<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 24, 1998
REGISTRATION NO. 333-57829
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
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>
DELAWARE 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 previously submitted
was based on the present discounted book value of the 13% Senior Discount
Notes to be received by the Registrant in the exchange as of June 26, 1998.
--------------------------
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.
- --------------------------------------------------------------------------------
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<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 AUGUST 24, 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
[LOGO]
------------------------
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.
SEE "RISK FACTORS" BEGINNING ON PAGE 10 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." As of June 30, 1998, the
Company had no Subordinated Indebtedness and $7.1 million in outstanding
Indebtedness that ranks 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
Exchange 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 THAT INVOLVE RISKS AND
UNCERTAINTIES. 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 began network operations in July 1997 and began providing
services to commercial customers in November 1997. As of July 31, 1998, the
Company had approximately 100 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 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. For prime
commercial customers (businesses with sophisticated communications needs), the
Company utilizes a consultative selling approach that involves a systematic
assessment of each
1
<PAGE>
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'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 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. 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.
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. In June 1998, the Company
changed its state of incorporation from California to Delaware.
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 10, for a
discussion of certain risks involved with an investment in the Exchange Notes
including, without limitation, those risks associated with the Company's (i)
limited history of operations, (ii) history of operating losses, (iii)
substantial leverage and ability to service its indebtedness (including the
Notes), (iv) ability to manage future growth, (v) dependence upon its network
infrastructure and (vi) reliance on third parties for access to telephony
services.
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. See "Risk Factors."
2
<PAGE>
THE EXCHANGE OFFER
<TABLE>
<CAPTION>
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 July 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."
<S> <C>
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
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."
</TABLE>
3
<PAGE>
<TABLE>
<S> <C>
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
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
</TABLE>
4
<PAGE>
<TABLE>
<S> <C>
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
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
</TABLE>
5
<PAGE>
<TABLE>
<S> <C>
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 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."
</TABLE>
6
<PAGE>
<TABLE>
<S> <C>
As of June 30, 1998, the Company had no Subordinated Indebtedness and
$7.1 million in outstanding Indebtedness that ranks 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 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."
7
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
The summary consolidated financial data presented below for the period from
September 1, 1993 (inception) to September 30, 1993, 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 June 30, 1998 and for
the nine month periods ended June 30, 1997 and 1998 and the period from
September 1, 1993 (inception) to June 30, 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 nine month
period ended June 30, 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>
PERIOD FROM
PERIOD FROM SEPTEMBER 1,
SEPTEMBER 1, 1993
1993 YEAR ENDED (INCEPTION)
(INCEPTION) TO SEPTEMBER 30, TO
SEPTEMBER 30, ------------------------------------------ SEPTEMBER
1993 1994 1995 1996 1997 30, 1997
--------------- --------- --------- --------- --------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Service revenue................................... $ -- $ 85 $ 57 $ 279 $ 75 $ 496
Other revenue..................................... -- 40 75 96 211
Costs and expenses:
Network development and operations.............. -- -- 188 1,708 3,170 5,067
Selling, general and administrative............. 23 429 740 2,409 4,725 8,325
Depreciation and amortization................... -- 21 39 75 501 637
--- --------- --------- --------- --------- ------------
Loss from operations.............................. (23) (365) (870) (3,838) (8,225) (13,322)
Other income (expense):
Interest expense................................ -- (53) (38) (27) (1,372) (1,489)
Interest income................................. -- -- -- 9 149 158
--- --------- --------- --------- --------- ------------
Loss before extraordinary item.................... (23) (418) (908) (3,856) (9,448) (14,653)
Extraordinary item--extinguishment of debt........ -- -- -- -- (105) (105)
--- --------- --------- --------- --------- ------------
Net loss.......................................... $ (23) $ (418) $ (908) $ (3,856) $ (9,553) $ (14,758)
--- --------- --------- --------- --------- ------------
--- --------- --------- --------- --------- ------------
OTHER DATA:
EBITDA(1)......................................... $ (23) $ (344) $ (831) $ (3,763) $ (7,829) $ (12,790)
Net cash provided by (used in) operating
activities...................................... 3 (416) (781) (2,168) (7,446) (10,808)
Net cash used in investing activities............. -- 18 45 923 12,647 13,633
Net cash provided by financing activities......... 10 425 827 3,156 20,557 24,976
Capital expenditures.............................. -- 6 25 908 12,637 13,576
Deficiency of earnings to cover fixed
charges(2)...................................... 23 418 908 3,856 9,500 14,705
<CAPTION>
PERIOD FROM
SEPTEMBER 1,
1993
NINE MONTHS (INCEPTION)
ENDED JUNE 30, TO
----------------------- JUNE 30,
1997 1998 1998
--------- ------------ ------------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Service revenue................................... $ -- $ 649 $ 1,145
Other revenue..................................... 114 10 221
Costs and expenses:
Network development and operations.............. 3,186 5,497 10,564
Selling, general and administrative............. 2,806 4,756 13,081
Depreciation and amortization................... 393 1,841 2,478
--------- ------------ ------------
Loss from operations.............................. (6,271) (11,435) (24,757)
Other income (expense):
Interest expense................................ (242) (11,072) (12,561)
Interest income................................. 144 3,247 3,405
--------- ------------ ------------
Loss before extraordinary item.................... (6,369) (19,260) (33,913)
Extraordinary item--extinguishment of debt........ -- (4,730) (4,835)
--------- ------------ ------------
Net loss.......................................... $ (6,369) $ (23,990) $ (38,748)
--------- ------------ ------------
--------- ------------ ------------
OTHER DATA:
EBITDA(1)......................................... $ (5,878) $ (14,324) $ (27,114)
Net cash provided by (used in) operating
activities...................................... (5,783) (10,754) (21,562)
Net cash used in investing activities............. (5,918) (157,737) (171,369)
Net cash provided by financing activities......... 11,922 273,576 298,552
Capital expenditures.............................. 5,918 12,311 25,887
Deficiency of earnings to cover fixed
charges(2)...................................... 6,369 19,478 34,182
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 JUNE 30, 1998
------------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents...................................................... $ 536 $ 105,622
Working capital (deficit)...................................................... (3,319) 248,991
Total assets................................................................... 25,321 286,053
Long-term debt................................................................. 18,964 242,352
Total stockholders' equity..................................................... 2,265 38,716
</TABLE>
- ------------------------------
(1) EBITDA represents earnings before interest, income taxes, depreciation and
amortization. EBITDA is not a measurement of financial performance under
generally accepted accounting principles, is not intended to represent cash
flow from operations, and should not be considered as an alternative to net
loss as an indicator of the Company's operating performance or to cash flows
as a measure of liquidity. The Company believes that EBITDA is widely used
by analysts, investors and other interested parties in the
telecommunications industry. The Company's computation of EBITDA may not be
comparable to similarly titled measures for other companies.
(2) For purposes of calculating the ratio of earnings to fixed charges, earnings
is defined as net loss plus fixed charges (other than capitalized interest).
Fixed charges consist of interest and amortization of debt discount and debt
issuance costs, whether expensed or capitalized, and that portion of rental
expense deemed to represent interest (estimated to be one-third of such
expense). For the periods presented, earnings were insufficient to cover
fixed charges by the amounts disclosed.
9
<PAGE>
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 slightly more
than one year, and as of July 31, 1998 had approximately 100 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 achieve its goals, generate sufficient positive cash flows to make
principal
10
<PAGE>
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. Given the dynamic nature of
the marketplace for telecommunications services, the prices the Company charges
for some or all of its services may from time to time be higher than those
charged by providers for some competing services, although the Company is not
aware of any specific type of service that it currently prices higher than its
competitors. 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 $39.0 million through June
30, 1998. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations." The Company expects to continue to generate significant
operating and net losses for at least the next several years. There can be no
assurance that the Company will achieve or sustain profitability or generate
sufficient positive cash flow to meet its working capital requirements 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. As of
June 30, 1998, the Company had approximately $243.2 million of outstanding
indebtedness, the Company's total debt as a
11
<PAGE>
percentage of capitalization was approximately 86% as of June 30, 1998 and the
Company had a deficiency of earnings to fixed charges of $19.4 million for the
nine months ended June 30, 1998. See "Capitalization," "Selected Consolidated
Financial 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 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."
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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. In addition, on August 6, 1998 the FCC initiated a proceeding to allow
ILECs to offer DSL and other advanced telecommunications services. The FCC has
proposed to permit the offering of such services by ILECs on an unregulated
basis if certain separate subsidiary and interconnection requirements are met.
The outcome of this proceeding, and its ultimate effect on competition, are
uncertain.
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. AT&T has also announced
plans to merge with Tele-Communications, Inc. ("TCI"), the nation's largest
operator of cable television systems, and to provide telephone services over the
TCI cable plant. Sprint 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
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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. ("Qwest"), a growing
provider of fiber optic-based telecommunications services. Although the legality
of these particular deals with Qwest 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 systems, 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. FirstWorld utilizes various procedures to minimize security
risks. The Company currently provides its customers their own physical and
permanent virtual circuits throughout the FirstWorld network. The Company also
utilizes a Fire Wall to protect its internet customers. In addition, the
Company's own fiber network is inaccessible, in that it has no electrical
interfaces that allow the possibility of monitoring. All termination points and
manholes within Firstworld's own fiber network are locked and secured. There can
be no assurance, however, that these security procedures will prove to be
adequate. Moreover, the Company's current, and certain of its planned networks,
are located in an area prone to earthquakes. An earthquake or other natural
disaster affecting the normal operations of the Company or the ILECs with which
the Company does business could seriously impair the Company's ability to
provide service to customers. Interruptions in service, capacity limitations or
security breaches could have a material adverse effect on customer acceptance
and, therefore, on the Company's business. Certain aspects of the Company's
network architecture involve new applications of equipment which may result in
technical issues that may not be easily resolved. Although the Company generally
seeks to limit its liability through its
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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.
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
customer located equipment ("CLE"). The Company believes that the proceeds from
the Private Note Offering and the concurrent investment by Colorado Spectra 3,
LLC, a Colorado limited liability Company controlled by Donald L. Sturm
("Spectra 3") and Enron of an aggregate amount of $20 million (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 its revolving credit facility (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,
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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.
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 services at competitive prices, or otherwise increase the
cost and regulatory burdens of providing services. There can be no assurance
that regulatory authorities in the areas served by the Company or the FCC will
refrain from taking actions having an adverse effect on the business or
financial condition or results of operations of the Company. The
Telecommunications Act has significantly altered regulation of the
telecommunications industry by preempting state and local laws to the extent
that they 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,
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the costs incurred in defending against any such claims and potential adverse
outcomes of such claims could have a material adverse effect on the Company's
financial condition and results of operations. The Company believes that it is
currently unclear whether the Telecommunications Act prohibits or imposes
liability for any services provided by the Company should the content of
information transmitted be subject to the statute.
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. FWA has an obligation to
fund a reserve account with a portion of "net revenues" (as defined in the UTS
Agreement) derived from the Anaheim network. See "Business--Agreements with the
City of Anaheim and The Irvine Company-- The City of Anaheim--Universal
Telecommunications System Participation Agreement." There currently are no other
restrictions on payments from the Company's subsidiaries to the Company and 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 June 30, 1998 were
approximately $28.3 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 Exchange 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 is continuing to determine whether its systems and its vendors'
systems will require updating to continue to function properly beyond 1999. As
the Company adds new features to its network it will continue to evaluate the
functionality of such features beyond 1999. Although the Company does not expect
to incur significant expenditures to upgrade its network to address Year 2000
problems, there can be no assurance that the Company will be able to identify
all Year 2000 problems in its systems in advance of their occurrence or that the
Company will be able to successfully remedy any problems. In addition, to the
extent that the Company's suppliers, including the ILECs 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, 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
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regarding the development of the Company's business, the markets for the
Company's services and products, the Company's anticipated capital expenditures,
regulatory reform and other statements contained herein regarding matters that
are not historical facts, are only predictions. No assurance can be given that
the expected future results will be achieved; actual events or results may
differ materially as a result of risks facing the Company or other external
events or due to decisions made by the Company in the future. The risks facing
the Company include, but are not limited to, those relating to the Company's
ability to successfully market its services to current and new customers, access
markets, 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 reasonable 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
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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 at maturity 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.
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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.
29
<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> <C>
BY HAND OR OVERNIGHT DELIVERY: FACSIMILE TRANSMISSIONS: BY REGISTERED OR CERTIFIED
MAIL:
The Bank of New York (Eligible Institutions The Bank of New York
101 Barclay Street Only) 101 Barclay Street, 7E
Corporate Trust Services (212)815-6339 New York, New York 10286
Window CONFIRM BY TELEPHONE Attn: Reorganization Section,
Ground Level or for Information Call: Nathalie Simon
New York, New York 10286 (212)815-5788
Attn: Reorganization Section,
Nathalie Simon
</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 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.
30
<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.
31
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of June
30, 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
JUNE 30, 1998--UNAUDITED
------------------------
<S> <C>
(DOLLARS IN THOUSANDS)
Cash and cash equivalents.............................................................. $ 105,622
--------
--------
Debt:
Current portion of long-term obligations and short-term borrowings:
Current portion of long-term debt.................................................. $ 9
Current portion of capital lease obligations....................................... 820
--------
Total current debt............................................................... $ 829
--------
--------
Long-term obligations, less current portion:
Long-term debt, net of discount...................................................... $ 158
Capital lease obligations............................................................ 6,066
13% Senior discount notes, net of discount........................................... 236,128
--------
Total long-term debt............................................................. 242,352
--------
Stockholders' equity:
Preferred Stock, $.0001 par value, 10,000,000 shares authorized at June 30, 1998; no
shares issued or outstanding....................................................... --
Common Stock, $.0001 par value, 100,000,000 shares authorized at June 30, 1998:
Series A, 10,135,164 shares designated at June 30, 1998; 10,135,164 shares issued
and outstanding.................................................................. 1
Series B, 89,864,836 shares designated at June 30, 1998; 15,913,208 shares issued
and outstanding(1)............................................................... 2
Additional paid-in-capital........................................................... 45,595
Warrants............................................................................. 31,963
Stockholder receivables.............................................................. (97)
Deficit accumulated during development stage......................................... (38,748)
--------
Total stockholders' equity....................................................... 38,716
--------
Total capitalization........................................................... $ 281,068
--------
--------
</TABLE>
- ------------------------
(1) 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) 1,766,170 shares of Series B Common Stock
issuable upon exercise of options outstanding under the Company's 1995 and
1997 Stock Option Plans as of June 30, 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 June 30, 1998, including all
adjustments resulting from the Equity Investment (as defined) and the
Additional Equity Investment.
32
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented below for the period from
September 1, 1993 (inception) to September 30, 1993, 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 June 30, 1998 and for
the nine month periods ended June 30, 1997 and 1998 and the period from
September 1, 1993 (inception) to June 30, 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 nine month
period ended June 30, 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>
PERIOD FROM
SEPTEMBER 1, NINE MONTHS PERIOD FROM
1993 YEAR ENDED PERIOD FROM ENDED SEPTEMBER 1,
(INCEPTION) TO SEPTEMBER 30, SEPTEMBER 1, 1993 JUNE 30, 1993
SEPTEMBER 30, ------------------------------ (INCEPTION) TO ----------------- (INCEPTION) TO
1993 1994 1995 1996 1997 SEPTEMBER 30, 1997 1997 1998 JUNE 30, 1998
-------------- ----- ----- ------- ------- ------------------ ------- -------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Service revenue........... $ -- $ 85 $ 57 $ 279 $ 75 $ 496 $ -- $ 649 $ 1,145
Other revenue............. -- -- 40 75 96 211 114 10 221
Costs and expenses:
Network development and
operations............ -- -- 188 1,708 3,170 5,067 3,186 5,497 10,564
Selling, general and
administrative........ 23 429 740 2,409 4,725 8,325 2,806 4,756 13,081
Depreciation and
amortization.......... -- 21 39 75 501 637 393 1,841 2,478
--- ----- ----- ------- ------- -------- ------- -------- --------------
Loss from operations...... (23) (365) (870) (3,838) (8,225) (13,322) (6,271) (11,435) (24,757)
Other income (expense):
Interest expense........ -- (53) (38) (27) (1,372) (1,489) (242) (11,072) (12,561)
Interest income......... -- -- -- 9 149 158 144 3,247 3,405
--- ----- ----- ------- ------- -------- ------- -------- --------------
Loss before extraordinary
item.................... (23) (418) (908) (3,856) (9,448) (14,653) (6,369) (19,260) (33,913)
Extraordinary item--
extinguishment of
debt.................... -- -- -- -- (105) (105) -- (4,730) (4,835)
--- ----- ----- ------- ------- -------- ------- -------- --------------
Net loss.................. $(23) $(418) $(908) $(3,856) $(9,553) $(14,758) $(6,369) $(23,990) $(38,748)
--- ----- ----- ------- ------- -------- ------- -------- --------------
--- ----- ----- ------- ------- -------- ------- -------- --------------
OTHER DATA:
EBITDA(1)................. $(23) $(344) $(831) $(3,763) $(7,829) $(12,790) $(5,878) $(14,324) $(27,114)
Net cash provided by (used
in) operating
activities.............. 3 (416) (781) (2,168) (7,446) (10,808) (5,783) (10,754) (21,562)
Net cash used in investing
activities.............. -- 18 45 923 12,647 13,633 (5,918) (157,737) (171,369)
Net cash provided by
financing activities.... 10 425 827 3,156 20,557 24,976 11,922 273,576 298,552
Capital expenditures...... -- 6 25 908 12,637 13,576 5,918 12,311 25,887
Deficiency of earnings to
cover fixed
charges(2).............. 23 418 908 3,856 9,500 14,705 6,369 19,478 34,182
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 JUNE 30, 1998
------------------ -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents...................................................................... $ 536 $ 105,622
Working capital (deficit)...................................................................... (3,319) 248,991
Total assets................................................................................... 25,321 286,053
Long-term debt................................................................................. 18,964 242,352
Total stockholders' equity..................................................................... 2,265 38,716
</TABLE>
- ------------------------------
(1) EBITDA represents earnings before interest, income taxes, depreciation and
amortization. EBITDA is not a measurement of financial performance under
generally accepted accounting principles, is not intended to represent cash
flow from operations, and should not be considered as an alternative to net
loss as an indicator of the Company's operating performance or to cash flows
as a measure of liquidity. The Company believes that EBITDA is widely used
by analysts, investors and other interested parties in the
telecommunications industry. The Company's computation of EBITDA may not be
comparable to similarly titled measures for other companies.
(2) For purposes of calculating the ratio of earnings to fixed charges, earnings
is defined as net loss plus fixed charges (other than capitalized interest).
Fixed charges consist of interest and amortization of debt discount and debt
issuance costs, whether expensed or capitalized, and that portion of rental
expense deemed to represent interest (estimated to be one-third of such
expense). For the periods presented, earnings were insufficient to cover
fixed charges by the amounts disclosed.
34
<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
35
<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, such
as local and long distance services, which are directly comparable to its
competitors' offerings below prevailing market rates to build market share. The
Company believes that its initial networks in Orange County and 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 and customer service, including salaries of the employees, real
estate leases for central offices, access offices, co-location and other sites,
costs to interconnect and terminate traffic with other network providers and
network design, planning and internal project management costs.
The Company has leveraged its substantial internal expertise with respect to
engineering, network creation and business processes to design and construct a
network architecture that it believes will result in enhanced product offerings
and enable the Company to improve scalability, reduce operating costs and
improve network profitability.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses are expected to consist primarily of product marketing, sales staff and
sales support expenses, consulting fees related to ongoing regional expansion
studies, 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.
36
<PAGE>
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
NINE MONTHS ENDED JUNE 30, 1998 COMPARED WITH THE NINE MONTHS ENDED JUNE 30,
1997
Service revenue increased from zero for the nine-month period ended June 30,
1997 to $649,000 for the nine-month period ended June 30, 1998. The increase
reflects the Company's first three 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 $114,000 for the nine-month period ended June 30, 1997 to $10,000 for the
nine-month period ended June 30, 1998, a decrease of $104,000 or approximately
91%. 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 $3,186,000 for
the nine-month period ended June 30, 1997 to $5,497,000 for the nine-month
period ended June 30, 1998, an increase of $2,311,000 or approximately 73%. 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 $2,806,000 for
the nine-month period ended June 30, 1997 to $4,756,000 for the nine-month
period ended June 30, 1998, an increase of $1,950,000 or approximately 70%. In
December 1997, the Company entered into agreements with each of Corporate
Managers, LLC, an affiliate of Spectra 3, and Enron to provide management
consulting services. In March 1998, the agreement with Corporate Managers, LLC
was amended. Fees associated with these agreements are $280,000 per quarter and
payable in arrears. During the period ended June 30, 1998, the Company paid fees
totaling $560,000 under these agreements. Also in March 1998, the Company
engaged an executive recruiting firm to conduct an executive search assignment
for the Chief Executive Officer position. Fees associated with this agreement
totaled approximately $167,000 for the nine-month period ended June 30, 1998.
The remaining increase was principally due to additional marketing, sales and
administrative personnel and an increase in administration expenses related to
rent, liability insurance, telephone and consulting expenses.
37
<PAGE>
Depreciation and amortization expenses increased from $393,000 for the
nine-month period ended June 30, 1997 to $1,841,000 for the nine-month period
ended June 30, 1998, an increase of $1,448,000 or approximately 369%. 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.
Interest expense increased from $242,000 for the nine-month period ended
June 30, 1997 to $11,072,000 for the nine-month period ended June 30, 1998, an
increase of $10,830,000 or approximately 4,479%. $8,212,000 of the increase
relates to the accretion of the Notes. $915,000 of the increase relates to
interest expense associated with the Company's capital lease arrangements with
the City of Anaheim. $513,000 of the increase relates to interest expense under
the Company's Credit Facility; $635,000 of the increase relates to amortization
of deferred loan costs associated with the Company's Credit Facility. The
remaining portion 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 $143,000 for the nine-month period ended June
30, 1997 to $3,247,000 for the nine-month period ended June 30, 1998, an
increase of $3,104,000 or approximately 2,164%. The increase is a result of the
availability of additional funds from the sale of the Notes for investments in
Marketable Securities and cash equivalents. Marketable Securities consist of
commercial paper with original maturities of beyond three months but less than
six months. The Company has classified its Marketable Securities as "held to
maturity," as management has the intent and ability to hold these securities to
maturity. The fair value of the Company's Marketable Securities approximates the
carrying value.
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.
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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."
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. The
Company used $10,754,000 in cash for
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operating activities for the nine-month period ended June 30, 1998, compared to
$5,783,000 for the nine-month period ended June 30, 1997. The increase was
primarily due to an increase in the Company's activities associated with the
development and initiation of switched local services in the City of Anaheim.
The Company invested an additional $12,311,000 of cash in property and equipment
for the nine-month period ended June 30, 1998, compared to $5,918,000 for the
nine-month period ended June 30, 1997. The Company has funded substantially all
of these expenditures through the private sale of equity securities, capital
leases, and short and long-term debt financing.
From its inception through June 30, 1998, the Company raised approximately
$67 million from the private sale of stock. On December 30, 1997, the Company
consummated a private placement of equity securities to Spectra 3 and Enron.
Aggregate proceeds from this offering, exclusive of the conversion of the bridge
notes, totaled approximately $26,330,000, 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. On
April 13, 1998, the Company completed the Private Note Offering and the
Additional Equity Investment. In the Private Note Offering, the Company sold
470,000 units consisting of the Private Notes and warrants to purchase an
aggregate of 3,713,094 shares of the Company's Series B Common Stock. In the
Additional Equity Investment, Spectra 3 and Enron invested $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. The aggregate net
proceeds of the Private Note Offering and the Additional Equity Investment were
$260.7 million.
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 will be sufficient to fund its
capital plan and operations through the buildout of its proposed networks in
Orange County and the San Gabriel Valley and South Bay areas of Los Angeles
County, 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.
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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 July 31, 1998, the
Company had approximately 100 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.
Although the Company does not own all of the facilities it uses to serve its
customers, it does own key components of such facilities. FirstWorld owns all of
its switching, transport and central monitoring equipment located in the Anaheim
central office, fiber optic clusters used to link customers to the fiber
backbone which it partially owns and partially leases from other entities and,
for customers connected to the Company's network via a direct fiber connection,
the fiber connections and CLE necessary to deliver requested services to such
customers. The Company also owns switching and transport equipment co-located in
other carriers' facilities.
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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, 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.
CORPORATE HISTORY
The Company was incorporated as a California corporation in July 1992 under
the name Sigma Link but did not commence operations until September 1993. Sigma
Link was formed as a wholly owned subsidiary of Lambda Link, a Nevada
corporation ("Lambda Link Nevada"). The Company changed its name from Sigma Link
to Lambda Link International in May 1993. In September 1993, two of the three
principal shareholders of Lambda Link Nevada (the "Separating Shareholders")
resolved a philosophical disagreement they had with the other principal
shareholder of Lambda Link Nevada (the "Remaining Shareholder") regarding the
direction that the business and operations of Lambda Link Nevada should
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take by entering into a separation agreement (the "Restructuring").
Specifically, the Separating Shareholders wanted Lambda Link Nevada to become
the facilities based ICP that the Company is today; whereas, the Remaining
Shareholder wanted Lambda Link Nevada to continue to concentrate on engineering,
designing and installing fiber optic and cabling communications systems.
In connection with the Restructuring, Lambda Link Nevada transferred its
100% ownership interest in the Company and certain other assets to the
Separating Shareholders in exchange for the stock the Separating Shareholders
held in Lambda Link Nevada. In addition, the Separating Shareholders resigned
from the board of directors of Lambda Link Nevada, agreed to change the name of
the Company and assumed certain liabilities of Lambda Link Nevada. Subsequent to
the Restructuring, the Company changed its name from Lambda Link International
to SpectraNet International and assumed the assets and liabilities of Lambda
Link Nevada that the Separating Shareholders received in the Restructuring. Both
Separating Shareholders have since left the Company.
In January 1998, the Company changed its name from SpectraNet International
to FirstWorld Communications, Inc. In June 1998, the Company changed its state
of incorporation from California to Delaware.
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 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
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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 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
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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.
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.
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INFORMATION TECHNOLOGY SERVICES
SYSTEMS INTEGRATION, INTRANET AND SERVER-BASED PRODUCTS. The Company offers
systems integration services, including design, implementation and support of
customer networks. The Company strives to improve functionality of customers'
LANs and reduce their expenditures on LANs by utilizing elements of the
Company's networks and central office. The Company's initial focus has been on
bandwidth management, local area/wide area integration, voice and data
integration and formation of intranets. 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 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
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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 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 July 31, 1998, the Company employed 53 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.
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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 approximately 100
commercial customers as of July 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 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
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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."
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.
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[LOGO]
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.
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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 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
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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 additional fiber clusters in Santa Ana, Irvine and
Orange that are currently under design, permitting or construction.
The Company also currently provides off-fiber service to customers located
around two Pacific Bell central offices located in 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
began establishing during the third quarter of 1998, will allow the Company to
offer services through Pacific Bell unbundled loops to businesses in most parts
of Orange County.
SAN GABRIEL VALLEY AND SOUTH BAY
The Company has commenced design, permitting and 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 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
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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. AT&T has also announced plans to merge with
TCI, the nation's largest operator of cable television systems, and to provide
telephone services over the TCI cable plant. Sprint 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 provider
of fiber optic-based telecommunications services. Although the legality of these
particular deals with Qwest 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
systems, 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.
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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.
FEDERAL LEGISLATION
THE TELECOMMUNICATIONS ACT OF 1996. The Telecommunications Act, enacted on
February 8, 1996, substantially departs from prior legislation in the
telecommunications industry by establishing local exchange competition as a
national policy through the removal of state regulatory barriers to competition
and the preemption of laws restricting competition in the local exchange market.
The Telecommunications Act, among other things, mandates that (i) ILECs permit
resale of their services and facilities on reasonable and nondiscriminatory
terms and at wholesale rates, (ii) all LECs (including the Company) allow
customers to retain the same telephone number ("number portability") when they
switch local service providers, (iii) ILECs permit interconnection by
competitors to an ILEC's network at any technically feasible point that is at
least equal in quality to that which the ILEC provides to itself and pursuant to
reasonable and nondiscriminatory terms and cost-based rates, (iv) ILECs unbundle
their network services and facilities at any technically feasible point and
permit competitors and others to use these facilities at cost-based, reasonable
and nondiscriminatory rates, (v) all LECs ensure that an end user
does not have to dial any more digits to reach customers of local competitors
than to reach the ILEC's customers to the extent technically feasible ("dialing
parity") and (vi) all LECs must establish reciprocal compensation arrangements
for the transport and termination of telecommunications traffic.
The Telecommunications Act permits RBOCs to provide out-of-region interLATA
long distance services immediately, and also allows RBOCs to provide in-region
interLATA services on a state-by-state basis once certain market-opening
requirements are implemented and entry is determined to be in the public
interest. The RBOCs, but not other ILECs, have an added incentive to open their
local exchange networks to facilities-based competition because Section 271 of
the Telecommunications Act provides for the removal of the current ban on RBOC
provision of in-region interLATA toll service only after meeting certain
requirements. The FCC, in consultation with the United States Department of
Justice and the states, is given jurisdiction to determine whether to approve
applications for RBOC entry into long
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distance. These provisions of the Telecommunications Act are designed in part to
ensure that RBOCs take affirmative steps to level the playing field for their
competitors so that others can compete effectively before the RBOC secures
in-region long-distance entry. To date, three RBOCs have filed applications with
the FCC for "in-region" long distance authority. The FCC denied the application
of SBC 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."
Under the Telecommunications Act, states have begun and, in a number of
cases, completed regulatory proceedings to determine the pricing of unbundled
network elements and services, and the results of these proceedings will
determine whether it is economically attractive to use these elements.
FEDERAL REGULATION
THE TELECOMMUNICATIONS ACT REGULATIONS. The Telecommunications Act in some
sections is self-executing, but in most cases the FCC must issue regulations
that identify specific requirements before the Company and its competitors can
proceed to implement the changes the Telecommunications Act prescribes. The
Company actively monitors pertinent FCC proceedings and has participated in some
of these proceedings (including the restructuring of access charges, the
application of access charges to Internet traffic and RBOC petitions for the
deregulation of ILEC-provided DSL services). The outcome of these various
ongoing FCC rulemaking proceedings or judicial appeals of such proceedings could
materially affect the Company's business, financial condition and results of
operations.
As required by the Telecommunications Act, in July and August 1996 the FCC
adopted orders issuing new rules to implement the interconnection and resale
provisions of the Telecommunications Act (the "Interconnection Orders") which
are intended to remove or minimize regulatory, economic and operational
impediments to full competition for local services, including switched local
exchange service. A number of parties filed petitions for review of the
Interconnection Orders in Federal court seeking to vacate certain of the rules
adopted therein. In a July 18, 1997 decision, the United States Court of Appeals
for the Eighth Circuit vacated significant portions of the Interconnection
Orders, including its provisions governing the pricing of local
telecommunications services and unbundled network elements, its unbundling
requirements and its "pick and choose" rule (which enabled a telecommunications
carrier to demand any individual term of an ILEC's interconnection contract with
another carrier). Another Eighth Circuit decision issued on October 14, 1996
vacated an FCC rule that obligated ILECs, under certain
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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 oral argument
calendared for October 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, (a) prohibit states from creating new area codes that could
unfairly hinder LEC competitors (including the Company) by requiring their
customers to use 10 digit dialing while existing ILEC customers use 7 digit
dialing, and (b) prohibit ILECs (which in many cases are still administering
central office numbers pending an operational transition to the neutral
administrator) from charging "code opening" fees to competitors (such as the
Company) unless they charge the same fee to all carriers including themselves.
In addition, each carrier is required to contribute to the cost of numbering
administration through a formula based on net telecommunications revenues. In
July 1996, the FCC released rules to permit both residential and business
customers to retain their telephone numbers when switching from one local
service provider to another (known as "number portability"). RBOCs were required
to implement number portability in the top 100 markets in five phases beginning
no later than March 31, 1998 and to complete it no later than December 1998,
although the FCC has granted numerous waivers of these implementation deadlines.
In smaller markets, RBOCs must implement number portability within six months of
a request therefore commencing December 31, 1998. Non-RBOC ILECs are not
required to implement number portability in any additional markets until
December 31, 1998, and then only in markets where the feature is requested by
another ILEC. 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 for
telecommunications services. In addition, in June 1998 the FCC announced that it
was restructuring and
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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.
Section 706 of the Telecommunications Act requires the FCC to initiate a
proceeding to address the provision of "advanced telecommunications services" to
all Americans. In early 1998, several RBOCs (Bell Atlantic, Ameritech, BellSouth
and SBC) filed petitions with the FCC seeking forbearance from FCC and state
regulation of their DSL high-speed data services. The RBOCs also seek an FCC
ruling under Section 706 that elements of their DSL services are not subject to
the interconnection, unbundling and resale requirements of the
Telecommunications Act. In response to these petitions, the FCC on August 6,
1998 proposed that RBOCs be permitted to offer DSL services on an unregulated
basis if certain separate subsidiary and interconnection requirements are met.
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
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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.
While the Telecommunications Act permits local governments to manage rights
of way, the scope of that authority, including the circumstances when fees can
be charged and the amount of such charges, has already been the subject of
numerous disputes between telecommunications carriers and such local
governments. In addition, some local governments have been requiring substantial
filings and review before telecommunications carriers can operate in their
licensed areas and have also required the payment of significant franchise fees
or taxes. Some of these disputes involving licensing of telecommunications
carriers and rights of way are in litigation and more administrative and court
litigation is likely. The prohibition of entry barriers set forth in the
Telecommunications Act and the FCC's power to preempt such barriers have been
addressed in these cases, which to date have rejected local government efforts
to impose "franchise" or tax obligations on CLECs and other telecommunications
carriers. The FCC has recently preempted, and thereby prevented enforcement of,
certain state and local regulations that had the effect of inhibiting local
competition. Any inability or unwillingness by the FCC to preempt additional
state and local regulations in a timely fashion could have a material adverse
impact on the Company.
AGREEMENTS WITH THE CITY OF ANAHEIM AND THE IRVINE COMPANY
THE CITY OF ANAHEIM
The Company, its wholly owned subsidiary, FirstWorld Anaheim ("FWA"), and
the City of Anaheim (the "City") entered into a series of agreements in February
1997 regarding development of the first portion of the Company's initial network
located within the City (the "Anaheim Network").
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
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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
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.
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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 originally required 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. However, in connection with
a significant expansion of the proposed scope of the project, the Company, FWA
and the City are currently negotiating extensions of such deadlines.
Contemplated plans now include the construction of an approximate 56,000 square
foot building which will include the demonstration center and FirstWorld
offices.
The City has an option to purchase all of the issued and outstanding stock
of FWA for appraised value (i) at any time after July 1, 2012 or (ii) if FWA
fails to meet the specified performance deadlines related to completion of the
first and second phases of the Anaheim Network as described above. Any sale or
issuance of FWA stock can only be made if such sale or issuance is expressly
made subject to the City's purchase option. Moreover, any sale of the Anaheim
Network or other sale of substantially all of FWA's assets can only be made if
the City is equitably compensated for the loss of its future income stream under
the UTS Agreement or the buyer expressly assumes the obligations of FWA under
the UTS Agreement.
DEVELOPMENT FEE AGREEMENT. Pursuant to a Development Fee Agreement between
the Company and the City, for a period of five years commencing with the earlier
to occur of the closing of the financing for, or the commencement of,
construction of the first Additional Network (as defined below), the Company
must pay to the City a lump sum fee for each Additional Network that the Company
develops ($300,000 for each Additional Network financed in the first year;
$200,000 for each Additional Network 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").
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AGREEMENT FOR LEASE OF TELECOMMUNICATIONS CONDUIT
Pursuant to an Agreement for Lease of Telecommunications Conduit dated as of
March 5, 1998 (the "Conduit Lease"), FWOC leases from The Irvine Company space
within two underground telecommunications tubes (the "Conduit"), and, in
connection therewith, has received the non-exclusive right to use undivided
space within the pull boxes serving such Conduit (collectively, the "Leased
Premises"). The Conduit Lease applies to (i) an existing Conduit system within
certain already-developed areas in the Irvine Spectrum and (ii) Conduit to be
constructed in the future in the as yet undeveloped areas of the Irvine
Spectrum. The Irvine Company may also install Conduit in other areas it may
develop in the cities of Irvine, Newport Beach and Tustin, and in unincorporated
areas of Orange County, and such areas may in the future be incorporated into
the Conduit Lease upon the mutual agreement of the parties ("Additional Areas").
The term of the Conduit Lease runs through December 31, 2027.
The Conduit Lease obligates FWOC to install fiber optic cable ("Cable") in
the Conduit pursuant to a phasing plan. A phase is completed when sufficient
Cable has been installed to enable FWOC to connect and provide service (for that
portion of the Irvine Network) to property abutting the Conduit. Upon
termination of the Conduit Lease, the Cable will be owned by The Irvine Company.
If FWOC fails to complete installation of the required Cable within 18 months,
The Irvine Company may, until such installation is completed, terminate the
Conduit Lease.
FWOC is obligated to make quarterly rent payments to The Irvine Company
based upon the "adjusted gross revenue" (as defined) from the Irvine Network. In
addition, FWOC is obligated to pay all costs associated with its lease,
operation, maintenance, repair and use of the Leased Premises, including
maintenance expenses, taxes and insurance premiums. Any assignment of FWOC's
rights under the Conduit Lease and any sale of a controlling interest in FWOC
require The Irvine Company's prior approval, and The Irvine Company has a right
of first refusal in the event of any such proposed sale.
TELECOMMUNICATIONS SYSTEM LICENSE AGREEMENT
Concurrently with the execution of the Conduit Lease, FWOC and The Irvine
Company executed a Telecommunications System License Agreement (the "License
Agreement"), which provides FWOC, with some exceptions, with the right and
obligation to provide telecommunications services to (i) the 106 buildings
currently owned by The Irvine Company in the Irvine Spectrum area, (ii)
commercial, industrial and retail buildings in the future owned by The Irvine
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.
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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 July 31, 1998, the Company had 135 employees, of whom 54 were in
network operations and development, 53 were in sales, marketing and product
development and 28 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.
PROPERTIES
The Company's headquarters are located in facilities consisting of
approximately 35,000 square feet in San Diego, California, which the Company
occupies under a lease that expires on August 31, 2002. The Company'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
Eric Hyde................................. 41 Senior Vice President, Sales and Product Marketing
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
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engineering firm of Randall Lamb Associates in 1974, which he subsequently built
into a large electrical 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.
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From 1992 to April 1993, Mr. Garland worked as an analyst with Stephens Inc., an
investment banking firm in Little Rock, Arkansas.
RODNEY MALCOLM joined the Company as a director in January 1998. Mr. Malcolm
has worked for Enron in Houston, Texas since September 1994 and currently serves
as a Vice President with responsibilities for public power and finance.
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 and
in July 1998, Mr. Stiska accepted an of-counsel position with the law firm of
Latham & Watkins.
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.
ERIC HYDE joined the Company as Senior Vice President, Sales & Product
Marketing in June 1998. Mr. Hyde has 15 years experience in product marketing,
strategic planning and sales. From March 1997 to June 1998, Mr. Hyde served as
Director of Customer Marketing in the Business Communications Systems Division
at Lucent Technologies where he was responsible for the implementation of
marketing programs for call center, telephony, video and messaging applications.
From January 1994 to March 1997, Mr. Hyde served in various capacities at
Ameritech, including Senior Director of Product Marketing and Integrated
Solutions where he was responsible for launching wireless transport, data and
voice CPE products to key accounts. From January 1982 to December 1993, Mr. Hyde
held various positions with General Motors Corporation, including Director of
Strategic Marketing of the North American Export Sales Division.
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. The Board of Directors has established the Chairman's
Committee consisting of Messrs. Randall, Sturm and Garland. The Chairman's
Committee is empowered to conduct all activities that may be conducted by the
Board of Directors, subject only to limitations imposed by applicable
corporation law.
COMPENSATION COMMITTEE. The Board of Directors has established a
Compensation Committee consisting of Mr. Garland and Ms. Sturm. The Compensation
Committee determines compensation for the Company's senior executive officers
and administers the 1995 Stock Option Plan (as defined) and the 1997 Stock
Option Plan (as defined).
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AUDIT COMMITTEE. The Board of Directors has established an Audit Committee
with Mr. Spitzenberger as its sole member. The Audit Committee makes
recommendations concerning the engagement of independent public accountants,
reviews with the independent public accountants the plans and results of the
audit engagement, approves professional services provided by the independent
public 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 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."
66
<PAGE>
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, Mr.
Lewis's options now have an exercise price of $3.00. See "--Stock Option
Plans."
OPTION EXERCISES AND FISCAL YEAR-END VALUES
The following table sets forth the information with respect to the Named
Executive Officers concerning the exercise of options during fiscal year 1997
and unexercised options held as of September 30, 1997.
OPTIONS EXERCISED DURING FISCAL 1997
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
SHARES ACQUIRED ON VALUE UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
EXERCISE REALIZED OPTIONS AT FY-END (#) AT FY-END ($)(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.
68
<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.
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.
69
<PAGE>
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 lowered to $3.00 the exercise
prices of options originally issued with an exercise price of $3.20. The
exercise price was reduced in connection with the conclusion of a private
financing, to reflect the Company's determination that the exercise price of
such options was substantially higher than fair market value at that time. In
December 1997 the Company sold shares of Series A Common Stock with 100% warrant
coverage for $3.00, the Company determined that the fair market value of the
Series B Common Stock (which does not possess the super-voting rights of the
Series A Common Stock and which would not be issued with warrant coverage) could
be no greater than $3.00. Accordingly, to continue to incentivize and maintain
good relations with its employees, the Board of Directors determined that
exercise prices should be adjusted to reflect the maximum fair market value of
the Series B Common Stock implied by the
70
<PAGE>
Series A Common Stock financing. 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.
71
<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(14)................................. 0 879,417 3.38% of Common Stock
*% of Voting Stock
William Johnson................................. 0 240,000 *% 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
72
<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
73
<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 and 5-13 above.
74
<PAGE>
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." As of June 30 1998, the
Company had no Subordinated Indebtedness and $7.1 million in outstanding
Indebtedness that ranks 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. As of June 30, 1998, the Company
had approximately $243.2 million of outstanding indebtedness. 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." As of
June 30, 1998, the total liabilities of the Company's Subsidiaries was
approximately $28.3 million. 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 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
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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 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
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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 June 30, 1998, no shares of preferred stock, 10,135,164
shares of Series A Common Stock, 15,913,208 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.
WARRANTS ISSUED IN CONNECTION WITH THE PRIVATE NOTE OFFERING
In the Private Note Offering the Company sold 470,000 units (the "Units"),
each Unit consisting of $1,000 principal amount at maturity of Private Notes and
a warrant to purchase 7.9002 shares of the Company's Series B Common Stock
(subject to adjustment) (each, a "Warrant Share"). The warrants issued in
connection with the Private Note Offering (the "Private Note Warrants") have an
exercise price of $.01 per share, are exercisable at any time on or after the
earlier to occur of (i) May 1, 1999, (ii) an initial public offering of the
Company's Series B common stock or (iii) in the event of a Change of Control of
the Company, and expire on April 15, 2008. Pursuant to the terms thereof, the
separation of the Private Note Warrants from the Private Notes occurred on July
11, 1998, 90 days after April 13, 1998 (the date of issuance of the Units). The
Private Note Warrants have the registration rights set forth below under the
caption "--Registration Rights." The Private Note Warrants are currently held of
record by one owner.
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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.
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.
PRIVATE NOTE WARRANTS. Beginning the earlier of April 15, 2003 or 180 days
after an initial Public Equity Offering, the holders of one-quarter or more of
the Private Note Warrants and the Warrant Shares will be entitled to require the
Company to effect one demand registration (the "Demand Registration") under the
Securities Act of the Warrant Shares, subject to certain limitations. Upon a
demand, the Company will (a) notify the holders of all Warrants and Warrant
Shares that a demand registration has been requested, (b) prepare, file and use
its best efforts to cause to become effective within 120 days of such demand a
registration statement in respect of all of the Warrant Shares which holders
request, no later than 30 days after the date of such notice, to have included
therein (the "Included Securities"); PROVIDED, that the Company shall not be
required to so notify holders of Warrants and Warrant Shares and file such
demand registration statement within 90 days following any underwritten offering
of equity securities for the Company's own account or within 60 days following
any underwritten offering of equity securities for the account of any
securityholder of the Company, and (c) keep such registration statement
continuously effective for the shorter of (i) 180 days (the "Effectiveness
Period") or (ii) such period of time as all of the Warrant Shares included in
such registration statement shall have been sold thereunder; PROVIDED, that the
Company may postpone the filing period, suspend the effectiveness of any
registration statement, suspend the use of any prospectus and shall not be
required to amend or supplement the registration statement, any related
prospectus or any document incorporated therein by reference (a "Black Out
Period") in the event that (i) an event or circumstance occurs and is continuing
as a result of which the registration statement, any related prospectus or any
document incorporated therein by
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reference as then amended or supplemented would, in the Company's good faith
judgment, contain an untrue statement of a 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 or (ii) for a
period of up to 90 days, the Company reasonably and in good faith determines
that the filing or effectiveness of, or sales pursuant to, such registration
statement would materially interfere with any significant pending transaction
involving the Company or require disclosure of material information which the
Company has a bona fide business purpose for keeping confidential; PROVIDED
FURTHER, that the Effectiveness Period shall be extended by the number of days
in any Black Out Period. In the event of any Black Out Period, the Company will
so notify the holders of Warrants and Warrant Shares. Holders of Warrant Shares
have priority for inclusion in a Demand Registration over any other security
holders seeking to include securities in such registration.
Holders of Warrants and Warrant Shares will also have the right to include
the Warrant Shares in any registration statement under the Securities Act filed
by the Company for its own account or for the account of any of its security
holders covering the sale of Common Stock (other than (a) a registration
statement on Form S-4 or S-8, (b) a registration statement filed in connection
with an offer of securities solely to existing security holders or any offer of
debt securities or convertible debt securities or (c) a Demand Registration) for
sale on the same terms and conditions as the securities of the Company or any
other selling security holder included therein (a "Piggy-Back Registration") if
and whenever any such registration statement is filed under the Securities Act,
except that 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 security
holders are to be included therein. In the case of a Piggy-Back Registration,
the number of Warrant Shares requested to be included therein is subject to pro
rata reduction (a "Cut Back") based upon the number of Warrant Shares and other
securities held by each holder of Warrants and Warrant Shares and any other
security holders exercising piggy-back registration rights to the extent that
the Company is advised by the managing underwriter, if any, therefor that the
total number or type of Warrant Shares or other securities to be included
therein is such as to materially and adversely affect the success of the
offering, except that (i) 800,000 shares of Series B Common Stock issuable upon
exercise of the Lender Warrant generally have seniority for inclusion over the
Warrant Shares and securities having registration rights under the Amended and
Restated Investor Rights Agreement and (ii) in the case of a demand registration
under the Amended and Restated Investor Rights Agreement holders of demand
registration rights thereunder have priority over the Warrant Shares and
securities issuable upon exercise of a the Lender Warrant.
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, 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 Cut
Back for a period not to exceed 90 days from such date of consummation.
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
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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 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.
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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 telecommunications regulatory matters contained in this
Prospectus is being passed upon for the Company by Blumenfeld & Cohen,
Washington, D.C. Mr. Stiska and five other Latham & Watkins attorneys own an
aggregate of 57,351 shares of Series B Common Stock, warrants to purchase an
aggregate of 9,634 shares of Series B Common Stock and options to purchase
15,000 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.
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
114
<PAGE>
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.
115
<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 June 30, 1998.............................................................. F-30
Consolidated Statements of Operations for the nine months ended June 30, 1997 and 1998 and for the period
from September 1, 1993 (inception) to June 30, 1998.................................................... F-31
Consolidated Statement of Stockholders' Equity for the nine months ended June 30, 1998................... F-32
Consolidated Statements of Cash Flows for the nine months ended June 30, 1997 and 1998 and for the period
from September 1, 1993 (inception) to June 30, 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 ,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 was accounted for at historical cost, which approximated the
purchase price. 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
maintains reserves for potential credit losses. The Company has not provided for
any anticipated credit loss as of September 30, 1997 as all amounts are
considered by management to be fully collectible.
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.
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED BALANCE SHEET (UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, 1998
--------------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents....................................................................... $ 105,621,691
Marketable securities........................................................................... 145,425,182
Interest receivable............................................................................. 2,223,323
Accounts receivable............................................................................. 299,863
Prepaid expenses................................................................................ 381,532
Other current assets............................................................................ 23,534
--------------
Total current assets.......................................................................... 253,975,125
Property and equipment, net....................................................................... 30,847,342
Deferred financing costs, net..................................................................... 828,117
Other assets, net................................................................................. 402,396
--------------
$ 286,052,980
--------------
--------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................................................ $ 2,545,666
Accrued interest................................................................................ 1,118,091
Accrued employee costs.......................................................................... 210,099
Other accrued expenses.......................................................................... 281,477
Current portion of long-term debt............................................................... 8,643
Current portion of capital lease obligations.................................................... 820,132
--------------
Total current liabilities..................................................................... 4,984,108
Long-term debt.................................................................................... 157,934
Senior discount notes............................................................................. 236,128,267
Capital lease obligations......................................................................... 6,066,232
--------------
Total liabilities............................................................................. 247,336,541
--------------
Commitments
Stockholders' equity:
Preferred stock, $.0001 par value, 10,000,000 shares authorized at June 30, 1998; no shares
issued or outstanding --
Common stock, voting, $.0001 par value, 100,000,000 shares authorized at June 30, 1998:
Series A, 10,135,164 shares designated at June 30, 1998; 10,135,164 shares issued and
outstanding.................................................................................. 1,014
Series B, 89,864,836 shares designated at June 30, 1998; 15,913,208 shares issued and
outstanding.................................................................................. 1,591
Additional paid-in capital...................................................................... 45,594,720
Warrants........................................................................................ 31,963,295
Stockholder receivables......................................................................... (96,500)
Deficit accumulated during development stage.................................................... (38,747,681)
--------------
Total stockholders' equity.................................................................... 38,716,439
--------------
$ 286,052,980
--------------
--------------
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
F-30
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
PERIOD FROM
NINE MONTHS ENDED JUNE 30, SEPTEMBER 1, 1993
----------------------------- (INCEPTION) TO
1997 1998 JUNE 30, 1998
------------- -------------- -----------------
<S> <C> <C> <C>
Service revenue................................................. $ -- $ 649,353 $ 1,145,219
Other revenue................................................... 114,368 10,000 220,715
------------- -------------- -----------------
114,368 659,353 1,365,934
------------- -------------- -----------------
Costs and expenses:
Network development and operations............................ 3,186,507 5,497,316 10,563,774
Selling, general and administrative........................... 2,806,044 4,756,496 13,081,400
Depreciation and amortization................................. 392,720 1,840,639 2,477,459
------------- -------------- -----------------
6,385,271 12,094,451 26,122,633
------------- -------------- -----------------
Loss from operations (6,270,903) (11,435,098) (24,756,699)
Other income (expense):
Interest income............................................... 143,447 3,247,160 3,405,361
Interest expense.............................................. (241,772) (11,071,636) (12,560,996)
------------- -------------- -----------------
Loss before extraordinary item.................................. (6,369,228) (19,259,574) (33,912,334)
Extraordinary item - extinguishment of debt..................... -- (4,730,667) (4,835,347)
------------- -------------- -----------------
Net loss........................................................ $ (6,369,228) $ (23,990,241) $ (38,747,681)
------------- -------------- -----------------
------------- -------------- -----------------
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
F-31
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED JUNE 30, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
SERIES C
SERIES A SERIES B CONVERTIBLE
COMMON STOCK COMMON STOCK ADDITIONAL PREFERRED STOCK
------------------------- -------------------------- PAID-IN --------------------------
SHARES AMOUNT SHARES AMOUNT CAPITAL SHARES AMOUNT
----------- ------------ ----------- ------------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at September 30,
1997................... -- $ -- -- $ -- -- 2,600,000 $ 12,279,362
Exercise of options to
purchase common stock
October 1997 to
December 1997.......... -- -- -- -- -- -- --
Issuance of Series A
common stock with
warrants to purchase
10,135,164 shares of
Series B common stock,
net of offering costs
of $3,863,691 -
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 -- -- --
Series A preferred
stock; conversion
ratio of 1:10........ -- -- 11,867 395,162 -- -- --
Issuance of Series B
common stock with
warrants to purchase
6,666,666 shares of
Series B common stock,
net of offering costs
of $1,800,000 - April
13, 1998............... -- -- 6,666,666 12,466,665 -- -- --
Issuance of warrants to
purchase 3,713,094
shares of Series B
common stock in
connection with the
issuance of 13% Senior
Discount Notes......... -- -- -- -- -- -- --
Exercise of options to
purchase Series B
common stock - April
1998 to June 1998...... -- -- 67,917 55,901 -- -- --
Establishment of $.0001
par value for Series A
and B common stock in
connection with
Delaware
reincorporation - June
26, 1998............... -- (16,912,795) -- (28,681,925) 45,594,720 -- --
Net loss for the
nine-month period ended
June 30, 1998.......... -- -- -- -- -- -- --
----------- ------------ ----------- ------------- ------------ ----------- -------------
Balance at June 30,
1998................... 10,135,164 $ 1,014 15,913,208 $ 1,591 $ 45,594,720 -- $ --
----------- ------------ ----------- ------------- ------------ ----------- -------------
----------- ------------ ----------- ------------- ------------ ----------- -------------
<CAPTION>
SERIES B SERIES A
CONVERTIBLE CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK COMMON STOCK
------------------------- ---------------------- ----------------------- STOCKHOLDER
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT WARRANTS RECEIVABLES
----------- ------------ ---------- ---------- ----------- ---------- ------------ -------------
<S> <C> <C>
Balance at September 30,
1997................... 2,016,638 $ 3,670,060 118,667 $ 395,162 3,262,900 $ (226,984) $ 1,000,960 $ (96,500)
Exercise of options to
purchase common stock
October 1997 to
December 1997.......... -- -- -- -- 266,100 43,350 -- --
Issuance of Series A
common stock with
warrants to purchase
10,135,164 shares of
Series B common stock,
net of offering costs
of $3,863,691 -
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......... (2,016,638) (3,670,060) -- -- (3,529,000) 183,634 -- --
Series A preferred
stock; conversion
ratio of 1:10........ -- -- (118,667) (395,162) -- -- -- --
Issuance of Series B
common stock with
warrants to purchase
6,666,666 shares of
Series B common stock,
net of offering costs
of $1,800,000 - April
13, 1998............... -- -- -- -- -- -- 6,333,335 --
Issuance of warrants to
purchase 3,713,094
shares of Series B
common stock in
connection with the
issuance of 13% Senior
Discount Notes......... -- -- -- -- -- -- 15,001,000 --
Exercise of options to
purchase Series B
common stock - April
1998 to June 1998...... -- -- -- -- -- -- -- --
Establishment of $.0001
par value for Series A
and B common stock in
connection with
Delaware
reincorporation - June
26, 1998............... -- -- -- -- -- -- -- --
Net loss for the
nine-month period ended
June 30, 1998.......... -- -- -- -- -- -- -- --
----------- ------------ ---------- ---------- ----------- ---------- ------------ -------------
Balance at June 30,
1998................... -- $ -- -- $ -- -- $ -- $ 31,963,295 $ (96,500)
----------- ------------ ---------- ---------- ----------- ---------- ------------ -------------
----------- ------------ ---------- ---------- ----------- ---------- ------------ -------------
<CAPTION>
DEFICIT
ACCUMULATED
DURING TOTAL
DEVELOPMENT STOCKHOLDERS'
STAGE EQUITY
-------------- --------------
Balance at September 30,
1997................... $(14,757,440) $ 2,264,620
Exercise of options to
purchase common stock
October 1997 to
December 1997.......... -- 43,350
Issuance of Series A
common stock with
warrants to purchase
10,135,164 shares of
Series B common stock,
net of offering costs
of $3,863,691 -
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........ -- --
Issuance of Series B
common stock with
warrants to purchase
6,666,666 shares of
Series B common stock,
net of offering costs
of $1,800,000 - April
13, 1998............... -- 18,800,000
Issuance of warrants to
purchase 3,713,094
shares of Series B
common stock in
connection with the
issuance of 13% Senior
Discount Notes......... -- 15,001,000
Exercise of options to
purchase Series B
common stock - April
1998 to June 1998...... -- 55,901
Establishment of $.0001
par value for Series A
and B common stock in
connection with
Delaware
reincorporation - June
26, 1998............... -- --
Net loss for the
nine-month period ended
June 30, 1998.......... (23,990,241) (23,990,241)
-------------- --------------
Balance at June 30,
1998................... $(38,747,681) $ 38,716,439
-------------- --------------
-------------- --------------
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
F-32
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
NINE MONTHS ENDED JUNE SEPTEMBER 1,
30 1993
------------------------ (INCEPTION) TO
1997 1998 JUNE 30, 1998
---------- ------------ ----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss................................................................... $(6,369,228) $(23,990,241) $(38,747,681)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization............................................ 392,720 1,840,639 2,477,459
Amortization of deferred financing costs................................. -- 773,634 834,506
Amortization of debt discount............................................ -- 8,666,203 8,724,445
Non-cash interest expense................................................ -- 293,264 331,046
Extraordinary loss on extinguishment of debt............................. -- 3,674,112 3,778,792
Changes in assets and liabilities:.......................................
Restricted cash related to operating activities........................ -- 50,000 --
Accounts receivable.................................................... 70,131 (227,296) (259,104)
Interest receivable.................................................... -- (2,223,323) (2,223,323)
Other assets........................................................... (151,456) (394,499) (616,081)
Accounts payable and accrued expenses.................................. 274,471 783,446 4,138,348
---------- ------------ ----------------
Net cash used in operating activities...................................... (5,783,362) $(10,754,061) (21,561,593)
---------- ------------ ----------------
Cash flows from investing activities:
Purchases of property and equipment...................................... (5,917,520) (12,311,407) (25,887,197)
Purchases of marketable securities....................................... -- (145,425,182) (145,425,182)
Procurement of patents................................................... -- -- (56,763)
---------- ------------ ----------------
Net cash flows used in investing activities................................ (5,917,520) (157,736,589) (171,369,142)
---------- ------------ ----------------
Cash flows from financing activities:
Proceeds from issuance of Senior Discount Notes and related warrants..... -- 242,698,365 242,698,365
Proceeds from issuance of Series B common stock and related warrants, net
of offering costs...................................................... -- 18,800,000 18,800,000
Proceeds from issuance of Series A common stock and related warrants, net
of offering costs...................................................... -- 26,136,309 26,136,309
Proceeds from issuance of common stock................................... -- -- 418,501
Proceeds from stock option and warrant exercises......................... 23,200 99,251 123,701
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 stockholder receivables...................... 54,167 -- 54,167
Principal payments on capital leases..................................... (80,302) (271,949) (436,751)
Proceeds from issuance of convertible bridge notes....................... 7,220,500 -- 8,182,000
Proceeds from draws under revolving credit facility and related
warrants............................................................... -- 3,796,262 15,968,854
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............................... (24,651) (4,155) (275,510)
Principal payments on revolving credit facility.......................... -- (16,299,900) (16,299,900)
Payment of deferred financing costs...................................... -- (828,117) (4,957,134)
---------- ------------ ----------------
Net cash provided by financing activities.................................. 11,921,776 273,576,066 298,552,426
---------- ------------ ----------------
Net increase in cash and cash equivalents.................................. 220,894 105,085,416 105,621,691
Cash and cash equivalents at beginning of period........................... 71,522 536,275 --
---------- ------------ ----------------
Cash and cash equivalents at end of period................................. $ 292,416 $105,621,691 $105,621,691
---------- ------------ ----------------
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 stockholder receivables..................... -- -- 173,167
Issuance of note payable to repurchase Series A preferred stock.......... -- -- 29,750
Conversion of convertible bridge notes into Series C preferred stock and
related warrants....................................................... 7,776,500 -- 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 services fees............ -- 150,000 150,000
Issuance of note payable for consulting services received................ -- -- 50,000
Cancellation of stockholder 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 June 30, 1998, and the results of its operations and
its cash flows for the nine months ended June 30, 1997 and 1998 and for the
period from September 1, 1993 (inception) to June 30, 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--HIGH YIELD DEBT OFFERING AND ADDITIONAL EQUITY INVESTMENT
On April 13, 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 Additional Equity Investment) 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 13% Senior Discount Notes due 2008 (the Notes) and warrants to purchase an
aggregate of 3,713,094 shares of the Company's Series B Common Stock. The Notes
will accrete in value through April 15, 2003 at a rate of 13% per annum,
compounded semi-annually, at which time $470.0 million in aggregate principal
amount at maturity will be outstanding. Cash interest will neither accrue nor be
payable prior to April 15, 2003. Thereafter, cash interest on the Notes will
accrue and will be payable semiannually in arrears on each April 15 and October
15, commencing October 15, 2003, at a rate of 13% per annum. The Company is not
required to make mandatory redemption or sinking fund payments with respect to
the Notes prior to maturity. The Notes are redeemable at the option of the
Company, in whole or in part, at any time on or after April 15, 2003, at a
premium declining to par on April 15, 2006, plus accrued and unpaid interest
through the date of redemption. In the event of a change in control, as defined
in the indenture governing the Notes, the holders of the Notes will have the
right to require the Company to purchase their Notes in an amount equal to 101%
of the aggregate principal amount at maturity or accreted value thereof, as
applicable, plus accrued and unpaid interest to the date of purchase. The
warrants issued in connection with the High Yield Debt Offering have an exercise
price of $0.01 per share, are exercisable at any time on or after the earlier to
occur of May 1, 1999, an initial public offering of the Company's common stock
or in the event of a change in control, and expire on April 15, 2008. The fair
value of these warrants at the time of grant, which was estimated by management
to be $15,001,000, has been recorded as a discount on the underlying debt and is
being amortized to interest expense using the effective interest method over the
period that the Notes are outstanding.
F-34
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
(FORMERLY SPECTRANET INTERNATIONAL)
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--HIGH YIELD DEBT OFFERING AND ADDITIONAL EQUITY INVESTMENT (CONTINUED)
Pursuant to the Additional Equity Investment, the Company sold to each of
Spectra 3 and Enron 3,333,333 shares of Series B Common Stock 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 Additional Equity
Investment were $260.7 million.
NOTE 3--DEBT EXTINGUISHMENT
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 $4,700,000 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.
NOTE 4--MARKETABLE SECURITIES
Marketable securities consist principally of commercial paper with original
maturities of beyond three months but less than six months. The Company has
classified its marketable securities as held to maturity as management has the
intent and ability to hold those securities to maturity. Such securities are
stated at cost. The fair value of the Company's marketable securities
approximates the carrying value.
NOTE 5--REINCORPORATION
Effective June 26, 1998, the Company changed its state of incorporation from
California to Delaware. In connection therewith, a par value equal to $.0001 per
share was assigned to each series of common and preferred stock. As a result,
the consolidated statement of stockholders' equity for the nine months ended
June 30, 1998 reflects a reclassification to additional paid-in capital for the
amounts in excess of par value.
NOTE 6--LONG DISTANCE CARRIER AGREEMENT
The Company's contract with Sprint (the long distance agreement referenced
in the final paragraph of Note 8 to the Company's Audited Consolidated Financial
Statements), whereby the Company is committed to certain minimum service fees
was amended in June of 1998. Pursuant to such amendment, minimum fees under the
contract aggregate $37,500, $487,500 and $1,437,500 during the remainder of
fiscal 1998 and for fiscal 1999 and 2000, respectively.
F-35
<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................................... 10
The Exchange Offer............................. 23
Use of Proceeds................................ 31
Capitalization................................. 32
Selected Consolidated Financial Data........... 33
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 35
Business....................................... 41
Management..................................... 63
Principal Stockholders......................... 72
Certain Transactions........................... 75
Description of Exchange Notes.................. 79
Book Entry; Delivery and Form.................. 108
Description of Capital Stock................... 109
Certain United States Federal Income Tax
Considerations................................ 112
Plan of Distribution........................... 113
Legal Matters.................................. 114
Experts........................................ 114
Change in Accountants.......................... 114
Available Information.......................... 114
Index to Financial Statements.................. F-1
Glossary....................................... A-1
</TABLE>
[LOGO]
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 Form of Certificate of Incorporation, as amended.
3.2 Form of Bylaws, as amended.
+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.
10.1 Form of Indemnification Agreement entered into by the Registrant and each
of its executive officers and directors and schedule listing all
executive officers and directors who have executed an Indemnification
Agreement.
+10.2 1995 Stock Option Plan and related form of option agreement.
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- --------------------------------------------------------------------------
+10.3 1997 Stock Option Plan and related form of option agreement.
<C> <S>
+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.
+10.21 Standard Industrial/Commercial Single-Tenant Lease--Gross dated as of
August 26, 1996 between Scope Development and FirstWorld Anaheim.
10.22 SpectraNet International Founders' Sale Agreement.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- --------------------------------------------------------------------------
10.23 System Acquisition Agreement.
<C> <S>
12.1 Computation of Ratio of Earnings to Fixed Charges.
16.1 Letter Regarding Change in Certifying Accountant.
21.1 Subsidiaries of the Registrant.
23.1 Consent of PricewaterhouseCoopers LLP.
23.2 Consent of Latham & Watkins (contained in Exhibit 5.1).
23.3 Consent of Blumenfeld & Cohen.
+24.1 Power of Attorney.
25.1 Statement of Eligibility of Trustee.
27.1 Financial Data Schedule.
99.1 Form of Letter of Transmittal.
99.2 Form of Notice of Guaranteed Delivery.
</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.
+ Previously filed.
(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:
(1) To file, during any period in which offers or sales are being made, a
post effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1993;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
posteffective amendment thereof) which individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at the time shall be deemed to be the initial bona
fide offering thereof;
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering; and
II-3
<PAGE>
(4) If the registrant is a foreign private issuer, to file a posteffective
amendment to the registration statement to include any financial statements
required by Rule 3-19 of Regulation S-X at the start of any delayed offering or
throughout a continuous offering. Financial statements and information otherwise
required by Section 10(a)(3) of the Act need not be furnished, provided that the
registrant includes in the prospectus, by means of a post-effective amendment,
financial statements required pursuant to this paragraph and other information
necessary to ensure that all other information in the prospectus is at least as
current as the date of those financial statements. Notwithstanding the
foregoing, with respect to registration statements on Form F-3, a post-effective
amendment need not be filed to include financial statements and information
required by Section 10(a)(3) of the Act or Rule 3-19 of Regulation S-X if such
financial statements and information are contained in periodic reports filed
with or furnished to the Commission by the registrant pursuant to section 13 or
section 15(d) of the Securities Exchange Act of 1934 that are incorporated by
reference in the Form F-3.
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-4
<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 August 21, 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>
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 August 21, 1998
Donald L. Sturm (Principal Executive
Officer)
Executive Vice President,
Chief Operating Officer,
/s/ ROBERT E. RANDALL Acting Chief Financial
- ------------------------------ Officer and Director August 21, 1998
Robert E. Randall (Principal Financial
Officer)
Vice President, Finance
/s/ DENNIS M. MULROY* and Administration
- ------------------------------ (Principal Accounting August 21, 1998
Dennis M. Mulroy Officer)
/s/ C. KEVIN GARLAND*
- ------------------------------ Director August 21, 1998
C. Kevin Garland
/s/ RODNEY MALCOLM*
- ------------------------------ Director August 21, 1998
Rodney Malcolm
/s/ JAMES O. SPITZENBERGER*
- ------------------------------ Director August 21, 1998
James O. Spitzenberger
/s/ MELANIE STURM*
- ------------------------------ Director August 21, 1998
Melanie Sturm
/s/ JOHN C. STISKA*
- ------------------------------ Director August 21, 1998
John C. Stiska
<TABLE>
<S> <C> <C> <C>
*By: /s/ ROBERT E. RANDALL
-------------------------
Robert E. Randall
Attorney-in-fact
</TABLE>
II-5
<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>
FORM OF
CERTIFICATE OF INCORPORATION, AS AMENDED
OF
FIRSTWORLD COMMUNICATIONS, INC.
FIRST: The name of the corporation (hereinafter the "Corporation")
is
FIRSTWORLD COMMUNICATIONS, INC.
SECOND: The address, including street, number, city and county, of
the registered office of the Corporation in the State of Delaware is 1013
Centre Road, City of Wilmington, County of New Castle; and the name of the
registered agent of the Corporation in the State of Delaware is CSC The
United States Corporation Company.
THIRD: The nature of the business and of the purposes to be
conducted and promoted by the Corporation shall be to engage in any lawful
act or activity for which corporations may be organized under the General
Corporation Law of Delaware.
FOURTH:
(a) This Corporation is authorized to issue two classes of shares,
designated "Common Stock" and "Preferred Stock." The total number of shares
which this Corporation shall have authority to issue is 110,000,000. The
number of shares of Common Stock authorized to be issued is 100,000,000, of
which 10,135,164 shall be designated Series A Common Stock and 89,864,836
shall be designated Series B Common Stock. The number of shares of Preferred
Stock authorized to be issued is 10,000,000. The par value of each share of
Common Stock and of each share of Preferred Stock is $.0001.
(b) The Preferred Stock may be issued from time to time in one or more
series. The Board of Directors of this Corporation is hereby authorized
within the restrictions stated in these Amended and Restated Articles of
Incorporation to fix the number of shares of each such series and determine
the designation thereof and to (i) determine or alter the rights, preferences
and restrictions imposed upon any wholly unissued series of Preferred Stock
and (ii) increase or decrease the number of shares of that series, but not
below the number of shares of any series then outstanding. In case the
number of shares of any series shall be so decreased, the shares constituting
such decrease shall resume the status which they had prior to the adoption of
the resolution originally fixing the number of shares of such series.
1. Voting Rights.
(a) Series A Common Stock. Each holder of shares of Series A Common
Stock shall be entitled to ten votes per share of Series A Common Stock held
by such holder; and
(b) Series B Common Stock. Each holder of shares of Series B Common
Stock shall be entitled to one vote per share of Series B Common Stock held
by such holder; and
<PAGE>
(c) Election of Directors. From and after 1998, the holders of Series B
Common Stock shall be entitled, voting as a separate class, to elect one (1)
director of the Corporation at each 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 the holders of a majority of the shares of Series B Common Stock
or, in the absence of such action by such holders, by action of the remaining
directors then in office. All directors not elected as provided above shall
be elected by the holders of Series A Common Stock and Series B Common Stock,
voting together and not as separate classes, with each share voting as
provided in this Article FOURTH, Section 1. Any vacancy with respect to such
directors shall be filled as provided in the Bylaws of the Corporation.
2. Conversion.
(a) Right to Convert. Each holder of Series A Common Stock shall have
the right to convert each share of Series A Common Stock held by such holder
into one fully paid and non-assessable share of Series B Common Stock in
accordance with this Article FOURTH, Section 2.
(b) Mechanics of Voluntary Conversion. In order to exercise the
conversion privilege, the holder of any shares of Series A Common Stock to be
converted shall present and surrender the certificate or certificates
representing such shares during usual business hours at the office or agency
maintained by the Corporation for the transfer of Series A Common Stock and
shall give written notice to the Corporation at such office or agency that
the holder elects to convert the shares of Series A Common Stock represented
by such certificate or certificates, to the extent specified in such notice.
Such notice shall also state the name or names (with addresses) in which the
certificate or certificates for shares of Series B Common Stock which shall
be issuable on such conversion shall be issued. If required by the
Corporation, any certificate for shares of Series A Common Stock surrendered
for conversion shall be accompanied by instruments of transfer, in form
satisfactory to the Corporation, duly executed by the holder of such shares
or his or her duly authorized representative. As promptly as practicable
after the receipt of such notice and the surrender of the certificate or
certificates representing such shares of Series A Common Stock as aforesaid,
the Corporation shall issue and deliver at such office or agency to such
holder, or on his or her written order, a certificate or certificates for the
number of full shares of Series B Common Stock issuable upon the conversion
of such shares. Each conversion of shares of Series A Common Stock shall be
deemed to have been effected on the date on which such notice shall have been
received by the office or agency maintained by the Corporation for such
purpose and the certificate or certificates representing such shares shall
have been surrendered (subject to receipt by such office or agency within
thirty (30) days thereafter of any required instruments of transfer as
aforesaid), and the person or persons in whose name or names any certificate
or certificates for shares of Series B Common Stock shall be issuable upon
such conversion shall be deemed to have become on said date the holder or
holders of record of the shares represented thereby.
(c) Automatic Conversion. Each share of Series A Common
Stock shall be converted automatically into one share of Series B
Common Stock upon the sale or transfer of such share of Series A
Common Stock (other than the original sale and issuance by the
Corporation) to any person or entity other than a Permitted
Transferee (as defined below), an Affiliate (as defined below) of
Donald L. Sturm or an Affiliate of Enron Capital & Trade
Resources Corp. or, with respect to shares of Series A Common
Stock 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. A
"Permitted Transferee" shall mean a natural person
2
<PAGE>
who is qualified as an accredited investor under applicable securities laws
and who is a member, manager or officer of Colorado Spectra 3, LLC or an
Affiliate of any such member, manager or officer. An "Affiliate" of an
entity or natural person shall mean (i) an entity or natural person which or
who, directly or indirectly, controls, is controlled by, or is under common
control with such entity or natural person and (ii), as applied to a natural
person, said person, a member of said person's Immediate Family, or the
personal representative of such person. "Immediate Family" shall mean a
natural person's spouse, child, grandchild, parent, grandparent, or sibling.
FIFTH: The name and the mailing address of the incorporator are
as follows:
NAME MAILING ADDRESS
Chris Allingham 701 "B" Street, Suite 2100
San Diego, California 92101
SIXTH: The Corporation is to have perpetual existence.
SEVENTH: In furtherance and not in limitation of the powers
conferred by statute, the board of directors shall have the power, without
the vote or assent of the stockholders to adopt, amend or repeal the by-laws
of the Corporation.
EIGHTH:
(a) The liability of the directors of this Corporation for monetary
damages shall be eliminated to the fullest extent permissible under Delaware
law.
(b) This Corporation is authorized to provide indemnification of agents
(as defined in Section 145 of the Delaware General Corporation Law) through
bylaw provisions, agreements with agents, vote of stockholders or
disinterested directors or otherwise, in excess of the indemnification
otherwise permitted by Section 145 of the Delaware General Corporation Law.
(c) Any repeal or modification of this Article EIGHTH shall be
prospective and shall not affect the rights of indemnification or limitation
of liability in effect at the time of the alleged occurrence of any act or
omission to act giving rise to liability or indemnification.
NINTH: The Corporation shall, to the fullest extent permitted by
Section 145 of the General Corporation Law of the State of Delaware, as the
same may be amended and supplemented, indemnify any and all persons whom it
shall have power to indemnify under said section from and against any and all
of the expenses, liabilities or other matters referred to in or covered by
said section, and the indemnification provided for herein shall not be deemed
exclusive of any other rights to which those indemnified may be entitled
under any By-Law, agreement, vote of stockholders or disinterested directors
or otherwise, both as to action in his official capacity and as to action in
another capacity while holding such office, and shall continue as to a person
who has ceased to be a director, officer, employee or agent and shall inure
to the benefit of the heirs, executors and administrators of such person.
3
<PAGE>
TENTH: From time to time any of the provisions of this
certificate of incorporation may be amended, altered or repealed, and other
provisions authorized by the laws of the State of Delaware at the time in
force may be added or inserted in the manner and at the time prescribed by
said laws, and all rights at any time conferred upon the stockholders of the
Corporation by this certificate of incorporation are granted subject to the
provisions of the Article TENTH.
4
<PAGE>
FORM OF
BY-LAWS, AS AMENDED
OF
FIRSTWORLD COMMUNICATIONS, INC.<PAGE>
<PAGE>
BY-LAWS
OF
FIRSTWORLD COMMUNICATIONS, INC.
ARTICLE I
OFFICES
Section 1. Registered Office. The registered office shall be in the
City of Wilmington, County of New Castle, State of Delaware.
Section 2. Other Offices. The corporation may also have offices at such
other places both within and without the State of Delaware as the Board of
Directors may from time to time determine or the business of the corporation
may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 1. Place of Meetings. Meetings of stockholders shall be held
at any place within or outside the State of Delaware designated by the Board
of Directors. In the absence of any such designation, stockholders' meetings
shall be held at the principal executive office of the corporation.
Section 2. Annual Meeting of Stockholders. The annual meeting of
stockholders shall be held each year on a date and a time designated by the
Board of Directors. At each annual meeting directors shall be elected and
any other proper business may be transacted.
Section 3. Quorum; Adjourned Meetings and Notice Thereof. A majority
of the stock issued and outstanding and entitled to vote at any meeting of
stockholders, the holders
<PAGE>
of which are present in person or represented by
proxy, shall constitute a quorum for the transaction of business except as
otherwise provided by law, by the Certificate of Incorporation, or by these
By-Laws. A quorum, once established, shall not be broken by the withdrawal
of enough votes to leave less than a quorum and the votes present may
continue to transact business until adjournment. If, however, such quorum
shall not be present or represented at any meeting of the stockholders, a
majority of the voting stock represented in person or by proxy may adjourn
the meeting from time to time, without notice other than announcement at the
meeting, until a quorum shall be present or represented. At such adjourned
meeting at which a quorum shall be present or represented, any business may
be transacted which might have been transacted at the meeting as originally
notified. If the adjournment is for more than thirty days, or if after the
adjournment a new record date is fixed for the adjourned meeting, a notice of
the adjourned meeting shall be given to each stockholder of record entitled
to vote thereat.
Section 4. Voting. When a quorum is present at any meeting, the vote
of the holders of a majority of the stock having voting power present in
person or represented by proxy shall decide any question brought before such
meeting, unless the question is one upon which by express provision of the
statutes, or the Certificate of Incorporation, or these By-Laws, a different
vote is required in which case such express provision shall govern and
control the decision of such question.
Section 5. Proxies. At each meeting of the stockholders, each
stockholder having the right to vote may vote in person or may authorize
another person or persons to act for him by proxy appointed by an instrument
in writing subscribed by such stockholder and bearing a date not more than
three years prior to said meeting, unless said instrument provides for a
longer period. All proxies must be filed with the Secretary of the
corporation at the beginning of
2
<PAGE>
each meeting in order to be counted in any vote at the meeting. Each
stockholder shall have one vote for each share of stock having voting power,
registered in his name on the books of the corporation on the record date set
by the Board of Directors as provided in Article V, Section 6 hereof. All
elections shall be had and all questions decided by a plurality vote, except
as otherwise expressly provided for herein.
Section 6. Special Meetings. Special meetings of the stockholders, for
any purpose, or purposes, unless otherwise prescribed by statute or by the
Certificate of Incorporation, may be called by the Chairman of the Board, the
President or by one or more stockholders holding shares in the aggregate
entitled to cast not less than 10% of the votes at any such special meeting
and shall be called by the President or the Secretary at the request in
writing of the Board of Directors. Business transacted at any special
meeting of stockholders shall be limited to the purposes stated in the notice.
Section 7. Notice of Stockholder's Meetings. Whenever stockholders are
required or permitted to take any action at a meeting, a written notice of
the meeting shall be given which notice shall state the place, date and hour
of the meeting, and, in the case of a special meeting, the purpose or
purposes for which the meeting is called. The written notice of any meeting
shall be given to each stockholder entitled to vote at such meeting not less
than ten nor more than sixty days before the date of the meeting. If mailed,
notice is given when deposited in the United States mail, postage prepaid,
directed to the stockholder at his address as it appears on the records of
the corporation. To be properly brought before the meeting, business must be
of a nature that is appropriate for consideration at a meeting of
stockholders and must be (i) specified in the notice of meeting (or any
supplement thereto) given by or at the direction of the Board of Directors,
(ii) otherwise properly brought before the meeting by or at
3
<PAGE>
the direction of the Board of Directors, or (iii) otherwise properly brought
before the meeting by a stockholder. In addition to any other applicable
requirements, for business to be properly brought before a stockholder's
meeting by a stockholder, the stockholder must have given timely notice
thereof in writing to the Secretary of the Corporation. To be timely, each
such notice must be given either by personal delivery or by United States
mail, postage prepaid, to the Secretary of the Corporation not later than (1)
with respect to a matter to be brought before an annual meeting or a special
meeting, sixty (60) days prior to the date set forth in the By-Laws for an
annual meeting and (2) with respect to a matter to be brought before a
special meeting, the close of business on the tenth day following the date on
which notice of such meeting is first given to stockholders. The notice
shall set forth (i) information concerning the stockholder, including his or
her name and address, (ii) a representation that the stockholder is entitled
to vote at such meeting and intends to appear in person or by proxy at the
meeting to present the matter specified in the notice, and (iii) such other
information as would be required to be included in a proxy statement
soliciting proxies for the presentation of such matter to the meeting.
Notwithstanding anything in these By-Laws to the contrary, no business
shall be transacted at an annual meeting except in accordance with the
procedures set forth in this section; provided, however, that nothing in this
section shall be deemed to preclude discussion by any stockholder of any
business properly brought before an annual meeting in accordance with these
By-Laws.
Section 8. Maintenance and Inspection of Stockholder List. The officer
who has charge of the stock ledger of the corporation shall prepare and make,
at least ten days before every meeting of stockholders, a complete list of
the stockholders entitled to vote at the meeting, arranged in alphabetical
order, and showing the address of each stockholder and the number of
4
<PAGE>
shares registered in the name of each stockholder. Such list shall be open
to the examination of any stockholder, for any purpose germane to the
meeting, during ordinary business hours, for a period of at least ten days
prior to the meeting, either at a place within the city where the meeting is
to be held, which place shall be specified in the notice of the meeting, or,
if not so specified, at the place where the meeting is to be held. The list
shall be produced and kept at the time and place of the meeting during the
whole time thereof, and may be inspected by any stockholder who is present.
Section 9. Stockholder Action by Written Consent Without a Meeting.
Unless otherwise provided in the Certificate of Incorporation, any action
required to be taken at any annual or special meeting of stockholders of the
corporation, or any action which may be taken at any annual or special
meeting of such stockholders, may not be taken without a meeting.
ARTICLE III
DIRECTORS
Section 1. The Number of Directors. The number of directors which
shall constitute the whole Board shall be not less than three (3) nor more
than eleven (11). The actual number of directors shall be fixed from time to
time by the Board as provided in the Certificate of Incorporation. The
directors need not be stockholders. The directors shall be elected at the
annual meeting of the stockholders, except as provided in Section 2 of this
Article, and each director elected shall hold office until his successor is
elected and qualified; provided, however, that unless otherwise restricted by
the Certificate of Incorporation or by law, any director or the entire Board
of Directors may be removed, for cause, from the Board of Directors at any
meeting of stockholders by not less than 66 2/3% of the outstanding stock of
the Corporation.
5
<PAGE>
Section 2. Vacancies. Vacancies on the Board of Directors by reason of
death, resignation, retirement, disqualification, removal from office, or
otherwise, and newly created directorships resulting from any increase in the
authorized number of directors may be filled by a majority of the directors
then in office, although less than a quorum, or by a sole remaining director.
The directors so chosen shall hold office until the next annual election of
directors and until their successors are duly elected and shall qualify,
unless sooner displaced. If there are no directors in office, then an
election of directors may be held in the manner provided by statute. If, at
the time of filling any vacancy or any newly created directorship, the
directors then in office shall constitute less than a majority of the whole
Board (as constituted immediately prior to any such increase), the Court of
Chancery may, upon application of any stockholder or stockholders holding at
least ten percent of the total number of the shares at the time outstanding
having the right to vote for such directors, summarily order an election to
be held to fill any such vacancies or newly created directorships, or to
replace the directors chosen by the directors then in office.
Section 3. Powers. The property and business of the corporation shall be
managed by or under the direction of its Board of Directors. In addition to
the powers and authorities by these By-Laws expressly conferred upon them,
the Board may exercise all such powers of the corporation and do all such
lawful acts and things as are not by statute or by the Certificate of
Incorporation or by these By-Laws directed or required to be exercised or
done by the stockholders.
MEETINGS OF THE BOARD OF DIRECTORS
6
<PAGE>
Section 4. Place of Directors' Meetings. The directors may hold their
meetings and have one or more offices, and keep the books of the corporation
outside of the State of Delaware.
Section 5. Regular Meetings. Regular meetings of the Board of
Directors may be held without notice at such time and place as shall from time
to time be determined by the Board.
Section 6. Special Meetings. Special meetings of the Board of
Directors may be called by the Chairman of the Board or the President on
forty-eight hours' notice to each director, either personally or by mail or
by telegram; special meetings shall be called by the President or the
Secretary in like manner and on like notice on the written request of two
directors unless the Board consists of only one director; in which case
special meetings shall be called by the President or Secretary in like manner
or on like notice on the written request of the sole director.
Section 7. Quorum. At all meetings of the Board of Directors a
majority of the authorized number of directors shall be necessary and sufficient
to constitute a quorum for the transaction of business, and the vote of a
majority of the directors present at any meeting at which there is a quorum,
shall be the act of the Board of Directors, except as may be otherwise
specifically provided by statute, by the Certificate of Incorporation or by
these By-Laws. If a quorum shall not be present at any meeting of the Board of
Directors the directors present thereat may adjourn the meeting from time to
time, without notice other than announcement at the meeting, until a quorum
shall be present. If only one director is authorized, such sole director shall
constitute a quorum.
7
<PAGE>
Section 8. Action Without Meeting. Unless otherwise restricted by
the Certificate of Incorporation or these By-Laws, any action required or
permitted to be taken at any meeting of the Board of Directors or of any
committee thereof may be taken without a meeting, if all members of the Board or
committee, as the case may be, consent thereto in writing, and the writing or
writings are filed with the minutes of proceedings of the Board or committee.
Section 9. Telephonic Meetings. Unless otherwise restricted by
the Certificate of Incorporation or these By-Laws, members of the Board of
Directors, or any committee designated by the Board of Directors, may
participate in a meeting of the Board of Directors, or any committee, by means
of conference telephone or similar communications equipment by means of which
all persons participating in the meeting can hear each other, and such
participation in a meeting shall constitute presence in person at such meeting.
8
<PAGE>
COMMITTEES OF DIRECTORS
Section 10. Committees of Directors. The Board of Directors may,
by resolution passed by a majority of the whole Board, designate one or more
committees, each such committee to consist of one or more of the directors of
the corporation. The Board may designate one or more directors as alternate
members of any committee, who may replace any absent or disqualified member at
any meeting of the committee. In the absence or disqualification of a member of
a committee, the member or members thereof present at any meeting and not
disqualified from voting, whether or not he or they constitute a quorum, may
unanimously appoint another member of the Board of Directors to act at the
meeting in the place of any such absent or disqualified member. Any such
committee, to the extent provided in the resolution of the Board of Directors,
shall have and may exercise all the powers and authority of the Board of
Directors in the management of the business and affairs of the corporation, and
may authorize the seal of the corporation to be affixed to all papers which may
require it; but no such committee shall have the power or authority in reference
to amending the Certificate of Incorporation, adopting an agreement of merger or
consolidation, recommending to the stockholders the sale, lease or exchange of
all or substantially all of the corporation's property and assets, recommending
to the stockholders a dissolution of the corporation or a revocation of a
dissolution, or amending the By-Laws of the corporation; and, unless the
resolution or the Certificate of Incorporation expressly so provide, no such
committee shall have the power or authority to declare a dividend or to
authorize the issuance of stock.
Section 11. Minutes of Committee Meetings. Each committee shall
keep regular minutes of its meetings and report the same to the Board of
Directors when required.
9
<PAGE>
COMPENSATION OF DIRECTORS
Section 12. Compensation of Directors. Unless otherwise restricted by
the Certificate of Incorporation or these By-Laws, the Board of Directors
shall have the authority to fix the compensation of directors. The directors
may be paid their expenses, if any, of attendance at each meeting of the
Board of Directors and may be paid a fixed sum for attendance at each meeting
of the Board of Directors or a stated salary as director. No such payment
shall preclude any director from serving the corporation in any other
capacity and receiving compensation therefor. Members of special or standing
committees may be allowed like compensation for attending committee meetings.
INDEMNIFICATION
Section 13. Indemnification. (a) The corporation shall indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by or in the
right of the corporation) by reason of the fact that he is or was a director,
officer, employee or agent of the corporation, or is or was serving at the
request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fees), judgments, fines and amounts
paid in settlement actually and reasonably incurred by him in connection with
such action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. The termination of any
action, suit or proceeding by judgment, order, settlement, conviction, or
upon a plea of nolo contendere or its equivalent, shall not, of itself,
create a presumption that the
10
<PAGE>
person did not act in good faith and in a manner which he reasonably believed
to be in or not opposed to the best interests of the corporation, and, with
respect to any criminal action or proceeding, had reasonable cause to believe
that his conduct was unlawful.
(b) The corporation shall indemnify any person who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action or suit by or in the right of the corporation to procure a judgment in
its favor by reason of the fact that he is or was a director, officer, employee
or agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the corporation except that no such indemnification shall be
made in respect of any claim, issue or matter as to which such person shall have
been adjudged to be liable to the corporation unless and only to the extent that
the Court of Chancery of Delaware or the court in which such action or suit was
brought shall determine upon application that, despite the adjudication of
liability but in view of all the circumstances of the case, such person is
fairly and reasonably entitled to indemnity for such expenses which such Court
of Chancery or such other court shall deem proper.
(c) To the extent that a director, officer, employee or agent of the
corporation has been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to in paragraphs (a) and (b), or in defense
of any claim, issue or matter therein, he shall
11
<PAGE>
be indemnified against expenses (including attorneys' fees) actually and
reasonably incurred by him in connection therewith.
(d) Any indemnification under paragraphs (a) and (b) (unless ordered by
a court) shall be made by the corporation only as authorized in the specific
case upon a determination that indemnification of the director, officer,
employee or agent is proper in the circumstances because he has met the
applicable standard of conduct set forth in paragraphs (a) and (b). Such
determination shall be made (1) by the Board of Directors by a majority vote
of a quorum consisting of directors who were not parties to such action, suit
or proceeding, or (2) if such a quorum is not obtainable, or, even if
obtainable a quorum of disinterested directors so directs, by independent
legal counsel in a written opinion, or (3) by the stockholders.
(e) Expenses incurred by an officer or director in defending any civil
or criminal, administrative or investigative action, suit or proceeding shall
be paid by the corporation in advance of the final disposition of such
action, suit or proceeding upon receipt of an undertaking by or on behalf of
such director or officer to repay such amount if it shall ultimately be
determined that he is not entitled to be indemnified by the corporation as
authorized in this Section 13. Such expenses incurred by other employees and
agents may be so paid upon such terms and conditions, if any, as the Board of
Directors deems appropriate.
(f) The indemnification and advancement of expenses provided by, or
granted pursuant to, the other paragraphs of this Section 13 shall not be
deemed exclusive of any other rights to which those seeking indemnification
or advancement of expenses may be entitled under any by-law, agreement, vote
of stockholders or disinterested directors or otherwise, both as to action in
his official capacity and as to action in another capacity while holding such
office.
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(g) The Board of Directors may authorize, by a vote of a majority of a
quorum of the Board of Directors, the corporation to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee
or agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise against any liability
asserted against him and incurred by him in any such capacity, or arising out
of his status as such, whether or not the corporation would have the power to
indemnify him against such liability under the provisions of this Section 13.
(h) For the purposes of this Section 13, references to "the
corporation" shall include, in addition to the resulting corporation, any
constituent corporation (including any constituent of a constituent) absorbed
in a consolidation or merger which, if its separate existence had continued,
would have had power and authority to indemnify its directors, officers, and
employees or agents, so that any person who is or was a director, officer,
employee or agent of such constituent corporation, or is or was serving at
the request of such constituent corporation as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise, shall stand in the same position under the provisions of this
Section with respect to the resulting or surviving corporation as he would
have with respect to such constituent corporation if its separate existence
had continued.
(i) For purposes of this section, references to "other enterprises"
shall include employee benefit plans; references to "fines" shall include any
excise taxes assessed on a person with respect to an employee benefit plan;
and references to "serving at the request of the corporation" shall include
service as a director, officer, employee or agent of the corporation
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which imposes duties on, or involves services by, such director, officer,
employee or agent with respect to an employee benefit plan, its participants
or beneficiaries; and a person who acted in good faith and in a manner he
reasonably believed to be in the interest of the participants and
beneficiaries of an employee benefit plan shall be deemed to have acted in a
manner "not opposed to the best interests of the corporation" as referred to
in this section.
(j) The indemnification and advancement of expenses provided by, or
granted pursuant to, this Section 13 shall, unless otherwise provided when
authorized or ratified, continue as to a person who has ceased to be a
director, officer, employee or agent and shall inure to the benefit of the
heirs, executors and administrators of such a person.
ARTICLE IV
OFFICERS
Section 1. Officers. The officers of this corporation shall be chosen
by the Board of Directors and shall include a Chairman of the Board, a
President, a Secretary, and a Chief Financial Officer or Treasurer. The
corporation may also have at the discretion of the Board of Directors such
other officers as are desired, including one or more Vice Presidents, one or
more Assistant Secretaries and Assistant Treasurers, and such other officers
as may be appointed in accordance with the provisions of Section 3 hereof.
In the event there are two or more Vice Presidents, then one or more may be
designated as Executive Vice President, Senior Vice President, or other
similar or dissimilar title. At the time of the election of officers, the
directors may by resolution determine the order of their rank. Any number of
offices may be held by the same person, unless the Certificate of
Incorporation or these By-Laws otherwise provide.
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Section 2. Election of Officers. The Board of Directors, at its first
meeting after each annual meeting of stockholders, shall choose the officers
of the corporation.
Section 3. Subordinate Officers. The Board of Directors may
appoint such other officers and agents as it shall deem necessary who shall hold
their offices for such terms and shall exercise such powers and perform such
duties as shall be determined from time to time by the Board.
Section 4. Compensation of Officers. The salaries of all officers and
agents of the corporation shall be fixed by the Board of Directors.
Section 5. Term of Office; Removal and Vacancies. The officers of the
corporation shall hold office until their successors are chosen and qualify
in their stead. Any officer elected or appointed by the Board of Directors
may be removed at any time by the affirmative vote of a majority of the Board
of Directors. If the office of any officer or officers becomes vacant for
any reason, the vacancy shall be filled by the Board of Directors.
CHAIRMAN OF THE BOARD
Section 6. Chairman of the Board. The Chairman of the Board shall, if
present, preside at all meetings of the stockholders and the Board of
Directors and exercise and perform such other powers and duties as may be
from time to time assigned to him by the Board of Directors or prescribed by
these By-Laws.
PRESIDENT
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Section 7. President. Subject to such supervisory powers as may be
given by the Board of Directors to the Chairman of the Board, the President
shall, subject to the control of the Board of Directors and in the absence of
the Chairman of the Board, assume the powers and duties prescribed in Section
6 of this Article IV. In the absence of the Chairman of the Board, he shall
preside at all meetings of the stockholders and at all meetings of the Board
of Directors. He shall be an ex-officio member of all committees and shall
have the general powers and duties of management usually vested in the office
of President of corporations, and shall have such other powers and duties as
may be prescribed by the Board of Directors or these By-Laws.
VICE PRESIDENTS
Section 8. Vice President. In the absence or disability of the
President, the Vice Presidents in order of their rank as fixed by the Board
of Directors, or if not ranked, the Vice President designated by the Board of
Directors, shall perform all the duties of the President, and when so acting
shall have all the powers of and be subject to all the restrictions upon the
President. The Vice Presidents shall have such other duties as from time to
time may be prescribed for them, respectively, by the Board of Directors.
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SECRETARY AND ASSISTANT SECRETARY
Section 9. Secretary. The Secretary shall attend all sessions of the
Board of Directors and all meetings of the stockholders and record all votes
and the minutes of all proceedings in a book to be kept for that purpose; and
shall perform like duties for the standing committees when required by the
Board of Directors. He shall give, or cause to be given, notice of all
meetings of the stockholders and of the Board of Directors, and shall perform
such other duties as may be prescribed by the Board of Directors or these
By-Laws. He shall keep in safe custody the seal of the corporation, and when
authorized by the Board, affix the same to any instrument requiring it, and
when so affixed it shall be attested by his signature or by the signature of
an Assistant Secretary. The Board of Directors may give general authority to
any other officer to affix the seal of the corporation and to attest the
affixing by his signature.
Section 10. Assistant Secretaries. The Assistant Secretary, or if
there be more than one, the Assistant Secretaries in the order determined by
the Board of Directors, or if there be no such determination, the Assistant
Secretary designated by the Board of Directors, shall, in the absence or
disability of the Secretary, perform the duties and exercise the powers of
the Secretary and shall perform such other duties and have such other powers
as the Board of Directors may from time to time prescribe.
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CHIEF FINANCIAL OFFICER OR TREASURER AND ASSISTANT TREASURER
Section 11. Chief Financial Officer or Treasurer. The Chief Financial
Officer or Treasurer shall have the custody of the corporate funds and
securities and shall keep full and accurate accounts of receipts and
disbursements in books belonging to the corporation and shall deposit all
moneys, and other valuable effects in the name and to the credit of the
corporation, in such depositories as may be designated by the Board of
Directors. He shall disburse the funds of the corporation as may be ordered
by the Board of Directors, taking proper vouchers for such disbursements, and
shall render to the Board of Directors, at its regular meetings, or when the
Board of Directors so requires, an account of all his transactions as Chief
Financial Officer or Treasurer and of the financial condition of the
corporation. If required by the Board of Directors, he shall give the
corporation a bond, in such sum and with such surety or sureties as shall be
satisfactory to the Board of Directors, for the faithful performance of the
duties of his office and for the restoration to the corporation, in case of
his death, resignation, retirement or removal from office, of all books,
papers, vouchers, money and other property of whatever kind in his possession
or under his control belonging to the corporation.
Section 12. Assistant Treasurer. The Assistant Treasurer, or if there
shall be more than one, the Assistant Treasurers in the order determined by
the Board of Directors, or if there be no such determination, the Assistant
Treasurer designated by the Board of Directors, shall, in the absence or
disability of the Treasurer, perform the duties and exercise the powers of
the Treasurer and shall perform such other duties and have such other powers
as the Board of Directors may from time to time prescribe.
Article V
CERTIFICATES OF STOCK
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Section 1. Certificates. Every holder of stock of the corporation shall
be entitled to have a certificate signed by, or in the name of the
corporation by, the Chairman or Vice Chairman of the Board of Directors, or
the President or a Vice President, and by the Secretary or an Assistant
Secretary, or the Treasurer or an Assistant Treasurer of the corporation,
certifying the number of shares represented by the certificate owned by such
stockholder in the corporation.
Section 2. Signatures on Certificates. Any or all of the signatures on
the certificate may be a facsimile. In case any officer, transfer agent, or
registrar who has signed or whose facsimile signature has been placed upon a
certificate shall have ceased to be such officer, transfer agent, or
registrar before such certificate is issued, it may be issued by the
corporation with the same effect as if he were such officer, transfer agent,
or registrar at the date of issue.
Section 3. Statement of Stock Rights, Preferences, Privileges. If the
corporation shall be authorized to issue more than one class of stock or more
than one series of any class, the powers, designations, preferences and
relative, participating, optional or other special rights of each class of
stock or series thereof and the qualification, limitations or restrictions of
such preferences and/or rights shall be set forth in full or summarized on
the face or back of the certificate which the corporation shall issue to
represent such class or series of stock, provided that, except as otherwise
provided in section 202 of the General Corporation Law of Delaware, in lieu
of the foregoing requirements, there may be set forth on the face or back of
the certificate which the corporation shall issue to represent such class or
series of stock, a statement that the corporation will furnish without charge
to each stockholder who so requests the powers, designations, preferences and
relative, participating, optional or other special rights
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of each class of stock or series thereof and the qualifications, limitations
or restrictions of such preferences and/or rights.
LOST, STOLEN OR DESTROYED CERTIFICATES
Section 4. Lost Certificates. The Board of Directors may direct a new
certificate or certificates to be issued in place of any certificate or
certificates theretofore issued by the corporation alleged to have been lost,
stolen or destroyed, upon the making of an affidavit of that fact by the
person claiming the certificate of stock to be lost, stolen or destroyed.
When authorizing such issue of a new certificate or certificates, the Board
of Directors may, in its discretion and as a condition precedent to the
issuance thereof, require the owner of such lost, stolen or destroyed
certificate or certificates, or his legal representative, to advertise the
same in such manner as it shall require and/or to give the corporation a bond
in such sum as it may direct as indemnity against any claim that may be made
against the corporation with respect to the certificate alleged to have been
lost, stolen or destroyed.
TRANSFERS OF STOCK
Section 5. Transfers of Stock. Upon surrender to the corporation, or
the transfer agent of the corporation, of a certificate for shares duly
endorsed or accompanied by proper evidence of succession, assignation or
authority to transfer, it shall be the duty of the corporation to issue a new
certificate to the person entitled thereto, cancel the old certificate and
record the transaction upon its books.
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FIXING RECORD DATE
Section 6. Fixing Record Date. In order that the corporation may
determine the stockholders entitled to notice of or to vote at any meeting of
the stockholders, or any adjournment thereof, or to express consent to
corporate action in writing without a meeting, or entitled to receive payment
of any dividend or other distribution or allotment of any rights, or entitled
to exercise any rights in respect of any change, conversion or exchange of
stock or for the purpose of any other lawful action, the Board of Directors
may fix a record date which shall not be more than sixty nor less than ten
days before the date of such meeting, nor more than sixty days prior to any
other action. A determination of stockholders of record entitled to notice
of or to vote at a meeting of stockholders shall apply to any adjournment of
the meeting; provided, however, that the Board of Directors may fix a new
record date for the adjourned meeting.
REGISTERED STOCKHOLDERS
Section 7. Registered Stockholders. The corporation shall be entitled
to treat the holder of record of any share or shares of stock as the holder
in fact thereof and accordingly shall not be bound to recognize any equitable
or other claim or interest in such share on the part of any other person,
whether or not it shall have express or other notice thereof, save as
expressly provided by the laws of the State of Delaware.
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ARTICLE VI
GENERAL PROVISIONS
DIVIDENDS
Section 1. Dividends. Dividends upon the capital stock of the
corporation, subject to the provisions of the Certificate of Incorporation,
if any, may be declared by the Board of Directors at any regular or special
meeting, pursuant to law. Dividends may be paid in cash, in property, or in
shares of the capital stock, subject to the provisions of the Certificate of
Incorporation.
Section 2. Payment of Dividends; Directors' Duties. Before payment of
any dividend there may be set aside out of any funds of the corporation
available for dividends such sum or sums as the directors from time to time,
in their absolute discretion, think proper as a refund to meet contingencies,
or for equalizing dividends, or for repairing or maintaining any property of
the corporation, or for such other purpose as the directors shall think
conducive to the interests of the corporation, and the directors may abolish
any such reserve.
CHECKS
Section 3. Checks. All checks or demands for money and notes of the
corporation shall be signed by such officer or officers as the Board of
Directors may from time to time designate.
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FISCAL YEAR
Section 4. Fiscal Year. The fiscal year of the corporation
shall be fixed by resolution of the Board of Directors.
SEAL
Section 5. Corporate Seal. The corporate seal shall have
inscribed thereon the name of the corporation, the year of its organization
and the words "Corporate Seal, Delaware". Said seal may be used by causing
it or a facsimile thereof to be impressed or affixed or reproduced or
otherwise.
NOTICES
Section 6. Manner of Giving Notice. Whenever, under the
provisions of the statutes or of the Certificate of Incorporation or of these
By-Laws, notice is required to be given to any director or stockholder, it
shall not be construed to mean personal notice, but such notice may be given
in writing, by mail, addressed to such director or stockholder, at his
address as it appears on the records of the corporation, with postage thereon
prepaid, and such notice shall be deemed to be given at the time when the
same shall be deposited in the United States mail. Notice to directors may
also be given by telegram.
Section 7. Waiver of Notice. Whenever any notice is required to be
given under the provisions of the statutes or of the Certificate of
Incorporation or of these By-Laws, a waiver thereof in writing, signed by the
person or persons entitled to said notice, whether before or after the time
stated therein, shall be deemed equivalent thereto.
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ANNUAL STATEMENT
Section 8. Annual Statement. The Board of Directors shall present at
each annual meeting, and at any special meeting of the stockholders when
called for by vote of the stockholders, a full and clear statement of the
business and condition of the corporation.
ARTICLE VII
AMENDMENTS
Section 1. Amendment by Directors. These By-Laws may be altered,
amended or repealed or new By-Laws may be adopted by the Board of Directors,
when such power is conferred upon the Board of Directors by the Certificate
of Incorporation or by the affirmative vote of not less than 66 2/3% of the
total voting power of all outstanding securities of the Corporation then
entitled to vote generally in the election of directors, voting together as a
single class, at any regular meeting of the stockholders or of the Board of
Directors or at any special meeting of the stockholders or of the Board of
Directors if notice of such alteration, amendment, repeal or adoption of new
By-Laws be contained in the notice of such special meeting.
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[LATHAM & WATKINS LETTERHEAD]
August 21, 1998
FirstWorld Communications, Inc.
9333 Genesee, Suite 200
San Diego, California 92121
Re: Registration Statement on Form S-4
FirstWorld Communications, Inc.
File No. 333-57829
Ladies and Gentlemen:
In connection with the registration of $470,000,000 in aggregate
principal amount at maturity of its 13% Senior Discount Notes due 2008 (the
"Exchange Notes") by FirstWorld Communications, Inc., a Delaware corporation
(the "Company"), pursuant to a registration statement on Form S-4 (the
"Registration Statement") filed with the Securities and Exchange Commission
(the "Commission") on June 26, 1998 (File No. 333-57829), as amended by
Amendment No. 1 filed August 21, 1998, you have requested our opinion with
respect to the matters set forth below. The Exchange Notes will be issued
pursuant to an indenture (the "Indenture"), dated as of April 13, 1998,
between the Company and The Bank of New York, as trustee (the "Trustee"). The
Exchange Notes will be issued in exchange for the Company's outstanding 13%
Senior Discount Notes due 2008 (the "Private Notes") on the terms set forth
in the prospectus contained in the Registration Statement and the Letter of
Transmittal filed as an exhibit thereto (the "Exchange Offer").
In our capacity as your counsel, we have made such legal and factual
examinations and inquiries as we have deemed necessary or appropriate for
purposes of this opinion.
In our examination, we have assumed the genuineness of all signatures,
the authenticity of all documents submitted to us as originals and the
conformity to authentic original documents of
<PAGE>
LATHAM & WATKINS
FirstWorld Communications, Inc.
August 21, 1998
Page 2
all documents submitted to us as copies. As to facts material to the
opinions, statements and assumptions expressed herein, we have, with your
consent, relied upon oral or written statements and representations of
officers and other representatives of the Company and others.
We are opining herein as to the effect on the subject transaction only of
the federal laws of the United States, the internal laws of the State of New
York and the General Corporation Law of the State of Delaware and we express
no opinion with respect to the applicability thereto, or the effect thereon,
of the laws of any other jurisdiction or, in the case of Delaware, any other
laws, or as to any matters of municipal law or the laws of any other local
agencies within any state.
Subject to the foregoing and the other matters set forth herein, it is
our opinion that, as of the date hereof:
When the Exchange Notes to be exchanged for the Private Notes pursuant to
the Exchange Offer have been duly executed, issued and authenticated in
accordance with the terms of the Exchange Offer and the Indenture, the
Exchange Notes will be legally valid and binding obligations of the Company,
enforceable against the Company in accordance with their terms.
The opinion rendered in the foregoing paragraph relating to the
enforceability of the Exchange Notes is 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 at 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) we express no opinion concerning the enforceability of
the waiver of rights or defenses contained in Section 6.11 of the Indenture;
and (v) we express no opinion with respect to whether acceleration of the
Exchange Notes may affect the collectibility of that portion of the stated
principal amount thereof which might be determined to constitute unearned
interest thereon.
To the extent that the obligations of the Company under the Indenture and
the Exchange Notes may be dependent upon such matters, we have assumed for
purposes of this opinion that (i) the Trustee is (a) duly organized, validly
existing and in good standing under the laws of its jurisdiction of
organization; (b) has the requisite organizational and legal power and
authority to perform its obligations under the Indenture; (c) is duly
qualified to engage in the activities contemplated by the Indenture; and (d)
has duly authorized, executed and delivered the Indenture; (ii) the Indenture
is the legally valid and binding agreement of the Trustee, enforceable
against the Trustee in accordance with its terms; (iii) that the Trustee is
in compliance, generally and with respect to acting as Trustee under the
Indenture, with all applicable laws and regulations; and (iv)
<PAGE>
LATHAM & WATKINS
FirstWorld Communications, Inc.
August 21, 1998
Page 3
the Trustee has complied with any applicable requirement to file returns and
pay taxes under the Franchise Tax law of the State of California.
We have not been requested to express and, with your knowledge and
consent, do not render any opinion with respect to the applicability to the
obligations of the Company under the Indenture and the Exchange Notes of
Sections 547 and 548 of Title 11 of the Bankruptcy Reform Act of 1978, as
amended, or applicable state law (including, without limitation, Article 10
of the New York Debtor & Creditor Law) relating to fraudulent transfers and
obligations.
We consent to your filing this opinion as an exhibit to the Registration
Statement and to the reference to our firm contained under the heading "Legal
Matters."
Very truly yours,
/s/ LATHAM & WATKINS
<PAGE>
FORM OF
INDEMNIFICATION AGREEMENT
This Indemnification Agreement is made as of the ___ day of ________,
_____ (the "Agreement"), by and between FirstWorld Communications, Inc., a
Delaware corporation (the "Company"), and the undersigned [Officer/Director]
of the Company (the "Indemnitee"), with reference to the following facts:
The Indemnitee is currently serving as an [Officer/Director] of the
Company and the Company wishes the Indemnitee to continue in such capacity.
The Indemnitee is willing, under certain circumstances, to continue serving
as an [Officer/Director] of the Company.
The Indemnitee has indicated that he does not regard the indemnities
available under the Company's By-Laws as adequate to protect him against the
risks associated with his service to the Company and has noted that the
Company's directors' and officers' liability insurance policy has numerous
exclusions and a deductible and thus does not adequately protect Indemnitee.
In this connection the Company and the Indemnitee now agree they should enter
into this Agreement in order to provide greater protection to Indemnitee
against such risks of service to the Company.
Section 145 of the General Corporation Law of the State of Delaware, under
which Law the Company is organized, empowers corporations to indemnify a
person serving as a director, officer, employee or agent of the corporation
and a person who serves at the request of the corporation as a director,
officer, employee or agent of another corporation, partnership, joint
venture, trust, or other enterprise, and said Section 145 and the By-Laws of
the Company specify that the indemnification set forth in said Section 145
and in the By-Laws, respectively, shall not be deemed exclusive of any other
rights to which those seeking indemnification may be entitled under any
By-Law, agreement, vote of stockholders or disinterested directors or
otherwise.
<PAGE>
In order to induce the Indemnitee to continue to serve as an
[Officer/Director] of the Company and in consideration of his continued
service, the Company hereby agrees to indemnify the Indemnitee as follows:
1. Indemnity. The Company will indemnify the Indemnitee, his
executors, administrators or assigns, for any Expenses (as defined below)
which the Indemnitee is or becomes legally obligated to pay in connection
with any Proceeding (as defined below). As used in this Agreement the term
"Proceeding" shall include any threatened, pending or completed claim,
action, suit or proceeding, whether brought by or in the right of the Company
or otherwise and whether of a civil, criminal, administrative or
investigative nature, in which the Indemnitee may be or may have been
involved as a party or otherwise, by reason of the fact that Indemnitee is or
was a director or officer of the Company, by reason of any actual or alleged
error or misstatement or misleading statement made or suffered by the
Indemnitee, by reason of any action taken by him or of any inaction on his
part while acting as such director or officer, or by reason of the fact that
he was serving at the request of the Company as a director, trustee, officer,
employee or agent of another corporation, partnership, joint venture, trust
or other enterprise; provided, that in each such case Indemnitee acted in
good faith and in a manner which he reasonably believed to be in or not
opposed to the best interests of the Company, and, in the case of a criminal
proceeding, in addition had no reasonable cause to believe that his conduct
was unlawful. As used in this Agreement, the term "other enterprise" shall
include (without limitation) employee benefit plans and administrative
committees thereof, and the term "fines" shall include (without limitation)
any excise tax assessed with respect to any employee benefit plan.
2. Expenses. As used in this Agreement, the term "Expenses" shall
include, without limitation, damages, judgments, fines, penalties,
settlements and costs, attorneys' fees and
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disbursements and costs of attachment or similar bonds, investigations, and
any expenses of establishing a right to indemnification under this Agreement.
3. Selection of Counsel. In the event the Company shall be obligated
hereby to pay the Expenses of any Proceeding against Indemnitee, the Company,
if appropriate, shall be entitled to assume the defense of such Proceeding,
with counsel approved by Indemnitee, which approval shall not be unreasonably
withheld, upon the delivery to Indemnitee of written notice of its election
so to. After delivery of such notice, approval of such counsel by Indemnitee
and the retention of such counsel by the Company, the Company will not be
liable to Indemnitee under this Agreement for any fees of counsel
subsequently incurred by Indemnitee with respect to the same Proceeding,
provided that (i) Indemnitee shall have the right to employ his counsel in
any such Proceeding at Indemnitee's expense; and (ii) if (A) the employment
of counsel by Indemnitee has been previously authorized by the Company, (B)
Indemnitee shall have reasonably concluded that there may be a conflict of
interest between the Company and Indemnitee in the conduct of any such
defense or (C) the Company shall not, in fact, have employed counsel to
assume the defense of such Proceeding, then the fees and expenses of
Indemnitee's counsel shall be at the expense of the Company.
4. Enforcement. If a claim or request under this Agreement is not paid
by the Company, or on its behalf, within thirty (30) days after a written
claim or request has been received by the Company, the Indemnitee may at any
time thereafter bring suit against the Company to recover the unpaid amount
of the claim or request and if successful in whole or in part, the Indemnitee
shall be entitled to be paid also the Expenses of prosecuting such suit. The
Company shall have the right to recoup from the Indemnitee the amount of any
item or items of Expenses theretofore paid by the Company pursuant to this
Agreement, to the extent such Expenses are not reasonable in nature or
amounts; provided, however, that the Company shall
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<PAGE>
have the burden of proving such Expenses to be unreasonable. The burden of
proving that the Indemnitee is not entitled to indemnification for any other
reason shall be upon the Company.
5. Subrogation. In the event of payment under this Agreement,
the Company shall be subrogated to the extent of such payment to all of the
rights of recovery of the Indemnitee, who shall execute all papers required
and shall do everything that may be necessary to secure such rights,
including the execution of such documents necessary to enable the Company
effectively to bring suit to enforce such rights.
6. Exclusions. The Company shall not be liable under this Agreement to
pay any Expenses in connection with any claim made against the Indemnitee:
(a) to the extent that payment is actually made to the Indemnitee
under a valid, enforceable and collectible insurance policy;
(b) to the extent that the Indemnitee is indemnified and actually
paid otherwise than pursuant to this Agreement;
(c) in connection with a judicial action by or in the right of the
Company, in respect of any claim, issue or matter as to which the Indemnitee
shall have been adjudged to be liable for negligence or misconduct in the
performance of his duty to the Company unless and only to the extent that any
court in which such action was brought shall determine upon application that,
despite the adjudication of liability but in view of all the circumstances of
the case, the Indemnitee is fairly and reasonably entitled to indemnity for
such expenses as such court shall deem proper;
(d) if it is proved by final judgment in a court of law or other
final adjudication to have been based upon or attributable to the
Indemnitee's in fact having gained any personal profit or advantage to which
he was not legally entitled;
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(e) for a disgorgement of profits made from the purchase and sale
by the Indemnitee of securities pursuant to Section 16(b) of the Securities
Exchange Act of 1934 and amendments thereto or similar provisions of any
state statutory law or common law;
(f) brought about or contributed to by the dishonesty of the
Indemnitee seeking payment hereunder; however, notwithstanding the foregoing,
the Indemnitee shall be protected under this Agreement as to any claims upon
which suit may be brought against him by reason of any alleged dishonesty on
his part, unless a judgment or other final adjudication thereof adverse to
the Indemnitee shall establish that he committed (i) acts of active and
deliberate dishonesty, (ii) with actual dishonest purpose and intent, (iii)
which acts were material to the cause of action so adjudicated; or
(g) for any judgment, fine or penalty which the Company is
prohibited by applicable law from paying as indemnity or for any other
reason.
7. Indemnification of Expenses of Successful Party. Notwithstanding
any other provision of this Agreement, to the extent that the Indemnitee has
been successful on the merits or otherwise in defense of any Proceeding or in
defense of any claim, issue or matter therein, including dismissal without
prejudice, Indemnitee shall be indemnified against any and all Expenses
incurred in connection therewith.
8. Partial Indemnification. If the Indemnitee is entitled under any
provision of this Agreement to indemnification by the Company for some or a
portion of Expenses, but not, however, for the total amount thereof, the
Company shall nevertheless indemnify the Indemnitee for the portion of such
Expenses to which the Indemnitee is entitled.
9. Advance of Expenses. Expenses incurred by the Indemnitee in
connection with any Proceeding, except the amount of any settlement, shall be
paid by the Company in advance upon request of the Indemnitee that the
Company pay such Expenses. The Indemnitee hereby undertakes to repay to the
Company the amount of any Expenses theretofore paid by the
5
<PAGE>
Company to the extent that it is ultimately determined that such Expenses
were not reasonable or that the Indemnitee is not entitled to
indemnification.
10. Approval of Expenses. No Expenses for which indemnity shall be
sought under this Agreement, other than those in respect of judgments and
verdicts actually rendered, shall be incurred without the prior consent of
the Company, which consent shall not be unreasonably withheld.
11. Notice of Claim. The Indemnitee, as a condition precedent to his
right to be indemnified under this Agreement, shall give to the Company
notice in writing as soon as practicable of any claim made against him for
which indemnity will or could be sought under this Agreement. Notice to the
Company shall be given at its principal office and shall be directed to the
Corporate Secretary (or such other address as the Company shall designate in
writing to the Indemnitee); notice shall be deemed received if sent by
prepaid mail properly addressed, the date of such notice being the date
postmarked. In addition, the Indemnitee shall give the Company such
information and cooperation as it may reasonably require and as shall be
within the Indemnitee's power.
12. Notice to Insurers. If, at the time of the receipt of a notice
of a claim pursuant to Section 11 hereof, the Company has director and
officer liability insurance in effect, the Company shall give prompt notice
of the commencement of such proceeding to the insurers in accordance with the
procedures set forth in the respective policies. The Company shall
thereafter take all necessary or desirable action to cause such insurers to
pay, on behalf of the Indemnitee, all amounts payable as a result of such
proceeding in accordance with the terms of such policies.
13. Mutual Acknowledgment. Both the Company and Indemnitee
acknowledge that in certain instances, Federal law or applicable public
policy may prohibit the Company from indemnifying its directors and officers
under this Agreement or otherwise. Indemnitee
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<PAGE>
understands and acknowledges that the Company has undertaken or may be
required in the future to undertake with the Securities and Exchange
Commission to submit the question of indemnification to a court in certain
circumstances for a determination of the Company's right under public policy
to indemnify Indemnitee.
14. Counterparts. This Agreement may be executed in any number of
counterparts, all of which taken together shall constitute one instrument.
15. Indemnification Hereunder Not Exclusive. Nothing herein shall be
deemed to diminish or otherwise restrict the Indemnitee's right to
indemnification under any provision of the Certificate of Incorporation or
By-Laws of the Company and amendments thereto or under law.
16. Governing Law. This Agreement shall be governed by
and construed in accordance with Delaware law.
17. Saving Clause. Wherever there is conflict between any provision
of this Agreement and any applicable present or future statute, law or
regulation contrary to which the Company and the Indemnitee have no legal
right to contract, the latter shall prevail, but in such event the affected
provisions of this Agreement shall be curtailed and restricted only to the
extent necessary to bring them within applicable legal requirements.
18. Coverage. The provisions of this Agreement shall apply with
respect to the Indemnitee's service as an [Officer/Director] of the Company
prior to the date of this Agreement and with respect to all periods of such
service after the date of this Agreement, even though the Indemnitee may have
ceased to be an [Officer/Director] of the Company.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and signed as of the day and year first above written.
FIRSTWORLD COMMUNICATIONS, INC.
By:___________________________
Robert E. Randall
Executive Vice President
_____________________________
________________________
[Officer/Director]
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<PAGE>
SCHEDULE OF FIRSTWORLD COMMUNICATIONS, INC. OFFICERS AND DIRECTORS
WHO HAVE ENTERED INTO INDEMNIFICAITON AGREEMENTS
1. DIRECTORS:
a. Donald L. Sturm
b. Robert E. Randall
c. C. Kevin Garland
d. James O. Spitzenberger
e. Rodney D. Malcolm
f. Melanie Sturm
g. John C. Stiska
2. OFFICERS:
a. Robert Cerasoli
b. John Lewis
c. G. Bradford Saunders
d. Andrew B. Taubman
e. Eric Hyde
f. Dan Brown
g. Jim Moriarty
h. Dennis Mulroy
i. Sharon Salisbury
j. Jim Schwartz
k. Deb Siegle
l. Lori Tappe
m. Kevin Timpane
n. Bob Wilson
o. Jim Zures
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SPECTRANET INTERNATIONAL
FOUNDERS' SALE AGREEMENT
THIS FOUNDERS' SALE AGREEMENT (the "Agreement") is made as of January 31,
1997 by and among SpectraNet International, a California corporation (the
"Company"), purchasers of at least 100,000 shares of the Company's Series C
Preferred Stock under that certain Series C Preferred Stock Purchase
Agreement dated January 31, 1997 (collectively, the "Major Investors") and
Renney Senn, David Duffie, Robert Cerasoli, Robert Randall, William Johnson,
and Javier Alverde (each a "Founder" and collectively, the "Founders").
RECITALS
WHEREAS, the Major Investors have expressed an interest in acquiring
shares of the Company's Series C Preferred Stock (the "Series C Preferred").
WHEREAS, the Founders desire to grant the Major Investors certain rights
of first offer and rights to participate, upon the terms and conditions set
forth in this Agreement, in certain subsequent sales of the Company's capital
stock made by the Founders, in order to induce the Major Investors to acquire
shares of the Series C Preferred.
NOW, THEREFORE, in consideration of the foregoing and the promises and
covenants contained herein, the sufficiency of which is hereby acknowledged,
the parties agree as follows:
SECTION 1
DEFINITIONS
1.1 Certain Definitions. For purposes of this Agreement, the following
terms have the following meanings:
(a) "Common Stock Equivalents" shall mean the Company's Common
Stock and shares of Common Stock issued or issuable upon (i) exercise of
outstanding options, warrants or other securities convertible into or
exercisable for Common Stock, and (ii) conversion of the Company's
outstanding Preferred Stock.
(b) "Right of First Offer" means the right of first offer provided
for in Section 2.
(c) "Stock" means shares of any class or series of capital stock
of the Company now held or hereafter acquired by the Founders. The number
of shares of Stock owned
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by the Founders are set forth on Exhibit A, which Exhibit may be
amended from time to time by the Company to reflect changes in the
number of shares owned by the Founders.
(d) "Offered Stock" means all Stock proposed to be transferred
(other than by Exempt Transfer as defined below) by a Founder or Founders.
(e) "Exempt Transfer" shall mean:
(i) Any pledge of Stock made pursuant to a bona fide loan
transaction that creates a mere security interest; any transfer to any
Founder's ancestors, descendants or spouse or to trusts for the
benefit of such persons or the Founder; or any bona fide gift;
provided that the pledgee, transferee or donee shall enter into a
written agreement to be bound by and comply with all provisions of
this Agreement. Such transferred stock shall remain "Stock"
hereunder, and such pledgee, transferee or donee shall be treated as
a "Founder" for purposes of this Agreement;
(ii) Any transfer by a Founder pursuant to a transaction in
which the Company is merged or consolidated with or into any other
entity and where the shareholders of the Company immediately prior to
the transaction own less than 50% of the outstanding voting securities
of the Company or the surviving entity immediately after the
transaction;
(iii) Any transfer or transfers by a Founder to another Founder
("Transferee-Founder") of the Company so long as the Transferee-Founder
is, at the time of the transfer, employed by or acting as a consultant
or director of the Company; provided that the transferred stock shall
remain "Stock" hereunder.
(iv) Any sale to the Company;
(v) Any sale prior to which a Founder held less than 1% of the
Company's outstanding Common Stock; and
(vi) Any transfer or transfers by a Founder which in the
aggregate, over the term of this Agreement amount to no more than ten
thousand (10,000) shares of Stock held by a Founder as of the date
hereof.
(f) "Founder Pro Rata Share" shall be calculated as of the date of a
Selling Founder's Notice (as defined in Section 2.1) and shall be
determined by dividing:
(i) The number of outstanding shares of Common Stock
Equivalents then held by each Founder other than the Selling Founder;
by
(ii) The number of outstanding shares of Common Stock
Equivalents then held by all Founders other than the Selling Founder.
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<PAGE>
(g) "Major Investor Pro Rata Share" shall be calculated as of the
date of the Selling Founder's Notice and shall be determined by dividing:
(i) The number of outstanding shares of Common Stock
Equivalents then held by each Major Investor; by
(ii) The number of outstanding shares of Common Stock
Equivalents then held by all Major Investors.
(h) "Major Investor Co-Sale Pro Rata Amount" shall be determined as
of the date of the Selling Founder's Notice set forth in Section 2.1 and
shall be determined by multiplying (x) the aggregate number of shares of
Offered Stock set forth in such Notice less the aggregate number of shares
of Offered Stock with respect to which the Founder's Right of First Offer
has been exercised as provided in Section 2.2, by (y) a fraction (i) the
numerator of which is the number of outstanding shares of Common Stock
Equivalents then held by the Major Investor exercising the Major Investor
Co-Sale Right (defined in Section 3.1) and (ii) the denominator of which
is the aggregate number of the then outstanding shares of Common Stock
Equivalents owned of record by all of the Major Investors plus the number
of the then outstanding shares of Common Stock Equivalents owned of record
by the Selling Founder.
SECTION 2
RIGHT OF FIRST OFFER
2.1 Notice of Proposed Transfer. Before any Founder may sell or
otherwise transfer (other than by an Exempt Transfer) any Offered Stock, such
Founder (the "Selling Founder") must comply with the provisions of this
Section 2 and of Section 3 below. Such Founder must give at the same time to
the Company, each of the other Founders and each of the Major Investors, a
written notice signed by the Selling Founder (the "Selling Founder's Notice")
stating (a) the Selling Founder's bona fide intention to transfer such
Offered Stock; (b) the number and type of shares of the Offered Stock; (c)
the bona fide cash price or, in reasonable detail, other consideration, per
share for which the Selling Founder proposes to transfer such Offered Stock
(the "Offered Price"); and (d) the name and address of the proposed third
party purchaser(s) or transferee(s) of the Offered Stock ("Third Party
Purchaser").
2.2 Founder's Right of First Offer.
(a) Founder's Pro Rata Rights. Each Founder will have the Right of
First Offer to purchase up to such Founder's Pro Rata Share of the Offered
Stock as follows. Any Founder desiring to purchase any or all of the
Offered Stock must, within the thirty (30) day period (the "Founder Refusal
Period") commencing on the date the Selling Founder's Notice is given by
the Selling Founder, give written notice to the Selling Founder and to the
Company of such Founder's election to purchase Offered Stock, and the number
of shares of Offered Stock (which may be less than or, in accordance with
Section 2.3(b), more than such Founder's Pro Rata Share of the Offered
Stock) that the Founder desires to purchase.
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(b) Founder's Over-Allotment Rights. If one or more Founders do not
elect to purchase their full Founder Pro Rata Share of the Offered Stock,
the portion that such Founders have not elected to purchase ("Excess Founder
Shares") will be allocated to each Founder electing to purchase in excess
of his Founder Pro Rata Share of the Offered Stock ("Electing Founder") in
accordance with the amount of Excess Founder Shares such Electing Founder
is willing to purchase as set forth in his notice delivered in accordance
with Section 2.2(a). Notwithstanding the preceding sentence, if there are
insufficient Excess Founder Shares such that an Electing Founder is unable
to purchase all of the Excess Founder Shares specified in his notice, the
Excess Founder Shares shall be allocated to each such Electing Founders up
to the number of Excess Founder Shares which such Electing Founder has
indicated that he is willing to purchase as set forth in his notice
delivered in accordance with Section 2.2(a), by multiplying the Excess
Founder Shares by a fraction, the numerator of which is the number of Common
Stock Equivalents then held by such Electing Founder, and the denominator of
which is the number of shares of Common Stock Equivalents then held by all
Electing Founders. Any remaining Excess Founder Shares will be reallocated
among the remaining Electing Founders on the same basis as set forth in the
preceding sentence, on an iterative basis until all Excess Founders Shares
have been allocated.
2.3 Major Investors Right of First Offer.
(a) If following the exercise of the Founder Right of First Offer as
indicated in Section 2.2, there are shares of Offered Stock remaining that
are not subject to purchase by the Founders other than the Selling Founder,
the Selling Founder shall notify the Major Investors in writing of such
remaining Offered Stock and each Major Investor will have the Right of First
Offer to purchase up to such Major Investor's Pro Rata Share of such
remaining Offered Stock (including any Co-Sale Shares substituted for any
Remaining Offered Stock pursuant to Section 3) ("Remaining Offered Stock").
Any Major Investor desiring to purchase any or all of the Remaining Offered
Stock must, within the fifteen (15) day period (the "Major Investor Refusal
Period") commencing on the date the notice is given by the Selling Founder
pursuant to this Section 2.3(a), give written notice to the Selling Founder,
the other Major Investors and to the Company of such Major Investor's
election to purchase Remaining Offered Stock, and the number of shares of
Remaining Offered Stock (which may be less than or, in accordance with
Section 2.3(b), more than such Major Investor's Pro Rata Share of the
Offered Stock) that the Major Investor desires to purchase.
(b) Major Investor Over-Allotment Rights. To the extent that one or
more Major Investors do not exercise their right to purchase their full Major
Investor Pro Rata Share of the Remaining Offered Stock, the portion that such
Major Investors have not elected to purchase ("Excess Major Investor Shares")
will be allocated to each Major Investor electing to purchase in excess of
its Major Investor Pro Rata Share of the Remaining Offered Stock ("Electing
Major Investor") in accordance with the number of Excess Major Investor
Shares such Major Investor has indicated it is willing to purchase as stated
in its notice delivered in accordance with Section 2.3(a). Notwithstanding
the preceding sentence, if there are insufficient Excess Major Investor
Shares such that an Electing Major Investor is unable to purchase all of the
Excess Major
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Investor Shares specified in its notice, the Excess Major Investor Shares
shall be allocated to each Electing Major Investor, up to the number of
Excess Major Investor Shares which such Major Investor has indicated it is
willing to purchase as stated in its notice delivered in accordance with
Section 2.3(a), by multiplying the Excess Major Investor Shares by a
fraction, the numerator of which is the number of multiplying the Excess
Major Investor Shares by a fraction, the numerator of which is the number
of Common Stock Equivalents then held by such Electing Major Investor and
the denominator of which is the number of shares of Common Stock Equivalents
then held by all Electing Major Investors. Any remaining Excess Major
Investor Shares will be reallocated among the remaining Electing Major
Investors on the same basis as set forth in the preceding sentence, on an
iterative basis until all Excess Major Investor Shares have been allocated.
2.4 Purchase Price. The purchase price for the Offered Stock to be
purchased by the Founders and Major Investors exercising their Right of First
Offer under this Agreement will be the Offered Price, and will be payable as
set forth in Section 2.5 hereof.
2.5 Payment. Payment of the purchase price for the Offered Stock
purchased by the Founders exercising their Right of First Offer will be made
within seven (7) days after the close of the Founder Refusal Period. Payment
of the purchase price for the Offered Stock purchased by the Major Investors
exercising their Right of First Offer will be made within seven (7) days
after the close of the Major Investor Refusal Period. Payment of the
purchase price will be made at the option of the Selling Founder (i) in cash,
by check or by promissory note, (ii) by cancellation of indebtedness of the
Selling Founder to such purchasing Founder or purchasing Major Investor, or
(iii) by any combination of the foregoing.
2.6 Selling Founder's Right to Transfer. If the Founders and the Major
Investors do not elect to purchase all of the Offered Stock, then, subject to
Section 3, the Selling Founder may, not later than 120 days following
delivery to the Company and each of the Major Investors of the Selling
Founder's Notice, transfer that portion of the Offered Stock not purchased by
the purchasing Founders or purchasing Major Investors, to any Third Party
Purchaser named in the Selling Founder's Notice, on terms and conditions not
more favorable to the Selling Founder than those described in the Selling
Founder's Notice. Any proposed transfer on terms and conditions more
favorable to the Selling Founder than those described in the Selling
Founder's Notice, as well as any subsequent proposed transfer of any Stock by
the Selling Founder, shall again be subject to the Right of First Offer. If
the Offered Stock is transferred in accordance with the terms and conditions
of this Agreement, then the transferee(s) of the Offered Stock (other than a
Founder) will thereafter hold such Offered Stock free of the Right of First
Offer and Co-Sale Right. If the Offered Stock is not so transferred during
such 120-day period, then the Selling Founder will not transfer any of such
Offered Stock without complying again in full with the provisions of this
Agreement.
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SECTION 3
CO-SALE RIGHT
3.1 Major Investor Co-Sale Right. Prior to the Transfer of any of the
Offered Stock to a Major Investor or a Third Party Purchaser, each Major
Investor who has not exercised its Right of First Offer under Section 2 shall
have a right to participate in the transfer of any Offered Stock to a Major
Investor or a Third Party Purchaser ("Major Investor Co-Sale Right") to the
extent of (but not to a greater extent than) such Major Investor's Co-Sale
Pro Rata Amount. Each Major Investor desiring to exercise the major Investor
Co-Sale Right must, within the Major Investor Refusal Period, give written
notice (the "Exercise Notice") to the Company and the Selling Founder of such
Major Investor's exercise of the Major Investor Co-Sale Right. The Major
Investor shall specify in the Exercise Notice the number of shares (up to its
Major Investor Co-Sale Pro Rata Amount) such Major Investor desires to sell.
The Selling Founder shall inform each Major Investor of the decision of each
other Major Investor promptly upon learning it. The Major Investors agree to
advise each other of their intentions under this Section 3 as soon as
reasonably feasible after receiving the Selling Founder's Notice.
3.2 Sale of Co-Sale Shares.
(a) The Selling Founder shall assign to each Major Investor which
exercises its Right of Co-Sale hereunder as much of his interest in the
agreement of sale with the transferee as such Major Investor shall be
entitled to and shall accept hereunder. To the extent that any transferee
prohibits such assignment or otherwise refuses to purchase shares or other
securities from a Major Investor exercising its Right of Co-Sale hereunder,
the Selling Founder shall not sell to such transferee any stock unless and
until, simultaneously with such sale, the Selling Founder shall purchase
such shares or other securities from such Major Investor for the same
consideration and on the same terms and conditions as the proposed transfer
described in the Selling Founder's Notice.
(b) Each Major Investor which elects to exercise its Co-Sale Right
pursuant to Section 3.1 above shall effect its participation in the sale by
promptly delivering to the Selling Founder for transfer to the transferee
one or more certificates, properly endorsed for transfer, which represent:
(i) the type and number of shares of stock which such Selling
Founder is selling; or
(ii) that number of shares of Series C Preferred Stock which is
at such time convertible into the number of shares of Common Stock
which such Major Investor elects to sell; provided that if the
transferee objects to the delivery of Series C Preferred Stock in lieu
of Common Stock, such Major Investor shall convert such Series C
Preferred Stock into Common Stock and deliver Common Stock as provided
in this Section 3.2(b). The Founders agree to take such actions as may
be necessary to cause the Company to make any such conversion
concurrent with the actual transfer of shares of Co-Sale Shares to
the transferee.
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The stock certificate or certificates that the Major Investor delivers to
the Selling Founder as provided above shall be transferred to the transferee
in consummation of the sale of the Co-Sale Shares pursuant to the terms and
conditions specified in the Exercise Notice, and the Selling Founder shall
concurrently therewith remit to the participating Major Investor that portion
of the sale proceeds to which such Major Investor is entitled by reason of
its participation in such sale.
3.3 Transfer of Shares Upon Failure to Exercise Right of Co-Sale. If
none of the Major Investors elects to exercise the Co-Sale Right with respect
to the offered Stock, the Selling Founder may, not later than 120 days
following delivery to the Company and each of the Major Investors of the
Selling Founder's Notice conclude a transfer of the Offered Stock on terms
and conditions not more favorable to the Selling Founder than those described
in the Selling Founder's Notice. Any proposed transfer on terms and
conditions more favorable to the Selling Founder than those described in the
Selling Founder's Notice, as well as any subsequent proposed transfer of any
Stock by the Selling Founder, shall again be subject to the Right of Co-Sale.
SECTION 4
ADDITIONAL PROVISIONS
4.1 Termination. The rights of the Major Investors (and each Major
Investor individually) under this Agreement shall terminate upon (i) that
point in time when such Major Investor no longer owns 100,000 shares of
Series C Preferred Stock of the Company (as adjusted for subdivisions,
conversions and stock splits), (ii) the closing of a firm commitment
underwritten public offering pursuant to an effective registration statement
under the Securities Act of 1933, as amended, covering the offer and sale of
Common Stock of the Company to the public, or (iii) the occurrence of a
merger or consolidation of the Company with or into, or the sale of all or
substantially all of the Company's assets to another entity, unless the
shareholders of the Company shall own at least 51% of the capital stock of
the surviving entity immediately after such merger, consolidation or sale.
4.2 Legends. Each certificate representing shares of Common Stock owned
by a Founder shall be endorsed with the following legend:
"THE SALE OR TRANSFER OF THE SECURITIES REPRESENTED
BY THIS CERTIFICATE IS SUBJECT TO THE TERMS AND CONDITIONS
OF A FOUNDERS' SALE AGREEMENT BY AND AMONG THE SHAREHOLDER,
THE CORPORATION AND CERTAIN OTHER SHAREHOLDERS OF THE
CORPORATION. COPIES OF SUCH AGREEMENT MAY BE OBTAINED UPON
WRITTEN REQUEST OF THE SECRETARY OF THE CORPORATION."
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4.3 Legend Removal. The legend referred to in Section 4.2 shall be
removed upon termination of this Agreement in accordance with the provisions
of Section 4.1 above.
4.4 Stop Transfer Instructions. Each Founder agrees, to ensure
compliance with the restrictions referred to herein, that the Company may
issue appropriate "stop transfer" certificates or instructions and that, if
the Company transfers its own securities, it may make appropriate notations
to the same effect in its records.
SECTION 5
MISCELLANEOUS
5.1 Entire Agreement. This Agreement 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.
5.2 Notice. All notices and other communications required or permitted
hereunder to a Major Investor or the Founders shall be in writing and be
deemed to have been duly given when deposited in the United States mail by
registered, certified or express mail or deposited with Federal Express or
United Parcel Service for overnight delivery, addressed to such Major
Investor's or Founder's address as shall have been furnished to the Company
in writing.
5.3 Successors and Assigns. This Agreement and the rights and
obligations of the parties hereunder shall inure to the benefit of, and be
binding upon, their respective successors, assigns and legal representatives.
5.4 Amendments or Waivers. This Agreement may not be amended, waived,
discharged or terminated other than by written instrument signed by the party
against whom enforcement of any such amendment, waiver, discharge or
termination is sought; provided, however, that the Major Investors who are
holders of a majority of the shares of Series C Preferred held by the Major
Investors may waive, discharge, terminate, modify or amend, on behalf of all
Major Investors, any provision hereof.
5.5 Counterparts. This Agreement may be executed in any number of
counterparts, all of which together shall constitute one instrument, and each
of which may be executed by less than all of the parties to this Agreement.
5.6 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. In such event, the parties shall negotiate, in good
faith, a valid, legal and enforceable substitute provision which most nearly
effects the intent of the parties in entering into this Agreement.
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5.7 Governing Law. The Agreement shall be governed by and construed in
accordance with the laws of the State of California as applied to agreements
between California residents entered and performed in California.
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IN WITNESS WHEREOF, the parties have executed this Founders' Sale
Agreement as of the date first above written.
COMPANY:
SPECTRANET INTERNATIONAL
/s/ RENNEY E. SENN
- ---------------------------------
By: Renney E. Senn
Title: President and Chief Executive Officer
FOUNDERS:
/s/ RENNEY E. SENN
- ---------------------------------
Renney Senn
/s/ DAVID DUFFIE
- ---------------------------------
David Duffie
/s/ ROBERT CERASOLI
- ---------------------------------
Robert Cerasoli
/s/ ROBERT RANDALL
- ---------------------------------
Robert Randall
/s/ WILLIAM JOHNSON
- ---------------------------------
William Johnson
/s/ JAVIER ALVERDE
- ---------------------------------
Javier Alverde
MAJOR INVESTORS:
COLORADO SPECTRA ONE, LLC
/s/ DONALD STURM
- ---------------------------------
By: Donald Sturm, Managing Member
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BKP PARTNERS, L.P.
/s/ BOB K. PRYT
- ---------------------------------
By: Bob K. Pryt
Title: General Partner
CHARLES MATHEWSON TRUST
/s/ CHARLES MATHEWSON
- ---------------------------------
By: Charles Mathewson, Trustee
/s/ JOSEPH RITCHIE
- ---------------------------------
Joseph Ritchie
/s/ DAVID SOLOMON
- ---------------------------------
David Solomon
-11-
<PAGE>
EXHIBIT 10.23
SYSTEM ACQUISITION AGREEMENT Ser. No. 97-0183
- --------------------------------------------------------------------------------
SYSTEM ACQUISITION AGREEMENT
THIS SYSTEM ACQUISITION AGREEMENT (the "AGREEMENT") is hereby entered
into between ACE*COMM Corporation ("ACE*COMM") located at 704 Quince Orchard
Road, Gaithersburg Maryland 20878 and SpectraNet International Inc.
("SPECTRANET") with offices at 9383 Genesee Avenue, Suite 200 San Diego, CA
92121 on the following terms and conditions:
Article I.
DEFINITIONS
"CUSTOM WORK PRODUCT" means (i) all original work product arising out of
professional services rendered by ACE*COMM hereunder including, without
limitation, functional and technical design documentation, software programs,
modules, routines, algorithms and associated user documentation, authorized
custom enhancements, modifications, interfaces and changes to Third Party
Software Products, Standard Software Products or Embedded Software in
furtherance of the Specifications, including without limitation the software
products and functionality described in the Gap Analysis, and (ii) all new
versions, upgrades, improvements, fixes and/or patch-tapes with respect to
the foregoing delivered by ACE*COMM to SpectraNet pursuant to the Maintenance
Agreement. Custom Work Product does not include any Embedded Software,
Standard Software Products or Third Party Software Products.
"DELIVERABLES" means (i) all equipment, cabling, Third Party Software
Products, Standard Software Products, Embedded Software, Custom Work Product,
documentation, goods, supplies, services, training, "know how," technology or
other things provided under this Agreement by or through ACE*COMM, and (ii)
with respect to the foregoing equipment, cabling, goods, supplies, all
replacement parts and components, all new versions, upgrades, improvements,
fixes and/or patch-tapes delivered by ACE*COMM to SpectraNet pursuant to the
Maintenance Agreement.
"EMBEDDED SOFTWARE" means (i) any pre-existing computer software
programs, modules, routines, algorithms and related documentation owned by
ACE*COMM and provided to SpectraNet for the purpose of incorporating or
"embedding" it in whole or in part into Custom Work Product, and (ii) all new
versions, upgrades, improvements, fixes and/or patch-tapes with respect to
the foregoing delivered by ACE*COMM to SpectraNet pursuant to the Maintenance
Agreement.
"GAP ANALYSIS" means the "SpectraNet Functional Description and Phase
List" attached hereto as Exhibit B and which document has the serial number
N97-0183.
"MAINTENANCE AGREEMENT" means that certain Support and Maintenance
Agreement by and between ACE*COM and SpectraNet dated as of the date hereof.
"MAJOR ALARM" means a warranty call under Section 11 concerning an
error, malfunction or other problem with a Deliverable covered by warranty
that prevents the Deliverable from
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operating at a level of Substantial Functionality. "Minor Alarm" means any
warranty call that is not a Major Alarm.
"SOFTWARE" means, collectively, the Third Party Software Products, the
Standard Software Products, Embedded Software and the Custom Work Products.
"SPECIFICATIONS" means all descriptions of Deliverables, including
associated functional and technical designs, drawings and samples included in
ACE*COMM's proposal, the Statement of Work, the Gap Analysis, ACE*COMM's
existing product documentation and any other material information created or
specifically adopted by ACE*COMM as the basis for discharging its
responsibilities hereunder. The order of precedence for such documents shall
be (i) the Statement of Work, (ii) the Gap Analysis, (iii) ACE*COMM's
existing product documentation and (iv) all other applicable documentation.
"STANDARD SOFTWARE PRODUCTS" means (i) all computer software programs
and related documentation owned by ACE*COMM and itemized on the Statement of
Work and provided to SpectraNet in a form generally available to the public
without substantial customization or modification, and (ii) all new versions,
upgrades, improvements, fixes and/or patch-tapes with respect to the
foregoing delivered by ACE*COMM to SpectraNet pursuant to the Maintenance
Agreement.
"STATEMENT OF WORK" means the attached description of professional
services, software products, equipment and devices, project work schedule,
job categories, prices, special payment terms, special license terms, and
other Deliverables or relevant descriptions of what ACE*COMM is to provide
hereunder and which is attached hereto as Exhibit A.
"SUBSTANTIAL FUNCTIONALITY" of a Deliverable means that such Deliverable
operates in accordance with the Specifications such that there are no
material errors or defects in any function that is used or is planned to be
used by SpectraNet and which cannot be accommodated or "worked around"
through relatively minor adjustments in work habits, operating procedures or
otherwise.
"THIRD PARTY SOFTWARE PRODUCTS" means (i) software programs, modules,
routines and related documentation of third party vendors (other than
ACE*COMM), including operating system software and application software, and
(ii) all new versions, upgrades, improvements, fixes and/or patch-tapes with
respect to the foregoing delivered by ACE*COMM to SpectraNet pursuant to the
Maintenance Agreement.
"WARRANTY PERIOD" means, with respect to each of Phase 1, 2 or 3, the
ninety (90) day period commencing upon Acceptance of the Deliverables that
are delivered as part of such phase, such that each of Phase 1, 2 or 3 shall
have separate 90 day Warranty Periods.
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ARTICLE II.
GENERAL UNDERTAKING
1. TERM OF AGREEMENT. The term of this Agreement ("TERM") shall
commence on the date last below written and shall continue in full force and
effect until terminated in accordance with Section 16.
2. SCOPE OF WORK
(a) GENERALLY. ACE*COMM agrees to provide, and SpectraNet agrees to
obtain and pay for, the Deliverables described in the Statement of Work at
the prices set forth therein according to the Specifications and this
Agreement.
(b) CHANGES IN SCOPE OF WORK. SpectraNet may request changes in
the Specifications or the Statement of Work or may request additional or
different work ("CHANGE ORDER"). If any Change Order causes an increase in
the price of, or the time required for performance of, the Statement of Work,
ACE*COMM shall notify SpectraNet of the additional time required for
performance and/or increase in price resulting from the Change Order and
shall proceed with work under the Change Order only upon written approval of
such changed terms and/or prices by SpectraNet. If a Change Order will not
cause an increase in the price of, or the time required for performance of,
the Statement of Work, ACE*COMM shall proceed with the Change Order. Upon the
approval by SpectraNet of the changed terms and/or prices that are caused by
such Change Order, such Change Order shall be included in the applicable
portion of the Specifications and/or Statement of Work.
3. PRICES. Pricing for the Statement of Work is broken down into
three (3) separate phases, as follows:
(a) PHASE 1. The first phase requires ACE*COMM to deliver
SpectraNet's initial business and technical needs, providing a current,
operational version of all of the Deliverables except for the Custom Work
Product, as more fully explained in the Statement of Work. The Standard
Software Products, Embedded Software Products and Third Party Software
Products will include, but not be limited to, the functionality described in
the Statement of Work for Fault Configuration, Accounting, Performance and
Security Management. ACE*COMM shall deliver all of the Phase 1 Deliverables
at the "firm fixed price" set forth in the Statement of Work, provided that
Section 2(b) shall apply to any proposed changes to the Deliverables to be
delivered as part of Phase 1.
(b) PHASE 2. In Phase 2, ACE*COMM shall begin processing
SpectraNet transactions as defined in the Data Processing Agreement and
deliver a current, operational version of all those portions of the Custom
Work Product that are to be delivered as part of Phase 2 as indicated in the
Gap Analysis and as more fully explained in the Statement of Work. ACE*COMM
shall deliver all of the Phase 2 Deliverable at the "firm fixed price" set
forth in the Statement of Work, provided that Section 2(b) shall apply to any
proposed changes to the Deliverables to be delivered as part of Phase 2.
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(c) PHASE 3. In Phase 3, ACE*COMM shall deliver a current,
operational version of all those portions of the Custom Work Product that are
to be delivered as part of Phase 3 as indicated in the Gap Analysis and as
more fully explained in the Statement of Work. ACE*COMM shall deliver all of
the Phase 3 Deliverables at the "firm fixed price" set forth in the Statement
of Work, provided that Section 2(b) shall apply to any proposed changes to
the Deliverables to be delivered as part of Phase 3.
(d) TAXES. SpectraNet shall be responsible for any state and local
sales or use tax based on SpectraNet's payment of fees, and use of the
Software, under this Agreement. ACE*COMM shall be responsible for taxes based
on ACE*COMM's net income, gross income, receipts, capital or net worth as
well as all minimum taxes, doing business taxes and franchise taxes.
4. CERTAIN OUT-OF-POCKET COSTS. Except as otherwise specifically set
forth in this Agreement, prices quoted do not include and SpectraNet shall
reimburse ACE*COMM for its reasonable cost of travel (air & cab fare,
lodging, or auto rental).
5. SHIPPING, RISK OF LOSS, TITLE. Unless otherwise set forth on the
Statement of Work, all equipment purchased by SpectraNet shall be shipped FOB
Gaithersburg, Md. to SpectraNet according to ACE*COMM's (or the
manufacturer's) normal procedures, and SpectraNet shall pay all associated
shipping, insurance and handling charges. Title to all equipment, cabling and
hardware delivered to SpectraNet hereunder shall transfer to SpectraNet
concurrently with SpectraNet's payment to ACE*COMM (or, if applicable, to the
vendor of such equipment, cabling or hardware) with respect to such
equipment, cabling or hardware.
6. INSTALLATION & ACCEPTANCE.
(a) GENERAL. ACE*COMM and SpectraNet shall cooperate to develop
acceptance test procedures ("ATPs") that shall provide guidelines to
determine whether or not the Deliverables substantially perform as set forth
in the applicable Specifications and which ATPs shall be subject to
SpectraNet's approval. The parties acknowledge that nothing contained in the
ATPs is intended to reduce SpectraNet's rights to report any errors or
defects in any Deliverables and have such errors or defects repaired by
ACE*COMM pursuant to this Section 6 and/or Section 11. ACE*COMM shall install
and provide on-site installation assistance for the Deliverables that are to
be delivered as part of Phases 1, 2 and 3 pursuant to the schedule set forth
in the Statement of Work. For each such phase, SpectraNet shall accept or
reject the Deliverables that are part of such phase within 30 days after
ACE*COMM'S successful installation of such Deliverables at the last of the
locations designated by SpectraNet on or before May 15, 1997 to have such
Deliverables installed; provided, however, that such 30 day period shall be
extended by up to 30 days in the event that SpectraNet reports any reasonable
errors or defects in such Deliverables that are not remedied by ACE*COMM
within the initial 30 day period. SpectraNet shall provide ACE*COMM with a
reasonably detailed description of any such errors or defects and the portion
of the Specifications at issue. ACE*COMM shall use all commercially
reasonable efforts to correct such reported error or defect. At the end of
such 30
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day testing period (as extended if applicable), the ATPs shall be executed and
SpectraNet shall accept such Deliverables by written notice to ACE*COMM if
(i) such Deliverables successfully completes each step of the applicable
ATPs, and (ii) such Deliverables do not contain, in SpectraNet's reasonable
judgment, any material and substantial non-conformances when compared to the
applicable Specifications ("ACCEPTANCE" or "ACCEPTED"). If such standards for
Acceptance have not been met, SpectraNet may reject such Deliverables.
Following Acceptance of a Deliverable, any defects in such Deliverable shall
be subject to Section 11.
(b) DECISION NOT TO ACCEPT. If the standards for Acceptance as set
forth in Section 6(a) have not been met with respect to the Deliverables that
are part of either Phase 1 on the one hand, or Phases 2 and 3 on the other
hand, and SpectraNet has rejected such Deliverables, then SpectraNet shall
pay ACE*COMM a maximum of 40% of the license fees and service fees listed in
the Statement of Work payable with respect to the rejected phases. If (i)
SpectraNet has elected to pay the license fees on a monthly payment schedule
as provided for in the Statement of Work, and (ii) at the time of the
rejection of the applicable phase(s), SpectraNet has paid in excess of 40% of
the license fees and service fees for such rejected phase(s) (not including
any accrued interest that is payable or has been paid), then ACE*COMM shall
refund to SpectraNet the amount of any license and/or service fees (together
with any accrued and paid interest) that SpectraNet has paid in excess of 40%
of the license fees and service fees for such rejected phase(s).
7. PAYMENT, INVOICES AND LATE CHARGES. ACE*COMM shall invoice
SpectraNet for the Deliverables pursuant to the payment schedule set forth in
the Statement of Work. The amounts shown on such invoices shall be due within
30 days from SpectraNet's receipt of such invoice. ACE*COMM reserves the
right to delay its performance hereunder without prejudice if amounts are not
paid when due. ACE*COMM retains a purchase money security interest and the
right to assert appropriate liens with respect to all Deliverables until all
amounts due are paid in full. Any late payment shall be subject to any costs
of collection (including reasonable legal fees) and shall bear interest at
the rate of one and one-half (1.5) percent per month or fraction thereof
until paid.
8. TRAINING & DOCUMENTATION. ACE*COMM shall provide training and
technical or user documentation in support of the Deliverables to the extent
and at the prices, if any, set forth on the Statement of Work. Any additional
training or documentation shall be provided at ACE*COMM's then prevailing
rates or at such other rates as the parties may agree with in writing.
9. OWNERSHIP AND LICENSING OF TECHNOLOGY.
(a) GRANT OF LICENSE. Subject to the terms and conditions of this
Agreement, SpectraNet is hereby granted (i) a paid-up, nonexclusive,
perpetual license to use, copy and execute in object code form only the
Standard Software Products, the Embedded Software Products and the Custom
Work Product and, (ii) subject to Section 9(b), a paid-up, nonexclusive,
perpetual sublicense to use, copy and execute in object code form only the
Third Party Software.
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SpectraNet may make as many additional copies as it deems necessary
(including for back-up and archival purposes) but may only use and execute in
a "live production" environment (a) one (1) copy of the Software at a time,
(b) for use by its employees, contractors and temporary employees in support
of SpectraNet's (and its affiliates') internal business operations and not
for purposes of providing "service bureau" services to third parties, (c) for
installation at the single office building (or contiguous set of buildings) at
which the Software is first installed, and (d) for use in connection with the
number of separate subscriber "lines" set forth in the Statement of Work,
which number of subscriber lines may be increased upon payment by SpectraNet
of the applicable expansion fees set forth in the Statement of Work. Any such
back-up and archival copy may be stored away from SpectraNet's site. The
full amount of the license fees payable by SpectraNet with respect to the
license granted hereunder to the Standard Software Products is set forth in
the Statement of Work.
(b) THIRD PARTY SOFTWARE PRODUCTS. The sublicense to the Third
Party Software granted by ACE*COMM pursuant to Section 9(a) shall be granted
to the maximum extent permitted by ACE*COMM's original vendor license
agreements and SpectraNet hereby agrees to be bound and governed by the
terms and conditions of such original vendor license agreements accompanying
such Third Party Software Products or, if no such license agreement is
included, by the vendor's standard license terms generally applicable to the
particular product, provided such terms are typical and ordinary and, in all
cases, do not impose any obligations upon SpectraNet in addition to
SpectraNet's obligations as set forth in this Agreement.
(c) RELOCATION OF SOFTWARE; NETWORK USE. Subject to Article III
of the Maintenance Agreement, the Software may be relocated to any other
SpectraNet location, provided no more than one (1) copy is used and executed
in a "live production" environment at any one time. Notwithstanding the
limitation that the Software may only be installed at a single location, the
system located at such location may be a networked or distributed system
(including a client/server system) and "use," "execute" and "installation" as
such terms are used in this Section 9 shall include use and installation in
connection with such networked or distributed system and access to such
network from remote locations.
(d) TRANSFER OF LICENSE. Such license shall be transferable by
SpectraNet in object code form only pursuant to Section 21 upon the
transferee's written agreement to be bound by the terms and conditions
contained in this Agreement applicable to the license hereunder. Subject to
the release of the Escrow Materials (as defined below) pursuant to
Section 17, the transfer of any license in source code form shall always
require ACE*COMM's prior written approval. Upon any transfer of Software in
any form, SpectraNet shall destroy all copies of the transferred Software in
its possession and cease all further use.
(e) TITLE. Subject only to the licenses granted to SpectraNet
hereunder, ACE*COMM shall retain all right, title and interests in the
Standard Software Products, Embedded Software Products and Custom Work
Product. SpectraNet expressly acknowledges and agrees that in no event shall
Custom Work Product be deemed to constitute "work made for hire" under the
Copyright Act (17 U.S.C. Sec. 101) and, alternatively, SpectraNet hereby
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irrevocably assigns all ownership or other rights it might have in Custom Work
Product to ACE*COMM. This Agreement does not grant to SpectraNet any ownership
interest in the Third Party Software.
(f) SPECTRANET'S DATA. ACE*COMM understands and acknowledges that
SPECTRANET will (i) manage, modify, maintain and update substantial amounts of
pre-existing data and information, and (ii) generate, manage, modify, maintain
and update substantial amounts of additional data and information
(collectively, "SPECTRANET DATA") using the Software. SpectraNet shall retain
all right, title and interest in and to SpectraNet Data. Nothing contained in
this Agreement shall be deemed or construed to limit or prevent SpectraNet from
using the Software (or any other process, program or device) to copy, modify,
sell, license, distribute, transmit, reformat, reconfigure or manipulate
SpectraNet Data in any way. SpectraNet or any employee, third-party
consultant, contractor or subcontractor or temporary employee of SpectraNet may
at any time (including after any termination of this Agreement) access by any
means any program, communications or computer equipment, network and/or
database in which, or in connection with which, SpectraNet Data is then stored
to do any of the foregoing and nothing in this Agreement shall be deemed or
construed to require that SpectraNet use Deliverables by ACE*COMM in order to
access any SpectraNet Data.
10. CONFIDENTIAL INFORMATION.
(a) ACKNOWLEDGMENT OF CONFIDENTIALITY. Each party hereby
acknowledges that it may be exposed to confidential and proprietary information
of the other party including, without limitation, any trade secrets embodied in
the source code for Standard Software Products, the Custom Work Product, the
Embedded Software and other technical information (including functional and
technical specifications, designs, drawings, analysis, research, process,
source code versions of computer programs, algorithms, methods, ideas, "know
how" and the like), business information (sales and marketing research,
materials, plans, accounting and financial information, personnel records and
the like) and other information that has been clearly designated in writing as
confidential ("Confidential Information"). Confidential Information does not
include (i) information previously known or independently developed by the
recipient; (ii) information in the public domain through no wrongful act of the
recipient, or (iii) information received by the recipient from a third party
who was free to disclose it.
(b) COVENANT NOT TO DISCLOSE. With respect to the other party's
Confidential Information, the recipient hereby agrees that during the Term and
at all times thereafter it shall not use, commercialize or disclose such
Confidential Information to any person or entity, except to its own employees
(and in the case of SpectraNet, to its temporary employees and to any
contractors retained to perform data entry or related services) having a "need
to know" (and who are themselves bound by similar nondisclosure restrictions),
and to such other recipients as the other party may approve in a signed writing;
provided, that all such recipients shall have first executed a confidentiality
agreement in a form acceptable to the owner of such information. Each party
shall use at least the same degree of care in safeguarding the other party's
Confidential Information as it uses in safeguarding its own confidential
information. Neither
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party nor any recipient may alter or remove from any software or associated
documentation owned or provided by the other party hereunder, any proprietary,
copyright, trademark or trade secret legend, nor may it attempt to decompile or
reverse engineer such software. The provisions of this Section 10 shall survive
termination of this Agreement.
(c) REMEDIES FOR BREACH OF CONFIDENTIALITY. Each party acknowledges
that the unauthorized use, commercialization or disclosure of the other party's
Confidential Information would cause irreparable harm to such other party. The
parties acknowledge that remedies at law would be inadequate to redress the
actual or threatened unauthorized use, commercialization or disclosure of such
Confidential Information and that a party may seek temporary and permanent
injunctive relief to enforce the foregoing restrictions. Each party shall pay
its own costs and expenses (including attorneys' fees) incurred in any
proceeding arising under this Section 10.
(d) NORMAL USE. Except as otherwise specifically set forth in
Section 9, nothing in this Section 10 shall be deemed to restrict SpectraNet
from using any of SpectraNet's Data or any Deliverable in the ordinary course
of its business it being understood that many employees, subcontractors and
others will use the Confidential Information in completing their duties for
SpectraNet and that it may become necessary for SpectraNet to interface
Confidential Information constituting software to other systems utilized by
SpectraNet, its customers, its suppliers, and its consultants.
11. WARRANTIES.
(a) EQUIPMENT, THIRD PARTY SOFTWARE PRODUCTS. ACE*COMM hereby
assigns to SpectraNet, to the extent assignable, all warranties and indemnities
provided by manufacturers of equipment and associated devices, and by vendors
of Third Party Software Products provided to SpectraNet hereunder. SpectraNet
will look solely to the applicable manufacturer or vendor of Third Party
Software Products for all warranty claims with respect to those items and shall
hold ACE*COMM harmless therefrom; provided, however, that ACE*COMM shall remain
obligated to SpectraNet as set forth below for the performance of the
Deliverables as a system. ACE*COMM warrants that the Equipment and Third Party
Software Product when installed with the other Deliverables will be sufficient
to deliver the service levels and functionality described in the statement of
Work for each applicable delivery date in the Statement of Work.
(b) NONINFRINGEMENT WARRANTY; INDEMNIFICATION. ACE*COMM represents
and warrants that during the Term hereof (i) the Deliverables (not including
the Third Party Software Products), when properly used as contemplated herein
and in the Statement of Work, will not infringe or misappropriate any United
States copyright, trademark, patent, or the trade secrets of any third persons,
and (ii) the use of the Third Party Software Products in combination or in
connection with the remaining Deliverables when properly used as contemplated
herein and in the Statement of Work, will not infringe or misappropriate any
United States copyright, trademark, patent, or the trade secrets of any third
persons. ACE*COMM shall indemnify and hold SpectraNet harmless for any
damages, suits, claims, actions, costs, expenses, settlements arising out of
the breach of ACE*COMM's representation and warranty in the preceding
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sentence provided that (i) ACE*COMM is given prompt written notice of such
claim; (ii) ACE*COMM is given the right to control and direct the
investigation, preparation, defense or settlement of any claim; (iii)
SpectraNet reasonably cooperates with ACE*COMM in the investigation,
preparation, defense or settlement of any claim provided that (1) ACE*COMM
shall reimburse SpectraNet for its reasonable out-of-pocket expenses incurred
in providing such cooperation and (2) the foregoing notwithstanding,
SpectraNet shall be solely responsible for the cost of retaining its own
attorneys after ACE*COMM has taken control of the defense of such claim; and
(iv) SpectraNet is not in material breach of this Agreement, and (v) the
alleged infringement was not caused by SpectraNet's alteration of the product
or use of it in combination with other software, equipment or technology not
supplied or authorized by ACE*COMM. In the event that an injunction is
sought or obtained preventing SpectraNet's use of the Deliverables as
contemplated herein and in the Statement of Work, then in addition to any
other obligations ACE*COMM may have under this Section 11(b), it shall do one
or more of the following, such choice being in ACE*COMM's sole discretion;
(i) defend through litigation or obtain through negotiation the right of
SpectraNet to continue using the product; (ii) rework the product so as to
make it noninfringing while preserving the original functionality and
performance; (iii) replace the product with software having substantially
equivalent functionality and performance, or (iv) terminate this Agreement
with respect to such infringing product upon advance written notice to
SpectraNet and refund an equitable portion of license fees actually paid by
SpectraNet for the infringing product. THESE ARE THE SOLE AND EXCLUSIVE
REMEDIES AVAILABLE FOR BREACH OF THE WARRANTY PROVIDED IN THIS SUBSECTION.
(c) LIMITED PERFORMANCE WARRANTY. ACE*COMM represents and warrants
that during the Warranty Period, all Deliverables (not including the Third
Party Software) shall operate at a level of Substantial Functionality and
shall operate with and/or interface with the Third Party Software at a level
of Substantial Functionality provided that (i) SpectraNet shall provide
notice to ACE*COMM of such failure of the Software to operate at a level of
Substantial Functionality, (ii) the applicable Deliverable is installed and
implemented substantially in accordance with all written user or technical
documentation previously supplied by ACE*COMM; (iii) SpectraNet has properly
installed and paid all applicable fees for all updates made available and
required by ACE*COMM with respect to the Deliverables and SpectraNet has
further installed any updates required by ACE*COMM with respect to any other
equipment or software that materially affect the performance of the
Deliverables; (iv) SpectraNet has properly maintained all associated
equipment, software and environmental conditions substantially in accordance
with applicable Specifications and reasonable industry standards; (v) the
failure to meet Substantial Functionality is not caused directly or
indirectly by equipment or software not supplied or otherwise authorized by
ACE*COMM; (vi) SpectraNet is not in material breach of this Agreement; (vii)
SpectraNet has made no changes (nor permitted any changes to be made) other
than by or with the express approval of ACE*COMM to the Software source code.
Any failure by SpectraNet to satisfy the foregoing conditions shall not be a
breach of this Agreement but shall delay or suspend ACE*COMM's warranty
response obligations set forth in Section 11(d); provided, however, that (a)
any such delay or suspension by ACE*COMM shall not extend the applicable
Warranty Period, and (b) ANY UNAUTHORIZED
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CHANGES TO THE SOFTWARE SOURCE CODE WILL VOID THE WARRANTY PROVIDED UNDER
THIS SUBSECTION.
(d) WARRANTY RESPONSE.
(i) GENERAL. During the Warranty Period, upon being notified
by SpectraNet in accordance with ACE*COMM's standard "trouble report"
procedures (written copies of which have been or shall be provided to
SpectraNet) of a Major Alarm that is covered by the warranty set forth
in Section 11(c), ACE*COMM shall respond by telephone to acknowledge the
Major Alarm within 4 business hours and, with the cooperation of
SpectraNet (including installation of dial-in contact via modem), shall
promptly commence diagnosis and error correction efforts and shall use
all commercially reasonable efforts to correct such Major Alarm.
(ii) MINOR ALARMS. Minor Alarms shall be diagnosed and
corrected by ACE*COMM within a reasonable time by telephone support or
through the issuance of periodic updates. ACE*COMM acknowledges that a
large accumulation of Minor Alarms may collectively be characterized and
treated by SpectraNet as a Major Alarm if not corrected within a
reasonable time. All corrections issued in response to Major Alarms and
Minor Alarms shall during the original Warranty Period only be warranted
against defects to the same extent as the original Deliverable.
(iii) OUT OF POCKET EXPENSES. Out-of-pocket travel expenses
and reasonable costs of labor incurred by ACE*COMM in providing on-site
assistance required to correct problems not covered by warranty shall be
borne by SpectraNet and, in any event SpectraNet shall bear all travel
expense associated with problems that are covered by warranty.
(e) WARRANTY DISCLAIMER. EXCEPT AS SPECIFICALLY PROVIDED IN THIS
SECTION 11, ACE*COMM HEREBY DISCLAIMS WITH RESPECT TO ALL DELIVERABLES
PROVIDED HEREUNDER, ALL EXPRESS AND IMPLIED WARRANTIES, INCLUDING ANY IMPLIED
WARRANTIES OF MERCHANTABILITY, TITLE OR FITNESS FOR A PARTICULAR PURPOSE.
(f) DISCLAIMER REGARDING GOVERNMENTAL LAWS AND REGULATIONS. THE
PARTIES HEREBY AGREE THAT, TO THE EXTENT ANY DELIVERABLE HEREUNDER IS USED
FOR THE PURPOSE OF GENERATING OUTPUT USED IN COMPLYING WITH GOVERNMENTAL LAWS
AND REGULATIONS (INCLUDING TAX LAWS AND REGULATIONS), SPECTRANET SHALL ASSUME
ALL RESPONSIBILITY FOR HAVING THE DELIVERABLES THOROUGHLY TESTED BY
QUALIFIED PROFESSIONALS TO ENSURE THE OUTPUT IS ACCURATE AND COMPLETE,
PROVIDED, HOWEVER, THAT ANY ERRORS DISCOVERED BY SPECTRANET WITH REGARD TO
SUCH OUTPUT SHALL BE SUBJECT TO REPAIR BY ACE*COMM PURSUANT TO THIS SECTION
11.
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12. LIMITATION OF REMEDIES & LIABILITIES. The parties acknowledge that
the following provisions have been negotiated by them and reflect a fair
allocation of risk:
(a) REMEDIES. Except for (i) SpectraNet's Acceptance rights under
Section 6, (ii) certain injunctive relief authorized under Sections 10, 16
and 17 and (iii) indemnification authorized under Sections 11(b), 18, 26 and
27, SpectraNet's sole and exclusive remedies for ACE*COMM's default hereunder
shall be (i) to obtain the repair, replacement or correction of the defective
Deliverable, or, if ACE*COMM reasonably determines that such remedy is not
economically or technically feasible and (ii) to obtain in accordance with
the specific provisions of this Agreement an equitable partial or full refund
of amounts paid with respect to the defective Deliverable.
(b) LIMITATION ON ACE*COMM'S LIABILITY. EXCEPT FOR DAMAGES ARISING
FROM BODILY INJURY CAUSED BY THE NEGLIGENCE OF ACE*COMM, DAMAGES COVERED BY
THE INDEMNIFICATION AUTHORIZED UNDER SECTIONS 11(b), 18 AND 26, AND ANY
INJUNCTIVE RELIEF AUTHORIZED PURSUANT TO THIS AGREEMENT, (i) ACE*COMM SHALL
NOT BE LIABLE FOR ANY AMOUNT EXCEEDING THE PORTION OF THE TOTAL CONTRACT
PRICE ACTUALLY PAID BY SPECTRANET, AND (ii) IN NO EVENT SHALL ACE*COMM BE
LIABLE, WHETHER IN CONTRACT, TORT (INCLUDING NEGLIGENCE) OR OTHERWISE, FOR
ANY INDIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFIT OR
BUSINESS INTERRUPTION EVEN IF ACE*COMM IS NOTIFIED IN ADVANCE OF SUCH
POSSIBILITY) ARISING OUT OF OR PERTAINING TO THE SUBJECT MATTER OF THIS
AGREEMENT.
(c) LIMITATION ON SPECTRANET'S LIABILITY. EXCEPT FOR CHANGE ORDERS
AGREED TO BY THE PARTIES UNDER SECTION 2(b), IN NO EVENT SHALL SPECTRANET BE
LIABLE TO ACE*COMM OR TO ANY THIRD PARTY, WHETHER IN CONTRACT, TORT
(INCLUDING NEGLIGENCE) OR OTHERWISE, FOR ANY INDIRECT, INCIDENTAL OR
CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFIT, BUSINESS INTERRUPTION OR COST
OF COVER EVEN IF SPECTRANET IS NOTIFIED IN ADVANCE OF SUCH POSSIBILITY)
ARISING OUT OF ANY USE BY ACE*COMM OF ANY INFORMATION, DATA, DESIGN, ADVICE
OR OTHER MATERIALS OBTAINED FROM SPECTRANET OR ANY FAILURE BY SPECTRANET TO
DELIVER ANY SUCH INFORMATION, DATA, DESIGN, ADVICE OR OTHER MATERIALS.
Article III.
NOTICES; TERMINATION:
RESOLUTION OF DISPUTES
13. NOTICES. Notices sent to either party shall be effective when
delivered in person or when transmitted in good form by telecopier ("fax")
machine; one (1) day after being sent by
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overnight courier, or two (2) days after being sent by first class mail
postage prepaid to the address set forth below, or to such other address as
the parties may from time to time give notice:
SpectraNet Address: ACE*COMM Address
Mr. John Lewis Mr. S. Joseph Dorr
Vice President, Network Operations Vice President, Net*Comm
SpectraNet International ACE*COMM, Corporation
9383 Genesee Avenue 704 Quince Orchard Road
Suite 200 Suite 100
San Diego, CA 92121 Gaithersburg, MD 20878
14. ARBITRATION. Except for certain injunctive relief authorized under
Sections 10,11, 16 and 17, which may be sought at any time, any dispute
between the parties arising out of or relating to this Agreement or a breach
hereof which dispute is not resolved within 10 days after receipt of notice
by the allegedly breaching party, such dispute shall immediately be referred
for resolution jointly by senior executives of the parties who are authorized
to negotiate a resolution to such dispute. If such individuals are unable to
agree upon a resolution within 20 days after referral of such dispute to them
(such 20 day period together with the preceding 10 day period being referred
to as the "RESOLUTION PERIOD;" provided, however that the Resolution Period
shall in no event be less than 30 days), then either party may, upon notice
to the other party pursuant to Section 13, refer the dispute for final,
binding arbitration to J.A.M.S./Endispute or its successor organization for
arbitration before a panel of three arbitrators (with each party choosing one
arbitrator and the third arbitrator being chosen by the first two
arbitrators) in Washington DC. Such arbitration shall be conducted under the
administrative rules of J.A.M.S./Endispute; provided, however, that in the
event of any conflict between such administrative rules and this Section 14,
the provisions of this Section 14 shall govern. Each party shall bear its own
costs and attorneys' fees with respect to such arbitration. The award of the
arbitrators shall include a written explanation of their decision. The
parties hereby agree that arbitration before J.A.M.S./Endispute pursuant to
this Section 14 shall be the parties' exclusive remedy and that the
arbitration decision and award, if any, shall be final, binding upon, and
enforceable against, the parties, and may be confirmed by the judgment of a
court of competent jurisdiction.
15. CHOICE OF LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE SUBSTANTIVE LAWS OF MARYLAND.
16. TERMINATION.
(a) If SpectraNet materially breaches this Agreement at any time
before it has Accepted either Phase 1,2 or 3, then ACE*COMM may terminate
this Agreement with respect to any Uncompleted Phases (as defined below)
effective no earlier than the expiration of the applicable Resolution Period
upon prior written notice to ACE*COMM. Upon a termination
12
<PAGE>
SYSTEM ACQUISITION AGREEMENT Ser. No. 97-0183
- --------------------------------------------------------------------------------
pursuant to this Section 16(a), SpectraNet shall return or destroy all
Deliverables theretofore delivered by ACE*COMM with respect to any Uncompleted
Phases and SpectraNet shall pay ACE*COMM an aggregate amount for such
Uncompleted Phase that (i) does not exceed the license and service fees for
such Uncompleted Phase as set forth in the Statement of Work, and that (ii)
reasonably reflects ACE*COMM's costs and expenses for performing the work
completed on such Uncompleted Phase as of the date of termination. ACE*COMM
shall refund any amount already paid by SpectraNet that exceeds the amount that
is determined to be owed to ACE*COMM under phrase (ii) of the preceding
sentence. An "UNCOMPLETED PHASE" shall be any of Phase 1, 2 or 3 for which
SpectraNet has not made the final license fee and service fee payment as set
forth in the payment schedule in the Statement of Work. In no event shall
ACE*COMM enjoin or otherwise prevent or seek to prevent any use by SpectraNet
of any Deliverables that have been Accepted by SpectraNet and which use is
otherwise authorized under this Agreement. In the event of any such
unauthorized use of any such Accepted Deliverable by SpectraNet, ACE*COMM shall
be entitled to seek injunctive relief with respect to the unauthorized use,
without posting bond or other security, and without the necessity of proving
actual damages.
(b) Any notice from a party with respect to an alleged breach by the
other party shall conform to the requirements of Section 13 and shall identify
the contract provision at issue and describe in reasonable factual detail how
such party believes the other party has materially violated such provision.
Article IV.
MISCELLANEOUS PROVISIONS
17. SOURCE CODE ESCROW.
(a) ESCROW AGREEMENT. ACE*COMM shall enter into a source code
escrow agreement with Data Securities International, Inc., (the "ESCROW
HOLDER") in the form attached hereto as Exhibit C pursuant to which SpectraNet
shall be a named beneficiary (the "ESCROW AGREEMENT"). ACE*COMM shall
continually maintain such Escrow Agreement. SpectraNet shall be responsible
for any fees due under the Escrow Agreement that are charged by the Escrow
Holder with respect to the Escrow Materials (as defined below) that are being
held for the benefit of SpectraNet. ACE*COMM shall deposit and continually
maintain in escrow with the Escrow Holder a copy of the most current version of
the source code for any and all portions of the Software which have been
Accepted and for which ACE*COMM is authorized to sublicense the source code
(including at a minimum the Standard Software Products, the Embedded Software
and the Custom Work Product) together with all additional relevant
documentation required for an experienced programmer/analyst to reasonably
understand and maintain such portion of the Product, brought up to date to the
date of delivery of such Software (collectively the "ESCROW MATERIALS"), and
ACE*COMM shall continue to update such Escrow Materials as the applicable
software is modified or improved in accordance with this Agreement.
13
<PAGE>
SYSTEM ACQUISITION AGREEMENT Ser. No. 97-0183
- --------------------------------------------------------------------------------
(b) RELEASE EVENTS. The Escrow Materials shall be released to
SpectraNet solely upon the occurrence of one or more of the following "RELEASE
EVENTS":
(i) If ACE*COMM ceases to provide or is unable to continue
to provide its repair, support and maintenance obligations for the
Software under either Section 11 (during the Warranty Period) or
under the Maintenance Agreement.
(ii) If the Escrow Agreement expires or is terminated
without ACE*COMM entering into a new Escrow Agreement and naming a
new Escrow Holder pursuant to Section 17(d).
(iii) If ACE*COMM fails to deposit or maintain with the
Escrow Holder all required Escrow Materials promptly after such Escrow
Materials become available.
(iv) Upon any other breach of this Agreement by ACE*COMM
that is not cured by ACE*COMM within 30 days after notice by
SpectraNet and which breach is determined to be a material breach of
this Agreement by ACE*COMM under an arbitration proceeding pursuant
to Section 16.
(v) If ACE*COMM (a) fails to continue to do business in
the ordinary course, (b) voluntarily or involuntarily dissolves or
winds-up its affairs, (c) becomes insolvent, (d) files for
bankruptcy, makes a general assignment for the benefit of its
creditors, or fails within 30 business days to dismiss any
involuntary proceeding seeking the entry of an order for relief under
any bankruptcy or related laws or the appointment of a receiver on
account of the insolvency of ACE*COMM and ACE*COMM or its successor in
interest fails to perform its obligations under this Agreement within
30 days after such filing or appointment.
(c) LICENSE. Upon the occurrence of any Release Event, SpectraNet
is hereby granted a license to take all actions with respect to such Escrow
Materials reasonably necessary to continue to support, maintain and use the
Software for the purposes authorized under this Agreement.
(d) REPLACEMENT OF ESCROW HOLDER. ACE*COMM shall have the right to
replace Escrow Holder with another qualified escrow holder pursuant to another
escrow agreement substantially similar to the Escrow Agreement. ACE*COMM shall
notify SpectraNet, in writing, of the new escrow holder and shall certify in
writing that a new copy of the Escrow Materials have been deposited with the
new escrow holder. ACE*COMM shall enter into such supplementary agreement(s)
with SpectraNet and the new escrow holder as are necessary to make SpectraNet a
named beneficiary of such new escrow agreement. Upon such change and
replacement, the subsequent escrow holder shall become for all purposes the
Escrow
14
<PAGE>
SYSTEM ACQUISITION AGREEMENT SER. NO. 97-0183
- ------------------------------------------------------------------------------
Holder and the subsequent escrow agreement shall become the Escrow Agreement
for all purposes.
(e) INJUNCTIVE RELIEF. ACE*COMM and SpectraNet each acknowledge
that the release of the Escrow Materials to SpectraNet upon the occurrence of
a Release Event is essential to protect the legitimate business interests of
SpectraNet and that ACE*COMM's or Escrow Holder's failure to release such
Escrow Materials upon the occurrence of the applicable Release Event will
result in irreparable injury to SpectraNet, and that in such event the exact
amount of damages is now and will be difficult to ascertain and the remedies
at law for any such failure would not be reasonable or adequate compensation.
Accordingly, ACE*COMM and SpectraNet agree that if ACE*COMM or Escrow Holder
fail to release the Escrow Materials following the applicable Release Event,
SpectraNet shall be entitled to specific performance and injunctive relief,
without posting bond or other security, and without the necessity of proving
actual damages.
18. INDEPENDENT ACE*COMM STATUS. Each party and its people are
independent contractors in relation to the other party with respect to all
matters arising under this Agreement. Nothing herein shall be deemed to
establish a partnership, joint venture, association or employment
relationship between the parties. Each party shall remain responsible for and
shall indemnify and hold harmless the other party for the withholding and
payment of all Federal, state and local personal income, wage, earnings,
occupation, social security, unemployment, sickness and disability insurance
taxes, payroll levies or employee benefit requirements (under ERISA, state
law or otherwise) now existing or hereafter enacted and attributable to
themselves and their respective people.
19. ENTIRE AGREEMENT, AMENDMENT. This document, the Statement of Work,
the accompanying Specifications and any applicable provisions under Section
25, which are hereby incorporated by reference, constitute the entire
agreement between the parties and supersede all other representations,
understandings or communications, whether written or verbal, with respect to
the subject matter hereof. This Agreement is expressly limited to its terms
and any different or additional provisions of any purchase order, invoice or
similar documentation or printed form are specifically rejected and shall
have no effect. Any amendment, modification or waiver of this Agreement, or
any part hereof, shall be binding upon the parties only if such amendment,
modification or waiver specifically references this agreement and has been
signed by representatives of both parties specifically authorized to execute
such binding amendments. Waiver of any provision of this Agreement in one
instance shall not preclude future enforcement of it in future situations.
20. SEVERABILITY. If any provision hereof is determined by a tribunal
of competent jurisdiction to be illegal or unenforceable, it shall
automatically be deemed conformed to the minimum requirements of law and,
along with all other provisions hereof, shall thereupon be given full force
and effect. Headings are for reference purposes only and have no substantive
effect.
15
<PAGE>
21. ASSIGNMENT, SUBCONTRACTING. Upon the consent of ACE*COMM (which
consent shall not be unreasonably withheld), SpectraNet may transfer or
assign this Agreement, including the licenses granted hereunder, to any
parent, subsidiary or other affiliate controlled by any of the foregoing
(where "control" for purposes of this Section 21 means a 50% ownership
interest); provided, however, that if such transfer or assignment by
SpectraNet is done as part of a public offering of securities by SpectraNet,
by an entity that directly or indirectly controls SpectraNet, or by an entity
directly or indirectly controlled by SpectraNet, then SpectraNet shall
provide written notice to ACE*COMM of such transfer or assignment, but
ACE*COMM's consent to such transfer or assignment shall not be required.
ACE*COMM reserves the right to subcontract discrete portions of the Statement
of Work with SpectraNet's consent, which shall not unreasonably be withheld.
This Agreement is binding upon and is enforceable by the parties and their
authorized successors and assigns. Except as otherwise provided in this
Section 21, neither party may assign this Agreement or any of its rights or
obligations hereunder without the written consent of the other party and any
attempt to do so shall be void and of no legal effect. In any permitted
transfer, assignment or subcontracting of this Agreement, the transferring,
assigning or subcontracting party shall remain liable and responsible for all
transferred, assigned or subcontracted rights and obligations.
22. FAX COUNTERPARTS. A facsimile of this Agreement and notices sent
according to Section 13 generated in good form from a telecopier "fax"
machine (as well as a photocopy thereof) shall be treated as "original"
documents admissible into evidence unless a document's authenticity is
genuinely placed in question.
23. FORCE MAJEURE. Excluding any of SpectraNet's payment obligations
under this Agreement, neither party shall be liable for delays or failure to
perform as a direct result of causes beyond its reasonable control, including
acts of god (such as fire, storm, earthquake), electrical outages, labor
disputes or delay or failure by others to provide proper site or
environmental conditions, or in the performance of any co-contractor or
subcontractors selected by the other party.
24. NONSOLICITATION. During the Term and for a period of one (1) year
thereafter, each party agrees not to solicit, nor attempt to solicit, the
services of any employee of the other party without the prior written consent
of the other party. If this provision is violated, the violating party shall
pay liquidated damages equal to one hundred fifty (150) percent of the
solicited person's annual compensation; provided that upon making such
payment, the violating party shall not be in breach of this Agreement.
25. SECURITY, NO CONFLICTS. Each party agrees to inform the other party
of any information made available to it that is classified or restricted
data, agrees to comply with the security requirements imposed by any state or
local government, or by the United States Government, and shall return all
such material upon request. Each party represents that its participation in
this Agreement does not create any conflict of interest prohibited by the
United States Government or any other domestic or foreign government and
shall promptly notify the other party if any such conflict arises during the
Term.
16
<PAGE>
SYSTEM ACQUISITION AGREEMENT Ser. No. 97-0183
- -------------------------------------------------------------------------------
26. INSURANCE INDEMNITY. ACE*COMM shall maintain during the Term hereof
reasonable insurance protection for ACE*COMM's workers and their work
hereunder and shall to the extent of such coverage indemnify SpectraNet for
bodily injury and physical property damage directly and solely attributable
to the negligent or intentional acts of its employees occurring within the
scope of their employment. SpectraNet shall maintain secure, up-to-date
archival copies of all valuable data, software programs and the like, as well
as adequate liability, casualty and business interruption insurance and
appropriate disaster recovery plans.
27. COMPLIANCE WITH EXPORT REGULATIONS. SpectraNet has or shall obtain
in a timely manner all necessary or appropriate licenses, permits or other
governmental authorizations or approvals; shall indemnify and hold ACE*COMM
harmless from, and bear all expense of, complying with all foreign or
domestic laws, regulations or requirements pertaining to the importation,
exportation, or use of the technology to be developed or provided herein.
SpectraNet shall take no action, nor omit to take any required action, which
would cause either party to violate the Foreign Corrupt Practices Act of 1977
or the U.S. Export Administration Regulations.
17
<PAGE>
SYSTEM ACQUISITION AGREEMENT Ser. No. 97-0183
- -------------------------------------------------------------------------------
IN WITNESS WHEREOF, and intending to be legally bound, the parties
hereto have caused this Agreement to be executed by their duly authorized
representatives.
SpectraNet International Inc. ACE*COMM, Inc.
By: /s/ John W. Lewis By: /s/ S. Joseph Dorr
-------------------------------- ---------------------------------
Name: JOHN W. LEWIS Name: S. Joseph Dorr
-------------------------------- ---------------------------------
Title: Sr. Vice President Title: Vice President
-------------------------------- ---------------------------------
Date: JUNE 19, 1997 Date: May 28, 1997
-------------------------------- ---------------------------------
18
<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>
PERIOD FROM YEAR ENDED
SEPTEMBER 1, 1993 SEPTEMBER 30,
(INCEPTION) TO ---------------------------
SEPTEMBER 30, 1993 1994 1995 1996 1997
--------------------- ----- ----- --------- ---------
<S> <C> <C> <C> <C> <C>
Pre-tax loss from continuing operations $ (23) (418) (908) (3,856) (9,448)
Interest capitalized during the period -- -- -- -- (52)
--- --- --- --------- ---------
(23) (418) (908) (3,856) (9,500)
--- --- --- --------- ---------
Fixed charges:
Interest expense and amortization of debt discount and
premium on all indebtedness -- 53 38 27 1,424
Interest portion of rentals (33% of rent expense) 1 16 24 36 120
--- --- --- --------- ---------
Total fixed charges 1 69 62 63 1,544
--- --- --- --------- ---------
Loss before income taxes and fixed charges (22) (349) (846) (3,793) (7,956)
--- --- --- --------- ---------
--- --- --- --------- ---------
Ratio of earnings to fixed charges n/a n/a n/a n/a n/a
--- --- --- --------- ---------
--- --- --- --------- ---------
Insufficiency of earnings to cover fixed charges $ 23 418 908 3,856 9,500
--- --- --- --------- ---------
--- --- --- --------- ---------
<CAPTION>
NINE MONTHS ENDED
PERIOD FROM PERIOD FROM
SEPTEMBER 1, 1993 JUNE 30, SEPTEMBER 1, 1993
(INCEPTION) TO -------------------- (INCEPTION) TO
SEPTEMBER 30, 1997 1997 1998 JUNE 30, 1998
------------------- --------- --------- -----------------
<S> <C> <C> <C> <C> <C>
Pre-tax loss from continuing operations (14,653) (6,369) (19,260) (33,912)
Interest capitalized during the period (52) -- (218) (270)
------- --------- --------- -------
(14,705) (6,369) (19,478) (34,182)
------- --------- --------- -------
Fixed charges:
Interest expense and amortization of debt discount and
premium on all indebtedness 1,541 242 11,290 12,831
Interest portion of rentals (33% of rent expense) 197 80 80 277
------- --------- --------- -------
Total fixed charges 1,738 322 11,370 13,108
------- --------- --------- -------
Loss before income taxes and fixed charges (12,967) (6,047) (8,108) (21,074)
------- --------- --------- -------
------- --------- --------- -------
Ratio of earnings to fixed charges n/a n/a n/a n/a
------- --------- --------- -------
------- --------- --------- -------
Insufficiency of earnings to cover fixed charges 14,705 6,369 19,478 34,182
------- --------- --------- -------
------- --------- --------- -------
</TABLE>
<PAGE>
EXHIBIT 16.1
[LETTERHEAD OF PRICEWATERHOUSECOOPERS LLP]
August 21, 1998
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C 20549
Ladies and Gentlemen:
Re: FIRSTWORLD COMMUNICATIONS, INC.
We have read the section titled "Change in Accountants" of FirstWorld
Communications, Inc.'s Form S-4 and are in agreement with the statements
contained therein.
Yours very truly,
/s/ PRICEWATERHOUSECOOPERS LLP
-------------------------------
<PAGE>
Schedule 21.1
Subsidiaries of the Registrant
<TABLE>
<CAPTION>
No. Name State of Incorporation Doing Business As
--- ---- ---------------------- -----------------
<S> <C> <C> <C>
1. FirstWorld Anaheim California FirstWorld Anaheim
2. FirstWorld Engineering California FirstWorld Engineering
3. FirstWorld Orange Coast California FirstWorld Orange Coast
4. FirstWorld SGV California FirstWorld SGV
5. FirstWorld SoCal California FirstWorld SoCal
</TABLE>
<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 21, 1998
<PAGE>
EXHIBIT 23.3
CONSENT OF BLUMENFELD & COHEN
[LETTERHEAD OF BLUMENFELD & COHEN]
August 21, 1998
FirstWorld Communications, Inc.
9333 Genesee, Suite 200
San Diego, California 92121
Re: Registration Statement on Form S-4
FirstWorld Communications, Inc.
File No. 333-57829
------------------
Ladies and Gentlemen:
In connection with the registration of $470,000,000 in aggregate
principal amount at maturity of its 13% Senior Discount Notes due 2008 (the
"Exchange Notes") by FirstWorld Communications, Inc., a Delaware corporation
(the "Company"), pursuant to a registration statement on Form S-4 (the
"Registration Statement") filed with the Securities and Exchange Commission
(the "Commission") on June 26, 1998 (File No. 333-57829), as amended by
Amendment No. 1 Filed August 21, 1998, you have requested that we consent to
the use of our name in the Registration Statement.
We consent to your filing this letter as an exhibit to the Registration
Statement and to the reference to our firm contained under the heading "Legal
Matters."
Sincerely,
BLUMENFELD & COHEN
By: /s/ GLENN B. MANISHIN
Glenn B. Manishin, Partner
<PAGE>
===============================================================================
FORM T-1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
STATEMENT OF ELIGIBILITY
UNDER THE TRUST INDENTURE ACT OF 1939 OF A
CORPORATION DESIGNATED TO ACT AS TRUSTEE
CHECK IF AN APPLICATION TO DETERMINE
ELIGIBILITY OF A TRUSTEE PURSUANT TO
SECTION 305(b)(2) |__|
THE BANK OF NEW YORK
(Exact name of trustee as specified in its charter)
New York 13-5160382
(State of incorporation (I.R.S. employer
if not a U.S. national bank) identification no.)
48 Wall Street, New York, N.Y. 10286
(Address of principal executive offices) (Zip code)
FIRSTWORLD COMMUNICATIONS, INC.
(Exact name of obligor as specified in its charter)
California 33-0521976
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
9333 Genesee Avenue, Suite 200
San Diego, California 92121
(Address of principal executive offices) (Zip code)
------------------------
13% Senior Discount Notes due 2008
(Title of the indenture securities)
===============================================================================
<PAGE>
1. GENERAL INFORMATION. FURNISH THE FOLLOWING INFORMATION AS TO THE TRUSTEE:
(a) NAME AND ADDRESS OF EACH EXAMINING OR SUPERVISING AUTHORITY TO WHICH
IT IS SUBJECT.
- -------------------------------------------------------------------------------
Name Address
- -------------------------------------------------------------------------------
Superintendent of Banks of the 2 Rector Street, New York,
State of New York N.Y. 10006, and Albany, N.Y. 12203
Federal Reserve Bank of New York 33 Liberty Plaza, New York,
N.Y. 10045
Federal Deposit Insurance Corporation Washington, D.C. 20429
New York Clearing House Association New York, New York 10005
(b) WHETHER IT IS AUTHORIZED TO EXERCISE CORPORATE TRUST POWERS.
Yes.
2. AFFILIATIONS WITH OBLIGOR.
IF THE OBLIGOR IS AN AFFILIATE OF THE TRUSTEE, DESCRIBE EACH SUCH
AFFILIATION.
None.
16. LIST OF EXHIBITS.
EXHIBITS IDENTIFIED IN PARENTHESES BELOW, ON FILE WITH THE COMMISSION, ARE
INCORPORATED HEREIN BY REFERENCE AS AN EXHIBIT HERETO, PURSUANT TO RULE
7A-29 UNDER THE TRUST INDENTURE ACT OF 1939 (THE "ACT") AND 17 C.F.R.
229.10(d).
1. A copy of the Organization Certificate of The Bank of New York
(formerly Irving Trust Company) as now in effect, which contains the
authority to commence business and a grant of powers to exercise
corporate trust powers. (Exhibit 1 to Amendment No. 1 to Form T-1
filed with Registration Statement No. 33-6215, Exhibits 1a and 1b to
Form T-1 filed with Registration Statement No. 33-21672 and Exhibit 1
to Form T-1 filed with Registration Statement No. 33-29637.)
4. A copy of the existing By-laws of the Trustee. (Exhibit 4 to Form T-1
filed with Registration Statement No. 33-31019.)
6. The consent of the Trustee required by Section 321(b) of the Act.
(Exhibit 6 to Form T-1 filed with Registration Statement No.
33-44051.)
7. A copy of the latest report of condition of the Trustee published
pursuant to law or to the requirements of its supervising or examining
authority.
-2-
<PAGE>
SIGNATURE
Pursuant to the requirements of the Act, the Trustee, The Bank of New York,
a corporation organized and existing under the laws of the State of New York,
has duly caused this statement of eligibility to be signed on its behalf by the
undersigned, thereunto duly authorized, all in The City of New York, and State
of New York, on the 25th day of June, 1998.
THE BANK OF NEW YORK
By: /S/ JAMES W.P. HALL
-----------------------
Name: JAMES W.P. HALL
Title: VICE PRESIDENT
<PAGE>
Exhibit 7
Consolidated Report of Condition of
THE BANK OF NEW YORK
of 48 Wall Street, New York, N.Y. 10286
And Foreign and Domestic Subsidiaries,
a member of the Federal Reserve System, at the close of business December 31,
1997, published in accordance with a call made by the Federal Reserve Bank of
this District pursuant to the provisions of the Federal Reserve Act.
<TABLE>
<CAPTION>
<S> <C>
Dollar Amounts
ASSETS in Thousands
Cash and balances due from depos-
itory institutions:
Noninterest-bearing balances and
currency and coin ......................................... $ 5,742,986
Interest-bearing balances .................................. 1,342,769
Securities:
Held-to-maturity securities ................................ 1,099,736
Available-for-sale securities .............................. 3,882,686
Federal funds sold and Securities pur-
chased under agreements to resell........................... 2,568,530
Loans and lease financing
receivables:
Loans and leases, net of unearned
income ................................................... 35,019,608
LESS: Allowance for loan and
lease losses ............................................. 627,350
LESS: Allocated transfer risk
reserve................................................... 0
Loans and leases, net of unearned
income, allowance, and reserve............................ 34,392,258
Assets held in trading accounts .............................. 2,521,451
Premises and fixed assets (including
capitalized leases) ........................................ 659,209
Other real estate owned ...................................... 11,992
Investments in unconsolidated
subsidiaries and associated
companies .................................................. 226,263
Customers' liability to this bank on
acceptances outstanding .................................... 1,187,449
Intangible assets ............................................ 781,684
Other assets ................................................. 1,736,574
-----------
Total assets ................................................. $56,153,587
-----------
-----------
LIABILITIES
Deposits:
In domestic offices ........................................ $27,031,362
Noninterest-bearing ........................................ 11,899,507
Interest-bearing ........................................... 15,131,855
In foreign offices, Edge and
Agreement subsidiaries, and IBFs ........................... 13,794,449
Noninterest-bearing ........................................ 590,999
Interest-bearing ........................................... 13,203,450
Federal funds purchased and Securities
<PAGE>
sold under agreements to repurchase ........................ 2,338,881
Demand notes issued to the U.S.
Treasury ................................................... 173,851
Trading liabilities .......................................... 1,695,216
Other borrowed money:
With remaining maturity of one year
or less .................................................. 1,905,330
With remaining maturity of more than
one year through three years.............................. 0
With remaining maturity of more than
three years .............................................. 25,664
Bank's liability on acceptances exe-
cuted and outstanding ...................................... 1,195,923
Subordinated notes and debentures ............................ 1,012,940
Other liabilities ............................................ 2,018,960
-----------
Total liabilities ............................................ 51,192,576
-----------
-----------
EQUITY CAPITAL
Common stock ................................................. 1,135,284
Surplus ...................................................... 731,319
Undivided profits and capital
reserves ................................................... 3,093,726
Net unrealized holding gains
(losses) on available-for-sale
securities ................................................. 36,866
Cumulative foreign currency transla-
tion adjustments ........................................... ( 36,184)
Total equity capital ......................................... 4,961,011
-----------
Total liabilities and equity
capital .................................................... $56,153,587
-----------
-----------
</TABLE>
I, Robert E. Keilman, Senior Vice President and Comptroller of the
above-named bank do hereby declare that this Report of Condition has been
prepared in conformance with the instructions issued by the Board of
Governors of the Federal Reserve System and is true to the best of my
knowledge and belief.
Robert E. Keilman
We, the undersigned directors, attest to the correctness of this Report
of Condition and declare that it has been examined by us and to the best of
our knowledge and belief has been prepared in conformance with the
instructions issued by the Board of Governors of the Federal Reserve System
and is true and correct.
Thomas A. Renyi
Alan R. Griffith Directors
J. Carter Bacot
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 105,621,691
<SECURITIES> 145,425,182
<RECEIVABLES> 299,863
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 253,975,125
<PP&E> 32,687,981
<DEPRECIATION> 1,840,639
<TOTAL-ASSETS> 286,052,980
<CURRENT-LIABILITIES> 4,984,108
<BONDS> 236,128,267
0
0
<COMMON> 2,605
<OTHER-SE> 77,461,515
<TOTAL-LIABILITY-AND-EQUITY> 286,052,980
<SALES> 649,353
<TOTAL-REVENUES> 659,353
<CGS> 0
<TOTAL-COSTS> 5,497,316
<OTHER-EXPENSES> 4,756,496
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,071,636
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 4,730,667
<CHANGES> 0
<NET-INCOME> (23,990,241)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
<PAGE>
Exhibit 99.1
LETTER OF TRANSMITTAL
TO TENDER FOR EXCHANGE
13% SENIOR DISCOUNT NOTES DUE 2008
of
FIRSTWORLD COMMUNICATIONS, INC.
PURSUANT TO THE PROSPECTUS DATED ___________ ____, 1998
- --------------------------------------------------------------------------------
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M. NEW YORK
CITY TIME, ON ___________ ____, 1998, UNLESS EXTENDED.
- --------------------------------------------------------------------------------
THE EXCHANGE AGENT FOR THE EXCHANGE OFFER IS:
THE BANK OF NEW YORK
<TABLE>
<CAPTION>
<S> <C> <C>
BY HAND OR OVERNIGHT DELIVERY: FACSIMILE TRANSMISSIONS: BY REGISTERED OR CERTIFIED MAIL:
The Bank of New York (Eligible Institutions Only) The Bank of New York
101 Barclay Street 101 Barclay Street, 7E
Corporate Trust Services Window (212) 815-6339 New York, New York 10286
Ground Level CONFIRM BY TELEPHONE Attn.: Reorganization Section,
New York, New York 10286 or for Information Call: Nathalie Simon
Attn.: Reorganization Section,
Nathalie Simon (212) 815-5788
</TABLE>
DELIVERY OF THIS LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET
FORTH ABOVE OR TRANSMISSION OF THIS LETTER OF TRANSMITTAL VIA FACSIMILE TO A
NUMBER OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE A VALID DELIVERY.
The instructions accompanying this Letter of Transmittal should be read
carefully before this Letter of Transmittal is completed.
The undersigned acknowledges receipt of the Prospectus, dated
___________ ___, 1998 (the "Prospectus"), of FirstWorld Communications, Inc.
(the "Company"), and this Letter of Transmittal (the "Letter of
Transmittal"), which together with the Prospectus constitutes the Company's
offer (the "Exchange Offer") to exchange $1,000 principal amount at maturity
of its 13% Senior Discount Notes due 2008 (the "Exchange Notes"), which have
been registered under the Securities Act of 1933, as amended (the "Securities
Act"), pursuant to a Registration Statement, for each $1,000 principal amount
at maturity of its outstanding 13% Senior Discount Notes due 2008 (the
"Private Notes"), of which $470,000,000 principal amount at maturity is
outstanding. The term "Expiration Date" shall mean 5:00 p.m. New York City
time, on _________ ___, 1998, unless the Company in its reasonable
discretion, extends the Exchange Offer, in which case the term shall mean the
latest date and time to which the Exchange Offer is extended. The term
"Holder" with respect to the Exchange Offer means any person in whose name
Private Notes are registered on the books of the Company or any other person
who has obtained a properly completed bond power from the registered holder.
Capitalized terms used but not defined herein shall have the meaning given to
them in the Prospectus.
This Letter of Transmittal is to be used by holders of Private Notes if
(i) certificates representing Private Notes are to be physically delivered to
the Exchange Agent herewith, (ii) tender of the Private Notes is to be made
by book-entry transfer to the Exchange Agent's account at The Depository
Trust Company (the "Book-Entry Transfer Facility"), pursuant to the
procedures set forth in the section of the Prospectus entitled "The Exchange
Offer -- Procedures for Tendering" by any financial institution that is a
participant in the Book-Entry Transfer Facility and whose name appears on a
security position listing as the owner of Private Notes to the extent
provided herein or (iii) tender of the Private Notes is to be made pursuant
to the guaranteed delivery procedures in the section of the Prospectus
entitled "The Exchange Offer -- Guaranteed Delivery Procedures." See
Instruction 2. Delivery of documents to the Book-Entry Transfer Facility
does not constitute delivery to the Exchange Agent.
<PAGE>
Notwithstanding the foregoing, valid acceptance of the terms of the
Exchange Offer may be effected by a participant in the Book-Entry Transfer
Facility tendering Private Notes through the Book-Entry Transfer Facility's
Automated Tender Offer Program ("ATOP") through the transmission of a
computer-generated message from the Book-Entry Transfer Facility to, and
received by, the Exchange Agent (an "Agent's Message") prior to the
Expiration Date. Accordingly, such participant must electronically transmit
its acceptance to the Book-Entry Transfer Facility through ATOP, and then the
Book-Entry Transfer Facility will edit and verify the acceptance, execute a
book-entry delivery to the Exchange Agent's account at the Book-Entry
Transfer Facility and send an Agent's Message to the Exchange Agent for its
acceptance. By tendering through ATOP, participants in the Book-Entry
Transfer Facility will expressly acknowledge receipt of the Letter of
Transmittal and agree to be bound by its terms and the Company will be able
to enforce such agreement against such Book-Entry Transfer Facility
participants.
The undersigned has completed, executed and delivered this Letter of
Transmittal to indicate the action the undersigned desires to take with respect
to the Exchange Offer. Holders who wish to tender their Private Notes must
complete this Letter of Transmittal in its entirety.
/ / CHECK HERE IF TENDERED PRIVATE NOTES ARE BEING DELIVERED BY
BOOK-ENTRY TRANSFER MADE TO THE ACCOUNT MAINTAINED BY THE EXCHANGE AGENT
WITH THE BOOK-ENTRY TRANSFER FACILITY AND COMPLETE THE FOLLOWING:
Name of Tendering Institution:
-------------------------------------------
Account Number:
----------------------------------------------------------
Transaction Code Number:
-------------------------------------------------
Principal Amount at Maturity of Tendered Private Notes:
------------------
If Holders desire to tender Private Notes pursuant to the Exchange Offer
and (i) time will not permit this Letter of Transmittal, certificates
representing the Private Notes, an Agent's Message or other required
documents to reach the Exchange Agent prior to the Expiration Date or (ii)
the procedures for book-entry transfer cannot be completed prior to the
Expiration Date, such Holders may effect a tender of such Private Notes in
accordance with the guaranteed delivery procedures set forth in the
Prospectus under the caption "The Exchange Offer -- Guaranteed Delivery
Procedures." See Instruction 2 below.
/ / CHECK HERE IF TENDERED PRIVATE NOTES ARE BEING DELIVERED PURSUANT TO A
NOTICE OF GUARANTEED DELIVERY PREVIOUSLY SENT TO THE EXCHANGE AGENT AND
COMPLETE THE FOLLOWING:
Name of Registered or Acting Holder(s):
----------------------------------
Window Ticket Number (if any):
-------------------------------------------
Date of Execution of Notice of Guaranteed Delivery:
----------------------
Name of Eligible Institution that Guaranteed Delivery:
-------------------
If Delivered by Book-Entry Transfer, the Account Number:
-----------------
Transaction Code Number:
-------------------------------------------------
/ / 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.
PLEASE NOTE: THE COMPANY HAS AGREED THAT, FOR A PERIOD OF ONE FULL YEAR
AFTER THE EXPIRATION DATE, IT WILL MAKE COPIES OF THE PROSPECTUS AVAILABLE
TO ANY PARTICIPATING BROKER-DEALER FOR USE IN CONNECTION WITH RESALES OF
THE EXCHANGE NOTES.
Name:
--------------------------------------------------------------------
Address:
-----------------------------------------------------------------
Attention:
---------------------------------------------------------------
2
<PAGE>
List below the Private Notes to which this Letter of
Transmittal relates. If the space provided below is inadequate, the
certificate numbers and principal amount at maturity of Private Notes should
be listed on a separate signed schedule affixed hereto.
PLEASE READ THIS ENTIRE LETTER OF TRANSMITTAL CAREFULLY BEFORE COMPLETING
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
BOX 1
DESCRIPTION OF PRIVATE NOTES
- ------------------------------------------------------------------------------------------------------------------------------------
Name(s) and Address(es) of Registered Private Note Aggregate Principal Principal Amount at Maturity Tendered
Holder(s) of Private Note(s), Exactly as Certificate Amount at Maturity (must be integral multiples of $1,000)**
Name(s) Appear(s) on Private Note Number(s) (Attach Represented by
Certificate(s) (Please fill in if blank) signed list if Certificate(s)*
necessary)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Total
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Need not be completed by Holders tendering by book-entry transfer.
** Unless indicated in the column "Principal Amount at Maturity Tendered," any
tendering Holder of 13% Senior Discount Notes due 2008 will be deemed to
have tendered the entire aggregate principal amount at maturity represented
by the column labeled "Aggregate Principal Amount at Maturity Represented
by Certificate(s)." If the space provided above is inadequate, list the
certificate numbers and principal amounts on a separate schedule and affix
the list to this Letter of Transmittal.
The minimum permitted tender is $1,000 in principal amount at maturity
of 13% Senior Discount Notes due 2008. All other tenders must be in
integral multiples of $1,000.
- --------------------------------------------------------------------------------
- -------------------------------------- -----------------------------------
BOX 2 BOX 3
SPECIAL REGISTRATION INSTRUCTIONS SPECIAL DELIVERY INSTRUCTIONS
(SEE INSTRUCTIONS 4, 5 AND 6) (SEE INSTRUCTIONS 4, 5 AND 6)
To be completed ONLY if To be completed ONLY if
certificates for Private Notes in a certificates for Private Notes
principal amount at maturity not in a principal amount at
tendered, or Exchange Notes issued maturity not tendered, or
in exchange for Private Notes Exchange Notes issued in
accepted for exchange, are to be exchange for Private Notes
issued in a name other than the accepted for exchange, are to be
name appearing in Box 1 above. sent to an address other than
the address appearing in Box 1
above, or if Box 2 is filled in,
to an address other than the
address appearing in Box 2 above.
Issue certificate(s) to: Deliver certificate(s) to:
Name: Name:
------------------------------- ----------------------------
(please print) (please print)
Address: Address:
---------------------------- -------------------------
- ------------------------------------- ----------------------------------
(include zip code) (include zip code)
- ------------------------------------- ----------------------------------
(Tax Identification or (Tax Identification or
Social Security Number) Social Security Number)
- -------------------------------------- -----------------------------------
- --------------------------------------------------------------------------------
BOX 4
BROKER-DEALER STATUS
/ / Check this box if the Beneficial Owner of the Private Notes is a
Participating Broker-Dealer and such Participating Broker-Dealer acquired the
Private Notes for its own account as a result of market-making activities or
other trading activities. If this box is checked, please send a copy of
this Letter of Transmittal to Robert E. Randall, Acting Chief Financial
Officer, via facsimile: (619) 552-8006
- --------------------------------------------------------------------------------
3
<PAGE>
NOTE: SIGNATURES MUST BE PROVIDED BELOW
PLEASE READ ACCOMPANYING INSTRUCTIONS CAREFULLY
Ladies and Gentlemen:
Subject to the terms and conditions of the Exchange Offer, the
undersigned hereby tenders to the Company, the principal amount at maturity
of Private Notes indicated above.
Subject to and effective upon the acceptance for exchange of the
principal amount at maturity of Private Notes tendered in accordance with
this Letter of Transmittal, the undersigned sells, assigns and transfers to,
or upon the order of, the Company all right, title and interest in and to the
Private Notes tendered hereby. The undersigned hereby irrevocably
constitutes and appoints the Exchange Agent as its agent and attorney-in-fact
(with full knowledge that the Exchange Agent also acts as the agent of the
Company in connection with the Exchange Offer) with respect to the tendered
Private Notes with full power of substitution (subject only to the right of
withdrawal described in the Prospectus) to (i) present such Private Notes and
all evidences of transfer and authenticity to, or transfer ownership of, such
Private Notes on the account books maintained by the Book-Entry Transfer
Facility to, or upon, the order of, the Company, (ii) deliver certificates
for such Private Notes to the Company together with all accompanying
evidences of transfer and authenticity to, or upon the order of, the Company
and (iii) present such Private Notes for transfer on the books of the Company
and receive all benefits and otherwise exercise all rights of beneficial
ownership of such Private Notes, all in accordance with the terms of the
Exchange Offer.
The undersigned hereby represents and warrants that the undersigned
has full power and authority to tender, sell, assign and transfer the Private
Notes tendered hereby and that the Company will acquire good, valid and
unencumbered title thereto, free and clear of all liens, restrictions,
charges and encumbrances and not subject to any adverse claims, when the same
are acquired by the Company. The undersigned hereby further represents that
any Exchange Notes acquired in exchange for Private Notes tendered hereby
will have been acquired in the ordinary course of business of the person
receiving such Exchange Notes, whether or not such person is the undersigned,
that neither the undersigned nor any other such person has any arrangement or
understanding with any person to participate in the distribution of such
Exchange Notes and that neither the undersigned nor any such other person is
an "affiliate," as defined in Rule 405 under the Securities Act, of the
Company. In addition, the undersigned and any such person acknowledge that
(a) any person participating in the Exchange Offer for the purpose of
distributing the Exchange Notes must, in the absence of an exemption
therefrom, comply with the registration and prospectus delivery requirements
of the Securities Act in connection with a secondary resale of the Exchange
Notes and cannot rely on the position of the staff of the Securities and
Exchange Commission enunciated in no-action letters and (b) failure to comply
with such requirements in such instance could result in the undersigned or
such person incurring liability under the Securities Act for which the
undersigned or such person is not indemnified by the Company. The undersigned
will, upon request, execute and deliver any additional documents deemed by
the Exchange Agent or the Company to be necessary or desirable to complete
the assignment, transfer and purchase of the Private Notes tendered hereby.
If the undersigned is not a broker-dealer, the undersigned represents that
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 Private Notes that were
acquired as a result of market-making activities or other trading activities,
it 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. Unless otherwise
notified in accordance with the instructions set forth herein in Box 4 under
"Broker-Dealer Status," the Company will assume that the undersigned is not a
Participating Broker-Dealer.
For purposes of the Exchange Offer, the Company shall be deemed to
have accepted validly tendered Private Notes when, as and if the Company has
given notice thereof to the Exchange Agent (such notice if given orally, to
be confirmed in writing).
If any Private Notes tendered herewith are not accepted for exchange
pursuant to the Exchange Offer for any reason, certificates for any such
unaccepted Private Notes will be returned, without expense,
4
<PAGE>
to the undersigned at the address shown below or to a different address as
may be indicated in Box 3 under "Special Delivery Instructions" as promptly
as practicable after the Expiration Date.
All authority conferred or agreed to be conferred by this Letter of
Transmittal shall survive the death, incapacity or dissolution of the
undersigned, and every obligation of the undersigned under this Letter of
Transmittal shall be binding upon the undersigned's heirs, personal
representatives, successors and assigns.
The undersigned understands that tenders of Private Notes pursuant
to the procedures described under the caption "The Exchange Offer --
Procedures For Tendering" in the Prospectus and in the instructions hereto
will constitute a binding agreement between the undersigned and the Company
upon the terms and subject to the conditions of the Exchange Offer, subject
only to withdrawal of such tenders on the terms set forth in the Prospectus
under the caption "The Exchange Offer -- Withdrawal of Tenders."
Unless otherwise indicated in Box 2 under "Special Registration
Instructions" please issue the certificates representing the Exchange Notes
issued in exchange for the Private Notes accepted for exchange and any
certificates for Private Notes not tendered or not exchanged, in the name(s)
of the registered holder of Private Notes appearing in Box 1 above.
Similarly, unless otherwise indicated in Box 3 under "Special Delivery
Instructions," please send the certificates, if any, representing the
Exchange Notes issued in exchange for the Private Notes accepted for exchange
and any certificates for Private Notes not tendered or not exchanged (and
accompanying documents, as appropriate) to the undersigned at the address
shown below in the undersigned's signature(s). In the event that the box
entitled "Special Registration Instructions" and the box entitled "Special
Delivery Instructions" both are completed, please issue the certificates
representing the Exchange Notes issued in exchange for the Private Notes
accepted for exchange in the name(s) of, and return any certificates for
Private Notes not tendered or not exchanged to, the person(s) so indicated.
The undersigned understands that the Company has no obligation pursuant to
the "Special Registration Instructions" and "Special Delivery Instructions"
to transfer any Private Notes from the name of the registered holder(s)
thereof if the Company does not accept for exchange any of the Private Notes
so tendered.
Holders who wish to tender their Private Notes and (i) whose Private
Notes are not immediately available or (ii) who cannot deliver the Private
Notes, an Agent's Message, this Letter of Transmittal or any other documents
required hereby to the Exchange Agent prior to the Expiration Date, may
tender their Private Notes pursuant to the guaranteed delivery procedures set
forth in the Prospectus under the caption "The Exchange Offer -- Guaranteed
Delivery Procedures." See Instruction 2.
5
<PAGE>
The lines below must be signed by the registered holder(s) exactly
as their name(s) appear(s) on the Private Notes or by person(s) authorized to
become registered holder(s) by a properly completed bond power from the
registered holder(s), a copy of which must be transmitted with this Letter of
Transmittal. If Private Notes to which this Letter of Transmittal relate are
held of record by two or more joint holders, then all such holders must sign
this Letter of Transmittal.
- -------------------------------------------------------------------------------
SIGNATURES
x
- -------------------------------------------------------------- --------------
Date
x
- -------------------------------------------------------------- --------------
Date
Area Code and Telephone Number:
------------------------------
If signature is by a trustee, executor, administrator, guardian,
attorney-in-fact, officer of a corporation or other person acting in a
fiduciary or representative capacity, then such person must (i) set forth his
or her full title below and (ii) submit evidence satisfactory to the Company
of such person's authority to so act. See instruction 5.
Name(s):
-----------------------------------------------------------------------
(Please Print)
Capacity:
----------------------------------------------------------------------
Address:
----------------------------------------------------------------------
(Include Zip Code)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
MEDALLION SIGNATURE GUARANTEE
(If required by Instruction 5)
Certain Signatures Must Be Guaranteed by an Eligible Institution
Signature(s) Guaranteed by an Eligible Institution:
---------------------------
(Authorized Signature)
- -------------------------------------------------------------------------------
(Title)
- -------------------------------------------------------------------------------
(Name of Firm)
- -------------------------------------------------------------------------------
(Address, Include Zip Code)
- -------------------------------------------------------------------------------
(Area Code and Telephone Number)
- -------------------------------------------------------------------------------
6
<PAGE>
INSTRUCTIONS
FORMING PART OF THE TERMS AND CONDITIONS OF THE EXCHANGE OFFER
1. DELIVERY OF LETTER OF TRANSMITTAL AND CERTIFICATES FOR PRIVATE
NOTES OR BOOK-ENTRY CONFIRMATIONS. Certificates representing the tendered
Private Notes (or a confirmation of book-entry transfer of such Private Notes
into the Exchange Agent's account with the Book-Entry Transfer Facility), as
well as a properly completed and duly executed copy of this Letter of
Transmittal (or, in the case of a book-entry transfer, an Agent's Message), a
Substitute Form W-9 and any other documents required by this Letter of
Transmittal must be received by the Exchange Agent at its address set forth
herein prior to the Expiration Date. The method of delivery of certificates
for Private Notes and all other required documents is at the election and
sole risk of the tendering holder and delivery will be deemed made only when
actually received by the Exchange Agent. If delivery is by mail, registered
mail with return receipt requested, properly insured, is recommended. As an
alternative to delivery by mail, the holder may wish to use an overnight or
hand delivery service. In all cases, sufficient time should be allowed to
assure timely delivery. Neither the Company nor the Exchange Agent is under
an obligation to notify any tendering holder of the Company's acceptance of
tendered Private Notes prior to the completion of the Exchange Offer.
2. GUARANTEED DELIVERY PROCEDURES. Holders who wish to tender their
Private Notes but whose Private Notes are not immediately available and who
cannot deliver their certificates for Private Notes (or comply with the
procedures for book-entry transfer prior to the Expiration Date), the Letter
of Transmittal and any other documents 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 below.
Pursuant to such procedures:
(i) such tender must be made by or through a firm which is a
member of a registered national securities exchange or of the National
Association of Securities Dealers, Inc., or a commercial bank or trust
company having an office or correspondent in the United States (an "Eligible
Institution");
(ii) prior to the Expiration Date, the Exchange Agent must
have received from the holder and the Eligible Institution a properly
completed and duly executed Notice of Guaranteed Delivery (by facsimile
transmission, mail or hand delivery) setting forth the name and address of
the holder, the certificate number or numbers of the tendered Private Notes,
the principal amount at maturity of tendered Private Notes and 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 facsimile thereof) (or, in the case of a book-entry transfer,
an Agent's Message), together with the tendered Private Notes (or a
confirmation of book-entry transfer of such Private Notes into the Exchange
Agent's account with the Book-Entry Transfer Facility) and any other required
documents will be deposited by the Eligible Institution with the Exchange
Agent; and
(iii) the certificates representing the tendered Private Notes
in proper form for transfer (or a confirmation of book-entry transfer of such
Private Notes into the Exchange Agent's account with the Book-Entry Transfer
Facility), together with this Letter of Transmittal (or facsimile thereof,
properly completed and duly executed, with any required signature guarantees
(or, in the case of a book-entry transfer, an Agent's Message) and all other
documents required by the Letter of Transmittal must be received by the
Exchange Agent within five New York Stock Exchange trading days after the
Expiration Date.
Failure to complete the guaranteed delivery procedures outlined
above will not, of itself, affect the validity or effect a revocation of any
Letter of Transmittal form properly completed and executed by a holder who
attempted to use the guaranteed delivery procedure.
3. TENDER BY HOLDER. Only a registered holder of Private Notes may
tender such Private Notes in the Exchange Offer. Any beneficial owner of
Private Notes who is not the registered holder and who wishes to tender
should arrange with such Holder to execute and deliver this Letter of
7
<PAGE>
Transmittal on such owner's behalf or must, prior to completing and executing
this Letter of Transmittal and delivering such 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.
4. PARTIAL TENDERS. Tenders of Private Notes will be accepted only
in integral multiples of $1,000 in principal amount at maturity. If less
than the entire principal amount at maturity of Private Notes is tendered,
the tendering holder should fill in the principal amount at maturity tendered
in the column labeled "Principal Amount at Maturity Tendered" of the box
entitled "Description of Private Notes" (Box 1) above. The entire principal
amount at maturity of Private Notes delivered to the Exchange Agent will be
deemed to be have been tendered unless otherwise indicated. If the entire
principal amount at maturity of Private Notes is not tendered, Private Notes
for the principal amount at maturity of Private Notes not tendered and
Exchange Notes exchanged for any Private Notes tendered will be sent to the
holder at his or her registered address, unless a different address is
provided in the appropriate box on this Letter of Transmittal, as soon as
practicable following the Expiration Date.
5. SIGNATURES ON THE LETTER OF TRANSMITTAL; BOND POWERS AND
ENDORSEMENTS; MEDALLION GUARANTEE OF SIGNATURE. If this Letter of
Transmittal is signed by the registered holder(s) of the Private Notes
tendered herewith, the signatures must correspond with the name(s) as written
on the face of the tendered Private Notes without alteration, enlargement or
any change whatsoever.
If any of the tendered Private Notes are owned of record by two or more
joint owners, all such owners must sign this Letter of Transmittal. If any
tendered Private Notes are held in different names on several Private Notes,
it will be necessary to complete, sign and submit as many separate copies of
the Letter of Transmittal documents as there are names in which tendered
Private Notes are held.
If this Letter of Transmittal or any of the Private Notes is signed by
the registered holder, and Exchange Notes are to be issued and any untendered
or unaccepted principal amount at maturity of Private Notes are to be
reissued or returned to the registered holder, then, the registered holder
need not and should not endorse any tendered Private Notes nor provide a
separate bond power. In any other case, the registered holder must either
properly endorse the Private Notes tendered or transmit a properly completed
bond power with this Letter of Transmittal (executed exactly as the name(s)
of the registered holder(s) appear(s) on such Private Notes), with the
signature(s) on the endorsement or bond power guaranteed by an Eligible
Institution unless such certificates or bond powers are signed by an Eligible
Institution.
If this 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 also indicate when signing and evidence
satisfactory to the Company of their authority to so act must be submitted
with this Letter of Transmittal.
No medallion signature guarantee is required if this Letter of
Transmittal is signed by the registered holder(s) of the Private Notes
tendered herewith and the Exchange Notes (and any Private Notes not tendered
or not accepted) are to be issued to such registered holder(s) and neither
the "Special Registration Instructions" (Box 2) nor the "Special Delivery
Instructions" (Box 3) has been completed. In all other cases, all signatures
on this Letter of Transmittal must be guaranteed by an Eligible Institution.
6. SPECIAL REGISTRATION AND DELIVERY INSTRUCTIONS. Tendering holders
should indicate, in the applicable box, the name and address in which the
Exchange Notes and/or substitute Private Notes for any principal amount at
maturity not tendered or not accepted for exchange are to be sent, if
different from the name and address or account of the person signing this
Letter of Transmittal. In the case of issuance in a different name, the
employer identification number or social security umber of the person named
must also be indicated and the tendering holders should complete the
applicable box.
If no such instructions are given, the Exchange Notes (and any Private
Notes not tendered or not accepted) will be issued in the name of and sent to
the registered holder of the Private Notes.
7. TRANSFER TAXES. The Company will pay all transfer taxes, if any,
applicable to the sale and transfer of Private Notes to it or its order
pursuant to the Exchange Offer. If, however, a transfer tax is imposed for
any reason other than the transfer and sale of Private Notes to the Company
or its order
8
<PAGE>
pursuant to the Exchange Offer, then the amount of any such transfer taxes
(whether imposed on the registered holder or on any other person) will be
payable by the tendering holder. If satisfactory evidence of payment of such
taxes or exemption from taxes therefrom is not submitted with this Letter of
Transmittal, the amount of transfer taxes will be billed directly to such
tendering holder.
Except as provided in this Instruction 7, it will not be necessary for
transfer tax stamps to be affixed to the Private Notes listed in this Letter
of Transmittal.
8. TAX IDENTIFICATION NUMBER. Federal income tax law requires that a
holder of any Private Notes which are accepted for exchange must provide the
Company (as payor) with its correct taxpayer identification number ("TIN"),
which, in the case of a holder who is an individual, is his or her social
security number. If the Company is not provided with the correct TIN, the
Holder may be subject to a $50 penalty imposed by the Internal Revenue
Service. (If withholding results in an over-payment of taxes, a refund may be
obtained.) Certain holders (including, among others, all corporations and
certain foreign individuals) are not subject to these backup withholding and
reporting requirements. See the enclosed "Guidelines for Certification of
Taxpayer Identification Number on Substitute Form W-9" for additional
instructions.
To prevent backup withholding, each tendering holder must provide such
holder's correct TIN by completing the Substitute Form W-9 set forth herein,
certifying that the TIN provided is correct (or that such holder is awaiting
a TIN), and that (i) the holder has not been notified by the Internal Revenue
Service that such holder is subject to backup withholding as a result of
failure to report interest or dividends or (ii) the Internal Revenue Service
has notified the holder that such holder is no longer subject to backup
withholding. If the Private Notes are registered in more than one name or are
not in the name of the actual owner, see the enclosed "Guidelines for
Certification of Taxpayer Identification Number on Substitute Form W-9" for
information on which TIN to report.
The Company reserves the right in its sole discretion to take whatever
steps are necessary to comply with the Company's obligation regarding backup
withholding.
9. VALIDITY OF TENDERS. All questions as to the validity, form,
eligibility (including time of receipt), and acceptance 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 right to
reject any and all Private Notes not validly tendered or any Private Notes,
the Company's acceptance of which would, in the opinion of the Company or its
counsel, be unlawful. The Company also reserves the right to waive any
conditions of the Exchange Offer or defects or irregularities in tenders of
Private Notes as to any ineligibility of any holder who seeks to tender
Private Notes in the Exchange Offer. The interpretation of the terms and
conditions of the Exchange Offer (including this Letter of Transmittal and
the instructions hereto) by the Company shall 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. The Company will use reasonable efforts to give notification of
defects or irregularities with respect to tenders of Private Notes, but shall
not incur any liability for failure to give such notification.
10. WAIVER OF CONDITIONS. The Company reserves the absolute right to
amend, waive or modify specified conditions in the Exchange Offer in the case
of any tendered Private Notes.
11. NO CONDITIONAL TENDERS. No alternative, conditional, irregular or
contingent tender of Private Notes will be accepted.
12. MUTILATED, LOST, STOLEN OR DESTROYED PRIVATE NOTES. Any tendering
holder whose Private Notes have been mutilated, lost, stolen or destroyed
should promptly contact the Exchange Agent at the address indicated above for
further instruction.
13. REQUESTS FOR ASSISTANCE AND ADDITIONAL COPIES. Requests for
information and for additional copies of the Prospectus may be directed to
the Exchange Agent at the address set forth on the first page of this Letter
of Transmittal. Holders may also contact their broker, dealer, commercial
bank, trust company or other nominee for assistance concerning the Exchange
Offer.
9
<PAGE>
14. ACCEPTANCE OF TENDERED PRIVATE NOTES AND ISSUANCE OF EXCHANGE
NOTES; RETURN OF PRIVATE NOTES. Subject to the terms and conditions of the
Exchange Offer, the Company will accept for exchange all validly tendered
Private Notes as soon as practicable after the Expiration Date and will issue
Exchange Notes therefor as soon as practicable thereafter. For purposes of
the Exchange Offer, the Company shall be deemed to have accepted tendered
Private Notes when, as and if the Company has given notice thereof to the
Exchange Agent (such notice if given orally, to be confirmed in writing). If
any tendered Private Notes are not exchanged pursuant to the Exchange Offer
for any reason, such unexchanged Private Notes will be returned, without
expense, to the undersigned at the address shown above or at a different
address as may be indicated under "Special Delivery Instructions."
15. WITHDRAWAL. Tenders may be withdrawn only pursuant to the limited
withdrawal rights set forth in the Prospectus under the caption "The Exchange
Offer -- Withdrawal of Tenders."
10
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
PAYER'S NAME: FIRSTWORLD COMMUNICATIONS, INC.
- ----------------------------------------------------------------------------------------------
<S> <C>
PART 1 -- PLEASE PROVIDE YOUR SOCIAL SECURITY
TAXPAYER IDENTIFICATION NUMBER NUMBER
("TIN") IN THE BOX AT RIGHT AND OR TIN
CERTIFY BY SIGNING AND DATING BELOW
/ /
----- ----- -----
-------------------------------------------------------------------
PART 2 -- CHECK THE BOX IF YOU ARE NOT SUBJECT TO BACKUP
WITHHOLDING UNDER THE PROVISIONS OF SECTION 3408(a)(1)(C) OF
THE INTERNAL REVENUE CODE BECAUSE (1) YOU HAVE NOT BEEN
NOTIFIED THAT YOU ARE SUBJECT TO BACKUP WITHHOLDING AS A
RESULT OF FAILURE TO REPORT ALL INTEREST OR DIVIDENDS OR (2)
THE INTERNAL REVENUE SERVICE HAS NOTIFIED YOU THAT YOU ARE NO
LONGER SUBJECT TO BACKUP WITHHOLDING. / /
-------------------------------------------------------------------
SUBSTITUTE CERTIFICATION -- UNDER THE PENALTIES OF
PERJURY, I CERTIFY THAT THE INFORMATION
FORM W-9 PROVIDED ON THIS FORM IS TRUE, CORRECT AND
COMPLETE. PART 3
SIGNATURE DATE AWAITING TIN / /
-------------------------------------------------------------------
DEPARTMENT OF NAME (IF JOINT NAMES, LIST FIRST AND CIRCLE THE NAME OF THE
THE TREASURY PERSON OR ENTITY WHOSE NUMBER YOU ENTER IN PART 1 ABOVE. SEE
INTERNAL REVENUE SERVICE INSTRUCTIONS IF YOUR NAME HAS CHANGED.
PAYER'S REQUEST FOR -------------------------------------------------------------------
TAXPAYER Address
IDENTIFICATION NUMBER
(TIN) -------------------------------------------------------------------
City, State and Zip Code
-------------------------------------------------------------------
List account number(s) here (optional)
- ----------------------------------------------------------------------------------------------
</TABLE>
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP
WITHHOLDING OF 31% OF ANY AMOUNTS PAID TO YOU PURSUANT TO THE EXCHANGE
OFFER. PLEASE REVIEW THE ENCLOSED GUIDELINES FOR CERTIFICATION OF
TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 FOR ADDITIONAL
DETAILS.
YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU CHECK THE BOX
IN PART 3 OF SUBSTITUTE FORM W-9
- --------------------------------------------------------------------------------
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
I CERTIFY UNDER PENALTIES OF PERJURY THAT A TAXPAYER IDENTIFICATION NUMBER
HAS NOT BEEN ISSUED TO ME, AND EITHER (1) I HAVE MAILED OR DELIVERED AN
APPLICATION TO RECEIVE A TAXPAYER IDENTIFICATION NUMBER TO THE APPROPRIATE
INTERNAL REVENUE SERVICE CENTER OR SOCIAL SECURITY ADMINISTRATION OFFICE OR
(2) I INTEND TO MAIL OR DELIVER AN APPLICATION IN THE NEAR FUTURE. I
UNDERSTAND THAT IF I DO NOT PROVIDE A TAXPAYER IDENTIFICATION NUMBER BY THE
TIME OF PAYMENT, 31% OF ALL PAYMENTS MADE TO ME ON ACCOUNT OF THE EXCHANGE
NOTES SHALL BE RETAINED UNTIL I PROVIDE A TAXPAYER IDENTIFICATION NUMBER TO
THE EXCHANGE AGENT AND THAT, IF I DO NOT PROVIDE MY TAXPAYER IDENTIFICATION
NUMBER WITHIN 60 DAYS, SUCH RETAINED AMOUNTS SHALL BE REMITTED TO THE
INTERNAL REVENUE SERVICE AS BACKUP WITHHOLDING AND 31% OF ALL REPORTABLE
PAYMENTS MADE TO ME THEREAFTER WILL BE WITHHELD AND REMITTED TO THE INTERNAL
REVENUE SERVICE UNTIL I PROVIDE A TAXPAYER IDENTIFICATION NUMBER.
SIGNATURE DATE , 1998
--------------------------------------- --------------- ---
- --------------------------------------------------------------------------------
11
<PAGE>
NOTICE OF GUARANTEED DELIVERY
With Respect to
FIRSTWORLD COMMUNICATIONS, INC.
13% Senior Discount Notes due 2008
This Notice of Guaranteed Delivery must be used by a holder of 13% Senior
Discount Notes due 2008 (the "Private Notes") of FirstWorld Communications, Inc.
(the "Company"), who wishes to tender Private Notes to The Bank of New York (the
"Exchange Agent") pursuant to the guaranteed delivery procedures described in
the section of the Prospectus entitled "The Exchange Offer -- Guaranteed
Delivery Procedures," and in Instruction 2 of the related Letter of Transmittal.
Any holder who wishes to tender Private Notes pursuant to the guaranteed
delivery procedures must ensure that the Exchange Agent receives this Notice of
Guaranteed Delivery prior to the Expiration Date of the Exchange Offer.
Capitalized terms not defined herein have the meanings assigned to them in the
Prospectus or in the Letter of Transmittal.
- --------------------------------------------------------------------------------
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M. NEW YORK CITY TIME, ON
_____________ ___, 1998, UNLESS EXTENDED (THE "EXPIRATION DATE")
- --------------------------------------------------------------------------------
THE EXCHANGE AGENT FOR THE EXCHANGE OFFER IS:
THE BANK OF NEW YORK
<TABLE>
<CAPTION>
<S> <C> <C>
BY REGISTERED OR CERTIFIED MAIL: FACSIMILE TRANSMISSIONS: BY HAND OR OVERNIGHT DELIVERY:
The Bank of New York (Eligible Institutions Only) The Bank of New York
101 Barclay Street, 7E (212) 815-6339 101 Barclay Street
New York, New York 10286 TO CONFIRM BY TELEPHONE Corporate Trust Services Window
Attn.: Reorganization Section OR FOR INFORMATION CALL: Ground Level
Nathalie Simon (212) 815-5788 New York, New York 10286
Attn.: Reorganization Section,
Nathalie Simon
</TABLE>
DELIVERY OF THIS NOTICE OF GUARANTEED DELIVERY TO AN ADDRESS OTHER THAN
AS SET FORTH ABOVE OR TRANSMISSION OF THIS NOTICE OF GUARANTEED DELIVERY VIA
FACSIMILE TO A NUMBER OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE A
VALID DELIVERY.
This Notice of Guaranteed Delivery is not to be used to guarantee
signatures. If a signature on a Letter of Transmittal is required to be
guaranteed by an "Eligible Institution" under the instructions thereto, such
signature guarantee must appear in the applicable space provided in the
signature box on the Letter of Transmittal.
<PAGE>
LADIES AND GENTLEMEN:
The undersigned hereby tenders to the Company, upon the terms and
subject to the conditions set forth in the Prospectus dated __________ ___,
1998 (as the same may be amended or supplemented from time to time, the
"Prospectus"), and the related Letter of Transmittal (which together
constitute the "Exchange Offer"), receipt of which is hereby acknowledged,
the aggregate principal amount at maturity of Private Notes set forth below
pursuant to the guaranteed delivery procedures set forth in the Prospectus
and in Instruction 2 of the Letter of Transmittal.
The undersigned hereby tenders the Private Notes listed below:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
CERTIFICATE NUMBER(S) (IF KNOWN) OF PRIVATE NOTES AGGREGATE PRINCIPAL AGGREGATE PRINCIPAL
OR ACCOUNT NUMBER OF THE BOOK-ENTRY FACILITY AMOUNT AT MATURITY AMOUNT AT MATURITY
REPRESENTED TENDERED
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
PLEASE SIGN AND COMPLETE
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
Signature(s) of Registered Holder(s)
- -----------------------------------------------------------------------------------------------
or Authorized Signatory: Date:
- -----------------------------------------------------------------------------------------------
Address:
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
Name(s) of Registered Holder(s):
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
Area Code and Telephone No.:
- -----------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
This Notice of Guaranteed Delivery must be signed by the holder(s) of
Private Notes exactly as their name(s) appear (i) on certificates for Private
Notes or (ii) on a security position listing as the owner of private notes or
by person(s) authorized to become holder(s) by endorsements and documents
transmitted with this Notice of Guaranteed Delivery. If a signature is by a
trustee, executor, administrator, guardian, attorney-in-fact, officer or
other person acting in a fiduciary or such representative capacity, such
person must provide the following information.
PLEASE PRINT NAME(S) AND ADDRESS(ES)
Name(s):
----------------------------------------------------------------------
------------------------------------------------------------------------------
Capacity:
--------------------------------------------------------------------
Address(es):
-----------------------------------------------------------------
------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
2
<PAGE>
- -------------------------------------------------------------------------------
GUARANTEE
(NOT TO BE USED FOR SIGNATURE GUARANTEE)
The undersigned, a firm which is a member of a registered national
securities exchange or of the National Association of Securities Dealers,
Inc., or is a commercial bank or trust company having an office or
correspondent in the United States, or is otherwise an "eligible guarantor
institution" within the meaning of rule 17Ad-15 under the Securities Exchange
Act of 1934, as amended, guarantees that either the Private Notes tendered
hereby in proper form for transfer (or confirmation of the book-entry
transfer of such Private Notes into the exchange agent's account at the
Book-Entry Transfer Facility as described in the Prospectus under the caption
"The Exchange Offer -- Guaranteed Delivery Procedures"), together with one or
more properly completed and duly executed Letter(s) of Transmittal (or
facsimile(s) thereof) (or in the case of a book-entry transfer, an Agent's
Message) and any other required documents will be received by the Exchange
Agent by 5:00 p.m. New York City time, within five New York Stock Exchange
Trading days following the Expiration Date.
The undersigned acknowledges that it must deliver the Letter(s) of
Transmittal and the Private Notes Tendered hereby to the Exchange Agent
within the time period set forth above and that failure to do so could result
in a financial loss to the undersigned.
(PLEASE TYPE OR PRINT)
- --------------------------------- -----------------------------------------
Name of Firm Authorized Signature
- --------------------------------- -----------------------------------------
Name
- ---------------------------------
- ---------------------------------
Address
-----------------------------------------
Title
- --------------------------------- -----------------------------------------
Area Code and Telephone No. Dated
- -------------------------------------------------------------------------------
DO NOT SEND CERTIFICATES FOR PRIVATE NOTES WITH THIS FORM. ACTUAL SURRENDER
OF PRIVATE NOTES MUST BE MADE PURSUANT TO, AND BE ACCOMPANIED BY, AN
EXECUTED LETTER OF TRANSMITTAL.
3
<PAGE>
INSTRUCTIONS FOR NOTICE OF GUARANTEED DELIVERY
1. DELIVERY OF THIS NOTICE OF GUARANTEED DELIVERY. A properly
completed and duly executed copy of this Notice of Guaranteed Delivery and
any other documents required by this Notice of Guaranteed Delivery must be
received by the Exchange Agent at its address set forth herein prior to the
Expiration Date. The method of delivery of this Notice of Guaranteed Delivery
and any other required documents to the Exchange Agent is at the election and
sole risk of the holder, and the delivery will be deemed to be made only when
actually received by the Exchange Agent. If delivery is by mail, registered
mail with return receipt requested, properly insured, is recommended. As an
alternative to delivery by mail, the holders may wish to consider using an
overnight or hand delivery service. In all cases, sufficient time should be
allowed to assure timely delivery. For a description of the guaranteed
delivery procedures, see Instruction 2 of the Letter of Transmittal.
2. SIGNATURES ON THIS NOTICE OF GUARANTEED DELIVERY. If this Notice
of Guaranteed Delivery is signed by the registered holder(s) of the Private
Notes referred to herein, the signature must correspond with the name(s)
written on the face of the Private Notes without alteration, enlargement or
any change whatsoever. If this Notice of Guaranteed Delivery is signed by a
participant of the Book-Entry Transfer Facility whose name appears on a
security position listing as the owner of the Private Notes, the signature
must correspond with the name shown on the security position listing as the
owner of the Private Notes.
If this Notice of Guaranteed Delivery is signed by a person other than
the registered holder(s) of any Private Notes listed or as a participant of
the Book-Entry Transfer Facility, this Notice of Guaranteed Delivery must be
accompanied by appropriate bond powers, signed as the name of the registered
holder(s) appear(s) on the Private Notes or signed as the name of the
participant shown on the Book-Entry Transfer Facility's security position
listing.
If this Notice of Guaranteed Delivery is signed by a trustee, executor,
administrator, guardian, attorney-in-fact, officer of a corporation or other
person acting in a fiduciary or representative capacity, such person should
so indicate when signing and submit with the Letter of Transmittal evidence
satisfactory to the Company of such person's authority to so act.
3. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES. Requests for information
and additional copies of the Prospectus may be directed to the Exchange Agent
at the address set forth on the first page of this Notice of Guaranteed
Delivery. Holders may also contact their broker, dealer, commercial bank,
trust company or nominee for assistance concerning the Exchange Offer.
4
