld
within the Spectrum. If FirstWorld elects to service the Spectrum with more
than one Network in accordance with terms and provisions of this Agreement, then
all such Networks shall collectively be the Spectrum Network.
"Spectrum Service Area" means the Existing Spectrum together with the
Additional Spectrum to the extent developed and added to the Conduit Lease from
time to time.
"Term" shall mean the period commencing on the Commencement Date and
continuing until December 31, 2027.
"Third Party Building Access Payments" means payments for access to
buildings for which FirstWorld does not have a right of entry pursuant to the
License Agreement.
"Transfer" shall have the meaning set forth in Section 12.1 of this
Agreement.
"Unavoidable Delay" means any cause beyond the reasonable control of
the party affected, including, without limitation, the following:
9
<PAGE>
(a) Failures of or threats of failure of facilities, including
power failures and the failure of any component of a Network;
(b) Floods, earthquakes, tornadoes, storms, fires, lightning,
epidemics or other casualties;
(c) Acts of war, riots, civil disturbances or disobediences;
(d) Labor disputes, labor or material shortages (including the
inability to obtain Equipment necessary to provide service) or acts of sabotage;
(e) Restraint by court order or Governmental Authority;
(f) Any failure to obtain the necessary permits, authorizations
or approvals from any Governmental Authority not caused by the failure of a
Party to take the actions required of it to obtain the same; or
(g) The need to condemn or acquire property prior to performing
any act.
"Underground Agencies" means one or more underground utility
monitoring companies.
"Users" means any Person who contracts with FirstWorld for access to a
Network in order to provide telecommunications services to its own customers (as
opposed to Customers who contract with FirstWorld for Network services as end
users).
10
<PAGE>
APPENDIX 2
DEPICTION OF EXISTING SPECTRUM
THIS APPENDIX CONTAINS A MAP OF THE EXISTING SPECTRUM
(AS DEFINED)
<PAGE>
APPENDIX 3
DEPICTION OF ADDITIONAL SPECTRUM
THIS APPENDIX CONTAINS A MAP OF THE ADDITIONAL SPECTRUM
(AS DEFINED)
<PAGE>
APPENDIX 4
EXISTING AVAILABLE SPECTRUM CONDUIT
THIS APPENDIX CONTAINS A SERIES OF MAPS OF THE AVAILABLE SPECTRUM CONDUIT
(AS DEFINED)
<PAGE>
APPENDIX 5
ADDITION MEMORANDUM
<PAGE>
ADDITON MEMORANDUM NO.
(CONDUIT LEASE)
THIS ADDITION MEMORANDUM is dated as of _____________,_____, and made by
and between THE IRVINE COMPANY, a Delaware corporation ("Irvine"), and
FIRSTWORLD ORANGE COAST, a California corporation ("FirstWorld").
A. Prior to the date hereof, Irvine and FirstWorld have entered into that
certain AGREEMENT FOR LEASE OF TELECOMMUNICATIONS CONDUIT dated as of
____________, 1998, (the "Conduit Lease") providing for, among other things, the
lease of space within certain Conduit to FirstWorld as more particularly set
forth in the Conduit Lease.
B. Irvine now desires to add to the Leased Premises under the Conduit
Lease, space within additional Available Conduit in accordance with the terms,
provisions and conditions of the Conduit Lease.
NOW THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Parties hereto agree as
follows;
1. DEFINITIONS. Capitalized terms used in this Addition Memorandum and
not otherwise defined herein shall have the meaning given to them in the Conduit
Lease.
2. ADDITIONAL BUILDING. Pursuant to the provisions of Article 2 of the
Conduit Lease, effective as of ______________,_____, (the "Effective Date"),
space within the additional Available Conduit more particularly identified in
Exhibit A attached hereto and incorporated herein by this reference is added to
the Leased Premises. The Available Conduit as to which space is hereby added to
the Leased Premises services that portion of the [Additional Spectrum/Additional
Area of ___________] shown on Exhibit B. From and after the Effective Date, for
purposes of determining Rent due pursuant to Sections 4.1, 4.2 and 4.3 of the
Conduit Lease, Gross Revenues shall include Gross Revenues attributable to the
[Additional Spectrum\Additional Area] shown on Exhibit B.
3. FORCE AND EFFECT. Except for the addition to the Leased Premises set
forth in this Addition Memorandum, and the inclusion of the [Additional
Spectrum\Additional Area] shown
Appendix 5
Page 1 of 2
<PAGE>
in Exhibit B for purposes of determining Rent and calculating Gross Revenues,
the Conduit Lease shall remain unmodified and in full force and effect.
IN WITNESS WHEREOF, the Parties have executed this Addition Memorandum as
of the day and year first above written.
FIRSTWORLD ORANGE COAST,
a California corporation
By:
-------------------------------
Name:
----------------------------
Title:
---------------------------
By:
-------------------------------
Name:
----------------------------
Title:
---------------------------
THE IRVINE COMPANY,
a Delaware corporation
By:
-------------------------------
Name:
----------------------------
Title:
---------------------------
By:
-------------------------------
Name:
----------------------------
Title:
---------------------------
Appendix 5
Page 2 of 2
<PAGE>
APPENDIX 6
PHASING PLAN
THIS APPENDIX CONTAINS A COLOR CODED MAP OF THE AREA IN WHICH
THE COMPANY'S FACILITIES ARE TO BE CONSTRUCTED AND INDICATES
WHICH AREAS MUST BE COMPLETED AT VARIOUS TIMES
<PAGE>
APPENDIX 7
MEMORANDUM OF LEASE
<PAGE>
RECORDED REQUESTED BY AND
WHEN RECORDED MAIL TO:
- -------------------------
- -------------------------
- -------------------------
- -------------------------
- --------------------------------------------------------------------------------
MEMORANDUM OF CONDUIT LEASE
THIS MEMORANDUM OF AGREEMENT FOR LEASE OF TELECOMMUNICATIONS CONDUIT is
dated as of ______________, 1998, and made by and between THE IRVINE COMPANY, a
Delaware corporation ("Irvine"), and FIRSTWORLD ORANGE COAST, a California
corporation ("FirstWorld").
A. Prior to the date of this Memorandum, Irvine and FirstWorld have
entered into that certain AGREEMENT FOR LEASE OF TELECOMMUNICATIONS CONDUIT
dated as of ________________, 1998 (the "Conduit Lease").
B. Irvine and FirstWorld now desire to execute this Memorandum and to
cause the same to be recorded in the Official Records of Orange County,
California, to provide record notice of the rights, interests and obligations
set forth in the Conduit Lease.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Parties hereto agree as
follows:
1. LEASED PREMISES. Irvine has leased to FirstWorld space within
certain, but not all, tubes of the Existing Available Spectrum Conduit, together
with the non-exclusive right to undivided space within the pull boxes serving
the same, subject to, upon and in accordance with the terms, provisions and
conditions set forth in the Conduit Lease. The approximate location of the
Existing Available Spectrum Conduit is more particularly shown on Exhibit "A"
attached hereto and incorporated herein by the reference.
2. TERM. The Term of the Lease is for the period commencing upon the
date of the Conduit Lease, and expiring on December 31, 2027, with no
extensions.
Appendix 7
Page 1 of 3
<PAGE>
3. DEFINED TERMS. Initially capitalized terms used in this Memorandum
and not otherwise defined herein shall have the meanings given to them in the
Conduit Lease.
4. OTHER PROVISIONS. The purpose of this Memorandum is to provide record
notice of the rights, interests and obligations under the Conduit Lease, and all
of the terms, provisions and conditions of the Conduit Lease are incorporated in
this Memorandum as though the same were set forth herein in full. This
Memorandum shall in no way be construed to modify, amend, limit or expand, in
any manner whatsoever, the terms, provisions and conditions of the Conduit
Lease. In the event of any inconsistency between the terms, provisions and
conditions of this Memorandum and the terms, provisions and conditions of the
Conduit Lease, the terms, provisions and conditions of the Conduit Lease shall
prevail.
IN WITNESS WHEREOF, the Parties have executed this Memorandum as of the day
and year first above written.
FIRSTWORLD ORANGE COAST,
a California corporation
By:
---------------------------
Name:
-------------------------
Title:
------------------------
By:
---------------------------
Name:
-------------------------
Title:
------------------------
THE IRVINE COMPANY,
a Delaware corporation
By:
---------------------------
Name:
-------------------------
Title:
------------------------
By:
---------------------------
Name:
-------------------------
Title:
------------------------
Appendix 7
Page 2 of 3
<PAGE>
STATE OF____________ )
) ss.
COUNTY OF___________ )
On ______________, ____, before me, ____________________________, Notary
Public, personally appeared _____________________________ and __________________
personally known to me or proved to me on the basis of satisfactory evidence to
be the person(s) whose name(s) is/are subscribed to the within instrument and
acknowledged to me that he/she/they executed the same in his/her/their
authorized capacity(ies), and that by his/her/their signature(s) on the
instrument the person(s), or the entity upon behalf of which the person(s)
acted, executed the instrument.
WITNESS my hand and official seal.
- -----------------------
Notary Public
STATE OF____________ )
) ss.
COUNTY OF___________ )
On ______________, ____, before me, ____________________________, Notary
Public, personally appeared _____________________________ and __________________
personally known to me or proved to me on the basis of satisfactory evidence to
be the person(s) whose name(s) is/are subscribed to the within instrument and
acknowledged to me that he/she/they executed the same in his/her/their
authorized capacity(ies), and that by his/her/their signature(s) on the
instrument the person(s), or the entity upon behalf of which the person(s)
acted, executed the instrument.
WITNESS my hand and official seal.
- -----------------------
Notary Public
Appendix 7
Page 3 of 3
<PAGE>
CERTAIN MATERIAL (INDICATED BY AN ASTERISK) HAS BEEN
OMITTED FROM THIS DOCUMENT PURSUANT TO A REQUEST
FOR CONFIDENTIAL TREATMENT. THE OMITTED
MATERIAL HAS BEEN FILED SEPARATELY
WITH THE SECURITIES AND
EXCHANGE COMMISSION.
TELECOMMUNICATIONS SYSTEM LICENSE AGREEMENT
BY AND BETWEEN
THE IRVINE COMPANY
AND
FIRSTWORLD ORANGE COAST
DATE: MARCH 5, 1998
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
1. DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
2. GRANT OF LICENSE. . . . . . . . . . . . . . . . . . . . . . . . . . . .2
2. 1. Grant of License. . . . . . . . . . . . . . . . . . . . . . .2
2. 2. Use.. . . . . . . . . . . . . . . . . . . . . . . . . . . . .4
2. 3. Access. . . . . . . . . . . . . . . . . . . . . . . . . . . .4
2. 4. Condition of Equipment Space and Building . . . . . . . . . .4
2. 5. Subordination . . . . . . . . . . . . . . . . . . . . . . . .4
3. TERM . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5
4. CONNECTION OF BUILDINGS TO THE NETWORKS . . . . . . . . . . . . . . . .5
4. 1. Connection of Spectrum Network. . . . . . . . . . . . . . . .5
4. 2. Connection of Additional Networks . . . . . . . . . . . . . .5
4. 3. Time to Connect Buildings.. . . . . . . . . . . . . . . . . .5
4. 4. Manner of Connection. . . . . . . . . . . . . . . . . . . . .6
4. 5. Tenant Waivers. . . . . . . . . . . . . . . . . . . . . . . .6
4. 6. Multiple Networks; Switch Service.. . . . . . . . . . . . . .6
5. OPERATION OF THE NETWORKS . . . . . . . . . . . . . . . . . . . . . . .7
5. 1. Operations. . . . . . . . . . . . . . . . . . . . . . . . . .7
5. 2. Level of Service. . . . . . . . . . . . . . . . . . . . . . .8
5. 3. Reports to Irvine . . . . . . . . . . . . . . . . . . . . . .8
5. 4. Enforcement . . . . . . . . . . . . . . . . . . . . . . . . .9
5. 5. Right To Enter Into Operations and Maintenance Agreements.. .9
5. 6. Failure to Operate. . . . . . . . . . . . . . . . . . . . . .9
6. PAYMENTS TO IRVINE. . . . . . . . . . . . . . . . . . . . . . . . . . .9
6. 1. License Fee.. . . . . . . . . . . . . . . . . . . . . . . . .9
6. 2. Adjusted Gross Revenue. . . . . . . . . . . . . . . . . . . 11
6. 3. Gross Square Footage. . . . . . . . . . . . . . . . . . . . 11
7. IMPOSITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
7. 1. Impositions . . . . . . . . . . . . . . . . . . . . . . . . 11
7. 2. Assessments in Installments.. . . . . . . . . . . . . . . . 12
7. 3. Direct Payment by Irvine. . . . . . . . . . . . . . . . . . 12
7. 4. Right to Contest. . . . . . . . . . . . . . . . . . . . . . 12
8. CONSTRUCTION AND MAINTENANCE OF NETWORK . . . . . . . . . . . . . . . 12
8. 1. Construction. . . . . . . . . . . . . . . . . . . . . . . . 13
8. 2. Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
8. 3. Hazardous Materials.. . . . . . . . . . . . . . . . . . . . 14
8. 4. Maintenance of Equipment. . . . . . . . . . . . . . . . . . 14
8. 5. FirstWorld Equipment. . . . . . . . . . . . . . . . . . . . 14
8. 6. Interference. . . . . . . . . . . . . . . . . . . . . . . . 15
8. 7. Establishment of MPOE.. . . . . . . . . . . . . . . . . . . 15
8. 8. Damage; Condemnation. . . . . . . . . . . . . . . . . . . . 16
9. COVENANTS OF IRVINE . . . . . . . . . . . . . . . . . . . . . . . . . 17
9. 1. Right-of-Way. . . . . . . . . . . . . . . . . . . . . . . . 17
i
<PAGE>
9. 2. Periodic Notices. . . . . . . . . . . . . . . . . . . . . . 17
9. 3. Electric Utilities. . . . . . . . . . . . . . . . . . . . . 17
10. EQUIPMENT; SURRENDER OF LICENSE . . . . . . . . . . . . . . . . . . . 17
10. 1. Equipment and Removal . . . . . . . . . . . . . . . . . . . 18
10. 2. Option To Purchase. . . . . . . . . . . . . . . . . . . . . 18
10. 3. Rental of Equipment . . . . . . . . . . . . . . . . . . . . 18
11. FINANCING 19
11. 1. Financing Not Prohibited Transfer.. . . . . . . . . . . . . 19
11. 2. Cooperation with Lender Requirements. . . . . . . . . . . . 19
11. 3. Notice of Financing . . . . . . . . . . . . . . . . . . . . 20
11. 4. Notice of Default and Lender's Cure Rights. . . . . . . . . 20
11. 5. Obligations of Lender and Successors. . . . . . . . . . . . 22
11. 6. Lender Protections. . . . . . . . . . . . . . . . . . . . . 23
11. 7. Remedies. . . . . . . . . . . . . . . . . . . . . . . . . . 23
11. 8. New Agreement . . . . . . . . . . . . . . . . . . . . . . . 23
11. 9. Concurrent Exercise.. . . . . . . . . . . . . . . . . . . . 24
12. IRVINE CURE RIGHTS. . . . . . . . . . . . . . . . . . . . . . . . . . 24
12. 1. Purpose . . . . . . . . . . . . . . . . . . . . . . . . . . 24
12. 2. Notice of Default . . . . . . . . . . . . . . . . . . . . . 24
12. 3. Priority of Cure Rights . . . . . . . . . . . . . . . . . . 24
12. 4. Irvine's Cure Rights. . . . . . . . . . . . . . . . . . . . 25
12. 5. Purchase of Financing Encumbrance; Subrogation. . . . . . . 26
12. 6. Right to Bid at Foreclosure Sale. . . . . . . . . . . . . . 27
13. DEFAULTS; REMEDIES. . . . . . . . . . . . . . . . . . . . . . . . . . 27
13. 1. Events of Default . . . . . . . . . . . . . . . . . . . . . 27
13. 2. Waiver. . . . . . . . . . . . . . . . . . . . . . . . . . . 28
13. 3. Remedies. . . . . . . . . . . . . . . . . . . . . . . . . . 28
13. 4. Late Payments . . . . . . . . . . . . . . . . . . . . . . . 29
13. 5. Right to Perform. . . . . . . . . . . . . . . . . . . . . . 30
13. 6. Waiver of Jury Trial. . . . . . . . . . . . . . . . . . . . 30
13. 7. Limitation. . . . . . . . . . . . . . . . . . . . . . . . . 30
13. 8. Damages Limitation. . . . . . . . . . . . . . . . . . . . . 30
14. SALE OF NETWORKS. . . . . . . . . . . . . . . . . . . . . . . . . . . 31
14. 1. FirstWorld's Right to Assign. . . . . . . . . . . . . . . . 31
14. 2. Submittal for Consent . . . . . . . . . . . . . . . . . . . 31
14. 3. Effect of Transfer. . . . . . . . . . . . . . . . . . . . . 31
14. 4. Right of First Refusal. . . . . . . . . . . . . . . . . . . 32
14. 5. Permitted Transfers.. . . . . . . . . . . . . . . . . . . . 32
14. 6. Multiple Networks.. . . . . . . . . . . . . . . . . . . . . 32
15. TRANSFER OF BUILDINGS . . . . . . . . . . . . . . . . . . . . . . . . 33
15. 1. Transfer of Single Building . . . . . . . . . . . . . . . . 33
15. 2. Transfer of Portfolio.. . . . . . . . . . . . . . . . . . . 33
16. INSURANCE; INDEMNIFICATION. . . . . . . . . . . . . . . . . . . . . . 33
16. 1. FirstWorld Indemnity. . . . . . . . . . . . . . . . . . . . 33
16. 2. Exemption of Irvine from Liability. . . . . . . . . . . . . 34
16. 3. Irvine Indemnity. . . . . . . . . . . . . . . . . . . . . . 34
16. 4. FirstWorld Insurance. . . . . . . . . . . . . . . . . . . . 35
16. 5. Form of Policies. . . . . . . . . . . . . . . . . . . . . . 36
ii
<PAGE>
16. 6. Increase in Liability Limits. . . . . . . . . . . . . . . . 37
16. 7. Release and Waiver of Subrogation . . . . . . . . . . . . . 37
17. REPRESENTATIONS AND WARRANTIES. . . . . . . . . . . . . . . . . . . . 37
17. 1. Representations and Warranties of FirstWorld. . . . . . . . 37
17. 2. Representations and Warranties of Irvine. . . . . . . . . . 38
18. PROTECTION OF CONFIDENTIAL INFORMATION. . . . . . . . . . . . . . . . 38
18. 1. Designation of Confidential Information . . . . . . . . . . 38
18. 2. Obligations of Confidentiality. . . . . . . . . . . . . . . 38
19. MARKS AND PUBLICITY . . . . . . . . . . . . . . . . . . . . . . . . . 39
19. 1. Exclusive Ownership of Marks. . . . . . . . . . . . . . . . 39
19. 2. References to Marks.. . . . . . . . . . . . . . . . . . . . 40
19. 3. Effect of Termination.. . . . . . . . . . . . . . . . . . . 40
19. 4. Publicity . . . . . . . . . . . . . . . . . . . . . . . . . 40
20. ARBITRATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
21. NO BROKER . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. .41
22. WAIVERS. .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
23. UCC FILING. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
24. ESTOPPEL CERTIFICATES . . . . . . . . . . . . . . . . . . . . . . . . 41
25. MISCELLANEOUS PROVISIONS. . . . . . . . . . . . . . . . . . . . . . . 42
25. 1. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . 42
25. 2. Further Assurances. . . . . . . . . . . . . . . . . . . . . 43
25. 3. Performance Under Protest . . . . . . . . . . . . . . . . . 43
25. 4. No Third Party Beneficiaries. . . . . . . . . . . . . . . . 43
25. 5. Interpretation. . . . . . . . . . . . . . . . . . . . . . . 43
25. 6. Delivery of Drafts. . . . . . . . . . . . . . . . . . . . . 43
25. 7. Headings. . . . . . . . . . . . . . . . . . . . . . . . . . 43
25. 8. Cumulative Remedies . . . . . . . . . . . . . . . . . . . . 44
25. 9. Entire Agreement. . . . . . . . . . . . . . . . . . . . . . 44
25. 10. Amendments. . . . . . . . . . . . . . . . . . . . . . . . . 44
25. 11. Partial Invalidity. . . . . . . . . . . . . . . . . . . . . 44
25. 12. Successors. . . . . . . . . . . . . . . . . . . . . . . . . 44
25. 13. Governing Law . . . . . . . . . . . . . . . . . . . . . . . 44
25. 14. Counterparts. . . . . . . . . . . . . . . . . . . . . . . . 44
25. 15. Time Periods. . . . . . . . . . . . . . . . . . . . . . . . 44
25. 16. Waivers . . . . . . . . . . . . . . . . . . . . . . . . . . 44
25. 17. Negation of Partnership . . . . . . . . . . . . . . . . . . 45
25. 18. Attorneys' Fees.. . . . . . . . . . . . . . . . . . . . . . 45
25. 19. Relationships . . . . . . . . . . . . . . . . . . . . . . . 45
25. 20. Nondedication of Facilities.. . . . . . . . . . . . . . . . 45
25. 21. Force Majeure. .. . . . . . . . . . . . . . . . . . . . . . 45
</TABLE>
TABLE OF APPENDICES
iii
<PAGE>
APPENDIX 1 - GLOSSARY OF DEFINED TERMS
APPENDIX 2 - DEPICTION OF EXISTING SPECTRUM
APPENDIX 3 - ADDITIONAL SPECTRUM
APPENDIX 4 - EXISTING SPECTRUM BUILDINGS
APPENDIX 5 - ADDITION MEMORANDUM
APPENDIX 6 - PHASING PLAN
APPENDIX 7 - WAIVER AND RELEASE
iv
<PAGE>
TELECOMMUNICATIONS SYSTEM LICENSE AGREEMENT
THIS TELECOMMUNICATIONS SYSTEM LICENSE AGREEMENT (this "Agreement") is
dated as of March 5, 1998, and made by and between THE IRVINE COMPANY, a
Delaware corporation ("Irvine") and FIRSTWORLD ORANGE COAST, a California
corporation ("FirstWorld").
RECITALS
A. FirstWorld is a wholly owned subsidiary of FWC. FWC is engaged
in the business of providing telecommunications network facilities and services
to municipalities and other users, both directly and through subsidiaries such
as FirstWorld.
B. FirstWorld proposes to build, own and operate Networks within the
State of California. Pursuant to the Conduit Lease, FirstWorld intends to
install the Spectrum Network to service Buildings in the Spectrum Service Area.
C. The Spectrum Service Area currently consists of the Existing
Spectrum, which is currently improved with commercial, industrial and retail
buildings including the Existing Spectrum Buildings, and the Additional
Spectrum, which Irvine anticipates it will improve with additional commercial,
industrial and retail buildings and which will include the Additional Spectrum
Buildings. Irvine is the master developer of the Spectrum Service Area. Irvine
also contemplates development of the Additional Areas which will be owned or
otherwise controlled by it.
D. Irvine desires to give FirstWorld the right to connect the
Spectrum Network to Additional Spectrum Buildings and may give FirstWorld the
right to connect the Irvine Networks to Additional Area Buildings or its other
Networks to Additional Other Buildings, to enable FirstWorld to provide
telecommunications services to occupants of such buildings, all in exchange for
the payments set forth in this Agreement. FirstWorld desires to obtain the
right to provide such services in the Existing Buildings and in the Additional
Buildings from time to time added to this Agreement in accordance with the terms
hereof.
E. On June 11, 1997, the PUC issued to FirstWorld a Certificate of
Public Convenience and Necessity with respect to, among other things, the
construction and operation of the Networks.
F. FirstWorld will develop, own, maintain and operate the Irvine
Networks. Pursuant to the terms of this Agreement, Irvine will have certain
rights and responsibilities, and will be entitled to receive certain payments,
in connection with access to the Existing Buildings and access to Additional
Buildings which may be added to this Agreement.
G. FirstWorld and Irvine have also entered into the Conduit Lease
concurrently with this Agreement pursuant to which, among other things, Irvine
has leased to FirstWorld space within the Existing Available Spectrum Conduit
(as described in the Conduit Lease).
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NOW, THEREFORE, in consideration of the mutual agreements contained
herein, and other good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, the Parties hereto agree as follows:
AGREEMENT
1.
DEFINITIONS
Capitalized terms used herein as defined terms shall have the meanings
given to them in the Glossary of Defined Terms attached hereto as Appendix 1
(such definitions to be equally applicable to both the singular and plural forms
of the terms defined) or elsewhere in this Agreement.
2.
GRANT OF LICENSE
2.1. GRANT OF LICENSE.
2. 1. 1. Irvine hereby grants to FirstWorld, for the Term of
this Agreement, the right and license (the "License") to construct, install,
maintain, operate, use, repair, replace, augment and remove, at FirstWorld's
sole expense and risk, Cable and associated Equipment in the Existing Spectrum
Buildings as set forth herein.
2. 1. 2. Irvine further grants to FirstWorld the License to
construct, install, maintain, operate, use, repair, replace, augment and remove,
at FirstWorld's sole expense and risk, Cable and associated Equipment in any
Additional Spectrum Building in the Spectrum Service Area at any time during the
Term of this Agreement. Once any construction has been substantially completed
by Irvine on any building in the Spectrum Service Area, such building shall be
deemed a "Building" for purposes of this Agreement, and the License shall apply
thereto.
2. 1. 3. Irvine may add any Additional Area Building in any
Additional Areas to this Agreement effective not earlier than the substantial
completion of such Additional Area Building either (i) by notice to FirstWorld,
or (ii) by the substantial completion of an Additional Area Building in an
Additional Area as to which space within Available Other Conduit has been added
to the Leased Premises pursuant to the terms of the Conduit Lease. To the
extent Irvine adds an Additional Area Building to this Agreement, Irvine further
grants to FirstWorld the License to install, maintain, operate, use, repair,
replace, augment and remove, at FirstWorld's sole expense risk, Cable and
associated Equipment in such Additional Area Building. Once any Additional Area
Building is so added to this Agreement by Irvine, such building shall be deemed
a "Building" for purposes of this Agreement, and the License shall apply
thereto.
2. 1. 4. Irvine may add any Additional Other Building owned
by it and located in the State of California (other than buildings in the
Spectrum Service Area and the Additional Areas) to this Agreement by written
notice to FirstWorld. To the extent Irvine adds an Additional Other Building to
this Agreement, Irvine further grants to FirstWorld the License to
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construct, install, maintain, operate, use, repair, replace, augment and remove,
at FirstWorld's sole expense and risk, Cable and associated Equipment in such
Additional Other Building. Once any Additional Other Building has been added to
this Agreement by Irvine, such building shall be deemed a "Building" for
purposes of this Agreement, and the License shall apply thereto.
2. 1. 5. As to those Buildings which are owned by Irvine and
which are not leased as a single building in its entirety to a single tenant,
Irvine shall provide Equipment Space to FirstWorld to the extent available in
any Building and FirstWorld shall, at FirstWorld's cost, keep each such
Equipment Space in good condition and repair and shall ensure that each such
Equipment Space provides a secure, water tight and otherwise adequate
environment for operation of the Equipment. FirstWorld shall have access to
each such Equipment Space during each Building's normal hours of operation but
shall, in addition, have access to each such Equipment Space twenty-four (24)
hours a day to perform emergency maintenance and repairs. The Equipment Space
and the Equipment in each Building within the Spectrum Service Area or any
Additional Area will be used by FirstWorld as a service site for the Spectrum
and/or any Additional Area and only for that purpose. In connection therewith,
FirstWorld shall have the right to permit occupants of the Building to locate
telecommunications equipment in the Equipment Space, provided that all risk of
loss and/or damage to such equipment shall be borne solely by such occupants
and/or FirstWorld, and FirstWorld shall defend and indemnify Irvine therefrom
pursuant to Section 16.1 of this Agreement. Irvine may, from time to time as
needed, have access to the Equipment Space, and FirstWorld agrees to cooperate
in providing such access. FirstWorld acknowledges that the Equipment Space in
most Buildings will be located in equipment rooms to which other Persons have
access, including other telecommunications providers, that Irvine will not
undertake any responsibility for protecting any Cable or Equipment installed by
FirstWorld in any Equipment Space, and that FirstWorld will be solely
responsible for taking such actions as may be reasonably necessary or
appropriate for protecting the same.
2. 1. 6. As to those Buildings which are owned by Irvine and
which are not leased as a single building in its entirety to a single tenant,
Irvine shall permit use of existing Building entrance conduit systems and
existing Building wiring to the extent that Irvine has the possession of and
authority to allow such use of said facilities. In addition, the License shall
include the right of FirstWorld to construct, install, maintain, operate,
repair, replace, augment and utilize building entrance conduit systems as
described in Section 8.1.2.
2. 1. 7. As to Buildings which are owned by Irvine and as to
which FirstWorld has been or is granted a License hereunder, and which are
leased as a single building in its entirety to a single tenant, FirstWorld will
likely need to obtain access to and the right to use the Equipment Space, any
existing Building entrance conduit systems and existing Building wiring from the
tenant of such Building for the term of such lease. FirstWorld anticipates that
any rights of access or consents which it requires from any tenant with regard
to any such Building can be obtained as part of any service agreement entered
into between FirstWorld and such tenant for service to the Building. Irvine
shall cooperate with FirstWorld and such tenant to permit FirstWorld to provide
service to such Buildings. Irvine hereby grants any consents reasonably
required by a tenant of any such Building, to permit FirstWorld to provide
service to such tenant, and will provide notice confirming such consent to any
such tenant upon request.
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2. 1. 8. The License granted for any Building shall not be
exclusive. Irvine hereby reserves the right to grant, renew or extend similar
licenses to others, including other fiber optic or non-fiber optic
telecommunications service providers, which other licenses may include rights to
utilize space in the equipment room in which the Equipment Space is located to
the extent that such use does not materially interfere with the Equipment Space
to be provided to FirstWorld pursuant to this Agreement.
2. 1. 9. Notwithstanding the foregoing grants to FirstWorld
and FirstWorld's rights and options contained in this Agreement, except as
expressly provided in Sections 8.1.2, and 4.3, FirstWorld shall have no
obligation to construct or install any Equipment or any building entrance
conduit system in or to any Building.
2. 2. USE. FirstWorld may use the Equipment Space and Equipment
only for the purpose of providing a Building's occupants with fiber optic
telecommunications services which FirstWorld: (a) has been, or may in the
future be, certified to provide by either the local public utility governing
body, the PUC, the Federal Communications Commission, or any other Governmental
Authority with jurisdiction as to the provision of such services; or (b) is now,
or may in the future be, permitted to provide without any such certification.
2. 3. ACCESS. Subject to the rights of Irvine's Tenants, Irvine
shall provide FirstWorld's authorized employees, representatives and contractors
access to each Building, so that FirstWorld may construct, install, maintain,
operate, use, repair, replace, augment and/or remove FirstWorld Equipment from
time to time. Except in emergency situations, such access shall be during
normal business hours and with prior notice to Irvine. Any access shall be
subject to such reasonable requirements and procedures as may be established
from time to time by Irvine. FirstWorld shall be responsible for any damage or
injury resulting from such entry and shall indemnify Irvine therefrom in
accordance with the provisions of this Agreement. FirstWorld acknowledges that
Irvine's right to provide such access may be limited in Buildings which are
wholly leased to a single tenant.
2. 4. CONDITION OF EQUIPMENT SPACE AND BUILDING. Irvine makes no
warranty or representation that the Equipment Space in any Building is suitable
for the use contemplated herein, it being assumed that FirstWorld has satisfied
or will satisfy itself thereof; provided, however, that the foregoing shall not
limit Irvine's obligation to the extent required under Section 2.1.5 hereof to
make Equipment Space available to FirstWorld to enable FirstWorld to install and
operate Equipment for the purposes contemplated by this Agreement. FirstWorld
agrees to accept, and shall have inspected, the Equipment Space in the Buildings
"as is" and agrees that Irvine is under no obligation to perform any work or
provide any materials to prepare the Equipment Space or any Building for
FirstWorld.
2. 5. SUBORDINATION. FirstWorld accepts the License granted
hereunder subject and subordinate to any mortgage, deed of trust or other lien
presently existing upon any Building, but FirstWorld agrees that the holder or
beneficiary of any such mortgage, deed of trust or lien shall have the right at
any time to subordinate such mortgage, deed of trust or other lien to the
License on such terms and subject to such conditions as such holder or
beneficiary may deem appropriate in its discretion. This provision is hereby
declared to be self-operative and no further instrument shall be required to
effect such subordination of this Agreement, provided that
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FirstWorld shall upon request execute an instrument submitted by Irvine
confirming the same. FirstWorld agrees to subordinate this Agreement to any
mortgage, deed of trust or other lien created after the effective date of this
Agreement affecting any Building so long as in connection with such
subordination the holder of such mortgage, deed of trust or other lien agrees in
writing that in the event of the foreclosure thereof this Agreement shall not be
terminated as to any Building then subject to this Agreement, and encumbered by
such mortgage, deed of trust or other lien and the holder thereof shall
recognize the rights of FirstWorld created by this Agreement as to the real
property encumbered by such mortgage, deed of trust or other lien, which
recognition agreement shall be in a form reasonably acceptable to FirstWorld and
such holder, provided, however, that such lender have the same rights to
terminate this Agreement in connection with any sale of a Building as are
reserved by Irvine in Section 15.1 of this Agreement. No provision of this
Section 2.5 shall be construed to give any such holder or beneficiary any claim,
right or title to any Equipment.
3.
TERM
The term of this Agreement shall commence on the date of this
Agreement (the "Commencement Date") and shall expire on December 31, 2027,
unless terminated sooner as provided herein.
4.
CONNECTION OF BUILDINGS TO THE NETWORKS
4. 1. CONNECTION OF SPECTRUM NETWORK. FirstWorld shall construct
the Spectrum Network and any expansion thereof into Additional Spectrum areas by
FirstWorld's installation of Cable in the Conduit in accordance with the Conduit
Lease, and shall connect the Existing Spectrum Buildings and any Additional
Spectrum Buildings to the Spectrum Network over time based on factors such as
(a) the rate at which Customers subscribe for Network services, (b) the location
of such Customers relative to the orderly and logical extension of Spectrum
Network facilities, and (c) the number of customers requiring "on-Net" and
"off-Net" service, all as reasonably determined by FirstWorld.
4. 2. CONNECTION OF ADDITIONAL NETWORKS. To the extent that
Irvine adds space within Available Other Conduit to the Leased Premises pursuant
to the Conduit Lease, FirstWorld shall construct a Network for the portion of
the Additional Area serviced by such Available Other Conduit in accordance with
the Conduit Lease and shall connect Additional Area Buildings in such Additional
Area over time based on the factors set forth in Section 4.1, above.
4. 3. TIME TO CONNECT BUILDINGS. Within *** (***) days after a
Customer that is a tenant of an office or other non-retail commercial Building
has subscribed in writing with FirstWorld for Network services as an end user,
FirstWorld shall submit to Irvine
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Plans for the construction work necessary to provide telecommunications network
service to such customer, which Plans shall be approved or disapproved by Irvine
in accordance with Section 8.1.1 below. Within *** (***) days after Irvine's
approval of such Plans, FirstWorld shall install such Cable and Equipment in,
and any necessary building entrance conduit system to, such Building as is
necessary to provide telecommunications network service to such Customer;
provided, however, that FirstWorld shall only be required to install such Cable
and Equipment and commence such service if there shall already exist, at the
time such Customer subscribes with FirstWorld, Conduit (as defined in the
Conduit Lease) either owned or leased by FirstWorld within one thousand (1,000)
feet of such Building that is, in FirstWorld's reasonable judgment, sufficient
to provide such service. FirstWorld shall also not be obligated to provide
service to a Customer if the equipment room in the Building in which such
Customer is located lacks adequate space for FirstWorld's installation of the
Equipment necessary to provide service to such Customer. To the extent that
FirstWorld reasonably anticipates that the tenants of a Building will incur an
average billing of $ *** per month for FirstWorld's services, FirstWorld will
provide on-net service to such Building within the time periods and subject to
the conditions specified in this Section. Notwithstanding any contrary
provision of this Section 4.3, if FirstWorld is required to condemn an access
route for connecting any Building in which a tenant which has requested service
is located, then the time within which FirstWorld is obligated to provide
service to such tenant shall be extended by the period of time necessary to
obtain possession of the requisite access route by condemnation.
4. 4. MANNER OF CONNECTION. When FirstWorld installs Cable in any
building entrance conduit system and into a Building for connection to the MPOE,
FirstWorld shall provide adequate Cable so that upon termination of service to
any Building and removal of FirstWorld's Equipment, there will be a length of
Cable extending from the point of penetration of the Cable into the Building to
the point of connection to the MDF plus an additional approximately twenty (20)
feet of Cable coiled at such point of connection.
4. 5. TENANT WAIVERS. FirstWorld shall not provide
telecommunications services to any tenant of a Building unless and until a
Waiver and Release, substantially in the form attached as Appendix 7 hereto, has
been duly executed by such tenant and delivered by FirstWorld to Irvine,
provided, however, that FirstWorld may satisfy the requirements of this Section
4.5 by including language similar to that contained in Appendix 7 in its
standard service agreement for the benefit of Irvine.
4. 6. MULTIPLE NETWORKS; SWITCH SERVICE.
4. 6. 1. FirstWorld shall have the right to provide service
to the Spectrum Service Area through a single Network or through multiple
Networks, and may provide service to any Additional Area as to which space in
Available Other Conduit has been added to the Conduit Lease from the Spectrum
Network or from an Additional Network. FirstWorld may provide service to any
areas not covered by this Agreement utilizing the Spectrum Network or any
Additional Network, so long as: (a) there is at all times adequate capacity in
the Spectrum
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6
<PAGE>
Network or such Additional Network to provide service to Customers in the
Spectrum and the Additional Areas as to which space in Available Other Conduit
has then been added to the Leased Premises under the Conduit Lease; (b) the
provision of service to such areas not covered by this Agreement (as to any
single area or in the aggregate) does not materially and adversely impact the
speed or quality of service provided to the Spectrum or such portions of the
Additional Areas; and (c) there will be at all times an alternative fiber optic
route to provide service to any such areas not covered by this Agreement without
use of the Spectrum Network or any Additional Network.
4. 6. 2. FirstWorld contemplates providing service to the
Spectrum Network from one of its Affiliate's switching facility in Anaheim or
any other switching facility which FirstWorld or any of its Affiliates may
hereafter control. Such facility is expected to be utilized in providing
service to multiple Networks, including Networks other than the Irvine Networks.
FWC may transfer such facility into a separate Affiliate after the date hereof,
and will enter into a separate agreement or agreements between such Affiliate
and FirstWorld with regard to the provision of service to the Irvine Networks
from such switching facility. No provision of this Agreement shall be construed
as causing such switching facility to be a part of the Spectrum Network or any
Additional Network, or requiring the transfer of such switching facility to a
separate Affiliate. In the event that Irvine succeeds to rights of FirstWorld
pursuant to the terms of this Agreement, including without limitation by
exercising any of its cure rights under Article 12 or its right of first refusal
under Section 14.4, Irvine shall have the option as to whether to assume any
agreement regarding the provision of service from such switching facility or to
terminate such agreement as to the Irvine Networks, and any such agreement
regarding any such switching facility shall acknowledge and affirm the rights of
Irvine under this Agreement as to agreements regarding switching facilities.
5.
OPERATION OF THE NETWORKS
5. 1. OPERATIONS. FirstWorld shall be the owner and operator of
the Irvine Networks and shall have the responsibility for and authority to make
decisions regarding all aspects of the operations of the Irvine Networks,
including, without limitation, the following matters:
5. 1. 1. Operating, maintaining and repairing all Network
facilities in accordance with prudent industry practice.
5. 1. 2. Making capital improvements and enhancements to the
Irvine Networks in accordance with prudent industry practice in order to
reasonably respond to technological improvements and Customer or User
requirements.
5. 1. 3. Using commercially reasonable diligence to obtain
Customers and Users for Network services.
5. 1. 4. Developing and implementing billing and collection
systems to support the operation of the Irvine Networks.
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5. 1. 5. Performing all accounting functions associated with
the development and operation of the Irvine Networks and preparing and
maintaining (or causing to be prepared and maintained) detailed operating and
financial records for the Irvine Networks. Irvine shall have the right to
inspect such records at FirstWorld's offices in Orange County during reasonable
business hours upon ten (10) days' notice to FirstWorld, at Irvine's expense
(except to the extent Irvine is entitled to recover the cost of any audit of
Rent due under the Conduit Lease pursuant to the terms of the Conduit Lease).
5. 1. 6. Keeping (or causing to be kept) such other accounts,
books and records as may be necessary for proper financial management and
reporting by FirstWorld.
5. 1. 7. Obtaining all permits that may be required in
connection with the development, ownership and operation of the Irvine Networks.
5. 1. 8. Procuring and maintaining insurance as required
pursuant to Article 16.
5. 1. 9. Hiring, training, supervising and terminating all
employees, independent contractors and consultants necessary to develop,
maintain and operate the Irvine Networks.
5. 1. 10. Determining, in accordance with Applicable Law, the
manner and extent of carrier interconnection with the Irvine Networks and
negotiating with carriers regarding the terms upon which they may interconnect
with and operate on the Irvine Networks.
5. 1. 11. Taking such other actions as FirstWorld may deem
reasonably necessary or appropriate in connection with the Irvine Networks.
5. 2. LEVEL OF SERVICE. To the extent that FirstWorld provides
fiber optic service to any Building, FirstWorld shall provide reliable
telecommunications industry standard services to Irvine (if Irvine is a Customer
or User) and/or tenants of such Building as defined by a *** with respect to
network performance uptime; provided, however, that FirstWorld shall not be
liable or responsible for any acts or omissions of Irvine or any other tenant or
occupant of any Building, or for any Unavoidable Delay, including the
consequences of any fire or other peril, civil unrest, unavailability of labor
or materials, or other events or circumstances beyond the reasonable control of
FirstWorld.
5. 3. REPORTS TO IRVINE. Within forty-five (45) days following
the end of each calendar quarter, FirstWorld shall provide to Irvine a quarterly
written report summarizing the operations of the Irvine Networks for the
preceding calendar quarter and projecting the operations of the Irvine Networks
for the following calendar quarter. Such reports shall include information
concerning the amount of payments anticipated to be made to Irvine pursuant to
Article 6 of this Agreement during the following calendar quarter and, in the
case of each report
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first submitted after the end of a calendar year, an annual audit of FirstWorld
and the operations of the Irvine Networks for the preceding calendar year
prepared by an independent certified public accounting firm. Such reports shall
also specify the cost of each building entrance conduit system installed by
FirstWorld during the relevant calendar quarter in compliance with the
provisions of Section 8.1.2, below.
5. 4. ENFORCEMENT. FirstWorld reserves the right to enforce the
obligations of its Customers and Users to FirstWorld, which enforcement may
include, without limitation, the termination of service to any Customer or User
which does not timely pay sums due FirstWorld.
5. 5. RIGHT TO ENTER INTO OPERATIONS AND MAINTENANCE AGREEMENTS.
FirstWorld shall be entitled to enter into agreements with other Persons,
whether affiliated or nonaffiliated, under which such other Persons may
undertake operational or maintenance duties associated with FirstWorld's rights
and/or obligations hereunder, including, without limitation, (a) sales, (b)
Conduit, Cable and/or Equipment installation, maintenance and repair, and (c)
other similar duties. Neither said agreements nor any performance thereunder
shall constitute a Transfer within the meaning of Section 14.1 hereof.
5. 6. FAILURE TO OPERATE. In the event that FirstWorld fails to
operate the Irvine Networks or otherwise provide fiber optic telecommunications
service on the Irvine Networks for a consecutive period of five (5) days or more
then, in addition to any other rights or remedies of Irvine hereunder and
subject to the rights and remedies of any Lender under Articles 11 and 12,
Irvine may until such failure is cured by FirstWorld (but shall not be obligated
to) either remedy such failure directly or cause another fiber optic service
provider to provide service, as an agent or contractor of Irvine, utilizing the
Irvine Networks. In either such case, FirstWorld shall upon Irvine's demand
bear all expenses for, or reimburse Irvine for, all costs incurred in connection
with, Irvine's exercise of its rights under this Section 5.6. If Irvine elects
to exercise its rights under this Section 5.6, Irvine shall also have the right
during any period in which it is exercising such remedy to utilize or to permit
another fiber optic service provider as an agent or contractor of Irvine to
utilize FirstWorld's Equipment.
6.
PAYMENTS TO IRVINE
6. 1. LICENSE FEE.
6. 1. 1. FirstWorld shall pay to Irvine during the Term of
this Agreement a quarterly fee (the "License Fee"), which shall be paid in
advance on the first day of each calendar quarter at the address set forth in
Section 25.1, below, or at such other address as Irvine may designate in writing
from time to time, without prior demand and without offset or deduction. The
License Fee payable for any calendar quarter at the beginning or end of the Term
shall be prorated based on the actual number of days of the Term in such
calendar quarter.
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6. 1. 2. The License Fee shall equal the sum of ***
Dollars ($ *** ), subject to adjustment in accordance with the provisions of
this Section 6.1. In the event an Additional Building is added to this
Agreement pursuant to the provisions hereof, the License Fee shall be
adjusted effective upon the date such Additional Building is added to this
Agreement by increasing the License Fee by a sum equal to the Additional
License Fee Base times the gross square footage of such Additional Building.
In the event that any Building is removed from this Agreement in accordance
with the provisions hereof after the date of this Agreement, or this
Agreement is otherwise terminated as to any Building in accordance with the
terms hereof, the License Fee shall be decreased effective upon the date such
Building is removed from this Agreement or so terminated by a sum equal to
the Additional License Fee Base times the gross square footage of the
Building removed or so terminated. The Additional License Fee Base for each
calendar quarter during the calendar year in which the Commencement Date
occurs shall be *** cents ($ *** ) per gross square foot per calendar quarter.
6. 1. 3. On January 1 of each calendar year during the Term
following the calendar year in which the Commencement Date occurs (each an
"Adjustment Date"), the License Fee and the Additional License Fee Base shall be
increased, but not decreased, to an amount equal to the product obtained by
multiplying the then-current License Fee (as it may previously have been
adjusted pursuant to Section 6.1.2, above, or Section 6.1.4, below) and the
Additional License Fee Base, respectively, by a fraction, the numerator of which
shall be the CPI published three months preceding the applicable Adjustment Date
and the denominator of which shall be the CPI published three months preceding
the prior Adjustment Date, or, in the case of the first Adjustment Date, the
Commencement Date; provided, however, that in no event shall such fraction be
greater than 1.06 or less than 1.02. In no event shall the License Fee be
decreased as a result of the decrease in the CPI in any calendar year. No
provision of this Section 6.1.3 shall be construed to prohibit any decrease in
the License Fee which would result from a removal of a Building from this
Agreement pursuant to Section 6.1.2, above.
6. 1. 4. Notwithstanding any contrary provision of Section
6.1.3, above, on January 1, 2008 and January 1, 2018 (each a "Market Adjustment
Date") the License Fee for all Buildings then subject to this Agreement shall be
increased, but not decreased, to the greater of the amount determined pursuant
to Section 6.1.3, above, or the Fair Market License Fee determined in accordance
with this Section 6.1.4. The Fair Market License Fee shall equal the fair
market license fee then customarily being charged by owners of office and
industrial buildings in Los Angeles, Orange and San Diego Counties, California,
per building or per square foot, whichever is then customary (as a fee to
telecommunications service providers to permit such providers access to and
space for telecommunications facilities and conduit within an owner's building
to allow such providers to provide telecommunications service to one or more
tenants of such building) times the number, or gross square footage, of the
Buildings then subject to this Agreement, as applicable, provided, however, that
in no event shall the License Fee be
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increased on any Market Adjustment Date to an amount equal to more than 200% of
the License Fee in effect for the immediately preceding calendar year. On or
before one-hundred eighty (180) days prior to either Market Adjustment Date,
Irvine shall notify FirstWorld of Irvine's determination of the Fair Market
License Fee and the adjusted License Fee pursuant to this Section 6.1.4. Within
thirty (30) days after such notice, FirstWorld shall either notify Irvine that
FirstWorld agrees with Irvine's determination or that it disagrees. Any failure
of FirstWorld to notify Irvine within such thirty (30) day period that
FirstWorld agrees or disagrees with Irvine's determination shall be deemed an
approval of Irvine's determination of the Fair Market License Fee and the
adjusted License Fee. Any notice from FirstWorld that it disagrees with
Irvine's determination shall specify FirstWorld's opinion of the Fair Market
License Fee and the adjusted License Fee under this Agreement. If FirstWorld
disagrees with Irvine's determination, the Parties shall for a period of thirty
(30) days following FirstWorld's notice of disagreement endeavor to reach
agreement on the adjusted License Fee due under this Section 6.1.4. If the
Parties are unable to so reach agreement, then the Fair Market License Fee shall
be determined by binding arbitration in accordance with Article 20 of this
Agreement.
6. 1. 5. The gross square footage of any Building or
Additional Building shall be calculated by Irvine in accordance with its
standard practices for calculating gross square footage of office and industrial
buildings, and shall be identified by Irvine at the time any Building or
Additional Building is added to or removed from this Agreement. Such gross
square footage shall be used for all purposes under this Agreement unless
FirstWorld requests a recalculation of the same as to any Building or Additional
Building added to or removed from this Agreement within sixty (60) days after
the date of the addition or removal of such Building or Additional Building. If
the Parties are unable to reach agreement upon the gross square footage of any
Building or Additional Building within thirty (30) days after FirstWorld
requests a recalculation of gross square footage as to any Building, then the
gross square footage in dispute shall be determined by binding arbitration in
accordance with Article 20, below, and the gross square footage specified by
Irvine shall be utilized for the calculation of the License Fee until resolution
of such arbitration.
6. 2. ADJUSTED GROSS REVENUE. In addition to the License Fee
payable hereunder, FirstWorld shall, as additional rental, pay Bonus Percentage
Rental on account of any Additional Other Building which is added to this
Agreement, as provided in the Conduit Lease. Such Bonus Percentage Rental shall
be paid by adding the Other Building Gross Revenue earned by from any Additional
Other Building into the Adjusted Gross Combined Revenue under the Conduit Lease
as provided in the Conduit Lease.
6. 3. GROSS SQUARE FOOTAGE. As used in this Agreement, the "gross
square footage" of any Building shall exclude the square footage of any vertical
penetrations in such Building.
7.
IMPOSITIONS
7. 1. IMPOSITIONS. For any period within the Term of this Agreement
(with daily proration for periods partially within the Term and partially
outside the Term), FirstWorld
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shall pay and discharge all Impositions related to the Cable, the Equipment and
any Conduit, before the same are delinquent. FirstWorld shall also pay all
interest and penalties assessed by any Governmental Authority on account of late
payment of any Imposition, unless such late payment was caused by Irvine's
failure to remit an Imposition (paid to Irvine by FirstWorld), in which case
Irvine shall pay such interest and penalties. If the bill for any Imposition
which is FirstWorld's obligation to pay hereunder is sent to Irvine by the
Governmental Authority, Irvine shall deliver such bill to FirstWorld as soon as
reasonable possible after Irvine's receipt of the same.
7. 2. ASSESSMENTS IN INSTALLMENTS. To the extent permitted by
Applicable Law, FirstWorld shall have the right to apply for conversion of any
assessment or Imposition to cause it to be payable in installments. After such
conversion, FirstWorld shall pay and discharge only such installments of such
assessment or Imposition as shall become due and payable during the Term.
7. 3. DIRECT PAYMENT BY IRVINE. If any Person entitled to receive
payment of an Imposition refuses to accept it from FirstWorld, then FirstWorld
shall give Irvine notice of such fact and shall remit payment of such Imposition
to Irvine in a timely manner, and Irvine shall thereafter be responsible for
remitting the same to such Person.
7. 4. RIGHT TO CONTEST. Notwithstanding anything to the contrary
in this Agreement, FirstWorld shall have the right to contest, at its sole
expense, by appropriate legal proceedings diligently conducted in good faith,
the amount or validity of any Imposition or other tax or fee and the valuation,
assessment or reassessment (whether proposed or final) of FirstWorld's property
or any Conduit for purposes of real and personal property taxes. FirstWorld may
defer payment of the contested amount pending the outcome of such contest,
provided that such deferral does not subject any portion of the Conduit or any
other right or asset of Irvine, to any risk of forfeiture or Irvine to any risk
of criminal liability. Irvine shall not be required to join in any such contest
proceedings unless such proceedings must be brought in the name of Irvine,
provided however, that Irvine shall have the right to participate in any such
proceedings to the extent it determines that such participation is necessary or
appropriate to protect its interests, and Irvine shall be entitled to be
reimbursed by FirstWorld upon demand for legal fees incurred by it in
participating in any such proceeding. If any such proceedings must be brought
in Irvine's name, Irvine shall cooperate with FirstWorld so as to permit such
proceedings to be brought in Irvine's name. FirstWorld shall pay all reasonable
costs and expenses (including reasonable attorneys' fees) incident to such
proceedings. FirstWorld shall be entitled to any refund of any contested amount
(and penalties and interest paid by FirstWorld) to the extent such refund is of
amounts previously paid by FirstWorld with regard to such contested amount,
whether such refund is made during or after the Term of this Agreement. Upon
termination of FirstWorld's contest of any amount, FirstWorld shall pay the
amount (if any) as has been finally determined in such proceedings to be due,
together with any costs, interest, penalties or other liabilities in connection
with such Imposition.
8.
CONSTRUCTION AND MAINTENANCE OF NETWORK
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8. 1. CONSTRUCTION.
8. 1. 1. Prior to the installation of any FirstWorld
Equipment, FirstWorld shall, at its sole cost and expense, prepare and deliver
to Irvine working drawings, plans and specifications (the "Plans") which shall
specifically describe all construction work. No work shall commence until
Irvine has approved the Plans in writing, which approval shall not be
unreasonably withheld, conditioned or delayed. If Irvine fails to approve or
disapprove any Plans within thirty (30) days after the receipt of the same, such
Plans shall be deemed to have been approved by Irvine. All work by FirstWorld
shall be performed in a neat, safe and workmanlike manner and in accordance with
all Applicable Laws. FirstWorld shall obtain, prior to such work, any necessary
governmental permits, licenses and approvals, copies of which shall be delivered
to Irvine before commencement of the work. In performing the work FirstWorld
shall not unreasonably disrupt, adversely affect or interfere with any other
licensee, service provider or tenant of a Building, and any such interference
shall be immediately rectified following written or oral notice from Irvine.
All work shall be performed in compliance with Irvine's standard construction
rules and insurance requirements for the Building, which shall be made available
to FirstWorld upon submittal of any Plans for work.
8. 1. 2. In the event FirstWorld is the first competitive
access provider to actually provide service to a particular Building, then
FirstWorld shall, at its sole expense, design, engineer and install a building
entrance conduit system, having a capacity equal to two hundred percent (200%)
of the capacity initially required by FirstWorld to service such Building, that
connects the minimum point of entry ("MPOE") of that Building to the most
appropriate street access point, which access point shall be subject to the
reasonable prior written approval of Irvine, such approval not to be
unreasonably withheld or conditioned. The installation by FirstWorld of the
building entrance conduit system shall be pursuant to plans approved by Irvine
(such approval not to be unreasonably withheld or conditioned) and in accordance
with the construction requirements set forth above. Any approval requested of
Irvine pursuant to this Section 8.1.2 shall be deemed granted if Irvine fails to
respond to a request for such approval within thirty (30) days after its receipt
of such request. In the event that Irvine desires to grant to any other person
or entity the right or license to use a building entrance conduit system
installed by FirstWorld, then, as a condition precedent to Irvine's grant of any
such right or license to such other Person or entity, Irvine shall pay, or shall
cause such Person or entity to pay, FirstWorld fifty percent (50%) of all costs
incurred by FirstWorld in installing such building entrance conduit system, as
specified in the applicable quarterly report submitted by FirstWorld pursuant to
Section 5.3. If for any reason FirstWorld fails to report the costs incurred by
FirstWorld in installing a building entrance conduit system for any particular
Building in its quarterly report for the quarter in which the same was
installed, Irvine, as its sole remedy for such failure, shall not be obligated
to pay or cause the payment of any portion of the costs incurred for such
installation in connection with the grant of any right or license to use such
building entrance conduit system. For purposes of calculating such payment, the
amount of costs incurred by FirstWorld in installing such building entrance
conduit system shall be increased by multiplying such costs incurred by
FirstWorld by a fraction, the numerator of which is the CPI immediately prior to
Irvine's or such other Person's or entity's payment to FirstWorld and the
denominator of which shall be the CPI upon FirstWorld's completion of the
initial installation of such building
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entrance conduit system; provided, however, that such calculation shall not in
any event decrease the amount of costs incurred by FirstWorld in installing such
building entrance conduit system.
8. 1. 3. With respect to any building entrance conduit system
installed by FirstWorld, FirstWorld shall register such installation with such
Underground Agencies as are reasonable and appropriate to identify the location
of such system. In the event such a building entrance conduit system already
exists to serve a particular Building, Irvine shall make available to FirstWorld
any excess capacity in such system required by FirstWorld to provide service to
such Building which is available to or controlled by Irvine.
8. 2. LIENS. FirstWorld shall be responsible for the satisfaction
or payment of any liens for any provider of work, labor, material or services
claiming by, through or under FirstWorld. FirstWorld shall also indemnify, hold
harmless and defend Irvine against any such liens, including the reasonable fees
of Irvine's attorneys. Such liens shall be discharged by FirstWorld within
thirty (30) days after notice of recordation thereof by bonding, payment or
otherwise. Subject to the foregoing, FirstWorld may contest, in good faith and
by appropriate proceedings, any such liens, provided, however, that Irvine may
require FirstWorld to bond any liens which FirstWorld may contest to assure that
any property of Irvine is protected from such lien during the period for which
any contest is pending. The provisions of this Section shall survive
termination of this Agreement.
8. 3. HAZARDOUS MATERIALS. FirstWorld shall not install any
Hazardous Material into any Building. In the event that FirstWorld shall
discover, uncover, disturb or otherwise reveal any existing Hazardous Materials
within the Building, FirstWorld shall immediately stop any work in progress and
report such findings to Irvine within twenty-four (24) hours. FirstWorld shall
not conduct any further work in the reported area without Irvine's written
approval. FirstWorld shall have three options upon discovery of Hazardous
Material and cessation of work as described above: (1) abate or remove, at its
sole cost and expense and in compliance with all applicable legal requirements,
the Hazardous Material within the route or area needed by FirstWorld to complete
its work, and only with the approval of Irvine; (2) reroute its planned access
route to avoid such Hazardous Material areas; or (3) terminate the License as to
such Building upon ten (10) days' prior written notice to Irvine.
8. 4. MAINTENANCE OF EQUIPMENT. FirstWorld shall keep each
Equipment Space and Equipment in good order, repair and condition during the
Term, and shall reimburse Irvine upon demand for the cost to repair any damage
to a Building caused by FirstWorld. FirstWorld shall at all times comply with
Applicable Law pertaining to the installation and operation of Cable and
Equipment.
8. 5. FIRSTWORLD EQUIPMENT. All Equipment shall be and shall at
all times remain the property of FirstWorld and shall not be deemed a fixture
upon or an improvement to any Building, except to the extent purchased by Irvine
or surrendered by FirstWorld upon the expiration or sooner termination of this
Agreement pursuant to Article 10. The Cable and Equipment, and any other
personal property in a Building belonging to FirstWorld, shall be there at the
sole risk of FirstWorld, and Irvine shall not be liable for damage thereto or
theft, misappropriation or loss thereof unless such damage is caused by Irvine's
sole active negligence. FirstWorld shall be solely responsible for maintaining
and servicing all such Cable and Equipment
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during the Term hereof. Irvine may require that FirstWorld relocate the
Equipment Space and/or Cable and Equipment in the Building, at Irvine's expense,
so long as such relocation can be conducted in a manner that does not
unreasonably interfere with FirstWorld's operation of Equipment and does not
result in an interruption of service to FirstWorld's Customers in the Building.
Irvine shall allow FirstWorld to perform a standard cutover procedure, if
required by said relocation, which will ensure that the relocated equipment is
operational for service prior to discontinuing service from the prior service
location.
8. 6. INTERFERENCE. FirstWorld covenants that neither its
Equipment nor the installation thereof will interfere with the computer,
software, communication, information or other electronic equipment or systems of
any other tenant, licensee or occupant of any Building. If such interference
occurs (other than interference with wireless services which are not currently
available but which may become available in the future), FirstWorld shall
immediately stop the operation of its Equipment until such interference is cured
and if necessary, pay any and all costs incurred by Irvine and resulting from
the interference, including, without limitation, any costs for which FirstWorld
is obligated to indemnify Irvine hereunder. If FirstWorld cannot cure such
interference within a reasonable time (not to exceed fifteen (15) days), Irvine
may terminate the License granted hereunder (but if such interference is only as
to one or more Buildings, only with respect to the Building(s) in which such
interference occurs) upon ten (10) days written notice to FirstWorld.
8. 7. ESTABLISHMENT OF MPOE.
8. 7. 1. FirstWorld recognizes that Irvine desires to provide
access to both existing and future telecommunications services and service
providers for tenants of each Building and Irvine may deem it desirable to
achieve this objective by providing a building riser and distribution cabling
system ("BR&DCS") in the Building for use by competitive providers of wired
telecommunications services. Accordingly, and notwithstanding anything
contained in this Agreement to the contrary, Irvine reserves the right to
provide access to or install, and to require FirstWorld to utilize, a common
BR&DCS, including a main distribution frame ("MDF"), in order to reach tenant
demarcation points in the Building. In this event, the MDF shall be connected
to the MPOE demarcation point for service providers. The MDF shall also serve
as the origination point of the BR&DCS. The tenant demarcation block on each
floor of the Building will serve as the terminating point of the BR&DCS on that
floor. Notwithstanding the foregoing, nothing herein shall be deemed to
obligate Irvine to install a BR&DCS; provided, however, that if Irvine elects to
install a BR&DCS, then Irvine shall provide FirstWorld with access thereto
without the obligation to pay additional fees or other compensation to Irvine
for such access.
8. 7. 2. If Irvine elects to provide an MDF or to relocate an
MDF (and, if necessary, the MPOE), then so long as FirstWorld can utilize such
MDF to provide the same level of service to tenants of the Building that
FirstWorld is then able to provide utilizing the Equipment, then FirstWorld
shall, at FirstWorld's expense not to exceed $ *** , (i) relocate its existing
services and demarcation facilities to the MDF, if such a frame is installed;
(ii) remove its
- --------------------
*** CONFIDENTIAL TREATMENT REQUESTED
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existing cables throughout the Building (other than from the exterior of the
Building to the MPOE along such path or paths as may be designated by Irvine,
which shall thereafter be deemed the "Raceway" for purposes of this Agreement
and which may be used by other service providers as well as FirstWorld); and
(iii) utilize the MDF for providing all new service to Building tenants once
Irvine notifies FirstWorld that the MDF is ready for service. Irvine agrees to
allow FirstWorld a reasonable amount of time (not to exceed 60 days) for proper
planning, engineering and cutover in this regard. Cutover to the MDF will be
accomplished at times other than normal business hours. Upon the completion of
such cutover, FirstWorld shall have no further rights to use of the Equipment
Space or any other parts of the Building except where necessary to the extent
contemplated in this Section 8.7.2 so long as Irvine provides an MDF to allow
FirstWorld to provide service to tenants of the Building.
8. 7. 3. If Irvine elects to provide an MDF or to relocate an
MDF (and, if necessary, the MPOE), Irvine's sole responsibility in the event of
interruption or other effects caused by malfunction, damage or destruction of
the MDF shall be to promptly repair or replace the MDF as necessary to eliminate
the cause of malfunction or interruption as soon as reasonably practicable, the
cost of which shall be borne by FirstWorld to the extent the problem was caused
directly or indirectly by FirstWorld. In limitation of the foregoing, Irvine's
obligation to repair or replace the MDF shall apply only to the extent necessary
to reach premises in the Building that will again be used by tenants upon the
completion of restoration or repair thereof. In no event shall FirstWorld have
any right to make any claim against Irvine whatsoever for any damages, whether
direct, indirect or consequential, for Irvine's failure to repair or replace the
MDF as required by this Section 8.7.3, FirstWorld's remedy being limited to a
claim for specific performance of Irvine's obligation to repair or replace as
specified above. Notwithstanding the foregoing, if Irvine fails or refuses to
repair or replace and otherwise maintain the MDF in such manner as to avoid any
malfunction or interruption in FirstWorld's service, then FirstWorld shall have
the right, but not the obligation, to make such repairs and replacements as are
reasonably necessary and to recover from Irvine all of FirstWorld's costs of
repair and replacement.
8. 7. 4. The foregoing provisions of this Section 8.7 shall
not apply to any Building which Irvine has leased in its entirety to a single
tenant. FirstWorld hereby acknowledges that Irvine would have no control over
the installation of a BR&DCS or an MDF in any such building and that FirstWorld
would need to address use, maintenance and repair of an installed BR&DCS or MDF
in any such building with such tenant.
8. 8. DAMAGE; CONDEMNATION. In the event of any physical damage
or condemnation of any Building which makes it impossible or commercially
infeasible for FirstWorld to carry out the purposes of its installation,
maintenance and operation in such Building, Irvine, at its option, may attempt
to remedy such problem within sixty (60) days, or any such period deemed
reasonable under the circumstances, after written notice thereof. In the event
that Irvine either (a) elects not to attempt to cure or remedy such a problem,
or (b) fails to provide adequate remedy within such sixty (60) day period, or
any such period deemed reasonable under the circumstances, FirstWorld may
terminate the License as to such Building upon thirty (30) days' prior written
notice to Irvine. FirstWorld shall have no obligation to provide service to
Customers of or Users in such Building or to undertake repairs or replacement of
its Equipment in such Building during any period in which Irvine is attempting
to remedy such problem. Payment of License Fees shall be abated equitably
following such damage or condemnation based upon the
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extent to which such damage or condemnation has interfered with FirstWorld's
ability to provide Network services to the Building.
9.
COVENANTS OF IRVINE
9. 1. RIGHT-OF-WAY. In connection with the License, Irvine hereby
agrees to permit FirstWorld to enter upon such portions of the real property
owned by Irvine within the Spectrum Service Area and any Additional Areas from
time to time and not leased to third parties (unless FirstWorld obtains the
consent of such third parties to such entry), or into such easement areas as to
which easements are held by Irvine which permit Irvine to allow a third party
access over the same, as may be designated by Irvine from time to time upon
request by FirstWorld for such entry, for the purposes of installing,
maintaining, operating, repairing, replacing and augmenting conduit, cable and
the Irvine Networks for the purpose of connecting any Building to an Irvine
Network. To the extent that Irvine is permitting FirstWorld to utilize easement
rights held by Irvine, FirstWorld agrees to be bound by the terms and conditions
of said easements, insofar as they pertain to FirstWorld's utilization of the
same. FirstWorld agrees not to unreasonably interfere with any use of real
property as to which Irvine permits such entry by the owner, lessee or occupant
thereof.
9. 2. PERIODIC NOTICES. From time to time during the Term, Irvine
may, or upon written request from FirstWorld made no more frequently than once
each quarter Irvine shall, give FirstWorld written notice identifying (i) all
Buildings then under construction by or for and owned by Irvine in the Spectrum
Service Area and any Additional Area then added to the Conduit Lease and (ii)
any Buildings owned by Irvine in the Spectrum Service Area and any Additional
Area then added to the Conduit Lease as to which substantial completion of
construction has occurred, in each case, since the date any Building was last
added to or removed from this Agreement pursuant to the terms hereof. The
Parties shall endeavor from time to time to execute an Addition Memorandum in
the form of Appendix 6 hereto to specify all Buildings which have been added to
or removed from this Agreement and the effective date of such addition or
removal, provided, however, that no failure by the Parties to execute an
Addition Memorandum shall invalidate any addition to or removal of a Building
under this Agreement.
9. 3. ELECTRIC UTILITIES. Irvine shall use all reasonable efforts
to notify FirstWorld in advance of any planned utility outages which may
interfere with FirstWorld's use, provided that Irvine shall incur no liability
to FirstWorld for any failure to provide such notice. It is understood that
neither Irvine nor FirstWorld has any obligation or responsibility to provide
emergency or "back-up" power to FirstWorld, and that it is solely within
FirstWorld's determination whether it elects to provide emergency or "back-up"
power at its expense in any Building.
10.
EQUIPMENT; SURRENDER OF LICENSE
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10. 1. EQUIPMENT AND REMOVAL. Except as otherwise set forth in
this Article 10 and except for Irvine's rights to obtain title to the Equipment
pursuant to Article 12, the Equipment shall at all times be and remain the
property of FirstWorld and installation of the Equipment in any Building shall
not cause the same to become the property of Irvine. Upon the termination of
this Agreement (or, if sooner, of the License as to a particular Building), and
except as otherwise provided in Sections 10.2 and 10.3 below, FirstWorld will
elect either to (a) remove all Equipment and FirstWorld's personal property from
the Buildings (or from particular Buildings, if the License is terminated only
as to such Buildings) and repair all damage caused by such removal at its sole
cost and expense which removal shall occur within ninety (90) days after such
termination; or (b) leave in place any or all of the Equipment installed in the
Buildings by FirstWorld, in which event the same shall become the property of
Irvine following termination of this Agreement (or the earlier termination of
the License as to any Building). Any property not removed within ninety (90)
days after the termination of this Agreement shall be deemed the property of
Irvine.
10. 2. OPTION TO PURCHASE. On or before the date which is one (1)
year prior to the expiration of the Term, or as soon as reasonably possible
prior to any earlier termination of this Agreement, FirstWorld shall notify
Irvine whether FirstWorld intends to remove all of its Equipment from the
Buildings at the expiration of the Term or such earlier termination, or whether
it intends to leave the Equipment in place at the expiration of the Term. If
FirstWorld notifies Irvine that FirstWorld intends to remove all of its
Equipment from the Buildings at the expiration of the Term or such earlier
termination, then such notice shall also specify FirstWorld's determination of
the fair market value of the Equipment, and within thirty (30) days after
Irvine's receipt of such notice Irvine may by notice given to FirstWorld elect
to purchase the Equipment from FirstWorld at the expiration of the Term or
earlier termination of this Agreement for the fair market value of the same.
Any failure by Irvine to give notice of such election to purchase within such
thirty (30) day period, shall be deemed Irvine's election to not purchase the
Equipment from FirstWorld. Any notice from Irvine that it elects to purchase
the Equipment from FirstWorld shall specify whether Irvine agrees with
FirstWorld's determination of the fair market value of the Equipment. If Irvine
does not agree with FirstWorld's determination of the fair market value of the
Equipment, Irvine shall specify its own determination of such fair market value
and the Parties shall thereafter attempt to reach agreement on such fair market
value for a period of thirty (30) days after FirstWorld's receipt of Irvine's
notice that it elects to purchase the Equipment. In the event the Parties are
unable to agree upon the fair market value of the Equipment within such thirty
day period, the fair market value shall be determined by arbitration in
accordance with the provisions of Article 20, below, provided, however, that in
no event shall the fair market value of the Equipment be more than the value
specified by FirstWorld in its initial notice to Irvine or less than the value
specified by Irvine in its notice of election to purchase the Equipment.
10. 3. RENTAL OF EQUIPMENT. Notwithstanding the foregoing, if
FirstWorld desires to remove the Equipment from the Buildings at the expiration
of the Term or any earlier termination of this Agreement, and Irvine does not
elect to purchase the Equipment in accordance with the provisions of Section
10.2, above, then Irvine shall have the right (but not the obligation) upon
reasonable notice to FirstWorld to rent the Equipment from FirstWorld for the
fair market rental value thereof for a period commencing upon, and not to exceed
ninety (90) days after, the expiration of the Term or such earlier termination
of this Agreement, in which case, the obligation
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of FirstWorld to remove the Equipment from the Buildings within ninety (90) days
after the expiration of the Term shall be extended for a period of time equal to
the period of time for which Irvine rents the Equipment from FirstWorld pursuant
to this Section 10.3. If the Parties are not able to agree upon the fair market
rental value of the Equipment for such period, the same shall be determined by
arbitration in accordance with Article 20, below.
11.
FINANCING
11. 1. FINANCING NOT PROHIBITED TRANSFER. Subject to and in
accordance with the terms and provisions of this Article 11, and notwithstanding
anything in this Agreement to the contrary, FirstWorld shall have the right,
without Irvine's consent, to encumber the Equipment, this Agreement and
FirstWorld's interest in the License (or a portion of the foregoing) as security
for any Financing and to file or record any Financing Encumbrance given by
FirstWorld as security for any Financing. None of the following shall be deemed
to constitute a Transfer of FirstWorld's rights under this Agreement or to
otherwise violate any provision of this Agreement prohibiting the assignment,
encumbrance, or other transfer of this Agreement or FirstWorld's rights
hereunder: (a) FirstWorld's making of a Financing Encumbrance as security for
any Financing; (b) any sale of this Agreement and of FirstWorld's interest in
the License in any proceedings for the foreclosure of any Financing Encumbrance;
(c) any assignment, transfer or conveyance to Lender in lieu of such foreclosure
(or to a Lender's designated purchaser or assignee which is a Permitted
Assignee); or (d) any sale of this Agreement and of FirstWorld's interest in the
License by Lender following Lender's acquisition of the same in any proceedings
for the foreclosure of any Financing Encumbrance, so long as such sale is to a
Person (a "Permitted Assignee"): (i) which is not insolvent or the subject of
any bankruptcy proceeding for reorganization or liquidation or (ii) with which
Irvine does not have material litigation pending. Irvine shall recognize any
purchaser of FirstWorld's interests under this Agreement pursuant to a
foreclosure sale under a Financing Encumbrance, any transferee of FirstWorld's
interests under this Agreement under an assignment in lieu of foreclosure, or,
if the Lender should be such purchaser or assignee, a direct transferee of
Lender that is a Permitted Assignee.
11. 2. COOPERATION WITH LENDER REQUIREMENTS.
11. 2. 1. Irvine acknowledges that any Lender may require,
among other things, certain protections and agreements from FirstWorld and
Irvine, anticipated to include, without limitation, the following:
(a) Security interests in all Equipment,
furniture, fixtures and other tangible and intangible property owned by
FirstWorld and incorporated into or used in connection with the Irvine Networks;
collateral assignments of all major construction and consulting contracts;
collateral assignments of FirstWorld's contracts with Customers and Users and
the rights to receive revenue thereunder; and collateral assignments of
FirstWorld's bank accounts, accounts receivable and other similar collateral
relating to the Irvine Networks.
(b) The creation of sinking funds and
reserves, the maintenance of specified financial ratios, and other similar
covenants with respect to the
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development and operation of the Irvine Networks that would commonly be required
in connection with non-recourse financing.
(c) That Irvine agree (i) to recognize such
Lenders and their successors, following a foreclosure on a Financing Encumbrance
or an assignment in lieu of foreclosure, as parties having the rights and
obligations of FirstWorld under this Agreement, in the event such Lenders and
their successors elect to assume FirstWorld's rights and obligations hereunder,
and (ii) in the event of such an assumption, that such Lenders and their
successors, following a foreclosure on a Financing Encumbrance or an assignment
in lieu of foreclosure, will not be obligated to cure any of FirstWorld's
non-monetary defaults arising prior to the foreclosure which are not reasonably
capable of being cured.
11. 2. 2. Irvine agrees to cooperate in good faith with
FirstWorld's efforts to obtain Financing. In particular, if required by a
Lender, Irvine agrees to enter into one or more commercially reasonable
agreements with one or more Lenders containing or permitting the provisions
contemplated pursuant to Section 11.2.1, and which may reflect that the Lenders
may succeed to the rights of FirstWorld hereunder. FirstWorld shall reimburse
Irvine for Irvine's costs, including attorney's fees, incurred in connection
with the review and negotiation of any such agreements with Lenders if Irvine is
requested to review more than one such agreement in any calendar year. Irvine
shall not, however, be required to consent to any provision that would obligate
Irvine to repay or be liable for any cost related to any Financing. Irvine's
obligations under any such agreement with any Lender shall be considered
material obligations of this Agreement enforceable by FirstWorld against Irvine
as if fully set forth herein. Irvine agrees that all information regarding the
Lenders and their relationship with FirstWorld shall constitute Pre-Authorized
Confidential Information. Irvine's failure to enter into any such agreement
shall not limit or in any way adversely affect the rights of any Lender pursuant
to this Article 11.
11. 2. 3. Any Lender, by acceptance of any Financing
Encumbrance, agrees that it accepts the same subject to the rights of Irvine
pursuant to Article 12, below. Any agreements entered into with any Lenders
pursuant to Section 11.2.2., above, if any, shall contain provisions for the
benefit of Irvine acknowledging and confirming the rights of Irvine pursuant to
the provisions of Article 12, below, and that such Lender's rights in and to the
License, shall be subordinate to Irvine's rights to the Equipment as set forth
in this Agreement upon the expiration of this Agreement or any earlier
termination of the License.
11. 3. NOTICE OF FINANCING. If FirstWorld enters into any
Financing Encumbrance(s), then the Lender(s) thereunder shall be entitled to the
Lender protections provided for under this Agreement only from and after such
time as FirstWorld or such Lender has given Irvine written notice of the name
and address of such Lender, accompanied by a copy of the executed Financing
Encumbrance. Irvine shall, upon request, acknowledge receipt of the name and
address of any Lender (or proposed Lender). Any Lender shall provide Irvine
written notice of any change in its address.
11. 4. NOTICE OF DEFAULT AND LENDER'S CURE RIGHTS. If Irvine
shall give any notice of default or breach under this Agreement, then Irvine
shall (provided that Irvine has received notice of a Financing Encumbrance
pursuant to Section 11.3 hereof) at the same time and by the same means give a
copy of such notice to the Lender, which notice shall describe in
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reasonable detail the alleged default. Upon receiving any notice of a default,
any Lender shall have the same cure period granted to FirstWorld under this
Agreement, plus (so long as such Lender is not an Affiliated Lender) the
additional time provided for below, within which to take (if such Lender so
elects) whichever of the actions set forth below shall apply with respect to the
default described in such notice of default (such actions, "Lender's Cure," and
a Lender's rights to take such actions, "Lender's Cure Rights"):
11. 4. 1. In the case of a monetary default the Lender shall
be entitled (but not required) to cure such default within a cure period
following notice of such default consisting of the cure period allowed to
FirstWorld under this Agreement plus (so long as such Lender is not an
Affiliated Lender) an additional period of twenty (20) days.
11. 4. 2. In the case of any non-monetary default that a
Lender is reasonably capable of curing without obtaining possession of the
Equipment or FirstWorld's rights under this Agreement (other than a non-monetary
default that is not reasonably susceptible of being cured by a Lender, such as a
bankruptcy of FirstWorld), the Lender shall be entitled, but not required, to:
(a) within a period following notice of such default consisting of the cure
period allowed to FirstWorld under this Agreement plus (so long as such Lender
is not an Affiliated Lender) an additional period of thirty (30) days, advise
Irvine of Lender's intention to take all reasonable steps necessary to remedy
such non-monetary default; and (b) cure the same within such period or; (c) if
the same is not reasonably susceptible of being cured within such period, duly
commence the cure of such non-monetary default within such extended period and
thereafter diligently prosecute to completion the cure of such non-monetary
default and complete such cure within a reasonable time under the circumstances,
subject to Unavoidable Delay (other than the inability of Lender to obtain
possession of the Equipment or FirstWorld's rights under this Agreement).
11. 4. 3. In the case of a non-monetary default that is not
reasonably susceptible of being cured by a Lender without obtaining possession
of the Equipment or FirstWorld's rights under this Agreement the Lender shall be
entitled (but not required) to do the following, so long as, with respect to any
defaults other than those referred to in this Section 11.4.3, such Lender has
exercised or is exercising the applicable Lender's Cure Rights as defined in
this Agreement:
(a) At any time within sixty (60) days after
notice of default, Lender shall be entitled to: (i) institute proceedings to (A)
obtain possession of the Equipment or FirstWorld's rights under this Agreement
as mortgagee (including possession by a receiver), or (B) acquire the Equipment
or FirstWorld's rights under this Agreement by foreclosure proceedings or
otherwise or (ii) unless the Lender is an Affiliated Lender, commence
negotiations for an assignment in lieu of foreclosure, and (subject to any stay
in any proceedings involving the bankruptcy, insolvency, or reorganization of
FirstWorld or the like, or any injunction, unless such stay or injunction is
lifted), prosecute the same or any combination of the same to completion with
commercially reasonable diligence subject to Unavoidable Delay, for a period not
to exceed a total of three hundred sixty (360) days.
(b) Upon obtaining possession of the Equipment or FirstWorld's rights under
this Agreement (before or after expiration of any otherwise applicable
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cure period), Lender shall be entitled (but not required) to commence and
proceed with reasonable diligence and reasonable continuity to cure such non-
monetary defaults as are then reasonably susceptible of being cured by such
Lender, subject to Unavoidable Delay.
11. 4. 4. In addition to the foregoing Lender's Cure Rights,
during any period following Irvine's notice of default, any Lender shall have an
additional period of ninety (90) days beyond the time in which FirstWorld would
be obligated to act, to take any action to install Equipment or to provide
service to any Customer who requests or has requested service as may then be
required under this Agreement. No provision of this Section 11.4.4 shall be
construed to relieve or delay FirstWorld's obligations hereunder to install
Equipment or provide service.
So long as the time period for a Lender to exercise Lender's Cure Rights with
respect to a non-monetary default by FirstWorld has not expired (and provided
that all monetary defaults are cured within Lender's cure period provided for
under this Agreement), Irvine shall not terminate this Agreement or such
Lender's right to cure a default or obtain title to the License, provided,
however, that Irvine shall be permitted to proceed to seek damages on account of
such default from FirstWorld. A Lender shall not be required to continue to
exercise Lender's Cure Rights if and when the default that such Lender was
attempting to cure shall have been cured. Upon such cure and the cure of any
other defaults in accordance with this Agreement, this Agreement shall continue
in full force and effect as if no default(s) had occurred. Nothing in the
Lender protections provided for in this Agreement shall be construed to either
(i) extend the Term beyond the expiration date provided for in this Agreement
that would have applied if no default had occurred or (ii) require any Lender to
cure any default by FirstWorld that is not reasonably capable of being cured by
the Lender (such as a bankruptcy of FirstWorld) in order to preserve its rights
under this Agreement.
11. 5. OBLIGATIONS OF LENDER AND SUCCESSORS. No Lender,
in the exercise of its rights under this Agreement, shall solely on account
of such exercise be deemed to be an assignee or transferee of FirstWorld, or
mortgagee in possession of the License, so as to require such Lender to
assume or otherwise be obligated to perform any of FirstWorld's obligations
under this Agreement except when, and then only for matters accruing while,
such Lender has entered into possession of the License in the exercise of its
remedies under a Financing Encumbrance (as distinct from its rights under
this Agreement to cure any Events of Default or exercise Lender's Cure
Rights). Except for pre-existing uncured monetary defaults of FirstWorld,
which any Lender (or purchaser at foreclosure sale) shall be obligated to
cure upon becoming the owner of FirstWorld's rights hereunder, no Lender (or
purchaser at a foreclosure sale held pursuant to a Financing Encumbrance)
shall be liable under this Agreement unless and until such time as it
becomes, and in the case of the Lender only for matters accruing while it
remains, the owner of the License or FirstWorld's rights hereunder after
foreclosure or an assignment in lieu thereof. During such time, and for
matters accruing while any Lender is the owner of FirstWorld's rights
hereunder, Lender shall be fully liable and responsible for all obligations
under the terms and provisions of this Agreement. Except as to pre-existing
uncured monetary defaults of FirstWorld, which any purchaser shall be
obligated to cure, any purchaser from a Lender after the Lender's foreclosure
or acceptance of an assignment in lieu of foreclosure shall only be liable
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under this Agreement from and after the time it becomes the owner of the
interests of FirstWorld in and to the License under this Agreement.
11. 6. LENDER PROTECTIONS.
11. 6. 1. No voluntary cancellation, termination, surrender,
acceptance of surrender, or abandonment, of this Agreement, nor any amendment or
modification adversely affecting a Lender's rights under this Article 11, shall
bind a Lender (other than an Affiliated Lender) if done without notice to and
the written consent of such Lender.
11. 6. 2. Any Lender shall have the right, but not the
obligation, to take possession of the License and to perform any obligation of
FirstWorld under this Agreement and to remedy any default by FirstWorld. Irvine
shall accept performance by or at the instigation of a Lender in fulfillment of
FirstWorld's obligations, for the account of FirstWorld and with the same force
and effect as if performed by FirstWorld.
11. 6. 3. A Lender shall in no event be required to cure or
commence to cure any default (if such default is provided for in this Agreement)
consisting of FirstWorld's failure to satisfy or discharge any lien, charge, or
encumbrance affecting the License or this Agreement junior in priority to the
lien of the Financing Encumbrance held by such Lender.
11. 6. 4. Any payment made by a Lender to Irvine to cure any
claimed default shall be deemed to have been made without prejudice to
FirstWorld's or the Lender's recovery of such payment if Irvine's claim of a
default shall be determined by a court of competent jurisdiction to have been
erroneous.
11. 6. 5. Any Lender may exercise its rights under this
Agreement, or perform any action permitted to be taken by a Lender under this
Agreement, through an agent.
11. 6. 6. If more than one Lender desires to exercise Lender's
Cure Rights or if more than one Lender desires to exercise any other right or
privilege provided for Lenders under this Agreement, then the Party against whom
such rights or privileges are to be exercised shall be required to recognize
either: (a) only the Lender that desires to exercise such right or privilege and
whose Financing Encumbrance is most senior in lien (as against other Financing
Encumbrances of Lenders desiring to exercise such rights) or (b) such other
Lender, as has been designated in writing by all Lenders, to exercise such right
or privilege. In such case, Irvine shall be provided joint written instructions
of all Lenders of the priority of Financing Encumbrances.
11. 7. REMEDIES. No Financing Encumbrance shall encumber or in any
other way limit or restrict Irvine's rights and remedies under this Agreement
except as expressly provided in this Agreement.
11. 8. NEW AGREEMENT. In the event that this Agreement or any
portion hereof is irrevocably rejected by a trustee or debtor-in-possession in
any bankruptcy or insolvency proceeding, Irvine agrees that it will, upon the
request of the Lender whose Financing Encumbrance is most senior (as evidenced
by the notice required under Section 11.6.6, above) execute and deliver to such
senior Lender, a new agreement containing the same covenants,
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agreements, terms, provisions and limitations set forth in this Agreement and
for a term equal to the then remaining Term hereof, so long as such Lender prior
to or concurrently with Irvine's execution and delivery of such new agreement:
(a) executes and delivers to Irvine a counterpart or counterparts of such new
agreement and agrees to be bound under the covenants, agreements, terms,
provisions and limitations thereof; (b) provides Irvine with such assurances as
Irvine may reasonably require confirming that this Agreement has been
irrevocably rejected and that no trustee in bankruptcy, debtor in possession,
other Lender, or FirstWorld or any of its Affiliates will assert the continuing
effectiveness and enforceability of this Agreement; (c) cures any then existing
monetary defaults under this Agreement through the effective date of such new
agreement; (d) agrees to indemnify Irvine or provide Irvine with such other
assurances as may be reasonably satisfactory to Irvine that such Lender is the
Lender whose Financing Encumbrance is most senior; and (e) reimburses Irvine for
its reasonable attorneys' fees in connection with entering into such new
agreement.
11. 9. CONCURRENT EXERCISE. Notwithstanding any contrary
provisions of this Article 11, any Lender exercising any of its rights under
this Article 11 with regard to any Financing Encumbrance, must concurrently
exercise its rights under Article 13 of the Conduit Lease with regard to the
same Financing Encumbrance, it being the intent of the Parties that in order to
succeed to the rights of FirstWorld under this Agreement, a Lender must also
succeed to the rights of FirstWorld under the Conduit Lease and that a Lender
may not receive the benefits of this Agreement separately from the benefits and
burdens of the Conduit Lease.
12.
IRVINE CURE RIGHTS
12. 1. PURPOSE. Irvine desires to assure, to the extent feasible,
that (a) the Equipment installed by FirstWorld in connection with the Irvine
Networks remains in place and is not removed by Lender while Irvine exercises
its remedies for a default under a Financing Encumbrance or this Agreement in
the manner described in Section 12.4, or (b) that Irvine may effectively acquire
the Equipment by paying the outstanding obligations under the Financing to the
extent provided under Section 12.5, below, and thereafter foreclosing the
Financing Encumbrance.
12. 2. NOTICE OF DEFAULT. Concurrently with the giving of any
notice of any default, breach or event of default under any Financing
Encumbrance (including, without limitation, any notice of acceleration of
foreclosure of the Financing Encumbrance for any reason) to FirstWorld, or to
the party obligated thereunder if it is not FirstWorld, the Lender shall at same
time and by the same means provide a copy of such notice to Irvine at Irvine's
address for notices set forth in this Agreement, which notice shall describe in
reasonable detail the alleged default. Irvine shall provide any Lender with
written notice of any change in its address. FirstWorld agrees to provide to
Irvine a copy of any notice of change of address received by FirstWorld from any
Lender, provided, however, that no failure by FirstWorld to provide Irvine a
copy of such notice shall adversely affect the rights of a Lender pursuant to
Article 11, above.
12. 3. PRIORITY OF CURE RIGHTS. In any case where FirstWorld is in
default, has breached or there is any Event of Default, under both this
Agreement and any Financing
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Encumbrance, and both Lender and Irvine would therefore have the right to
exercise their respective Cure Rights hereunder, then, notwithstanding any
contrary provision of this Agreement:
12. 3. 1. So long as the Lender is operating or causing
FirstWorld or a third party to operate the Irvine Networks and is exercising
Lender's Cure Rights pursuant to Section 11.4, above (a) Irvine shall not be
entitled to terminate this Agreement or to exercise any of Irvine's Cure Rights
and (b) the Lender's Cure Rights shall be absolutely and unconditionally prior
and superior to Irvine's Cure Rights and Lender shall be entitled to exercise
the Lender's Cure Rights and its rights and remedies under its Financing
Encumbrance and other loan documents without any direct or indirect delay,
interference, impairment or prohibition by Irvine.
12. 3. 2. If (a) the Lender is exercising the Lender's Cure
Rights under Section 11.4, above, and is acting diligently to prosecute the same
to completion, or (b) the time period for exercising Lender's Cure Rights or
commencing to exercise Lender's Cure Rights pursuant to Section 11.4 above, has
not yet expired, and (c) in either such case, the Lender is not operating or
causing FirstWorld or a third party to operate the Irvine Networks, then Irvine
shall not be entitled to terminate this Agreement, but may exercise Irvine's
Cure Rights, provided that in the event of any conflict or inconsistency between
Irvine's Cure Rights and the Lender's Cure Rights, the Lender's Cure Rights
shall be superior to Irvine's Cure Rights, but only to the extent of such
conflict or inconsistency. During any such period, the Lender shall be entitled
to exercise the Lender's Cure Rights and its rights and remedies under its
Financing Encumbrance and other loan documents without any direct or indirect
delay, interference, impairment or prohibition by Irvine, except to the extent
reasonably necessary to permit Irvine to exercise Irvine's Cure Rights.
12. 3. 3. If the Lender fails to commence to exercise the
Lender's Cure Rights within the time periods set forth in Section 11.4, above,
or after commencing the same fails to diligently prosecute the same (including
without limitation, the Lender's failure to diligently prosecute any proceeding
to obtain possession of the Leased Premises or to acquire the Leased Premises by
foreclosure, if applicable), then Irvine shall have the right upon five (5)
business days notice to Lender to exercise Irvine's Cure Rights or to enforce
against FirstWorld all of Irvine's rights and remedies for a default under this
Agreement, or both, as Irvine may elect in its sole and absolute discretion, and
without any direct or indirect delay, interference, impairment or prohibition by
Lender.
12. 4. IRVINE'S CURE RIGHTS. Subject to and in accordance with the
terms and provisions of this Article 12, upon receiving any notice of a default
under a Financing Encumbrance, Irvine shall have the right, but not the
obligation, to cure FirstWorld's default within the same cure period granted to
FirstWorld under such Financing Encumbrance, plus the additional time provided
for below, and the Lender thereunder shall accept such cure (such actions,
"Irvine's Cure," and Irvine's rights to take such actions, "Irvine's Cure
Rights"):
12. 4. 1. In the case of a monetary default, Irvine shall be
entitled (but not obligated) to cure such default within a cure period following
notice of such default consisting of the cure period allowed to FirstWorld (or
any other obligor under such Financing Encumbrance if FirstWorld is not the
obligor thereunder) plus an additional period of twenty (20) days; provided,
however, that if the Lender is in a position to conduct a foreclosure sale in
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connection with such default prior to the expiration of said twenty (20) day
period, then Irvine's additional cure period (i.e., in addition to the cure
period allowed FirstWorld) shall be shortened from twenty (20) days to the
greater of ten (10) days or the number of days within said twenty (20) day
period prior to the date on which the Lender is in a position to conduct a
foreclosure sale.
12. 4. 2. In the case of any non-monetary default that Irvine
is reasonably capable of curing, Irvine shall be entitled (but not obligated) to
cure such default within a period following notice of such default consisting of
(a) the cure period allowed to FirstWorld (or any other obligor under such
Financing Encumbrance if FirstWorld is not the obligor thereunder) under such
Financing Encumbrance plus an additional thirty (30) days, or (b) if the default
is not reasonably susceptible of being cured within said thirty (30) day period,
to duly commence the cure of such non-monetary default within said thirty (30)
day period and thereafter diligently prosecute to completion the cure of such
non-monetary default and complete such cure within a reasonable time under the
circumstances, not to exceed a total of ninety (90) days after the date a notice
of such default was delivered to Irvine. Notwithstanding the foregoing, if the
Lender is in a position to conduct a foreclosure sale in connection with such
non-monetary default prior to the expiration of said thirty (30) or ninety (90)
day period, as applicable, then Irvine's additional cure period (i.e., in
addition to the cure period allowed FirstWorld) shall be shortened from thirty
(30) days or ninety (90) days, as applicable, to the greater of ten (10) days or
the number of days within said thirty (30) or ninety (90) day period prior to
the date on which the Lender is in a position to conduct a foreclosure sale.
12. 4. 3. In the event that Irvine makes any payment to Lender
or otherwise expends any funds to cure any claimed default by FirstWorld under a
Financing, then FirstWorld shall be obligated upon Irvine's demand to reimburse
Irvine for all sums so expended by Irvine (including any premium over par paid
in connection with a partial release of the Irvine Network from the lien of the
Financing Encumbrance which affects any Networks in addition to Irvine Networks,
as provided in Section 12.5.1, but excluding amounts expended in connection with
Irvine's purchase of the Financing at par pursuant to Section 12.5), together
with interest at an interest rate of *** percent ( *** %) per annum, but in no
event to exceed the maximum rate permitted by law, from the date Irvine made any
payment or otherwise expended funds through the date of reimbursement.
Any payment made by Irvine to a Lender to cure any claimed
default shall be deemed to have been made without prejudice to FirstWorld's or
Irvine's recovery of such payment if such Lender's claim of a default shall be
determined by a court of competent jurisdiction to have been erroneous.
12. 5. PURCHASE OF FINANCING ENCUMBRANCE; SUBROGATION. In addition
to Irvine's Cure Rights as described in Section 12.4, upon receiving a notice of
default under a Financing Encumbrance, Irvine shall have the right to pay the
Financing Encumbrance (or the portion thereof determined as provided in Section
12.5.1 where the Financing which is secured by
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the Financing Encumbrance is secured by assets of the obligor in addition to the
Irvine Networks) in full (including, without limitation, unless Lender is an
Affiliated Lender, any premium over par payable for a partial release as
provided in Section 12.5.1, late charges, default interest, default costs,
prepayment penalties, and other fees and charges imposed by the Lender), and in
connection therewith to be subrogated to and receive an assignment by Lender to
Irvine of the rights of the Lender against FirstWorld, including the rights of
the Lender under its Financing Encumbrance. Thereafter, Irvine shall be free to
enforce its remedies as holder of the Financing, including foreclosure of the
Financing Encumbrance.
12. 5. 1. Any Financing Encumbrance which is given by
FirstWorld after the date of this Agreement to secure Financing which encumbers
any Networks in addition to Irvine Networks shall contain provisions permitting
the release of the Irvine Network from the lien of the Financing Encumbrance
upon payment of not more than *** % of those portions of the Financing allocable
to the Irvine Networks.
12. 5. 2. Irvine shall have the right (but not the obligation)
to negotiate with any Lender for an intercreditor agreement which would contain
provisions allowing Irvine to obtain, or to cause a third party who will provide
telecommunication service on the Irvine Networks and to whom Irvine may assign
its cure rights as contemplated by this Article 12 to obtain, financing for
Irvine's or said third party's acquisition of the Financing Encumbrance (or the
portion thereof determined as provided in Section 12.5.1) pursuant to Section
12.5, so long as Irvine or such assignee of Irvine is approved by Lender based
upon Lender's completion of its normal underwriting procedures. In such event:
(a) FirstWorld does not represent, warrant or guarantee that such Lender will
negotiate with Irvine or accept any of Irvine's proposals; (b) successful
completion of such negotiations shall not be a condition precedent, condition
concurrent or condition subsequent to any rights of FirstWorld or obligations of
Irvine under this Agreement, nor shall Irvine's failure to reach agreement with
such Lender constitute a default, or entitle Irvine to any remedy, hereunder;
(c) Irvine shall negotiate in good faith and shall not interfere with or in any
manner delay the closing by FirstWorld or any affiliate of FirstWorld of any
Financing; and (d) if Irvine is unsuccessful in negotiating any intercreditor
agreement, then Irvine shall have only the rights set forth in this Agreement,
and no other rights.
12. 6. RIGHT TO BID AT FORECLOSURE SALE. In the event of
foreclosure of a Financing Encumbrance, Irvine shall be entitled to bid at such
sale on the same terms as, and without any priority or preference over, any
other third person bidder.
13.
DEFAULTS; REMEDIES
13. 1. EVENTS OF DEFAULT. The occurrence of any one or more of the
following shall be deemed to be an event of default ("Event of Default") by a
Party in the performance of its duties and obligations arising under this
Agreement.
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*** CONFIDENTIAL TREATMENT REQUESTED
27
<PAGE>
13. 1. 1. A Party breaches or defaults in the performance of
any of such Party's duties or obligations arising under this Agreement involving
the payment of money, and after receiving written notice thereof from the other
Party, fails within ten (10) days from receipt of such notice to have fully
cured and corrected such breach or default.
13. 1. 2. A Party breaches or defaults in the performance of
any of such Party's material duties or obligations arising under this Agreement
that do not involve the payment of money, and after receiving written notice
thereof from the other Party, fails within thirty (30) days from receipt of such
notice (or such longer time as may reasonably be required to cure the default so
long as the defaulting Party commences to cure such failure within such thirty
(30) day period and diligently prosecutes such cure to completion) to have fully
cured and corrected such breach or default;
13. 1. 3. A Party makes an assignment of its rights hereunder
for the benefit of its creditors.
13. 1. 4. The filing by or against a Party of a petition to
have a Party adjudged a Chapter 7 debtor under the Bankruptcy Code or to have
debts discharged or a petition for reorganization or arrangement under any law
relating to bankruptcy (unless, in the case of a petition filed against a Party,
the same is dismissed within thirty (30) days).
13. 1. 5. A Person (other than the other Party) obtains an
order or decree in any court of competent jurisdiction enjoining or prohibiting
a Party from substantially performing its obligations under this Agreement, and
such decree is not vacated within sixty (60) days after the granting thereof.
13. 1. 6. All or substantially all of the assets of a Party
are assumed by a trustee or other Person pursuant to a judicial proceeding,
unless possession or control of its assets is returned to such Party within
sixty (60) days.
13. 1. 7. Any representation, warranty, certification or
statement made in this Agreement by a Party shall prove to have been incorrect
in any material respect when made.
Any Event of Default by a Party of its obligations under the
Conduit Lease.
13. 2. WAIVER. No waiver of any Event of Default shall be valid or
effective unless in writing and signed by the waiving Party. Any waiver of any
one Event of Default shall not constitute, or be construed as creating, a waiver
of any other Event of Default.
13. 3. REMEDIES. Upon the occurrence of an Event of Default, then,
subject to the rights of Lenders under Articles 11 and 12, the non-defaulting
Party shall have all remedies available at law or in equity, except as
specifically provided herein. Such remedies shall include, without limitation:
13. 3. 1. The non-defaulting Party may terminate this
Agreement. Upon such termination the terminating Party shall be entitled to
recover from the breaching or
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defaulting Party, all damages proximately caused by such breach or default,
except as otherwise limited pursuant to the terms of this Agreement.
13. 3. 2. The non-defaulting Party shall not be under any
obligation to observe or perform any covenant of this Agreement on its part to
be observed or performed which accrues after the date of any default by the
other Party unless and until the default is cured by the defaulting Party, other
than those provisions which are for the benefit of any Lender.
13. 3. 3. No delay or omission of either Party to exercise any
right or remedy shall be construed as a waiver of the right or remedy or of any
default. The acceptance by Irvine of License Fees or any other sums payable
hereunder shall not be a (i) waiver of any preceding breach or default by
FirstWorld of any provision of this Agreement, other than the failure of
FirstWorld to pay the particular License Fee or other sums accepted, regardless
of Irvine's knowledge of the preceding breach or default at the time of
acceptance of the same, or (ii) a waiver of Irvine's right to exercise any
remedy available to Irvine by virtue of the breach or default. The acceptance
of any payment from a debtor in possession, a trustee, a receiver or any other
Person acting on behalf of a Party or its estate shall not waive or cure a
default under this Agreement. No payment by FirstWorld or receipt by Irvine of a
lesser amount than the sums required by this Agreement shall be deemed to be
other than a partial payment on account of the earliest due License Fees or
other sums, nor shall any endorsement or statement on any check or letter be
deemed an accord and satisfaction and Irvine shall accept the check or payment
without prejudice to Irvine's right to recover the balance of the License Fees
or other sums or pursue any other remedy available to it. No act or thing done
or not done by FirstWorld or Irvine or their agents during the Term shall be
deemed a surrender or an acceptance of surrender of the License, and no
agreement to accept a surrender shall be valid unless in writing and signed by
Irvine and consented to by each Lender.
13. 4. LATE PAYMENTS. Any License Fees or other sums due under
this Agreement that are not paid to Irvine within five (5) days of the date when
due shall bear interest at the rate of *** % per annum, but in no event to
exceed the maximum rate permitted by law, from the date due until fully paid.
The payment of interest shall not cure any default by FirstWorld under this
Agreement. In addition, FirstWorld acknowledges that the late payment by
FirstWorld to Irvine of License Fees or other sums will cause Irvine to incur
costs not contemplated by this Agreement, the exact amount of which will be
extremely difficult and impracticable to ascertain. Those costs may include,
but are not limited to, administrative, processing and accounting charges, and
late charges which may be imposed on Irvine by the terms of other agreements to
which Irvine is a party. Accordingly, if any License Fees or other sums due
from FirstWorld shall not be received by Irvine or Irvine's designee within five
(5) days after the date due, then FirstWorld shall pay to Irvine, in addition to
the interest provided above, a late charge in the amount of *** Dollars ($ *** )
for each delinquent payment. Acceptance of a late charge by Irvine shall not
constitute a waiver of FirstWorld's default with respect to the overdue amount,
nor shall it prevent Irvine from exercising any of its other rights and
remedies.
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13. 5. RIGHT TO PERFORM. All covenants and agreements to be
performed by either Party under this Agreement shall be performed at such
Party's sole cost and expense and without any abatement of payments due
hereunder or right of set-off. If either Party fails to pay any sum of money,
other than License Fees, or fails to perform any other act on its part to be
performed under this Agreement, and the failure continues beyond any applicable
grace period set forth in this Agreement, then in addition to any other
available remedies, the other Party may, at its election make the payment or
perform the other act on the part of the Party which failed to pay or perform.
Either Party's election to make a payment or perform an act on the other Party's
part shall not give rise to any responsibility of the paying or performing Party
to continue making the same or similar payments or performing the same or
similar acts. Any Party which fails to pay any sum of money or perform any act
required of it hereunder shall, promptly upon demand by the other Party,
reimburse the other Party for all sums paid by the other Party, if any, and all
necessary incidental costs, together with interest at the rate of *** % per
annum, but in no event to exceed the maximum rate permitted by law, from the
date of the payment by the other Party. Each Party shall thereafter have the
same rights and remedies for a failure to pay those amounts as it would have in
the event of a monetary default by the other Party.
13. 6. WAIVER OF JURY TRIAL. IRVINE AND FIRSTWORLD EACH
ACKNOWLEDGES THAT IT IS AWARE OF AND HAS HAD THE ADVICE OF COUNSEL OF ITS CHOICE
WITH RESPECT TO ITS RIGHTS TO TRIAL BY JURY, AND EACH PARTY DOES HEREBY
EXPRESSLY AND KNOWINGLY WAIVE AND RELEASE ALL SUCH RIGHTS TO TRIAL BY JURY IN
ANY ACTION, PROCEEDING OR COUNTERCLAIM BROUGHT BY EITHER PARTY HERETO AGAINST
THE OTHER (AND/OR AGAINST ITS OFFICERS, DIRECTORS, EMPLOYEES, AGENTS, OR
SUBSIDIARY OR AFFILIATED ENTITIES) ON ANY MATTERS WHATSOEVER ARISING OUT OF OR
IN ANY WAY CONNECTED WITH THIS AGREEMENT, AND/OR ANY CLAIM OF INJURY OR DAMAGE.
13. 7. LIMITATION. The obligations of Irvine hereunder do not
constitute the personal obligations of the individual partners, members,
trustees, directors, officers or shareholders of Irvine. Except for the
obligations of FWC pursuant to the Guaranty to be executed and delivered by FWC
in favor of Irvine concurrently with the execution and delivery of this
Agreement, the obligations of FirstWorld hereunder do not constitute the
personal obligations of the individual partners, members, trustees, directors,
officers or shareholders of FirstWorld.
13. 8. DAMAGES LIMITATION. Neither Party shall be entitled to
recover from the other Party any award of punitive damages, or any award for
profits lost by such Party on account of the other Party's failure to perform
its obligations under this Agreement (other than the right of Irvine to recover
unpaid Rent due or Rent which would have become due under the Conduit Lease
after a breach thereof by FirstWorld). Without limiting the generality of the
foregoing, the foregoing waiver of the right to recover lost profits shall apply
(a) to any claims by FirstWorld that it lost Customers or potential Customers
due to a breach by Irvine and (b) to any claims by Irvine that it lost tenants
or potential tenants for its properties due to a breach by FirstWorld. The
foregoing limitation shall not, however, be construed as a waiver of any rights
of Irvine to recover sums expended pursuant to Section 11.3.4, above.
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14.
SALE OF NETWORKS
14. 1. FIRSTWORLD'S RIGHT TO ASSIGN. FirstWorld shall not either
voluntarily or by operation of law, assign, encumber (except in accordance with
Article 11) or otherwise transfer its rights under this Agreement, or sublicense
or otherwise permit the use of the License by anyone other than FirstWorld (any
of the foregoing being a "Transfer") without the prior written consent of
Irvine, which consent shall not be unreasonably withheld or conditioned. For
purposes of this Agreement, any sale of a controlling percentage of the shares
of FirstWorld (except by or to a Lender which is not an Affiliated Lender in
connection with the enforcement by Lender of its remedies), shall be deemed to
constitute a Transfer of this Agreement. Any purported Transfer without
Irvine's consent shall be void and of no force or effect. Except to the extent
permitted under Section 14.6, below and Article 11, above, in no event shall
FirstWorld have the right to Transfer this Agreement or any of its rights
hereunder separately from the Irvine Networks and the Conduit Lease, and any
attempted transfer of this Agreement or any of FirstWorld's rights hereunder
separate from the Irvine Networks and the Conduit Lease shall be void and of no
force or effect.
14. 2. SUBMITTAL FOR CONSENT. If FirstWorld desires to Transfer
this Agreement, then unless Irvine's consent is not required hereunder for such
Transfer, FirstWorld shall notify Irvine at least thirty (30) days in advance of
the proposed Transfer and shall submit to Irvine concurrently with such notice:
(a) the name and address of the proposed transferee, (b) financial statements
for the proposed transferee, (c) a description of the proposed transferee's
business experience in the telecommunications industry, (d) a copy of the
proposed instrument effecting the Transfer and (e) such other information as
Irvine may reasonably request in connection with its review of the proposed
Transfer. Within thirty (30) days after Irvine's receipt of such information,
Irvine may consent to the proposed Transfer or disapprove of the proposed
Transfer. If Irvine disapproves of the proposed Transfer, Irvine's notice of
disapproval shall specify its reasons for disapproving of the same. Any failure
by Irvine to consent to or disapprove such Transfer within such thirty (30) day
period shall be deemed to constitute Irvine's consent to such Transfer.
FirstWorld acknowledges that this Agreement is being entered into by Irvine to
provide telecommunications service to the Spectrum, and any Additional Areas,
and that it shall be reasonable for Irvine to withhold its consent to a proposed
Transfer if Irvine reasonably determines that the proposed transferee will be
unable to provide such service at such level and quality as is then reasonably
expected by occupants of Spectrum and any Additional Areas.
14. 3. EFFECT OF TRANSFER. No Transfer, even with the consent of
Irvine, shall relieve FirstWorld of its obligations under this Agreement.
Except as provided in Article 11, each transferee of FirstWorld, shall be deemed
to assume all obligations of FirstWorld under this Agreement and shall be liable
jointly and severally with FirstWorld for the payment of all License Fees and
other sums payable hereunder, and for the due performance of all of FirstWorld's
obligations under this Agreement, except that in the case of a sublicense such
assumption shall be limited to the obligations relating to the sublicensed
Buildings. Except as provided in Article 11, no Transfer shall be binding on
Irvine unless a document memorializing the Transfer is delivered to Irvine and
both the assignee/sublicensee and FirstWorld deliver to Irvine an executed
consent to transfer instrument in a form reasonably required by Irvine and
consistent with the requirements
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of this Article. The acceptance by Irvine of any payment due under this
Agreement from any other Person shall not be deemed to be a waiver by Irvine of
any provision of this Agreement or to be a consent to any Transfer. Consent by
Irvine to one or more Transfers shall not operate as a waiver or estoppel to the
future enforcement by Irvine of its rights under this Agreement.
14. 4. RIGHT OF FIRST REFUSAL. In the event that FirstWorld
desires to sell the Irvine Networks, or a direct controlling interest in
FirstWorld, Irvine shall have a continuing right of first refusal as to any such
transactions. FirstWorld agrees to provide Irvine with written notice of the
terms and provisions of any such proposed transaction. Irvine shall have
fifteen (15) days after its receipt of notice of such terms and provisions to
exercise its right of first refusal. If Irvine does not exercise the same
within such fifteen (15) day period, Irvine shall be deemed to have waived such
right as to the transaction for which notice was given, and FirstWorld shall
thereafter have the right for a period of one hundred eighty (180) days
thereafter to complete the proposed transaction at a price not less than
ninety-five (95) percent of that set forth in the notice given to Irvine and
with no material changes to other terms of the transaction which would
reasonably be considered to be monetary or financial terms of the transaction.
This right of first refusal shall not be construed to apply to any Financing or
to the pledge of FirstWorld's shares as security for a Financing, or to any
transfer by or to a Lender. Any information provided in connection with a
transaction to which this right of first refusal would apply shall be
Pre-Authorized Confidential Information, including, without limitation, any
notice of the terms and provisions of any proposed transaction. In the event
that FirstWorld intends to undertake a public offering of its shares, FirstWorld
shall have the right to notify Irvine prior to commencing efforts towards such
public offering and the parties shall for a period of thirty (30) days following
such notice attempt in good faith to negotiate a private transaction involving
the sale to Irvine of the shares of FirstWorld to be offered to the public. If
FirstWorld and Irvine are unable to negotiate such a transaction within such
thirty (30) day period, the Parties shall negotiate in good faith to establish a
procedure to apply the right of first refusal of Irvine set forth in this
Section 14.4 to the structure of the proposed public offering and shall use
their best efforts to conclude such negotiations within fifteen (15) days after
the end of such thirty (30) day period.
14. 5. PERMITTED TRANSFERS. Notwithstanding any contrary provision
of Article 14, FirstWorld shall have the right, without obtaining the prior
consent of Irvine: (a) to assign this Agreement to an Affiliate, so long as such
assignment occurs concurrently with the assignment to such Affiliate of the
Conduit Lease and all of the Irvine Networks ; (b) to assign this Agreement in
connection with a reorganization or merger, so long as concurrently with such
assignment the Conduit Lease and all of the Irvine Networks are assigned to the
same entity as this Agreement; and (c) to encumber its rights under this
Agreement in accordance with Article 11, above.
14. 6. MULTIPLE NETWORKS. FirstWorld shall have the right to
provide service to the Spectrum Service Area through a single Network or through
multiple Networks, and may provide service to any Additional Area added to this
Agreement from the Spectrum Network or from an Additional Network. If
FirstWorld elects to provide service to any portion of the Spectrum Service Area
or any such Additional Area through more than one Network, FirstWorld may need
to assign or partially assign this Agreement to a separate Affiliate formed by
FirstWorld or by FWC for such purpose. In such event, the Parties shall work
together in good faith to determine a mutually satisfactory method for partially
assigning FirstWorld's rights under this
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Agreement to such Affiliate while protecting both Parties rights and obligations
hereunder. In connection with such provision of service by any Additional
Network, FirstWorld may sublicense one or more Buildings to an Affiliate formed
by FirstWorld or FWC for such purpose, provided, however, that Irvine shall be
provided a copy of any proposed sublicense prior to the execution thereof and
shall have the right to require both FirstWorld and the proposed
sublicensee/Affiliate to enter into such further agreements with regard to such
sublicense as Irvine may determine are reasonably necessary to protect its
rights under this Agreement. FirstWorld shall reimburse Irvine for Irvine's
costs, including attorneys' fees, incurred in connection with any assignment or
sublicense pursuant to this Section 14.6.
15.
TRANSFER OF BUILDINGS
15. 1. TRANSFER OF SINGLE BUILDING. Upon any sale, conveyance or
other transfer of title to any Building by Irvine, Irvine may either remove such
Building from this Agreement effective upon the date of such sale, conveyance or
other transfer, or may require FirstWorld to enter into a separate
telecommunications license agreement for such Building (an "Individual License
Agreement"). Such Individual License Agreement would provide for a License Fee
based upon the Additional License Fee Base, and shall otherwise be on a form to
be agreed to between the Parties as soon as reasonably possible after the date
of this Agreement, but no such separate Individual License Agreement shall
contain any provisions of this Article 15, Section 6.2, above, or any other
provisions of this Agreement which would be inapplicable to a single building
Individual License Agreement. Such separate agreement would be entered into
upon fifteen (15) days notice from Irvine to FirstWorld and would be effective
as of the date of any such sale, conveyance or other transfer. Any such
separate agreement may be entered into by Irvine and assigned to the purchaser
or other transferee, or at Irvine's request may be entered into directly between
FirstWorld and such purchaser or other transferee. In the event that a separate
Individual License Agreement is entered into by Irvine or by the purchaser or
other transferee upon a sale, conveyance or other transfer of any Building by
Irvine, then the Adjusted Gross Combined Revenues from such Building shall
continue to be included in the calculation of Bonus Percentage Rent under the
Conduit Lease for so long as FirstWorld is providing services to the tenants
and/or owner of such Building.
15. 2. TRANSFER OF PORTFOLIO. In the event Irvine sells, conveys
or otherwise transfers title to multiple Buildings representing a substantial
portion of the Buildings to an Affiliate, a newly formed entity or a third
party, Irvine shall have the right to partially assign this Agreement to such
Person as to the Buildings so transferred and the Parties shall work together to
determine a mutually satisfactory method for partially assigning Irvine's rights
under this Agreement to such Person while protecting both Parties rights and
obligations hereunder.
16.
INSURANCE; INDEMNIFICATION
16. 1. FIRSTWORLD INDEMNITY. FirstWorld shall indemnify, defend,
protect and hold harmless Irvine its principals, officers, directors, agents,
employees and servants from
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and against any and all losses, costs, expenses, claims, liabilities and damages
(including reasonable attorneys' fees) arising directly or indirectly from (a)
the operation of the Networks, by FirstWorld or its employees, agents, or
contractors, (b) FirstWorld's breach of its obligations or representations under
this Agreement, (c) FirstWorld's exercise of any rights of entry periodically
provided to FirstWorld as contemplated by Section 9.1, above, or (d) the
construction, operation, maintenance and repair of Cable and Equipment or use of
the Equipment Space, in each of the above cases except to the extent ultimately
proved to be caused by the sole active negligence or willful misconduct of
Irvine, its employees, agents or contractors, or Irvine's breach of its
obligations, representations or warranties under this Agreement. In cases of
alleged negligence, or any alleged breach of an obligation, representation or
warranty by Irvine under this Agreement, asserted by third parties against
Irvine which arise out of, are occasioned by, or are in any way attributable to
any of the matters specified in clauses (a) through (d), above, FirstWorld shall
accept any tender of defense for Irvine and shall, notwithstanding any
allegation of negligence or willful misconduct on the part of Irvine, defend
Irvine and pay all costs, expenses and attorneys' fees incurred in connection
with such litigation, provided that FirstWorld shall not be liable for any such
injury or damage, and Irvine shall reimburse FirstWorld for the reasonable
attorneys' fees and costs incurred by FirstWorld, all to the extent and in the
proportion that such injury or damage is ultimately determined by a court of
competent jurisdiction (or in connection with any negotiated settlement agreed
to by Irvine) to be attributable to the sole active negligence or willful
misconduct of Irvine, or Irvine's breach of any its obligations, representations
or warranties under this Agreement. The provisions of this Section shall
survive termination of this Agreement.
16. 2. EXEMPTION OF IRVINE FROM LIABILITY. FirstWorld hereby
agrees that Irvine, including Irvine's officers, trustees, partners, affiliates,
directors, agents, management contractors and representatives (collectively
referred to as "Irvine's Affiliates"), shall not be liable for, and FirstWorld
hereby irrevocably waives any claim against such parties for, injury to
FirstWorld's business or loss of income therefrom or for damage to Cable and/or
Equipment or other property of FirstWorld, whether such damage or injury is
caused by or results from fire, steam, electricity, gas, water or rain, or from
the breakage, leakage, obstruction or other defects of pipes, sprinklers, wires,
appliances, plumbing, heating, ventilation, air conditioning or lighting
fixtures, or from any other cause; provided, however, that the foregoing shall
not limit Irvine's liability for a default by Irvine of an express
representation, warranty, covenant or obligation set forth in this Agreement or
the Conduit Lease or from the sole active negligence of Irvine or its employees,
agents or contractors. Irvine and Irvine's Affiliates shall not be liable for
any damage arising from any act or neglect of any other tenant of any Building.
16. 3. IRVINE INDEMNITY. Irvine shall indemnify, protect and hold
harmless FirstWorld, its principals, officers, directors, agents, employees and
servants from and against any and all losses, costs, expenses, claims,
liabilities and damages (including reasonable attorneys' fees) arising directly
or indirectly from the sole active negligence or willful misconduct of Irvine,
its employees, agents or contractors, or Irvine's breach of its obligations,
representations or warranties under this Agreement. The provisions of this
Section shall survive termination of this Agreement.
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16. 4. FIRSTWORLD INSURANCE. FirstWorld shall procure and maintain
in force, or cause to be procured and maintained in force, throughout the Term
of this Agreement, the following insurance coverage:
16. 4. 1. A Commercial General Liability policy with a
combined single limit of at least *** Dollars ($ *** ) per occurrence and ***
Dollars ($ *** ) in the aggregate. Such Comprehensive General Liability policy
shall include a Broad Form Endorsement including: Broad Form Property Damage;
Contractual Liability; Products and Completed Operations; and Explosion,
Collapse and Underground.
16. 4. 2. A Business Auto Policy providing a liability limit
of at least *** Dollars ($ *** ) for each accident and covering owned and
non-owned and hired automobiles.
16. 4. 3. A Workers' Compensation and Employer's Liability
policy providing California statutory Workers' Compensation benefits, including
Employer's Liability with at least the following limits:
Bodily Injury by Accident: $ *** each accident
Bodily Injury by Disease: $ *** policy limit
Bodily Injury by Disease: $ *** each employee
In addition, each Workers' Compensation and Employer's Liability policy shall
contain an insurer's waiver of subrogation in favor of Irvine.
16. 4. 4. A Builder's Risk policy or a Course of Construction
policy providing a liability limit of at least *** Dollars ($ *** ) covering any
Equipment, Conduit or Networks during the course of construction (including,
without limitation, installation of Cable into the Conduit) against loss or
damage caused by All Risk Builders Risk perils.
16. 4. 5. Fire and All Risk insurance in an amount not less
than *** Dollars ($ *** ) per occurrence.
16. 4. 6. A Transmission and Distribution All Risk policy in
an amount not less than *** Dollars ($ *** ) with Replacement Cost Blanket
Endorsement and, for the Irvine Networks, an Agreed Amount Endorsement.
16. 4. 7. An All Risk Property Damage policy covering
FirstWorld's or its Affiliate's switching facility in Anaheim, as well as an
additional switching facilities in an
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*** CONFIDENTIAL TREATMENT REQUESTED
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amount not less than the full replacement cost of the switching facilities and
with an earthquake sublimit of not less than *** ( *** ) percent of the
replacement cost coverage amount.
16. 4. 8. Any combination of Primary, Umbrella and Excess
Liability policies which together provide total limits of at least *** Dollars
($ *** ) per occurrence and *** Dollars ($ *** ) in the aggregate.
16. 4. 9. As to any alterations, modifications,
reconstruction, improvements, or additions to the Conduit which involve a cost
in excess of $ *** (which amount shall be increased from time to time by the
same percentage increase as the percentage increase in the CPI from and after
the date of this Agreement) and which involve construction of a building
entrance link on real property owned by Irvine, completion and performance bonds
and guaranties assuring the lien free completion of all improvements being
installed or constructed when improvements are under construction, if required
by Irvine, provided, however, that if at any time during the Term FirstWorld
allows a lien to be recorded on account of work performed by or on behalf of
FirstWorld which is not released within thirty (30) days after recordation of
the same, then Irvine may thereafter require bonds and guaranties for all work
to be performed by FirstWorld in connection with this Agreement.
16. 5. FORM OF POLICIES. The insurance policies required to be
procured pursuant to paragraph 9.2 shall be written only with California
admitted insurance companies having a policyholder rating of *** and a
financial rating of *** or better in the Best's Key Rating Guide and shall
contain the following provisions:
16. 5. Each policy shall contain a provision that the
coverages afforded thereby will not be canceled, reduced or materially changed
without at least thirty (30) days' prior written notice to Irvine.
16. 5. 2. The Commercial General Liability and Umbrella/Excess
Liability policies shall name Irvine as an additional insured with the following
clauses added:
(a) The insurance afforded to the additional
insureds is primary insurance. If any of the additional insureds has other
insurance which is applicable to the loss, such other insurance shall be excess
and non-contributory with this insurance as respects claims or liability arising
out of or resulting from the acts or omissions of the named insured, or of
others on behalf of the named insured.
(b) This insurance shall apply separately to each
insured except with respect to the limits of liability.
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*** CONFIDENTIAL TREATMENT REQUESTED
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16. 6. INCREASE IN LIABILITY LIMITS. Irvine may from time to time
require that the limits of liability for any insurance policy to be maintained
under this Article 16 be increased, provided that no such increase shall cause
the limits of liability to exceed the greater of: (a) the limits of liability
required by FirstWorld's Lenders; or (b) the limits of liability set forth in
this Article 16 increased by the same percentage increase as the percentage
increase in the CPI from and after the date of this Agreement.
16. 7. RELEASE AND WAIVER OF SUBROGATION. Notwithstanding anything
to the contrary in this Agreement, the Parties release each other, and their
respective agents, employees and contractors, from any liability for damage to
the property of the waiving Party that arises out of or incident to any peril
covered by property insurance carried by the Parties or out of a peril of the
type to be covered by the property insurance required to be carried under the
terms of this Agreement, whether due to the negligence of Irvine or FirstWorld
or their respective agents, employees or contractors or any other cause. Each
Party shall cause each property insurance policy obtained by it to authorize the
foregoing waiver.
17.
REPRESENTATIONS AND WARRANTIES
17. 1. REPRESENTATIONS AND WARRANTIES OF FIRSTWORLD.
17. 1. 1. As of the date of this Agreement, FirstWorld is a
corporation duly organized and validly existing in good standing under the laws
of the State of California and has all necessary corporate power and authority
to carry on its business as presently conducted, to own or hold under lease its
properties and to enter into and perform its obligations under this Agreement.
17. 1. 2. The execution, delivery and performance by
FirstWorld of this Agreement has been duly authorized by all necessary action on
the part of FirstWorld, do not require any approval, except as has been
heretofore obtained, of the shareholders of FirstWorld or any consent of or
approval from any trustee, lessor or holder of any indebtedness or other
obligation of FirstWorld, except for such as have been duly obtained, and do not
contravene any Applicable Law, the articles or bylaws of FirstWorld or any
agreement, judgment, injunction, order, decree or other instrument binding upon
FirstWorld.
17. 1. 3. There are no actions, suits, proceedings or
investigations pending or, to the knowledge of FirstWorld, threatened against it
at law or in equity before any court or tribunal or which individually or in the
aggregate could result in any materially adverse effect on its business,
properties or assets or its condition, financial or otherwise, or in any
impairment of its ability to perform its obligations under this Agreement.
FirstWorld has no knowledge of a violation or default with respect to any order,
writ, injunction or any decree of any court or tribunal or any Governmental
Authority which may result in any such materially adverse effect or such
impairment.
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17. 1. 4. There are no pending agreements or active
negotiations for the sale of all or substantially all of the assets of, or stock
representing a direct controlling interest in FirstWorld or FWC, or any of their
respective subsidiary or affiliated entities.
17. 2. REPRESENTATIONS AND WARRANTIES OF IRVINE. Irvine is a
corporation duly organized and validly existing in good standing under the laws
of the State of Delaware and has all necessary power and authority to carry on
its business as presently conducted, to own or hold under lease its properties
and to enter into and perform its obligations under this Agreement.
17. 2. 1. The execution, delivery and performance by Irvine of
this Agreement have been duly authorized by all necessary action on the part of
Irvine, do not require any consent of or approval from any trustee, lessor or
holder of any indebtedness or other obligation of Irvine, except for such as
have been duly obtained, and do not contravene or constitute a default under any
Applicable Law, the Articles of Incorporation or By-Laws of Irvine or of any
agreement, judgment, injunction, order, decree or other instrument binding upon
Irvine.
17. 2. 2. There are no actions, suits, proceedings or
investigations pending or, to the knowledge of Irvine, threatened against it at
law or in equity before any court or tribunal which individually or in the
aggregate could result in any materially adverse effect on its business,
properties or assets or its condition, financial or otherwise, or in any
impairment of its ability to perform its obligations under this Agreement.
Irvine has no knowledge of a violation or default with respect to any order,
writ, injunction or any decree of any court or tribunal or any Governmental
Authority which may result in any such materially adverse effect or such
impairment.
17. 2. 3. Irvine currently owns good and marketable title to
the Existing Buildings, and will own good and marketable title to any Additional
Buildings at the time the same are added to this Agreement.
17. 2. 4. There is no existing or, to Irvine's knowledge,
pending or threatened litigation, suit, action or proceeding, including
condemnation proceedings, before any court or administrative agency against
Irvine or any Building that would, if adversely determined, prohibit FirstWorld
from installing the Equipment in the Equipment Space.
18.
PROTECTION OF CONFIDENTIAL INFORMATION
18. 1. DESIGNATION OF CONFIDENTIAL INFORMATION. Any Confidential
Information submitted to either Party by or on behalf of the other Party or its
Affiliates shall be labeled as "Proprietary" or "Confidential" by use of a
prominent legend, label or sticker, except that Pre-Authorized Confidential
Information need not be so labelled.
18. 2. OBLIGATIONS OF CONFIDENTIALITY. Each Party shall treat and
hold the Confidential Information in confidence and shall undertake the
following obligations with respect thereto:
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18. 2. 1. Each shall keep confidential all Confidential
Information disclosed to it, in accordance herewith, and to protect the
confidentiality thereof, in the same manner in which it protects the
confidentiality of similar information and data of its own (at all times
exercising at least a reasonable degree of care in the protection of
Confidential Information); provided, however, that neither shall have any
obligation with respect to the use or disclosure to others of any Confidential
Information that can be established to have: (a) been known publicly; (b) been
known generally in the industry before communication; (c) become known publicly,
without fault on the part of either Party; (d) been known otherwise before
communication; (e) been received without any obligation of confidentiality from
a source (other than a Party or its Affiliates) lawfully having possession of
such information; (f) been required to be disclosed by law or court order; (g)
been reasonably necessary to disclose in connection with the enforcement of a
Party's rights under this Agreement; (h) been reasonably necessary to disclose
in connection with a Financing, a Transfer, a borrowing by FWC or FirstWorld,
the sale of shares of FirstWorld or FWC, or any similar transaction, whether of
FirstWorld, FWC or any Affiliate of either entity; or (i) been reasonably
necessary to disclose in connection with any financing, sale of shares, transfer
of a substantial portion of the assets of, or any similar transaction of Irvine
or any of its Affiliates.
18. 2. 2. All Confidential Information which may be furnished
to a Party shall continue to be the property of the Party furnishing the same,
or the Affiliate submitting such Confidential Information on such Party's
behalf.
18. 2. 3. No rights or licenses, express or implied, are
hereby granted to any Confidential Information, including without limitation,
any patents, trademarks, service marks, trade names, copyrights or trade
secrets, as a result of or related to this Agreement.
19.
MARKS AND PUBLICITY
19. 1. EXCLUSIVE OWNERSHIP OF MARKS. Irvine acknowledges and
recognizes the exclusive rights of FWC, FirstWorld and their Affiliates to the
"FirstWorld" name and all other service marks, trademarks, names, copyrights,
logos, registrations and patents used exclusively (individually or collectively)
by FWC, FirstWorld, or their Affiliates in connection with the "FirstWorld" name
and or the conduct of their business, and not constituting generic or
descriptive terms, marks or logos used within the telecommunications industry
(collectively, the "FirstWorld Marks"). FirstWorld acknowledges and recognizes
the exclusive rights of Irvine, Irvine Community Development Company and their
Affiliates to the "Irvine Company" and "Spectrum" names, other project names
that may be designated by them for any Additional Area and all other service
marks, trademarks, names, copyrights, logos, registrations and patents used
exclusively by Irvine in connection with its real estate development and
investment activities and not constituting generic or descriptive terms, marks
or logos used within the real estate industry (collectively, the "Irvine
Marks"). Each hereby disclaims any right, title or interest in or to any of the
others Marks by operation of this Agreement. Each shall have the sole right and
(to the extent they determine appropriate) responsibility to institute and
prosecute all disputes with third parties concerning use of their respective
Marks.
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19. 2. REFERENCES TO MARKS. Each Party agrees not to use or
directly or indirectly refer to any of the other Party's Marks in any way or for
any purpose without the other Party's prior written consent, which it may
withhold for any reason or no reason. Irvine shall not use the words
"SpectraNet" or "FirstWorld" or any other FirstWorld Mark, or any combination or
variation of any of them, in the name of any partnership, corporation or other
entity. FirstWorld shall not use the words "Irvine" or "Spectrum" or any other
Irvine Mark, or any combination or variation of any of them, in the name of any
partnership, corporation or other entity.
19. 3. EFFECT OF TERMINATION. Each Party hereby acknowledges and
agrees that in the event of any termination or cancellation of this Agreement:
(a) neither Party or their respective Affiliates shall be under any obligation,
express or implied, to issue to the other a license (or commitment to issue a
license) permitting use of the other's names or Marks; and (b) neither Party or
their Affiliates shall be permitted to use of the other's Marks in connection
with the operation of any Network.
19. 4. PUBLICITY. Irvine shall notify FirstWorld orally or in
writing, of any press release, announcement, advertisement or other public
communication related to any Network. FirstWorld shall notify Irvine, orally or
in writing, of any press release, announcement, advertisement or other public
communication related to FirstWorld's Networks providing service to Irvine, the
Spectrum or any Additional Area.
20.
ARBITRATION
Any dispute between Irvine and FirstWorld under this Agreement shall
be resolved by binding arbitration by JAMS/ENDISPUTE, or its successor, in
Orange, California ("JAMS") as provided in this paragraph; provided that either
Party shall retain the right to pursue any equitable remedy available to it by
filing a separate action in a court of competent jurisdiction. Within ten (10)
business days following submission of any such claim or dispute to JAMS, JAMS
shall designate three (3) arbitrators and each Party may, within five (5)
business days thereafter, veto one of the three persons so designated. If two
different designated arbitrators have been vetoed, the third arbitrator shall
hear and decide the matter. If the Parties both veto the same arbitrator, the
two remaining arbitrators shall choose a third arbitrator. Any arbitration
pursuant to this paragraph shall be decided within sixty (60) days of submission
to JAMS. The decision of the arbitrator shall be final and binding on all
Parties. The arbitrator shall have the right to order such discovery as the
arbitrator deems reasonable in connection with such arbitration. All costs
associated with arbitration (including, without limitation, reasonable
attorneys' fees) shall be awarded to the prevailing Party as determined by the
arbitrator. Notice of the demand for arbitration may be filed by either Party
to this Agreement. The award rendered by the arbitrators shall be final, and
judgment may be entered upon it in accordance with applicable law in any court
having jurisdiction thereof.
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21.
NO BROKER
Irvine and FirstWorld each represents and warrants that it did not
engage any broker or finder in connection with this Agreement and that no Person
is entitled to any commission or finder's fee on account of any agreements or
arrangements made by such Party with any broker or finder. Each Party shall
indemnify the other Party against any breach of the foregoing representation by
the indemnitor.
22.
WAIVERS
Failure of either Party to complain of any act or omission on the part
of the other Party shall not be deemed a waiver by the noncomplaining Party of
any of its rights under this Agreement. No waiver by either Party at any time,
express or implied, of any breach of any provisions of this Agreement shall be a
waiver of a breach of any other provision of this Agreement or a consent to any
subsequent breach of the same or any other provision. No acceptance by Irvine
of any partial payment shall constitute an accord or satisfaction but shall only
be deemed a part payment on account.
23.
UCC FILING
Upon the request of FirstWorld, Irvine agrees to execute and to allow
FirstWorld to file with the Secretary of State at its expense a UCC statement in
form reasonably satisfactory to Irvine affirming that any Equipment installed by
FirstWorld in any Building is owned by FirstWorld and shall not be deemed to
have become a part of the Building in which it is installed, subject to the
rights of Irvine in and to any Equipment pursuant to the terms and provisions of
this Agreement. Upon the request of FirstWorld from time to time, Irvine shall
execute and deliver and allow FirstWorld to file with the Secretary of State at
its expense additional UCC statements as additional Buildings are added to this
Agreement.
24.
ESTOPPEL CERTIFICATES
At any time and from time to time, upon not less than twenty (20) days' prior
written request (an "Estoppel Certificate Request") by either Party to this
Agreement or any Lender to FirstWorld (the "Requesting Party"), the other Party
to this Agreement (the "Certifying Party") shall execute, acknowledge and
deliver an Estoppel Certificate in reasonable form to the Requesting Party (or
directly to a third party whose name and address are provided by the Requesting
Party). Any Estoppel Certificate may be relied upon by any third party (but not
by the Requesting Party) to whom an Estoppel Certificate is required to be
directed. If the Certifying Party fails to execute and deliver within such
twenty (20) day period to the Requesting Party (or its attorneys or the third
party(ies) designated by such Requesting Party) an Estoppel Certificate,
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setting forth with reasonable specificity any alleged exceptions to the
statements requested to be contained in such Estoppel Certificate, then the
Certifying Party shall be deemed for all purposes, whether or not this Agreement
has been terminated or is otherwise in full force and effect, to have executed
and delivered to the third party and the Requesting Party an Estoppel
Certificate, dated as of the effective date of the Estoppel Certificate Request,
certifying that this Agreement is in full force and effect, that there are no
amendments or modifications hereof and that the Requesting Party is not in
default under this Agreement.
25.
MISCELLANEOUS PROVISIONS
25. 1. NOTICES. Any notice, request, demand, consent, approval or
other communication required or permitted hereunder or by law shall be given in
writing, addressed as follows:
If to Irvine: The Irvine Company
550 Newport Center Drive
Newport Beach, CA 92660
Attn: Vice President, Industrial Operations
With a Copy to: The Irvine Company
550 Newport Center Drive
Newport Beach, CA 92660
Attn: General Counsel - Office
If to FirstWorld: FirstWorld Orange Coast
9333 Genessee Avenue, Suite 200
San Diego, California 92121
Attn: G. Bradford Saunders
With a Copy to: FirstWorld Communications
9333 Genessee Avenue, Suite 200
San Diego, California 92121
Attn: General Counsel
Any Party may from time to time, by written notice to the other, designate a
different address which shall be substituted for the address specified above or
designate additional Parties to receive copies of notices. Any notice shall be
delivered either personally, by certified mail (return receipt requested), by
Federal Express or similar overnight courier or by facsimile transmission. If
personally delivered, notices shall be deemed received at the time of delivery.
If sent by certified mail, return receipt requested, notices shall be deemed
fully delivered and received upon delivery or refusal of delivery. If delivered
by Federal Express or similar overnight courier, notices shall be deemed fully
delivered and received upon receipt or two (2) Business Days after deposited
with such courier prior to its deadline for next Business Day delivery. If sent
by facsimile transmission, notices shall be deemed fully delivered and received
upon receipt provided that the transmission is by a facsimile machine which
confirms completed transmission, and a copy of the notice is
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simultaneously sent by another method permitted under this Agreement. Except as
otherwise expressly provided herein, notices shall be deemed fully delivered and
received at the time of actual receipt.
25. 2. FURTHER ASSURANCES. Each Party shall fully support and
cooperate with the other Party in giving effect to the purpose and intent of
this Agreement, including, without limitation, in a Party's efforts to obtain
from any Governmental Authority or any other Person any permit, entitlement,
approval, authorization or other right necessary or convenient in connection
with such Party's activities or operations, provided that the cooperation
required under this Section 25.2 shall be at no expense to the Party requested
to provide its cooperation. Without limiting the generality of the foregoing,
each Party agrees to execute and deliver such further documents and perform such
further acts as may be reasonably necessary to achieve the intent of the Parties
as set forth in this Agreement.
25. 3. PERFORMANCE UNDER PROTEST. If at any time a dispute shall
arise as to the amount of any payment to be made by a Party to the other under
this Agreement, then the Party against whom the obligation to pay is asserted
shall pay the entire amount billed, but shall have the right to make payment
"under protest." The Party making the payment shall continue to have the right
to seek recovery of such sum. To the extent that it shall be determined that
the Party making the payment "under protest" was not required to make such
payment, such Party shall be entitled to recover such sum or so much of such sum
as such Party was not legally required to pay pursuant to this Agreement.
25. 4. NO THIRD PARTY BENEFICIARIES. Except as to the permitted
successors and assigns of each Party, nothing in this Agreement shall be deemed
to confer upon any Person (other than Irvine, FirstWorld or Lenders) any right
to insist upon, or to enforce against Irvine or FirstWorld, the performance or
observance by either Party of its obligations under this Agreement.
25. 5. INTERPRETATION. No inference in favor of or against any
Party shall be drawn from the fact that such Party has drafted any portion of
this Agreement. The Parties have both participated substantially in the
negotiation, drafting and revision of this Agreement with representation by
counsel and such other advisors as they have deemed appropriate. The words
"include" and "including" shall be construed to be followed by the words
"without limitation".
25. 6. DELIVERY OF DRAFTS. Neither Irvine nor FirstWorld shall be
bound by this Agreement unless and until each Party shall have executed at least
one counterpart of this Agreement and delivered such executed counterpart to the
other Party. The submission of draft(s) of this Agreement or comment(s) on such
drafts shall not bind either Party in any way and such draft(s) and comment(s)
shall not be considered in interpreting this Agreement.
25. 7. HEADINGS. Article and section headings have been inserted
in this Agreement as a matter of convenience and for reference only. Such
section headings are not a part of this Agreement and shall not be used in the
interpretation of any provision of this Agreement.
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25. 8. CUMULATIVE REMEDIES. Subject to the express limitations set
forth in this Agreement, the remedies to which either Party may resort under
this Agreement are cumulative and are not intended to be exclusive of any other
remedies to which such Party may lawfully be entitled in the event of any breach
or threatened breach by the other Party of any provision of this Agreement.
25. 9. ENTIRE AGREEMENT. This Agreement, including all exhibits
and appendices hereto, together with the Conduit Lease, constitutes the entire
agreement between the Parties hereto pertaining to the subject matter thereof,
and the final, complete and exclusive expression of the terms and conditions
thereof. All prior agreements, representations, negotiations and understandings
of the Parties hereto, oral or written, express or implied, are hereby
superseded and merged herein.
25. 10. AMENDMENTS. No addition to or modification of any provision
contained in this Agreement shall be effective unless fully set forth in a
writing signed by Irvine and FirstWorld.
25. 11. PARTIAL INVALIDITY. If any term or provision of this
Agreement or the application of such term or provision to any Party or
circumstance shall to any extent be invalid or unenforceable, then the remainder
of this Agreement, or the application of such term or provision to Persons or
circumstances other than those as to which it is invalid or unenforceable, shall
not be affected by such invalidity or unenforceability, and each remaining term
and provision of this Agreement shall be valid and enforceable to the fullest
extent permitted by Applicable Law.
25. 12. SUCCESSORS. This Agreement shall bind and benefit Irvine
and FirstWorld and their successors and assigns, but the foregoing shall not
limit or supersede any transfer restrictions contained in this Agreement.
25. 13. GOVERNING LAW. This Agreement and its interpretation and
performance shall be governed, construed and regulated by the Applicable Law of
the State of California without regard to principles of conflict of Applicable
Law.
25. 14. COUNTERPARTS. This Agreement may be executed in one or more
duplicate counterparts and when signed by all of the Parties listed below shall
constitute a single binding agreement.
25. 15. TIME PERIODS. Whenever this Agreement requires either Party
to perform any action within a specified period, or requires that a particular
event occur within a specified period, if the last day of such period is not a
Business Day, then the period shall be deemed extended through the close of
business on the first Business Day following such period as initially specified.
This paragraph shall in no event delay or defer the effective date of any
License Fee adjustment or the commencement of any period with respect to which
interest on a payment shall accrue or the date for payment of any License Fee.
25. 16. WAIVERS. The consent by one Party to any act by another
Party shall not be deemed to imply consent, or waiver of the necessity of
obtaining such consent, for the
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same or any similar acts in the future. No waiver or consent shall be implied
from silence or from any failure of a Party to act, except as otherwise
specified in this Agreement.
25. 17. NEGATION OF PARTNERSHIP. The covenants, obligations and
liabilities of the Parties are intended to be several and not joint or
collective, and nothing herein contained shall ever be construed to create an
association, joint venture, trust or partnership, or to impose a trust or
partnership covenant, obligation or liability on or with regard to the Parties.
Each Party shall be individually responsible for its own covenants, obligations
and liabilities as herein provided. No Party shall be under the control of or
shall be deemed to control the other Party. No Party shall be the agent of or
have a right or power to bind the other Party without its express written
consent, except as expressly provided in this Agreement.
25. 18. ATTORNEYS' FEES. Each Party shall bear its own attorney's
fees incurred in relation to the negotiation and execution of this Agreement. In
the event of any action instituted between the Parties in connection with this
Agreement, the prevailing Party shall be entitled to recover from the losing
Party the prevailing Party's costs and expenses, including reasonable attorneys'
fees. The prevailing Party for the purpose of this paragraph shall be
determined by the trier of the facts.
25. 19. RELATIONSHIPS. Irvine and FirstWorld acknowledge and agree
that the relationship between them is solely that of independent contractors,
and nothing herein shall be construed to constitute the Parties as
employer/employee, partners, joint venturers, co-owners, or otherwise as
participants in a joint or common undertaking. Neither Party, nor its
employees, agents or representatives shall have any right, power or authority to
act or create any obligation, express or implied, on behalf of the other.
25. 20. NONDEDICATION OF FACILITIES. The Parties do not intend to
dedicate and nothing in this Agreement shall be construed as constituting a
dedication by FirstWorld of its properties or facilities, or any part thereof,
to Irvine or to any governmental entity or agency or to the customers of Irvine
or any third-party vendor of services delivered by the Networks, except as may
otherwise be expressly provided in this Agreement or the Conduit Lease with
regard to surrender of the Cable at the expiration of the term of the Conduit
Lease.
25. 21. FORCE MAJEURE. No Party shall be considered to be in
default in the performance of any of its obligations under this Agreement (other
than obligations of said Party to pay any monetary sums due hereunder) when a
failure of such performance shall be due to an Unavoidable Delay. Nothing
contained herein shall be construed so as to require any Party to settle any
strike or labor dispute in which it may be involved. Any Party rendered unable
to fulfill any of its obligations under this Agreement by reason of an
Unavoidable Delay shall give prompt written notice of such fact to the other
Party and shall exercise reasonable diligence to remove such inability with all
reasonable dispatch. If an Unavoidable Delay shall have occurred, the Parties
shall consult with one another as soon as practicable concerning the effect of
such delay upon their performance hereunder. In the event that any Party's
activity hereunder is delayed, curtailed or prevented by any Unavoidable Delay,
the time for carrying out the activity thereby affected shall be extended for a
period equal to the total number of days during which such causes
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or their effects were operative, and for such additional time, if any, as shall
be necessary to make good the time lost as a result of any Unavoidable Delay.
IN WITNESS WHEREOF, the Parties have executed this Agreement as of the
day and year first above written.
FIRSTWORLD ORANGE COAST,
a California corporation
By: /s/ Robert E. Randall
-------------------------------------
Name: Robert E. Randall
Title: Executive Vice President & Chief
Operating Officer
By: /s/ G. Bradford Saunders
-------------------------------------
Name: G. Bradford Saunders
Title: Senior Vice President
THE IRVINE COMPANY,
a Delaware corporation
By: /s/ Richard G. Sim
-------------------------------------
Richard G. Sim,
Executive Vice President
By: /s/ Clarence W. Barker
-------------------------------------
Clarence W. Barker, President
of Irvine Industrial Company, a
division of The Irvine Company
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Appendix 1
GLOSSARY OF DEFINED TERMS
<PAGE>
Appendix 1
GLOSSARY OF DEFINED TERMS
(LICENSE AGREEMENT)
"Addition Memorandum" means a memorandum in the form of APPENDIX 5
adding space within Additional Available Spectrum Conduit or Available Other
Conduit to the Leased Premises under the Conduit Lease, or Additional Buildings
to the License Agreement.
"Additional Areas" means other areas which Irvine may develop within
the cities of Irvine, Newport Beach and Tustin and within certain unincorporated
areas of the County of Orange.
"Additional Area Buildings" means any additional commercial,
industrial and retail buildings which Irvine owns and develops within those
Additional Areas as to which Available Other Conduit is added to the Leased
Premises in accordance with the terms and provisions of the Conduit Lease.
"Additional Available Spectrum Conduit" means additional multi-tube
telecommunications conduit located within the Additional Spectrum of
substantially similar capacity and configuration to the Existing Available
Spectrum Conduit, or such other configuration as may be required under the
Conduit Lease.
"Additional Buildings" means all of the Additional Spectrum Buildings,
the Additional Area Buildings and the Additional Other Buildings, to the extent
added to this Agreement pursuant to the terms and provisions hereof.
"Additional License Fee Base" shall have the meaning set forth in
Section 6.1 of the License Agreement.
"Additional Networks" means any Networks established by FirstWorld to
service any Additional Areas.
"Additional Other Buildings" means any additional commercial,
industrial and retail buildings which Irvine owns and which are now existing or
are hereafter constructed, and which are located in the State of California but
not in the Spectrum or any Additional Areas as to which space within Available
Other Conduit is added to the Leased Premises in accordance with the terms and
provisions of the Conduit Lease.
"Additional Spectrum" means additional areas which Irvine intends to
develop within or as part of the Irvine Spectrum as more particularly shown on
the map attached to the License Agreement as APPENDIX 3 or located adjacent to
the Existing Spectrum.
"Additional Spectrum Buildings" means any additional commercial,
industrial and retail buildings which Irvine develops and owns within the
Additional Spectrum.
"Adjusted Gross Combined Revenue" means Adjusted Gross Revenue plus,
for the relevant period, the remainder, if any, of the Other Building Gross
Revenues for the relevant
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period less the sum of the following for the same period, to the extent derived
from Customers occupying the applicable Additional Other Buildings or Users
providing services through FirstWorld or one or more of its Affiliates to the
applicable Additional Other Buildings: (i) Service Provider Payments; and (ii)
FirstWorld Consulting Revenues.
"Adjusted Gross Revenue" means, for the relevant period, the
remainder, if any, of the Gross Revenues for the relevant period less the sum of
the following for the same period (a) Third Party Building Access Payments paid
with regard to buildings in the Spectrum and any Additional Areas as to which
space in Available Other Conduit has been added to the Leased Premises in
accordance with the terms and provisions of the Conduit Lease; and (b) to the
extent derived from Customers occupying buildings within the Spectrum and any
such Additional Areas or from Users providing services through the Irvine
Networks to such buildings: (i) Service Provider Payments; and (ii) FirstWorld
Consulting Revenues.
"Affiliate" means, with respect to Irvine, FirstWorld or any other
Person, any other Person that directly or indirectly through one or more
intermediaries controls, is controlled by or is under common control with the
Person specified, or who holds or beneficially owns fifty percent (50%) or more
of the equity interest in the Person specified or fifty percent (50%) or more of
any class of voting securities of the Person specified.
"Affiliated Lender" means any Lender which is also an Affiliate of
FirstWorld.
"Agreement" means this License Agreement.
"Applicable Law" means any applicable law, statute, ordinance,
regulation, rule, notice requirement, court decision, agency guideline,
principle of law and order of any Governmental Authority, including, without
limitation, those related to energy, the environment, motor vehicle safety,
public utility, zoning, building and health codes, occupational safety and
health and laws respecting employment practices, employee documentation, terms
and conditions of employment, and wages and hours.
"Available Conduit" means the Available Spectrum Conduit together with
the Available Other Conduit.
"Available Other Conduit" means telecommunications conduit which
Irvine installs in Additional Areas and as to which space within the same is
added to the Leased Premises in accordance with the terms and provisions of the
Conduit Lease.
"Available Spectrum Conduit" means the Existing Available Spectrum
Conduit together with the Additional Available Spectrum Conduit to the extent
constructed from time to time.
"Basic Percentage Rent" shall have the meaning set forth in Section
4.2 of the Conduit Lease.
"Bonus Percentage Rent" shall have the meaning set forth in Section
4.3 of the Conduit Lease.
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"Buildings" means the Existing Spectrum Buildings together with any
Additional Buildings to the extent added to the License Agreement pursuant to
the terms thereof.
"Business Day" means any day which is not a Saturday, a Sunday or a
day on which national banks are obligated by law, regulation or executive order
to be closed.
"Cable" means all fiber optic cable installed in the Available Conduit
by or on behalf of FirstWorld or any of its Affiliates whether installed within
Conduit or extending into a building to be connected to Equipment located
therein.
"Certifying Party" shall have the meaning set forth in Article 24 of
this Agreement.
"City" means the City of Irvine, provided, however, that with regard
to any Additional Areas, the City shall mean the city within which the
applicable Additional Area is located, or if such Additional Area is in an
unincorporated area of a county, the county within which the same is located.
"Commencement Date" is defined in Article 3 of this Agreement.
"Condemnation" means any action in eminent domain, brought with regard
to the Leased Premises or any portion thereof, or with regard to any Building or
any portion thereof, by any Governmental Authority, or any conveyance to a
Governmental Authority in lieu of, or in settlement of, a pending or threatened
action in eminent domain.
"Conduit" means *** tubes being a portion of the Available Conduit
together with the pull boxes serving such tubes within which FirstWorld utilizes
space, and together with all additional conduit which may be installed by
FirstWorld within the Spectrum and within any Additional Areas (including
building entrance conduit systems), and any alterations, repairs, modifications
and improvements of any of the same, provided, however, that for those portions
of the Available Conduit which include more than *** tube, the Conduit shall
consist of: (a) where the Available Conduit includes *** tubes, *** tube and ***
tube and (b) wherever the Available Conduit includes *** tubes, *** tubes.
"Conduit Lease" means that certain Agreement For Lease of
Telecommunications Conduit made and entered into by and between Irvine and
FirstWorld and dated as of March 5, 1998.
"Confidential Information" means all information and documents which
either party furnishes to the other on or after the date of this Agreement,
which such party designates as proprietary or confidential or which is
Pre-Authorized Confidential Information not required to be so designated.
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"CPI" means the Consumer Price Index, All Urban Consumers, Subgroup
"All Items" for the Los Angeles-Anaheim-Riverside Region (Base Period 1993-95 =
100), which is currently being published monthly by the United States Department
of Labor, Bureau of Labor Statistics. If, however, the CPI is changed, revised
or discontinued for any reason, there shall be substituted in lieu thereof, and
the term "CPI" shall thereafter refer to, the most nearly comparable official
price index of the United States Government so as to obtain substantially the
same result as would have been obtained had the original CPI not been changed,
revised or discontinued, which alternative index shall be selected by Irvine and
shall be subject to FirstWorld's written approval.
"Customers" means any Person who subscribes with FirstWorld for
Network services as an end user (as opposed to Users who contract for access to
a Network in order to provide telecommunications services to their own
customers).
"Equipment" means switches, connectors, amplifiers, and other
equipment located in a building and not within the Conduit and required to
connect Cable to a building and/or provide telecommunications services to the
occupants thereof.
"Equipment Space" means a reasonable amount of equipment room space in
each Building, not to exceed 100 square feet, that is sufficient to enable
FirstWorld to install the Cable and Equipment needed by FirstWorld to deliver
the services described by this Agreement, which Equipment Space shall be in a
reasonable configuration taking into account the size and shape of the equipment
room in which the same will be located and the number of service providers
requiring space within such equipment room. Once Equipment is installed in any
Building, Equipment Space shall exclude equipment room space not utilized by
FirstWorld.
"Estoppel Certificate Request" shall have the meaning set forth in
Article 24 of this Agreement.
"Event of Default" shall have the meaning set forth in Section 13.1 of
this Agreement.
"Existing Available Spectrum Conduit" means a multi-tube
telecommunications conduit which Irvine has constructed within the Existing
Spectrum at the approximate locations shown on APPENDIX 4 attached to the
Conduit Lease.
"Existing Spectrum" means certain developed areas in the area commonly
referred to as the Irvine Spectrum and more particularly shown on the map
attached hereto as APPENDIX 2.
"Existing Spectrum Buildings" means the commercial, industrial and
retail buildings which are owned by Irvine within the Existing Spectrum and
which are listed on APPENDIX 3 attached to the License Agreement.
"Fair Market License Fee" shall have the meaning set forth in Section
6.1.4. of the License Agreement.
"Financing" means any mortgage financing, project financing,
refinancing or borrowing, or any sale and leaseback transaction in which
FirstWorld has the right to repurchase
5
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the Leased Premises, secured by a Financing Encumbrance, the proceeds of which
are utilized in whole or in part to finance the cost of the design,
construction, replacement, improvement, maintenance or operation of one or more
Irvine Networks.
"Financing Encumbrance" means any mortgage, deed of trust, assignment,
security agreement, pledge, financing statement, conveyance and lease (in the
case of a sale and leaseback transaction) or any other instrument(s) or
agreement(s) intended to grant security for any financing, that encumbers all of
the Leased Premises and FirstWorld's rights under the License Agreement and the
Conduit Lease (or any portion of the Leased Premises together with but not
separate from FirstWorld's rights under the License Agreement and the Conduit
Lease to the extent affecting Buildings and areas, respectively, served by the
portion of the Leased Premises encumbered by the applicable Financing
Encumbrance) (as well as such other assets or rights as may be encumbered by
such instruments) as the same may be renewed, modified, consolidated, amended,
extended or assigned from time to time.
"FirstWorld" means FirstWorld Orange Coast, a California corporation.
"FirstWorld Consulting Revenues" means payment for service related to
advice or other provision of consulting services which does not involve payment
for the transmission of information over a Network.
"FirstWorld Marks" shall have the meaning set forth in Section 19.1 of
the License Agreement.
"Fiscal Year" means the fiscal year of FirstWorld, ending on September
30, as the same may be changed from time to time.
"FWC" means FirstWorld Communications, Inc., a California corporation.
"Governmental Authority" means any national, state or local government
(whether domestic or foreign), any political subdivision thereof or any other
governmental, quasi-governmental, judicial, public or statutory instrumentality,
authority, body, agency, bureau or entity.
"Gross Revenues" means, for any period, all revenues received by
FirstWorld or any of its Affiliates, assignees or sublessees with respect to the
operation of the Irvine Networks during such period that are attributable to the
following derived from Customers occupying buildings within the Spectrum and any
Additional Areas, or from Users providing services through the Irvine Networks
to any Person in the Spectrum or any Additional Areas: (a) fees for access
rights and other services sold by FirstWorld to such Customers, (b) *** , (c)
*** , (d) the lease or re-sale of lines or circuit paths within the Irvine
Networks to Users to access customers of said Users, and (e) the lease to
Customers of Customer premises equipment which is not generally available and
which is required by FirstWorld as a condition of service.
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"Hazardous Materials" means all materials, substances and wastes,
variously designated as hazardous or toxic substances, materials or wastes
pursuant to all federal, state, and local laws, statutes, ordinances, rules and
regulations relating to the environment, including without limitation, the
federal Comprehensive Environmental Response Compensation and Liability Act, the
Resource Conservation and Recovery Act, the Superfund Amendment and
Reathorization Act and the California Health and Safety Code, and shall also
include, PCB's, asbestos, radon and fractions of petroleum, whether or not so
designated therein.
"Imposition" means the sum of all of the following to the extent
imposed on the Leased Premises, the Conduit, the Cable, the Irvine Networks, any
Equipment installed in connection therewith, or the services to be provided by
FirstWorld to Customers and Users; (i) all real estate taxes and assessments or
personal property taxes and assessments, as such property taxes may be assessed
or reassessed from time to time ; (ii) any and all other taxes, charges and
assessments which are levied with respect to this Agreement or to any of the
foregoing, other than general net income and franchise taxes of Irvine; (iv)
all charges, fees, taxes, surcharges or assessments of any kind or nature which
are in the future levied by any Governmental Authority, in lieu of, in addition
to or as a replacement for any other Imposition; and (iv) costs and expenses
incurred in contesting the amount or validity of any Imposition by appropriate
proceedings.
"Initial Installation Date" shall have the meaning set forth in
Section 2.10.1 of the Conduit Lease.
"Irvine" means The Irvine Company, a Delaware corporation.
"Irvine Marks" shall have the meaning set forth in Section 19.1 of the
License Agreement.
"Irvine Networks" means the Spectrum Network and any Additional
Networks.
"Irvine's Cure" shall have the meaning set forth in Section 12.4 of
this Agreement.
"Irvine's Cure Rights" shall have the meaning set forth in Section
12.4 of this Agreement.
"Leased Premises" means the space within the tubes of the Conduit
together with the non-exclusive right to use undivided space within the pull
boxes serving such tubes.
"Lender" means any Person(s), including bondholder(s), and any
Affiliate of FirstWorld providing Financing for the ownership, design,
construction, improvement, maintenance, replacement or operation of one or more
Networks or any matter related thereto, including, without limitation, any
trustee or collateral agent appointed by any such Lender to represent its
interests.
"Lender's Cure" shall have the meaning set forth in Section 11.4 of
this Agreement.
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"Lender's Cure Rights" shall have the meaning set forth in Section
11.4 of this Agreement.
"License Agreement" means that certain Telecommunications System
License Agreement dated as of March 5, 1998, by and between Irvine and
FirstWorld.
"License Fee" shall have the meaning set forth in Section 6.1 of the
License Agreement.
"Market Adjustment Date" shall have the meaning set forth in Section
6.1.4 of the License Agreement.
"Marks" means the FirstWorld Marks and the Irvine Marks.
"Memorandum of Lease" means a recordable memorandum of the Conduit
Lease in the form of APPENDIX 7 attached to the Conduit Lease to be executed
between the parties.
"Networks" means one or more neutral broadband fiber optic
telecommunications pathways which are available to all competing
telecommunication service providers for a fee on a non-discriminatory basis and
are inter-operable with an incumbent local telephone carrier, but excluding any
transport links between pathways and the applicable switching facility.
"Off Net" means that FirstWorld is providing service to the end user
over a third party's transport system.
"On Net" means that FirstWorld's Cable is connected to the applicable
building, and FirstWorld is providing service to the end user over such Cable.
"Other Building Gross Revenue" means, for any period, all revenues
received by FirstWorld or any of its Affiliates, assignees, or sublessees with
respect to services provided during such period that are attributable to the
following derived from Customers occupying Additional Other Buildings or Users
providing services to Persons occupying Additional Other Buildings: (a) fees for
access rights and other services sold by FirstWorld to such Customers, (b) *** ,
(c) *** , (d) the lease or re-sale of lines or circuit paths to Users to access
customers of said Users in such Additional Other Buildings, and (e) the lease to
Customers of Customer premises equipment which is not generally available and
which is required by FirstWorld as a condition of service.
"Party" means Irvine or FirstWorld as a party to this Agreement.
"Payment Date" means each May 15, August 15, November 15 and February
15, or the next succeeding Business Day if such date is not a Business Day.
"Permitted Assignee" shall have the meaning set forth in Section 11.1
of this Agreement.
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"Person" means any individual, corporation, partnership, limited
liability company, joint venture, association, joint-stock company, trust,
unincorporated organization, Governmental Authority or any agency or political
subdivision thereof or any other entity.
"Phasing Plan" means the plans showing the phasing for installation of
the Irvine Networks or portions thereof. The initial Phasing Plan for the
Network to be installed in the Existing Spectrum is attached to this Agreement
as APPENDIX 6. Additional Phasing Plans will be prepared for any Additional
Spectrum areas and for any Additional Areas, in accordance with the terms and
provisions of the Conduit Lease.
"Plans" shall have the meaning set forth in Section 8.1 of this
Agreement.
"Pre-Authorized Confidential Information" means Confidential
Information which pursuant to this Agreement is identified as Pre-Authorized
Confidential Information, and which shall be Confidential Information but need
not be so designated.
"Rent" means the sum of the Basic Percentage Rent and the Bonus
Percentage Rent.
"Requesting Party" shall have the meaning set forth in Article 24 of
this Agreement.
"Service Provider Payments" means all sums collected by FirstWorld or
any of its Affiliates, assignees or sublessees, on behalf of any Users or other
service providers.
"Serviced Buildings" means all buildings and other facilities within
both the Spectrum and such Additional Areas as may be incorporated into this
Agreement.
"Spectrum" means the Existing Spectrum together with the Additional
Spectrum to the extent developed from time to time.
"Spectrum Network" means the Network to be installed by FirstWorld
within the Spectrum. If FirstWorld elects to service the Spectrum with more
than one Network in accordance with terms and provisions of this Agreement, then
all such Networks shall collectively be the Spectrum Network.
"Spectrum Service Area" means the Existing Spectrum together with the
Additional Spectrum to the extent developed and added to the Conduit Lease from
time to time.
"Term" shall mean the period commencing on the Commencement Date and
continuing until December 31, 2027.
"Third Party Building Access Payments" means payments for access to
buildings for which FirstWorld does not have a right of entry pursuant to this
Agreement.
"Transfer" shall have the meaning set forth in Section 14.1 of this
Agreement.
9
<PAGE>
"Unavoidable Delay" means any cause beyond the reasonable control of
the party affected, including, without limitation, the following:
(a) Failures of or threats of failure of facilities, including
power failures and the failure of any component of a Network;
(b) Floods, earthquakes, tornadoes, storms, fires, lightning,
epidemics or other casualties;
(c) Acts of war, riots, civil disturbances or disobediences;
(d) Labor disputes, labor or material shortages (including the
inability to obtain Equipment necessary to provide service) or acts of sabotage;
(e) Restraint by court order or Governmental Authority;
(f) Any failure to obtain the necessary permits, authorizations
or approvals from any Governmental Authority not caused by the failure of a
Party to take the actions required of it to obtain the same; or
(g) The need to condemn or acquire property prior to performing
any act.
"Underground Agencies" means one or more underground utility
monitoring companies.
"Users" means any Person who contracts with FirstWorld for access to a
Network in order to provide telecommunications services to its own customers (as
opposed to Customers who contract with FirstWorld for Network services as end
users).
10
<PAGE>
APPENDIX 2
DEPICTION OF EXISTING SPECTRUM
THIS APPENDIX CONTAINS A MAP OF THE EXISTING SPECTRUM
(AS DEFINED)
<PAGE>
ADDITIONAL SPECTRUM
THIS APPENDIX CONTAINS A MAP OF THE ADDITIONAL SPECTRUM
(AS DEFINED)
<PAGE>
APPENDIX 4
EXISTING SPECTRUM BUILDINGS
<PAGE>
EXHIBIT 10.19
- ----------------------------------------------------------------------
INVESTMENT PROPERTIES GROUP
LIST OF SPECTRUM PROPERTIES
FOR FISCAL YEAR 96/97
- ----------------------------------------------------------------------
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Product # #
Project Name/Bldg Address City Type Bldgs Stories Sq Ft
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
IRVINE/ODG PHASE I (JV)
9351 Jeronimo Road IRV ISWH 1 2 103,602
9400-9420 Jeronimo Road IRV ISMT 1 1&2 168,314
9500 Jeronimo Road IRV ISMT 1 1 136,648
9560 Jeronimo Road IRV ISWH 1 1 49,043
457,607
ALTON/ADA (BLDG 1,2,3) (JV)
2 Ada Street (Bldg 3) IRV ISTS 1 2 51,431
31 Technology (Bldg 1) IRV ISFT 1 2 58,221
33 Technology (Bldg 2) IRV ISFT 1 2 75,766
185,418
9801 MUIRLANDS (ICL) (JV)
9801 Muirlands IRV ISMT 1 2 151,791
BAKE TECHNOLOGY PARK I
3 Parker IRV ISMT 1 2 46,394
9 Parker IRV ISFT 1 2 59,585
9775 Toledo IRV ISMT 1 2 96,398
9975 Toledo IRV ISMT 1 2 66,950
269,327
IRVINE/ODG BUSINESS PARK
9272 Jeronimo Road IRV ISMU 1 1 62,795
9292 Jeronimo Road IRV ISMT 1 2 51,485
9342 Jeronimo Road IRV ISMT 1 2 52,133
166,413
BAKE MINIWAREHOUSE
15401 Bake Parkway IRV ISOT 1 99,000
FAIRBANKS IND'L PARK
64 Fairbanks IRV ISWH 1 1 47,786
68 Fairbanks IRV ISWH 1 1 73,610
72 Fairbanks IRV ISWH 1 1 65,902
76 Fairbanks IRV ISWH 1 1 107,024
294,322
</TABLE>
SD_DOCS\94594.1 1
<PAGE>
- ----------------------------------------------------------------------
INVESTMENT PROPERTIES GROUP
LIST OF SPECTRUM PROPERTIES
FOR FISCAL YEAR 96/97
- ----------------------------------------------------------------------
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Product # #
Project Name/Bldg Address City Type Bldgs Stories Sq Ft
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
TECHNOLOGY PLAZA I (BLDG 8) (JV)
18 Technology Drive IRV ISMU 3 1&2 124,004
BARRANCA I (BLDG IO) (JV)
15345 Barranca Parkway IRV ISMT 1 2 81,450
TRIPOINTE
30 Fairbanks IRV ISMU 1 1 24,564
13900 Alton Parkway IRV ISMU 1 1 20,989
13844 Alton Parkway IRV ISMU 1 1 20,451
13766 Alton Parkway IRV ISMU 1 1 18,631
13700 Alton Parkway IRV ISMU 1 1 22,824
20 Fairbanks IRV ISTS 1 1 45,098
152,557
PARKER
29 Parker IRV ISFT 1 2 58,178
35 Parker IRV ISMT 1 2 23,632
39 Parker IRV ISMT 1 2 18,828
45 Parker IRV ISMT 1 2 39,579
140,217
JENNER BUSINESS PARK I
2 Jenner IRV ISFT 1 1 32,804
3 Jenner IRV ISFT 1 1 33,075
4 Jenner IRV ISFT 1 1 37,313
5 Jenner IRV ISFT 1 1 41,871
145,063
JERONIMO - 5 & 6
9600 Jeronimo Road IRV ISWH 1 2 32,518
9650 Jeronimo Road IRV ISMT 1 2 140,630
9700 Jeronimo Road IRV ISWH 1 2 40,004
213,152
SANDCANYON RV (BONNER)
1 Burroughs IRV ISOT 0 0
</TABLE>
SD_DOCS\94594.1 2
<PAGE>
- ----------------------------------------------------------------------
INVESTMENT PROPERTIES GROUP
LIST OF SPECTRUM PROPERTIES
FOR FISCAL YEAR 96/97
- ----------------------------------------------------------------------
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Product # #
Project Name/Bldg Address City Type Bldgs Stories Sq Ft
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BAKE TECHNOLOGY PARK II
2 Cromwell IRV ISMT 1 2 49,503
4 Cromwell IRV ISMT 1 2 55,703
6 Cromwell IRV ISMT 1 2 42,915
148,121
FREEWAY TECHNOLOGY PARK I
201 Technology Drive IRV ISFT 1 2 28,123
205 Technology Drive IRV ISFT 1 2 22,338
209 Technology Drive IRV ISFT 1 2 30,884
213 Technology Drive IRV ISFT 1 2 26,555
217 Technology Drive IRV ISFT 1 2 52,386
160,286
19 & 21 TECHNOLOGY
19 Technology Drive IRV ISFT 1 2 63,467
21 Technology Drive IRV ISFT 1 2 66,140
129,607
LAKEVIEW BUSINESS CENTER II
100 Technology Drive IRV ISTS 1 2 31,603
15350 Barranca Parkway IRV ISMT 1 2 45,300
15360 Barranca Parkway IRV ISTS 1 2 38,178
15370 Barranca Parkway IRV ISFT 1 2 47,039
80 Technology Drive IRV ISMT 1 2 67,940
230,060
TECHNOLOGY PLAZA II (BLDG 9)
16 Technology Drive IRV ISMU 4 1&2 120,123
BARRANCA II (BLDG 11) (JV)
15355 Barranca Parkway IRV ISFT 1 2 51,176
JENNER BUSINESS PARK II
1 Jenner IRV ISTS 1 2 30,636
6 Jenner IRV ISTS 1 2 30,243
60,879
</TABLE>
3
<PAGE>
- ----------------------------------------------------------------------
INVESTMENT PROPERTIES GROUP
LIST OF SPECTRUM PROPERTIES
FOR FISCAL YEAR 96/97
- ----------------------------------------------------------------------
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Product # #
Project Name/Bldg Address City Type Bldgs Stories Sq Ft
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
JENNER BUSINESS PARK III
10 Pasteur IRV ISFT 1 1 13,179
8 Pasteur IRV ISFT 1 1 32,745
45,924
ALTON/TECHNOLOGY (BLDG 6&7) (JV)
15326 Alton Parkway IRV ISTS 1 2 31,699
26 Technology Drive IRV ISTS 1 2 25,000
56,699
CORPORATE BUSINESS CTR I
175 Technology Drive IRV ISFT 1 2 39,985
173 Technology Drive IRV ISFT 1 2 62,034
102,019
CORPORATE BUSINESS CTR II
167 Technology Dr (bldg 3) IRV ISFT 1 32,580
165 Technology Dr (bldg 4) ISFT 1 43,920
163 Technology Dr (bldg 5) ISFT 1 43,920
120,420
ALCON
15800 Alton Parkway IRV ISMT 1 2 189,199
140 & 142 TECHNOLOGY (PCLS 6&7)
140 Technology Drive IRV ISMT 1 1 37,550
142 Technology Drive IRV ISMT 1 1 37,927
75,477
FREEWAY TECHNOLOGY PARK II
181 Technology Drive IRV ISFT 1 1 36,830
185 Technology Drive IRV ISFT 1 1 27,700
189 Technology Drive IRV ISFT 1 2 44,937
195 Technology Drive IRV ISFT 1 2 47,654
199 Technology Drive IRV ISFT 1 1 27,550
184,671
</TABLE>
SD_DOCS\94594.1 4
<PAGE>
- ----------------------------------------------------------------------
INVESTMENT PROPERTIES GROUP
LIST OF SPECTRUM PROPERTIES
FOR FISCAL YEAR 96/97
- ----------------------------------------------------------------------
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Product # #
Project Name/Bldg Address City Type Bldgs Stories Sq Ft
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
LAKEVIEW BUSINESS CENTER I
15320 Barranca Parkway IRV ISMT 1 2 48,142
15330 Barranca Parkway IRV ISMT 1 2 37,751
15340 Barranca Parkway IRV ISMT 1 2 20,271
50 Technology Drive IRV ISFT 1 2 55,872
56 Technology Drive IRV ISFT 1 2 71,054
60 Technology Drive IRV ISMT 1 2 21,015
254,105
9601 JERONIMO
9601 Jeronimo IRV ISFT 1 50,210
25-29 TECHNOLOGY (18-22)
25A Technology Drive IRV ISTS 1 2 28,640
25B Technology Drive IRV ISTS 1 2 33,003
27 Technology Drive IRV ISTS 1 2 45,362
29A Technology Drive IRV ISTS 1 2 32,847
29B Technology Drive IRV ISTS 1 2 28,670
168,522
ONE TECHNOLOGY PARK I
1 A Technology Drive IRV ISTS 1 2 23,252
1 B Technology Drive IRV ISMU 1 1 19,226
1 C Technology Drive IRV ISMU 1 1 21,913
1 D Technology Drive IRV ISMU 1 1 8,005
1 E Technology Drive IRV ISMU 1 1 8,005
1 F Technology Drive IRV ISMU 1 1 19,226
1 G Technology Drive IRV ISTS 1 2 23,252
1 H Technology Drive IRV ISTS 1 2 23,252
1 I Technology Drive IRV ISTS 1 2 23,252
1 J Technology Drive IRV ISTS 1 2 23,252
192,635
3 MORGAN
3 Morgan IRV ISFT 1 41,402
7 MORGAN
7 Morgan IRV ISFT 1 39,723
</TABLE>
SD_DOCS\94594.1 5
<PAGE>
- ----------------------------------------------------------------------
INVESTMENT PROPERTIES GROUP
LIST OF SPECTRUM PROPERTIES
FOR FISCAL YEAR 96/97
- ----------------------------------------------------------------------
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Product # #
Project Name/Bldg Address City Type Bldgs Stories Sq Ft
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
152 TECHNOLOGY
152 Technology IRV ISMT 1 29,192
IRVINE ENTERTAINMENT CENTER (PHASE 1)
31 Fortuna Drive IRV RSOT 229,898
AT&T
8001 Irvine Center Drive IRV OSHR 1 14 306,444
WESTERN DIGITAL
8105 Irvine Center Drive IRV OSHR 1 14 357,922
TOTAL SPECTRUM AREA: 107 5,825,035
=== =========
PRODUCT TYPE CODES:
1ST CHARACTER: 2ND CHARACTER: 3RD CHARACTER:
I = Industrial N = Newport MT = Mid Tech
O = Office A = Airport FT = Flex Tech
R = Retail S = Spectrum TS = Two Story
D = San Diego MU = Multi
L = Los Angeles WH = Warehouse
B = Sunnyvale (Bay area) OT = Other
O = Other
</TABLE>
6
<PAGE>
APPENDIX 5
ADDITION MEMORANDUM
<PAGE>
ADDITION MEMORANDUM NO.
(LICENSE AGREEMENT)
THIS ADDITION MEMORANDUM is dated as of _______________, _____________, and
made by and between THE IRVINE COMPANY, a Delaware corporation ("Irvine"), and
FIRSTWORLD ORANGE COAST, a California corporation ("FirstWorld").
A. Prior to the date hereof, Irvine and FirstWorld have entered into that
certain TELECOMMUNICATIONS SYSTEM LICENSE AGREEMENT dated as of ___________,
1998, (the "License Agreement") providing for, among other things, FirstWorld to
have a License to construct, install, maintain, operate, use, repair, replace,
augment and remove, Cable and associated Equipment in certain buildings as more
particularly set forth in the License Agreement.
B. Irvine now desires to grant a License to an Additional Building(s) in
accordance with the terms, provisions and conditions of the License Agreement.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Parties hereto agree as
follows:
1. DEFINITIONS. Capitalized terms used in this Addition Memorandum and
not otherwise defined herein shall have the meaning given to them in the License
Agreement.
2. ADDITIONAL BUILDING. Pursuant to the provisions of Article 2 of the
License Agreement, effective as of _____________, _________, (the "Effective
Date") the Additional Building(s) identified in Exhibit A attached hereto and
incorporated herein by this reference are added to the License Agreement, which
Additional Building(s) contain the gross square footage shown on Exhibit A.
3. ADJUSTMENT TO LICENSE FEE. As a result of the addition of the
Additional Building(s) shown on Exhibit A, the License Fee is hereby increased
as of the Effective Date by the sum of $________, which increase is equal to the
sum of the gross square footage of the Additional Building(s) identified on
Exhibit A of ______________ [sq. ft.] times the Additional License Fee Base of
$_____ per gross square foot (which Additional License Fee Base has been
adjusted pursuant to Section 6.1.3 of the License Agreement for the increase in
the CPI for the relevant period). As a result of such increase, effective as of
the Effective Date, the current quarterly License Fee shall be $____________.
Appendix 5
Page 1 of 2
<PAGE>
4. FORCE AND EFFECT. Except for the addition of the Additional
Building(s) and the adjustment of the License Fee in accordance with the
provisions of this Addition Memorandum, the License Agreement shall remain
unmodified and in full force and effect.
IN WITNESS WHEREOF, the Parties have executed this Addition Memorandum as
of the day and year first above written.
FIRSTWORLD ORANGE COAST,
a California corporation
By:
---------------------------
Name:
-------------------------
Title:
------------------------
By:
---------------------------
Name:
-------------------------
Title:
------------------------
THE IRVINE COMPANY,
a Delaware corporation
By:
---------------------------
Name:
-------------------------
Title:
------------------------
By:
---------------------------
Name:
-------------------------
Title:
------------------------
Appendix 5
Page 2 of 2
<PAGE>
APPENDIX 6
PHASING PLAN
THIS APPENDIX CONTAINS A COLOR CODED MAP OF THE AREA IN WHICH
THE COMPANY'S FACILITIES ARE TO BE CONSTRUCTED AND INDICATES
WHICH AREAS MUST BE COMPLETED AT VARIOUS TIMES
<PAGE>
APPENDIX 7
WAIVER AND RELEASE
<PAGE>
WAIVER AND RELEASE
The undersigned ("Tenant"), as a tenant in the building ("Building")
located at ________________________, desires to utilize telecommunications
services to be provided by _________________ ("PROVIDER"). Tenant acknowledges
that the services of Provider will be furnished over a cable distribution system
installed in the Building by Provider, and that in the future Provider may be
required to make use of a building riser and distribution cabling system should
the Building owner/Tenant's landlord ("Landlord") so elect. The agreement
between Tenant and Provider limits Provider's liability to Tenant and its
successors and assigns in various respects. In consideration of Landlord's
permitting Provider to provide services to Tenant, Tenant executes this
instrument to acknowledge that in no event shall Landlord, its mortgagees and
property manager, and each of their respective partners, directors, officers,
employees and agents ("RELEASED PARTIES") be liable to Tenant for direct,
indirect, consequential, special, incidental, actual, punitive or any other
damages, or for any lost profits of any kind or nature whatsoever, arising out
of mistakes, accidents, errors, omissions, interruptions or defects in
transmission, or delays, including those which may be caused by regulatory or
judicial authorities, in connection with the services and/or equipment to be
provided by Provider, or the obligations of Provider pursuant to its agreement
with Tenant, REGARDLESS OF WHETHER SAME IS CAUSED BY THE NEGLIGENCE OR SOLE
NEGLIGENCE OF A RELEASED PARTY, and agrees that Provider is the only Party
against which it will seek any form of damages or relief in any claim or action
related to the services contemplated to be provided by Provider. Tenant waives
and releases all rights and remedies against the Released Parties that are
inconsistent with the foregoing. It is understood that each Released Party
shall rely upon, and is an intended third party beneficiary of, this instrument.
This agreement shall be binding upon Tenant and its successors and assigns
and shall be governed by the laws of the state in which the Building is located.
TENANT:
By:
---------------------------
Name:
-------------------------
Title:
------------------------
<PAGE>
OFFICE LEASE
FOR
GENESEE EXECUTIVE PLAZA
This Lease is dated as of September 4, 1996, by and between TALCOTT REALTY I
LIMITED PARTNERSHIP, a Connecticut limited partnership, having an office at
Hartford, Connecticut (Landlord), and SPECTRANET INTERNATIONAL, INC., a
California corporation, having an office at San Diego, California (Tenant).
I. DEMISE OF PREMISES
Landlord hereby leases to Tenant and Tenant leases from Landlord the Premises
located in the Building, together with the nonexclusive right to use, in common
with Landlord and others, the following portions of the Building and Land: the
entrance foyer and lobby; the corridors and lavatories on the floor on which the
Premises are situated; the stairways, elevators, shipping and receiving areas;
and exterior sidewalks and driveways; subject to this Lease and the provisions
of a certain Declaration of Restrictions, dated January 21, 1957, as amended.
II. SUMMARY OF TERMS
As used in this Lease, the following terms shall have the following meanings:
A. PREMISES: That part of the Building outlined on the attached Plan
showing the Premises, called Suite 200, on the 2nd floor of the Building,
including all tenant improvements made by Landlord pursuant to the
attached Work Letter.
1. Subject to Section II.A.2 of this Lease, until the end of the 6th
month of the second Lease Year, if, at the date of any notice required
herein, this Lease shall be in full force and effect and Tenant named
herein shall be in occupancy of the entire Premises and shall not be in
monetary default of this Lease, Tenant may lease all of the space in
Suites B and C of the Building, designated "Suite B and Suite C" on the
Plan showing the Premises for a term to expire at the Termination Date.
If Tenant desires to exercise this option, it must do so by giving
Landlord notice of exercise not later than the last day of the 6th month
of the second Lease Year, which notice shall include the commencement
date for Suites B and C (which shall not be less than 30 days and not
more than 90 days after Tenant's notice of exercise). If Tenant
exercises this option, the parties shall enter into an amendment to this
Lease incorporating Suites B and C as part of the Premises upon the same
provisions as this Lease, except as follows:
(a) If Tenant exercises this option prior to the first day of the
10th month of the first Lease Year, the Base Rent for Suites B and C
shall be at the same rental rates per rentable square foot as the
Premises, subject to increases at the same times as set forth in Sections
II.J.&K., and the tenant improvement allowance per usable square foot of
Suites B and C shall be an amount up to the product of: (1) $5.00,
multiplied by (2) a fraction, the numerator of which is the number of
months remaining in the Term on the commencement date of the lease of
Suites B and C, and
<PAGE>
-2-
the denominator of which is 36. Tenant's Proportionate Share and the
total number of Parking Spaces shall be increased pro rata.
(b) If Tenant exercises this option after the last day of the 9th
month of the first Lease Year, the Base Rent and tenant improvement
allowance for Suites B and C shall be at the market rate for the Building
then being offered by Landlord for like space and for such a term (Market
Rate). Tenant's Proportionate Share and the total number of Parking
Spaces shall be increased pro rata. Within 15 days after Landlord's
receipt of Tenant's notice to exercise this option, Landlord shall
deliver to Tenant a notice setting forth the Market Rate for Suites B and
C (Market Rate Notice). Tenant shall approve or disapprove the Market
Rate within 5 business days after Tenant's receipt of the Market Rate
Notice (Approval Period). If Tenant fails to approve the Market Rate
within the Approval Period (either by notice of disapproval or by failing
to give any such notice), then this option shall be void and Tenant shall
have no further option to lease Suites B and C.
(c) Within 30 days after Landlord's receipt of notice pursuant to
Section II.A.1(a) or within 30 days after Tenant's approval of the Market
Rate pursuant to Section II.A.1(b), as the case may be, the parties shall
execute an agreement in form reasonably satisfactory to both, modifying
the Base Rent, the Monthly Installments of Base Rent, Tenant's
Proportionate Share, Parking Spaces and all other relevant matters. If
Tenant fails to enter into an amendment to this Lease in accordance with
this Section, Tenant shall have no further right to lease Suites B and C
and Landlord may contract with any party with respect thereto without any
further obligation to Tenant.
2. (a) So long as Tenant has not exercised its option as set forth in
Section II.A.1., then until the end of the 6th month of the second Lease
Year, if, at the date of any notice required herein, this Lease shall be
in full force and effect and Tenant named herein shall be in occupancy of
the entire Premises and shall not be in monetary default of this Lease,
Landlord shall, at such time as Landlord receives a lease proposal
acceptable to it from a bona fide prospective tenant (Proposal) for any
portion (or all) of the space in Suites B and C (the space delineated in
the Proposal is referred to as Refusal Space), notify Tenant of the
Proposal (Landlord's Notice). Notwithstanding the foregoing: (1) if the
space delineated in the Proposal does not include any portion of Suite B,
then the Refusal Space shall be deemed to include all of Suite B and (2)
Tenant's right of first refusal under this Section shall not extend to
any offer by Landlord to extend or renew the lease of any other tenant of
the Building.
(b) If Tenant receives Landlord's Notice prior to the 1st day of the
10th month of the first Lease Year, Tenant may lease all of the Refusal
Space at the same rates and upon the same terms as are contained in this
Lease (including the same rental rates per rentable square foot as the
Premises, subject to increases at the same times as set forth in Sections
II.J.&K., and for a term to expire at the Termination Date), provided,
however, that the tenant improvement allowance per usable square foot of
the Refusal Space shall be an amount up to the product of: (1) $5.00,
multiplied by (2) a fraction, the numerator of which is the number of
months remaining in the Term on the commencement date of the lease of the
Refusal Space, and the denominator of which is 36. The Tenant's
Proportionate Share and the total number of Parking Spaces shall be
increased pro rata. If Tenant receives Landlord's Notice after the last
day of the 9th month
<PAGE>
-3-
of the first Lease Year, Tenant may lease all of the Refusal Space upon
the terms contained in the Proposal (without regard to any of the terms
of this Lease).
(c) Tenant shall exercise this option by giving Landlord notice of
exercise within 5 business days after receipt of Landlord's Notice.
Promptly after Tenant exercises this option (but in no event later than
30 days after Landlord's Notice), the parties shall enter into a
supplemental agreement to this Lease incorporating the Refusal Space as
part of the Premises or, at Landlord's option, a separate lease
agreement. If the Proposal is deemed to include all of Suite B in
accordance with this Section II.A.2. because the Proposal does not
include any portion of Suite B, the Proposal shall be deemed to extend to
Suite B at the same rates as are included in the Proposal. Anything in
Section II.A.1 or this Section II.A.2. to the contrary notwithstanding,
this option shall terminate with regard to the Refusal Space if Tenant
fails to exercise this option or enter into an amendment to this Lease in
accordance with this Section, and upon such termination, Tenant shall
have no further right to lease the Refusal Space and Landlord may
contract with any party with respect thereto without any further
obligation to Tenant, provided that if Landlord fails to enter into a
lease with the tenant from whom Landlord received the Proposal for the
Refusal Space on terms not more favorable to that tenant than those
described in the Proposal, this option shall again be applicable to such
space.
B. BUILDING: The building on the Land, having an address of 9333/9339
Genesee Avenue, San Diego, California 92121, as shown on the attached
Land and Building Plan.
C. LAND: The real property shown on the Land and Building Plan.
D. OFFICE PARK: If indicated on the Land and Building Plan, the office
park, including land and buildings, of which the Land and Building are a
part.
E. BUILDING MANAGER: Koll, The Real Estate Services Company, 9333 Genesee
Avenue, Suite 140, San Diego, California 92121, or such other person as
Landlord may designate.
F. COMMENCEMENT DATE: The later of October 1, 1996 (the Expected
Commencement Date), or that date on which the Premises are substantially
completed pursuant to Section 1 of the Lease.
G. TERMINATION DATE: The last day of the 3rd Lease Year, unless extended as
provided in this Lease.
If, at the date of any notice required herein, this Lease shall be in
full force and effect and if Tenant named herein shall occupy the entire
Premises and shall not be in monetary default of this Lease, Tenant may
extend the Term for an additional term of 2 years. The Base Rent during
such extended Term shall be the greater of: (1) the Base Rent in effect
for the third Lease Year (Fixed Rate) or (2) the market rate for the
Building then being offered by Landlord for like space and for such an
extended term (Market Rate). No allowance shall be provided to Tenant
for improvements to the Premises; for purposes of determining the Base
Rent for the extended Term, however, the market rate shall be deemed to
include a standard tenant improvement allowance. Tenant shall be
responsible for any commission or fee due to any broker or other agent
employed by Tenant. If Tenant desires to exercise this option to extend
the Term, it must
<PAGE>
-4-
give Landlord notice of exercise (Extension Notice) not earlier than
the 1st day of the 4th month of the 3rd Lease Year and not later than
the last day of the 6th month of the 3rd Lease Year (Extension Notice
Window). If Tenant fails to deliver the Extension Notice during the
Extension Notice Window, then this option shall be void and Tenant
shall have no further option to extend the Term. If Tenant delivers the
Extension Notice during the Extension Notice Window, Landlord shall
determine the Market Rate and shall deliver to Tenant an notice setting
forth the Market Rate for the extended Term (Market Rate Notice). If
the Market Rate is less than or equal to the Fixed Rate, the Base Rent
for the extended Term shall be at the Fixed Rate and the parties shall
execute an agreement within 30 days after the Market Rate Notice, in
form reasonably satisfactory to both, modifying the Termination Date,
the Base Rent, the Monthly Installments of Base Rent and all other
relevant matters. If the Market Rate is greater than the Fixed Rate,
then Tenant shall approve or disapprove the Market Rate within 10
business days after Tenant's receipt of the Market Rate Notice
(Approval Period). If Tenant fails to approve the Market Rate within
the Approval Period (either by notice of disapproval or by failing to
give any such notice), then this option shall be void and Tenant shall
have no further option to extend the Term. If Tenant approves the
Market Rate within the Approval Period (by notice to Landlord), the
Base Rent for the extended Term shall be at the Market Rate and the
parties shall execute a lease amendment within 30 days after Landlord's
receipt of Tenant's notice of approval, in form reasonably satisfactory
to both, modifying the Termination Date, the Base Rent, the Monthly
Installments of Base Rent and all other relevant matters. Tenant's
occupancy during the extended Term shall be governed by the same
provisions of this Lease, except as otherwise provided in this Section
and Tenant shall have no further option to extend the Term. Anything in
this Section to the contrary notwithstanding, Tenant's option to extend
the Term is subject to the expansion rights or requests of prospective
tenants or tenants in the Building whose proportionate share would be
or is greater than Tenant's at the date of any notice required herein.
H. LEASE YEAR: A 12 month period, the first of which shall commence on the
Commencement Date if it is the first day of a month, otherwise, on the
first day of the month next following the Commencement Date, and each
subsequent Lease Year shall begin on successive anniversaries of the
commencement of the first Lease Year.
I. TERM: A period commencing on the Commencement Date and expiring at
midnight on the Termination Date, unless sooner terminated as provided in
this Lease.
J.&K. BASE RENT AND MONTHLY INSTALLMENTS OF BASE RENT:
<TABLE>
<CAPTION>
Base Rent Per
Base Rent Monthly Installments Annum Per
Lease Year Per Annum of Base Rent Per RSF
- ---------- --------- ------------ -------
<S> <C> <C> <C>
1 $216,262.20 $18,021.85 $18.60
2 223,238.40 18,603.20 19.20
3 230,214.60 19,184.55 19.80
</TABLE>
<PAGE>
-5-
Tenant shall pay Landlord $18,021.85 upon Tenant's execution of this
Lease, which sum shall be credited against the Base Rent first coming due
hereunder, until such credit is exhausted. This sum shall not be deemed
to be part of the Security Deposit.
L. TENANT'S PROPORTIONATE SHARE: 7.44 percent.
M. BASE YEAR: The calendar year of 1996.
N. Intentionally omitted.
O. SECURITY DEPOSIT: $68,661.85 So long as this Lease shall be in
full force and effect and Tenant shall not be in monetary default of this
Lease, then an amount equal to $16,880.00 shall be credited against the
Base Rent becoming due and payable under the Lease for the 3rd, 9th and
11th months of the 1st Lease Year, and the Security Deposit shall be
deemed reduced by a like amount. In no event shall the Security Deposit
be reduced to less than $18,021.85. For purposes of restoration under
Section 24 of the General Terms, Covenants and Conditions, the Security
Deposit shall be deemed to be $18,021.85 and Tenant shall not be required
to restore any amounts which would result in a Security Deposit held by
Landlord in excess of $18,021.85.
P. LANDLORD'S MAILING ADDRESS:
100 Pearl Street, Hartford, Connecticut 06103.
Q. TENANT'S MAILING ADDRESS:
Prior to Commencement Date: 6650 Lusk Boulevard, Suite B-100, San Diego,
California 92121.
As of Commencement Date: The Premises.
R. NORMAL BUSINESS HOURS: The hours from 8:00 a.m. to 6:00 p.m. Monday
through Friday and 8:00 a.m. to 1:00 p.m. on Saturday, except recognized
holidays.
S. STATE: The State of California.
T. PARKING SPACES: Tenant shall be entitled to the nonexclusive use in
common with Landlord and others of 42 unreserved spaces (Unreserved
Spaces), the exclusive use of 2 covered, reserved spaces (Covered
Spaces), and the exclusive use of 2 additional covered, reserved spaces
(Additional Spaces) in the parking facility which is shown on the Land
and Building Plan. Landlord shall have no responsibility for policing
the use of the reserved spaces.
U. PARKING FEE: Initially $-0- per Unreserved Space per month, $-0- per
Covered Space per month and $50.00 per Additional Space per month.
Anything in Section 28(b) to the contrary notwithstanding, during the
initial Term the Parking Fee shall not be changed except for such amounts
as may be charged by a governmental authority as provided in Section
28(b).
V. BROKER: CB Commercial Inc.
<PAGE>
-6-
W. PERMITTED USE (in addition to general office purposes): None.
X. TENANT'S REPRESENTATIVES: Tenant's employees, agents, contractors,
licensees and invitees.
III. ATTACHMENTS
If the attachments listed below conflict with the Summary of Terms, the Summary
of Terms shall prevail. The attachments listed below are incorporated in this
Lease and are to be constructed as part hereof:
1. General Terms, Covenants and Conditions
2. Plan showing the Premises
3. Land and Building Plan
4. Rules and Regulations
5. Expense Escalation
6. Work Letter
7. Space Plans
8. Additional Terms
9. Form of Nondisturbance Agreement
IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease or
caused it to be executed.
LANDLORD: TENANT:
TALCOTT REALTY I LIMITED SPECTRANET INTERNATIONAL,
PARTNERSHIP INC.
By Talcott Equities Limited Partnership By /s/ Robert E. Randall
Its Managing General Partner -------------------------------
By Talcott Corporation Robert E. Randall
Its General Partner -------------------------------
[Print Name]
Its COO EXEC VP
-----------------------------
[Title]
By /s/ John E. Reynolds
- -----------------------------------
JOHN E. REYNOLDS /s/ Renny E. Senn
SENIOR VICE PRESIDENT Renney E. Senn
CEO
<PAGE>
ATTACHMENT 1
GENERAL TERMS, COVENANTS AND CONDITIONS
1. COMMENCEMENT OF TERM.
(a) The Premises shall be deemed substantially completed upon the
issuance of a certificate of substantial completion by Landlord's architect or a
certificate of occupancy by the local building authority, notwithstanding that
minor or insubstantial details of construction, mechanical adjustment or
decoration remain to be performed. If the substantial completion of the Premises
by Landlord is delayed in any way by Tenant or Tenant's Representatives, the
Premises shall be deemed substantially completed for purposes of this Section on
the date when they would have been substantially completed but for such delay.
(b) Tenant's taking possession of the Premises shall be conclusive
evidence that the Premises were in good order, condition and repair when Tenant
took possession, except for those matters (for which Landlord is responsible as
provided in this Lease) of which Tenant gives Landlord notice within 10 days
after taking possession. Landlord shall complete or repair such matters as soon
as reasonably possible.
(c) If Landlord is unable to deliver possession of the Premises to
Tenant within 180 days after the Expected Commencement Date (the Outside
Commencement Date), then Tenant, as its sole remedy, may terminate this Lease by
notice to Landlord given within 10 days after the Outside Commencement Date. The
Outside Commencement Date shall be extended by the period of any delay described
in Section 1(a). Landlord shall not be liable to Tenant or any third party for
its failure to deliver possession of the Premises to Tenant. If the Commencement
Date does not occur within one year after the Expected Commencement Date, this
Lease shall terminate and Landlord and Tenant shall have no further obligations
to the other, except as may otherwise be provided in this Lease.
(d) After the Commencement Date has been determined, Landlord and
Tenant shall execute a supplemental agreement specifying the Commencement Date,
Termination Date and such other information as Landlord shall reasonably
require.
2. RENT.
Tenant shall pay Monthly Installments of Base Rent in advance on the
first day of each month of the Term. Monthly Installments of Base Rent for any
partial month (including any partial month prior to the first Lease Year) shall
be prorated on a per diem basis. All costs and expenses which Tenant assumes or
agrees to pay and any other sum payable by Tenant pursuant to this Lease shall
be deemed additional rent (together with Base Rent referred to as the Rent). The
Rent shall be paid in lawful money of the United States of America to the
Building Manager or to such other person or at such other place as Landlord may
from time to time designate, without any prior notice or demand therefor and
without deduction or offset.
3. LATE PAYMENT.
If any part of the Rent is not paid within 5 days after it is due,
Tenant shall pay Landlord (a) an administrative fee of 5 percent of the amount
due, and (b) interest on the amount due from its due date until paid at the
lesser of 12 percent per annum or the maximum rate which Landlord may lawfully
charge Tenant.
4. USE OF THE PREMISES.
Tenant shall use the Premises only for general office purposes and the
Permitted Use (if any) and all other uses or purposes are prohibited. Tenant
shall not commit waste in the Premises and shall not store, dispose or generate
any hazardous materials (except as is customary for an office use) or permit
anything to be done in the Premises which causes injury to persons or to the
Building, impairs the economic maintenance and operation of the Building, or
interferes with or inconveniences other tenants or occupants of the Building.
5. RULES AND REGULATIONS.
Tenant shall comply with and cause Tenant's Representatives to comply
with the attached Rules and Regulations and with such reasonable modifications
and additions as Landlord may from time to time make. Landlord shall not be
responsible for the violation of the Rules and Regulations by others.
6. SERVICES.
(a) Landlord shall furnish the following services (Normal Services):
elevator service (if the Building is equipped with elevators) for use in common
with the occupants of the Building; standard janitorial and cleaning services
to the Premises and common areas of the Building; domestic water in reasonable
quantities to the common areas (and the Premises, if required by this Lease);
electricity for lighting the Premises and the operation of ordinary office
equipment, but not in excess of that usually required for general office use
during Normal Business Hours;
<PAGE>
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and climate control to the Premises during Normal Business Hours as reasonably
required for the comfortable use of the Premises.
(b) If any utilities or services are specially or exclusively supplied
to Tenant or the Premises (Special Services), Tenant shall pay the cost of
the Special Services to Landlord or the applicable utility company, as required.
(c) To enable Landlord to fulfill its service obligations, Tenant
shall comply with the conditions of occupancy and connected electrical load
reasonably established by Landlord for the Building. Tenant shall not use
utilities or other services in excess of Normal Services or in a manner which
exceeds or interferes with any Building systems or Landlord's ability to provide
services to other tenants in the Building. To avoid possible adverse effects
upon the Building's electrical and mechanical systems, Tenant shall not, without
Landlord's prior consent in each instance (which shall not be unreasonably
withheld), connect air conditioning equipment, computers, appliances, heavy duty
equipment or other similar electrical equipment (High Usage Equipment) to the
Building's electrical system. Landlord may survey Tenant's use of services from
time to time. Tenant shall pay Landlord all costs arising out of any excess use
or the connection of High Usage Equipment, including the cost of all repairs and
alterations to the Building's mechanical and electrical systems (including the
installation of meters) and the cost of the additional electricity made
available to Tenant, if any. Tenant shall pay such costs within 10 days of
Landlord's demand therefor and as periodically billed to Tenant thereafter.
(d) Landlord does not warrant that the services supplied by Landlord
will be free from interruption. Any interruption or discontinuance of service
shall not be deemed an eviction or disturbance of Tenant's use or possession of
the Premises, or any part thereof, nor render Landlord liable to Tenant for
damages by abatement of Rent or otherwise, nor relieve Tenant from performance
of Tenant's obligations under this Lease. Landlord shall, however, exercise
reasonable diligence to restore any service so interrupted.
7. REPAIRS AND MAINTENANCE.
Tenant shall keep the Premises in good order and condition. Tenant shall
give Landlord prompt notice of any damage to or defective condition in the
Building. Except as provided in Sections 1, 6 and 8, Tenant shall be responsible
for all repairs, replacements and alterations in and to the Premises. Landlord
shall repair, replace and maintain those other portions of the Building which do
not constitute a part of the Premises and are not leased to others (except as
provided in Section 11). All repairs, replacements and maintenance shall be
performed with reasonable promptness and in a good and workmanlike manner.
8. ALTERATIONS.
(a) Alterations to the Premises shall not be made without the prior
consent of Landlord, which shall not be unreasonably withheld. Unless Landlord
permits Tenant to make approved alterations (which permission may be withheld in
Landlord's sole discretion), alterations shall be made by Landlord and Tenant
shall pay Landlord the cost thereof plus 15 percent for Landlord's overhead and
profit within 10 days of Landlord's demand. If Tenant is permitted to make
alterations, the work shall be done in accordance with such requirements as
Landlord may reasonably impose. Any review or approval by Landlord of plans or
specifications with respect to any alteration is solely for Landlord's benefit,
and without any representation or warranty whatsoever to Tenant with respect to
the adequacy, correctness or efficiency thereof. If required by Landlord,
alterations shall be removed by Tenant upon the termination of the Term and
Tenant shall at its expense repair any damage to the Premises or the Building
caused by the removal.
(b) Tenant shall indemnify and defend Landlord for, from and against
any and all mechanics' and other liens and encumbrances filed by any person
claiming through or under Tenant and against all costs, expenses, losses and
liabilities (including reasonable attorneys' fees) incurred by Landlord in
connection with any such lien or encumbrance or any action or proceeding
brought thereon. Tenant at its expense shall procure the discharge of record
of all such liens and encumbrances within 20 days after notice thereof.
9. INSURANCE.
Tenant shall at its expense maintain property insurance on Tenant's
property and above-standard leasehold improvements and comprehensive general
liability insurance in such amounts as Tenant determines in its reasonable
judgment. All such insurance shall be issued by insurers authorized to do
business in the State, shall name Landlord as an additional insured or shall
contain appropriate endorsements denying Tenant's insurers the right of
subrogation against Landlord. Tenant shall, upon request, furnish Landlord
with certificates evidencing such insurance coverages. If during the Term
insurance premiums on any insurance policy carried by Landlord on the
Building or the Premises are increased due to or resulting from Tenant's
occupancy hereunder, Tenant shall pay to Landlord as additional rent
<PAGE>
-3-
the amount of the increase in insurance premiums within 10 days after Landlord's
demand (accompanied by reasonable evidence of the increase).
10. INDEMNIFICATION.
Tenant shall indemnify and defend Landlord for, from and against all
claims, expenses, liabilities and losses (other than those for which
liability is waived by express provision in this Lease), including reasonable
attorneys' fees, resulting from any injury in or upon the Land or Building to
property or persons due to any negligence of Tenant or Tenant's
Representatives or resulting from Tenant's failure to comply with the Laws
(as provided in Section 11). Landlord shall indemnify and defend Tenant for,
from and against all claims, expenses, liabilities and losses (other than
those for which liability is waived by express provision in this Lease),
including reasonable attorneys' fees, resulting from any injury in or upon
the Land or the Building to property or persons due to any negligence of
Landlord, its agents, employees or contractors or resulting from Landlord's
failure to comply with the Laws (as provided in Section 11). Anything in this
Lease to the contrary notwithstanding, Landlord and Tenant each waive any
claims (except claims arising under Section 11) that either of them may have
against the other for any damage or injury to property caused by the other's
negligence, including the Premises and the Building, arising from a peril
coverable by fire or extended coverage insurance, whether or not caused by
the other, or its agents, employees or contractors. Neither party shall in
any event (except as provided in Sections 13 and 23) be liable to the other
for indirect or consequential damages for any breach of this Lease. The
provisions of this Section shall survive the termination or expiration of
this Lease.
11. OBSERVANCE OF LAWS.
Tenant shall at its expense comply with all laws, including the
requirements and regulations of any governmental authority having
jurisdiction (collectively, the Laws), including those which relate to: (a)
the partitioning, equipment operation, alteration, occupancy and use of the
Premises, (b) environmental matters (including the storage, disposal or
generation of hazardous materials), (c) the making of any repairs,
replacements or improvements to the Premises, and (d) any business conducted
in the Premises. Except as provided in the preceding sentence, Landlord shall
comply with all Laws which relate to the Building, provided nevertheless,
that structural changes shall be the responsibility of Tenant if they are
changes required by reason of a condition which has been created or caused
by Tenant, or are required by reason of a default by Tenant.
12. SURRENDER OF THE PREMISES.
Tenant, on the Termination Date or earlier expiration of the Term, shall
surrender the Premises in as good condition as when Tenant took possession,
except for reasonable wear and tear. Any of Tenant's property (except money and
securities) left on the Premises shall be deemed abandoned and, at Landlord's
option, title shall pass to Landlord under this Lease as by a bill of sale or,
if Landlord elects to remove all or any part of Tenant's property, the cost of
such removal, including repairing any damage to the Premises or Building caused
by the removal and the cost of storage and sale, shall be paid by Tenant within
10 days of Landlord's demand.
13. HOLDING OVER.
If Tenant retains possession of all or part of the Premises after the
Termination Date, Tenant's occupancy shall be as a tenant at sufferance,
terminable at any time by Landlord. Tenant shall pay Landlord rent for such
time as Tenant remains in possession at the monthly rate of 150 percent of the
Base Rent payable hereunder for the month immediately preceding the Termination
Date plus all other Rent required by the terms of this Lease and, in addition
thereto, shall pay Landlord for all damages (including consequential damages)
sustained by reason of Tenant's retention of possession. The provisions of this
Section do not exclude Landlord's rights of reentry or any other right
hereunder.
14. DAMAGE.
(a) If the Building, Land or Premises are damaged by fire or other
casualty and this Lease is not terminated as provided below, Landlord shall
repair the damage at its expense (except for excess costs related to
above-standard leasehold improvements in the Premises which shall be at Tenant's
expense), with reasonable promptness after notice to it of the damage; provided,
however, that Landlord shall not be required to repair or replace any of
Tenant's property or any alteration or improvements made by Tenant. If the
Premises are damaged by fire or other casualty, then to the extent that the
Premises are rendered untenantable, the Rent shall equitably
<PAGE>
-4-
abate from the date of the damage to the date the damage is repaired. If
repairs are delayed in any way by Tenant or Tenant's Representatives, the damage
shall be deemed repaired for purposes of this Section on the date when they
would have been repaired but for such delay.
(b) If the Building, Land or Premises are substantially damaged by fire
or other casualty, Landlord may terminate this Lease by notice to Tenant within
90 days after the date of the damage and this Lease shall terminate upon the
30th day after such notice by which date Tenant shall vacate and surrender the
Premises to Landlord. The Rent shall be equitably prorated to the date of
termination. The Building, Land or Premises (whether or not the Premises are
damaged) shall be deemed substantially damaged if: (1) Landlord is required to
expend for repairs more than 20 percent of the replacement value of the Building
immediately prior to the damage, or (2) repair is not possible in accordance
with Landlord's reasonable estimate within 180 days following the date of the
damage.
(c) If this Lease has not been terminated and Landlord does not
substantially complete the repair or restoration of the Building, Land or
Premises within 180 days after the date of the casualty, and if such failure has
a material, adverse effect on Tenant's business in the Premises, Tenant may
(provided such failure is not due to any fault of Tenant or Tenant's
Representatives) terminate this Lease by notice to Landlord given within 10 days
after the end of the 180-day period. Termination shall be effective 30 days
after such notice is given unless Landlord shall substantially complete the
repair or restoration within the 30-day period, in which case Tenant's notice of
termination shall be deemed withdrawn. This Section is intended to provide the
only remedies available to Tenant for damage caused by casualty and, therefore,
to the extent permitted by Law, Tenant waives the provisions of any Laws which
would provide alternative or additional remedies in the event of such damage.
15. CONDEMNATION.
(a) If the Building, Land or Premises are taken for more than 180 days
by condemnation or under threat thereof for any public or quasi-public purpose,
this Lease shall terminate as of the date Tenant is required to vacate the
Premises by reason of the taking and the Rent shall be equitably prorated to
such date. If any part of the Building or Land is so taken, this Lease shall be
unaffected by such taking, except that (1) Landlord may terminate this Lease by
notice to Tenant within 90 days after the date of taking if (A) the cost of
restoration will exceed the award received as a result of the taking, (B) repair
is not possible in accordance with Landlord's reasonable estimate within 180
days following the date of the taking, or (C) in Landlord's reasonable judgment,
it will be unable to economically operate the Building in light of Landlord's
agreements and obligations regarding the Building, and (2) Tenant may terminate
this Lease by notice to Landlord within 90 days after the date of taking if 20
percent or more of the Premises shall be taken and the remaining area of the
Premises shall not be reasonably sufficient for Tenant to continue operation of
its business. This Lease shall terminate on the 30th day after such notice by
which date Tenant shall vacate and surrender the Premises to Landlord and the
Rent shall be equitably prorated to such date. If this Lease continues in force
upon a temporary taking (180 days or less) or a partial taking, the Base Rent,
Tenant's Proportionate Share and other relevant items shall be equitably
adjusted according to the rentable area of the Premises and Building remaining.
(b) In the event of any taking, all of the proceeds of any award payable
by the condemning authority shall be and remain the sole and exclusive property
of Landlord, and Tenant hereby assigns all of its right, title and interest in
and to any award to Landlord. Tenant, however, shall have the right, to the
extent that the same shall not reduce, delay or prejudice Landlord's award, to
claim from the condemning authority, but not from Landlord, such compensation as
may be recoverable by Tenant in its own right for moving expenses.
16. ASSIGNMENT AND SUBLETTING.
(a) Tenant shall not, either directly or indirectly (including transfers
of interests in Tenant), assign or encumber this Lease or any interest therein
or sublet the Premises or any part thereof without the prior consent of Landlord
in each instance, which consent shall not be unreasonably withheld; provided,
however, in no event may this Lease be assigned or the Premises sublet to any
governmental authority or agency or to any tenant or occupant of the Building,
nor may the rental rate of any sublease be less than the market rate for such
space. The consent by Landlord to an assignment or subletting shall not be
construed to relieve Tenant from obtaining Landlord's consent to any further
assignment or subletting.
(b) Tenant shall give Landlord notice of Tenant's intent to assign this
Lease or sublet the Premises in whole or in part (including Tenant's estimate of
the date the assignment or sublease will be effective (Estimated Date) and, in
the case of a sublease, the area affected and the intended period of the
sublease) and Landlord shall have the option, exercisable by delivery to Tenant
of notice within 90 days after receipt of Tenant's notice, to terminate this
Lease (in the case of a proposed assignment) or to terminate or suspend this
Lease as to that portion of the Premises
<PAGE>
-5-
which Tenant seeks to sublet (if Landlord elects to suspend, the Lease with
respect to the sublet area shall be suspended only during the period specified
by Tenant in its notice and the Rent shall be equitably reduced only for such
period). If Landlord fails to give such notice, Landlord shall be deemed to
have rejected its option to terminate or suspend and Tenant may proceed to
attempt to assign or sublet, subject to the requirements of this Section 16,
including Landlord's prior consent. If Landlord exercises its option to
terminate or suspend, Landlord shall be entitled to recover possession of all or
such portion of the Premises as is applicable and Tenant shall vacate the same
on the later of the date which is 60 days after the giving of Landlord's notice
of termination (or suspension) or the Estimated Date, the Rent shall be adjusted
to the date of vacation and thereafter (or for the period of the suspension)
Tenant shall be relieved of all liability for the vacated portion of the
Premises. In the case of a suspension, Landlord shall redeliver possession of
the suspended portion of the Premises to Tenant "as is" at the expiration
thereof.
(c) If Landlord gives its consent to any assignment of this Lease or
to any sublease, Tenant shall in consideration therefor, pay to Landlord, as
additional rent: (1) in the case of an assignment, an amount equal to all
sums and other consideration paid to Tenant by the assignee for or by reason
of such assignment (including any sums paid for the sale, rental or use of
Tenant's property in excess of the then market value of Tenant's property),
less the reasonable expenses actually paid by Tenant in connection with the
assignment; and (2) in the case of a sublease, any rents, additional charges
or other consideration payable under the sublease to Tenant by the subtenant
(including any sums paid for the sale, rental or use of Tenant's property in
excess of the then market value of Tenant's property) which are in excess of
the Rent during the term of the sublease in respect of the subleased space,
less the reasonable expenses actually paid by Tenant in connection with the
subletting. The sums payable hereunder shall be paid to Landlord as and when
payable by the assignee or subtenant to Tenant.
(d) No assignment or subletting shall affect the continuing primary
liability of Tenant (which, following an assignment, shall be joint and several
with the assignee), and Tenant shall not be released from performing any of the
terms, covenants and conditions of this Lease.
17. SUBORDINATION.
This Lease and all rights of Tenant hereunder shall be, at the option
and designation of Landlord, subordinate or superior to any lease of the
Building or Land (an Underlying Lease) and to any mortgage or deed of trust
(a Mortgage) which may now or hereafter affect the Building or Land. If
Landlord designates this Lease as subordinate or superior to any Underlying
Lease or Mortgage, this Section shall be self-operative and no further
agreements of subordination or superiority shall be required but, in
confirmation of such subordination or superiority, Tenant shall promptly
execute, acknowledge and deliver any agreement that Landlord, the lessor
under any Underlying Lease (Lessor) or the holder of any Mortgage (Mortgagee)
or any of their respective assigns or successors in interest may reasonably
request to evidence such subordination or superiority. If any Lessor or
Mortgagee (or any purchaser at a foreclosure sale) succeeds to the rights of
Landlord under this Lease, whether through possession or foreclosure action
or delivery of a new lease or deed (a Successor Landlord), Tenant shall, upon
request, attorn to and recognize the Successor Landlord as Tenant's landlord
under this Lease and shall promptly execute and deliver any agreement that
the Successor Landlord may reasonably request to evidence such attornment.
If a Lessor, Mortgagee or Successor Landlord requires that an agreement of
subordination, superiority, or attornment be executed by Tenant in accordance
with this Section, Tenant's failure to do so within 15 days after Landlord's
request shall be deemed an event of default under this Lease.
18. ESTOPPEL CERTIFICATE.
Tenant shall from time to time deliver to Landlord a statement in writing
certifying the status of this Lease and any options contained herein, the
performance hereunder of Landlord and Tenant and such other matters as Landlord
shall reasonably request. Tenant's failure to do so within 15 days after
Landlord's request shall be deemed an event of default under this Lease.
19. TRANSFER OF LANDLORD'S INTEREST.
The term "Landlord" as used in this Lease shall be limited to mean and
include only the owners of Landlord's interest in this Lease at the time in
question. Upon any transfer of such interest, Landlord herein named (and in
case of any subsequent transfer, the then transferor) shall thereafter be
relieved of all liability for the performance of any obligations on the part of
Landlord contained in this Lease.
<PAGE>
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20. QUIET ENJOYMENT.
Tenant, upon paying the Rent and performing all of the terms, covenants
and conditions on its part to be performed, shall peaceably and quietly enjoy
the Premises subject, nevertheless, to the terms of this Lease.
21. RIGHTS RESERVED TO THE LANDLORD.
Landlord reserves the right: (a) to name the Building and Office Park, to
change the name or street address of the Building and Office Park, and to
install and maintain all signs in the Office Park (including the exterior and
interior of the Building); (b) on reasonable prior notice to Tenant, to exhibit
the Premises to any prospective purchaser or mortgagee of the Building or Land
and to others having an interest therein at any time during the Term, and to
prospective tenants during the last 12 months of the Term; (c) to enter the
Premises to make necessary inspections, repairs and adjustments or otherwise to
comply with the terms of this Lease; and (d) to relocate, alter, improve, reduce
or add to the configuration of and the various facilities and improvements
within the Building, the Land and the Office Park, provided that the change
shall not materially restrict Tenant's access to or use of the Premises.
22. DEFAULT.
The following shall be deemed events of default under this Lease: (a)
Tenant's failure to make any payment of Rent when it is due and payable
(provided that Tenant shall be entitled to 10 days notice of nonpayment during
which Tenant may cure the default, unless on 2 prior occasions within the same
12-month period there has been a default in the payment of Rent which has been
cured after notice has been given by Landlord, in which case no such notice need
be given for the remainder of the 12-month period and no such default in the
payment of Rent shall be curable, except as may be required by applicable Laws),
(b) any matter defined as an event of default in this Lease, (c) Tenant's
failure to cure a default in the performance of any other covenant or obligation
of Tenant under this Lease within a period of 30 days after notice from Landlord
specifying the default (or if the specified default is not capable of cure
within the 30-day period, if Tenant fails immediately after notice from Landlord
to commence to cure the default and diligently to pursue completion of the cure
during and after the 30-day period), and (d) Tenant's failure to occupy
substantially all of the Premises within 30 days after Landlord delivers the
Premises to Tenant in the condition required by this Lease or Tenant's vacation
of more than 50 percent of the Premises for more than 30 days except in
accordance with an approved assignment or sublease.
23. REMEDIES.
(a) If any event of default occurs, Landlord may, without prejudice to
Landlord's other rights hereunder and in addition to all other rights and
remedies which Landlord may have under the Laws:
(1) cure such default and any reasonable costs and expenses
incurred by Landlord therefor shall be deemed additional rent payable on demand;
or
(2) with or without terminating this Lease, reenter the Premises
and take possession thereof from Tenant by legal proceedings or otherwise. If
Landlord takes possession of the Premises and if the remedy provided in this
Section 23(a)(2) is permitted under the Laws after termination of a lease, this
Lease shall terminate, otherwise it shall remain in full force and effect.
Thereafter Landlord may recover from Tenant: (A) the worth at the time of award
of the unpaid Rent which had been earned at the time of such termination; (B)
the worth at the time of award of the amount by which the unpaid Rent which
would have been earned after termination until the time of award exceeds the
amount of such rental loss that Tenant proves could have been reasonably
avoided; (C) the worth at the time of award of the amount by which the unpaid
Rent for the balance of the Term after the time of award exceeds the amount of
such rental loss that Tenant proves could be reasonably avoided; and (D) any
other amount necessary to compensate Landlord for all the detriment proximately
caused by Tenant's failure to perform its obligations under this Lease or which
in the ordinary course of things would be likely to result therefrom. The
"worth at the time of award" of the amounts referred to in Subdivisions (A) and
(B) is computed by allowing interest at the lesser of 12 percent per annum or
the maximum rate which Landlord may lawfully charge Tenant. The worth at the
time of award of the amount referred to in Subdivision (C) is computed by
discounting such amount at the discount rate of the nearest Federal Reserve Bank
at the time of award plus one percent. Efforts by Landlord to mitigate the
damages caused by Tenant's breach of this Lease shall not constitute a waiver of
Landlord's right to recover damages under this or any other Section. Nothing in
this Section shall affect Landlord's rights to indemnification under any of the
other provisions of this Lease; or
<PAGE>
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(3) continue this Lease in full force and effect for so long as
Landlord does not exercise Landlord's right to terminate this Lease and Landlord
may enforce all Landlord's rights and remedies under this Lease, including the
right to recover the Rent as it becomes due. For purposes of this Section, the
following acts by Landlord shall not constitute a termination of Tenant's right
to possession of the Premises or a termination of the Lease: (A) acts of
maintenance or preservation or efforts to relet the Premises; or (B) the
appointment of a receiver upon the initiative of Landlord to protect Landlord's
interest under this Lease.
(b) Landlord shall use reasonable efforts to mitigate its damages in the
event of Tenant's default. If Tenant has vacated the Premises, Landlord shall
be deemed to have satisfied its obligation under this provision if it markets
the Premises in the same manner as it markets other available space in the
Building or the Office Park (if applicable). Landlord, however, shall not be
required to prefer the Premises over such other available space.
(c) Except as provided in Section 23(a)(2), no reentry or taking
possession of the Premises by Landlord shall be construed as an election to
terminate this Lease, unless notice to such effect is given by Landlord to
Tenant. If Landlord does reenter or take possession without terminating this
Lease, Landlord may, at any time thereafter, terminate this Lease by giving
notice to Tenant. All of the remedies given to Landlord in this Lease upon any
event of default are in addition to all other rights or remedies to which
Landlord may be entitled under the Laws, including, if available, the right to
restrict Tenant's access to the Premises; all such remedies shall be deemed
cumulative and the election of one shall not be deemed a waiver of any other or
further rights or remedies. Unless otherwise expressly provided herein,
Tenant's obligation to pay all the Rent due through the Termination Date shall
survive any termination or expiration of this Lease.
24. SECURITY DEPOSIT.
Tenant has deposited with Landlord the Security Deposit as security for
the faithful performance of every provision of this Lease to be performed by
Tenant. If Tenant defaults with respect to any provision of this Lease,
including payment of the Rent, Landlord may apply all or any part of the
Security Deposit for the payment of any Rent or to compensate Landlord for any
other loss, cost or liability which Landlord may incur by reason of Tenant's
default. If any portion of the Security Deposit is so applied, Tenant shall,
within 10 days after notice thereof, deposit cash with Landlord in an amount
sufficient to restore the Security Deposit to its original amount and Tenant's
failure to do so shall be deemed an event of default under this Lease. The
Security Deposit or any balance thereof shall be returned to Tenant without
interest (or, at Landlord's option, to the last transferee of Tenant's interest
hereunder) at the expiration of the Term and upon Tenant's vacation of the
Premises in accordance with the terms of this Lease. If the Building is sold,
the Security Deposit may be transferred to the new owner and Landlord shall be
discharged from further liability with respect thereto.
25. BANKRUPTCY.
If Tenant files a voluntary petition pursuant to the Bankruptcy Code
(including any successor code) or takes the benefit of any insolvency act or is
dissolved, or if any involuntary petition is filed against Tenant pursuant to
the Bankruptcy Code and the petition is not dismissed within 60 days after the
filing, or if a receiver is appointed for Tenant's business or assets and the
appointment of the receiver is not vacated within 60 days after the appointment,
or if Tenant shall make an assignment for the benefit of creditors, then
Landlord shall have all of the rights provided in Section 23 for nonpayment of
the Rent to the extent permitted by the Laws.
26. FORCE MAJEURE.
Landlord shall be excused for the period of any delay in the performance
of any obligation hereunder when prevented from so doing by causes beyond its
control, including labor disputes, civil commotion, hostilities, sabotage,
governmental regulations or controls, fire or other casualty, inability to
obtain any material, financing or services, and acts of God. Tenant shall
similarly be excused for delay in the performance of any obligation hereunder,
provided that nothing contained in this Section shall be deemed to excuse or
permit any delay in the payment of Rent or any delay in the cure of any default
which may be cured by the payment of money.
27. LIMITATION OF LIABILITY.
If Landlord becomes obligated to pay Tenant a money judgment arising out
of any failure by Landlord to perform any of its obligations under this Lease,
Tenant shall be limited for the satisfaction of the money judgment solely to
Landlord's interest in the Building and Land and no other property or assets of
Landlord or the individual.
<PAGE>
ATTACHMENT 2
[MAP OF SUBJECT PREMISES]
<PAGE>
ATTACHMENT 2
EXISTING IMPROVEMENTS
[MAP OF SUBJECT PREMISES]
<PAGE>
ATTACHMENT 3
[MAP OF SUBJECT BUILDING]
<PAGE>
ATTACHMENT 4
RULES AND REGULATIONS
1. The sidewalks, entrances, passages, courts or stairways of the
Building shall not be obstructed or used for any purpose other than ingress and
egress to and from the tenant's premises.
2. Nothing shall be attached to the outside walls or windows of the
Building. No curtains, blinds, shades, or screens shall be used in connection
with any exterior window or door of the tenant's premises, except as Landlord
designates as Building standard.
3. No sign, advertisement, object, notice or other lettering shall be
exhibited, inscribed, painted or affixed on any part of the outside, or inside
if visible from the outside, of the tenant's premises or the Building without
the prior consent of Landlord.
4. The restrooms and other plumbing fixtures shall not be used for any
purposes other than those for which they were constructed. No tenant shall
bring or keep any inflammable, combustible, explosive or hazardous fluid,
material, chemical, or substance in or about the tenant's premises without
Landlord's prior consent.
5. No tenant shall mark, paint, nail, tape, or drill into any part of
the Building except the premises, and then only with the prior consent of
Landlord. No tenant shall install any resilient tile or similar floor
covering in the tenant's premises except in a manner approved by Landlord.
6. No bicycles, vehicles or animals of any kind shall be brought into
the tenant's premises (except as may be required by handicapped persons). No
cooking shall be done or permitted in the Building by any tenant without the
approval of Landlord, except as is customary for general office purposes (such
as the use of microwave ovens and coffee machines). No tenant shall cause any
unusual or objectionable odors to emanate from the tenant's premises.
7. No tenant shall create, or permit to be created, any nuisance, or
interfere with other tenants or occupants of the Building or neighboring
buildings or premises.
8. No additional locks or bolts of any kinds shall be placed upon any
of the doors or windows, nor shall any changes be made in locks or the
mechanism thereof. Each tenant shall, upon the termination of its tenancy,
deliver to Landlord all keys of stores, offices and restrooms obtained by
such tenant.
9. Landlord shall have the right to prohibit any advertising by any
tenant which, in Landlord's reasonable opinion, impairs the reputation of the
Building.
10. If the tenant's premises become infested with vermin, such tenant,
at its sole cost and expense, shall cause its premises to be exterminated, from
time to time, to the satisfaction of Landlord, and shall employ such
exterminators therefor as shall be approved by Landlord.
11. No premises shall be used, or permitted to be used for lodging or
sleeping, or for any illegal purpose.
12. The requirements of tenants will be attended to only upon
application at the office of the Building Manager. Building employees shall
not be required to perform any work outside of their regular duties, unless
under specific instructions from the office of Building Manager.
13. Canvassing, soliciting and peddling in the Building are prohibited
and each tenant shall cooperate in seeking their prevention.
14. In the delivery or receipt of merchandise, freight or other matter,
only hand trucks or other means of conveyance equipped with rubber tires, rubber
side guards and such other safeguards as Landlord may require shall be used.
15. With respect to work being performed by a tenant in its premises
with the approval of Landlord, the
<PAGE>
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tenant shall refer all contractors, contractors' representatives and
installation technicians to the Building Manager for its supervision,
approval and control prior to the performance of any work or services.
This provision shall apply to all work performed in the Building including
installation of telephones, electrical devices and attachments.
16. Each tenant and all of Tenant's Representatives shall observe and
comply with the driving and parking signs and markers on the Land and the Office
Park and Landlord shall not be responsible for any damage to any vehicle towed
because of noncompliance with parking regulations.
17. No radio or television antenna, loudspeaker, music system or other
device shall be installed on the roof or exterior walls of the Building or on
common walls with adjacent tenants.
18. No material shall be placed in the trash boxes or receptacles in the
Building unless such material may be disposed of in the ordinary and customary
manner of removing and disposing of trash and garbage and will not result in a
violation of any Laws governing such disposal. All garbage and refuse disposal
shall be made only through entryways provided for such purposes and at such
times as Landlord shall designate.
19. If the Building is equipped with elevators, at least one elevator
shall remain in service at all times. Landlord may designate a specific
elevator for use as a service elevator.
20. Tenant shall pay to Landlord on demand the costs incurred by
Landlord for extra or unusual cleaning required because of the condition or
nature of the Premises.
21. If Tenant requires climate control at any time after Normal Business
Hours, Landlord shall use reasonable efforts to furnish such service upon
reasonable notice from Tenant, and Tenant shall pay Landlord's charges therefor
on demand.
22. No vending machines of any kind shall be installed in the tenant's
premises, except by Landlord upon the tenant's request. Only Landlord may
install vending machines in the Building and Landlord shall receive all of
the revenue derived therefrom.
<PAGE>
ATTACHMENT 5
EXPENSE ESCALATION
BASE YEAR
ESCALATION. The Base Rent does not reflect future increases in the amount of
taxes on the Land, the Building and other improvements on the Land
(collectively the Property) or in the cost of operations and maintenance of
the Property. In order that the Rent payable throughout the Term shall
reflect any such increase, the parties agree as follows:
1. DEFINITIONS.
(a) REAL ESTATE TAXES: (1) all general and special taxes, assessments,
duties and levies, if any, payable (adjusted after protest or litigation, if
any) for any part of the Term, exclusive of penalties or discounts, on the
Property; (2) any service, user or license fees or taxes, or any taxes which
shall be levied on the rentals of the Building in addition to or in lieu of
any of the foregoing in whole or in part; and (3) the reasonable expenses of
contesting the amount or validity of any such taxes, charges or assessments,
such expense to be applicable to the period of the item contested.
(b) OPERATING EXPENSES: all expenses paid or incurred by Landlord or
on Landlord's behalf in respect of the management, repair, operation and
maintenance of the Property, including: (1) utilities; (2) rent, casualty,
liability and fidelity insurance; (3) cleaning, snow and ice removal, and
security services; (4) landscaping; (5) alterations and improvements to the
Property made by reason of the Laws or the requirements of insurance bodies;
(6) management fees or, if an independent property manager is not employed by
Landlord, a sum which is not in excess of the then prevailing rates for
management fees of other comparable buildings in the area in which the
Building is located; (7) capital improvements, replacements or additions to
the Property made during the Term which Landlord reasonably projects will
reduce Operating Expenses, but only to the extent of the projected reduction
for each relevant calendar year; (8) reasonable administrative expenses; (9)
expenses (including real estate taxes) attributable to the Property as part
of an Office Park (if applicable); and (10) all other charges properly
allocable to the repair, operation and maintenance of the Building in
accordance with generally acceptable accounting principles. Operating
Expenses shall not include expenses for any capital repairs, replacements or
improvements (except as provided above); depreciation; expenses (other than
Operating Expenses) for which Landlord is reimbursed; brokerage commissions,
advertising expenses and expenses of renovating space incurred in procuring
new tenants; interest on and amortization of debts; and any cost or expense
representing an amount paid to a related or affiliated person or entity which
is in excess of the amount which would be paid in the absence of such
relationship.
(c) If during any calendar year (including the Base Year) the
Property is not fully assessed and the Building is not fully occupied or if
any tenant of the Building (other than Tenant) furnishes to itself any
services which would otherwise have been furnished by Landlord, Real Estate
Taxes and Operating Expenses shall be adjusted at the expiration of each
calendar year as if the Property were fully assessed, the Building were 95
percent occupied during the entire year and as if Landlord had furnished such
services. "Fully occupied" shall be defined as occupancy of 95 percent or
more of the rentable area of the Building.
2. EXCESS EXPENSES.
Commencing the calendar year following the Base Year and thereafter
(each such calendar year referred to as a Comparison Year), Tenant shall pay
Landlord an amount equal to Tenant's Proportionate Share of the amount by
which the sum of the Real Estate Taxes and the Operating Expenses for each
Comparison Year during the Term exceeds the sum of the Real Estate Taxes and
the Operating Expenses for the Base Year (the excess amount is referred to as
the Excess Expenses). Tenant's Proportionate Share of Excess Expenses shall
be prorated as necessary for the first and last calendar years of the Term if
the Commencement Date or Termination Date are other than the first or last
day of the year, respectively.
3. CURRENT PAYMENTS AND ADJUSTMENT.
(a) In order to provide for current payments on account of Excess
Expenses Tenant shall pay as additional rent, together with Monthly
Installments of Base Rent, an amount equal to Tenant's Proportionate Share of
the Excess Expenses due for the ensuing 12 months (as reasonably estimated
by Landlord from time to time) in 12 equal monthly installments commencing on
the first day of the month following the month in which Landlord notifies
Tenant of the amount.
(b) On or before April 1 of each calendar year (or as soon thereafter
as is practical), Landlord shall deliver to Tenant a statement (certified by
an officer of Landlord) of Tenant's Proportionate Share of the Excess
Expenses for the preceding
<PAGE>
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Comparison Year. If Tenant's Proportionate Share of the actual Excess
Expenses for the Comparison Year exceeds the aggregate of the estimated
monthly payments made by Tenant for that year, Tenant shall within 10 days of
receipt of the statement, pay Landlord such excess as additional rent. If
the aggregate exceeds Tenant's Proportionate Share of the actual Excess
Expenses, then Landlord shall credit against Tenant's next ensuing monthly
installment or installments of the Rent an amount equal to the difference
until the credit is exhausted.
4. TERMINATION.
(a) Landlord may at any time after the end of the Term give Tenant
notice of Landlord's reasonable estimate of Tenant's Proportionate Share of
the Excess Expenses (prorated) for the Comparison Year in which the Term
ends. Tenant shall within 30 days after receipt of such notice pay Landlord
the amount specified. Adjustments shall thereafter be made in accordance
with this Section.
(b) If a credit is due from Landlord at the end of the Term or at the
time of adjustment, Tenant shall be entitled to receive the amount of the
credit in the form of payment from Landlord, provided that Landlord may, in
lieu of such payment, apply the credit against any Rent which is due but not
paid on that date. No interest or penalties shall accrue on any amounts
which Landlord is obliged to credit or pay to Tenant by reason of this Rider.
5. STATEMENTS.
Each statement given by Landlord pursuant to this Rider shall be
conclusive and binding upon Tenant unless within 60 days after receipt of the
statement Tenant shall notify Landlord that it disputes the correctness of
the statement, specifying the particular respects in which it is claimed to
be incorrect. Pending resolution of the dispute, Tenant shall pay additional
rent in accordance with the statement but such payment shall be without
prejudice to Tenant's position. If the dispute is determined in Tenant's
favor, Landlord shall immediately credit Tenant the amount of Tenant's
overpayment of additional rent resulting from compliance with Landlord's
statement. If resolution of the dispute indicates that Tenant underpaid,
Tenant shall immediately pay Landlord the amount of such underpayment (no
interest shall be due thereon, provided Tenant paid all additional rent due
in accordance with this Rider). Landlord shall grant Tenant reasonable
access to Landlord's books and records for the purpose of verifying the
Excess Expenses.
<PAGE>
ATTACHMENT 6
WORK LETTER
Landlord and Tenant agree as follows:
1. (a) Landlord shall prepare the Premises (the Work) in accordance
with the Plans (hereinafter defined). Tenant shall, within 10 business days
after the date of this Lease, deliver to Landlord, for its approval, working
drawings adequate in detail to perform the Work (Plans) in accordance with
the Space Plans attached hereto. Landlord's failure to approve or disapprove
the Plans within 5 business days of their receipt by Landlord shall be deemed
an approval. Landlord shall not unreasonably withhold its approval of the
Plans. Any programming or interior design services or unreasonable or
excessive revisions to the Plans required by Tenant shall be at Tenant's sole
cost and expense and shall be considered a Tenant delay.
(b) Except as set forth in this Work Letter and the Lease,
Landlord has no other agreement with Tenant and has no other obligation to do
any other work with respect to the Premises.
2. If Landlord further agrees to do, at Tenant's request and upon
submission by Tenant (at Tenant's sole cost and expense) of all necessary
drawings, plans and specifications, any other work in addition to the Work
described in Section 1 hereof, such other work shall be done at Tenant's sole
cost and expense as a Tenant's extra. Prior to commencing any such other
work requested by Tenant, Landlord shall submit to Tenant written estimates
of the cost of such other work. If Tenant shall fail to approve said
estimates within 5 days from the receipt thereof, the same shall be deemed
disapproved in all respects by Tenant and Landlord shall not be authorized to
proceed thereon. Tenant agrees to pay to Landlord promptly upon being billed
therefor, at any time and from time to time, the cost of all such other work
together with 10 percent of said cost for Landlord's profit and overhead.
3. Landlord, at Landlord's discretion, may permit Tenant and Tenant's
agents to enter the Premises prior to the Commencement Date in order that
Tenant may do such other work as may be required by Tenant to make the
Premises ready for Tenant's use and occupancy. If Landlord permits such
entry prior to the Commencement Date, such permission is conditioned upon
Tenant and Tenant's Representatives working in harmony and not interfering
with Landlord and its agents, contractors and employees in doing Landlord's
work in the Premises or for other tenants and occupants of the Building. If
at any time such entry shall cause or threaten to cause disharmony or
interference, Landlord shall have the right to withdraw such permission upon
24 hours notice to Tenant. Tenant agrees that any such entry into and
occupation of the Premises shall be deemed to be under all of the provisions
of the Lease except as to the covenant to pay Base Rent, and Landlord shall
not be liable in any way for any injury, loss or damage which may occur to
any of Tenant's work and installations made in the Premises or to properties
placed therein prior to the commencement of the Term, the same being at
Tenant's sole risk, unless such injury, loss or damage is due to Landlord's
gross negligence.
4. (a) Subject to Sections 4(b) and 4(c) of this Work Letter,
Landlord shall provide Tenant an allowance (the Allowance) which shall be
applied to the cost of the Work (including the cost to bring the Premises
into compliance with building code requirements, including ADA compliance
only as provided in Section 34 of the General Terms, Covenants and
Conditions) and which shall be an amount up to $50,640.00. If the cost of
the Work (including the cost to bring the Premises into compliance with
building code requirements, including ADA compliance) exceeds the Allowance,
Tenant shall pay such
<PAGE>
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excess (together with the costs incurred by Landlord, if any, described in
Section 4(c) hereof) to Landlord within 20 days after demand therefor.
(b) The cost of the Work attributed to the installation of
building standard carpet or other building standard flooring in the Premises
shall be deemed to include the greater of $28,682.50 or the actual cost of
such installation.
(c) The cost of the Work shall in no event include the cost of
Tenant's fixtures, cabling, telephone and computer wiring which shall be the
sole responsibility of Tenant and in no event shall such costs be offset by
the Allowance.
5. Landlord shall procure bids from Landlord's contractor and at
least 2 other reputable contractors licensed in the State. Landlord shall be
bound by the lowest of the bids deemed acceptable.
<PAGE>
ATTACHMENT 7
[MAP OF APPROVED CONCEPTUAL SPACE STUDY]
APPROVED CONCEPTUAL SPACE STUDY
FOR PREPARATION OF MUTUALLY APPROVED CONSTRUCTION DOCUMENTS
<PAGE>
ATTACHMENT 8
ADDITIONAL TERMS
The Section numbers below in the margin correspond to the Section
numbers in the Lease.
GENERAL TERMS, COVENANTS AND CONDITIONS
1(b). Line 3 change "10 days" to "30 days".
1(c). Line 1 change "180 days" to "120 days".
Line 6 after "this Lease shall" add "automatically".
6(a). Line 3 after "Building" add "5 days per week".
Line 4 delete ", if required by this Lease".
Line 5 after "Normal Business Hours;" add "security services for the
Building at least at the level provided as of the date hereof;".
6(b). Line 1 after "Premises" add "at Tenant's request and other than
provided herein".
At the end of this Section add: "Tenant may request, upon reasonable
advance notice to Landlord and at Tenant's sole cost and expense, that
Landlord provide climate control to the Premises after Normal
Business Hours for a minimum of 2 hours per request. Landlord shall use
reasonable efforts to accommodate Tenant's requests therefor. Tenant
shall pay Landlord's charge for providing such service, provided that
such charge shall not exceed $50.00 per hour."
6(c). Line 6 after "computers" add "(except personal computers)".
At the end of this Section add: "Anything in this Section to the
contrary notwithstanding, Landlord acknowledges that the installation
of copy machines, computer servers, fax machines and similar office
equipment does not violate the requirements of this Section."
6(d). At the end of this Section add: "Anything to the contrary in
Section 6(d) notwithstanding, if any interruption or discontinuance
of service: (i) is caused by the negligence of Landlord, its agents,
employees or contractors (without the contributory negligence of
Tenant or Tenant's Representatives), (ii) continues for more than 10
consecutive business days without being cured by Landlord (or if
not capable of cure within such 10-day period, if Landlord fails
immediately to commence such a cure and diligently to pursue
completion of such cure during and after such 10-day period), and
(iii) has a material, adverse effect on Tenant's ability to conduct
Tenant's business in the Premises (Abatement Interruption), then the
Rent shall abate equitably from the date of occurrence during the
interruption or discontinuance. If an Abatement Interruption is
reasonably estimated by Landlord to extend for more than 180 days,
the Abatement Interruption shall be deemed to be an "other
casualty" pursuant to Section 14(b). If any interruption or
discontinuance of service is caused by the negligence of a third
party (with or without the contributory negligence of Tenant or
Tenant's Representatives) with whom Landlord has a contractual
relationship to provide such service and with whom Tenant has no
contractual relationship, and if Tenant has no separate cause of
action against such third party for such interruption or
discontinuance and Landlord chooses not to pursue remedies then
available to Landlord pursuant to such contract, then Tenant shall
be subrogated to Landlord's
<PAGE>
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rights under Landlord's contract with the third party to the extent
necessary to remedy damages incurred by Tenant, provided that such
subrogation does not cause Landlord to be in default of the
contract. Tenant shall indemnify and defend Landlord for, from and
against all claims, expenses, liabilities and losses, including
reasonable attorneys' fees, resulting from such subrogation."
7. At the end of this Section add: "On the Commencement Date, the
mechanical, HVAC and electrical systems serving the Premises
(excluding any kitchen equipment which Tenant shall lease on an "as
is" basis) shall be in good working order."
8(a). Line 4 change "15" to "10".
9. At the end of this Section add: "Landlord shall maintain
property insurance and commercial general liability insurance in
such amounts as Landlord determines in its reasonable judgment. All
such insurance shall be issued by insurers authorized to do
business in the State and shall permit Landlord to waive
subrogation against Tenant."
14(c). Lines 2 and 4 change "180" to "150".
16(b). Line 4 change "90 days" to "30 days".
16(e). Add new Section 16(e): "Anything in Section 16 to the
contrary notwithstanding, without Landlord's consent but upon 10
days notice to Landlord, this Lease may be assigned, or the Premises
may be sublet, to any entity which is a parent, subsidiary or
affiliate of Tenant and shall not be subject to the requirements of
Sections 16(b) and 16(c). For the purposes of this Section a
"parent" shall mean an entity which owns more than 50 percent of the
outstanding stock of Tenant, a "subsidiary" shall mean an entity
more than 50 percent of whose outstanding stock shall be owned by
Tenant, and an "affiliate" shall mean an entity more than 50 percent
of whose outstanding stock shall be owned by Tenant's parent."
17. At the end of this Section add: "Within 90 days after
execution of this Lease, Landlord shall deliver to Tenant a
nondisturbance agreement from Landlord's lender substantially in the
form of the Nondisturbance Agreement attached to this Lease."
21. Line 2 after "and Office Park" add ", provided that Landlord
agrees to reimburse Tenant for the reasonable cost of replacing its
then existing stationery stock, if necessary".
Line 3 delete "reasonable" and substitute "24 hours".
Line 5 change "12" to "6".
Line 8 after "materially" add "or unreasonably".
25. Lines 3 and 4 change "60" to "90".
28(a). Line 3 after "number" add "or nature (reserved, unreserved,
covered or uncovered)".
30. Line 1 after "Tenant" add "and Landlord each" and after
"represents" add "to the other".
<PAGE>
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Line 2 delete "Tenant" and substitute "Each party" and delete
"Landlord" and substitute "the other party".
Line 5 delete "Tenant" and substitute "the indemnifying party".
33. Add new Section: "33. SIGNAGE. Tenant may, within 120 days after the
Commencement Date, install Tenant's sign including the word
"SPECTRANET" (Sign), on one line of 1/2 of one side of the 3-sided
monument sign facing Genesee Avenue (Monument Sign). The Sign shall
be installed on the silver band of the Monument Sign by Landlord's
sign vendor and such installation shall be subject to: (a) Tenant
first obtaining all necessary approvals from the City of San Diego
and of any other governmental authority having jurisdiction; and (b)
Landlord's prior approval of material, design, location and size
(which approval shall not be unreasonably withheld). The Sign shall
not be illuminated. Landlord may remove the Sign if a monetary
default of Tenant has become an event of default as provided in
Section 22 of this Lease. All costs related to approval,
installation, maintenance and removal of the Sign shall be at
Tenant's expense. In addition, Landlord shall, at Landlord's expense,
install Tenant's name on the lobby Building directory and on the
door of the Premises using Building standard lettering."
34. Add new Section: "34. LANDLORD'S REPRESENTATION. Landlord
represents, to the best of the knowledge of Landlord's employees
charged with responsibility for the day to day management of the
Building, that at the Commencement Date of this Lease the Premises
meets the current guidelines with respect to the Americans with
Disabilities Act (ADA). In no event shall Tenant be responsible for
the cost of compliance with ADA except for such compliance which is
required due to Tenant's operation of the Premises or the Work (as
defined in the Work Letter)."
RULES AND REGULATIONS
20. Line 1 after "demand the costs" add "reasonably".
22. Line 3 after "therefrom" add "; provided, however, upon
notice to Landlord, Tenant may install coffee, soft drink, sandwich
and snack vending machines in the Premises solely for the use and
benefit of Tenant and Tenant's Representatives and Tenant may
receive all of the revenue derived therefrom."
EXPENSE ESCALATION
1(b). Line 15 after "relationship" add "; any legal fees incurred
by Landlord arising out of negotiations or disputes with other
tenants or prospective tenants."
2. At the end of this Section add: "Notwithstanding the
foregoing, Tenant's Proportionate Share of Excess Expenses shall be
$-0- for the period from the Commencement Date through the date
which is 12 months after the Commencement Date."
<PAGE>
ATTACHMENT 9
RECORDING REQUESTED BY AND )
WHEN RECORDED MAIL TO: )
Bank of America NT & SA )
Agency Management Services #5596 )
1455 Market Street, 12th Floor )
San Francisco, California 94103 )
Attention: Janice Sears )
- -------------------------------------------------------------------------------
Space above for Recorder's Use
SUBORDINATION, NONDISTURBANCE
AND ATTORNMENT AGREEMENT
"FOR SAMPLE PURPOSES ONLY"
FACTUAL BACKGROUND
A. Borrower is the owner of certain real property located in the City
of San Diego, State of California, commonly known as Genesee Executive Plaza,
described in the attached EXHIBIT A. As used here, the term "Property" means
that real property, together with all improvements (the "Improvements")
located on it.
B. Pursuant to that Credit Agreement dated as of June 28, 1995 (the
"Loan Agreement"), between Agent, the Banks and Borrower, the Banks have
agreed to make a loan to Borrower in the principal amount of $190,000,000.00
(the "Loan"). The
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<PAGE>
Loan is to be evidenced by one or more promissory notes (collectively, the
"Note") which is secured by, among other things, a deed of trust or mortgage
encumbering the Property (the "Deed of Trust"). The Loan Agreement, the Note,
the Deed of Trust, and all other documents and instruments identified in the
Loan Agreement as "Loan Documents," including this Agreement, shall be
collectively referred to herein as the "Loan Documents."
C. Tenant and Borrower (as Landlord) have agreed to enter into a lease,
a copy of which has been forwarded to Bank (the "Lease"), under which Tenant
will lease a portion of the Improvements located within the Property and more
particularly described in the Lease (the "Premises").
D. Tenant is willing to enter into the Lease provided that Agent agrees
not to disturb Tenant's possession under the Lease, all as set forth more
fully below. Bank is willing to so agree, provided that Tenant agrees to the
other terms and conditions of this Agreement, including Tenant's agreement to
attorn to Agent, all as set forth more fully below.
AGREEMENT
Therefore, the parties agree as follows:
1. SUBORDINATION. The Loan Documents, and all supplements, amendments,
modifications, renewals, replacements and extensions of and to them, shall
unconditionally be and remain at all times a lien or charge on the Property
prior and superior to the Lease, to the leasehold estate created by it, and
to all rights and privileges of Tenant under it. That Lease and leasehold
estate, together with all rights and privileges of Tenant under the Lease,
are, except as provided herein, hereby unconditionally subjected and made
subordinate to the lien or charge of the Loan Documents in favor of Agent.
Tenant understands that Borrower and Agent have entered into the Deed of
Trust and the other Loan Documents. Tenant further declares, agrees and
acknowledges that, in making disbursements under the Loan Documents, Agent
has no obligation or duty to, nor has Agent represented that it will, see to
the application of such proceeds by the person or persons to whom they are
disbursed by Agent, and any application or use of such proceeds for purposes
other than those provided for in the Loan
-2-
<PAGE>
Documents shall not defeat the subordination made in this Agreement, in whole
or in part.
2. DEFINITIONS OF "TRANSFER OF THE PROPERTY" AND "PURCHASER". As used
here, the term "Transfer of the Property" means any transfer of Borrower's
interest in the Property by foreclosure, trustee's sale or other action or
proceeding for the enforcement of the Deed of Trust or by deed in lieu
thereof. The term "Purchaser," as used here, means any transferee, including
Agent, of the interest of Borrower as a result of any such Transfer of the
Property, and also includes any and all successors and assigns, including
Agent, of such transferee.
3. NONDISTURBANCE. So long as Tenant is not in default, beyond any
applicable notice or grace period, in the performance of the terms,
provisions and conditions contained in the Lease and so long as Tenant
observes the provisions of this Agreement:
(a) Tenant shall not be named or joined in any foreclosure,
trustee's sale or other proceeding to enforce the Deed of Trust unless
the joinder is required by law in order to perfect such foreclosure,
trustee's sale or other proceeding;
(b) the enforcement of the Deed of Trust shall not terminate the
Lease or disturb Tenant in the possession and use of the Premises; and
(c) the leasehold estate granted by the Lease shall not be affected
in any manner by any Transfer of the Property or any other proceeding
instituted or action taken under or in connection with the Deed of Trust,
or by Agent's taking possession of the Property or the Premises in
accordance with any provision of the Deed of Trust; provided that Agent,
if it becomes the Purchaser or if it takes possession under the Deed of
Trust, and any other Purchaser shall not:
(i) be liable for any damages (except for repairs required to
be made under the Lease)
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<PAGE>
attributable to any act or omission of any prior landlord under the
Lease (including Borrower);
(ii) be liable for any damages (except for repairs required to
be made under the Lease) attributable to any latent or patent defects
in construction with respect to any portion of the Property;
(iii) be liable for any consequential damages attributable to
any act or omission of Purchaser;
(iv) be liable for any damages (except for repairs required
to be made under the Lease) attributable to any breach of any
representation or warranty contained in the Lease by any prior landlord
under the Lease;
(v) be subject to any offsets or defense not specifically
provided for in the Lease and which Tenant may have against any prior
landlord under the Lease, except those resulting from matters of which
Tenant has given written notice to Agent; or
(vi) except as may be required by the Lease (E.G., any
security deposit or monthly estimates of Tenant's proportionate share
of operating expenses and real estate taxes), be bound by any
prepayment by Tenant of more than one month's installment of rent or
for any security deposit not actually delivered to Purchaser or by any
modification or amendment of or to the Lease unless the prepayment,
amendment or modification shall have been approved in writing by Agent
or by any subsequent beneficiary under the Deed of Trust, which
approval shall not be unreasonably withheld or delayed. The failure of
Agent or such beneficiary to approve or disapprove a proposed
prepayment, modification or amendment within 30 days after receipt of a
request shall be deemed an approval thereof.
4. ATTORNMENT. If any Transfer of the Property should occur, and if
Tenant is not in default under the Lease beyond
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<PAGE>
any applicable notice or grace period, Purchaser shall be bound to Tenant and
Tenant shall be bound to Purchaser under all of the terms, covenants and
conditions of the Lease for the balance of the lease term and any extensions
or renewals of it which may then or later be in effect under any validly
exercised extension or renewal option contained in the Lease, all with the
same force and effect as if Purchaser had been the original landlord under
the Lease. Tenant does hereby attorn to Purchaser, including Agent if it
should become the Purchaser, as the landlord under the Lease. This attornment
shall be effective and self-operative without the execution of any further
instruments, upon Purchaser's succeeding to the interest of the landlord
under the Lease.
5. DEFAULT BY BORROWER. In the event of a default by Borrower, beyond
any applicable notice and grace period, in its performance of the terms,
provisions and conditions of the Loan Documents, Borrower directs Tenant and
Tenant agrees to recognize the assignment of rents made by Borrower to Agent
in the Deed of Trust, and to pay Agent as assignee all rents due under the
Lease, upon Tenant's receipt of written notice from Agent that Borrower is in
default, beyond any applicable notice and grace period, under the terms of
the Loan Documents. Agent agrees that such notice shall be ineffective
regarding any rent payment sent (by mail, wire or any other manner of
delivery) by Tenant to Landlord prior to receipt of the notice, provided such
rent payment has been sent not more than 30 days prior to the date required
by the Lease. Borrower hereby authorizes Tenant to accept such direction from
Agent and waives all claims against Tenant for any sums so paid at Agent's
direction. Such payments of rents by Tenant to Agent by reason of that
assignment and of Borrower's default, beyond any applicable notice and grace
period, shall continue until the first to occur of the following:
(a) no further rent is due or payable under the Lease;
(b) Agent gives Tenant notice that the default of Borrower under
the Loan Documents has been cured and instructs Tenant that the rents shall
thereafter be payable to Borrower; or
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<PAGE>
(c) a Transfer of the Property occurs and Purchaser gives
Tenant notice of such transfer. Purchaser shall thereupon succeed to the
interest of Borrower under the Lease as provided in Sections 3 and 4
above, after which time the rents and other benefits of Borrower under
the Lease shall be payable to Purchaser as the owner of them.
6. LIMITATION ON AGENT'S PERFORMANCE. Nothing in this Agreement shall
be deemed or construed to be an agreement by Agent to perform any covenant of
Borrower as landlord under the Lease unless and until Agent obtains title to
the Property as Purchaser or obtains possession of the Property under the
terms of the Deed of Trust, and then only during the time when Agent holds
title to the Property; however, Agent agrees that Tenant's rights under the
Lease shall not be abrogated as a result of Agent's failure to perform any
such covenant.
7. TENANT'S COVENANTS. Tenant agrees that during the term of the
Lease, without Agent's prior written consent, which shall not be unreasonably
withheld or delayed, Tenant shall not:
(a) except for any security deposit and estimated payments of
operating expenses and real estate taxes, pay any rent or additional rent
more than one month in advance to any landlord (including Borrower); or
(b) cancel, terminate or surrender the Lease, except at the normal
expiration of the Lease term or except as permitted by the Lease; or
(c) assign or sublet any portion of the Lease or the Premises,
except as permitted by the Lease.
8. NO MERGER. Borrower, Tenant and Agent agree that unless Agent
shall otherwise consent in writing, Borrower's estate in and to the Property
and the leasehold estate created by the Lease shall not merge, but shall
remain separate and distinct, notwithstanding the union of such estates
either in Borrower or Tenant or any third party by purchase, assignment or
otherwise.
-6-
<PAGE>
9. NOTICE OF DEFAULT; MATERIAL NOTICES. Tenant, from and after the
date of this Agreement, shall send a copy of any notice of default or similar
statement under the Lease to Agent at the same time such notice or statement
is sent to Borrower under the Lease, provided that Tenant shall have no
liability to Agent for failure to send such notice nor will such failure
result in the impairment of any of Tenant's rights under this Agreement or of
any term of the Lease, but until such notice is given together with an
opportunity to cure as provided below, Tenant shall not take any action with
respect to such default under the Lease. Borrower and Tenant shall send
copies of all material notices given under the Lease to Agent. Such notices
shall be delivered to Agent in the manner and at the addresses set forth
below.
10. LIMITATION ON LIABILITY. To the extent provided in the Lease, (a)
no Purchaser who acquires title to the Property shall have any obligation or
liability beyond its interest in the Property, (b) Tenant shall look
exclusively to Purchaser's interest in the Property for payment and discharge
of any of Purchaser's obligations under this Agreement or under the Lease,
and (c) Tenant shall not collect or attempt to collect any judgment based
upon such obligations out of any other assets of Purchaser. By executing this
Agreement, Borrower specifically acknowledges and agrees that nothing
contained in this Section shall impair, affect, lessen, abrogate or otherwise
modify the obligations of Borrower to Tenant under the Lease. To the extent
provided in the Loan Documents, Borrower shall have no obligation or
liability under this Agreement beyond its interest in the Property.
11. TENANT'S AGREEMENT.
(a) RELIANCE. Tenant acknowledges that Agent is relying on the
representations, certifications and undertakings made by Tenant in this
Agreement in entering into this Agreement.
(b) NONDISTURBANCE AGREEMENT. This Agreement satisfies any
condition or requirement in the Lease relating to the granting of a
nondisturbance agreement from Agent.
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<PAGE>
12. AGENT'S RIGHTS TO CURE DEFAULT. In the event of any act or
omission by Borrower which would give Tenant the right to terminate the Lease
or to claim a partial or total eviction, Tenant shall not exercise any such
right or make any such claim until it has given Agent written notice of such
act or omission and has given Agent the period of time set forth in the Lease
for Landlord to cure such default. Nothing in this Agreement shall, however,
be construed as a promise or undertaking by Agent to cure any default of
Borrower's.
13. INTEGRATION. This Agreement integrates all of the terms and
conditions of the parties' agreement regarding the subjection and
subordination of the Lease and the leasehold estate created by it, together
with all rights and privileges of Tenant under it, to the lien or charge of
the Loan Documents. This Agreement supersedes and cancels all oral
negotiations and prior and other writings with respect to such subjection and
subordination (only to such extent, however, as would affect the priority
between the Lease and the Loan Documents), including any provisions of the
Lease which provide for the subjection or subordination of the Lease and the
leasehold estate thereby created to a deed or deeds of trust or to a mortgage
or mortgages. This Agreement is intended by the parties as the final
expression of the agreement, and as the complete and exclusive statement of
the terms agreed to by the parties, with respect to such subordination and
subjection, to the extent specified in the foregoing sentence. This Agreement
may not be modified or amended except by a written agreement signed by the
parties or their respective successors in interest.
14. NOTICES. All notices given under this Agreement shall be in
writing and shall be given by personal delivery, overnight receipted courier,
or by registered or certified United States Mail, postage prepaid, sent to
the party at its address appearing below. Notices shall be effective upon
receipt or when proper delivery is refused. Addresses for notices may be
changed by any party by notice to all other parties in accordance with this
Section.
To Agent: Bank of America National
Trust and Savings Association
50 California Street
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<PAGE>
11th Floor (Unit 9105)
San Francisco, California 94111
Attention: Janice Sears, Vice President
To Borrower: Talcott Realty I Limited Partnership
100 Pearl Street
Hartford, Connecticut 06103
Attention: Mr. Kevin North
To Tenant: Spectranet International, Inc.
9333 Genesee Avenue
Suite 200
San Diego, California 92121
15. REFERENCE; ARBITRATION. Any controversy or claim between or among
the parties which arises out of or relates to this Agreement, including any
claim based on or arising from an alleged tort, shall be determined by
reference or arbitration in San Diego, California.
16. ATTORNEY'S FEES. If any lawsuit, reference or arbitration is
commenced which arises out of or relates to this Agreement, the prevailing
party shall be entitled to recover from each other party such sums as the
court, referee or arbitrator may adjudge to be reasonable attorneys' fees in
the action, reference or arbitration, including without duplication, the
allocated costs for services of in-house counsel, in addition to costs and
expenses otherwise allowed by law.
17. MISCELLANEOUS PROVISIONS. This Agreement shall inure to the
benefit of and be binding upon the parties and their respective successors
and assigns. This Agreement is governed by the laws of the State in which
the property is located, without regard to the choice of law rules of that
State. As used here, the word "includes(s)" means "include(s), without
limitation," and the word "including" means "including, but not limited to."
Agent may but shall not be obligated to record this Agreement, at Agent's
sole discretion. This Agreement may be executed in counterparts, each of
which shall be an original and all of which together shall constitute a
single agreement.
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<PAGE>
NOTICE: THIS AGREEMENT CONTAINS A PROVISION WHICH ALLOWS THE PERSON
OBLIGATED ON YOUR LEASE TO OBTAIN A LOAN, A PORTION OF WHICH MAY BE EXPENDED
FOR PURPOSES OTHER THAN IMPROVEMENT OF THE PROPERTY.
"Tenant"
SPECTRANET INTERNATIONAL, INC.,
a California corporation
By
---------------------------------------
---------------------------------------
[Printed Name and Title]
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<PAGE>
"Borrower"
TALCOTT REALTY I LIMITED PARTNERSHIP,
a Connecticut limited partnership
By: TALCOTT EQUITIES LIMITED PARTNERSHIP,
a Connecticut limited partnership
Managing General Partner
By: TALCOTT CORPORATION,
a Connecticut corporation
General Partner
By
----------------------------------
----------------------------------
[Printed Name and Title]
"Agent"
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION, as Agent
By
---------------------------------------
---------------------------------------
[Printed Name and Title]
-11-
<PAGE>
ACKNOWLEDGEMENT
STATE OF )
------------------------
COUNTY OF )
------------------------
On ____________ before me, _______________________, a Notary Public in
and for the State of ______________, personally appeared ___________________
and _____________________, personally known to me (or proved to me on the
basis of satisfactory evidence) to be the person[s] whose name[s] [is/are]
subscribed to the within instrument and acknowledged to me that [he/she/they]
executed the same in [his/her/their] authorized [capacity/capacities], and
that by [his/her/their] signature[s] on the instrument the person[s], or the
entity upon behalf of which the person[s] acted, executed the instrument.
WITNESS my hand and official seal.
- ----------------------------------
(Signature)
(Space above for official notarial seal)
ACKNOWLEDGEMENT
STATE OF )
------------------------
COUNTY OF )
------------------------
On ____________ before me, _______________________, a Notary Public in
and for the State of ______________, personally appeared ___________________
and _____________________, personally known to me (or proved to me on the
basis of satisfactory evidence) to be the person[s] whose name[s] [is/are]
subscribed to the within instrument and acknowledged to me that [he/she/they]
executed the same in [his/her/their] authorized [capacity/capacities], and
that by [his/her/their] signature[s] on the instrument the person[s], or the
entity upon behalf of which the person[s] acted, executed the instrument.
WITNESS my hand and official seal.
- ----------------------------------
(Signature)
(Space above for official notarial seal)
-12-
<PAGE>
ACKNOWLEDGEMENT
STATE OF )
------------------------
COUNTY OF )
------------------------
On ____________ before me, _______________________, a Notary Public in
and for the State of ______________, personally appeared ___________________
and _____________________, personally known to me (or proved to me on the
basis of satisfactory evidence) to be the person[s] whose name[s] [is/are]
subscribed to the within instrument and acknowledged to me that [he/she/they]
executed the same in [his/her/their] authorized [capacity/capacities], and
that by [his/her/their] signature[s] on the instrument the person[s], or the
entity upon behalf of which the person[s] acted, executed the instrument.
WITNESS my hand and official seal.
- ----------------------------------
(Signature)
(Space above for official notarial seal)
ACKNOWLEDGEMENT
STATE OF )
------------------------
COUNTY OF )
------------------------
On ____________ before me, _______________________, a Notary Public in
and for the State of ______________, personally appeared ___________________
and _____________________, personally known to me (or proved to me on the
basis of satisfactory evidence) to be the person[s] whose name[s] [is/are]
subscribed to the within instrument and acknowledged to me that [he/she/they]
executed the same in [his/her/their] authorized [capacity/capacities], and
that by [his/her/their] signature[s] on the instrument the person[s], or the
entity upon behalf of which the person[s] acted, executed the instrument.
WITNESS my hand and official seal.
- ----------------------------------
(Signature)
(Space above for official notarial seal)
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<PAGE>
LEASE COVER SHEET
FOR THE PREMISES
1520 LEWIS STREET
ANAHEIM, CALIFORNIA
DECEMBER 9, 1996
LANDLORD: Scope Development
1510 Lewis Street
Anaheim, California
CONTACT: Mr. Paul Clapp
Phone: (714) 999-2500
Fax: (714) 99-2525
PROPERTY SIZE: 8,918 square feet
DATE OF LEASE: August 26, 1996
LEASE TERM: Five (5) Years
LEASE COMMENCEMENT: November 1, 1996
LEASE TERMINATION: October 31, 2001
RENTAL SCHEDULE: Months Rent/Month
------ ----------
1-2: $0
3-12: $4,637.36 Gross
13-24: $4,815.72 Gross
25-36: $4,994.08 Gross
37-48: $5,172.44 Gross
49-60: $5,350.80 Gross
OPTION TO EXTEND: Tenant shall have the Option to Extend the Lease for
five (5) years by providing Landlord at least six (6)
months, yet no more than twelve (12) months, advance
written notice. Lease rate shall be at the Fair Market
Rental Value for similar properties in the Anaheim
Area.
FIRST RIGHT TO LEASE: Lessee shall have the First Right to Lease the adjacent
property known as 1510 Lewis Street.
SECURITY DEPOSIT: $4,637.36
RIGHT TO CANCEL LEASE: SpectraNet shall have the right to cancel the Lease
with written notice no later than December 31, 1996. In
the event SpectraNet shall choose to cancel the Lease,
the monies for the first (1st) month's rent and
security deposit ($9,274.72 total) shall remain in
Landlord's possession as a cancellation penalty.
REAL ESTATE BROKER: Jeff Read
Grubb & Ellis Company
500 N. State College Boulevard, Ste. 100
Orange, CA 92668
(714) 937-0881
<PAGE>
GRUBB & ELLIS COMPANY
COMMERCIAL REAL ESTATE SERVICES
STATE OF CALIFORNIA
SALE/LEASE AMERICANS WITH DISABILITIES ACT
AND HAZARDOUS MATERIALS DISCLOSURE
PROPERTY: 1520 LEWIS STREET, ANAHEIM
----------------------------------------------------------------------
The United States Congress has recently enacted the Americans With Disabilities
Act. Among other things, this act is intended to make many business
establishments equally accessible to persons with a variety of disabilities;
modifications to real property may be required. State and local laws also may
mandate changes. The real estate brokers in this transaction are not qualified
to advise you as to what, if any, changes may be required now, or in the future.
Owners and tenants should consult the attorneys and qualified design
professionals of their choice for information regarding these matters. Real
estate brokers cannot determine which attorneys or design professionals have the
appropriate expertise in this area.
Various construction materials may contain items that have been or may in the
future be determined to be hazardous (toxic) or undesirable and may need to be
specially treated/handled or removed. For example, some transformers and other
electrical components contain PCBs, and asbestos has been used in components
such as fire-proofing, heating and cooling systems, air duct insulation,
spray-on and tile acoustical materials, linoleum, floor tiles, roofing, dry wall
and plaster. Due to current or prior uses of the Property or in the area, the
Property may have hazardous or undesirable metals, minerals, chemicals,
hydrocarbons, or biological or radioactive items (including electric and
magnetic fields) in soils, water, building components, above or below-ground
containers or elsewhere in areas that may or may not be accessible or
noticeable. Such items may leak or otherwise be released. Real estate agents
have no expertise in the detection or correction of hazardous or undesirable
items. Expert inspections are necessary. Current or future laws may require
clean up by past, present and/or future owners and/or operators. It is the
responsibility of the Seller/Lessor and Buyer/Tenant to retain qualified experts
to detect and correct such matters and to consult with legal counsel of their
choice to determine what provisions, if any, they may wish to include in
transaction documents regarding the Property.
To the best of Seller's/Lessor's knowledge, Seller/Lessor has attached to this
Disclosure copies of all existing surveys and reports known to Seller/Lessor
regarding asbestos and other hazardous materials and undesirable substances
related to the Property. Seller/Lessors are required under California Health
and Safety Code Section 25915 et seq. to disclose reports and surveys regarding
asbestos to certain persons, including their employees, contractors, co-owners,
purchasers and tenants. Buyers/Tenants have similar disclosure obligations.
Sellers/Lessors and Buyers/Tenants have additional hazardous materials
disclosure responsibilities to each other under California Health and Safety
Code Section 25359.7 and other California laws. Consult your attorney regarding
this matter. Grubb & Ellis Company is not qualified to assist you in this
matter or provide you with other legal or tax advice.
LESSOR: LESSEE:
BY: /s/ Paul Clapp BY: /s/ Robert E. Randall
---------------------------- -------------------------------
TITLE: Gen Partner TITLE: C.O.O.
------------------------- ----------------------------
DATE: 11/20/96 DATE: 11/1/96
-------------------------- -----------------------------
/s/ Renney E. Senn
CEO
11/4/96
<PAGE>
[LOGO]
STANDARD INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE--GROSS
(DO NOT USE THIS FORM FOR MULTI-TENANT PROPERTY)
1. BASIC PROVISIONS ("BASIC PROVISIONS")
1.1 PARTIES: This Lease ("LEASE"), dated for reference purposes only,
August 26, 1996, is made by and between Scope Development ("LESSOR") and
Spectranet Anaheim ("LESSEE"), (collectively the "PARTIES," or individually a
"PARTY").
1.2 PREMISES: That certain real property, including all improvements
therein or to be provided by Lessor under the terms of this Lease, and
commonly known by the street address of 1520 Lewis Street, Anaheim, located
in the County of Orange, State of California, and generally described as
(describe briefly the nature of the property) an approximate 8,918 square
foot industrial building located within the Anaheim Business Center
("PREMISES"). (See Paragraph 2 for further provisions.)
1.3 TERM: 5 years and 0 months ("ORIGINAL TERM") commencing November 1,
1996 ("COMMENCEMENT DATE") and ending _________________ ("EXPIRATION DATE").
(See Paragraph 3 for further provisions.)
1.4 EARLY POSSESSION: None ("Early Possession Date"). (See Paragraphs
3.2 and 3.3 for further provisions.)
1.5 BASE RENT: $4,637.36 per month ("BASE RENT"), payable on the first
day of each month commencing February 1, 1997 (See Paragraph 4 for further
provisions.) /X/ If this box is checked, there are provisions in this Lease
for the Base Rent to be adjusted.
1.6 BASE RENT PAID UPON EXECUTION: $4,637.36 as Base Rent for the period
November 1996.
1.7 SECURITY DEPOSIT: $4,637.36 ("SECURITY DEPOSIT"). (See Paragraph 5
for further provisions.)
1.8 PERMITTED USE: Telecommunications, switching equipment, including
back-up generators, batteries and diesel tanks and related office use (See
Paragraph 6 for further provisions.)
1.9 INSURING PARTY: Lessor is the "INSURING PARTY." $591.00/yr is the
"BASE PREMIUM." (See Paragraph 8 for further provisions.)
1.10 REAL ESTATE BROKERS: The following real estate brokers
(collectively, the "BROKERS") and brokerage relationships exist in this
transaction and are consented to by the Parties (check applicable boxes):
CB Commercial Real Estate Group, Inc.--Walter Frome represents
/X/ Lessor exclusively ("LESSOR'S BROKER"); / / both Lessor and Lessee, and
Grubb & Ellis - Jeff Read represents
/X/ Lessee exclusively ("LESSEE'S BROKER"); / / both Lessee and Lessor. (See
Paragraph 15 for further provisions.)
1.11 GUARANTOR. The obligations of the Lessee under this Lease are to be
guaranteed by None ("GUARANTOR"). (See Paragraph 37 for further provisions.)
1.12 ADDENDA. Attached hereto is an Addendum or Addenda consisting of
Paragraphs _____ through _____ and Exhibits _____ Addendum, Option to Extend,
Option to Purchase, Right of First Refusal to Purchase Exhibit "A" and
Exhibit "B" all of which constitute a part of this Lease.
2. PREMISES.
2.1 LETTING. Lessor hereby leases to Lessee, and Lessee hereby leases
from Lessor, the Premises, for the term, at the rental, and upon all of the
terms, covenants and conditions set forth in this Lease. Unless otherwise
provided herein, any statement of square footage set forth in this Lease, or
that may have been used in calculating rental, is an approximation which
Lessor and Lessee agree is reasonable and the rental based thereon is not
subject to revision whether or not the actual square footage is more or less.
2.2 CONDITION. Lessor shall deliver the Premises to Lessee clean and
free of debris on the Commencement Date and warrants to Lessee that the
existing plumbing, fire sprinkler system, lighting, air conditioning,
heating, and loading doors, if any, in the Premises, other than those
constructed by Lessee, shall be in good operating condition on the
Commencement Date. If a non-compliance with said warranty exists as of the
Commencement Date, Lessor shall, except as otherwise provided in this Lease,
promptly after receipt of written notice from Lessee setting forth with
specificity the nature and extent of such non-compliance, rectify same at
Lessor's expense. If Lessee does not give Lessor written notice of a
non-compliance with this warranty within thirty (30) days after the
Commencement Date, correction of that non-compliance shall be the obligation
of Lessee at Lessee's sole cost and expense.
2.3 COMPLIANCE WITH COVENANTS, RESTRICTIONS AND BUILDING CODE. Lessor
warrants to Lessee that the improvements on the Premises comply with all
applicable covenants or restrictions of record and applicable building codes,
regulations and ordinances in effect on the Commencement Date. Said warranty
does not apply to the use to which Lessee will put the Premises or to any
Alterations or Utility Installations (as defined in Paragraph 7.3(a)) made or
to be made by Lessee. If the Premises do not comply with said warranty,
Lessor shall, except as otherwise provided in this Lease, promptly after
receipt of written notice from Lessee setting forth with specificity the
nature and extent of such non-compliance, rectify the same at Lessor's
expense. If Lessee does not give Lessor written notice of a non-compliance
with this warranty within six (6) months following the Commencement Date,
correction of that non-compliance shall be the obligation of Lessee at
Lessee's sole cost and expense.
2.4 ACCEPTANCE OF PREMISES. Lessee hereby acknowledges: (a) that it has
been advised by the Brokers to satisfy itself with respect to the condition of
the Premises (including but not limited to the electrical and fire sprinkler
systems, security, environmental aspects, compliance with Applicable Law, as
defined in Paragraph 6.3) and the present and future suitability of the
Premises for Lessee's intended use, (b) that Lessee has made such
investigation as it deems necessary with reference to such matters and
assumes all responsibility therefor as the same relate to Lessee's occupancy
of the Premises and/or the term of this Lease, and (c) that neither Lessor,
nor any of Lessor's agents, has made any oral or written representations or
warranties with respect to the said matters other than as set forth in this
Lease.
2.5 LESSEE PRIOR OWNER/OCCUPANT. The warranties made by Lessor in this
Paragraph 2 shall be of no force or effect if immediately prior to the date
set forth in Paragraph 1.1 Lessee was the owner or occupant of the Premises.
In such event, Lessee shall, at Lessee's sole cost and expense, correct any
non-compliance of the Premises with said warranties.
3. TERM.
3.1 TERM. The Commencement Date, Expiration Date and Original Term of
this Lease are as specified in Paragraph 1.3.
3.2 EARLY POSSESSION. If Lessee totally or partially occupies the
Premises prior to the Commencement Date, the obligation to pay Base Rent
shall be abated for the period of such early possession. All other terms of
this Lease except monetary obligations hereunder, however, shall be in effect
during such period. Any such early possession shall not affect nor advance
the Expiration Date of the Original Term.
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3.3 DELAY IN POSSESSION. If for any reason Lessor cannot deliver
possession of the Premises to Lessee as agreed herein by the Early Possession
Date, if one is specified in Paragraph 1.4, or, if no Early Possession Date
is specified, by the Commencement Date, Lessor shall not be subject to any
liability therefor, nor shall such failure affect the validity of this Lease,
or the obligations of Lessee hereunder, or extend the term hereof, but in
such case, Lessee shall not, except as otherwise provided herein, be
obligated to pay rent or perform any other obligation of Lessee under the
terms of this Lease until Lessor delivers possession of the Premises to
Lessee. If possession of the Premises is not delivered to Lessee within sixty
(60) days after the Commencement Date, Lessee may, at its option, by notice in
writing to Lessor within ten (10) days thereafter, cancel this Lease, in
which event the Parties shall be discharged from all obligations hereunder;
provided, however, that if such written notice by Lessee is not received by
Lessor within said ten (10) day period, Lessee's right to cancel this Lease
shall terminate and be of no further force or effect. Except as may be
otherwise provided, and regardless of when the term actually commences, if
possession is not tendered to Lessee when required by this Lease and Lessee
does not terminate this Lease, as aforesaid, the period free of the
obligation to pay Base Rent, if any, that Lessee would otherwise have enjoyed
shall run from the date of delivery of possession and continue for a period
equal to what Lessee would otherwise have enjoyed under the terms hereof, but
minus any days of delay caused by the acts, changes or omissions of Lessee.
4. RENT
4.1 BASE RENT. Lessee shall cause payment of Base Rent and other rent or
charges, as the same may be adjusted from time to time, to be received by
Lessor in lawful money of the United States, without offset or deduction,
on or before the day on which it is due under the terms of this Lease. Base
Rent and all other rent and charges for any period during the term hereof
which is for less than one (1) full calendar month shall be prorated based
upon the actual number of days of the calendar month involved. Payment of
Base Rent and other charges shall be made to Lessor at its address stated
herein or to such other persons or at such other addresses as Lessor may from
time to time designate in writing to Lessee.
5. SECURITY DEPOSIT. Lessee shall deposit with Lessor upon execution hereof
the Security Deposit set forth in Paragraph 1.7 as security for Lessee's
faithful performance of Lessee's obligations under this Lease. If Lessee
fails to pay Base Rent or other rent or charges due hereunder, or otherwise
Defaults under this Lease (as defined in Paragraph 13.1), Lessor may use,
apply or retain all or any portion of said Security Deposit for the payment
of any amount due Lessor or to reimburse or compensate Lessor for any
liability, cost, expense, loss or damage (including attorneys' fees) which
Lessor may suffer or incur by reason thereof. If Lessor uses or applies all
or any portion of said Security Deposit, Lessee shall within ten (10) days
after written request therefor deposit moneys with Lessor sufficient to
restore said Security Deposit to the full amount required by this Lease. Any
time the Base Rent increases during the term of this Lease, Lessee shall; upon
written request from Lessor, deposit additional moneys with Lessor sufficient
to maintain the same ratio between the Security Deposit and the Base Rent as
those amounts are specified in the Basic Provisions. Lessor shall not be
required to keep all or any part of the Security Deposit separate from its
general accounts. Lessor shall, at the expiration or earlier termination of
the term hereof and after Lessee has vacated the Premises, return to Lessee
(or, at Lessor's option, to the last assignee, if any, of Lessee's interest
herein), that portion of the Security Deposit not used or applied by Lessor.
Unless otherwise expressly agreed in writing by Lessor, no part of the
Security Deposit shall be considered to be held in trust, to bear interest or
other increment for its use, or to be prepayment for any moneys to be paid by
Lessee under this Lease.
6. USE
6.1 USE. Lessee shall use and occupy the Premises only for the purposes
set forth in Paragraph 1.8, or any other use which is comparable thereto, and
for no other purpose. Lessee shall not use or permit the use of the Premises
in a manner that creates waste or a nuisance, or that disturbs owners and/or
occupants of, or causes damage to, neighboring premises or properties. Lessor
hereby agrees to not unreasonably withhold or delay its consent to any
written request by Lessee, Lessees assignees or subtenants, and by
prospective assignees and subtenants of the Lessee, its assignees and
subtenants, for a modification of said permitted purpose for which the
premises may be used or occupied, so long as the same will not impair the
structural integrity of the improvements on the Premises, the mechanical or
electrical systems therein, is not significantly more burdensome to the
Premises and the improvements thereon, and is otherwise permissible pursuant
to this Paragraph 6. If Lessor elects to withhold such consent, Lessor shall
within five (5) business days give a written notification of same, which
notice shall include an explanation of Lessor's reasonable objections to the
change in use.
6.2 HAZARDOUS SUBSTANCES.
(a) REPORTABLE USES REQUIRE CONSENT. The term "HAZARDOUS SUBSTANCE"
as used in this Lease shall mean any product, substance, chemical, material
or waste whose presence, nature, quantity and/or intensity of existence, use,
manufacture, disposal, transportation, spill, release or effect, either by
itself or in combination with other materials expected to be on the Premises,
is either: (i) potentially injurious to the public health, safety or welfare,
the environment or the Premises, (ii) regulated or monitored by any
governmental authority, or (iii) a basis for liability of Lessor to any
governmental agency or third party under any applicable statute or common law
theory. Hazardous Substance shall include, but not be limited to,
hydrocarbons, petroleum, gasoline, crude oil or any products, by-products or
fractions thereof. Lessee shall not engage in any activity in, on or about
the Premises which constitutes a Reportable Use (as hereinafter defined) of
Hazardous Substances without the express prior written consent of Lessor and
compliance in a timely manner (as Lessee's sole cost and expense) with all
Applicable Law (as defined in Paragraph 6.3). "REPORTABLE USE" shall mean (i)
the installation or use of any above or below ground storage tank, (ii) the
generation, possession, storage, use, transportation, or disposal of a
Hazardous Substance that requires a permit from, or with respect to which a
report, notice, registration or business plan is required to be filed with,
any governmental authority. Reportable Use shall also include Lessee's being
responsible for the presence in, on or about the Premises of a Hazardous
Substance with respect to which any Applicable Law requires that a notice be
given to persons entering or occupying the Premises or neighboring
properties. Notwithstanding the foregoing, Lessee may, without Lessor's prior
consent, but in compliance with all Applicable Law, use any ordinary and
customary materials reasonably required to be used by Lessee in the normal
course of Lessee's business permitted on the Premises, so long as such use is
not a Reportable Use and does not expose the Premises or neighboring
properties to any meaningful risk of contamination or damage or expose Lessor
to any liability therefor. In addition, Lessor may (but without any obligation
to do so) condition its consent to the use or presence of any Hazardous
Substance, activity or storage tank by Lessee upon Lessee's giving Lessor
such additional assurances as Lessor, in its reasonable discretion, deems
necessary to protect itself, the public, the Premises and the environment
against damage, contamination or injury and/or liability therefrom or
therefor, including, but not limited to, the installation (and removal on or
before Lease expiration or earlier termination) of reasonably necessary
protective modifications to the Premises (such as concrete encasements)
and/or the deposit of an additional Security Deposit under Paragraph 5 hereof.
(b) DUTY TO INFORM LESSOR. If Lessee knows, or has reasonable cause
to believe, that a Hazardous Substance, or a condition involving or resulting
from same, has come to be located in, on, under or about the Premises, other
than as previously consented to by Lessor, Lessee shall immediately give
written notice of such fact to Lessor. Lessee shall also immediately give
Lessor a copy of any statement, report, notice, registration, application,
permit, business plan, license, claim, action or proceeding given to, or
received from, any governmental authority or private party, or persons
entering or occupying the Premises, concerning the presence, spill, release,
discharge of, or exposure to, any Hazardous Substance or contamination in,
on, or about the Premises, including but not limited to all such documents as
may be involved in any Reportable Uses involving the Premises.
(c) INDEMNIFICATION. Lessee shall indemnify, protect, defend and
hold Lessor, its agents, employees, lenders and ground lessor, if any, and
the Premises, harmless from and against any and all loss of rents and/or
damages, liabilities, judgments, costs, claims, liens, expenses, penalties,
permits and attorney's and consultant's fees arising out of or involving any
Hazardous Substance or storage tank brought onto the Premises by or for
Lessee or under Lessee's control. Lessee's obligations under this Paragraph 6
shall include, but not be limited to, the effects of any contamination or
injury to person, property or the environment created or suffered by Lessee,
and the cost of investigation (including consultant's and attorney's fees and
testing), removal, remediation, restoration and/or abatement thereof, or of
any contamination therein involved, and shall survive the expiration or
earlier termination of this Lease. No termination, cancellation or release
agreement entered into by Lessor and Lessee shall release Lessee from its
obligations under this Lease with respect to Hazardous Substances or storage
tanks, unless specifically so agreed by Lessor in writing at the time of such
agreement.
6.3 LESSEE'S COMPLIANCE WITH LAW. Except as otherwise provided in this
Lease, Lessee, shall, at Lessee's sole cost and expense, fully, diligently
and in a timely manner, comply with all "APPLICABLE LAW," which term issued in
this Lease to include all laws, rules, regulations, ordinances, directives,
covenants, easements and restrictions of record, permits, the requirements of
any applicable fire insurance underwriter or rating bureau, and the
recommendations of Lessor's engineers and/or consultants, relating in any
manner to the Premises (including but not limited to matters pertaining to
(i) industrial hygiene, (ii) environmental conditions on, in, under or about
the Premises, including soil and groundwater conditions, and (iii) the use,
generation, manufacture, production, installation, maintenance, removal,
transportation, storage, spill or release of any Hazardous Substance or
storage tank), now in effect or which may hereafter come into effect, and
whether or not reflecting a change in policy from any previously existing
policy. Lessee shall, within five (5) days after receipt of Lessor's written
request, provide Lessor with copies of all documents and information,
including, but not limited to, permits, registrations, manifests,
applications, reports and certificates, evidencing Lessee's compliance with
any Applicable Law specified by Lessor, and shall immediately upon receipt,
notify Lessor in writing (with copies of any documents involved) of any
threatened or actual claim, notice, citation, warning, complaint or report
pertaining to or involving failure by Lessee or the Premises to comply with
any Applicable Law.
6.4 INSPECTION; COMPLIANCE. Lessor and Lessor's Lender(s) (as defined in
Paragraph 8.3(a)) shall have the right to enter the Premises at any time, in
the case of an emergency, and otherwise at reasonable times, for the purpose
of inspecting the condition of the Premises and for verifying compliance by
Lessee with this Lease and all Applicable Laws (as defined in Paragraph 6.3),
and to employ experts and/or consultants in connection therewith and/or to
advise Lessor with respect to Lessee's activities, including but not limited
to the installation, operation, use, monitoring, maintenance, or removal of
any Hazardous Substance or storage tank on or from the Premises. The costs
and expenses of any such inspections shall be paid by the party requesting
same, unless a Default or Breach of this Lease, violation of Applicable Law,
or a contamination, caused or materially contributed to by Lessee is found to
exist or be imminent, or unless the inspection is requested or ordered by a
governmental authority as the result of any such existing or imminent
violation or contamination. In any such case, Lessee shall upon request
reimburse Lessor or Lessor's Lender, as the case may be, for the costs and
expenses of such inspections.
7. MAINTENANCE; REPAIRS; UTILITY INSTALLATIONS; TRADE FIXTURES AND ALTERATIONS.
7.1 LESSEE'S OBLIGATIONS.
(a) Subject to the provisions of Paragraphs 2.2 (Lessor's warranty
as to condition), 2.3 (Lessor's warranty as to compliance with covenants,
etc),
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7.2 (Lessor's obligations to repair), 9 (damage and destruction), and 14
(condemnation), Lessee shall, at Lessee's sole cost and expense and at all
times, keep the Premises and every part thereof in good order, condition and
repair, (whether or not such portion of the Premises requiring repair, or the
means of repairing the same, are reasonably or readily accessible to Lessee,
and whether or not the need for such repairs occurs as a result of Lessee's use,
any prior use, the elements or the age of such portion of the Premises),
including, without limiting the generality of the foregoing, all equipment or
facilities serving the Premises, such as plumbing, heating, air conditioning,
ventilating, electrical, lighting facilities, boilers, fired or unfired pressure
vessels, fire sprinkler and/or standpipe and hose or other automatic fire
extinguishing system, including fire alarm and/or smoke detection systems and
equipment, fire hydrants, fixtures, walls (interior and exterior), ceilings,
floors, windows, doors, plate glass, skylights, landscaping, driveways, parking
lots, fences, retaining walls, signs, sidewalks and parkways located in, on,
about, or adjacent to the Premises, but excluding foundations, the exterior
roof and the structural aspects of the Premises. Lessee shall not cause or
permit any Hazardous Substance to be spilled or released in, on, under or about
the Premises (including through the plumbing or sanitary sewer system) and shall
promptly, at Lessee's expense, take all investigatory and/or remedial action
reasonably recommended, whether or not formally ordered or required, for the
cleanup of any contamination of, and for the maintenance, security and/or
monitoring of, the Premises, the elements surrounding same, or neighboring
properties, that was caused or materially contributed to by Lessee, or
pertaining to or involving any Hazardous Substance and/or storage tank brought
onto the Premises by or for Lessee or under its control. Lessee, in keeping the
Premises in good order, condition and repair, shall exercise and perform good
maintenance practices. Lessee's obligations shall include restorations,
replacements or renewals when necessary to keep the Premises and all
improvements thereon or a part thereof in good order, condition and state of
repair.
(b) Lessee shall, at Lessee's sole cost and expense, procure and maintain
contracts, with copies to Lessor, in customary form and substance for, and with
contractors specializing and experienced in, the inspection, maintenance and
service of the following equipment and improvements, if any, located on the
Premises:(i) heating, air conditioning and ventilation equipment, (ii) boiler,
fired or unfired pressure vessels, (iii) fire sprinkler and/or standpipe and
hose or other automatic fire extinguishing systems, including fire alarm and/or
smoke detection, (iv) landscaping and irrigation systems, (v) roof covering and
drain maintenance and (vi) asphalt and parking lot maintenance.
7.2 LESSOR'S OBLIGATIONS. Upon receipt of written notice of the need for such
repairs and subject to Paragraph 13.5, Lessor shall, at Lessor's expense, keep
the foundations, exterior roof and structural aspects of the Premises in good
order, condition and repair, Lessor shall not, however, be obligated to paint
the exterior surface of the exterior walls or to maintain the windows, doors
or plate glass or the interior surface of exterior walls. Lessor shall not,
in any event, have any obligation to make any repairs until Lessor receives
written notice of the need for such repairs. It is the intention of the Parties
that the terms of this Lease govern the respective obligations of the Parties
as to maintenance and repair of the Premises. Lessee and Lessor expressly waive
the benefit of any statue now or hereafter in effect to the extent it is
inconsistent with the terms of this Lease with respect to, or which affords
Lessee the right to make repairs at the expense of Lessor or to terminate this
Lease by reason of, any needed repairs.
7.3 UTILITY INSTALLATIONS; TRADE FIXTURES; ALTERATIONS.
(a) DEFINITIONS; CONSENT REQUIRED. The term "UTILITY INSTALLATIONS" is
used in this lease to refer to all carpeting, window coverings, air lines, power
panels, electrical distribution, security, fire protection systems,
communication systems, lighting fixtures, heating, ventilating, and air
conditioning equipment, plumbing, and fencing in, on or about the Premises. The
term "TRADE FIXTURES" shall mean Lessee's machinery and equipment that can be
removed without doing material damage to the Premises. The term "ALTERATIONS"
shall mean any modification of the improvements on the Premises from that which
are provided by Lessor under the terms of this Lease, other than Utility
Installations or Trade Fixtures, whether by addition or deletion. "LESSEE OWNED
ALTERATIONS AND/OR UTILITY INSTALLATIONS" are defined as Alterations and/or
Utility Installations made by lessee that are not yet owned by Lessor as defined
in Paragraph 7.4(a). Lessee shall not make any Alterations or Utility
Installations in, on, under or about the Premises without Lessor's prior written
consent.
(b) CONSENT. Any Alterations or Utility Installations that Lessee
shall desire to make and which require the consent of the Lessor shall be
presented to Lessor in written form with proposed detailed plans. All
consents given by Lessor, whether by virtue of Paragraph 7.3(a) or by
subsequent specific consent, shall be deemed conditioned upon: (i) Lessee's
acquiring all applicable permits required by governmental authorities, (ii)
the furnishing of copies of such permits together with a copy of the plans
and specifications for the Alteration or Utility Installation to Lessor prior
to commencement of the work thereon, and (iii) the compliance by Lessee with
all conditions of said permits in a prompt and expeditious manner. Any
Alterations or Utility Installations by Lessee during the term of this Lease
shall be done in a good and workmanlike manner, with good and sufficient
materials, and in compliance with all Applicable Law. Lessee shall promptly
upon completion thereof furnish Lessor with as-built plans and specifications
therefor.
(c) INDEMNIFICATION. Lessee shall pay, when due, all claims for
labor or materials furnished or alleged to have been furnished to or for
Lessee at or for use on the Premises, which claims are or may be secured by
any mechanics' or materialmen's lien against the Premises or any interest
therein. Lessee shall give Lessor not less than ten (10) days' notice prior
to the commencement of any work in, on or about the Premises, and Lessor
shall have the right to post notices of non-responsibility in or on the
Premises as provided by law. If Lessee shall, in good faith, contest the
validity of any such lien, claim or demand, then Lessee shall, at its sole
expense defend and protect itself, Lessor and the Premises against the same
and shall pay and satisfy any such adverse judgement that may be rendered
thereon before the enforcement thereof against the Lessor or the Premises. If
Lessor shall require, Lessee shall furnish to Lessor a surety bond
satisfactory to Lessor in an amount equal to one and one-half times the
amount of such contested lien claim or demand, indemnifying Lessor against
liability for the same, as required by law for the holding of the Premises
free from the effect of such lien or claim. In addition, Lessor may require
Lessee to pay Lessor's attorney's fees and costs in participating in such
action if Lessor shall decide it is to its best interest to do so.
7.4 OWNERSHIP; REMOVAL; SURRENDER; AND RESTORATION.
(a) OWNERSHIP. Subject to Lessor's right to require their removal
or become the owner thereof as hereinafter provided in this Paragraph 7.4,
all Alterations and Utility Additions made to the Premises by Lessee shall be
the property of and owned by Lessee, but considered a part of the Premises.
Lessor may, at any time and its option, elect in writing to Lessee to be the
owner of all or any specified part of the Lessee Owned Alterations and
Utility Installations. Unless otherwise instructed per subparagraph 7.4(b)
hereof, all Lessee Owned Alterations and Utility Installations shall, at the
expiration or earlier termination of this Lease, become the property of
Lessor and remain upon and be surrendered by Lessee with the Premises.
(b) REMOVAL. Unless otherwise agreed in writing, Lessor may
require that any or all Lessee Owned Alterations or Utility Installations be
removed by the expiration or earlier termination of this Lease,
notwithstanding their installation may have been consented to by Lessor.
Lessor may require the removal at any time of all or any part of any Lessee
Owned Alterations or Utility Installations made without the required consent
of Lessor.
(c) SURRENDER/RESTORATION. Lessee shall surrender the Premises by
the end of the last day of the Lease term or any earlier termination date,
with all of the improvements, parts and surfaces thereof clean and free of
debris and in good operating order, condition and state of repair, ordinary
wear and tear excepted. "ORDINARY WEAR AND TEAR" shall not include any damage
or deterioration that would have been prevented by good maintenance practice
or by Lessee performing all of its obligations under this Lease. Except as
otherwise agreed or specified in writing by Lessor, the Premises, as
surrendered, shall include the Utility Installations. The obligation of
Lessee shall include the repair of any damage occasioned by the installation,
maintenance or removal of Lessee's Trade Fixtures, furnishings, equipment,
and Alterations and/or Utility Installations, as well as the removal of any
storage tank installed by or for Lessee, and the removal, replacement, or
remediation of any soil, material or ground water contaminated by Lessee, all
as may then be required by Applicable Law and/or good service practice.
Lessee's Trade Fixtures shall remain the property of Lessee and shall be
removed by Lessee subject to its obligation to repair and restore the
Premises per this Lease.
8. INSURANCE; INDEMNITY.
8.1 PAYMENT OF PREMIUM INCREASES.
(a) Lessee shall pay to Lessor any insurance cost increase
("INSURANCE COST INCREASE") occurring during the term of this Lease.
"INSURANCE COST INCREASE" is defined as any increase in the actual cost of
the insurance required under Paragraphs 8.2(b), 8.3(a) and 8.3(b). ("REQUIRED
INSURANCE"), over and above the Base Premium, as hereinafter defined,
calculated on an annual basis. "INSURANCE COST INCREASE" shall include, but
not be limited to, increases resulting from the nature of Lessee's occupancy,
any act or omission of Lessee, requirements of the holder of a mortgage or
deed of trust covering the Premises, increased valuation of the Premises,
and/or a premium rate increase. If the parties insert a dollar amount in
Paragraph 1.9, such amount shall be considered the "BASE PREMIUM." In lieu
thereof, if the Premises have been previously occupied, the "BASE PREMIUM"
shall be the annual premium applicable to the most recent occupancy. If the
Premises have never been occupied, the "BASE PREMIUM" shall be the lowest
annual premium reasonably obtainable for the Required Insurance as of the
commencement of the Original Term, assuming the most nominal use possible of
the Premises. In no event, however, shall Lessee be responsible for any
portion of the premium cost attributable to liability insurance coverage in
excess of $1,000,000 procured under Paragraph 8.2(b) (Liability Insurance
Carried By Lessor).
(b) Lessee shall pay any such Insurance Cost Increase to Lessor
within thirty (30) days after the receipt by Lessee of a copy of the premium
statement or other reasonable evidence of the amount due. If the insurance
policies maintained hereunder cover other property besides the Premises,
Lessor shall also deliver to Lessee a statement of the amount of such
Insurance Cost Increase attributable only to the Premises showing in
reasonable detail the manner in which such amount was computed. Premiums for
policy periods commencing prior to, or extending beyond, the term of this
Lease shall be prorated to coincide with the corresponding Commencement or
Expiration of the Lease term.
8.2 LIABILITY INSURANCE.
(a) CARRIED BY LESSEE. Lessee shall obtain and keep in force during
the term of this Lease a Commercial General Liability policy of insurance
protecting Lessee and Lessor (as an additional insured) against claims for
bodily injury, personal injury and property damage based upon, involving or
arising out of the ownership, use, occupancy or maintenance of the Premises
and all areas appurtenant thereto. Such insurance shall be on an occurrence
basis providing single limit coverage in an amount not less than $1,000,000
per occurrence with an "Additional Insured-Managers or Lessors or Premises"
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Endorsement and contain the "Amendment of the Pollution Exclusion" for damage
caused by heat, smoke or fumes from a hostile fire. The policy shall not
contain any intra-insured exclusions as between insured persons or
organizations, but shall include coverage for liability assumed under this
Lease as an "insured contract" for the performance of Lessee's indemnity
obligations under this Lease. The limits of said insurance required by this
Lease or as carried by Lessee shall not, however, limit the liability of
Lessee nor relieve Lessee of any obligation hereunder. All insurance to be
carried by Lessee shall be primary to and not contributory with any similar
insurance carried by Lessor, whose insurance shall be considered excess
insurance only.
(b) CARRIED BY LESSOR. In the event Lessor is the Insuring Party,
Lessor shall also maintain liability insurance described in Paragraph 8.2(a),
above, in addition to, and not in lieu of, the insurance required to be
maintained by Lessee. Lessee shall not be named as an additional insured
therein.
8.3 PROPERTY INSURANCE--BUILDING, IMPROVEMENTS AND RENTAL VALUE.
(a) BUILDING AND IMPROVEMENTS. The Insuring Party shall obtain and
keep in force during the term of this Lease a policy or policies in the name
of Lessor, with loss payable to Lessor and to the holders of any mortgages,
deeds of trust or ground leases on the Premises ("LENDER(S)"), insuring loss
or damage to the Premises. The amount of such insurance shall be equal to the
full replacement cost of the Premises, as the same shall exist from time to
time, or the amount required by Lenders, but in no event more than the
commercially reasonable and available insurable value thereof if, by reason
of the unique nature or age of the improvements involved, such latter amount
is less than full replacement cost. Lessee Owned Alterations and Utility
Installations shall be insured by Lessee under Paragraph 8.4. If the coverage
is available and commercially appropriate, such policy or policies shall
insure against all risks of direct physical loss or damage (except the perils
of flood and/or earthquake unless required by a Lender), including coverage
for any additional costs resulting from debris removal and reasonable amounts
of coverage for the enforcement of any ordinance or law regulating the
reconstruction or replacement of any undamaged sections of the Premises
required to be demolished or removed by reason of the enforcement of any
building, zoning, safety or land use laws as the result of a covered cause of
loss, but not including plate glass insurance. Said policy or policies shall
also contain an agreed valuation provision in lieu of any coinsurance clause,
waiver of subrogation, and inflation guard protection causing an increase in
the annual property insurance coverage amount by a factor of not less than
the adjusted U.S. Department of Labor Consumer Price Index for All Urban
Consumers for the city nearest to where the Premises are located.
(b) RENTAL VALUE. Lessor shall, in addition, obtain and keep in
force during the term of this Lease a policy or policies in the name of
Lessor, with loss payable to Lessor and Lender(s), insuring the loss of the
full rental and other charges payable by Lessee to Lessor under this Lease
for one (1) year (including all real estate taxes, insurance costs, and any
scheduled rental increases). Said insurance shall provide that in the event
the Lease is terminated by reason of an insured loss, the period of indemnity
for such coverage shall be extended beyond the date of the completion of
repairs or replacement of the Premises, to provide for one full year's loss
of rental revenues from the date of any such loss. Said insurance shall
contain an agreed valuation provision in lieu of any coinsurance clause, and
the amount of coverage shall be adjusted annually to reflect the projected
rental income, property taxes, insurance premium costs and other expenses, if
any, otherwise payable by Lessee, for the next twelve (12) month period.
(c) ADJACENT PREMISES. If the Premises are part of a larger
building, or if the Premises are part of a group of buildings owned by Lessor
which are adjacent to the Premises, the Lessee shall pay for any increase in
the premiums for the property insurance of such building or buildings if said
increase is caused by Lessee's acts, omissions, use or occupancy of the
Premises.
(d) TENANT'S IMPROVEMENTS. Since Lessor is the Insuring Party, the
Lessor shall not be required to insure Lessee Owned Alterations and Utility
Installations unless the item in question has become the property of Lessor
under the terms of this Lease.
8.4 LESSEE'S PROPERTY INSURANCE. Subject to the requirements of
Paragraph 8.5, Lessee at its cost shall either by separate policy or, at
Lessor's option, by endorsement to a policy already carried, maintain
insurance coverage on all of Lessee's personal property, Lessee Owned
Alterations and Utility Installations in, on, or about the Premises similar in
coverage to that carried by the Insuring Party under Paragraph 8.3. Such
insurance shall be full replacement cost coverage with a deductible of not to
exceed $1,000 per occurrence. The proceeds from any such insurance shall be
used by Lessee for the replacement of personal property or the restoration of
Lessee Owned Alterations and Utility Installations. Lessee shall be the
Insuring Party with respect to the insurance required by this Paragraph 8.4
and shall provide Lessor with written evidence that such insurance is in
force.
8.5 INSURANCE POLICIES. Insurance required hereunder shall be in
companies duly licensed to transact business in the state where the Premises
are located, and maintaining during the policy term a "General Policyholders
Rating" of at least B+, V, or such other rating as may be required by a
Lender having a lien on the Premises, as set forth in the most current issue
of "Best's Insurance Guide." Lessee shall not do or permit to be done
anything which shall invalidate the insurance policies referred to in this
Paragraph 8. Lessee shall cause to be delivered to Lessor certified copies
of, or certificates evidencing the existence and amounts of, the insurance,
and with the additional insureds, required under Paragraph 8.2(a) and 8.4. No
such policy shall be cancelable or subject to modification except after
thirty (30) days prior written notice to Lessor. Lessee shall at least thirty
(30) days prior to the expiration of such policies, furnish Lessor with
evidence of renewals or "insurance binders" evidencing renewal thereof, or
Lessor may order such insurance and charge the cost thereof to Lessee, which
amount shall be payable by Lessee to Lessor upon demand.
8.6 WAIVER OF SUBROGATION. Without affecting any other rights or
remedies, Lessee and Lessor ("WAIVING PARTY") each hereby release and relieve
the other, and waive their entire right to recover damages (whether in
contract or in tort) against the other, for loss of or damage to the Waiving
Party's property arising out of or incident to the perils required to be
insured against under Paragraph 8. The effect of such releases and waivers of
the right to recover damages shall not be limited by the amount of insurance
carried or required, or by any deductibles applicable thereto.
8.7 INDEMNITY. Except for Lessor's negligence and/or breach of express
warranties, Lessee shall indemnify, protect, defend and hold harmless the
Premises, Lessor and its agents. Lessor's master or ground lessor, partners
and Lenders, from and against any and all claims, loss of rents and/or
damages, costs, liens, judgments, penalties, permits, attorney's and
consultant's fees, expenses and/or liabilities arising out of, involving, or
in dealing with, the occupancy of the Premises by Lessee, the conduct of
Lessee's business, any act, omission or neglect of Lessee, its agents,
contractors, employees or invitees, and out of any Default or Breach by
Lessee in the performance in a timely manner of any obligation on Lessee's
part to be performed under this Lease. The foregoing shall include, but not
be limited to, the defense or pursuit of any claim or any action or
proceeding involved therein, and whether or not (in the case of claims made
against Lessor) litigated and/or reduced to judgment, and whether well
founded or not. In case any action or proceeding be brought against Lessor by
reason of any of the foregoing matters, Lessee upon notice from Lessor shall
defend the same at Lessee's expense by counsel reasonably satisfactory to
Lessor and Lessor shall cooperate with Lessee in such defense. Lessor need
not have first paid any such claim in order to be so indemnified.
8.8 EXEMPTION OF LESSOR FROM LIABILITY. Subject to Lessor's other
obligations specifically provided under the Lease, Lessor shall not be liable
for injury or damage to the person or goods, wares, merchandise or other
property of Lessee, Lessee's employees, contractors, invitees, customers, or
any other person in or about the Premises, whether such damage or injury is
caused by or results from fire, steam, electricity, gas, water or rain, or
from the breakage, leakage, obstruction or other defects of pipes, fire
sprinklers, wires, appliances, plumbing, air conditioning or lighting
fixtures, or from any other cause, whether the said injury or damage results
from conditions arising upon the Premises or upon other portions of the
building of which the Premises are a part, or from other sources or places,
and regardless of whether the cause of such damage or injury or the means of
repairing the same is accessible or not. Lessor shall not be liable for any
damages arising from any act or neglect of any other tenant of Lessor.
Notwithstanding Lessor's negligence or breach of this Lease, Lessor shall
under no circumstances be liable for injury to Lessee's business or for any
loss of income or profit therefrom.
9. DAMAGE OR DESTRUCTION.
9.1 DEFINITIONS.
(a) "PREMISES PARTIAL DAMAGE" shall mean damage or destruction to
the improvements on the Premises, other than Lessee Owned Alterations and
Utility Installations, the repair cost of which damage or destruction is less
than 50% of the then Replacement Cost of the Premises immediately prior to
such damage or destruction, excluding from such calculation the value of the
land and Lessee Owned Alterations and Utility Installations.
(b) "PREMISES TOTAL DESTRUCTION" shall mean damage or destruction
to the Premises, other than Lessee Owned Alterations and Utility
Installations the repair cost of which damage or destruction is 50% or more
of the then Replacement Cost of the Premises immediately prior to such damage
or destruction, excluding from such calculation the value of the land and
Lessee Owned Alterations and Utility Installations.
(c) "INSURED LOSS" shall mean damage or destruction to
improvements of the Premises, other than Lessee Owned Alterations and Utility
Installations, which was caused by an event required to be covered by the
insurance described in Paragraph 8.3(a), irrespective of any deductible
amounts or coverage limits involved.
(d) "REPLACEMENT COST" shall mean the cost to repair or rebuild
the improvements owned by Lessor at the time of the occurrence to their
condition existing immediately prior thereto, including demolition, debris
removal and upgrading required by the operation of applicable building codes,
ordinances or laws, and without deduction for depreciation.
(e) "HAZARDOUS SUBSTANCE CONDITION" shall mean the occurrence or
discovery of a condition involving the presence of, or a contamination by, a
Hazardous Substance as defined in Paragraph 6.2(a), in, on, or under the
Premises.
9.2 PARTIAL DAMAGE--INSURED LOSS. If a Premises Partial Damage that is
an Insured Loss occurs, then Lessor shall, at Lessor's expense, repair such
damage (but not Lessee's Trade Fixtures or Lessee Owned Alterations and
Utility Installations) as soon as reasonably possible and this Lease shall
continue in full force and effect. Notwithstanding the foregoing, if the
required insurance was not in force or the insurance proceeds are not
sufficient to effect such repair, the Insuring Party shall promptly
contribute the shortage in proceeds as and when required to complete said
repairs. In the event, however, the shortage in proceeds was due to the fact
that, by reason of the unique nature of the improvements, full replacement
cost insurance coverage was not commercially reasonable and available, Lessor
shall have no obligation to pay for the shortage in insurance proceeds or to
fully restore the unique aspects of the Premises unless Lessee provides
Lessor with the funds to cover same, or adequate assurance thereof, within
ten (10) days following receipt of written notice of such shortage and
request therefor. If Lessor receives said funds or adequate assurance thereof
within said ten (10) day period, the party responsible for making the repairs
shall complete them as soon as reasonably possible and this Lease shall
remain in full force and effect. If Lessor does not receive such funds or
assurance within said period, Lessor may nevertheless elect by written notice
to Lessee within ten (10) days thereafter to make such restoration and repair
as is commercially reasonable with Lessor paying any shortage in proceeds, in
which case this Lease shall remain in full force and effect. If in such case
Lessor does not so elect, then this Lease shall terminate sixty (60) days
following the occurrence of the damage or destruction. Unless otherwise
agreed, Lessee shall in no event have any right to reimbursement from Lessor
for any funds contributed by Lessee to repair
PAGE 4
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any such damage or destruction. Premises Partial Damage due to flood or
earthquake shall be subject to Paragraph 9.3 rather than Paragraph 9.2,
notwithstanding that there may be some insurance coverage, but the net
proceeds of any such insurance shall be made available for the repairs if
made by either Party.
9.3 PARTIAL DAMAGE--UNINSURED LOSS. If a Premises Partial Damage that
is not an Insured Loss occurs, unless caused by a negligent or willful act of
Lessee (in which event Lessee shall make the repairs at Lessee's expense and
this Lease shall continue in full force and effect, but subject to Lessor's
rights under Paragraph 13), Lessor may at Lessor's option, either: (i) repair
such damage as soon as reasonably possible at Lessor's expense, in which event
this Lease shall continue in full force and effect, or (ii) give written
notice to Lessee within thirty (30) days after receipt by Lessor of knowledge
of the occurrence of such damage of Lessor's desire to terminate this Lease
as of the date sixty (60) days following the giving of such notice. In the
event Lessor elects to give such notice of Lessor's intention to terminate
this Lease, Lessee shall have the right within ten (10) days after the
receipt of such notice to give written notice to Lessor of Lessee's
commitment to pay for the repair of such damage totally at Lessee's expense
and without reimbursement from Lessor. Lessee shall provide Lessor with the
required funds or satisfactory assurance thereof within thirty (30) days
following Lessee's said commitment. In such event this Lease shall continue
in full force and effect, and Lessor shall proceed to make such repairs as
soon as reasonably possible and the required funds are available. If Lessee
does not give such notice and provide the funds or assurance thereof within the
times specified above, this Lease shall terminate as of the date specified in
Lessor's notice of termination.
9.4 TOTAL DESTRUCTION. Notwithstanding any other provision hereof, if a
Premises Total Destruction occurs (including any destruction required by any
authorized public authority), this Lease shall terminate sixty (60) days
following the date of such Premises Total Destruction, whether or not the
damage or destruction is an Insured Loss or was caused by a negligent or
willful act of Lessee. In the event, however, that the damage or destruction
was caused by Lessee, Lessor shall have the right to recover Lessor's damages
from Lessee except as released and waived in Paragraph 8.6.
9.5 DAMAGE NEAR END OF TERM. If at any time during the last six (6)
months of the term of this Lease there is damage for which the cost to repair
exceeds (1) month's Base Rent, whether or not an Insured Loss, Lessor may, at
Lessor's option, terminate this Lease effective sixty (60) days following the
date of occurrence of such damage by giving written notice to Lessee of
Lessor's election to do so within thirty (30) days after the date of
occurrence of such damage. Provided, however, if Lessee at the time has an
exercisable option to extend this Lease or to purchase the Premises, then
Lessee may preserve this lease by, within twenty (20) days following the
occurrence of the damage, or before the expiration of the time provided in
such option for its exercise, whichever is earlier ("EXERCISE PERIOD"), (i)
exercising such option and (ii) providing Lessor with any shortage in
insurance proceeds (or adequate assurance thereof) needed to make the
repairs. If lessee duly exercises such option during said Exercise Period and
provides Lessor with funds (or adequate assurance thereof) to cover any
shortage in insurance proceeds, Lessor shall, at Lessor's expense repair such
damage as soon as reasonably possible and this Lease shall continue in full
force and effect. If Lessee fails to exercise such option and provide such
funds or assurance during said Exercise Period, then Lessor may at Lessor's
option terminate this Lease as of the expiration of said sixty (60) day
period following the occurrence of such damage by giving written notice to
Lessee of Lessor's election to do so within ten (10) days after the
expiration of the Exercise Period, notwithstanding any terms or provision in
the grant of option to the contrary.
9.6 ABATEMENT OF RENT; LESSEE'S REMEDIES.
(a) In the event of damage described in Paragraph 9.2 (Partial
Damage--Insured), whether or not Lessor or Lessor or Lessee repairs or
restores the Premises, the Base Rent, Real Property Taxes, insurance
premiums, and other charges, if any, payable by Lessee hereunder for the
period during which such damage, its repair or the restoration continues (not
to exceed the period of which rental value insurance is required under
Paragraph 8.3(b)), shall be abated in proportion to the degree to which
Lessee's use of the Premises is impaired. Except for abatement of Base Rent,
Real Property Taxes, insurance premiums, and other charges, if any, as
aforesaid, all other obligations of Lessee hereunder shall be performed by
Lessee, and Lessee shall have no claim against Lessor for any damage suffered
by reason of any such repair or restoration.
(b) If Lessor shall be obligated to repair or restore the Premises
under the provisions of this Paragraph 9 and shall not commence, in a
substantial and meaningful way, the repair or restoration of the Premises
within ninety (90) days after such obligation shall accrue, Lessee may, at
any time prior to the commencement of such repair or restoration, give
written notice to Lessor and to any Lenders of which Lessee has actual notice
of Lessee's election to terminate this Lease on a date not less than sixty
(60) days following the giving of such notice. If Lessee gives such notice to
Lessor and such Lenders and such repair or restoration is not commenced
within thirty (30) days after receipt of such notice, this Lease shall
terminate as of the date specified in said notice. If Lessor or a Lender
commences the repair or restoration of the Premises within thirty (30) days
after receipt of such notice, this Lease shall continue in full force and
effect. "COMMENCE" as used in this Paragraph shall mean either the
unconditional authorization of the preparation of the required plans, or the
beginning of the actual work on the Premises, whichever first occurs.
9.7 HAZARDOUS SUBSTANCE CONDITIONS. If a Hazardous Substance Condition
occurs, unless Lessee is legally responsible therefor (in which case Lessee
shall make the investigation and remediation thereof required by Applicable
Law and this Lease shall continue in full force and effect, but subject to
Lessor's rights under Paragraph 13), Lessor may at Lessor's option either (i)
investigate and remediate such Hazardous Substance Condition, if required, as
soon as reasonably possible at Lessor's expense, in which event this Lease
shall continue in full force and effect, or (ii) if the estimated cost to
investigate and remediate such condition exceeds twelve (12) times the then
monthly Base Rent or $100,000, whichever is greater, give written notice to
Lessee within thirty (30) days after receipt by Lessor of knowledge of the
occurrence of such Hazardous Substance Condition of Lessor's desire to
terminate this Lease as of the date sixty (60) days following the giving of
such notice. In the event Lessor elects to give such notice of Lessor's
intention to terminate this Lease. Lessee shall have the right within ten
(10) days after the receipt of such notice to give written notice to Lessor
of Lessee's commitment to pay for the investigation and remediation of such
Hazardous Substance Condition totally at Lessee's expense and without
reimbursement from Lessor except to the extent of an amount equal to twelve
(12) times the then monthly Base Rent or $100,000, whichever is greater.
Lessee shall provide Lessor with the funds required of Lessee or satisfactory
assurance thereof within thirty (30) days following Lessee's said commitment.
In such event this Lease shall continue in full force and effect, and Lessor
shall proceed to make such investigation and remediation as soon as
reasonably possible and the required funds are available. If Lessee does not
give such notice and provide the required funds or assurance thereof within
the times specified above, this Lease shall terminate as of the date
specified in Lessor's notice of termination. If a Hazardous Substance
Condition occurs for which Lessee is not legally responsible, there shall be
abatement of Lessee's obligations under this Lease to the same extent as
provided in Paragraph 9.6(a) for a period of not to exceed twelve (12) months.
9.8 TERMINATION--ADVANCE PAYMENTS. Upon termination of this Lease
pursuant to this Paragraph 9, an equitable adjustment shall be made
concerning advance Base Rent and any other advance payments made by Lessee to
Lessor. Lessor shall, in addition, return to Lessee so much of Lessee's
Security Deposit as has not been, or is not then required to be, used by
Lessor under the terms of this Lease.
9.9 WAIVE STATUTES. Lessor and Lessee agree that the terms of this Lease
shall govern the effect of any damage to or destruction of the Premises with
respect to the termination of this Lease and hereby waive the provisions of
any present or future statute to the extent inconsistent herewith.
10. REAL PROPERTY TAXES.
10.1 (a) PAYMENT OF TAXES. Lessor shall pay the Real Property Taxes, as
defined in Paragraph 10.2, applicable to the Premises; provided, however,
that Lessee shall pay, in addition to rent, the amount, if any, by which Real
Property Taxes applicable to the Premises increase over the fiscal tax year
during which the Commencement Date occurs ("TAX INCREASE"). Subject to
Paragraph 10.1(b), payment of any such Tax Increase shall be made by Lessee
within thirty (30) days after receipt of Lessor's written statement setting
forth the amount due and the computation thereof. Lessee shall promptly
furnish Lessor with satisfactory evidence that such taxes have been paid. If
any such taxes to be paid by Lessee shall cover any period of time prior to
or after the expiration or earlier termination of the term hereof. Lessee's
share of such taxes shall be equitably prorated to cover only the period of
time within the tax fiscal year this Lease is in effect, and Lessor shall
reimburse Lessee for any overpayment after such proration.
(b) ADVANCE PAYMENT. In order to insure payment when due and before
delinquency of any or all Real Property Taxes, Lessor reserves the right, at
Lessor's option, to estimate the current Real Property Taxes applicable to
the Premises, and to require such current year's Tax Increase to be paid in
advance to Lessor by Lessee, either: (i) in a lump sum amount equal to the
amount due, at least twenty (20) days prior to the applicable delinquency date,
or (ii) monthly in advance with the payment of the Base Rent. If Lessor
elects to require payment monthly in advance, the monthly payment shall be
that equal monthly amount which, over the number of months remaining before
the month in which the applicable tax installment would become delinquent (and
without interest thereon), would provide a fund large enough to fully
discharge before delinquency the estimated Tax Increase to be paid. When the
actual amount of the applicable Tax Increase is known, the amount of such
equal monthly advance payment shall be adjusted as required to provide the
fund needed to pay the applicable Tax Increase before delinquency. If the
amounts paid to Lessor by Lessee under the provisions of this Paragraph are
insufficient to discharge the obligations of Lessee to pay such Tax Increase
as the same becomes due, Lessee shall pay to Lessor, upon Lessor's demand,
such additional sums as are necessary to pay such obligation. All money paid
to Lessor under this Paragraph may be intermingled with other moneys of Lessor
and shall not bear interest. In the event of a Breach by Lessee in the
performance of the obligations of Lessee under this Lease, then any balance
of funds paid to Lessor under the provisions of this Paragraph may, subject
to proration as provided in Paragraph 10.1(a), at the option of Lessor, be
treated as an additional Security Deposit under Paragraph 5.
(c) ADDITIONAL IMPROVEMENTS. Notwithstanding Paragraph 10.1(a)
hereof, Lessee shall pay to Lessor upon demand therefor the entirety of any
increase in Real Property Taxes assessed by reason of Alterations of Utility
Installations placed upon the Premises Lessee or at Lessee's request.
10.2 DEFINITION OF "REAL PROPERTY TAXES." As used herein, the term "REAL
PROPERTY TAXES" shall include any form of real estate tax or assessment,
general, special, ordinary or extraordinary, and any license fee, commercial
rental tax, improvement bond or bonds, levy or tax (other than inheritance,
personal income or estate taxes) imposed upon the Premises by any authority
having the direct power to tax, including any city, state or federal
government, or any school, agricultural, sanitary, fire, street, drainage or
other improvement district thereof, levied against any legal or equitable
interest of Lessor in the Premises or in the real property of which the
Premises are a part, Lessor's right to rent or other income therefrom, and/or
Lessor's business of leasing the Premises. The term "REAL PROPERTY TAXES"
shall also include any tax, fee, levy, assessment or charge, or any increase
therein, imposed by reason of events occurring, or changes in applicable law
taking effect, during the term of this Lease, including but not limited to a
change in the ownership of the Premises or in the improvements thereon, the
execution of this Lease, or any modification, amendment or transfer thereof
and whether or not contemplated by the Parties.
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[LOGO]
ADDENDUM TO
STANDARD LEASE
DATED August 26, 1996
-------------------------------------------
BY AND BETWEEN Scope Development (Lessor)
---------------------------------
Spectranet Anaheim (Lessee)
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OPTION TO PURCHASE
- -------
(a) Lessor does hereby grant to Lessee an option to purchase the Premises
and the Lessor's interest under this Lease, upon the terms and conditions
herein set forth.
(b) Lessee must exercise the option to purchase, if it is to be exercised
at all, during the period from November 1996 to October 1998, herein after
referred to as the "Option Period".
(c) In order to exercise the option to purchase herein granted, Lessee
must give written notice of the exercise of the option to Lessor and Lessor
must receive the same during the Option Period, time being of the essence,
and if not so given and received, this option shall automatically expire. At
the same time the option is exercise, Lessee must deliver to Lessor a
cashier's check for 10,000--refundable of deal does not close--payable to
First American Title Company, Santa Ana, CA, to be part of the purchase price.
(d) The provisions of paragraph 39, including the provision relating to
default of Lessee set forth in paragraph 39.4 of this Lease are conditions of
this Option.
(e) If Lessee shall exercise the option to purchase during the Option
Period, the transfer of title to Lessee and the payment of the purchase price
to Lessor shall occur on 30 days from opening of escrow, and until that time
the terms of this Lease shall remain in full force and effect.
(f) The purchase price to be paid by Lessee to Lessor for the Premises,
if Lessee exercises its option to purchase, shall be six hundred six thousand
four hundred twenty four ($606,424)
(g) Within ten (10) days of the date the option to purchase is exercised,
Lessor and Lessee shall give instructions to consummate the sale to First
American Title Company, who shall act as escrow holder, on the normal and
usual escrow forms then used by such escrow holder, as follows:
(i) Escrow shall close on the date previously called for in
paragraph (e) of this Addendum:
(ii) Lessor shall deposit the check referred to in paragraph (c) of
the Addendum into escrow upon opening thereof, with the balance of the
purchase price to be deposited into escrow one day prior to the close of
escrow:
(iii) Lessor shall convey to Lessee title to the Premises subject
only to mortgages and deeds of trust of record and approved by Lessee
(the debt that such instruments secure shall constitute a credit against the
purchase price), and easements, subsurface mineral rights and restrictions of
record. Any other liens and encumbrances shall be removed prior to close of
escrow at the expense of Lessor.
(iv) Escrow fees shall be shared equally;
(v) Interest, if any, and rents will be prorated to the close of
escrow;
(vi) The cost of a standard title insurance policy to be issued to
Lessee shall be paid by Lessor;
(vii) The parties agree to execute any additional instructions as are
normal and usual;
(viii) All real estate transfer taxes shall be paid by Lessor.
OPTION TO PURCHASE
<PAGE>
10.3 JOINT ASSESSMENT. If the Premises are not separately assessed,
Lessee's liability shall be an equitable proportion of the Real Property
Taxes for all of the land and improvements included within the tax parcel
assessed, such proportion to be determined by Lessor from the respective
valuations assigned in the assessor's work sheets or such other information
as may be reasonably available. Lessor's reasonable determination thereof, in
good faith, shall be conclusive.
10.4 PERSONAL PROPERTY TAXES. Lessee shall pay prior to delinquency all
taxes assessed against and levied upon Lessee Owned Alterations, Utility
Installations, Trade Fixtures, furnishings, equipment and all personal property
of Lessee contained in the Premises or elsewhere. When possible, Lessee shall
cause its Trade Fixtures, furnishings, equipment and all other personal property
to be assessed and billed separately from the real property of Lessor. If any of
Lessee's said personal property shall be assessed with Lessors's real property,
Lessee shall pay Lessor the taxes attributable to Lessee within ten (10) days
after receipt of a written statement setting forth the taxes applicable to
Lessee's property or, at Lessor's option, as provided in Paragraph 10.1(b).
11. UTILITIES. Lessee shall pay for all water, gas, heat, light, power,
telephone, trash disposal and other utilities and services supplied to the
Premises, together with any taxes thereon. If any such services are not
separately metered to Lessee, Lessee shall pay a reasonable proportion, to be
determined by Lessor, of all charges jointly metered with other premises.
12. ASSIGNMENT AND SUBLETTING.
12.1 LESSOR'S CONSENT REQUIRED.
(a) Lessee shall not voluntarily or by operation of law assign,
transfer, mortgage or otherwise transfer or encumber (collectively,
"ASSIGNMENT") or sublet all or any part of Lessee's interest in this Lease or in
the Premises without Lessor's prior written consent given under and subject to
the terms of Paragraph 36.
(b) A change in the control of Lessee shall constitute an
assignment requiring Lessor's consent. The transfer, on a cumulative basis, of
twenty-five percent (25%) or more of the voting control of Lessee shall
constitute a change in control for this purpose.
(c) The involvement of Lessee or its assets in any transaction,
or series of transactions (by way of merger, sale, acquisition, financing,
refinancing, transfer, leveraged buy-out or otherwise), whether or not a
formal assignment or hypothecation of this Lease or Lessee's assets occurs,
which results or will result in a reduction of the Net Worth of Lessee, as
hereinafter defined, by an amount equal to or greater than twenty-five
percent (25%) of such Net Worth of Lessee as it was represented to Lessor at
the time of the execution by Lessor of this Lease or at the time of the most
recent assignment to which Lessor has consented, or as it exists immediately
prior to said transaction or transactions constituting such reduction, at
whichever time said Net Worth of Lessee was or is greater, shall be
considered an assignment of this Lease by Lessee to which Lessor may
reasonably withhold its consent."NET WORTH OF LESSEE" for purposes of this
Lease shall be the net worth of Lessee (excluding any guarantors) established
under generally accepted accounting principles consistently applied.
(d) An assignment or subletting of Lessee's interest in this
Lease without Lessor's specific prior written consent shall, at Lessor's
option, be a Default curable after notice per Paragraph 13.1(c), or a
noncurable Breach without the necessity of any notice and grace period. If
Lessor elects to treat such unconsented to assignment or subletting as a
noncurable Breach, Lessor shall have the right to either: (i) terminate this
Lease, or (ii) upon thirty (30) days written notice ("Lessor's Notice"),
increase the monthly Base Rent to fair market rental value or one hundred ten
present (110%) of the Base Rent then in effect, whichever is greater. Pending
determination of the new fair market rental value, if disputed by Lessee,
Lessee shall pay the amount set forth in Lessor's Notice, with any
overpayment credited against the next installment(s) of Base Rent coming due,
and any underpayment for the period retroactively to the effective date of
the adjustment being due and payable immediately upon the determination
thereof. Further, in the event of such Breach and market value adjustment,
(i) the purchase price of any option to purchase the Premises held by Lessee
shall be subject to similar adjustment to the then fair market value (without
the Lease being considered an encumbrance or any deduction for depreciation
or obsolescence, and considering the Premises at its highest and best use and
in good condition), or one hundred ten percent (110%) of the price previously
in effect, whichever is greater, (ii) any index-oriented rental or price
adjustment formulas contained in this Lease shall be adjusted to require that
the base index be determined with reference to the index applicable to the
time of such adjustment, and (iii) any fixed rental adjustments scheduled
during the remainder of the Lease term shall be increased in the same ratio
as the new market rental bears to the Base Rent in effect immediately prior
to the market value adjustment.
(e) Lessee's remedy for any breach of this Paragraph 12.1 by Lessor
shall be limited to compensatory damages and injunctive relief.
12.2 TERMS AND CONDITIONS APPLICABLE TO ASSIGNMENT AND SUBLETTING.
(a) Regardless of Lessor's consent, any assignment or subletting
shall not: (i) be effective without the express written assumption by such
assignee or sublessee of the obligations of Lessee under this Lease, (ii)
release Lessee of any obligations hereunder, or (iii) alter the primary
liability of Lessee for the payment of Base Rent and other sums due Lessor
hereunder or for the performance of any other obligations to be performed by
Lessee under this Lease.
(b) Lessor may accept any rent or performance of Lessee's
obligations from any person other than Lessee pending approval or disapproval
of an assignment. Neither a delay in the approval or disapproval of such
assignment nor the acceptance of any rent or performance shall constitute a
waiver or estoppel of Lessor's right to exercise its remedies for the Default
or Breach by Lessee of any of the terms, covenants or conditions of this
Lease.
(c) The consent of Lessor to any assignment or subletting shall not
constitute a consent to any subsequent assignment or subletting by Lessee or to
any subsequent or successive assignment or subletting by the sublessee. However,
Lessor may consent to subsequent sublettings and assignments of the sublease or
any amendments or modifications thereto without notifying Lessee or anyone else
liable on the Lease or sublease and without obtaining their consent, and such
action shall not relieve such persons from liability under this Lease or
sublease.
(d) In the event of any Default or Breach of Lessee's obligations
under this Lease, Lessor may proceed directly against Lessee, any Guarantors or
any one else responsible for the performance of the Lessee's obligations under
this Lease, including the sublessee, without first exhausting Lessor's remedies
against any other person or entity responsible therefor to Lessor, or any
security held by Lessor or Lessee.
(e) Each request for consent to an assignment or subletting shall
be in writing, accompanied by information relevant to Lessor's determination
as to the financial and operational responsibility and appropriateness of the
proposed assignee or sublessee, including but not limited to the intended use
and/or required modification of the Premises, if any, together with a
non-refundable deposit of $1,000 of ten percent (10%) of the current monthly
Base Rent, whichever is greater, as reasonable consideration for Lessor's
considering and processing the request for consent. Lessee agrees to provide
Lessor with such other or additional information and/or documentation as may
be reasonably requested by Lessor.
(f) Any assignee of, or sublessee under, this Lease shall, by
reason of accepting such assignment or entering into such sublease, be deemed,
for the benefit of Lessor, to have assumed and agreed to conform and comply with
each and every term, covenant, condition and obligation herein to be observed or
performed by Lessee during the term of said assignment or sublease, other than
such obligations as are contrary to or inconsistent with provisions of an
assignment or sublease to which Lessor has specifically consented in writing.
(g) The occurrence of a transaction described in Paragraph
12.1(c) shall give Lessor the right (but not the obligation) to require that
the Security Deposit be increased to an amount equal to six (6) times the
then monthly Base Rent, and Lessor may make the actual receipt by Lessor of
the amount required to establish such Security Deposit a condition to
Lessor's consent to such transaction.
(h) Lessor, as a condition to giving its consent to any
assignment or subletting, may require that the amount and adjustment
structure of the rent payable under this Lease be adjusted to what is then
the market value and/or adjustment structure for property similar to the
Premises as then constituted.
12.3 ADDITIONAL TERMS AND CONDITIONS APPLICABLE TO SUBLETTING. The
following terms and conditions shall apply to any subletting by Lessee of all
or any part of the Premises and shall be deemed included in all subleases
under this Lease whether or not expressly incorporated therein:
(a) Lessee hereby assigns and transfers to Lessor all of Lessee's
interest in all rentals and income arising from any sublease of all or a
portion of the Premises heretofore or hereafter made by Lessee, and Lessor
may collect such rent and income and apply same toward Lessee's obligations
under this Lease; provided, however, that until a Breach (as defined in
Paragraph 13.1) shall occur in the performance of Lessee's obligations under
this Lease, Lessee may, except as otherwise provided in this Lease, receive,
collect and enjoy the rents accruing under such sublease. Lessor shall not,
by reason of this or any other assignment of such sublease to Lessor, nor by
reason of the collection of the rents from a sublessee, be deemed liable to
the sublessee for any failure of Lessee to perform and comply with any of
Lessee's obligations to such sublessee under such sublease. Lessee hereby
irrevocably authorizes and directs any such sublessee, upon receipt of a
written notice from Lessor stating that a Breach exists in the performance of
Lessee's obligations under this Lease, to pay to Lessor the rents and other
charges due and to become due under the sublease. Sublessee shall rely upon
any such statement and request from Lessor and shall pay such rents and other
charges to Lessor without any obligation or right to inquire as to whether
such Breach exists and notwithstanding any notice from or claim from Lessee
to the contrary. Lessee shall have no right or claim against said sublessee,
or, until the Breach has been cured, against Lessor, for any such rents and
other charges so paid by said sublessee to Lessor.
(b) In the event of a Breach by Lessee in the performance of its
obligations under this Lease, Lessor, at its option and without any
obligation to do so, may require any sublessee to attorn to Lessor, in which
event Lessor shall undertake the obligations of the sublessor under such
sublease from the time of the exercise of said option to the expiration of
such sublease; provided, however, Lessor shall not be liable for any prepaid
rents or security deposit paid by such sublessee to such sublessor or for any
other prior Defaults or Breaches of such sublessor under such sublease.
(c) Any matter or thing requiring the consent of the sublessor
under a sublease shall also require the consent of the Lessor herein.
(d) No sublessee shall further assign or sublet all or any part
of the Premises without Lessor's prior written consent.
(e) Lessor shall deliver a copy of any notice of Default or
Breach by Lessee to the sublessee, who shall have the right to cure Default
of Lessee within the grace period, if any, specified in such notice. The
sublessee shall have a right of reimbursement and offset from and against
Lessee for any such Defaults cured by the sublessee.
13. DEFAULT; BREACH; REMEDIES.
13.1 DEFAULT: BREACH. Lessor and Lessee agree that if an attorney is
consulted by Lessor in connection with a Lessee Default or Breach (as
hereinafter defined), $350.00 is a reasonable minimum sum per such occurrence
for legal services and costs in the preparation and service of a notice of
Default,
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and that Lessor may include the cost of such services and costs in said notice
as rent due and payable to cure said Default. A "DEFAULT" is defined as a
failure by the Lessee to observe, comply with or perform any of the terms,
covenants, conditions or rules applicable to Lessee under this Lease. A "BREACH"
is defined as the occurrence of any one or more of the following Defaults, and,
where a grace period for cure after notice is specified herein, the failure by
Lessee to cure such Default prior to the expiration of the applicable grace
period, shall entitle Lessor to pursue the remedies set forth in Paragraphs 13.2
and/or 13.3:
(a) The vacating of the Premises without the intention to reoccupy
same, or the abandonment of the Premises.
(b) Except as expressly otherwise provided in this Lease, the
failure by Lessee to make any payment of Base Rent or any other monetary
payment required to be made by Lessee hereunder, whether to Lessor or to a
third party, as and when due, the failure by Lessee to provide Lessor with
reasonable evidence of insurance or surety bond required under this Lease, or
the failure of Lessee to fulfill any obligation under this Lease which
endangers or threatens life or property, where such failure continues for a
period of three (3) days following written notice thereof by or on behalf of
Lessor to Lessee.
(c) Except as expressly otherwise provided in this Lease, the
failure by Lessee to provide Lessor with reasonable written evidence (in duly
executed original form, if applicable) of (i) compliance with applicable law
per Paragraph 6.3, (ii) the inspection, maintenance and service contracts
required under Paragraph 7.1(b), (iii) the recission of an unauthorized
assignment or subletting per Paragraph 12.1(b), (iv) a Tenancy Statement per
Paragraphs 16 or 37, (v) the subordination or non-subordination of this Lease
per Paragraph 30, (vi) the guaranty of the performance of Lessee's
obligations under this Lease if required under Paragraphs 1.11 and 37, (vii)
the execution of any document requested under Paragraph 42 (easements), or
(viii) any other documentation or information which Lessor may reasonably
require of Lessee under the terms of this Lease, where any such failure
continues for a period of ten (10) days following written notice by or on
behalf of Lessor to Lessee.
(d) A Default by Lessee as to the terms, covenants, conditions or
provisions of this Lease, or of the rules adopted under Paragraph 40 hereof,
that are to be observed, complied with or performed by Lessee, other than
those described in subparagraphs (a), (b) or (c), above, where such Default
continues for a period of thirty (30) days after written notice thereof by or
on behalf of Lessor to Lessee; provided, however, that if the nature of
Lessee's Default is such that more than thirty (30) days are reasonably
required for its cure, then it shall not be deemed to be a Breach of this
Lease by Lessee if Lessee commences such cure within said thirty (30) day
period and thereafter diligently prosecutes such cure to completion.
(e) The occurrence of any of the following events: (i) The making
by lessee of any general arrangement or assignment for the benefit of
creditors; (ii) Lessee's becoming a "debtor" as defined in 11 U.S.C. Section
101 or any successor statute thereto (unless, in the case of a petition filed
against Lessee, the same is dismissed within sixty (60) days); (iii) the
appointment of a trustee or receiver to take possession of substantially all
of Lessee's assets located at the Premises or of Lessee's interest in this
Lease, where possession is not restored to Lessee within thirty (30) days; or
(iv) the attachment, execution or other judicial seizure of substantially all
of Lessee's assets located at the Premises or of Lessee's interest in this
Lease, where such seizure is not discharged within thirty (30) days;
provided, however, in the event that any provision of this subparagraph (e)
is contrary to any applicable law, such provision shall be of no force or
effect, and not affect the validity of the remaining provisions.
(f) The discovery by Lessor that any financial statement given to
Lessor by Lessee or any Guarantor of Lessee's obligations hereunder was
materially false.
(g) If the performance of Lessee's obligations under this Lease is
guaranteed: (i) the death of a guarantor, (ii) the termination of a guarantor's
liability with respect to this Lease other than in accordance with the terms of
such guaranty, (iii) a guarantor's becoming insolvent or the subject of a
bankruptcy filing, (iv) a guarantor's refusal to honor the guaranty, or (v) a
guarantor's breach of its guaranty obligation on an anticipatory breach basis,
and Lessee's failure, within sixty (60) days following written notice by or on
behalf of Lessor to Lessee of any such event, to provide Lessor with written
alternative assurance or security, which, when coupled with the then existing
resources of Lessee, equals or exceeds the combined financial resources of
Lessee and the guarantors that existed at the time of execution of this Lease.
13.2 REMEDIES. If Lessee fails to perform any affirmative duty or
obligation of Lessee under this Lease, within ten (10) days after written
notice to Lessee (or in case of an emergency, without notice), Lessor may at
its option (but without obligation to do so), perform such duty or obligation
on Lessee's behalf, including but not limited to the obtaining of reasonably
required bonds, insurance policies, or governmental licenses, permits or
approvals. The cost and expenses of any such performance by Lessor shall be
due and payable by Lessee to Lessor upon invoice therefor. If any check given
to Lessor by Lessee shall not be honored by the bank upon which it is drawn,
Lessor, at its option, may require all future payments to be made under this
Lease by Lessee to be made only by cashier's check. In the event of a Breach
of this Lease by Lessee, as defined in Paragraph 13.1, with or without
further notice or demand, and without limiting Lessor in the exercise of any
right or remedy which Lessor may have by reason of such Breach, Lessor may:
(a) Terminate Lessee's right to possession of the Premises by any
lawful means, in which case this Lease and the term hereof shall terminate
and Lessee shall immediately surrender possession of the Premises to Lessor.
In such event Lessor shall be entitled to recover from Lessee: (i) the worth
at the time of the award of the unpaid rent which had been earned at the time
of termination; (ii) the worth at the time of award of the amount by which
the unpaid rent which would have been earned after termination until the time
of award exceeds the amount of such rental loss that the Lessee proves could
have been reasonably avoided; (iii) the worth at the time of award of the
amount by which the unpaid rent for the balance of the term after the time of
award exceeds the amount of such retail loss that the Lessee proves could be
reasonably avoided; and (iv) any other amount necessary to compensate Lessor
for all the detriment proximately caused by the Lessee's failure to perform
its obligations under this Lease or which in the ordinary course of things
would be likely to result therefrom, including but not limited to the cost of
recovering possession of the Premises, expenses of reletting, including
necessary renovation and alteration of the Premises, reasonable attorneys'
fees, and that portion of the leasing commission paid by Lessor applicable to
the unexpired term of this Lease. The worth at the time of award of the
amount referred to in provision (iii) of the prior sentence shall be computed
by discounting such amount at the discount rate of the Federal Reserve Bank
of San Francisco at the time of award plus one percent (1%). Efforts by
Lessor to mitigate damages caused by Lessee's Default or Breach of this Lease
shall not waive Lessor's right to recover damages under this Paragraph. If
termination of this Lease is obtained through the provisional remedy of
unlawful detainer, Lessor shall have the right to recover in such proceeding
the unpaid rent and damages as are recoverable therein, or Lessor may reserve
the right to recover all or any part thereof in a separate suit for such rent
and/or damages. If a notice and grace period required under subparagraphs
13.1(b), (c), or (d) was not previously given, a notice to pay rent or quit,
or to perform or quit, as the case may be, given to Lessee under any statute
authorizing the forfeiture of leases for unlawful detainer shall also
constitute the applicable notice for grace period purposes required by
subparagraphs 13.1(b), (c) or (d). In such case, the applicable grace period
under subparagraphs 13.1(b), (c) or (d) and under the unlawful detainer
statute shall run concurrently after the one such statutory notice, and the
failure of Lessee to cure the Default within the greater of the two such
grace periods shall constitute both an unlawful detainer and a Breach of this
Lease entitling Lessor to the remedies provided for in this Lease and/or by
said statute.
(b) Continue the Lease and Lessee's right to possession in effect
(in California under California Civil Code Section 1951.4) after Lessee's
Breach and abandonment and recover the rent as it becomes due, provided
Lessee has the right to sublet or assign, subject only to reasonable
limitations. See Paragraphs 12 and 36 for the limitations on assignment and
subletting which limitations Lessee and Lessor agree are reasonable. Acts of
maintenance or preservation, efforts to relet the Premises, or the
appointment of a receiver to protect the Lessor's interest under the Lease,
shall not constitute a termination of the Lessee's right to possession.
(c) Pursue any other remedy now or hereafter available to Lessor
under the laws or judicial decisions of the state wherein the Premises are
located.
(d) The expiration or termination of this Lease and/or the
termination of Lessee's right to possession shall not relieve Lessee from
liability under any indemnity provisions of this Lease as to matters occurring
or accruing during the term hereof or by reason of Lessee's occupancy of the
Premises.
13.3 INDUCEMENT RECAPTURE IN EVENT OF BREACH. Any agreement by Lessor
for free or abated rent or other charges applicable to the Premises, or for
the giving or paying by Lessor to or for Lessee of any cash or other bonus,
inducement or consideration for Lessee's entering into this Lease, all of
which concessions are hereinafter referred to as "INDUCEMENT PROVISIONS,"
shall be deemed conditioned upon Lessee's full and faithful performance of
all of the terms, covenants and conditions of this Lease to be performed or
observed by Lessee during the term hereof as the same may be extended. Upon
the occurrence of a Breach of this Lease by Lessee, as defined in Paragraph
13.1, any such inducement Provision shall automatically be deemed deleted
from this Lease and of no further force or effect, and any rent, other
charge, bonus, inducement or consideration theretofore abated, given or paid
by Lessor under such an Inducement Provision shall be immediately due and
payable by Lessee to Lessor, and recoverable by Lessor as additional rent due
under this Lease, notwithstanding any subsequent cure of said Breach by
Lessee. The acceptance by Lessor of rent or the cure of the Breach which
initiated the operation of this Paragraph shall not be deemed a waiver by
Lessor of the provisions of this Paragraph unless specifically so stated in
writing by Lessor at the time of such acceptance.
13.4 LATE CHARGES. Lessee hereby acknowledges that late payment by Lessee
to Lessor of rent and other sums due hereunder will cause Lessor to incur costs
not contemplated by this Lease, the exact amount of which will be extremely
difficult to ascertain. Such costs include, but are not limited to, processing
and accounting charges, and late charges which may be imposed upon Lessor by the
terms of any ground lease, mortgage or trust deed covering the Premises.
Accordingly, if any installment of rent or any other sum due from Lessee shall
not be received by Lessor or Lessor's designee within five (5) days after such
amount shall be due, then, without any requirement for notice to Lessee, Lessee
shall pay to Lessor a late charge equal to six percent (6%) of such overdue
amount. The parties hereby agree that such late charge represents a fair and
reasonable estimate of the costs Lessor will incur by reason of late payment by
Lessee. Acceptance of such late charge by Lessor shall in no event constitute a
waiver of Lessee's Default or Breach with respect to such overdue amount, nor
prevent Lessor from exercising any of the other rights and remedies granted
hereunder. In the event that a late charge is payable hereunder, whether or not
collected, for three (3) consecutive installments of Base Rent, then
notwithstanding Paragraph 4.1 or any other provision of this Lease to the
contrary, Base Rent shall, at Lessor's option, become due and payable quarterly
in advance.
13.5 BREACH BY LESSOR. Lessor shall not be deemed in breach of this
Lease unless Lessor fails within a reasonable time to perform an obligation
required to be performed by Lessor. For purposes of this Paragraph 13.5, a
reasonable time shall in no event be less than thirty (30) days after receipt
by Lessor, and by the holders of any ground lease, mortgage or deed of trust
covering the Premises whose name and address shall have been furnished Lessee
in writing for such purpose, of written notice specifying wherein such
obligation of Lessor has not been performed; provided, however, that if the
nature of Lessor's obligation is such that more than thirty (30) days after
such notice are reasonably required for its performance, then Lessor shall
not be in breach of this Lease if performance is commenced within such thirty
(30) day period and thereafter diligently pursued to completion.
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14. CONDEMNATION. If the Premises or any portion thereof are taken under the
power of eminent domain or sold under the threat of the exercise of said
power (all of which are herein called "CONDEMNATION"), this Lease shall
terminate as to the part so taken as of the date the condemning authority
takes title or possession, whichever first occurs. If more than ten percent
(10%) of the floor area of the Premises, or more than twenty-five percent
(25%) of the land area not occupied by any building, is taken by
condemnation, Lessee may, at Lessee's option, to be exercised in writing
within ten (10) days after Lessor shall have given Lessee written notice of
such taking (or in the absence of such notice, within ten (10) days after the
condemning authority shall have taken possession) terminate this Lease as of
the date the condemning authority takes such possession. If Lessee does not
terminate this Lease in accordance with the foregoing, this Lease shall
remain in full force and effect as to the portion of the Premises remaining,
except that the Base Rent shall be reduced in the same proportion as the
rentable floor area of the Premises taken bears to the total rentable floor
area of the building located on the Premises. No reduction of Base Rent shall
occur if the only portion of the Premises taken is land on which there is no
building. Any award for the taking of all of or any part of the Premises
under the power of eminent domain or any payment made under threat of the
exercise of such power shall be the property of Lessor, whether such award
shall be made as compensation for diminution value of the leasehold or for
the taking of the fee, or as severance damages; provided, however, that
Lessee shall be entitled to any compensation separately awarded to Lessee for
Lessee's relocation expenses and/or loss of Lessee's Trade Fixtures. In the
event that this Lease is not terminated by reason of such condemnation,
Lessor shall to the extent of its net severance damages received, over and
above the legal and other expenses incurred by Lessor in the condemnation
matter, repair any damage to the Premises caused by such condemnation, except
to the extent that Lessee has been reimbursed therefor by the condemning
authority. Lessee shall be responsible for the payment of any amount in
excess of such net severance damages required to complete such repair.
15. BROKER'S FEE.
15.1 The Brokers named in Paragraph 1.10 are the procuring causes of this
Lease.
15.2 Upon execution of this Lease by both Parties, Lessor shall pay to
said Brokers jointly, or in such separate shares as they may mutually
designate in writing, a fee as set forth in a separate written agreement
between Lessor and said Brokers (or in the event there is no separate written
agreement between Lessor and said Brokers, the sum of $PER SEPERATE
AGREEMENT) for brokerage services rendered by said Brokers to Lessor in this
transaction.
15.3 Unless Lessor and Brokers have otherwise agreed in writing, Lessor
further agrees that: (a) if Lessee exercises any Option (as defined in
Paragraph 39.1) or any Option subsequently granted which is substantially
similar to an Option granted to Lessee in this Lease, or (b) if Lessee
acquires any rights to the Premises or other premises described in this
Lease which are substantially similar to what Lessee would have acquired had
an Option herein granted to Lessee been exercised, or (c) if Lessee remains
possession of the Premises, with the consent of Lessor, after the
expiration of the term of this Lease after having failed to exercise an
Option, or (d) if said Brokers are the procuring cause of any other lease or
sale entered into between the Parties pertaining to the Premises and/or any
adjacent property in which Lessor has an interest, or (e) if Base Rent is
increased, whether by agreement or operation of an escalation clause herein,
then as to any of said transactions, Lessor shall pay said Brokers a fee in
accordance with the schedule of said Brokers in effect at the time of the
execution of this Lease.
15.4 Any buyer or transferee of Lessor's interest in this Lease, whether
such transfer is by agreement or by operation of law, shall be deemed to have
assumed Lessor's obligation under this Paragraph 15. Each Broker shall be a
third party beneficiary of the provisions of this Paragraph 15 to the extent
of its interest in any commission arising from this Lease and may enforce
that right directly against Lessor and its successors.
15.5 Lessee and Lessor each represent and warrant to the other that it
has had no dealings with any person, firm, broker or finder (other than the
Brokers, if any named in Paragraph 1.10) in connection with the negotiation
of this Lease and/or the consummation of the transaction contemplated hereby,
and that no broker or other person, firm or entity other than said named
Brokers is entitled to any commission or finder's fee in connection with said
transaction. Lessee and Lessor do each hereby agree to indemnify, protect,
defend and hold the other harmless from and against liability for
compensation or charges which may be claimed by any such unnamed broker,
finder or other similar party by reason of any dealings or actions of the
indemnifying Party, including any costs, expenses, attorneys' fees reasonably
incurred with respect thereto.
15.6 Lessor and Lessee hereby consent to and approve all agency
relationships, including any dual agencies, indicated in Paragraph 1.10.
16. TENANCY STATEMENT
16.1 Each Party (as "RESPONDING PARTY") shall within ten (10) days after
written notice from the other Party (the "REQUESTING PARTY") execute
acknowledge and deliver to the Requesting party a statement in writing in form
similar to the then most current "TENANCY STATEMENT" form published by the
American Industrial Real Estate Association, plus such additional
information, confirmation and/or statements as may be reasonably requested by
the Requesting Party.
16.2 If Lessor desires to finance, refinance, or sell the Premises, any
part thereof, or the building of which the Premises are a part, Lessee and all
Guarantors of Lessee's performance hereunder shall deliver to any potential
lender or purchaser designated by Lessor such financial statements of Lessee
and such Guarantors as may be reasonably required by such lender or
purchaser, including but not limited to Lessee's financial statements for the
past three (3) years. All such financial statements shall be received by
Lessor and such lender or purchaser in confidence and shall be used only for
the purposes herein set forth.
17. LESSOR'S LIABILITY. The term "LESSOR" as used herein shall mean the
owner or owners at the time in question of the fee title to the Premises, or,
if this is a sublease, of the Lessee's interest in the prior lease. In the
event of a transfer of Lessor's title or interest in the Premises or in this
Lease, Lessor shall deliver to the transferee or assignee (in cash or by
credit) any unused Security Deposit held by Lessor at the time of such transfer
or assignment. Except as provided in Paragraph 15, upon such transfer or
assignment and delivery of the Security Deposit, as aforesaid, the prior
Lessor shall be relieved of all liability with respect to the obligations
and/or covenants under this Lease thereafter to be performed by the Lessor.
Subject to the foregoing, the obligations and/or covenants in this Lease to
be performed by the Lessor shall be binding only upon the Lessor as
hereinabove defined.
18. SEVERABILITY. The invalidity of any provision of this Lease, as
determined by a court of competent jurisdiction, shall in no way affect the
validity of any other provision hereof.
19. INTEREST ON PAST-DUE OBLIGATIONS. Any monetary payment due Lessor
hereunder, other than late charges, not received by Lessor within thirty (30)
days following the date on which it was due, shall bear interest from the
thirty-first (31st) day after it as due at the rate of 12% per annum, but not
exceeding the maximum rate allowed by law, in addition to the late charge
provided for in Paragraph 13.4.
20. TIME OF ESSENCE. Time is of the essence with respect to the performance
of all obligations to be performed or observed by the Parties under this
Lease.
21. RENT DEFINED. All monetary obligations of Lessee to Lessor under the
terms of this Lease are deemed to be rent.
22. NO PRIOR OR OTHER AGREEMENTS; BROKER DISCLAIMER. This Lease contains all
agreements between the Parties with respect to any matter mentioned herein,
and no other prior or contemporaneous agreement or understanding shall be
effective. Lessor and Lessee each represents and warrants to the Brokers that
it has made, and is relying solely upon, its own investigation as to the
nature, quality, character and financial responsibility of the other Party to
this Lease and as to the nature, quality and character of the Premises.
Brokers have no responsibility with respect thereto or with respect to any
default or breach hereof by either Party.
23. NOTICES.
23.1 All notices required or permitted by this Lease shall be in writing
and may be delivered in person (by hand or by messenger or courier service) or
may be sent by regular, certified or registered mail or U.S. Postal Service
Express Mail, with postage prepaid, or by facsimile transmission, and shall be
deemed sufficiently given if served in a manner specified in this Paragraph
23. The addresses noted adjacent to a Party's signature on this Lease shall
be that Party's address for delivery or mailing of notice purposes. Either
Party may by written notice to the other specify a different address for
notice purposes, except that upon Lessee's taking possession of the Premises,
the Premises shall constitute Lessee's address for the purpose of mailing or
delivering notices to Lessee. A copy of all notices required or permitted to
be given to Lessor hereunder shall be concurrently transmitted to such party
or parties at such addresses as Lessor may from time to time hereafter
designate by written notice to Lessee.
23.2 Any notice sent by registered or certified mail, return receipt
requested, shall be deemed given on the date of delivery shown on the receipt
card, or if no delivery date is shown, the postmark thereon. If sent by
regular mail the notice shall be deemed given forty-eight (48) hours after
the same is addressed as required herein and mailed with postage prepaid.
Notices delivered by United States Express Mail or overnight courier that
guarantees next day delivery shall be deemed given twenty-four (24) hours
after delivery of the same to the United States Postal Service or courier. If
any notice is transmitted by facsimile transmission or similar means, the
same shall be deemed served or delivered upon telephone confirmation of
receipt of the transmission thereof, provided a copy is also delivered via
delivery or mail. If notice is receive on a Sunday or legal holiday, it shall
be deemed received on the next business day.
24. WAIVERS. No waiver by Lessor of the Default or Breach of any term,
covenant or condition hereof by Lessee, shall be deemed a waiver of any other
term, covenant or condition hereof, or of any subsequent Default or Breach by
Lessee of the same or of any other term, covenant or condition hereof.
Lessor's consent to, or approval of, any act shall not be deemed to render
unnecessary the obtaining of Lessor's consent to, or approval of, any
subsequent or similar act by Lessee, or be construed as the basis of an
estoppel to enforce the provision or provisions of this Lease requiring such
consent. Regardless of Lessor's knowledge of a Default or Breach at the time
of accepting rent, the acceptance of rent by Lessor shall not be a waiver of
any preceding Default or Breach by Lessee of any provision hereof, other than
the failure of Lessee to pay the particular rent so accepted. Any payment
given Lessor by Lessee may be accepted by Lessor on account of moneys or
damages due Lessor, notwithstanding any qualifying statements or conditions
made by Lessee in connection therewith, which such statements and/or
conditions shall be of no force or effect whatsoever unless specifically
agreed to in writing by Lessor at or before the time of deposit of such
payment.
25. RECORDING. Either Lessor or Lessee shall, upon request of the other,
execute, acknowledge and deliver to the other a short form memorandum of this
Lease for recording purposes. The Party requesting recordation shall be
responsible for payment of any fees or taxes applicable thereto.
PAGE 8
<PAGE>
26. NO RIGHT TO HOLDOVER. Lessee has no right to retain possession of the
Premises or any part thereof beyond the expiration or earlier termination of
this Lease.
27. CUMULATIVE REMEDIES. No remedy or election hereunder shall be deemed
exclusive but shall, wherever possible, be cumulative with all other remedies
at law or in equity.
28. COVENANTS AND CONDITIONS. All provisions of this Lease to be observed or
performed by Lessee are both covenants and conditions.
29. BINDING EFFECT; CHOICE OF LAW. This Lease shall be binding upon the
parties, their personal representatives, successors and assigns and be
governed by the laws of the State in which the Premises are located. Any
litigation between the Parties hereto concerning this Lease shall be
initiated in the county in which the Premises are located.
30. SUBORDINATION; ATTORNMENT; NON-DISTURBANCE.
30.1 SUBORDINATION. This Lease and any Option granted hereby shall be
subject and subordinate to any ground lease, mortgage, deed of trust, or
other hypothecation or security device (collectively, "SECURITY DEVICE"), now
or hereafter placed by Lessor upon the real property of which the Premises
are a part, to any and all advances made on the security thereof, and to all
renewals, modifications, consolidations, replacements and extensions thereof.
Lessee agrees that the Lenders holding any such Security Device shall have no
duty, liability or obligation to perform any of the obligations of Lessor
under this Lease, but that in the event of Lessor's default with respect to
any such obligation, Lessee will give any Lender whose name and address have
been furnished Lessee in writing for such purpose notice of Lessor's default
and allow such Lender thirty (30) days following receipt of such notice for
the cure of said default before invoking any remedies Lessee may have by
reason thereof. If any Lender shall elect to have this Lease and/or any
Option granted hereby superior to the lien of its Security Device and shall
give written notice thereof to Lessee, this Lease and such Options shall be
deemed prior to such Security Device, notwithstanding the relative dates of
the documentation of recordation thereof.
30.2 ATTORNMENT. Subject to the non-disturbance provisions of
Paragraph 30.3, Lessee agrees to attorn to a Lender or any other party who
acquires ownership of the Premises by reason of a foreclosure of a Security
Device, and that in the event of such foreclosure, such new owner shall not:
(i) be liable for any act or omission of any prior lessor or with respect to
events occurring prior to acquisition of ownership, (ii) be subject to any
offsets or defenses which Lessee might have against any prior lessor, or
(iii) be bound by prepayment of more than one (1) month's rent.
30.3 NON-DISTURBANCE. With respect to Security Devices entered into by
Lessor after the execution of this Lease, Lessee's subordination of this
Lease shall be subject to receiving assurance (a "NON-DISTURBANCE AGREEMENT")
from the Lender that Lessee's possession and this Lease, including any
options to extend the term hereof, will not be disturbed so long as Lessee is
not in Breach hereof and attorns to the record owner of the Premises.
30.4 SELF-EXECUTING. The agreements contained in this Paragraph 30 shall
be effective without the execution of any further documents; provided,
however, that, upon written request from Lessor or a Lender in connection
with a sale, financing or refinancing of the Premises, Lessee and Lessor
shall execute such further writings as may be reasonably required to
separately document any such subordination or non-subordination, attornment
and/or non-disturbance agreement as is provided for herein.
31. ATTORNEY'S FEES. If any Party or Broker brings an action or proceeding
to enforce the terms hereof or declare rights hereunder, the Prevailing Party
(as hereafter defined) or Broker in any such proceeding, action, or appeal
thereon, shall be entitled to reasonable attorney's fees. Such fees may be
awarded in the same suit or recovered in a separate suit, whether or not such
action or proceeding is pursued to decision or judgment. The term,
"PREVAILING PARTY" shall include, without limitation, a Party or Broker who
substantially obtains or defeats the relief sought, as the case may be,
whether by compromise, settlement, judgment, or the abandonment by the other
Party or Broker of its claim or defense. The attorney's fee award shall not
be computed in accordance with any court fee schedule, but shall be such as
to fully reimburse all attorney's fees reasonably incurred. Lessor shall be
entitled to attorney's fees, costs and expenses incurred in the preparation
and service of notices of Default and consultations in connection therewith,
whether or not a legal action is subsequently commenced in connection with
such Default or resulting Breach.
32. LESSOR'S ACCESS; SHOWING PREMISES; REPAIRS. Lessor and Lessor's agents
shall have the right to enter the Premises at any time, in the case of an
emergency, and otherwise at reasonable times for the purpose of showing the
same to prospective purchasers, lenders, or lessees, and making such
alterations, repairs, improvements or additions to the Premises or to the
building of which they are a part, as Lessor may reasonably deem necessary.
Lessor may at any time place on or about the Premises or building any
ordinary "For Sale" signs and Lessor may at any time during the last one
hundred twenty (120) days of the term hereof place on or about the Premises
any ordinary "For Lease" signs. All such activities of Lessor shall be
without abatement of rent or liability to Lessee.
33. AUCTIONS. Lessee shall not conduct, nor permit to be conducted, either
voluntarily or involuntarily, any auction upon the Premises without first
having obtained Lessor's prior written consent. Notwithstanding anything to
the contrary in this Lease, Lessor shall not be obligated to exercise any
standard of reasonableness in determining whether to grant such consent.
34. SIGNS. Lessee shall not place any sign upon the Premises, except that
Lessee may, with Lessor's prior written consent, install (but not on the roof)
such signs as are reasonably required to advertise Lessee's own business. The
installation of any sign on the Premises by or for Lessee shall be subject to
the provisions of Paragraph 7 (Maintenance, Repairs, Utility Installations,
Trade Fixtures and Alterations). Unless otherwise expressly agreed herein,
Lessor reserves all rights to the use of the roof and the right to install,
and all revenues from the installation of, such advertising signs on the
Premises, including the roof, as do not unreasonably interfere with the
conduct of Lessee's business.
35. TERMINATION; MERGER. Unless specifically stated otherwise in writing by
Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual
termination or cancellation hereof, or a termination hereof by Lessor for
Breach by Lessee, shall automatically terminate any sublease or lesser
estate in the Premises; provided, however, Lessor shall, in the event of any
such surrender, termination or cancellation, have the option to continue any
one or all of any existing subtenancies. Lessor's failure within ten (10)
days following any such event to make a written election to the contrary by
written notice to the holder of any such lesser interest, shall constitute
Lessor's election to have such event constitute the termination of such
interest.
36. CONSENTS.
(a) Except for Paragraph 33 hereof (Auctions) or as otherwise
provided herein, wherever in this Lease the consent of a Party is required
to an act by or for the other Party, such consent shall not be unreasonably
withheld or delayed. Lessor's actual reasonable costs and expenses (including
but not limited to architects' attorneys', engineers' or other consultants'
fees) incurred in the consideration of, or response to, a request by Lessee
for any Lessor consent pertaining to this Lease or the Premises, including
but not limited to consents to an assignment, a subletting or the presence or
use of a Hazardous Substance, practice or storage tank, shall be paid by
Lessee to Lessor upon receipt of an invoice and supporting documentation
therefor. Subject to Paragraph 12.2(e) (applicable to assignment or
subletting), Lessor may, as a condition to considering any such request by
Lessee, require that Lessee deposit with Lessor an amount of money (in
addition to the Security Deposit held under Paragraph 5) reasonably
calculated by Lessor to represent the cost Lessor will incur in considering
and responding to Lessee's request. Except as otherwise provided, any unused
portion of said deposit shall be refunded to Lessee without interest.
Lessor's consent to any act, assignment of this Lease or subletting of the
Premises by Lessee shall not constitute an acknowledgement that no Default or
Breach by Lessee of this Lease exists, nor shall such consent be deemed a
waiver of any then existing Default or Breach, except as may be otherwise
specifically stated in writing by Lessor at the time of such consent.
(b) All conditions to Lessor's consent authorized by this Lease are
acknowledged by Lessee as being reasonable. The failure to specify herein any
particular condition to Lessor's consent shall not preclude the imposition by
Lessor at the time of consent of such further or other conditions as are then
reasonable with reference to the particular matter for which consent is being
given.
37. GUARANTOR.
37.1 If there are to be any Guarantors of this Lease per Paragraph 1.11,
the form of the guaranty to be executed by each such Guarantor shall be in
the form most recently published by the American Industrial Real Estate
Association, and each said Guarantor shall have the same obligations as
Lessee under this Lease, including but not limited to the obligation to
provide the Tenancy Statement and information called for by Paragraph 16.
37.2 It shall constitute a Default of the Lessee under this Lease if any
such Guarantor fails or refuses, upon reasonable request by Lessor to give:
(a) evidence of the due execution of the guaranty called for by this Lease,
including the authority of the Guarantor (and of the party signing on
Guarantor's behalf) to obligate such Guarantor on said guaranty, and
including in the case of a corporate Guarantor, a certified copy of a
resolution of its board of directors authorizing the making of such guaranty,
together with a certificate of incumbency showing the signature of the
persons authorized to sign on its behalf, (b) current financial statements of
Guarantor as may from time to time be requested by Lessor, (c) a Tenancy
Statement, or (d) written confirmation that the guaranty is still in effect.
38. QUIET POSSESSION. Upon payment by Lessee of the rent for the Premises and
the observance and performance of all of the covenants, conditions and
provisions on Lessee's part to be observed and performed under this Lease,
Lessee shall have quiet possession of the Premises for the entire term hereof
subject to all of the provisions of this Lease.
39. OPTIONS.
39.1 DEFINITION. As used in this Paragraph 39 the word "OPTION" has the
following meaning: (a) the right to extend the term of this Lease or to renew
this Lease or to extend or renew any lease that Lessee has on other property
of Lessor; (b) the right of first refusal to lease the Premises or the right
of first offer to lease the Premises or the right of first refusal to
purchase the Premises, or the right of first offer to purchase the Premises,
or the right to purchase other property of Lessor, or the right of first
refusal to purchase other property of Lessor, or the right of first offer to
purchase other property of Lessor.
39.2 OPTIONS PERSONAL TO ORIGINAL LESSEE. Each Option granted to Lessee
in this Lease is personal to the original Lessee named in Paragraph 1.1
hereof, an cannot be voluntarily or involuntarily assigned or exercised by
any person or entity other than said original Lessee while the original Lessee
PAGE 9
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is in full and actual possession of Premises and without the intention of
thereafter assigning or subletting. The Options, if any, herein granted to
Lessee are not assignable, either as a part of an assignment of this Lease or
separately or apart therefrom, and no Option may be separated from this Lease
in any manner, by reservation or otherwise.
39.3 MULTIPLE OPTIONS. In the event that Lessee has any Multiple Options
to extend or renew this Lease, a later Option cannot be exercised unless the
prior Options to extend or renew this Lease have been validly exercised.
39.4 EFFECT OF DEFAULT ON OPTIONS.
(a) Lessee shall have no right to exercise an Option,
notwithstanding any precision in the grant of Option of the contrary: (i)
during the period commencing with the giving of any notice of Default under
Paragraph 13.1 and continuing until the noticed Default is cured, or (ii)
during the period of time any monetary obligation due Lessor from Lessee is
unpaid (without regard to whether notice thereof is given Lessee), or (iii)
during the time Lessee is in Breach of this Lease, or (iv) in the event that
Lessor has given to Lessee three (3) or more notices of Default under
Paragraph 13.1, whether or not the Defaults are cured, during the twelve
(12) month period immediately preceding the exercise of the Option.
(b) The period of time within which an Option may be exercised
shall not be extended or enlarged by reason of Lessee's inability to exercise
an Option because of the provisions of Paragraph 39.4(a).
(c) All rights of Lessee under the provisions of an Option shall
terminate and be of no further force or effect, notwithstanding Lessee's due
and timely exercise of the Option, if, after such exercise and during the
term of the Lease, (i) Lessee fails to pay to Lessor a monetary obligation of
Lessee for a period of thirty (30) days after such obligation becomes due
(without any necessity of Lessor to give notice thereof to Lessee), or (ii)
Lessor gives to Lessee three (3) or more notices of Default under Paragraph
13.1 during any twelve (12) month period, whether or not the Defaults are
cured, or (iii) if Lessee commits a Breach of this Lease.
40. MULTIPLE BUILDINGS. If the Premises are part of a group of buildings
controlled by Lessor, Lessee agrees that it will abide by, keep and observe
all reasonable rules and regulations which Lessor may make from time to time
for the management, safety, care, and cleanliness of the grounds, the parking
and unloading of vehicles and the preservation of good order, as well as for
the convenience of other occupants or tenants of such other buildings and
their invitees, and that Lessee will pay its fair share of common expenses
incurred in connection therewith.
41. SECURITY MEASURES. Lessee hereby acknowledges that the rental payable to
Lessor hereunder does not include the cost of guard service or other security
measures, and that Lessor shall have no obligation whatsoever to provide same.
Lessee assumes all responsibility for the protection of the Premises, Lessee,
its agents and invitees and their property from the acts of third parties.
42. RESERVATIONS. Lessor reserves to itself the right, from time to time, to
grant, without the consent or joinder of Lessee, such easements, rights and
dedications that Lessor deems necessary, and to cause the recordation of
parcel maps and restrictions, so long as such easements, rights, dedications,
maps and restrictions do not unreasonably interfere with the use of the
Premises by Lessee. Lessee agrees to sign any documents reasonably requested
by Lessor to effectuate any such easement rights, dedication, map or
restrictions.
43. PERFORMANCE UNDER PROTEST. If at any time a dispute shall arise as to any
amount or sum of money to be paid by one Party to the other under the
provisions hereof, the Party against whom the obligation to pay the money is
asserted shall have the right to make payment "under protest" and such
payment shall not be regarded as a voluntary payment and there shall survive
the right on the part of said Party to institute suit for recovery of such
sum. If it shall be adjudged that there was no legal obligation on the part of
said Party to pay such sum or any part thereof, said Party shall be entitled
to recover such sum or so much thereof as it was not legally required to pay
under the provisions of this Lease.
44. AUTHORITY. If either Party hereto is a corporation, trust, or general or
limited partnership, each individual executing this Lease on behalf of such
entity represents and warrants that he or she is duly authorized to execute
and deliver this Lease on its behalf. If Lessee is a corporation, trust or
partnership, Lessee shall, within thirty (30) days after request by Lessor,
deliver to Lessor evidence satisfactory to Lessor of such authority.
45. CONFLICT. Any conflict between the printed provisions of this Lease and
the typewritten or handwritten provisions shall be controlled by the
typewritten or handwritten provisions.
46. OFFER. Preparation of this Lease by Lessor or Lessor's agent and
submission of same to Lessee shall not be deemed an offer to lease to Lessee.
This Lease is not intended to be binding until executed by all Parties hereto.
47. AMENDMENTS. This Lease may be modified only in writing, signed by the
parties in interest at the time of the modification. The parties shall amend
this Lease from time to time to reflect any adjustments that are made to the
Base Rent or other rent payable under this Lease. As long as they do not
materially change Lessee's obligations hereunder, Lessee agrees to make such
reasonable non-monetary modifications to this Lease as may be reasonably
required by an institutional, insurance company, or pension plan Lender in
connection with the obtaining of normal financing or refinancing of the
property of which the Premises are a part.
48. MULTIPLE PARTIES. Except as otherwise expressly provided herein, if more
than one person or entity is named herein as either Lessor or Lessee, the
obligations of such Multiple Parties shall be the joint and several
responsibility of all persons or entities named herein as such Lessor or
Lessee.
LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM
AND PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR
INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE
TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY
REASONABLE AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH
RESPECT TO THE PREMISES.
IF THIS LEASE HAS BEEN FILLED IN, IT HAS BEEN PREPARED FOR
SUBMISSION TO YOUR ATTORNEY FOR HIS APPROVAL. FURTHER, EXPERTS
SHOULD BE CONSULTED TO EVALUATE THE CONDITION OF THE PROPERTY
AS TO THE POSSIBLE PRESENCE OF ASBESTOS, STORAGE TANKS OR
HAZARDOUS SUBSTANCES. NO REPRESENTATION OR RECOMMENDATION IS
MADE BY THE AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION OR BY
THE REAL ESTATE BROKER(S) OR THEIR AGENTS OR EMPLOYEES AS TO THE
LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS
LEASE OR THE TRANSACTION TO WHICH IT RELATES; THE PARTIES SHALL
RELY SOLELY UPON THE ADVICE OF THEIR OWN COUNSEL AS TO THE LEGAL
AND TAX CONSEQUENCES OF THIS LEASE. IF THE SUBJECT PROPERTY IS
LOCATED IN A STATE OTHER THAN CALIFORNIA, AN ATTORNEY FROM THE
STATE WHERE THE PROPERTY IS LOCATED SHOULD BE CONSULTED.
The parties hereto have executed this Lease at the place on the dates
specified above to their respective signatures.
Executed at Executed at San Diego, CA
-------------------------- --------------------------
on on 11/1/96
----------------------------------- -----------------------------------
by LESSOR: by LESSEE:
Scope Development Spectranet Anaheim
- ------------------------------------- -------------------------------------
- ------------------------------------- -------------------------------------
By By Robert E. Randall
----------------------------------- -----------------------------------
Name Printed: Paul Clapp Name Printed: Robert E. Randall
------------------------- ------------------------
Title: Title: C.O.O.
------------------------------- -------------------------------
By By Renney E. Senn
----------------------------------- -----------------------------------
Name Printed: Frank Grillo Name Printed: Renney E. Senn
------------------------- ------------------------
Title: Title: CEO
------------------------------- -------------------------------
Address: 1510 Lewis Street Address: 9333 Genesee Ave #200
----------------------------- -----------------------------
Anaheim, California San Diego, CA. 92121
- ------------------------------------- -------------------------------------
Tel.No.(714)999-2500 Tel.No.(619)552-8010
------------- -------------
Fax No.(714)999-2525 Fax No.(619)552-8006
------------- -------------
BY:
----------------
PAGE 10
NAME:
--------------
<PAGE>
ADDENDUM TO THE STANDARD INDUSTRIAL/COMMERCIAL SINGLE TENANT LEASE GROSS
FORM DATED AUGUST 26,1996, BY AND BETWEEN SCOPE DEVELOPMENT (LESSOR) AND
SPECTRANET ANAHEIM (LESSEE) FOR THE PROPERTY LOCATED AT 1520 SOUTH LEWIS
STREET, ANAHEIM, CALIFORNIA
1. BASE RENT:
The base monthly rent, Lessee shall pay Lessor in advance on the first
day of each month. The lease term shall be as follows:
Months Rent/SF/MO Rent/MO
------ ---------- -------
1-2 Free of base rent Free of base rent
3-12 $.52 gross $4,637.36 gross
13-24 $.54 gross $4,815.72 gross
25-36 $.56 gross $4,994.08 gross
37-48 $.58 gross $5,172.44 gross
49-60 $.60 gross $5,350.80 gross
LESSEE SHALL BE RESPONSIBLE FOR ITS PRO RATA SHARE OF ALL COMMON AREA
MAINTENANCE (CAM) COSTS.
2. FIRST RIGHT TO LEASE ADJACENT SPACE:
Tenant shall have the first right to lease all or any portion of any
previously leased space which may become available during the initial
term in the adjacent property located at 1510 Lewis Street. Landlord
shall notify Tenant of such space becoming available, and lease term
shall be the same for the subject premises.
3. HAZARDOUS MATERIALS:
See attached Exhibit "A".
<PAGE>
[LOGO]
OPTION(S) TO EXTEND
ADDENDUM TO
STANDARD LEASE
DATED August 26, 1996
-------------------------------------------------------------
BY AND BETWEEN (LESSOR) Scope Development
-------------------------------------------
(LESSEE) Spectranet Anaheim
-------------------------------------------
PROPERTY ADDRESS: 1520 Lewis Street, Anaheim, California
-------------------------------------------------
Paragraph
-----
A. OPTION(S) TO EXTEND
Lessor hereby grants to Lessee the option to extend the term of this
Lease for 1 additional 60 month period(s) commencing when the prior term
expires upon each and all of the following terms and conditions:
(i) Lessee gives to Lessor, and Lessor actually receives on a date which
is prior to the date that the option period would commence (if exercised) by
at least 6 and not more than 12 months, a written notice of the exercise of
the option(s) to extend this Lease for said additional term(s), time being of
essence. If said notification of the exercise of said option(s) is (are) not
so given and received, the options(s) shall automatically expire; said
option(s) may (if more than one) only be exercised consecutively;
(ii) The provisions of paragraph 39, including the provision relating to
default of Lessee set forth in paragraph 39.4 of this Lease are conditions of
this Option;
(iii) All of the terms and conditions of this Lease except where
specifically modified by this option shall apply;
(iv) The monthly rent for each month of the option period shall be
calculated as follows, using the method(s) indicated below:
(Check Method(s) to be Used and Fill in Appropriately)
/ / I. COST OF LIVING ADJUSTMENT(S) (COL)
(a) On (Fill in COL Adjustment Date(s):_____________________________
_______________________________________________________________________________
the monthly rent payable under paragraph 1.5 ("Base Rent") of the attached
Lease shall be adjusted by the change, if any, from the Base Month specified
below, in the Consumer Price Index of the Bureau of Labor Statistics of the
U.S. Department of Labor for (select one): / / CPI W (Urban Wage Earners and
Clerical Workers) or / / CPI U (All Urban Consumers), for (Fill in Urban
Area):________________________________________________________________________,
All Items (1982-1984) = 100), herein referred to as "C.P.I."
(b) The monthly rent payable in accordance with paragraph AI(a) of
this Addendum shall be calculated as follows: the Base Rent set forth in
paragraph 1.5 of the attached Lease, shall be multiplied by a fraction the
numerator of which shall be the C.P.I. of the calendar month 2 (two) months
prior to the month(s) specified in paragraph AI(a) above during which the
adjustment is to take effect, and the denominator of which shall be the C.P.I.
of the calendar month which is two (2) months prior to (select one): / / the
first month of the term of this Lease as set forth in paragraph 1.3 ("Base
Month") or / / (Fill in Other "Base Month"): __________________________________.
The sum so calculated shall constitute the new monthly rent hereunder, but in
no event, shall any such new monthly rent be less than the rent payable for
the month immediately preceding the date for rent adjustment.
(c) In the event compilation and/or publication of the C.P.I. shall
be transferred to any other governmental department or bureau or agency or
shall be discontinued, then the index most nearly the same as the C.P.I.
shall be used to make such calculation. In the event that Lessor and Lessee
cannot agree on such alternative index, then the matter shall be submitted
for decision to the American Arbitration Association in accordance with the
then rules of said association and the decision of the arbitrators shall be
binding upon the parties. The cost of said Arbitrators shall be paid equally
by Lessor and Lessee.
/X/ II. MARKET RENTAL VALUE ADJUSTMENT(S) (MRV)
(a) On (Fill in MRV Adjustment Date(s): November 1, 2001
_______________________________________________________________________________
the monthly rent payable under paragraph 1.5 ("Base Rent") of the attached
Lease shall be adjusted to the "Market Rental Value" of the property as
follows:
1) Four months prior to the Market Rental Value (MRV)
Adjustment Date(s) described above, Lessor and Lessee shall meet to establish
an agreed upon new MRV for the specified term. If agreement cannot be
reached, then:
OPTION(S) TO EXTEND
PAGE 1 OF 2
<PAGE>
i) Lessor and Lessee shall immediately appoint a mutually
acceptable appraiser or broker to establish the new MRV within the next 30
days. Any associated costs will be split equally between the parties, or
ii) Both Lessor and Lessee shall each immediately select and
pay the appraiser or broker of their choice to establish a MRV within the
next 30 days. If, for any reason, either one of the appraisals is not
completed within the next 30 days, as stipulated, then the appraisal that is
completed at that time shall automatically become the new MRV. If both
appraisals are completed and the two appraisers/brokers cannot agree on a
reasonable average MRV then they shall immediately select a third mutually
acceptable appraiser/broker to establish a third MRV within the next 30 days.
The average of the two appraisals closest in value shall then become the new
MRV. The costs of the third appraisal will be split equally between the
parties.
2) In any event, the new MRV shall not be less than the rent
payable for the month immediately preceding the date for rent adjustment.
(b) Upon the establishment of each New Market Rental Value as
described in paragraph AII:
1) the monthly rental sum so calculated for each term as
specified in paragraph AII(a) will become the new "Base Rent" for the purpose
of calculating any further Cost of Living Adjustments as specified in
paragraph AI(a) above and
2) the first month of each Market Rental Value term as
specified in paragraph AII(a) shall become the new "Base Month" for the
purpose of calculating any further Cost of Living Adjustments as specified in
paragraph AI(b).
/ / III. FIXED RENTAL ADJUSTMENT(S) (FRA)
The monthly rent payable under paragraph 1.5 ("Base Rent") of the attached
Lease shall be increased to the following amounts on the dates set forth
below:
On (Fill in FRA Adjustment Date(s)): The New Base Rental shall be:
____________________________________ $_____________________________
____________________________________ $_____________________________
____________________________________ $_____________________________
____________________________________ $_____________________________
B. NOTICE: Unless specified otherwise herein, notice of any escalculations
other than Fixed Rental Adjustments shall be made as specified in paragraph
23 of the attached Lease.
C. BROKER'S FEE:
The Real Estate Brokers specified in paragraph 1.10 of the attached
Lease shall be paid a Brokerage Fee for each adjustment specified above
in accordance with paragraph 15 of the attached Lease.
OPTION(S) TO EXTEND
PAGE 2 OF 2
<PAGE>
[Logo]
ADDENDUM TO
STANDARD LEASE
DATED August 26, 1996
-----------------------------------
BY AND BETWEEN Scope Development (Lessor)
--------------------------------
Spectranet Anaheim (Lessee)
----------------------------------------------
RIGHT OF FIRST REFUSAL TO PURCHASE
- --------
(a) Lessor shall not, at any time prior to the expiration of the term
of this Lease, or any extension thereof, sell the Premises, or any interest
therein, without first giving written notice thereof to Lessee, which notice
is hereinafter referred to as "Notice of Sale".
(b) The Notice of Sale shall include the exact and complete terms of
the proposed sale and shall have attached thereto a photocopy of bona fide
offer and counteroffer, if any, duly executed by both Lessor and the
prospective purchaser.
(c) For a period of ten (10) business days after receipt by Lessee of
the Notice of Sale, Lessee shall have the right to give written notice to
Lessor of Lessee's exercise of Lessee's right to purchase the Premises, or
the interest proposed to be sold, on the same terms, price and conditions as
set forth in the Notice of Sale. In the event that Lessor does not receive
written notice of Lessee's exercise of the right herein granted within said
ten (10) day period, there shall be a conclusive presumption that Lessee has
elected not to exercise Lessee's right hereunder, and Lessor may sell the
Premises, or the interest proposed to be sold, on the same terms set forth in
the Notice of Sale.
(d) In the event that Lessee declines to exercise its right of first
refusal after receipt of the Notice of Sale, and, thereafter, Lessor and the
prospective purchaser modify by more than 5%, (i) the sales price, (ii) the
amount of down payment, or (iii) interest charged, or in the event that the
sale is not consummated within 160 days of the date of the Notice of Sale,
then Lessee's right of first refusal shall reapply to said transaction as of
the occurrence of any of the aforementioned events.
(e) Lessee has option to purchase the Premises within the first twenty
(24) months of the Lease. Should Lessee not exercise said Option to Purchase,
that option will expire and this Right of First Refusal to Purchase shall
remain in effect during the expiration of the term of this Lease or any
extension hereof.
<PAGE>
EXHIBIT "A"
3. HAZARDOUS SUBSTANCES. Landlord shall indemnify, defend (by counsel
reasonably acceptable to Tenant), protect and hold Tenant and its
indemnities, partners, agents, officers, directors, employees and successors
and assigns, free and harmless from and against any and all claims,
liabilities, penalties, forfeitures, losses, costs, damages and/or expenses,
attorney's fees, consultant fees and expert fees, judgments, administrative
rulings or orders, fines, costs for death of or injury to any person or
damage to any property whatsoever (including, without limitation, Tenant's
goods and stock in trade, the Premises, Tenant's quiet enjoyment thereof, or
fixtures installed therein) arising from, or caused or resulting, either
prior to or during the Lease Term, in whole or in part, directly or
indirectly, by the release, presence, or discharge in, or under or about the
Premises, or from the transportation or disposal of any hazardous or toxic
substance, material waste, including, but not limited to those substances,
materials and wastes listed in the United States Department of Transportation
Hazardous Materials Table (49 CFR 172.101) or by the Environmental Protection
Agency as Hazardous Substances (40 CFR Part 302) and any amendments thereto,
or such substances, materials and wastes that are or become regulated under
any applicable local, state or federal law (hereafter collectively, "Toxic or
Hazardous Substances and Substances"), to or from the Premises, by Landlord,
Landlord's agents, employees, licensees, other lessees or invitees or at
Landlord's direction, or by Landlord's failure to comply with any Hazardous
Materials laws, or from Landlord's failure to provide adequate disclosures or
warnings as required by the Hazardous Materials laws. Landlord's
indemnification obligations hereunder shall include, without limitation, and
whether foreseeable or unforeseeable, all costs of any Hazardous Materials
management plan, investigation, repairs, clean up or detoxification or
decontamination of the Premises and presence and implementation of any
closure, remedial action or other required plans in connection therewith
which are required by law or by appropriate regulatory agencies having
jurisdiction, and shall survive the expiration of or early termination of the
Lease Term. Landlord shall further be solely responsible for and shall
indemnify, protect, defend and hold Tenant and Tenant's guarantor and each of
their indemnities, partners, directors, officers, agents, employees and
successors in interest harmless from and against all claims, costs and
liabilities including actual attorneys' fees and costs, arising out of or in
connection with any removal, remediation, clean up, restoration, and
materials required hereunder by law or by appropriate regulatory agencies
having jurisdiction to address any environmental conditions that exist as of
the commencement of the Lease Term.
Tenant covenants that it will not use, maintain, generate, store, treat,
dispose of or cause or permit to be brought upon the Premises any Toxic or
Hazardous Substances or Substances in violation of applicable governmental
regulations. Tenant shall be solely responsible for, shall at its sole cost
and expense perform as necessary or required, and hereby agrees to
indemnify, defend, hold harmless and release Landlord and Landlord's
officers, directors, partners, agents, employees, assignees and Landlord's
mortgagee(s), from and against any loss, damages, injury, penalty,
requirements, investigation, remediation, duty, demand, proceeding,
liability, claim, action, cost and expense (including, without limitation,
any compliance, monitoring, investigative, clean-up, engineering and
attorneys' fees and expenses), whether known or unknown, contingent or
liquidated and whether arising in the past, now or in the future, relating
to, in whole or in part the violation of this covenant by Tenant, Tenant's
partners, affiliates, officers, directors, agents,
<PAGE>
EXHIBIT "A"
(CONTINUED)
employees, assignees or sublessees. Tenant's indemnity to Landlord under this
section shall survive the cancellation or termination of this Lease. Tenant's
indemnification obligations hereunder shall include, without limitation, and
whether foreseeable or unforeseeable and arising from Tenant's breach of its
covenant contained in this paragraph, all costs of any Hazardous Materials
management plan, investigation, repairs, clean up or detoxification or
decontamination of the Premises and presence and implementation of any
closure, remedial action or other required plans in connection therewith
which are required by law or by appropriate regulatory agencies having
jurisdiction, and shall survive the expiration of or early termination of the
Lease Term.
During the Lease Term, if Toxic or Hazardous Substancess or Substances
are discovered on the Premises beyond the levels permitted under the
applicable environmental regulations, and such Toxic or Hazardous Substancess
or Substances were not placed on the Premises by or with the knowledge or
permission of Tenant, or its officers, directors, agents, contractors,
employees, assignees and sublessees as specifically provided in this section,
and if Landlord is required to remediate, remove, dispose or treat such toxic
or Hazardous Substancess or Substances, the Premises, or any portion thereof,
by the governmental authorities with jurisdiction thereof, the Landlord shall
do so at its sole cost and expense. Nothing contained herein shall be
construed or interpreted as requiring Tenant to assume the status of an
owner, operator, generator, person who arranges for disposal, transporter,
storer, treatment or disposal facility as those terms appear in applicable
governmental regulations. Landlord shall further provide copies to Tenant in
a timely fashion, in whatever capacity and in whatever form obtained, any and
all information acquired in connection with Landlord's locating, remediating,
removing and disposing of Toxic or Hazardous Substancess of Substances on the
Premises and the improvements thereon and any other information that Tenant
may reasonably request from time to time. In the event that such remediation
or clean up requires the vacation of all or a portion of the Premises, then
the same shall be deemed to be either a permanent or temporary taking,
depending upon the amount of the Premises and time so vacated, and as defined
in the Lease.
-2-
<PAGE>
EXHIBIT "B"
[MAP OF SOUTH LEWIS STREET ANAHEIM]
<PAGE>
Exhibit 12.1
FIRSTWORLD COMMUNICATIONS, INC.
(formerly SpectraNet International)
(a development stage enterprise)
Computation of Ratio of Earnings to Fixed Charges
(Dollars in Thousands)
<TABLE>
<CAPTION>
Year ended Period from Six months ended Period from
September 30, September 1, 1993 March 31, September 1, 1993
--------------------------------- (inception) to ---------------- (inception) to
1994 1995 1996 1997 September 30, 1997 1997 1998 March 31, 1998
-------- ------ ------- ------ ------------------ ------- ------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Pre-tax loss from continuing operations (418) (908) (3,856) (9,448) (14,653) (3,326) (8,318) (22,971)
Interest capitalized during the period - - - (52) (52) - - (52)
----- ------ ------- ------- -------- ------- ------- --------
(418) (908) (3,856) (9,500) (14,705) (3,326) (8,318) (23,023)
----- ------ ------- ------- -------- ------- ------- --------
Fixed charges:
Interest expense and amortization of debt
discount and premium on all
indebtedness 53 38 27 1,424 1,541 127 2,480 4,021
Interest portion of rentals
(33% of rent expense) 16 24 36 120 197 60 60 257
----- ------ ------- ------- -------- ------- ------- --------
Total fixed charges 69 62 63 1,544 1,738 187 2,540 4,278
----- ------ ------- ------- -------- ------- ------- --------
Loss before income taxes and fixed charges (349) (846) (3,793) (7,956) (12,967) (3,139) (5,778) (18,745)
----- ------ ------- ------- -------- ------- ------- --------
----- ------ ------- ------- -------- ------- ------- --------
Ratio of earnings to fixed charges n/a n/a n/a n/a n/a n/a n/a n/a
----- ------ ------- ------- -------- ------- ------- --------
----- ------ ------- ------- -------- ------- ------- --------
Insufficiency of earnings to cover fixed
charges 418 908 3,856 9,500 14,705 3,326 8,318 23,023
----- ------ ------- ------- -------- ------- ------- --------
----- ------ ------- ------- -------- ------- ------- --------
</TABLE>
Page 1
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-4 of our report dated March 5, 1998, except
as to Note 13 which is as of March 17, 1998, relating to the financial
statements of FirstWorld Communications, Inc. (formerly SpectraNet
International)(a development stage enterprise), which appears in such
Prospectus. We also consent to the application of such report to the
Financial Statement Schedule for the three years ended September 30, 1997 and
for the period from September 1, 1993 (inception) through September 30, 1997
listed under Item 21(b) of this Registration Statement when such schedule is
read in conjunction with the financial statements referred to in our report.
The audits referred to in such report also included this schedule. We also
consent to the reference to us under the heading "Experts" in such Prospectus.
PRICE WATERHOUSE LLP
San Diego, California
June 25, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE MARCH
31, 1998 QUARTERLY REPORT AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FORM S-4 REGISTRATION FILING.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 1,749,922
<SECURITIES> 0
<RECEIVABLES> 134,050
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,072,112
<PP&E> 27,539,317
<DEPRECIATION> (1,623,393)
<TOTAL-ASSETS> 32,650,013
<CURRENT-LIABILITIES> 5,177,198
<BONDS> 0
0
0
<COMMON> 33,074,759
<OTHER-SE> 10,532,460
<TOTAL-LIABILITY-AND-EQUITY> 32,650,013
<SALES> 233,714
<TOTAL-REVENUES> 243,714
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 6,138,644
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,479,726
<INCOME-PRETAX> (5,894,930)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,318,136)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
