<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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)
________________
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)
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL
YEAR, IF CHANGED SINCE LAST REPORT)
________________
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 MAY 1, 1999, THE REGISTRANT'S OUTSTANDING COMMON STOCK CONSISTED OF
10,135,164 SHARES OF SERIES A COMMON STOCK AND 16,961,201 SHARES OF SERIES B
COMMON STOCK.
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
FORWARD-LOOKING STATEMENTS 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at March 31, 1999, (unaudited)
December 31, 1998 (unaudited) and September 30, 1998....................... 4
Consolidated Statements of Operations (unaudited) for the
Three months ended March 31, 1999 and 1998................................. 5
Consolidated Statements of Cash Flows (unaudited) for the
Three months ended March 31, 1999 and 1998................................. 6
Notes to Consolidated Financial Statements................................... 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................................... 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk............. 14
PART II. OTHER INFORMATION
Item 1. Legal Matters.......................................................... 15
Item 6. Exhibits and Reports on Form 8-K....................................... 15
SIGNATURES...................................................................... 16
</TABLE>
2
<PAGE>
FORWORD-LOOKING STATEMENTS
All statements contained herein, as well as statements made in press
releases and oral statements that may be made by the Company or by officers,
directors or employees of the Company acting on its behalf, that are not
statements of historical fact constitute "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. Such forward-
looking statements involve known and unknown risks, uncertainties and other
factors that could cause the actual results of the Company to be materially
different from historical results or from any future results expressed or
implied by such forward-looking statements. Among the factors that could cause
actual results to differ materially are the following: an unexpected business
interruption due to the failure of third parties to remediate Year 2000 issues;
the inability of the Company to retain necessary authorizations from the Federal
Communications Commission ("FCC") or state public utility commissions; an
increase in competition; the introduction of new technologies and competitors
into the internet and telephony business; a merger of existing internet and
telephony competitors; a change in the regulations governing the industry;
general business and economic conditions; and other risk factors described from
time to time in the Company's reports filed with the United States Securities
and Exchange Commission. In addition to statements that explicitly describe such
risks and uncertainties, readers are urged to consider statements that include
the terms "believes," "belief," "expects," "plans," "anticipates," "intends" or
the like to be uncertain and forward-looking. All cautionary statements made
herein should be read as being applicable to all forward-looking statements
wherever they appear. In this connection, investors should consider the risks
described herein. The Company assumes no obligation to update forward-looking
statements.
3
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FIRSTWORLD COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31, SEPTEMBER 30,
1999 1998 1998
-----------------------------------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 80,163 $ 29,659 $ 72,039
Marketable securities 84,235 170,030 165,591
Interest receivable 969 2,228 3,017
Accounts receivable, net 4,793 4,663 493
Revenues in excess of billings 1,755 1,539 -
Prepaid expenses and other 528 399 317
-------- -------- --------
Total current assets 172,443 208,518 241,457
-------- -------- --------
Property and equipment, net 67,272 61,247 44,020
Deferred financing costs, net 8,007 8,259 8,217
Goodwill and intangibles, net 35,137 16,410 -
Other assets 500 382 411
-------- -------- --------
Total assets $283,359 $294,816 $294,105
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 4,741 $ 13,573 $ 6,611
Accrued interest 876 586 546
Accrued payroll related liabilities 2,606 1,156 222
Other accrued expenses 4,229 2,835 694
Long-term debt, current portion 108 75 30
Capital lease obligations, current portion 425 259 788
-------- -------- --------
Total current liabilities 12,985 18,484 8,891
-------- -------- --------
Long-term debt, net of current portion and discount 266,613 258,135 249,726
Capital lease obligation, net of current portion 6,554 6,403 6,115
-------- -------- --------
Total liabilities 286,152 283,022 264,732
-------- -------- --------
Stockholders' equity (deficit):
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 March 31, 1999, December 31,
1998 and September 30, 1998 1 1 1
Series B, 89,864,836 shares designated; 16,851,134,
16,137,958 and 15,929,708 shares issued and outstanding at
March 31, 1999, December 31, 1998 and September 30, 1998,
respectively 2 2 2
Additional paid-in capital 49,007 45,830 45,617
Warrants 31,963 31,963 31,963
Stockholder receivables (158) (158) (97)
Accumulated deficit (83,608) (65,844) (48,113)
-------- -------- --------
Total stockholders' equity (deficit) (2,793) 11,794 29,373
-------- -------- --------
Total liabilities and stockholders' equity (deficit) $283,359 $294,816 $294,105
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------
MARCH 31, 1999 MARCH 31, 1998
---------------------------------------
<S> <C> <C>
Revenue:
Internet services $ 2,412 $ --
Web integration and consulting services 5,207 --
Telephony services 643 130
-------- -------
Total revenue 8,262 130
-------- -------
Cost and expenses:
Network operations 5,696 192
Selling, general and administrative expenses 10,912 2,525
Depreciation and amortization 2,989 551
-------- -------
Total costs and expenses 19,597 3,268
-------- -------
Loss from operations (11,335) (3,138)
Other income (expense):
Interest income 2,401 49
Interest expense (8,830) (1,131)
-------- -------
Total other expense (6,429) (1,082)
-------- -------
Net loss $(17,764) $(4,220)
======== =======
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------
MARCH 31, 1999 MARCH 31, 1998
-----------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(17,764) $ (4,220)
Adjustments to reconcile net loss
to net cash provided (used) by operating activities:
Depreciation and amortization expense 2,989 552
Amortization of deferred financing costs 203 416
Amortization of debt discount 8,484 115
Changes in assets and liabilities, net of effects of acquisitions:
Accounts receivable 328 (58)
Interest receivable 1,259 --
Other assets (318) (299)
Accounts payable (9,086) (185)
Accrued payroll and related liabilities 1,440 --
Other liabilities 535 --
-------- --------
Net cash used by operating activities (11,930) (3,679)
-------- --------
Cash flows from investing activities:
Purchases of held-to-maturity marketable securities (84,235) --
Maturities of held-to-maturity marketable securities 170,030 --
Acquisitions, net of cash acquired (17,789) --
Purchase of property and equipment (5,651) (4,079)
-------- --------
Net cash provided (used) by investing activities 62,355 (4,079)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock -- 26,094
Proceeds from exercise of stock options and warrants 342 43
Principal payments of debt and capital leases (263) (16,883)
Proceeds from short-term borrowings and related warrants -- 426
Payment of deferred financing costs -- (392)
-------- --------
Net cash provided by financing activities 79 9,288
-------- --------
Net increase in cash and cash equivalents 50,504 1,530
Cash and cash equivalents, beginning of period 29,659 270
-------- --------
Cash and cash equivalents, end of period $ 80,163 $ 1,800
======== ========
Supplemental cash flow information:
Effects of acquisition:
Assets acquired $ 22,551 $ --
Liabilities assumed (1,927) --
Common stock issued (2,835) --
Less cash paid (17,940) --
-------- --------
Net cash acquired from acquisition $ (151) $ --
======== ========
</TABLE>
See notes to consolidated financial statements.
6
<PAGE>
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.
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.
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. Certain 1998 amounts have been reclassified to conform to the 1999 basis
of presentation.
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 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. Web integration and consulting services
revenue consists primarily of revenue generated by the Company's Optec, Inc.
subsidiary (described below). Revenues and expenses related to web 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 ACQUISITIONS
Optec
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 ("the Indefeasible
Right"). 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 "WAN Rights"). The Company paid an aggregate of
$18.3 million for the Optec capital stock, the Indefeasible Right and the WAN
Rights. The Company also repaid at closing approximately $4.0 million of Optec's
indebtedness to ECI. The Company assigned values of $11.1 million, $9.2 million
and $2.0 million to the WAN Rights, Optec and the Indefeasible Right,
respectively. The WAN Rights have not yet been placed into service, as a result,
the Company is not amortizing this asset. The acquisition of Optec 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
$5.4 million, was recorded as goodwill and will be amortized on a straight-line
basis over 10 years. The Company is amortizing the Indefeasible Right on a
straight-line basis over 20 years.
Slip.Net
On January 7, 1999, the Company purchased all of the outstanding capital stock
of Accelerated Information, Inc., a California corporation ("AI"), in exchange
for cash of approximately $10.5 million 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
Internet service provider ("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.
7
<PAGE>
The Company deposited an aggregate of approximately $1.5 million of the total
purchase price into an escrow account for the purpose of satisfying claims the
Company may have 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.
The acquisition was accounted for under the purchase method of accounting. In
order to determine the total consideration paid, the Company assigned a value of
$6.00 per share to the Series B Common Stock. This resulted in total
consideration of $11.6 million. The excess of the consideration over the
estimated fair value of the acquired net assets, which is approximately $10.9
million, was recorded as goodwill and will be amortized on a straight-line basis
over 3 years.
Sirius
On March 2, 1999, the Company purchased all of the outstanding capital stock
of Sirius Solutions, Inc., d/b/a Sirius Connections, a California corporation
("Sirius"), in exchange for cash of approximately $7.5 million and 285,000
shares of the Company's Series B Common Stock. Sirius 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 deposited $500,000 and 83,333 shares of its Series B Common Stock
into an escrow account for the purpose of satisfying claims the Company may
have for breach of representations, warranties or covenants made by the selling
shareholders in the Stock Purchase Agreement on behalf of themselves, Sirius.
Absent a claim for indemnification, all of the funds in the escrow account will
be released to the selling shareholders 18 months after the closing. The Company
used available cash to fund the acquisition.
The acquisition was accounted for under the purchase method of accounting. In
order to determine the total consideration paid, the Company assigned a value of
$6.00 per share to the Series B Common Stock. This resulted in total
consideration of $9.2 million. The excess of the consideration over the
estimated fair value of the acquired net assets, which is approximately $9.0
million, was recorded as goodwill and will be amortized on a straight-line basis
over 3 years.
Pro Forma Acquisition Information
The following unaudited condensed pro forma information presents the unaudited
results of operations of the Company as if the acquisitions of the above
mentioned companies had occurred on January 1, 1998:
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------
March 31, 1999 March 31, 1998
-------------- -------------------
<S> <C> <C>
(In Thousands)
Revenue......... $ 9,274 $ 4,993
Net loss........ $(17,825) $(4,400)
</TABLE>
These pro forma results do not necessarily represent results that would have
occurred if the consolidated acquisitions had taken place as of January 1, 1998,
nor are they necessarily indicative of the results of future operations.
5. SUBSEQUENT EVENTS
The 1999 Equity Incentive Plan (the "Incentive Plan") was adopted by the
Company's Board of Directors on March 8, 1999, subject to approval by the
stockholders at the Company's 1999 Annual Meeting of Stockholders. The principal
purposes of the Incentive Plan are to provide incentives for key employees and
consultants of the Company through granting of options and stock appreciation
rights ("SARs," and together with the options and the, "Awards").
The aggregate number of shares of Series B Common Stock of the Company
("Shares") or the equivalent in other equity securities which may be issued upon
exercise of options will not exceed 5,000,000. At May 1, 1999, options covering
an aggregate of 1,738,250 Shares were outstanding under the Incentive Plan. In
addition, as of May 1, 1999, SARs covering an aggregate of 278,550 Shares were
outstanding under the Incentive Plan.
The Quarterly Bonus Program of the Company (the "Bonus Program") was adopted
by the Company's Board of Directors on May 3, 1999. The Bonus Program is
intended to incentivize both individual productivity and employee retention. A
bonus paid out to each eligible employee in the Bonus Program is based in part
on the productivity of that participant's profit and loss center and in part on
that participant's individual performance. The Company expects to pay eligible
employees approximately $610,000 worth of bonuses for the quarter ended March
31, 1999. Certain executive officers may elect to receive Shares, in lieu of a
cash bonus payment under the Bonus Program. An aggregate of 200,000 Shares will
be available for issuance under the Bonus Program. The Company has no present
knowledge of whether any eligible participant will elect to receive all or a
portion of such eligible participant's bonus in stock.
8
<PAGE>
6. OTHER MATTERS
On May 13, 1999, the City of Anaheim (the "City") filed a lawsuit in
Orange County Superior Court, Case Number 809281, against FirstWorld and
FirstWorld Anaheim, Inc. (collectively "FirstWorld Parties"). The City alleges
that FirstWorld Parties have repudiated their contractual obligations under the
Universal Telecommunications System Participation Agreement (the "Participation
Agreement"), the Agreement for Use of Operating Property (the "Operating
Property Agreement") and the Development Fee Agreement (the "Development
Agreement," and together with the Participation Agreement and the Operating
Property Agreement, the "UTS Agreements"). In addition, the City alleges, among
other things, that FirstWorld Parties materially breached their obligations
under the UTS Agreements by: (i) failing to commence construction of a
demonstration center in downtown Anaheim and that FirstWorld Parties will not
commence operation of this downtown demonstration center by June 30, 1999 under
the UTS Agreements; (ii) failing to provide verification that Substantial
Completion of Phase I, as each such term is defined in the UTS Agreements, has
been achieved; (iii) failing to provide a "Subsequent Implementation Program"
(as defined in the UTS Agreements); (iv) failing to comply with various auditing
procedures in the UTS Agreements; and (v) failing to make a quarterly payment
due under the Participation Agreement. The City alleges that it is entitled to
damages in excess of $45 million as well as costs, pre-judgment interest and
such other relief as the Court deems proper. The City also seeks specific
performance compelling FirstWorld Parties to completely perform under the UTS
Agreements.
The Company believes that it is not in breach as alleged and intends to
vigorously defend the action; however, there can be no assurance that an
unfavorable outcome of this dispute would not have a material adverse effect on
the Company's results of operations, liquidity or financial position.
The Company is engaged in other legal actions arising in the ordinary
course of its business and believes that the outcome of these actions will not
have a material adverse effect on its results of operations, liquidity or
financial position.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company is an Internet solutions and telecommunications service
provider. Specifically, the Company provides high speed Internet access,
digital subscriber line ("DSL") service, web design and hosting, e-commerce
support, web integration and consulting services, as well as local and long
distance telephony service. 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 and medium
sized businesses. The Company is designing its systems to leverage advanced IP
technology to deliver its end-to-end solution set. The Company uses a
combination of both owned and leased facilities, with technically advanced
provisioning, billing and customer care applications.
The Company is strategically building co-location facilities within the
central offices of incumbent local exchange carriers ("ILECs") and pursuing
peer-like agreements with other service providers to extend the Company's
service areas. In addition, the Company is building integrated data centers
("IDCs") that will house the Company's advanced voice and data service
platforms. The Company's IDCs will also provide co-location space for customers,
offering reliable, secure and environmentally sound facilities to run mission
critical platforms and content applications.
To date, the Company has experienced significant operating and net losses
and negative cash flow from operations. To achieve positive operating margins
over time, the Company must significantly increase the number of customers and
increase the products and services that it can provide to its customers. It is
anticipated that operating and net losses and negative operating cash flow will
increase significantly for at least the next several years 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 high
speed Internet access, DSL, integrated services digital network ("ISDN"), web
design and hosting, e-commerce support and web integration and consulting
services, as well as local and long distance telephony services. The Company
intends to generate near-term revenue by replacing Internet and telephony
services currently provided by ILECs, competitive local exchange carriers
("CLECs"), incumbent exchange carriers ("IXCs") and ISPs. The Company uses a
dedicated sales force, agent sales force, telemarketing, direct mail and
advertising to market its Internet solutions and telecommunications services.
The Company also offers use of its network elements on a wholesale basis to
other IXCs and ISPs.
COSTS AND EXPENSES
NETWORK OPERATIONS. Network operations is comprised of service and network
costs. Service costs consist of payments to ILECs, CLECs and IXCs for monthly
recurring and non-recurring line and activation charges incurred to provide DSL,
ISDN, frame relay and telephony services as well as backbone transport charges
between the Company's data centers. Additional service costs include labor and
materials associated with web integration and consulting services. Network costs
primarily include rent and utilities associated with data centers, co-locations,
points of presence ("POPs") and network operations centers ("NOCs"). Labor
associated with network design and planning, technical support, customer
service, installation and line repair is also included in Network costs.
The Company has leveraged its substantial internal expertise with respect
to engineering, planning 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
10
<PAGE>
direct fiber connections, DSL, unbundled network elements leased from the ILEC
or other providers, depending on the most cost-effective connection that will
support the bundle of services provided to the customer.
RESULTS OF OPERATIONS
QUARTER ENDED MARCH 31, 1999 COMPARED WITH THE QUARTER ENDED MARCH 31, 1998
Revenue increased from $130,000 for the quarter ended March 31, 1998 to
$8.3 million for the quarter ended March 31, 1999, an increase of $8.1 million
or 6,255%. This increase is due primarily to the Company's various acquisitions
during the quarters ended December 31, 1998 and March 31, 1999. Optec
contributed approximately $4.8 million of web integration and consulting
services revenue during the quarter ended March 31, 1999. Slip.Net and Sirius
contributed approximately $1.9 million of Internet services revenue during this
same period. Lastly, approximately $1.4 million of the total increase in
revenue resulted from growth and expansion of the Company's customer base for
Internet services, web integration and telephony primarily in the Southern
California area.
Network operations expenses increased from $192,000 for the quarter ended
March 31, 1998 to $5.7 million for the quarter ended March 31, 1999, an increase
of $5.5 million or approximately 2,867%. Optec, Slip.Net and Sirius increased
network operations expense in aggregate by approximately $3.9 million. The
remaining increase is due to the cost of providing service to the expanded
customer base in the Southern California area.
Selling, general and administrative expenses increased from $2.5 million
for the quarter ended March 31, 1998 to $10.9 million for the quarter ended
March 31, 1999, an increase of $8.4 million or approximately 332%. Optec,
Slip.Net and Sirius increased selling, general and administrative expense in
aggregate by approximately $2.6 million. Salaries and other related expenses
increased approximately $3.9 million primarily due to higher staffing levels. In
addition, bonuses in the amount of $610,000 were accrued during the quarter
ended March 31, 1999. The increase also resulted in part from the Company's
obligations under separate management consulting agreements the Company entered
into in December 1997, with a term starting in 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 March 31, 1999. Spectra 3 and an
affiliate of Enron are significant stockholders in the Company. The remaining
increase is due to higher overall expenses resulting from expansion of
operations in accordance with the execution of the Company's business plan.
Depreciation and amortization expenses increased from $551,000 for the
quarter ended March 31, 1998 to $3.0 million for the quarter ended March 31,
1999, an increase of $2.4 million or approximately 442%. The majority of the
increase in depreciation and amortization is due to the amortization of goodwill
associated with the Optec, Slip.Net and Sirius acquisitions. Amortization of
the goodwill associated with these acquisitions approximated $1.4 million for
the quarter ended March 31, 1999. The remaining increase primarily relates to
depreciation expense associated with equipment purchased in connection with the
overall expansion of operations in accordance with the execution of the
Company's business plan.
Interest income increased from $49,000 for the quarter ended March 31, 1998
to $2.4 million for the quarter ended March 31, 1999, an increase of $2.4
million or approximately 4,800%. The increase is attributable to the
availability of additional funds from the sale of the Senior Notes (as defined
below), 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.
Interest expense increased from $1.1 million for the quarter ended March
31, 1998 to $8.8 million for the quarter ended March 31, 1999, an increase of
$7.7 million or approximately 681%. 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. During the
quarter ended March 31, 1999 approximately $141,000 of interest was
capitalized. No interest was capitalized during the quarter ended March 31,
1998.
11
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's existing operations have required and will continue to
require substantial capital investment for the installation of
telecommunications equipment, DSL, IDCs, co-locations, fiber optics and
other electronics and related equipment and the funding of operating losses
during the start-up phase of markets targeted by the Company. 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 the Company's network, business acquisitions and
the funding of operating losses as a result of expanding the network into new
markets.
From its inception through March 31, 1999, 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 $26.1 million, 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 $1.0
million termination fee pursuant to the terms thereof.
The Company's most significant sources and uses of funds for the three
months ended March 31, 1999 are as follows (000s):
<TABLE>
<CAPTION>
Sources of funds:
<S> <C>
Maturities of held-to-maturity marketable securities $170,030
Proceeds from the exercise of stock options and warrants 342
--------
Total sources of cash $170,372
========
Uses of funds:
Net cash used by operating activities $ 11,930
Purchases of held-to-maturity marketable securities 84,235
Acquisitions, net of cash acquired 17,789
Purchase of property and equipment 5,651
Payments associated with debt and capital leases 263
--------
Total uses of cash $119,868
========
</TABLE>
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 its inception. This negative cash flow is the result of
the Company's capital expansion and acquisition activities. 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 break-even
cash flow can be attained 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 believes that it
currently has sufficient capital to support 1999 operations and to execute its
1999 capital expenditure plan.
Acquisition Activities
On November 24, 1998, the Company purchased all of the outstanding capital
stock of Optec from ECI. Optec is a web 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 million in cash for the Optec capital stock, the
indefeasible rights of use and the WAN rights. The Company also repaid at
closing approximately $4 million 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 cash of $10.5 million 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. 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.
12
<PAGE>
On March 2, 1999, the Company purchased all of the outstanding capital
stock of Sirius, in exchange for cash of approximately $7.5 million and 285,000
shares of the Company's Series B Common Stock. Sirius 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.
Fair Value of Financial Instruments
With the exception of the Company's Senior Discount Notes, management
believes that the carrying amounts shown for the Company's financial instruments
reasonably approximate their fair values. The fair value of the Company's
Senior Discount Notes, determined based on quoted high-yield market bid prices,
approximates $181.0 million at March 31, 1999. The carrying amount of such
Senior Discount Notes at March 31, 1999 was $266.4 million. However, on May 12,
1999, the fair value of the Senior Discount Notes, determined based on quoted
high-yield market bid prices, had increased to approximately $256.4 million.
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 Company has not yet determined the full cost of its Year 2000
readiness program and its related impact on its financial condition. The
budgeted amount for the cost of the Company's Year 2000 effort is approximately
$500,000. Through March 31, 1999, expenditures totaled less than $100,000. The
Company currently expects to use two full-time equivalent workers to support its
Year 2000 effort, a figure representing approximately 7% of the budgeted IT
staff. While there can be no assurance, the Company believes its costs to
successfully mitigate the Year 2000 issue will not be material to its
operations. No assurance can be made, however, as to the total cost for the
Year 2000 program until the program has been completed.
Risks: The Company currently 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
13
<PAGE>
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 may 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
due diligence factor.
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 currently expects to circulate identified risks and
potential resolutions in the form of a contingency plan by the end of May. This
plan will be monitored and updated as part of an on-going process that the
Company currently 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.
14
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
On May 13, 1999, the City of Anaheim (the "City") filed a lawsuit in
Orange County Superior Court, Case Number 809281, against FirstWorld and
FirstWorld Anaheim, Inc. (collectively "FirstWorld Parties"). The City alleges
that FirstWorld Parties have repudiated their contractual obligations under the
Universal Telecommunications System Participation Agreement (the "Participation
Agreement"), the Agreement for Use of Operating Property (the "Operating
Property Agreement") and the Development Fee Agreement (the "Development
Agreement," and together with the Participation Agreement and the Operating
Property Agreement, the "UTS Agreements"). In addition, the City alleges, among
other things, that FirstWorld Parties materially breached their obligations
under the UTS Agreements by: (i) failing to commence construction of a
demonstration center in downtown Anaheim and that FirstWorld Parties will not
commence operation of this downtown demonstration center by June 30, 1999 under
the UTS Agreements; (ii) failing to provide verification that Substantial
Completion of Phase I, as each such term is defined in the UTS Agreements, has
been achieved; (iii) failing to provide a "Subsequent Implementation Program"
(as defined in the UTS Agreements); (iv) failing to comply with various auditing
procedures in the UTS Agreements; and (v) failing to make a quarterly payment
due under the Participation Agreement. The City alleges that it is entitled to
damages in excess of $45 million as well as costs, pre-judgment interest and
such other relief as the Court deems proper. The City also seeks specific
performance compelling FirstWorld Parties to completely perform under the UTS
Agreements.
The Company believes that it is not in breach as alleged and intends to
vigorously defend the action; however, there can be no assurance that an
unfavorable outcome of this dispute would not have a material adverse effect on
the Company's results of operations, liquidity or financial position.
The Company is engaged in other legal actions arising in the ordinary
course of its business and believes that the outcome of these actions will not
have a material adverse effect on its results of operations, liquidity or
financial position.
ITEM 6. Exhibits And Reports On Form 8-K
(a) Exhibits:
Exhibit 10.35 Employment Agreement between the Company and Paul C. Adams.
Exhibit 10.36 First Amendment to Lease between the Registrant and The
Prudential Insurance Company of America dated December 1,
1998.
Exhibit 27.1 Financial Data Schedule
(b) Two reports on Form 8-K were filed in the 3 month period ended March 31,
1999:
<TABLE>
<CAPTION>
Were any financial
Item Reported statements filed? Date of filing
- --------------------------------------------------------------------- ------------------ --------------
<S> <C> <C>
Item 5 - Other Event - Acquisition of Accelerated Information, Inc. No January 20, 1999
Item 5 - Other Event - Acquisition of Sirius Solutions, Inc. No March 29, 1999
</TABLE>
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
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 May 14, 1999
- ---------------------------------------------- (Principal Executive Officer)
Sheldon S. Ohringer
/s/ PAUL C. ADAMS Vice President, Finance, Treasurer and Assistant May 14, 1999
- ---------------------------------------------- Secretary (Principal Financial and Accounting
Paul C. Adams Officer)
</TABLE>
16
<PAGE>
EXHIBIT 10.35
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement"), dated as of January 21, 1999,
---------
is by and between FirstWorld Communications, Inc., a Delaware corporation (the
"Company") and Paul C. Adams ("Executive").
- -------- ---------
RECITAL
The Company desires to employ Executive, effective as of January 27, 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 Vice
----------
President of Finance and Treasurer 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 27, 2000. The Employment Period may be sooner
terminated by either party in accordance with Section 5 of this Agreement.
3. Position and Duties. During the Employment Period, Executive shall
-------------------
serve as Vice President of Finance and Treasurer of the Company. Executive
shall devote such time, attention and energies to Company affairs as are
necessary to fully perform his duties (other than absences due to illness or
vacation) for the Company. During the Employment Period, Executive shall not,
directly or indirectly, render services to any other organization, entity or
person, as an employee, independent contractor, consultant or otherwise, with or
without compensation, without the prior written consent of the Board of
Directors of the Company (the "Board").
-----
4. Compensation and Related Matters.
--------------------------------
(a) Salary. During the Employment Period, the Company shall pay
Executive an annual base salary of $120,000 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 January
2000 and each year thereafter. If Executive's Base Salary is increased by the
Company, such increased Base Salary shall then constitute the Base Salary for
all purposes of this Agreement. All compensation paid to Executive shall be
subject to withholding and other employment taxes imposed by applicable law.
<PAGE>
(b) Annual Bonus. The Board's compensation committee (the
"Compensation Committee") shall review Executive's performance at least once
- ------------- ---------
annually during each year of the Employment Period and, based on Executive's
performance, recommend whether the Company should award Executive a cash bonus
("Bonus") in order to reward Executive for services rendered to the Company
-----
and/or as an incentive for continued service to the Company. The amount of
Executive's Bonus, if any, shall be determined in the reasonable discretion of
the Compensation Committee and shall be dependent upon, among other things, the
achievement of certain performance levels by the Company, including, without
limitation, (i) the nature, magnitude and quality of the services performed by
Executive for the Company, (ii) the condition (financial and other) and results
of operations of the Company and (iii) the compensation paid for positions of
comparable responsibility and authority within the telecommunications industry.
The targeted amount of Executive's Bonus shall be an amount equal to 25% of Base
Salary at 100% completion of applicable performance levels, to be set forth in
the Company's Annual Bonus Plan.
(c) Stock Options. Effective as of the Commencement Date, Executive
shall be awarded a stock option (the "Stock Option") to purchase 100,000 shares
------------
of the Company's Series B Common Stock, par value $.0001 per share (the "Common
------
Stock"). The shares of Common Stock subject to the Stock Option shall vest in
- -----
increments of 25,000 shares on each of the first, second, third and fourth
anniversaries of the Commencement Date, with the shares in the first such
increment having an exercise price of $6.00, shares in the second such increment
having an exercise price of $6.50, shares in the third such increment having an
exercise price of $7.00 and shares in the fourth such increment having an
exercise price of $7.50. The Stock Option will be granted under one of the
Company's stock option plans and the terms and conditions of the Stock Option
will be determined in accordance with the applicable stock option plan.
Notwithstanding any such terms, however, all shares subject to the Stock Option
shall become immediately vested and exercisable in the event of the sale of all
or substantially all of the Company's assets or a merger or consolidation in
which the Company is not the surviving entity or the Company's stockholders
prior to the transaction own less than 50% of the voting power of the Company's
outstanding securities immediately following the transaction.
(d) Expenses. The Company shall promptly reimburse Executive for all
reasonable business expenses upon the presentation of reasonably itemized
statements of such expenses in accordance with the Company's policies and
procedures now in force or as such policies and procedures may be modified with
respect to all senior executive officers of the Company.
(e) Welfare and Pension Plans. In addition to Executive's Base
Salary and any incentive compensation and bonuses awarded to Executive
hereunder, he (and his family) shall be entitled to participate, to the extent
that he is (and they are) eligible under the terms and conditions thereof, in
any pension, retirement, hospitalization, insurance, disability or medical
service plan generally available to the executive officers of the Company that
may be in effect from time to time during the Employment Period. The Company
shall be under no obligation to institute or continue the existence of any such
employee benefit plan.
5. Termination. Executive's employment hereunder may be terminated during
-----------
the Employment Period under the following circumstances:
2
<PAGE>
(a) Death. Executive's employment hereunder shall terminate upon his
death.
(b) Disability. If, as a result of Executive's incapacity due to
physical or mental illness, Executive shall have been substantially unable to
perform his duties hereunder for an entire period of thirty (30) consecutive
days, and within thirty (30) days after written Notice of Termination (as
defined in Section 6(a)) is given after such thirty (30) day period, Executive
shall not have returned to the substantial performance of his duties on a full-
time basis, the Company shall have the right to terminate Executive's employment
hereunder for "Disability," and such termination in and of itself shall not be,
nor shall it be deemed to be, a breach of this Agreement.
(c) Cause. The Company shall have the right to terminate Executive's
employment for Cause (as defined), and such termination in and of itself shall
not be, nor shall it be deemed to be, a breach of this Agreement. For purposes
of this Agreement, the Company shall have "Cause" to terminate Executive's
employment upon Executive's:
(i) conviction of, or plea of guilty or nolo contendere to, any
crime constituting a felony;
(ii) commission of a material act of dishonesty, fraud,
misrepresentation or other act of moral turpitude that would, in the
Board's reasonable judgment, prevent the effective performance of his
duties hereunder;
(iii) continued failure to substantially perform his duties
hereunder to the reasonable satisfaction of the Board (other than such
failure resulting from Executive's incapacity due to physical or mental
illness or subsequent to the issuance of a Notice of Termination by
Executive for Good Reason (as defined in Section 5(d)) after demand for
substantial performance is delivered by the Board in writing that
specifically identifies the manner in which the Board believes Executive
has not used reasonable best efforts to substantially perform his duties;
or
(iv) willful misconduct (including, but not limited to, a
willful breach of the provisions of Section 8) that is, in the Board's
reasonable judgment, injurious to the Company or to any entity in control
of, controlled by or under common control with the Company ("Affiliate").
---------
For purposes of this Section 5(c), no act, or failure to act, by Executive
shall be considered "willful" unless committed in bad faith and without a
reasonable belief that the act or omission was in the best interests of the
Company or any Affiliates thereof; provided, however, that the requirements
-------- -------
outlined in paragraphs (iii) or (iv) above shall be deemed to have occurred if
Executive's action or non-action continues for more than ten (10) days after
Executive has received written notice of the inappropriate action or non-action.
This Section 5(c) shall not prevent Executive from challenging the Board's
determination that Cause exists or that Executive has failed to cure any act (or
failure to act) that purportedly formed the basis for the Board's determination,
under the arbitration procedures set forth in Section 10 below.
3
<PAGE>
(d) Good Reason. Executive may terminate his employment for "Good
Reason" within thirty (30) days after Executive has actual knowledge of the
occurrence, without the written consent of Executive, of one of the following
events that has not been cured within thirty (30) days after written notice
thereof has been given by Executive to the Company (provided, that with respect
--------
to this Section 5(d), the Company shall have the right to challenge Executive's
determination that he has the right to terminate his employment for "Good
Reason" under the arbitration procedures set forth in Section 10 below):
(i) a reduction by the Company in Executive's Base Salary or a
failure by the Company to pay any such amounts when due;
(ii) any purported termination of Executive's employment for
Cause which is not effected pursuant to the procedures of Section 5(c) (and
for purposes of this Agreement, no such purported termination shall be
effective);
(iii) the Company's failure to provide the Stock Option or the
Company's material breach of one or more of the stock option agreements
pursuant to which the Stock Option was issued to Executive;
(iv) the Company's failure to substantially provide any material
employee benefits due to be provided to Executive; or
(v) the Company's failure to provide in all material respects
the indemnification set forth in the agreement referenced in Section 9 of
this Agreement.
Executive's continued employment during the thirty (30) day period referred
to above in this paragraph (d) shall not constitute Executive's consent to, or a
waiver of rights with respect to, any act or failure to act constituting Good
Reason hereunder.
(e) Without Good Reason or Cause. Executive shall have the right to
terminate his employment hereunder without Good Reason and the Company shall
have the right to terminate Executive's employment hereunder without Cause by
providing the other with a Notice of Termination, and such termination shall not
in and of itself be, nor shall it be deemed to be, a breach of this Agreement.
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.
4
<PAGE>
(b) Date of Termination. "Date of Termination" shall mean (i) if
Executive's employment is terminated by his death, the date of his death, (ii)
if Executive's employment is terminated pursuant to Section 5(b), thirty (30)
days after Notice of Termination (provided that Executive shall not have
returned to the substantial performance of his duties on a full-time basis
during such thirty (30) day period) and (iii) if Executive's employment is
terminated for any other reason, the date on which a Notice of Termination is
given or any later date (within thirty (30) days after the giving of such
notice) set forth in such Notice of Termination.
7. Compensation Upon Termination or During Disability. In the event
--------------------------------------------------
Executive is disabled or his employment terminates during the Employment Period,
the Company shall provide Executive with the payments and benefits set forth
below. Executive acknowledges and agrees that the payments set forth in this
Section 7 constitute liquidated damages for termination of his employment during
the Employment Period.
(a) Termination By Company Without Cause or By Executive for Good
Reason. If Executive's employment is terminated by the Company without Cause or
by Executive for Good Reason:
(i) the Company shall pay to Executive a severance payment
equal to the amount of Base Salary Executive would have received under the
Agreement if Executive had remained employed throughout the Employment
Period 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 agreements, plans or programs of the
Company.
(b) Termination by Company For Cause or By Executive Without Good
Reason. If Executive's employment is terminated by the Company for Cause or by
Executive (other than for Good Reason):
(i) the Company shall pay Executive his Base Salary and, to the
extent required by law or the Company's vacation policy, his accrued
vacation pay through the Date of Termination, as soon as practicable
following the Date of Termination;
(ii) the Company shall reimburse Executive pursuant to Section
4(e) for reasonable expenses incurred, but not paid prior to such
termination of employment, unless such termination resulted from a
misappropriation of Company funds; and
5
<PAGE>
(iii) Executive shall be entitled to any other rights,
compensation and/or benefits as may be due to Executive in accordance with
the terms and provisions of any agreements, plans or programs of the
Company.
(c) Disability. During any period that Executive fails to perform
his duties hereunder as a result of incapacity due to physical or mental
illness, Executive shall continue to receive his full Base Salary set forth in
Section 4(b) until his employment is terminated pursuant to Section 5(b). In
the event Executive's employment is terminated for Disability pursuant to
Section 5(b):
(i) the Company shall pay to Executive his Base Salary and
accrued vacation pay through the Date of Termination, within 30 days
following the Date of Termination;
(ii) the Company shall reimburse Executive pursuant to Section
4(e) for reasonable expenses incurred, but not paid prior to such
termination of employment; and
(iii) Executive shall be entitled to any other rights,
compensation and/or benefits as may be due to Executive in accordance with
the terms and provisions of any agreements, plans or programs of the
Company.
(d) Death. If Executive's employment is terminated by his death:
(i) the Company shall pay in a lump sum to Executive's
beneficiary, legal representatives or estate, as the case may be,
Executive's Base Salary through the Date of Termination;
(ii) the Company shall reimburse Executive's beneficiary, legal
representatives, or estate, as the case may be, pursuant to Section 4(e)
for reasonable expenses incurred, but not paid prior to such termination of
employment; and
(iii) Executive's beneficiary, legal representatives or estate,
as the case may be, shall be entitled to any other rights, compensation and
benefits as may be due to any such persons or estate in accordance with the
terms and provisions of any agreements, plans or programs of the Company.
8. Confidential Information, Ownership of Documents; Non-Competition.
-----------------------------------------------------------------
(a) Confidential Information. Executive shall hold in a fiduciary
capacity for the benefit of the Company all Confidential Information (as defined
below) relating to the Company and its businesses and investments, which shall
have been obtained by Executive during Executive's employment by the Company and
which is not generally available public knowledge (other than by acts of
Executive in violation of this Agreement). Except as may be required or
appropriate in connection with his carrying out his duties under this Agreement,
Executive shall not, without the prior written consent of the Company or as may
otherwise be required by law or any legal process, or as is necessary in
connection with any adversarial
6
<PAGE>
proceeding against the Company (in which case Executive shall use his reasonable
best efforts in cooperating with the Company in obtaining a protective order
against disclosure by a court of competent jurisdiction), communicate or divulge
any such Confidential Information relating to the Company to anyone other than
the Company and those designated by the Company or on behalf of the Company in
the furtherance of its business or to perform duties hereunder.
For the purposes hereof, the term "Confidential Information" means, with respect
to any person, any information concerning such person or its business, products,
financial condition, prospects and affairs that is not generally available to
the public. The term Confidential Information shall not include information
that: (i) is already known to the recipient and was properly obtained by the
recipient prior to the date of this Agreement; (ii) is in the public domain
other than through a negligent act or omission or willful misconduct of the
recipient; (iii) is acquired in good faith from a third party and, at the time
of the acquisition, the recipient had no knowledge or reason to believe that
such information was wrongfully obtained or disclosed by the third party; (iv)
is independently developed by the recipient from information not defined as
"Confidential Information" in this Agreement, as evidenced by the recipient's
written records; (v) is disclosed to third parties by the disclosing party
without restriction; (vi) is required to be disclosed under applicable law or by
a valid subpoena or other court or governmental order, decree, regulation or
rule; provided, however, that if disclosure is required under this provision the
-------- -------
recipient shall advise the disclosing party of the requirement to disclose the
Confidential Information prior to such disclosure and as soon as reasonably
practicable after the recipient becomes aware of such required disclosure; and
further provided that upon the request of the disclosing party, the recipient
- ------- -------- ----
agrees to cooperate in good faith with any reasonable and lawful actions which
the disclosing party takes to resist such disclosure, limit the information to
be disclosed or limit the extent to which the information so disclosed may be
used or made available to third parties, at the cost of the disclosing party.
(b) Removal of Documents; Rights to Products. All records, files,
drawings, documents, models, equipment, and the like relating to the Company's
business, which Executive has control over shall not be removed from the
Company's premises by Executive without the Board's written consent, unless such
removal is in the furtherance of the Company's business or is in connection with
Executive's carrying out his duties under this Agreement and, if so removed by
Executive, shall be returned to the Company promptly after termination of
Executive's employment hereunder, or otherwise promptly after removal if such
removal occurs following termination of employment. Executive shall assign to
the Company all rights to trade secrets and other products relating to the
Company's business developed by him alone or in conjunction with others at any
time while employed by the Company.
(c) Continuing Operation. Except as specifically provided in this
Section 8, the termination of Executive's employment or of this Agreement shall
have no effect on the continuing operation of this Section 8.
9. Indemnification.
---------------
(a) Upon the Commencement Date, Executive will enter into the
Company's standard directors and officers indemnification agreement.
7
<PAGE>
(b) Upon the Commencement Date, the Company will ensure that Executive
is added as an insured on its directors and officers liability insurance policy.
In the event that Executive's employment relationship with the Company is
severed, for any reason, the Company will provide that Executive shall continue
to be an insured under the Company's directors and officers liability insurance
policy for as long as the Company retains such coverage, and if the Company
discontinues such coverage, Executive and/or his heirs or personal or legal
representative shall be given the opportunity to purchase continuation coverage
in accordance with the terms of the applicable policy.
10. Arbitration. Any controversy between Executive and the Company
-----------
involving the construction or application of any of the terms, provisions or
conditions of this Agreement, including, without limitation, the determination
of whether "Cause" or "Good Reason" exists under Section 5(c) or Section 5(d)
hereof and claims involving specific performance, shall on the written request
of either party served on the other in accordance with Section 12 below be
submitted to binding arbitration. EACH PARTY, BY SIGNING THIS AGREEMENT,
VOLUNTARILY, KNOWINGLY AND INTELLIGENTLY WAIVES ANY RIGHTS SUCH PARTY MAY
OTHERWISE HAVE TO SEEK REMEDIES IN COURT OR OTHER FORUMS, INCLUDING THE RIGHT TO
A JURY TRIAL. Arbitration shall comply with and be governed in accordance with
the Commercial Arbitration Rules of the American Arbitration Association (the
"AAA"). The arbitration will be conducted only in Denver, Colorado, before a
- ----
single arbitrator selected by the parties or, if they are unable to agree on an
arbitrator, before an arbitrator selected by the AAA. The arbitrator shall have
full authority to order specific performance and award damages and other relief
available under this Agreement or applicable law, but shall have no authority to
add to, detract from, change or amend the terms of this Agreement or existing
law. All arbitration proceedings, including settlements and awards, shall be
confidential. The decision of the arbitrator will be final and binding, and
judgment on the award by the arbitrator may be entered in any court of competent
jurisdiction. THIS SUBMISSION AND AGREEMENT TO ARBITRATE WILL BE SPECIFICALLY
ENFORCEABLE. The arbitrator will have no power to award punitive or exemplary
damages, to ignore or vary the terms of this Agreement and any other agreement
between Executive and the Company and will be bound to apply controlling law.
The prevailing party in any such arbitration shall be entitled to receive the
costs of arbitration, including reasonable attorneys' fees and costs, from the
losing party.
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.
8
<PAGE>
(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:
Paul C. Adams
1541 Valley View Court
Golden, CO 80403-7779
If to the Company:
FirstWorld Communications, Inc.
7100 East Belleview Avenue, Suite 210
Greenwood Village, CO 80111
Attn: General Counsel
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.
9
<PAGE>
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.
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]
10
<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/ Paul C. Adams
----------------------------------------------
PAUL C. ADAMS
11
<PAGE>
EXHIBIT 10.36
AMENDMENT TO OFFICE BUILDING LEASE
----------------------------------
THIS AMENDMENT TO OFFICE BUILDING LEASE (this "Amendment") is entered into
----------
effective as of the 1st day of March, 1999, by and between THE PRUDENTIAL
INSURANCE COMPANY OF AMERICA, a New Jersey corporation ("Landlord"), and
--------
FIRSTWORLD COMMUNICATIONS, INC., a Delaware corporation ("Tenant").
------
WITNESSETH:
A. Landlord and Tenant entered into that certain Office Building Lease
("the Lease"), as of December 1, 1998, with respect to the premises known as
-----
Suite 208, comprised of approximately 7,108 rentable square feet (the "Original
--------
Premises"), being a part of the building known as the Paragon Building located
- ----------
at 7100 East Belleview Avenue, Greenwood Village, Colorado (the "Building").
--------
B. Landlord and Tenant desire to amend the Lease to adjust the net
rentable square feet of the Premises, the amount of the Base Rent and otherwise
in the manner and form hereinafter set forth.
NOW, THEREFORE, in consideration of the premises and other good and valuable
consideration, the receipt and adequacy of which is hereby acknowledged, the
parties hereto agree as follows:
1. Additional Premises. Effective as of March 1, 1999, approximately
-------------------
5,979 rentable square feet, known as Suite 111 and depicted on Exhibit 1 hereto
(the "Additional Premises") shall be added to the Premises. The terms and
conditions of the Lease shall apply to the Additional Premises and the term
"Premises," when used in the Lease shall mean the Original Premises and the
Additional Premises.
2. Condition of Additional Premises. Tenant accepts the Additional
--------------------------------
Premises "as is" and Landlord shall have no obligation for the completion or
remodeling of the Additional Premises.
3. Base Rent. Effective as of March 1,1999 the Base Rent, as defined in
---------
Section 3 of the Lease shall be Two Hundred Fifty Four Thousand Six Hundred
Thirty One Dollars and Ninety Six Cents ($254,631.96) per year and shall be
payable in monthly installments of Twenty One Thousand Two Hundred Nineteen
Dollars and Thirty Three Cents ($21,219.33) through the Primary Lease term.
4. Tenant's Pro Rata Share. Effective as of March 1,1999, Section 5 of
-----------------------
the Lease is amended to provide: Tenant's Pro Rata Share shall be 7.7%,
calculated on the basis of the
<PAGE>
ratio of the total rentable area of floor space in the Premises to the total
rentable area of the floor space in the Building, which shall be deemed to be
169,757.
5. Parking. Effective on March 1,1999, Paragraph 29 of the Lease shall be
-------
amended to substitute 43 for 24 parking spaces.
6. Miscellaneous.
-------------
a. Tenant represents and warrants to Landlord that it has not
engaged any broker in connection with the negotiation and/or execution of this
Amendment except for Frederick Ross Company. Tenant has no knowledge of any
brokers' involvement in this transaction, except PREMISYS COLORADO, a Delaware
corporation ("Premisys"), which has acted as Landlord's leasing agent. Tenant
will indemnify Landlord and Premisys against any claim or expense (including,
without limitation, attorneys' fees) paid or incurred by Landlord or Premisys,
respectively, as a result of any claim for commissions or fees by any broker,
finder or agent other than Fredrick Ross Company, whether or not meritorious,
employed by Tenant or claiming by, through or under Tenant. Tenant acknowledges
that Landlord is not liable for any representations by Premisys or any other
broker or agent regarding the Premises, the Building or this Amendment.
b. In the event of any litigation arising out or of in connection
with this Amendment, the prevailing party shall be awarded reasonable attorney's
fees, costs and expenses.
c. The Lease as modified herein remains in full force and effect and
is ratified by Landlord and Tenant. In the event of any conflict between the
Lease and this Amendment, the terms and conditions of this Amendment shall
control. Capitalized terms not defined herein shall have the same meaning as set
forth in the Lease.
d. This Amendment is binding upon and inures to the benefit of the
parties hereto and their heirs, personal representative, successors and assigns.
Except as expressly provided herein, Tenant has not assigned or transferred any
interest in the Lease and has full power and authority to execute this
Amendment. Tenant has no known claims of any kind or nature against Landlord
arising from or under the Lease and there are no agreements between Landlord and
Tenant other than the Lease, as amended hereby.
e. Time is of the essence herein, unless waived by Landlord, which
it shall have the right, but not the obligation to do.
2
<PAGE>
f. This Amendment shall be governed by and construed in
accordance with the laws of the State of Colorado.
g. The respective rights and obligations of Landlord and Tenant
with respect to the Original Premises shall be preserved and shall survive the
Surrender Date as to all matters arising or accruing prior to the Surrender
Date.
j. Tenant represents as follows:
(1) Neither Tenant nor any of its affiliates (within the meaning
of Part V(c) of Prohibited Transaction Exemption 84-14,49 Fed.Reg.
9494 (1984), as amended ("PTE 84-14") has, or during the immediately
---------
preceding year, has exercised authority to:
(A) appoint or terminate the Prudential Insurance Company of
America or Prudential Real Estate Investors ("Prudential") as
investment manager over assets of any employee benefit plan
invested in Landlord; or
(B) negotiate the terms of a management agreement with
Prudential on behalf of any such plan;
(2) Tenant is not a "related party" of Prudential (as defined in
Part V(h) of PTE 84-14);
(3) Tenant has negotiated and determined the terms of this
Amendment at arm's length, as such terms would be negotiated and
determined by Tenant with unrelated parties; and
(4) Tenant is not an "employee benefit plan" as defined in
Section 3(3) of the Employee Retirement Income Security Act of 1974,
as amended ("ERISA"), a "plan" as defined in Section 4965(e)(1) of the
Internal Revenue Code of 1986, as amended (the "Code"), or any entity
deemed to hold "plan assets" within the meaning of 29 C.F.R. (S)
2510.3-101 of any such employee benefit plan or plans.
3
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Amendment to
Office Building Lease as of the day and year first above written.
LANDLORD:
--------
THE PRUDENTIAL INSURANCE COMPANY
OF AMERICA, a New Jersey corporation
By: CUSHMAN AND WAKEFIELD,
INC./PREMISYS COLORADO, a
Delaware corporation, as agent for The
Prudential Insurance Company of America
By: /s/ Stephen M. Schwab
------------------------------------------
Stephen M. Schwab
Its: Director
Date: 3/5/99
TENANT:
------
FIRSTWORLD COMMUNICATIONS, INC. a
Delaware corporation
By: /s/ Scott M. Chase
------------------------------------------
Print Name: Scott M. Chase
Its: SVP Corp. & Gov't. Affairs
Date: 2/22/99
4
<PAGE>
Exhibit 1
"Additional Premises"
Exhibit 1 - "Additional Premises" includes a diagram of the paragon building,
first level.
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<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 80,163
<SECURITIES> 84,235
<RECEIVABLES> 5,897
<ALLOWANCES> 135
<INVENTORY> 0
<CURRENT-ASSETS> 172,443
<PP&E> 73,168
<DEPRECIATION> 5,896
<TOTAL-ASSETS> 283,359
<CURRENT-LIABILITIES> 12,985
<BONDS> 266,721
0
0
<COMMON> 3
<OTHER-SE> (2,796)
<TOTAL-LIABILITY-AND-EQUITY> 283,359
<SALES> 8,262
<TOTAL-REVENUES> 8,262
<CGS> 5,696
<TOTAL-COSTS> 19,597
<OTHER-EXPENSES> 0
<LOSS-PROVISION> (17,764)
<INTEREST-EXPENSE> (8,830)
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<INCOME-CONTINUING> (17,764)
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<EXTRAORDINARY> 0
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