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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
[ ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1998
OR
[X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM OCTOBER 1, 1998 TO DECEMBER 31, 1998
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COMMISSION FILE NUMBER 0-24953
FIRSTWORLD COMMUNICATIONS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 33-0521976
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NUMBER)
INCORPORATION OR ORGANIZATION)
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7100 E. BELLEVIEW AVENUE
SUITE 210
GREENWOOD VILLAGE, CO 80111
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(ZIP CODE)
(303) 874-8010
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Effective October 16, 1998, the Registrant changed its
fiscal year end from September 30 to December 31
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL
YEAR, IF CHANGED SINCE LAST REPORT)
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INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS:
[ X ] YES [ ] NO
AS OF FEBRUARY 11, 1999 THERE WERE OUTSTANDING 10,135,164 SHARES OF SERIES A
COMMON STOCK AND 16,448,292 SHARES OF SERIES B COMMON STOCK.
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FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains certain "forward-looking"
statements within the meaning of the Private Securities Litigation Reform Act of
1995 which provides a "safe harbor" for these types of statements. To the extent
statements in this Quarterly Report involve, without limitation, the Company's
expectations for growth, estimates of future revenue, expenses, profit, cash
flow, balance sheet items or any other guidance on future periods, these
statements are forward-looking statements. These risks and uncertainties include
those identified in the Company's Annual Report on Form 10-K in Item 1 -
"Business--Risk Factors" and other risks identified from time to time in the
Company's filings with the Securities and Exchange Commission, press releases
and other communications. Copies of the Company's Form 10-K are available from
the Company upon request. The Company assumes no obligation to update
forward-looking statements.
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FIRSTWORLD COMMUNICATIONS, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
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<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at December 31, 1998 (unaudited)
and September 30, 1998 ........................................ 4
Consolidated Statements of Operations (unaudited) for the
three months ended December 31, 1998 and 1997 ................. 5
Consolidated Statements of Cash Flows (unaudited) for the
three months ended December 31, 1998 and 1997 ................. 6
Notes to Consolidated Financial Statements ...................... 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ...................................... 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ....................................... 14
Item 5. Other Information ....................................... 14
Item 6. Exhibits and Reports on Form 8-K ........................ 14
SIGNATURES ......................................................... 15
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FIRSTWORLD COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1998
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(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 29,659 $ 72,039
Marketable securities 170,030 165,591
Interest receivable 2,228 3,017
Accounts receivable, net 4,663 493
Revenues in excess of billings 1,539 --
Prepaid expenses and other 399 317
--------- ---------
Total current assets 208,518 241,457
--------- ---------
Property and equipment, net 61,247 44,020
Deferred financing costs, net 8,259 8,217
Goodwill and intangibles, net 16,410 --
Other assets 382 411
--------- ---------
Total assets $ 294,816 $ 294,105
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 13,573 $ 6,611
Accrued interest 586 546
Accrued payroll related liabilities 1,156 222
Other accrued expenses 2,835 694
Long-term debt, current portion 75 30
Capital lease obligations, current portion 259 788
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Total current liabilities 18,484 8,891
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Long-term debt, net of current portion and discount 258,135 249,726
Capital lease obligation, net of current portion 6,403 6,115
--------- ---------
Total liabilities 283,022 264,732
--------- ---------
Stockholders' equity:
Preferred stock, $.0001 par value per share, 10,000,000 shares authorized;
no shares outstanding
Common stock, voting, $.0001 par value, 100,000,000 shares authorized; Series
A, 10,135,164 shares designated; 10,135,164 shares issued and outstanding
at December 31, 1998 and September 30, 1998 1 1
Series B, 89,864,836 shares designated; 16,137,958 and 15,929,708 shares issued
and outstanding at December 31, 1998 and September 30, 1998, respectively 2 2
Additional paid-in capital 45,830 45,617
Warrants 31,963 31,963
Stockholder receivables (158) (97)
Accumulated deficit (65,844) (48,113)
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Total stockholders' equity 11,794 29,373
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Total liabilities and stockholders' equity $ 294,816 $ 294,105
--------- ---------
--------- ---------
</TABLE>
See notes to consolidated financial statements.
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FIRSTWORLD COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------
DECEMBER 31, 1998 DECEMBER 31, 1997
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<S> <C> <C>
Revenue
Internet services $ 123 $ --
Data integration and consulting services 2,285 10
Telephony services 565 104
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Total Revenue 2,973 114
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Cost and expenses
Network development and operations 6,191 1,661
Selling, general and administrative expenses 7,328 731
Depreciation and amortization 1,484 478
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Total cost and expenses 15,003 2,870
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Loss from operations (12,030) (2,756)
Other income (expense):
Interest income 3,227 7
Interest expense (8,600) (1,349)
Other (328) --
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Total other expense (5,701) (1,342)
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Net loss $(17,731) $ (4,098)
-------- --------
-------- --------
</TABLE>
See notes to consolidated financial statements.
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FIRSTWORLD COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------
DECEMBER 31, 1998 DECEMBER 31, 1997
-------------------- --------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (17,731) $ (4,098)
Adjustments to reconcile net loss
to net cash provided (used) by operating activities:
Depreciation and amortization expense 1,484 478
Amortization of deferred financing costs 243 358
Write-down of property and equipment 328 --
Amortization of debt discount 8,323 120
Non-cash interest expense -- 293
Changes in assets and liabilities, net
of effects of acquisitions:
Accounts receivable (1,449) (3)
Interest receivable 789 --
Other assets 173 (17)
Accounts payable 6,119 --
Accrued payroll and related liabilities 555 --
Other liabilities 1,300 1,752
--------- ---------
Net cash provided (used) by operating activities 134 (1,117)
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Cash flows from investing activities:
Purchases of held-to-maturity marketable securities (127,212) --
Maturities of held-to-maturity marketable securities 122,773 --
Purchase of property and equipment (15,518) (2,490)
Acquisitions, net of cash acquired (22,307) --
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Net cash used by investing activities (42,264) (2,490)
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of common stock 152 43
Principal payments on capital leases (70) (70)
Proceeds from short-term borrowings and related warrants -- 3,370
Principal payments on borrowings (47) (52)
Payment of deferred financing costs (285) --
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Net cash provided (used) by financing activities (250) 3,291
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Net decrease in cash and cash equivalents (42,380) (316)
Cash and cash equivalents, beginning of period 72,039 536
--------- ---------
Cash and cash equivalents, end of period $ 29,659 $ 220
--------- ---------
--------- ---------
Supplemental cash flow information:
Effects of acquisition:
Assets acquired $ 24,617 $ --
Liabilities assumed (2,310) --
Less cash paid (22,307) --
--------- ---------
Net cash acquired from acquisition $ -- $ --
--------- ---------
--------- ---------
</TABLE>
See notes to consolidated financial statements.
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FIRSTWORLD COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of FirstWorld
Communications, Inc. ("FirstWorld") and its wholly owned subsidiaries
(collectively, the "Company"). All significant intercompany transactions and
balances have been eliminated in consolidation.
In the opinion of management, the accompanying consolidated financial
statements include all adjustments (consisting of normal recurring items)
necessary for a fair presentation of results for the interim periods presented
of the Company. The results of operations for any interim period are not
necessarily indicative of results for the full year. The consolidated financial
statements and footnote disclosures should be read in conjunction with the
audited consolidated financial statements and related notes thereto filed with
the Company's Annual Report on Form 10-K for the fiscal year ended September 30,
1998.
2. CHANGE IN FISCAL YEAR
At a meeting held on October 16, 1998, the Board of Directors of the
Company voted to change the Company's fiscal year end from September 30 to
December 31, beginning with a short fiscal period ending on December 31, 1998.
3. REVENUE RECOGNITION
The Company primarily recognizes revenue on Internet and telephony services
in the month such services are provided. Data integration and consulting
services revenue consists primarily of revenue generated by the Company's Optec,
Inc. subsidiary described below. Revenues and expenses related to data
integration and consulting services are recognized under the
percentage-of-completion method of accounting based on the ratio that costs
incurred bear to the total estimated costs for each contract. Provisions for
estimated losses on uncompleted contracts are made in the period in which such
losses are determined.
4. BUSINESS ACQUISITION
The Company completed the acquisition of Optec, Inc. ("Optec") on November
24, 1998. The Company purchased for cash, all of the outstanding capital stock
of Optec from Enron Communications, Inc. ("ECI"), an affiliate of a principal
stockholder of the Company. Optec is a telecommunications systems and data
networks integrator with operations in Oregon and Washington. Simultaneous to
this transaction, the Company also purchased from ECI an indefeasible right of
use to fiber optic cable in a metropolitan area network serving Portland, Oregon
with routes connecting Beaverton and Hillsboro, Oregon. In addition, the Company
obtained rights to OC-3 level capacity on a wide area network being developed by
ECI that will connect up to 15 cities nationwide, for approximately seven years
depending on the completion dates of ECI's wide area network. The Company paid
an aggregate of $18,000,000 for the Optec capital stock, the indefeasible rights
of use and the wide area network rights. The Company also repaid at closing
approximately $4,000,000 of Optec's indebtedness to ECI. The acquisition was
accounted for under the purchase method of accounting. The excess of the
purchase price over the estimated fair value of the acquired net assets, which
is approximately $5,400,000, was recorded as goodwill and will be amortized on
a straight-line basis over 10 years.
5. SUBSEQUENT EVENTS
On January 7, 1999, the Company purchased all of the outstanding capital
stock of Accelerated Information, Inc., a California corporation ("AI") in
exchange for an aggregate of $10,094,380 and 187,500 shares of the Company's
Series B Common Stock. By virtue of its acquisition of all of the outstanding
capital stock of AI, the Company also acquired Slip.Net, Inc., a California
corporation and a wholly owned subsidiary of AI ("Slip.Net"). Slip.Net is an ISP
engaged in the business of providing Internet access, web hosting services,
support for e-commerce and co-location services primarily
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in the San Francisco Bay area. The Company also repaid $355,620 of long-term
debt of Slip.Net at the closing and, by virtue of the acquisition, assumed
certain capital lease obligations.
The Company deposited an aggregate of $1,450,000 of the total purchase
price into an escrow account for the purpose of satisfying claims made by the
Company for breach of representations, warranties or covenants made by the
selling shareholders in the Stock Purchase Agreement on behalf of themselves, AI
and Slip.Net. Absent a claim for indemnification, all of the funds in the escrow
account other than those specifically allocated to tax matters will be released
to the selling shareholders on the first anniversary of the closing. The Company
used available cash to fund the acquisition.
In January 1999, the Company received a notice from the City of Anaheim
alleging that FirstWorld had failed to satisfy its obligation to achieve
Substantial Completion (as defined in that certain Universal Telecommunications
System Participation Agreement, dated as of February 25, 1997 (the "UTS
Agreement"), by and among the City of Anaheim, FirstWorld Anaheim, a wholly
owned subsidiary of the Company, and the Company) of the UTS (as defined in the
UTS Agreement) by the December 31, 1998 deadline. Pursuant to the terms of the
UTS Agreement, the Company has 180 days from the receipt of such notice to cure
the alleged default. The Company is evaluating the City's allegation and the
rights and remedies of the City and the Company under the UTS Agreement. The
Company is confident that it can cure whatever default, if any, has occurred
under the UTS Agreement within the applicable 180 day cure period, and believes
that it will resolve this matter to the Company's satisfaction.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company offers services within three core areas: Internet services,
data integration and consulting services and telephony services.
Specifically, the Company provides data connectivity, high speed Internet
access, web hosting, e-commerce and system integration services, as well as
switch-based local and long distance telephone services. The Company's
business strategy incorporates a data-centric focus, with service offerings
strategically bundled to address the increasingly complex data and voice
communications needs of small, medium and large businesses. The Company uses
a combination of both owned and managed facilities, with a digital network
and related provisioning, billing and customer care applications. With
targeted marketing and a consultative sales approach, the Company provides
its customers with advanced, integrated data and voice communications
solutions.
The Company is strategically building telecommunications facilities and
implementing advanced digital networks and related support systems that combine
advanced hardware and software from leading vendors with its own systems. With a
combination of both owned and managed network facilities, the Company provides
its customers with an integrated approach to enhanced data and voice network
services. The Company has designed its core processes to streamline
provisioning, billing, network management and customer service, and has
incorporated operational support systems that implement such processes into its
network offerings. Among other things, these systems provide
single-point-of-contact customer service and facilitate electronic exchanges of
information with other network providers where possible. The Company is
designing its systems to be compatible with voice over packet technologies, such
as voice over IP, as such technologies are refined in the industry.
To date, the Company has experienced significant operating and net losses
and negative cash flow from operations and expects that operating and net losses
and negative operating cash flow will continue for at least the next several
years and will continue as the Company implements its growth strategy of
expanding its operations. See "--Liquidity and Capital Resources." 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 services, including data
connectivity, high speed Internet access, web hosting, e-commerce and data
integration services, as well as switch-based local and long distance
telephone services. The Company intends to generate near-term revenue by
replacing basic services currently provided by ILECs, IXCs, CLECs and ISPs,
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,
below its largest competitors' rates to build market share.
The Company employs a market segmentation strategy, which involves
tailoring service offerings, sales and marketing techniques and network
deployment to meet the different needs of prime commercial, basic commercial
and wholesale customers. For prime commercial customers (businesses with
sophisticated communications needs), the Company utilizes a consultative
selling approach that involves a systematic assessment of each customer's
telephony, Internet, data communications and video applications needs. For
basic commercial customers (businesses with primarily voice and Internet
needs), the Company uses direct mail, telemarketing and advertising and
offers standardized product bundles consisting of local and long distance
telephony and high speed Internet access. The Company also offers use of its
network elements on a wholesale basis to other IXCs and ISPs.
9
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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. These costs consist primarily of
salaries of 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. Following the Company's acquisition of
Optec, these costs also incorporate the direct costs associated with revenues
generated from data integration services.
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 consist primarily of product marketing, sales staff and sales support
expenses, general management and administrative overhead expenses and office
leases.
CAPITAL EXPENDITURES. The Company employs a demand-driven approach to
network deployment. This approach is intended to minimize capital expenditure
and maximize flexibility to serve the higher margin data market as demand for
high speed data communication services grows. The Company connects customers to
its networks through direct fiber connections, DSL or unbundled network elements
leased from the ILEC, depending on the most cost-effective connection that will
support the bundle of services provided to the customer.
RESULTS OF OPERATIONS
QUARTER ENDED DECEMBER 31, 1998 COMPARED WITH THE QUARTER ENDED DECEMBER
31, 1997
Revenue increased from $114,000 for the quarter ended December 31, 1997 to
$2,973,000 for the quarter ended December 31, 1998, an increase of $2,859,000 or
2,508%. This increase is due primarily to the Company's acquisition of Optec,
which contributed approximately $2,285,000 of data integration and consulting
services revenue during the quarter ended December 31, 1998. Approximately
$584,000 of the increase in revenue resulted from growth and expansion of the
Company's customer base for telephony and Internet services.
Network development and operations expenses increased from $1,661,000 for
the quarter ended December 31, 1997 to $6,191,000 for the quarter ended December
31, 1998, an increase of $4,530,000 or approximately 273%. This increase
resulted from the following factors: the acquisition of Optec, which resulted in
the addition of $1,830,000 in operating costs; an increase of $1,434,000 in
personnel costs associated with the expansion of the Company's operations and
network deployment groups; and increased operating costs relating to the
Company's Orange County operations, including $1,193,000 of operating and
supplies costs.
Selling, general and administrative expenses increased from $731,000 for
the quarter ended December 31, 1997 to $7,328,000 for the quarter ended
December 31, 1998, an increase of $6,597,000 or approximately 902%.
Significant factors contributing to the overall increase in selling, general
and administrative expenses included an increase of approximately $4,610,000
in personnel costs associated with increased staffing, executive signing
bonuses and personnel bonuses; an increase of approximately $913,000 in
legal, accounting and rent expenses; an increase of approximately $558,000
associated with the operations of Optec, and an increase of approximately
$266,000 relating to marketing and public relations. The increase also
resulted in part from the Company's obligations under separate management
consulting agreements the Company entered into during 1998 with Corporate
Managers, LLC, an affiliate of Colorado Spectra 3, LLC ("Spectra 3"), and
Enron Capital & Trade Resources Corp. ("Enron"), pursuant to which the
Company incurred costs aggregating $250,000 during the quarter ended December
31, 1998. Spectra 3 and an affiliate of Enron are significant stockholders in
the Company.
Depreciation and amortization expenses increased from $478,000 for the
quarter ended December 31, 1997 to
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$1,484,000 for the quarter ended December 31, 1998, an increase of $1,006,000 or
approximately 210%. This increase primarily relates to depreciation expense
associated with equipment purchased for the Orange County central office and
network, as well as other equipment associated with the Company's general
operations.
Interest expense increased from $1,349,000 for the quarter ended December
31, 1997 to $8,600,000 for the quarter ended December 31, 1998, an increase of
$7,251,000 or approximately 538%. This increase relates primarily to interest
expense associated with the Senior Notes (as defined below), inclusive of the
amortization of related debt discount and deferred financing costs, offset by a
reduction in interest expense associated with a revolving credit facility which
was terminated in April 1998 (the "Credit Facility"), inclusive of the
amortization of related debt discount and deferred financing costs. Interest
expense incurred during the quarter ended December 31, 1998 and 1997 was offset
by approximately $333,000 and $0, respectively, of capitalized interest.
Interest income increased from $7,000 for the quarter ended December 31,
1997 to $3,227,000 for the quarter ended December 31, 1998, an increase of
$3,220,000 or approximately 46,000%. The increase is attributable to the
availability of additional funds from the sale of the Senior Notes, which
funds have been invested in marketable securities and cash equivalents.
Marketable securities consist of commercial paper with original maturities of
beyond three months but less than six months. The Company has classified its
marketable securities as "held to maturity," as management has the intent and
ability to hold these securities to maturity.
During the quarter ended December 31, 1998, the Company recorded a
charge of approximately $328,000 related to the write-down of certain unused
telecommunications equipment which the Company intends to dispose of through
resale. The write-down reflected the carrying amount of such equipment which
totaled $481,000 less the expected sales proceeds as determined by third
party valuations.
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
of these markets. 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, construction and acquisition of new
networks and the funding of operating losses during the start-up phase of each
new market. The Company invested $15,318,000 of cash in property and equipment
for the quarter ended December 31, 1998, compared to $2,490,000 for the quarter
ended December 31, 1997.
From its inception through September 30, 1998, the Company raised
approximately $67 million from the private sale of stock. On December 30, 1997,
the Company consummated a private placement of equity securities to Spectra 3
and Enron. Aggregate proceeds from this offering totaled approximately
$26,136,000, net of offering commissions and certain other advisory fees, and
were received on January 6, 1998. On April 13, 1998, the Company completed an
offering of debt securities (the "Debt Offering") pursuant to Rule 144A under
the Securities Act of 1933, as amended (the "Securities Act"). In the Debt
Offering, the Company sold 470,000 units consisting of 13% Senior Discount Notes
due 2008 (the "Senior Notes") and warrants to purchase an aggregate of 3,713,094
shares of the Company's Series B Common Stock. On April 13, 1998, the Company
also completed a $20 million private placement to Spectra 3 and Enron (the
"Additional Equity Investment"), pursuant to the exercise of an existing option
held by Spectra 3 and Enron. The aggregate net proceeds of the Debt Offering and
the Additional Equity Investment were $260.7 million. The Company terminated the
Credit Facility concurrently with the closing of the Debt Offering and paid a
$1,000,000 termination fee pursuant to the terms thereof.
On November 24, 1998, the Company purchased all of the outstanding
capital stock of Optec from ECI. Optec is a data integrator with operations
in Oregon and Washington and has approximately 90 employees in engineering,
sales and operations. The Company also purchased from ECI an indefeasible
right of use to fiber optic cable in a metropolitan area network serving
Portland, Oregon with routes connecting Beaverton and Hillsboro, Oregon. In
addition, the Company obtained rights to OC-3 level capacity on a wide area
network ("WAN") being developed by ECI that will connect up to 15 cities
nationwide. The Company paid an aggregate of $18,000,000 in cash for the
Optec capital stock, the indefeasible rights of use and the WAN rights. The
Company also repaid at closing approximately $4,000,000 of Optec's
indebtedness to ECI. The Company used available cash to fund the acquisition.
On January 7, 1999, the Company purchased all of the outstanding capital
stock of AI, in exchange for an aggregate of $10,094,380 and 187,500 shares of
the Company's Series B Common Stock. By virtue of its acquisition of
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all of the outstanding capital stock of AI, the Company also acquired Slip.Net.
Slip.Net is an ISP engaged in the business of providing Internet access, web
hosting services, support for e-commerce and co-location services primarily in
the San Francisco Bay area. The Company also repaid $355,620 of long-term debt
of Slip.Net at the closing and by virtue of the acquisition assumed certain
capital lease obligations.
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 construction of the Company's Orange County central office and
network. The Company expects to continue to experience negative cash flow for
the foreseeable future due to expansion through acquisitions and other
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. As the Company pursues acquisitions and 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 decide 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
vendor financing and/or a bank credit facility. However, there can be no
assurance that the Company will obtain such funding.
YEAR 2000 READINESS DISCLOSURE
YEAR 2000 READINESS: The Company has an active program to assess its
systems as well as its vendors' subsystems to determine whether they will
properly recognize and process date sensitive information beyond January 1,
2000. The Company is conducting an inventory of its systems and applications and
analyzing them for potential Year 2000 issues. The Company is resolving problems
it identifies through remediation, upgrade or replacement before such problems
affect operations. The Company's primary focus is on customer supporting
applications (such as billing and customer care applications), network
infrastructure systems (such as switching and other central office platforms)
and systems that support core business functions (such as payroll and
purchasing). The Company expects that by July 1, 1999, its essential service and
delivery systems will be Year 2000 ready.
COSTS: The current estimate for the cost of the Company's Year 2000 effort
is approximately $500,000. Through December 31, 1998, expenditures totaled less
than $100,000. The Company expects to use three full-time equivalent workers to
support its Year 2000 effort, a figure representing approximately 10% of the
budgeted IT staff.
RISKS: The Company believes it is taking all necessary steps to resolve its
Year 2000 issues. To date the Company has no indication that any specific
function or system is so deficient that it will threaten the Company's Year 2000
schedule. Although the Company does not expect to incur significant expenditures
to upgrade its systems to address Year 2000 problems, there can be no assurance
the Company will be able to identify all Year 2000 problems in advance of their
occurrence, or that the Company will be able to successfully remedy all
problems.
To the extent the Company's customers, suppliers and vendors, including
ILECs over whose networks the Company provides certain of its services, 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 by Year 2000 problems beyond the Company's
control. The Company currently is analyzing such risks and will address them in
the Company's contingency plan.
The Company expects to make business acquisitions during 1999. The
acquisition of a company which has failed to address its Year 2000 issues could
have a material adverse affect on the Company's own Year 2000 effort. To
minimize this risk, the Company has instituted guidelines that include Year 2000
readiness as a crucial acquisition factor.
12
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The expenses associated with the Company's efforts to remedy any Year 2000
problems, the liabilities to which the Company may become subject as a result of
such problems and the impact of Year 2000 problems on customers' abilities 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.
CONTINGENCY PLANS: Given the extent to which the Company relies on external
vendors and suppliers -- including ILECs -- there can be no assurance that,
despite the Company's best efforts, no Year 2000-related problems will occur.
The Company has begun to evaluate the risks associated with likely worst-case
Year 2000 scenarios, and is developing contingency plans to address each
scenario. These contingency plans include the switching of carriers and similar
workarounds. The Company expects to complete its contingency plan by May 1,
1999. This plan will be monitored and updated as part of an on-going process
that the Company expects to continue throughout 1999 and into the first three
months of the year 2000.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company believes there has been no significant changes in the market
risk associated with its financial instruments since September 30, 1998.
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PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
On October 16, 1998, the Company filed a declaratory relief action
in San Diego Superior Court, asking the Court to find that the Company is not
obligated to offer stock to Dina Partners L.P. ("Dina") with respect to the
December 1997 equity investment by Enron and Spectra 3. Dina had previously
indicated in conversations with the Company's officers and counsel and in
writing that it believed the Company had breached a certain Amended and
Restated Investor Rights Agreement to which the Company and Dina were
parties by refusing to allow Dina to purchase additional stock and warrants
in the Company. On December 3, 1998, in answer to the Company's complaint,
Dina filed a general denial with the court. Although the ultimate resolution
of this dispute is subject to the uncertainties inherent in litigation, the
Company does not believe that the resolutions of the declaratory relief
action will have a material adverse effect on the Company's results of
operations, liquidity or financial position.
ITEM 5. Other Information
In January 1999, the Company received a notice from the City of Anaheim
alleging that FirstWorld had failed to satisfy its obligation to achieve
Substantial Completion (as defined in that certain Universal Telecommunications
System Participation Agreement, dated as of February 25, 1997 (the "UTS
Agreement"), by and among the City of Anaheim, FirstWorld Anaheim, a wholly
owned subsidiary of the Company, and the Company) of the UTS (as defined in the
UTS Agreement) by the December 31, 1998 deadline. Pursuant to the terms of the
UTS Agreement, the Company has 180 days from the receipt of such notice to cure
the alleged default. The Company is evaluating the City's allegation and the
rights and remedies of the City and the Company under the UTS Agreement. The
Company is confident that it can cure whatever default, if any, has occurred
under the UTS Agreement within the applicable 180 day cure period, and believes
that it will resolve this matter to the Company's satisfaction.
ITEM 6. Exhibits And Reports On Form 8-K
(a) Exhibits:
Exhibit 10.34 Employment Agreement, as amended, between the
Company and Jeffrey L. Dykes.
Exhibit 27.1 Financial Data Schedule
(b) Two reports on Form 8-K were filed in the 3 month period ended
December 31, 1998:
<TABLE>
<CAPTION>
Were any financial
Item Reported statements filed? Date of filing
------------- ------------------ --------------
<S> <C> <C>
Item 8 - Change in Fiscal Year No November 3, 1998
Item 5 - Other Event No December 15, 1998
</TABLE>
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRSTWORLD COMMUNICATIONS, INC.,
a Delaware corporation
(Registrant)
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ SHELDON S. OHRINGER President, Chief Executive Officer and Director February 12, 1999
- --------------------------- (Principal Executive Officer)
Sheldon S. Ohringer
/s/ PAUL C. ADAMS Vice President, Finance and Treasurer February 12, 1999
- --------------------------- (Principal Financial and Accounting Officer)
Paul C. Adams
</TABLE>
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Exhibit 10.34
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "AGREEMENT"), dated as of December 14,
1998, is by and between FirstWorld Communications, Inc., a Delaware corporation
(the "COMPANY"), and Jeffrey L. Dykes ("EXECUTIVE").
RECITAL
The Company desires to employ Executive, effective as of January 4,
1999 (the "COMMENCEMENT DATE"), on the terms and conditions set forth in this
Agreement, and Executive desires to be so employed.
AGREEMENT
IN CONSIDERATION of the premises and the mutual covenants set forth
below, the parties hereby agree as follows:
1. EMPLOYMENT. The Company hereby agrees to employ Executive as the
General Counsel of the Company, and Executive hereby accepts such employment, on
the terms and conditions hereinafter set forth.
2. TERM. The period of employment of Executive by the Company hereunder
(the "EMPLOYMENT PERIOD") shall commence at the Commencement Date and shall
continue through January 3, 2001. The Employment Period may be sooner terminated
by either party in accordance with Section 5 of this Agreement.
3. POSITION AND DUTIES. During the Employment Period, Executive shall
serve as the General Counsel of the Company. Executive shall devote such time,
attention and energies to Company affairs as are necessary to fully perform his
duties (other than absences due to illness or vacation) for the Company. During
the Employment Period, Executive shall not, directly or indirectly, render
services to any other organization, entity or person, as an employee,
independent contractor, consultant or otherwise, with or without compensation,
without the prior written consent of the Board of Directors of the Company (the
"BOARD"); PROVIDED, HOWEVER, that, without obtaining the prior written consent
of the Board, Executive may (i) render services, with or without compensation,
to Executive's and his wife's business distributing health products and (ii)
provide occasional legal advice and assistance to friends and family, so long as
the provision of any of the foregoing services does not interfere with
Executive's ability to perform his duties to the Company hereunder.
4. COMPENSATION AND RELATED MATTERS.
(a) EQUALIZATION PAYMENT. To compensate Executive for certain
benefits that he may lose or forfeit as a result of his termination of
employment with his former employer and commencement of employment with the
Company, the Company shall pay Executive in cash a
<PAGE>
$30,000 payment (the "EQUALIZATION PAYMENT") payable with Executive's first
regularly scheduled paycheck in January, 1999.
(b) SALARY. During the Employment Period, the Company shall
pay Executive an annual base salary of an amount not less than $160,000 per year
("BASE SALARY"). Executive's Base Salary shall be paid in approximately equal
installments in accordance with the Company's customary payroll schedule and
practices. Executive's Base Salary shall be subject to annual reviews commencing
December 1999 and each year thereafter. If Executive's Base Salary is increased
by the Company, such increased Base Salary shall then constitute the Base Salary
for all purposes of this Agreement. All compensation paid to Executive shall be
subject to withholding and other employment taxes imposed by applicable law.
(c) ANNUAL BONUS. The Board's compensation committee (the
"COMPENSATION COMMITTEE") shall review Executive's performance at least once
annually during each year of the Employment Period and, based on Executive's
performance, recommend whether the Company should award Executive a cash bonus
("BONUS") in order to reward Executive for services rendered to the Company
and/or as an incentive for continued service to the Company. The amount of
Executive's Bonus, if any, shall be determined in the reasonable discretion of
the Compensation Committee and shall be dependent upon, among other things, the
achievement of certain performance levels by the Company, including, without
limitation, (i) the nature, magnitude and quality of the services performed by
Executive for the Company, (ii) the condition (financial and other) and results
of operations of the Company and (iii) the compensation paid for positions of
comparable responsibility and authority within the telecommunications industry.
The targeted amount of Executive's Bonus shall be an amount equal to 35% of Base
Salary at 100% completion of applicable performance levels, to be set forth in
the Company's Annual Bonus Plan.
(d) STOCK OPTIONS. Effective as of the Commencement Date,
Executive shall be awarded a stock option (the "STOCK OPTION") to purchase
150,000 shares of the Company's Series B Common Stock, par value $.0001 per
share (the "COMMON STOCK"). The shares of Common Stock subject to the Stock
Option shall vest in increments of 37,500 shares on each of the first, second,
third and fourth anniversaries of the Commencement Date, with the shares in the
first such increment having an exercise price of $6.00, shares in the second
such increment having an exercise price of $6.50, shares in the third such
increment having an exercise price of $7.00 and shares in the fourth such
increment having an exercise price of $7.50. The Stock Option will be granted
under one of the Company's stock option plans and the terms and conditions of
the Stock Option will be determined in accordance with the applicable stock
option plan. Notwithstanding any provision in this Agreement to the contrary,
the Common Stock subject to the Option shall, if not already vested, immediately
vest prior to a change in control of the Company whereby the Company is no
longer controlled by the persons or entities who currently own more than fifty
percent of the voting control of the Company or upon termination of Executive's
employment by the Company without Cause or by the Executive for Good Reason.
(e) EXPENSES. The Company shall promptly reimburse Executive
for all reasonable business expenses upon the presentation of reasonably
itemized statements of such expenses in accordance with the Company's policies
and procedures now in force or as such
2
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policies and procedures may be modified with respect to all senior executive
officers of the Company.
(f) WELFARE AND PENSION PLANS. In addition to Executive's Base
Salary and any incentive compensation and bonuses awarded to Executive
hereunder, he (and his family) shall be entitled to participate, to the extent
that he is (and they are) eligible under the terms and conditions thereof, in
any pension, retirement, hospitalization, insurance, disability or medical
service plan generally available to the executive officers of the Company that
may be in effect from time to time during the Employment Period. The Company
shall be under no obligation to institute or continue the existence of any such
employee benefit plan.
5. TERMINATION. Executive's employment hereunder may be terminated
during the Employment Period under the following circumstances:
(a) DEATH. Executive's employment hereunder shall terminate
upon his death.
(b) DISABILITY. If, as a result of Executive's incapacity due
to physical or mental illness, Executive shall have been substantially unable to
perform his duties hereunder for an entire period of ninety (90) consecutive
days, and within thirty (30) days after written Notice of Termination (as
defined in Section 6(a)) is given after such ninety (90) day period, Executive
shall not have returned to the substantial performance of his duties on a
full-time basis, the Company shall have the right to terminate Executive's
employment hereunder for "Disability," and such termination in and of itself
shall not be, nor shall it be deemed to be, a breach of this Agreement.
(c) CAUSE. The Company shall have the right to terminate
Executive's employment for Cause (as defined), and such termination in and of
itself shall not be, nor shall it be deemed to be, a breach of this Agreement.
For purposes of this Agreement, the Company shall have "Cause" to terminate
Executive's employment upon Executive's:
(i) conviction of, or plea of guilty or nolo
contendere to, any crime constituting a felony;
(ii) commission of a material act of dishonesty,
fraud, misrepresentation or other act of moral turpitude that
would, in the Board's reasonable judgment, prevent the
effective performance of his duties hereunder;
(iii) continued failure to substantially and
materially perform his duties hereunder to the reasonable
satisfaction of the Board (other than such failure resulting
from Executive's incapacity due to physical or mental illness
or subsequent to the issuance of a Notice of Termination by
Executive for Good Reason (as defined in Section 5(d)) after
demand for substantial performance is delivered by the Board
in writing that specifically identifies the manner in which
the Board believes Executive has not used reasonable best
efforts to substantially perform his duties; or
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<PAGE>
(iv) willful misconduct (including, but not limited
to, a willful breach of the provisions of Section 8) that is,
in the Board's reasonable judgment, injurious to the Company
or to any entity in control of, controlled by or under common
control with the Company ("AFFILIATE").
For purposes of this Section 5(c), no act, or failure to act, by
Executive shall be considered "willful" unless committed in bad faith and
without a reasonable belief that the act or omission was in the best interests
of the Company or any Affiliates thereof; PROVIDED, HOWEVER, that the
requirements outlined in paragraphs (iii) or (iv) above shall be deemed to have
occurred if Executive's action or non-action continues for more than thirty (30)
days after Executive has received written notice of the inappropriate action or
non-action. This Section 5(c) shall not prevent Executive from challenging the
Board's determination that Cause exists or that Executive has failed to cure any
act (or failure to act) that purportedly formed the basis for the Board's
determination, under the arbitration procedures set forth in Section 10 below.
(d) GOOD REASON. Executive may terminate his employment for
"Good Reason" within thirty (30) days after Executive has actual knowledge of
the occurrence, without the written consent of Executive, of one of the
following events that has not been cured within thirty (30) days after written
notice thereof has been given by Executive to the Company (PROVIDED, that with
respect to this Section 5(d), the Company shall have the right to challenge
Executive's determination that he has the right to terminate his employment for
"Good Reason" under the arbitration procedures set forth in Section 10 below):
(i) a reduction by the Company in Executive's Base
Salary or a failure by the Company to pay any such amounts
when due;
(ii) any purported termination of Executive's
employment for Cause which is not effected pursuant to the
procedures of Section 5(c) (and for purposes of this
Agreement, no such purported termination shall be effective);
(iii) the Company's failure to provide the Stock
Option or the Company's material breach of one or more of the
stock option agreements pursuant to which the Stock Option was
issued to Executive;
(iv) the Company's failure to substantially provide
any material employee benefits due to be provided to
Executive; or
(v) the Company's failure to provide in all material
respects the indemnification set forth in the agreement
referenced in Section 9 of this Agreement.
Executive's continued employment during the thirty (30) day period
referred to above in this paragraph (d) shall not constitute Executive's consent
to, or a waiver of rights or remedies with respect to, any act or failure to act
constituting Good Reason hereunder.
4
<PAGE>
(e) WITHOUT GOOD REASON OR CAUSE. Executive shall have the
right to terminate his employment hereunder without Good Reason and the Company
shall have the right to terminate Executive's employment hereunder without Cause
by providing the other with a Notice of Termination, and such termination shall
not in and of itself be, nor shall it be deemed to be, a breach of this
Agreement.
6. TERMINATION PROCEDURE.
(a) NOTICE OF TERMINATION. Any termination of Executive's
employment by the Company or by Executive during the Employment Period (other
than termination pursuant to Section 5(a)) shall be communicated by written
Notice of Termination (as defined below) to the other party hereto in accordance
with Section 12 below. For purposes of this Agreement, a "Notice of Termination"
shall mean a notice which shall indicate the specific termination provision in
this Agreement relied upon and shall set forth in reasonable detail the facts
and circumstances claimed to provide a basis for termination of Executive's
employment under the provision so indicated.
(b) DATE OF TERMINATION. "Date of Termination" shall mean (i)
if Executive's employment is terminated by his death, the date of his death,
(ii) if Executive's employment is terminated pursuant to Section 5(b), thirty
(30) days after Notice of Termination (provided that Executive shall not have
returned to the substantial performance of his duties on a full-time basis
during such thirty (30) day period) and (iii) if Executive's employment is
terminated for any other reason, the date on which a Notice of Termination is
given or any later date (within thirty (30) days after the giving of such
notice) set forth in such Notice of Termination.
7. COMPENSATION UPON TERMINATION OR DURING DISABILITY. In the event
Executive is disabled or his employment terminates during the Employment Period,
the Company shall provide Executive with the payments and benefits set forth
below. Executive acknowledges and agrees that the payments set forth in this
Section 7 constitute liquidated damages for termination of his employment during
the Employment Period.
(a) TERMINATION BY COMPANY WITHOUT CAUSE OR BY EXECUTIVE FOR
GOOD REASON. If Executive's employment is terminated by the Company without
Cause or by Executive for Good Reason:
(i) the Company shall pay to Executive a severance
payment equal to the amount of Base Salary Executive would have
received under the Agreement if Executive had remained employed
throughout the Employment Period stated in Section 2, plus accrued
vacation, within thirty (30) days following the Date of Termination;
(ii) the Company shall reimburse Executive pursuant
to Section 4(e) for reasonable expenses incurred, but not paid prior to
such termination of employment; and
(iii) Executive shall be entitled to any other
rights, compensation and/or benefits as may be due to Executive in
accordance with the terms and provisions of any
5
<PAGE>
agreements, plans or programs of the Company, including, but not
limited to, the items described in Section 5(d)(iii), (iv) and (v)
above.
(b) TERMINATION BY COMPANY FOR CAUSE OR BY EXECUTIVE WITHOUT
GOOD REASON. If Executive's employment is terminated by the Company for Cause or
by Executive (other than for Good Reason):
(i) the Company shall pay Executive his Base Salary
and, to the extent required by law or the Company's vacation policy,
his accrued vacation pay through the Date of Termination, as soon as
practicable following the Date of Termination;
(ii) the Company shall reimburse Executive pursuant
to Section 4(e) for reasonable expenses incurred, but not paid prior to
such termination of employment, unless such termination resulted from a
misappropriation of Company funds; and
(iii) Executive shall be entitled to any other
rights, compensation and/or benefits as may be due to Executive in
accordance with the terms and provisions of any agreements, plans or
programs of the Company, including, but not limited to, the items
described in Section 5(d)(iii), (iv) and (v) above.
(c) DISABILITY. During any period that Executive fails to
perform his duties hereunder as a result of incapacity due to physical or mental
illness, Executive shall continue to receive his full Base Salary set forth in
Section 4(b) until his employment is terminated pursuant to Section 5(b). In the
event Executive's employment is terminated for Disability pursuant to Section
5(b):
(i) the Company shall pay to Executive his Base
Salary and accrued vacation pay through the Date of Termination, within
30 days following the Date of Termination;
(ii) the Company shall reimburse Executive pursuant
to Section 4(e) for reasonable expenses incurred, but not paid prior to
such termination of employment; and
(iii) Executive shall be entitled to any other
rights, compensation and/or benefits as may be due to Executive in
accordance with the terms and provisions of any agreements, plans or
programs of the Company, including, but not limited to, the items
described in Section 5(d)(iii), (iv) and (v) above.
(d) DEATH. If Executive's employment is terminated by his
death:
(i) the Company shall pay in a lump sum to
Executive's beneficiary, legal representatives or estate, as the case
may be, Executive's Base Salary through the Date of Termination;
6
<PAGE>
(ii) the Company shall reimburse Executive's
beneficiary, legal representatives, or estate, as the case may be,
pursuant to Section 4(e) for reasonable expenses incurred, but not paid
prior to such termination of employment; and
(iii) Executive's beneficiary, legal representatives
or estate, as the case may be, shall be entitled to any other rights,
compensation and benefits as may be due to any such persons or estate
in accordance with the terms and provisions of any agreements, plans or
programs of the Company, including, but not limited to, the items
described in Section 5(d)(iii), (iv) and (v) above.
8. CONFIDENTIAL INFORMATION, OWNERSHIP OF DOCUMENTS.
(a) CONFIDENTIAL INFORMATION. Executive shall hold in a
fiduciary capacity for the benefit of the Company all Confidential Information
(as defined below) relating to the Company and its businesses and investments,
which shall have been obtained by Executive during Executive's employment by the
Company and which is not generally available public knowledge (other than by
acts of Executive in violation of this Agreement). Except as may be required or
appropriate in connection with his carrying out his duties under this Agreement,
Executive shall not, without the prior written consent of the Company or as may
otherwise be required by law or any legal process, or as is necessary in
connection with any adversarial proceeding against the Company (in which case
Executive shall use his reasonable best efforts in cooperating with the Company
in obtaining a protective order against disclosure by a court of competent
jurisdiction), communicate or divulge any such Confidential Information relating
to the Company to anyone other than the Company and those designated by the
Company or on behalf of the Company in the furtherance of its business or to
perform duties hereunder.
For the purposes hereof, the term "Confidential Information" means, with respect
to any person, any information concerning such person or its business, products,
financial condition, prospects and affairs that is not generally available to
the public. The term Confidential Information shall not include information
that: (i) is already known to the recipient and was properly obtained by the
recipient prior to the date of this Agreement; (ii) is in the public domain
other than through a negligent act or omission or willful misconduct of the
recipient; (iii) is acquired in good faith from a third party and, at the time
of the acquisition, the recipient had no knowledge or reason to believe that
such information was wrongfully obtained or disclosed by the third party; (iv)
is independently developed by the recipient from information not defined as
"Confidential Information" in this Agreement, as evidenced by the recipient's
written records; (v) is disclosed to third parties by the disclosing party
without restriction; (vi) is required to be disclosed under applicable law or by
a valid subpoena or other court or governmental order, decree, regulation or
rule; PROVIDED, HOWEVER, that if disclosure is required under this provision the
recipient shall advise the disclosing party of the requirement to disclose the
Confidential Information prior to such disclosure and as soon as reasonably
practicable after the recipient becomes aware of such required disclosure; and
FURTHER PROVIDED THAT upon the request of the disclosing party, the recipient
agrees to cooperate in good faith with any reasonable and lawful actions which
the disclosing party takes to resist such disclosure, Limit the information to
be disclosed or limit the
7
<PAGE>
extent to which the information so disclosed may be used or made available to
third parties, at the cost of the disclosing party.
(b) REMOVAL OF DOCUMENTS; RIGHTS TO PRODUCTS. All records,
files, drawings, documents, models, equipment, and the like relating to the
Company's business, which Executive has control over shall not be removed from
the Company's premises by Executive without the Board's written consent, unless
such removal is in the furtherance of the Company's business or is in connection
with Executive's carrying out his duties under this Agreement and, if so removed
by Executive, shall be returned to the Company promptly after termination of
Executive's employment hereunder, or otherwise promptly after removal if such
removal occurs following termination of employment. Executive shall assign to
the Company all rights to trade secrets and other products relating to the
Company's business developed by him alone or in conjunction with others at any
time while employed by the Company.
(c) CONTINUING OPERATION. Except as specifically provided in
this Section 8, the termination of Executive's employment or of this Agreement
shall have no effect on the continuing operation of this Section 8.
9. INDEMNIFICATION. Upon the Commencement Date, Executive will enter
into the Company's standard directors and officers indemnification agreement.
10. ARBITRATION. Any controversy between Executive and the Company
involving the construction or application of any of the terms, provisions or
conditions of this Agreement, including, without limitation, the determination
of whether "Cause" or "Good Reason" exists under Section 5(c) or Section 5(d)
hereof and claims involving specific performance, shall on the written request
of either party served on the other in accordance with Section 12 below be
submitted to binding arbitration. EACH PARTY, BY SIGNING THIS AGREEMENT,
VOLUNTARILY, KNOWINGLY AND INTELLIGENTLY WAIVES ANY RIGHTS SUCH PARTY MAY
OTHERWISE HAVE TO SEEK REMEDIES IN COURT OR OTHER FORUMS, INCLUDING THE RIGHT TO
A JURY TRIAL. Arbitration shall comply with and be governed in accordance with
the Commercial Arbitration Rules of the American Arbitration Association (the
"AAA"). The arbitration will be conducted only in Denver, Colorado, before a
single arbitrator selected by the parties or, if they are unable to agree on an
arbitrator, before an arbitrator selected by the AAA. The arbitrator shall have
full authority to order specific performance and award damages and other relief
available under this Agreement or applicable law, but shall have no authority to
add to, detract from, change or amend the terms of this Agreement or existing
law. All arbitration proceedings, including settlements and awards, shall be
confidential. The decision of the arbitrator will be final and binding, and
judgment on the award by the arbitrator may be entered in any court of competent
jurisdiction. THIS SUBMISSION AND AGREEMENT TO ARBITRATE WILL BE SPECIFICALLY
ENFORCEABLE. The arbitrator will have no power to award punitive or exemplary
damages, to ignore or vary the terms of this Agreement and any other agreement
between Executive and the Company and will be bound to apply controlling law.
Each party shall pay its own costs and attorneys' fees associated with the
arbitration. Each party will be responsible for 1/2 of the amounts payable to
the arbitrator in connection with the arbitration.
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11. SUCCESSORS; BINDING AGREEMENT.
(a) COMPANY'S SUCCESSORS. No rights or obligations of the
Company under this Agreement may be assigned or transferred, except that the
Company will require any successor (whether direct or indirect, by purchase,
merger, consolidation or otherwise) to all or substantially all of the business
and/or assets of the Company to expressly assume and agree to perform this
Agreement in the same manner and to the same extent that the Company would be
required to perform it if no such succession had taken place. As used in this
Agreement, "Company" shall mean the Company as herein before defined and any
successor to its business and/or assets (by merger, purchase or otherwise) which
executes and delivers the agreement provided for in this Section 11 or which
otherwise becomes bound by all the terms and provisions of this Agreement by
operation of law.
(b) EXECUTIVE'S SUCCESSORS. No rights or obligations of
Executive under this Agreement may be assigned or transferred by Executive other
than his rights to payments or benefits hereunder, which may be transferred only
by will or the laws of descent and distribution. Upon Executive's death, this
Agreement and all rights of Executive hereunder shall inure to the benefit of
and be enforceable by Executive's beneficiary or beneficiaries, personal or
legal representatives or estate, to the extent any such person succeeds to
Executive's interests under this Agreement. Executive shall be entitled to
select and change a beneficiary or beneficiaries to receive any benefit or
compensation payable hereunder following Executive's death by giving the Company
written notice thereof. In the event of Executive's death or a judicial
determination of his incompetence, reference in this Agreement to Executive
shall be deemed, where appropriate, to refer to his beneficiary(ies), estate or
other legal representative(s). If Executive should die following his Date of
Termination while any amounts would still be payable to him hereunder if he had
continued to live, all such amounts unless otherwise provided herein shall be
paid in accordance with the terms of this Agreement to such person or persons so
appointed in writing by Executive, or otherwise to his legal representatives or
estate.
12. NOTICE. For the purposes of this Agreement, notices, demands and
all other communications provided for in this Agreement shall be in writing and
shall be deemed to have been duly given when delivered either personally or by
United States certified or registered mail, return receipt requested, postage
prepaid, addressed as follows:
If to Executive:
Jeffrey L. Dykes
7157 S. Lafayette Way
Littleton, Colorado 80122
Telecopy: (303) 738-1749
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If to the Company:
FirstWorld Communications, Inc.
7100 E. Belleview Avenue, Suite 210
Greenwood Village, Colorado 80111
Attn.: Secretary
Telecopy: (303) 874-2479
With a copy to:
David A. Hahn, Esq.
Latham & Watkins
701 "B" Street, Suite 2100
San Diego, California 92101
Telecopy: (619) 696-7419
or to such other address as any party may have furnished to the others in
writing in accordance herewith, except that notices of change of address shall
be effective only upon receipt.
13. WAIVER. No provisions of this Agreement may be amended, modified,
or waived unless such amendment or modification is agreed to in a writing signed
by Executive and by a duly authorized officer of the Company, and such waiver is
set forth in writing and signed by the party to be charged. No waiver by either
party hereto at any time of any breach by the other party hereto of any
condition or provision of this Agreement to be performed by such other party
shall be deemed a waiver of similar or dissimilar provisions or conditions at
the same or at any prior or subsequent time.
14. SURVIVAL. Except as otherwise expressly set forth herein, the
respective rights and obligations of the parties under this Agreement shall
survive Executive's termination of employment and the termination of this
Agreement to the extent necessary for the intended preservation of such rights
and obligations.
15. CHOICE OF LAW. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the State of
Colorado without regard to its conflicts of law principles.
16. VALIDITY. The invalidity or unenforceability of any provision or
provisions of this Agreement shall not affect the validity or enforceability of
any other provision of this Agreement, which shall remain in full force and
effect.
17. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument. Facsimile signatures will
be deemed to be effective originals hereunder.
10
<PAGE>
18. ENTIRE AGREEMENT. This Agreement sets forth the entire agreement of
the parties hereto in respect of the subject matter contained herein and
supersedes all prior agreements, promises, covenants, arrangements,
communications, representations or warranties, whether oral or written, by any
officer, employee or representative of any party hereto in respect of such
subject matter. Any prior agreement of the parties hereto in respect of the
subject matter contained herein is hereby terminated and canceled.
19. WITHHOLDING. All payments hereunder shall be subject to any
required withholding of Federal, state and local taxes pursuant to any
applicable law or regulation.
20. SECTION HEADINGS. The section headings in this Agreement are for
convenience of reference only, and they form no part of this Agreement and shall
not affect its interpretation.
[REMAINDER OF THIS PAGE LEFT BLANK INTENTIONALLY]
11
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
the date first above written.
FIRSTWORLD COMMUNICATIONS, INC.,
a Delaware corporation
By: /s/ SHELDON S. OHRINGER
------------------------
Name: Sheldon S. Ohringer
Title: President and Chief Executive Officer
/s/ JEFFREY L. DYKES
--------------------
JEFFREY L. DYKES
12
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0
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