<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K/A
AMENDMENT NO. 1
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934. (Mark One)
/X/ Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
[NO FEE REQUIRED] for the fiscal year ended September 30, 1998.
/ / Transitional report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
[NO FEE REQUIRED] for the transition period from ___________ to
____________.
COMMISSION FILE NUMBER: 0-24953
FIRSTWORLD COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 33-0521976
(State of other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
7100 E. BELLEVIEW AVENUE, SUITE 210, GREENWOOD VILLAGE, COLORADO 80111
(Address of principal executive offices, Zip Code)
Registrant's telephone number, including area code: (303) 874-8010
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
SERIES B COMMON STOCK, $.0001 PAR VALUE
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports, and (2) has been subject to such
filing requirements for the past 90 days. Yes / / No /X/
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. /X/
The aggregate market value of the voting stock held by non-affiliates of
the Registrant as of November 30, 1998 was approximately $46,338,420.
As of November 30, 1998, 10,135,164 shares of Series A Common Stock and
16,137,958 shares of Series B Common Stock were outstanding.
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's exposure to market risk for changes in interest rates
relates primarily to the Company's investment portfolio and long-term debt
obligations.
As of September 30, 1998, the Company's interest bearing cash
equivalents and short-term investments consist exclusively of commercial
paper having original maturities of six months or less. The Company
classifies those instruments having original maturities of three months or
less as cash equivalents whereas instruments having original maturities of
greater than three months but less than six months are classified as short
term investments. The Company places its commercial paper investments with
high credit-quality counterparts and limits the amount of credit exposure to
any one entity. The Company has the ability and intent to hold such
investments, which are not held for trading or speculative purposes, through
their maturity dates.
The Company's long-term debt at September 30, 1998 consists principally
of Senior Discount Notes which bear interest at a fixed rate. The Senior
Discount Notes accrete in value at a stated rate of 13% per annum through
April 2003 and thereafter bear interest at a stated rate of 13% per annum
payable semi-annually in arrears. The Senior Discount Notes mature as to
principal in the aggregate amount of $470,000,000 in April 2008. The Company
has no cash flow exposure due to rate changes for its Senior Discount Notes.
The following table presents notional amounts and related weighted-average
interest rates by year of maturity for the Company's investment portfolio and
Senior Discount Note obligations of which have fixed interest rates:
Interest Rate Sensitivity
Principal Amount by Maturity
(Dollars in Millions)
<TABLE>
<CAPTION>
Year ended September 30,
------------------------------------ Fair Value
1999 2000 2001 2002 2003 Thereafter at 9/30/98
---- ---- ---- ---- ---- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
CASH EQUIVALENTS
Commercial paper $70.1 - - - - - $70.1
Average interest rate 5.8%
HELD-TO-MATURITY
INVESTMENTS
Commercial paper $165.6 - - - - - $165.6
Average interest rate 5.8%
SENIOR NOTES (A) - - - - - $470.0 $141.0
Average interest rate (B) 13.0%
</TABLE>
(A) The carrying amount of the Senior Discount Notes at September 30, 1998 is
approximately $249.6 million, which amount represents the $470.0 million
principal amount due at maturity less the unamortized debt discount of
approximately $220.4 million at September 30, 1998.
(B) Represents the stated interest rate of the Senior Discount Notes per the
indenture. The Senior Discount Notes' effective interest rate, inclusive
of the amortization of debt discount and deferred financing costs over
their term, approximates 14.2%.
2
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
(a) DOCUMENTS FILED AS PART OF THE REPORT:
Report of Independent Accountants. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-2
Consolidated Balance Sheets at September 30, 1998 and 1997 . . . . . . . . . . . . . . . . . . . . . . . . F-3
Consolidated Statements of Operations for each of the three years in the period ended September 30, 1998 . F-4
Consolidated Statements of Stockholders' Equity (Deficit) for each of the three years in the period ended
September 30, 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-5
Consolidated Statements of Cash Flows for each of the three years in the period ended September 30, 1998 . F-6
Notes to Consolidated Financial Statements.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-7
FINANCIAL STATEMENT SCHEDULE:
Schedule II - Valuation and Qualifying Accounts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-27
</TABLE>
Financial statement schedules other than those listed above have been
omitted because they are either not required, not applicable or the information
is otherwise included herein.
3
<PAGE>
(c) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- ------------
<S> <C>
3.1 Form of Certificate of Incorporation, as amended. (2)
3.2 Form of Bylaws, as amended. (2)
4.1 Indenture dated as of April 13, 1998 between the Registrant
and The Bank of New York. (1)
4.2 Form of 13% Senior Discount Notes due 2008 and schedule of 13%
Senior Discount Notes due 2008. (1)
4.3 Registration Rights Agreement dated as of April 13, 1998 among
the Registrant and the Initial Purchasers. (1)
10.1 Form of Indemnification Agreement entered into by the
Registrant and each of its executive officers and directors
and schedule listing all executive officers and directors who
have executed an Indemnification Agreement. (2)
10.2 1995 Stock Option Plan and related form of option agreement.
(1)
10.3 1997 Stock Option Plan and related form of option agreement.
(1)
10.4 Warrant Agreement dated as of April 13, 1998 among the
Registrant and the Initial Purchasers and related form of
warrant attached thereto. (1)
10.5 Warrant Registration Rights Agreement dated as of April 13,
1998 among the Registrant and the Initial Purchasers. (1)
10.6 Common Stock Purchase Agreement dated as of December 30, 1997
among the Registrant, Colorado Spectra 3, LLC, Enron Capital &
Trade Resources Corp. and the holders of $405,000 in principal
amount of the Company's convertible subordinated promissory
notes. (1)
10.7 First Amendment to Common Stock Purchase Agreement dated as of
February 9, 1998 among the Registrant, Colorado Spectra 3, LLC
and Enron Capital & Trade Resources Corp. (1)
10.8 Amended and Restated Investor Rights Agreement dated as of
April 13, 1998 among the Registrant and the Investors set
forth therein. (1)
10.9 Securityholders Agreement dated as of December 30, 1997 among
the Registrant, Enron Capital & Trade Resources Corp.,
Colorado Spectra 1, LLC, Colorado Spectra 2, LLC and Colorado
Spectra 3, LLC. (1)
10.10 Business Opportunity Agreement dated as of December 30, 1997
among the Registrant, Enron Capital & Trade Resources Corp.,
Colorado Spectra 1, LLC, Colorado Spectra 2, LLC and Colorado
Spectra 3, LLC. (1)
10.11 Management Consulting Services Agreement dated as of December
30, 1997, as amended by that First Amendment to Management
Consulting Services Agreement dated as of March 17, 1998,
between the Registrant and Corporate Managers, LLC. (1)
10.12 Management Consulting Services Agreement dated as of December
30, 1997 between the Registrant and Enron Trade & Capital
Resources Corp. (1)
10.13 Form of Warrant to Purchase Series B Common Stock and schedule
listing all holders of such warrants entitled to purchase a
number of shares of Series B Common Stock equal to or greater
than 1% of the Company's common stock outstanding as of May
31, 1998. (1)
10.14 Warrant to Purchase 2,110,140 shares of Series B Common Stock
issued to Colorado Spectra 2, LLC on December 30, 1997 (1)
10.15 Agreement for Use of Operating Property dated as of February
25, 1997 between FirstWorld Anaheim and the City of Anaheim.
(1)
10.16 Universal Telecommunications System Participation Agreement
dated as of February 25, 1997
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- ------------
<S> <C>
among the Registrant, FirstWorld Anaheim and the City of
Anaheim. (1)
10.17 Development Fee Agreement dated as of February 25, 1997
between the Registrant and the City of Anaheim. (1)
*10.18 Agreement for Lease of Telecommunications Conduit dated as
of March 5, 1998 between FirstWorld Orange Coast and The
Irvine Company. (3)
*10.19 Telecommunications System License Agreement dated as of
March 5, 1998 between FirstWorld Orange Coast and The Irvine
Company. (3)
10.20 Office Lease for Genesee Executive Plaza dated as of September
4, 1996 between Talcott Realty I Limited Partnership and the
Registrant. (1)
10.21 Standard Industrial/Commercial Single-Tenant Lease-Gross dated
as of August 26, 1996 between Scope Development and FirstWorld
Anaheim. (1)
10.22 SpectraNet International Founders' Sale Agreement. (2)
10.23 System Acquisition Agreement. (2)
10.24 Employment Agreement between the Registrant and Sheldon S.
Ohringer. (3)
10.25 Stock Option Agreement between the Registrant and Sheldon S.
Ohringer.
10.26 Employment Agreement between the Registrant and Scott Chase.
10.27 Employment Agreement between the Registrant and Marion K.
Jenkins.
10.28 Employment Agreement between the Registrant and David Gandini.
10.29 Employment Agreement between the Registrant and Doug Kramer.
10.30 Lease between the Registrant and The Prudential Insurance
Company of America.
10.31 First Amendment to Lease (Genesee Executive Plaza) dated as of
July 31, 1998 between Arden Realty Limited Partnership
(successor in interest to Talcott Realty I Limited
Partnership) and the Registrant.
10.32 Second Amendment to Management Consulting Services Agreement,
dated as of October 1, 1998, by and between the Registrant and
Corporate Managers, LLC.
10.33 First Amendment to Amended and Restated Investor Rights
Agreement, dated as of September 28, 1998, among the
Registrant, Enron Capital & Trade Resources Corp., Colorado
Spectra 1, LLC, Colorado Spectra 2, LCC and Colorado
Spectra 3, LLC.
12.1 Computation of Ratio of Earnings to Fixed Charges.
16.1 Letter Regarding Change in Certifying Accountant. (2)
21.1 Subsidiaries of the Registrant. (2)
23.1 Consent of PricewaterhouseCoopers LLP.
24.1 Power of Attorney (included on signature page hereof).
27.1 Financial Data Schedule.
</TABLE>
- ----------------
* Portions of this exhibit have been omitted pursuant to an order granting
confidential treatment filed with the Securities and Exchange Commission
(1) Incorporated herein by reference to the Registrant's Registration Statement
on Form S-4 (No. 333-57829) filed with the Securities and Exchange
Commission on June 26, 1998.
(2) Incorporated herein by reference to Amendment No. 1 to the Registrant's
Registration Statement on Form S-4 (No. 333-57829) filed with the
Securities and Exchange Commission on August 24, 1998.
(3) Incorporated herein by reference to Amendment No. 2 to the Registrant's
Registration Statement on Form S-4 (No. 333-57829) filed with the
Securities and Exchange Commission on October 8, 1998.
5
<PAGE>
(b) REPORTS ON FORM 8-K
There were no reports on Form 8-K filed by the Company during the fourth
quarter of the fiscal year ended September 30, 1998.
(c) EXHIBITS
The exhibits required by this Item are listed under Item 14(a)(3).
(d) FINANCIAL STATEMENT SCHEDULES
The consolidated financial statement schedules required by this Item are
listed under Item 14(a)(2).
6
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Dated: April 16, 1999 FIRSTWORLD COMMUNICATIONS, INC.
By: /s/ SHELDON S. OHRINGER
-----------------------
Name: Sheldon S. Ohringer
Title: President, Chief Executive Officer,
and Director (Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
<S> <C> <C>
/s/ SHELDON S. OHRINGER President, Chief Executive April 16, 1999
- ----------------------- Officer and Director (Principal
Sheldon S. Ohringer Executive Officer)
/s/ PAUL C. ADAMS Vice President, Finance and April 16, 1999
- ----------------------- Treasurer (Principal
Paul C. Adams Financial Officer)
</TABLE>
7
<PAGE>
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
FINANCIAL STATEMENTS:
Report of Independent Accountants. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-2
Consolidated Balance Sheets at September 30, 1998 and 1997 . . . . . . . . . . . . . . . . . . . . . . . . F-3
Consolidated Statements of Operations for each of the three years in the period ended September 30, 1998 . F-4
Consolidated Statements of Stockholders' Equity (Deficit) for each of the three years in the period ended
September 30, 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-5
Consolidated Statements of Cash Flows for each of the three years in the period ended September 30, 1998 . F-6
Notes to Consolidated Financial Statements.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-7
FINANCIAL STATEMENT SCHEDULE:
Schedule II - Valuation and Qualifying Accounts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-27
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of FirstWorld Communications, Inc.
(formerly SpectraNet International)
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of FirstWorld Communications, Inc. (formerly SpectraNet International)
and its subsidiaries at September 30, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 1998, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICEWATERHOUSECOOPERS LLP
San Diego, California
December 11, 1998
F-2
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
(formerly SpectraNet International)
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SEPTEMBER 30,
1998 1997
----------------- ------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $72,039,498 $536,275
Restricted cash - 50,000
Marketable securities 165,591,010 -
Interest receivable 3,016,623 -
Accounts receivable, net of allowance for doubtful accounts of
$9,765 and $0 493,393 72,567
Prepaid expenses 305,834 100,442
Other current assets 10,453 14,709
----------------- ------------------
Total current assets 241,456,811 773,993
Property and equipment, net 44,020,418 20,331,353
Deferred financing costs, net of accumulated amortization
of $429,818 and $60,872 8,217,102 4,067,932
Other assets 411,026 147,812
----------------- ------------------
$ 294,105,357 $ 25,321,090
----------------- ------------------
----------------- ------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 6,611,380 $2,483,793
Accrued interest 546,416 569,816
Accrued employee costs 221,785 205,012
Other accrued expenses 694,398 113,266
Short-term borrowings, net of discount - 401,262
Current portion of long-term debt 30,070 8,446
Current portion of capital lease obligations 787,874 311,166
----------------- ------------------
Total current liabilities 8,891,923 4,092,761
Long-term debt, net of discount 249,725,538 11,756,283
Convertible bridge notes - 405,500
Capital lease obligations 6,114,509 6,801,926
----------------- ------------------
Total liabilities 264,731,970 23,056,470
----------------- ------------------
Commitments (Notes 7, 8 and 14) - -
Stockholders' equity:
Preferred stock, no par value, 5,160,335 shares authorized at September 30,
1997:
Series C, convertible, voting, 2,600,000 shares issued and
outstanding - 12,279,362
Series B, convertible, voting, 2,016,638 shares issued and
outstanding - 3,670,060
Series A, convertible, non-voting, 118,667 shares issued and
outstanding - 395,162
Preferred stock, $.0001 par value, 10,000,000 shares authorized at
September 30, 1998; no shares designated, issued or outstanding - -
Common stock, voting, no par value, 15,000,000 shares authorized
at September 30, 1997; 3,262,900 shares issued and outstanding - (226,984)
Common stock, voting, $.0001 par value, 100,000,000 shares authorized
at September 30, 1998:
Series A, 10,135,164 shares designated; 10,135,164 shares
issued and outstanding 1,014 -
Series B, 89,864,836 shares designated; 15,929,708 shares
issued and outstanding 1,591 -
Additional paid-in capital 45,617,220 -
Warrants 31,963,295 1,000,960
Stockholder receivables (96,500) (96,500)
Accumulated deficit (48,113,233) (14,757,440)
----------------- ------------------
Total stockholders' equity 29,373,387 2,264,620
----------------- ------------------
$ 294,105,357 $ 25,321,090
----------------- ------------------
----------------- ------------------
</TABLE>
See accompanying notes to consolidated financial statements
F-3
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
(formerly SpectraNet International)
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
Service revenue $1,078,288 $ 75,118 $279,483
Other revenue 12,373 95,715 75,000
---------------- ---------------- ----------------
1,090,661 170,833 354,483
---------------- ---------------- ----------------
Costs and expenses:
Network development and operations 6,501,105 3,169,854 1,708,416
Selling, general and administrative expenses 10,641,312 4,724,649 2,409,442
Depreciation and amortization 2,424,466 501,354 75,258
---------------- ---------------- ----------------
19,566,883 8,395,857 4,193,116
---------------- ---------------- ----------------
Loss from operations (18,476,222) (8,225,024) (3,838,633)
Other income (expense):
Interest expense (16,898,271) (1,372,377) (26,517)
Interest income 6,749,367 149,243 8,958
---------------- ---------------- ----------------
Loss before extraordinary item (28,625,126) (9,448,158) (3,856,192)
Extraordinary item - extinguishment of debt
(Notes 4 and 5) (4,730,667) (104,680) -
---------------- ---------------- ----------------
Net loss $(33,355,793) $ (9,552,838) $ (3,856,192)
---------------- ---------------- ----------------
---------------- ---------------- ----------------
</TABLE>
See accompanying notes to consolidated financial statements
F-4
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
(formerly SpectraNet International)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SERIES A SERIES B
COMMON STOCK COMMON STOCK ADDITIONAL
------------------------------ ------------------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
------------- -------------- ------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
BALANCE AT OCTOBER 1, 1995 - $ - - $ - $ -
Issuance of Series B preferred stock
Issuance of Series B preferred stock for settlement
of notes payable and for consulting services
Repurchase of Series A preferred stock
Issuance of Series B preferred stock for property
and equipment
Issuance of common stock for notes receivable
Exercise of options to purchase common stock for
shareholder notes receivable
Net loss for 1996
------------- -------------- ------------- -------------- ---------------
BALANCE AT SEPTEMBER 30, 1996 - - - - -
Cancellation of shareholder notes receivable for
common stock repurchase
Repayment of shareholder notes receivable
Issuance of Series C preferred stock with warrants to purchase 520,000 shares
of common stock, net
of issuance costs of $704,638
Issuance of common stock warrants as finders fees
Issuance of common stock warrant for cash
Exercise of options and warrants to purchase
common stock
Issuance of common stock warrants with debt
Net loss for 1997
------------- -------------- ------------- -------------- ---------------
BALANCE AT SEPTEMBER 30, 1997 - - - - -
Exercise of options to purchase common stock -
October 1997 to December 1997 - - - - -
Issuance of Series A common stock with warrants to purchase 10,135,164 shares
of Series B common stock, net of offering costs of
$3,863,691 10,135,164 16,913,809 - - -
Conversion of Series C preferred stock, Series B preferred stock, Series A
preferred stock and common stock to Series B common stock as follows:
Series C preferred stock; conversion ratio of
1.39:1, including anti-dilutive adjustments - - 3,621,120 12,279,362 -
Series B preferred stock and common stock;
conversion ratio of 1:1 - - 5,545,638 3,486,426 -
Series A preferred stock; conversion ratio
of 1:10 - - 11,867 395,162 -
Issuance of Series B common stock with warrants to purchase 6,666,666 shares of
Series B common stock, net of offering costs of
$1,800,000 - - 6,666,666 12,466,665 -
Issuance of warrants to purchase 3,713,094 shares
of Series B common stock in connection with the
issuance of 13% Senior Discount Notes - - - - -
Exercise of options to purchase Series B common
stock - - 67,917 55,901 -
Establishment of $.0001 par value for Series A and
B common stock in connection with Delaware
reincorporation - (16,912,795) - (28,681,925) 45,594,720
Exercise of options to purchase Series B common 16,500 - 22,500
stock - post Delaware reincorporation
Net loss for 1998 - - - - -
------------- -------------- ------------- -------------- ---------------
BALANCE AT SEPTEMBER 30, 1998 10,135,164 $ 1,014 15,929,708 $ 1,591 $ 45,617,220
------------- -------------- ------------- -------------- ---------------
------------- -------------- ------------- -------------- ---------------
SERIES C
CONVERTIBLE
PREFERRED STOCK
------------------------------
SHARES AMOUNT
------------- --------------
<S> <C> <C>
BALANCE AT OCTOBER 1, 1995 - -
Issuance of Series B preferred stock
Issuance of Series B preferred stock for settlement
of notes payable and for consulting services
Repurchase of Series A preferred stock
Issuance of Series B preferred stock for property
and equipment
Issuance of common stock for notes receivable
Exercise of options to purchase common stock for
shareholder notes receivable
Net loss for 1996
------------- --------------
BALANCE AT SEPTEMBER 30, 1996 - -
Cancellation of shareholder notes receivable for
common stock repurchase
Repayment of shareholder notes receivable
Issuance of Series C preferred stock with warrants to purchase 520,000 shares
of common stock, net
of issuance costs of $704,638 2,600,000 12,279,362
Issuance of common stock warrants as finders fees
Issuance of common stock warrant for cash
Exercise of options and warrants to purchase
common stock
Issuance of common stock warrants with debt
Net loss for 1997
------------- --------------
BALANCE AT SEPTEMBER 30, 1997 2,600,000 12,279,362
Exercise of options to purchase common stock -
October 1997 to December 1997 - -
Issuance of Series A common stock with warrants to purchase 10,135,164 shares
of Series B common stock, net of offering costs of
$3,863,691 - -
Conversion of Series C preferred stock, Series B preferred stock, Series A
preferred stock and common stock to Series B common stock as follows:
Series C preferred stock; conversion ratio of
1.39:1, including anti-dilutive adjustments (2,600,000) (12,279,362)
Series B preferred stock and common stock;
conversion ratio of 1:1 - -
Series A preferred stock; conversion ratio
of 1:10 - -
Issuance of Series B common stock with warrants to purchase 6,666,666 shares
Series B common stock, net of offering costs of
$1,800,000 - -
Issuance of warrants to purchase 3,713,094 shares
of Series B common stock in connection with the
issuance of 13% Senior Discount Notes - -
Exercise of options to purchase Series B common
stock - -
Establishment of $.0001 par value for Series A and
B common stock in connection with Delaware
reincorporation - -
Exercise of options to purchase Series B common
stock - post Delaware reincorporation
Net loss for 1998 - -
------------- --------------
BALANCE AT SEPTEMBER 30, 1998 - $ -
------------- --------------
------------- --------------
SERIES B
CONVERTIBLE
PREFERRED STOCK
------------------------------
SHARES AMOUNT
------------- --------------
<S> <C> <C>
BALANCE AT OCTOBER 1, 1995 837,667 $1,256,502
Issuance of Series B preferred stock 1,142,304 2,355,226
Issuance of Series B preferred stock for settlement
of notes payable and for consulting services 33,334 50,000
Repurchase of Series A preferred stock
Issuance of Series B preferred stock for property
and equipment 3,333 8,332
Issuance of common stock for notes receivable
Exercise of options to purchase common stock for
shareholder notes receivable
Net loss for 1996
------------- --------------
BALANCE AT SEPTEMBER 30, 1996 2,016,638 3,670,060
Cancellation of shareholder notes receivable for
common stock repurchase
Repayment of shareholder notes receivable
Issuance of Series C preferred stock with warrants to purchase 520,000 shares
of common stock, net
of issuance costs of $704,638
Issuance of common stock warrants as finders fees
Issuance of common stock warrant for cash
Exercise of options and warrants to purchase
common stock
Issuance of common stock warrants with debt
Net loss for 1997
------------- --------------
BALANCE AT SEPTEMBER 30, 1997 2,016,638 3,670,060
Exercise of options to purchase common stock -
October 1997 to December 1997 - -
Issuance of Series A common stock with warrants to purchase 10,135,164 shares
of Series B common stock, net of offering costs of
$3,863,691 - -
Conversion of Series C preferred stock, Series B preferred stock, Series A
preferred stock and common stock to Series B common stock as follows:
Series C preferred stock; conversion ratio of
1.39:1, including anti-dilutive adjustments - -
Series B preferred stock and common stock;
conversion ratio of 1:1 (2,016,638) (3,670,060)
Series A preferred stock; conversion ratio
of 1:10 - -
Issuance of Series B common stock with warrants to purchase 6,666,666 shares
Series B common stock, net of offering costs of
$1,800,000 - -
Issuance of warrants to purchase 3,713,094 shares
of Series B common stock in connection with the
issuance of 13% Senior Discount Notes - -
Exercise of options to purchase Series B common
stock - -
Establishment of $.0001 par value for Series A and
B common stock in connection with Delaware
reincorporation - -
Exercise of options to purchase Series B common
stock - post Delaware reincorporation
Net loss for 1998 - -
------------- --------------
BALANCE AT SEPTEMBER 30, 1998 - $ -
------------- --------------
------------- --------------
SERIES A
CONVERTIBLE
PREFERRED STOCK COMMON STOCK
------------------------- ---------------------------
SHARES AMOUNT SHARES AMOUNT
----------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
BALANCE AT OCTOBER 1, 1995 127,601 $ 424,912 2,520,000 $ (402,101)
Issuance of Series B preferred stock
Issuance of Series B preferred stock for settlement
of notes payable and for consulting services
Repurchase of Series A preferred stock (8,934) (29,750)
Issuance of Series B preferred stock for property
and equipment
Issuance of common stock for notes receivable 396,000 99,000
Exercise of options to purchase common stock for
shareholder notes receivable 330,000 74,167
Net loss for 1996
----------- ------------ ------------ -------------
BALANCE AT SEPTEMBER 30, 1996 118,667 395,162 3,246,000 (228,934)
Cancellation of shareholder notes receivable for
common stock repurchase (90,000) (22,500)
Repayment of shareholder notes receivable
Issuance of Series C preferred stock with warrants to purchase 520,000 shares
of common stock, net
of issuance costs of $704,638
Issuance of common stock warrants as finders fees
Issuance of common stock warrant for cash
Exercise of options and warrants to purchase
common stock 106,900 24,450
Issuance of common stock warrants with debt
Net loss for 1997
----------- ------------ ------------ -------------
BALANCE AT SEPTEMBER 30, 1997 118,667 395,162 3,262,900 (226,984)
Exercise of options to purchase common stock -
October 1997 to December 1997 - - 266,100 43,350
Issuance of Series A common stock with warrants to purchase 10,135,164 shares
of Series B common stock, net of offering costs of
$3,863,691 - - - -
Conversion of Series C preferred stock, Series B preferred stock, Series A
preferred stock and common stock to Series B common stock as follows:
Series C preferred stock; conversion ratio of
1.39:1, including anti-dilutive adjustments - - - -
Series B preferred stock and common stock;
conversion ratio of 1:1 - - (3,529,000) 183,634
Series A preferred stock; conversion ratio
of 1:10 (118,667) (395,162) - -
Issuance of Series B common stock with warrants to purchase 6,666,666 shares
Series B common stock, net of offering costs of
$1,800,000 - - - -
Issuance of warrants to purchase 3,713,094 shares
of Series B common stock in connection with the
issuance of 13% Senior Discount Notes - - - -
Exercise of options to purchase Series B common
stock - - - -
Establishment of $.0001 par value for Series A and
B common stock in connection with Delaware
reincorporation - - - -
Exercise of options to purchase Series B common
stock - post Delaware reincorporation
Net loss for 1998 - - - -
----------- ------------ ------------ -------------
BALANCE AT SEPTEMBER 30, 1998 - $ - - $ -
----------- ------------ ------------ -------------
----------- ------------ ------------ -------------
Shareholder
Warrants Receivables
-------------- ------------
<S> <C> <C>
BALANCE AT OCTOBER 1, 1995 $ - $ -
Issuance of Series B preferred stock
Issuance of Series B preferred stock for settlement
of notes payable and for consulting services
Repurchase of Series A preferred stock
Issuance of Series B preferred stock for property
and equipment
Issuance of common stock for notes receivable (99,000)
Exercise of options to purchase common stock for
shareholder notes receivable (74,167)
Net loss for 1996
-------------- ------------
BALANCE AT SEPTEMBER 30, 1996 - (173,167)
Cancellation of shareholder notes receivable for
common stock repurchase 22,500
Repayment of shareholder notes receivable 54,167
Issuance of Series C preferred stock with warrants to purchase 520,000 shares
of common stock, net
of issuance costs of $704,638 16,000
Issuance of common stock warrants as finders fees 37,200
Issuance of common stock warrant for cash 200,000
Exercise of options and warrants to purchase
common stock
Issuance of common stock warrants with debt 747,760
Net loss for 1997
-------------- ------------
BALANCE AT SEPTEMBER 30, 1997 1,000,960 (96,500)
Exercise of options to purchase common stock -
October 1997 to December 1997 - -
Issuance of Series A common stock with warrants to purchase 10,135,164 shares
of Series B common stock, net of offering costs of
$3,863,691 9,628,000 -
Conversion of Series C preferred stock, Series B preferred stock, Series A
preferred stock and common stock to Series B common stock as follows:
Series C preferred stock; conversion ratio of - -
1.39:1, including anti-dilutive adjustments
Series B preferred stock and common stock;
conversion ratio of 1:1 - -
Series A preferred stock; conversion ratio
of 1:10 - -
Issuance of Series B common stock with warrants to purchase 6,666,666 shares
Series B common stock, net of offering costs of
$1,800,000 6,333,335 -
Issuance of warrants to purchase 3,713,094 shares
of Series B common stock in connection with the
issuance of 13% Senior Discount Notes 15,001,000 -
Exercise of options to purchase Series B common
stock - -
Establishment of $.0001 par value for Series A and
B common stock in connection with Delaware
reincorporation - -
Exercise of options to purchase Series B common
stock - post Delaware reincorporation
Net loss for 1998 - -
-------------- ------------
BALANCE AT SEPTEMBER 30, 1998 $31,963,295 $ (96,500)
-------------- ------------
-------------- ------------
Total
Stockholders'
Accumulated Equity
Deficit (Deficit)
----------------- --------------
<S> <C> <C>
BALANCE AT OCTOBER 1, 1995 $ (1,348,410) $ (69,097)
Issuance of Series B preferred stock 2,355,226
Issuance of Series B preferred stock for settlement
of notes payable and for consulting services 50,000
Repurchase of Series A preferred stock (29,750)
Issuance of Series B preferred stock for property
and equipment 8,332
Issuance of common stock for notes receivable -
Exercise of options to purchase common stock for
shareholder notes receivable -
Net loss for 1996 (3,856,192) (3,856,192)
----------------- --------------
BALANCE AT SEPTEMBER 30, 1996 (5,204,602) (1,541,481)
Cancellation of shareholder notes receivable for
common stock repurchase -
Repayment of shareholder notes receivable 54,167
Issuance of Series C preferred stock with warrants to purchase 520,000 shares
of common stock, net
of issuance costs of $704,638 12,295,362
Issuance of common stock warrants as finders fees 37,200
Issuance of common stock warrant for cash 200,000
Exercise of options and warrants to purchase
common stock 24,450
Issuance of common stock warrants with debt 747,760
Net loss for 1997 (9,552,838) (9,552,838)
----------------- --------------
BALANCE AT SEPTEMBER 30, 1997 (14,757,440) 2,264,620
Exercise of options to purchase common stock -
October 1997 to December 1997 - 43,350
Issuance of Series A common stock with warrants to purchase 10,135,164 shares
of Series B common stock, net of offering costs of $3,863,691 26,541,809
Conversion of Series C preferred stock, Series B preferred stock, Series A
preferred stock and common stock to Series B common stock as follows:
Series C preferred stock; conversion ratio of
1.39:1, including anti-dilutive adjustments - -
Series B preferred stock and common stock;
conversion ratio of 1:1 - -
Series A preferred stock; conversion ratio
of 1:10
Issuance of Series B common stock with warrants to purchase 6,666,666 shares
Series B common stock, net of offering costs of
$1,800,000 - 18,800,000
Issuance of warrants to purchase 3,713,094 shares
of Series B common stock in connection with the
issuance of 13% Senior Discount Notes - 15,001,000
Exercise of options to purchase Series B common
stock - 55,901
Establishment of $.0001 par value for Series A and
B common stock in connection with Delaware
reincorporation - -
Exercise of options to purchase Series B common 22,500
stock - post Delaware reincorporation
Net loss for 1998 (33,355,793) (33,355,793)
----------------- --------------
BALANCE AT SEPTEMBER 30, 1998 $ (48,113,233) $ 29,373,387
----------------- --------------
----------------- --------------
</TABLE>
See accompanying notes to consolidated financial statements
F-5
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
(formerly SpectraNet International)
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-----------------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (33,355,793) $(9,552,838) $ (3,856,192)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 2,424,466 501,354 75,258
Amortization of deferred financing costs 1,203,452 60,872 -
Amortization of debt discount 14,571,093 58,242 -
Non-cash interest expense 293,264 37,782 -
Extraordinary loss on extinguishment of debt 3,730,667 104,680 -
Changes in assets and liabilities:
Restricted cash related to operating activities 50,000 (50,000) -
Accounts receivable (420,826) 29,954 (101,771)
Interest receivable (3,016,623) - -
Other assets (314,350) (98,219) (116,117)
Accounts payable and accrued expenses 4,702,092 1,462,457 1,830,947
----------------- ----------------- --------------
Net cash used in operating activities (10,132,558) (7,445,716) (2,167,875)
----------------- ----------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (26,068,310) (12,636,918) (908,120)
Purchases of held-to-maturity marketable securities (236,701,191) - -
Maturities of held-to-maturity marketable securities 71,110,181 - -
Procurement of patents - (9,827) (15,317)
----------------- ----------------- --------------
Net cash used in investing activities (191,659,320) (12,646,745) (923,437)
----------------- ----------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of Senior Discount Notes and
related warrants 250,205,000 - -
Proceeds from issuance of Series A common stock and
related warrants, net of offering costs 26,136,309 - -
Proceeds from issuance of Series B common stock and
related
warrants, net of offering costs 18,800,000 - -
Proceeds from stock option and warrant exercises 121,751 24,450 -
Proceeds from issuance of Series B preferred stock - - 2,355,226
Proceeds from issuance of Series C preferred stock
and related common stock warrants, net of
offering costs - 4,528,862 -
Proceeds from issuance of commons stock warrants - 200,000 -
Proceeds from collection of stockholder receivables - 54,167 -
Principal payments on capital leases (255,930) (114,197) (34,371)
Proceeds from issuance of convertible bridge notes - 7,347,000 835,000
Proceeds from draws under revolving credit facility and
related warrants 3,796,262 12,172,592 -
Proceeds from short-term borrowings and related warrants - 1,000,000 -
Principal payments on short-term borrowings (550,000) (500,000) -
Proceeds from other long-term debt - - 27,510
Principal payments on other long-term debt (11,471) (26,643) (26,934)
Principal payments on revolving credit facility (16,299,900) -
Payment of deferred financing costs (8,646,920) (4,129,017) -
----------------- ----------------- --------------
Net cash provided by financing activities 273,295,101 20,557,214 3,156,431
----------------- ----------------- --------------
Net increase in cash and cash equivalents 71,503,223 464,753 65,119
Cash and cash equivalents at beginning of period 536,275 71,522 6,403
----------------- ----------------- --------------
Cash and cash equivalents at end of period $ 72,039,498 $ 536,275 $ 71,522
----------------- ----------------- --------------
----------------- ----------------- --------------
</TABLE>
See accompanying notes to consolidated financial statements
F-6
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-----------------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
SUPPLEMENTAL CASH FLOWS INFORMATION:
Cash paid during the period for interest $ 1,292,511 $ 440,178 $ 14,142
NON-CASH TRANSACTIONS:
Property and equipment purchased under capitalized leases 45,221 7,097,437 105,808
Issuance of Series B preferred stock for settlement of
note payable, for consulting services received,
and for procurement of property and equipment - - 58,332
Issuance of common stock for stockholder receivables - - 173,167
Issuance of note payable to repurchase Series A
preferred stock - - 29,750
Conversion of convertible bridge notes into Series C
preferred stock and related warrants - 7,776,500 -
Conversion of convertible bridge notes into Series A
common stock and related warrants 405,000 - -
Issuance of common stock warrants as finders fees - 10,000 -
Non-cash deferred financing costs - 27,200 -
Issuance of note payable to vendor for up-front service 150,000 - -
fees
Issuance of note payable for consulting services received - 50,000 -
Cancellation of stockholder receivable for stock - 22,500 -
repurchase
</TABLE>
See accompanying notes to consolidated financial statements
F-7
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
(formerly SpectraNet International)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------
NOTE 1 - THE COMPANY
FirstWorld Communications, Inc. (the Company) commenced operations on September
1, 1993 under the name SpectraNet International. On January 29, 1998, the
Company changed its name to FirstWorld Communications, Inc. Effective June 26,
1998, the Company changed its state of incorporation from California to Delaware
(Note 9). Prior to fiscal 1998, the Company was considered a development stage
enterprise, as defined in Statement of Financial Accounting Standards No. 7.
The Company is a facilities-based integrated communications provider. The
Company has a data-centric focus, with service offerings bundled to address the
data and voice communications needs of emerging businesses. The Company's
service offerings include data connectivity, high speed Internet access, local
and wide area network (LAN/WAN) connectivity, web hosting, video communications
and system integration services, as well as switch-based local and long distance
telephone services.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of FirstWorld
Communications, Inc. and its wholly-owned subsidiaries. All intercompany
accounts and transactions have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the financial statement date,
as well as the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
CASH EQUIVALENTS
The Company considers all highly liquid investments with original maturities of
three months or less at the time of purchase to be cash equivalents. The Company
invests primarily in high-grade short-term investments which consist of money
market instruments and commercial paper.
MARKETABLE SECURITIES
Marketable securities consist principally of commercial paper with original
maturities of beyond three months but less than six months. The Company has
classified its marketable securities as held to maturity as management has the
intent and ability to hold those securities to maturity. Such securities are
recorded at cost, which approximates fair value.
RESTRICTED CASH
Restricted cash in support of outstanding letters of credit totaled $50,000 at
September 30, 1997. No restricted cash exists at September 30, 1998.
F-8
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
(formerly SpectraNet International)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------
REVENUE RECOGNITION
The Company recognizes service revenue on local competitive access services in
the month such services are provided. Billings to customers for services in
advance of providing such services are deferred and recognized as revenue when
earned. Other revenues consist primarily of royalties earned under a certain
patent licensing agreement and are recorded when earned and when payment is
reasonably assured.
During fiscal 1998, approximately 25% of the Company's service revenue was
derived from a single telecommunications customer. During fiscal 1997,
approximately 73% of the Company's service revenue was derived under
non-recurring service contracts with two governmental entities.
CONCENTRATION OF CREDIT RISK
The Company's financial instruments that are exposed to concentrations of credit
risk consist principally of cash equivalents, marketable securities and accounts
receivable. The Company places its short-term cash investments with high
credit-quality financial institutions while commercial paper investments are
placed with high credit-caliber corporate issuers. The Company limits the amount
of credit exposure in any one institution or type of investment instrument.
Credit risk with respect to accounts receivable is minimized because of the
diversification of the Company's commercial telecommunications customer base.
Credit is extended to commercial customers based on an evaluation of the
customer's financial condition and generally collateral is not required.
The Company maintains reserves for potential credit losses from such customers.
As of September 30, 1998 and 1997, approximately 25% and 70% of accounts
receivable, respectively, was due from a single customer.
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost and is depreciated using the
straight-line method over the estimated useful lives of the assets. Costs
capitalized in connection with the development of communication networks include
expenses associated with network engineering, design and construction.
Depreciation of communications networks and related infrastructure commences
when the applicable network becomes commercially operational.
The estimated useful lives of the Company's principal classes of assets are as
follows:
<TABLE>
<S> <C>
Network infrastructure 20 years
Telecommunications 5 - 7 years
Building and improvements 30 years
Furniture, office equipment and other 3 - 7 years
Leasehold improvements Shorter of estimated useful life or lease term
</TABLE>
CAPITALIZATION OF INTEREST
Interest costs incurred during the period of time that internally constructed
assets are being made ready for their intended use are capitalized as part of
acquiring such assets to the extent that these interest costs relate to
financing obtained in order to prepare such assets for use. During fiscal 1998
and 1997, the Company capitalized approximately $450,000 and $52,000,
respectively, in interest costs associated with the development of the Company's
telecommunications networks.
F-9
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
(formerly SpectraNet International)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------
DEFERRED FINANCING COSTS
Deferred financing costs include commitment fees and other costs related to
certain debt financing transactions and are being amortized over the term of the
related debt using the interest method.
DEBT DISCOUNT
Discounts recorded in connection with the issuance of debt financing are
deferred and amortized over the term of the related debt using the interest
method.
FAIR VALUE OF FINANCIAL INSTRUMENTS
With the exception of the Company's Senior Discount Notes, management believes
that the carrying amounts shown for the Company's financial instruments
reasonably approximate their fair values. The fair value of the Company's Senior
Discount Notes, determined based on quoted high-yield market bid prices,
approximates $141,000,000 at September 30, 1998. The carrying amount of such
Senior Discount Notes at September 30, 1998 is $249,596,346.
LONG-LIVED ASSETS
The Company assesses potential impairments to its long-lived assets when there
is evidence that events or changes in circumstances have made recovery of the
asset's carrying value unlikely. Potential impairment associated with network
infrastructure costs is measured on the basis of specific network projects. An
impairment loss would be recognized when the sum of the expected future net cash
flows is less than the carrying amount of the asset. No such impairment losses
have been identified by the Company during the fiscal years presented.
STOCK-BASED COMPENSATION ACCOUNTING
The Company measures compensation expense for its stock-based employee
compensation plans using the intrinsic value method and provides pro forma
disclosures of net loss as if the minimum value method had been applied in
measuring compensation expense. Compensation charges for non-employee
stock-based compensation is measured using fair value-based methods.
INCOME TAXES
Current income tax expense is the amount of income taxes expected to be payable
for the current year. A deferred tax asset or liability is computed for both the
expected future impact of differences between the financial statement and tax
bases of assets and liabilities and for the expected future tax benefit to be
derived from tax loss and tax credit carryforwards. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount expected
to be "more likely than not" realized in future tax returns. Tax rate changes
are reflected in the statement of operations in the period such changes are
enacted.
F-10
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
(formerly SpectraNet International)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
1998 1997
<S> <C> <C>
Network infrastructure $19,758,122 $12,636,955
Telecommunications equipment 8,971,835 5,048,156
Building and improvements 1,328,237 1,328,237
Furniture, office equipment and other 4,447,438 976,341
Leasehold improvements 633,175 507,573
Construction in process 11,881,300 427,986
----------- -----------
47,020,107 20,925,248
Accumulated depreciation (2,999,689) (593,895)
----------- -----------
$44,020,418 $20,331,353
----------- -----------
----------- -----------
</TABLE>
The following is a summary of property and equipment acquired under capital
leases, included in the above:
<TABLE>
<CAPTION>
SEPTEMBER 30,
1998 1997
<S> <C> <C>
Network infrastructure $ 6,000,000 $ 6,000,000
Telecommunications equipment 218,747 218,747
Building and improvements 557,612 557,612
Furniture, office equipment and other 519,761 474,540
----------- -----------
7,296,120 7,250,899
Accumulated depreciation (613,035) (191,847)
----------- -----------
$ 6,683,085 $ 7,059,052
----------- -----------
----------- -----------
</TABLE>
NOTE 4 - SHORT-TERM BORROWINGS
On August 29, 1997, the Company obtained a $1,000,000, 18% per annum, short-term
bridge loan with an institutional lender which was due on October 15, 1997. On
September 17, 1997, the Company repaid $500,000 of the outstanding principal
balance associated with this loan, plus accrued interest thereon, and extended
the maturity date of the remaining principal balance of $500,000 to March 16,
1998 through the consummation of a new loan agreement with the lender.
Simultaneous to the execution of the new loan agreement on September 17, 1997,
which was considered to be a substantial modification of the original loan
agreement which it superseded, the Company recognized an extraordinary charge on
debt extinguishment totaling $104,680. The extraordinary charge consisted of the
write-off of unamortized debt discount and deferred financing costs associated
with the original bridge loan. The remaining $500,000 bridge loan balance was
repaid during January 1998.
On September 2, 1997, the Company issued a $50,000, 10% per annum, unsecured
promissory note to a financial adviser of the Company as payment for services
performed in connection with the attainment of debt financing.
The note was repaid on October 2, 1997.
F-11
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
(formerly SpectraNet International)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------
NOTE 5 - LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
1998 1997
<S> <C> <C>
13% senior Discount Notes, net of unamortized discount totaling
$220,403,654 at September 30, 1998 $249,596,346 $ -
14% Revolving Credit Facility, net of unamortized discount totaling
$463,513 at September 30, 1997 - 11,746,861
14% unsecured term note with a vendor; monthly installments of
principal and interest payable through December 2000 150,000 -
Other 9,262 17,868
------------ -----------
249,755,608 11,764,729
Less current portion (30,070) (8,446)
------------ -----------
$249,725,538 $11,756,283
------------ -----------
------------ -----------
</TABLE>
Aggregate principal maturities of long-term debt are as follows:
<TABLE>
<S> <C>
FISCAL YEAR
1999 $ 30,070
2000 88,514
2001 40,678
2002 -
2003 -
Thereafter 470,000,000
-------------
470,159,262
Less unamortized discount on the 13% Senior Discount Notes (220,403,654)
-------------
$ 249,755,608
-------------
-------------
</TABLE>
SENIOR DISCOUNT NOTES
On April 13, 1998, the Company completed an offering of debt securities pursuant
to Rule 144A under the Securities Act of 1933, as amended (the Act), for gross
proceeds of $250,205,000 (the High Yield Debt Offering). In the High Yield Debt
Offering, the Company sold 470,000 units consisting of 13% Senior Discount Notes
due 2008 (the Notes) and warrants to purchase an aggregate of 3,713,094 shares
of the Company's Series B common stock (Note 10). The Company allocated
$235,204,000 of the proceeds to the Notes and $15,001,000 to the warrants,
representing their estimated fair value at the date of issuance as determined
via an independent valuation.
F-12
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
(formerly SpectraNet International)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
The Notes will accrete in value through April 15, 2003 at a rate of 13% per
annum, compounded semi-annually, at which time $470,000,000 in aggregate
principal amount at maturity will be outstanding. Cash interest will neither
accrue nor be payable prior to April 15, 2003. Thereafter, cash interest on
the Notes will accrue and will be payable semiannually in arrears on each
April 15 and October 15, commencing October 15, 2003, at a rate of 13% per
annum. The Company is not required to make mandatory redemption or sinking
fund payments with respect to the Notes prior to maturity. The Notes are
redeemable at the option of the Company, in whole or in part, at any time on
or after April 15, 2003, at a premium declining to par on April 15, 2006,
plus accrued and unpaid interest through the date of redemption. In the event
of a change in control, as defined in the indenture governing the Notes, the
holders of the Notes will have the right to require the Company to purchase
their Notes in an amount equal to 101% of the aggregate principal amount at
maturity or accreted value thereof, as applicable, plus accrued and unpaid
interest to the date of purchase.
The indenture pursuant to which the Notes are issued contains certain
covenants which, among other things, limit the ability of the Company and its
subsidiaries to incur additional indebtedness, issue stock in subsidiaries,
pay dividends or make other distributions, engage in sale and leaseback
transactions, create certain liens, enter into certain transactions with
affiliates, sell assets of the Company and its subsidiaries, and enter into
certain mergers and consolidations. The Company is in compliance with such
covenants at September 30, 1998.
REVOLVING CREDIT FACILITY
On September 16, 1997, the Company entered into a five-year $23,000,000
revolving credit facility (the Credit Facility) with a syndicate of lenders
(the Lenders) to provide financing for the construction of telecommunication
networks and for general working capital purposes. The Company terminated
this facility April 13, 1998, concurrent with the closing of the High Yield
Debt Offering, and paid the Lenders a $1,000,000 termination fee pursuant to
the terms thereof. The Company has recorded an extraordinary loss of
$4,730,667 associated with such debt extinguishment, which loss is inclusive
of the aforementioned termination fee and the write-off of unamortized debt
discount and deferred financing costs associated with the Credit Facility.
NOTE 6 - CONVERTIBLE BRIDGE NOTES
Convertible bridge notes outstanding at September 30, 1997 consist of
$405,500 in principal funding received through the issuance of 8%
subordinated, convertible bridge notes pursuant to a private placement in
fiscal 1997. On December 30, 1997, such convertible bridge notes were
converted into shares of the Company's Series A common stock and related
warrants at the conversion rate of $3.00 per share (Note 9).
NOTE 7 - COMMITMENTS
LEASE COMMITMENTS
The Company leases its office space, certain network access facilities and
fiber transport, and automobiles under noncancelable operating lease
arrangements which expire on varying dates through fiscal 2008. Rent expense
under noncancelable operating leases totaled $549,400, $361,156, and
$108,429, during each of fiscal 1998, 1997 and 1996, respectively.
The Company has procured certain of its property and equipment, including its
Anaheim network central office switching facility, through capital leases
which expire through fiscal 2001. Additionally, the Company has accounted for
certain agreements with the City of Anaheim, as more fully described below
and which extend through fiscal 2027, as both capital leases and executory
contracts in the accompanying financial statements.
F-13
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
(formerly SpectraNet International)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Future minimum payments under capital leases (inclusive of the minimum
payments allocated from the agreements with the City of Anaheim) and
noncancelable operating leases are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR CAPITAL OPERATING
LEASES LEASES
<S> <C> <C>
1999 $1,539,459 $1,206,955
2000 1,396,141 1,190,403
2001 1,289,953 1,205,561
2002 1,277,226 1,112,133
2003 1,277,226 223,713
Thereafter 30,014,822 462,916
---------------- ----------------
Total minimum lease payments 36,794,827 $5,401,681
---------------- ----------------
----------------
Amount representing interest (29,892,444)
----------------
Present value of minimum lease payments $6,902,383
----------------
----------------
</TABLE>
COMMITMENTS RELATING TO AGREEMENTS WITH THE CITY OF ANAHEIM
During February 1997, the Company and its wholly-owned subsidiary FirstWorld
Anaheim (FWA) entered into a 30-year Universal Telecommunications System
Participation Agreement (as amended, the UTS Agreement) with the City of
Anaheim, California (the City), under which FWA has agreed to design, construct
and operate a fiber-optic telecommunications network in cooperation with the
City. The UTS Agreement requires FWA to pay to the City (i) an annual payment
in lieu of a franchise fee based on a percentage of FWA's "adjusted gross
revenues," as defined, related to the Anaheim network, subject to a minimum
annual payment of $1,000,000 for periods after June 30, 1999 through the term
of the agreement, (ii) a percentage of FWA's "net revenues," as defined,
derived from the Anaheim network, (iii) certain of the City's annual
operating costs associated with the UTS Agreement, not to exceed $175,000 per
year prior to the commencement of the third phase of the Anaheim network (as
discussed below), and not to exceed $350,000 per year thereafter, subject to
inflationary adjustments, and (iv) $20,000 per year to support the City's
presence on the Internet, subject to inflationary adjustments. The UTS
Agreement also requires the Company to deposit an amount equal to up to 15%
of "net revenues" derived from the Anaheim network, as defined, to fund and
maintain a $6,000,000 reserve account for debt service and capital
improvements. As of September 30, 1998, no amounts have been deposited into
such reserve account as "net revenues" have not yet been generated from the
Anaheim network. Pursuant to the UTS Agreement, the City has been granted an
irrevocable option to purchase all of the issued and outstanding stock of FWA
at anytime after July 1, 2012 for its then current appraised fair value, the
determination of which is to be derived by qualified independent appraisers
selected by both the Company and the City, as more specifically defined
within the UTS Agreement. Any sale or issuance of FWA stock can only be made
if such sale or issuance is expressly made subject to the City's purchase
option. Moreover, any sale of the Anaheim network or other sale of
substantially all of FWA's assets can only be made if the City is equitably
compensated for the loss of its future income stream under the UTS Agreement
or the buyer expressly assumes the obligations of FWA under the UTS Agreement.
Simultaneous to the execution of the UTS Agreement, FWA entered into a
30-year Agreement for Use of Operating Property (the Operating Property
Agreement) with the City under which FWA has been granted the exclusive right
to lease 60 of 96 fiber strands contained in an approximate 50 mile loop of
fiber optic cable owned by the City,
F-14
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
(formerly SpectraNet International)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
together with related facilities and rights. Under the terms of the Operating
Property Agreement, the Company is obligated to make quarterly payments to
the City in the amount of $113,862. In addition, the Company is obligated to
pay all costs associated with operating and maintaining the leased property,
including maintenance expenses, taxes, insurance premiums and pole usage
fees. FWA has the right to assign its rights under the Operating Property
Agreement, but will not be released from liability unless the City expressly
consents. FWA also has the right to encumber its interest in the leased
property.
Although the Company considers the Operating Property Agreement to be a
capital lease and the UTS Agreement to be an executory contract, certain of
the minimum payments prescribed by the UTS Agreement have been accounted for
as additional minimum capital lease payments. The Operating Property
Agreement and the UTS Agreement were bid, negotiated and consummated
simultaneously with each other. In addition, both agreements have identical
30-year terms and include certain cross-default provisions. Moreover, the
Operating Property Agreement contains payment terms which are below the fair
value of the benefits conferred by such agreement; whereas, the UTS Agreement
contains payment terms which are above the fair value of the benefits
conferred by such agreement. Accordingly, the Company has allocated the
collective payments prescribed by the agreements between the two contracts
based upon the estimated fair value of the benefits the Company receives
under each of the two agreements. Future minimum payments prescribed by the
UTS Agreement and not allocated to the capital lease total $239,555,
$373,220, $373,220, $373,220, $373,220 and $8,770,670 during each of fiscal
1999, 2000, 2001, 2002, 2003 and thereafter, respectively.
Pursuant to the UTS Agreement, FWA is required to meet certain future
performance requirements for the completion of network design and the
commencement of network construction related to certain phases of the
city-wide network. The first phase, which extended service to identified
municipal facilities, was substantially completed in October 1997. The second
phase requires service to be extended in the ordinary course of business
(i.e., within six months following execution of a customer service agreement)
to commercial, industrial and governmental customers within certain defined
service areas. The Company was required to complete 44% of the first and
second phases by April 1, 1998 and is further required to complete 90% of the
first and second phases by December 31, 1998, plus a 180-day cure period in
each case. The Company has constructed and installed the necessary
infrastructure to satisfy the 44% completion requirement and expects that the
completion of infrastructure currently under construction and approved for
construction will satisfy the 90% completion requirement in a timely manner.
In the event that FWA does not meet the specified performance deadlines
related to completion of the first and second phases of the Anaheim network
due to financial or other reasons, the City may elect to either terminate the
Operating Property Agreement or to immediately exercise its option to
purchase all of the issued and outstanding stock of FWA under the same option
terms, as defined within the UTS Agreement, which otherwise do not become
effective until after July 1, 2012. Any termination of the Operating
Property Agreement would have a material adverse effect on the Company's
business, financial condition and results of operations.
Under the UTS Agreement, the third phase of the Anaheim network, which allows
service to be extended in the ordinary course of business to all customers
within the city, including residential customers, will be commenced only
after the economic feasibility of the third phase is validated by an
independent consultant's report and financing is arranged. FWA has agreed to
cause a feasibility study with respect to the third phase to be completed no
later than January 1, 2000, and thereafter to provide annual updates to the
study if necessary. If the Company determines not to proceed with the
development of the third phase of the Anaheim network, or if for any reason
the principal financing for the third phase is not funded or construction of
the third phase is not commenced by December 31, 2002, then the City may
pursue development of the third phase on its own.
The UTS Agreement also requires FWA to commence construction of a
demonstration center in the City's downtown area by November 30, 1998, and to
complete such demonstration center by June 30, 1999. However, as a result of
a change in the proposed scope of the project, FWA now contemplates leasing
additional office space in the downtown area of Anaheim and housing a
demonstration center in the leased facilities. The Company expects the
demonstration center to be operational prior to March 31, 1999. Although
the Company believes that it is in compliance with its obligations with
respect to the demonstration center, the City has asserted its belief that
the Company is not satisfying such obligations. The parties are currently in
the process of attempting to resolve these issues. The Company does not
believe that the ultimate resolution will have a material adverse effect on
the Company's results of operations, liquidity or financial position.
Pursuant to a Development Fee Arrangement dated simultaneous to the
aforementioned City agreements, for a period of five years, commencing with
the earlier to occur of the closing of the financing for or the commencement
of construction of the first Additional Network (as defined below), the
Company must pay to the City a lump sum development fee for each Additional
Network which the Company develops ($300,000 for each Additional Network
financed in the first year; $200,000 for each Additional Network financed in
the second year; and $100,000 for each Additional Network financed in the
third, fourth and fifth years, which amounts must be paid within thirty days
F-15
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
(formerly SpectraNet International)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
following the closing of the principal financing for an Additional Network or
the commencement of construction of such Additional Network, whichever occurs
first). "Additional Network" means (a) any expansion of the Anaheim network
into one or more adjacent or nearby cities where FWA enters into a revenue
sharing agreement with any such city, and (b) any separate communications
system developed by any other subsidiary of the Company that holds a
Certificate of Public Convenience and Necessity issued by the Public
Utilities Commission and enters into a revenue sharing agreement with one or
more public entities.
COMMITMENTS RELATING TO AGREEMENTS WITH THE IRVINE COMPANY
On March 5, 1998, FirstWorld Orange Coast (FWOC), a wholly-owned subsidiary
of the Company, and The Irvine Company entered into two agreements regarding
FWOC's development of a network to serve certain areas that have been or are
planned to be developed by The Irvine Company (the Irvine Network). The
Company has guaranteed the payment obligations of FWOC under each of such
agreements.
Pursuant to an Agreement for Lease of Telecommunications Conduit dated as of
March 5, 1998 (the Conduit Lease), FWOC leases from The Irvine Company space
within two underground telecommunications tubes (the Conduit), and, in
connection therewith, has received the non-exclusive right to use undivided
space within the pull boxes serving such Conduit (collectively, the Leased
Premises). The Conduit Lease applies to (i) an existing Conduit system within
certain already-developed areas in the Irvine Spectrum and (ii) Conduit to be
constructed in the future in the as yet undeveloped areas of the Irvine
Spectrum. The Irvine Company may also install Conduit in other areas it may
develop in the cities of Irvine, Newport Beach and Tustin, and in
unincorporated areas of Orange County, and such areas may in the future be
incorporated into the Conduit Lease upon the mutual agreement of the parties
(Additional Areas). The term of the Conduit Lease runs through December 31,
2027.
The Conduit Lease obligates FWOC to install fiber optic cable (Cable) in the
Conduit pursuant to a phasing plan. A phase is completed when sufficient
Cable has been installed to enable FWOC to connect and provide service (for
that portion of the Irvine Network) to property abutting the Conduit. Upon
termination of the agreement, the Cable will be owned by The Irvine Company.
If FWOC fails to complete installation of the required Conduit within 18
months following March 5, 1998, The Irvine Company may, until such
installation is completed, terminate the Conduit Lease.
The Conduit Lease obligates FWOC to make quarterly rent payments to The
Irvine Company based upon its "adjusted gross revenue", as defined, from the
Irvine Network. In addition, FWOC is obligated to pay all costs associated
with its lease, operation, maintenance, repair and use of the Leased
Premises, including maintenance expenses, taxes and insurance premiums. Any
assignment of FWOC's rights under the Conduit Lease and any sale of a
controlling interest in FWOC require The Irvine Company's prior approval, and
The Irvine Company has a right of first refusal in the event of any such
proposed sale.
Based upon its term, the Conduit Lease is a capital lease. However, as such
lease does not prescribe any fixed rental payments and as it is not
practicable for the Company to estimate any future probable contingent rental
payments associated with such lease, no amount has been capitalized in the
accompanying Consolidated Financial Statements. Contingent rental payments
associated with this lease are recorded as additional operating expenditures
when they become due pursuant to the lease.
Concurrently with the execution of the Conduit Lease, FWOC and The Irvine
Company executed a Telecommunications System License Agreement (the License
Agreement) which provides FWOC, with some exceptions, with the right and
obligation to provide telecommunications services to (i) the 106 buildings
currently owned by The Irvine Company in the Irvine Spectrum area, (ii)
commercial, industrial and retail buildings in the future owned by The Irvine
Company in the Irvine Spectrum, and (iii) under certain circumstances in The
Irvine Company's discretion, similar buildings located in the Additional
Areas and other locations in California.
F-16
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
(formerly SpectraNet International)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
The License Agreement requires FWOC to pay The Irvine Company a license fee
each calendar quarter, subject to an annual CPI increase that will not be
less than 2% or greater than 6%. The base license fee was initially $62,500
for the buildings owned by Irvine in the Irvine Spectrum area at the time
that the License Agreement was consummated. Pursuant to the License
Agreement, such fee is increased or decreased over its term based on the
rentable square footage of the buildings that are from time to time subject
to the License Agreement. As of September 30, 1998, such fee totals $88,000
per calendar quarter. Future minimum payments prescribed by the License
Agreement, based upon this current fee and assuming a 2% per annum upward CPI
adjustment over its term, total approximately $359,000, $366,000, $374,000,
$381,000, $389,000 and $11,747,000 during each of fiscal 1999, 2000, 2001,
2002, 2003 and thereafter, respectively.
The License Agreement provides FWOC with the right to install, maintain,
operate, replace and remove Cable and associated communications equipment
(Equipment) in, as well as access rights to, such buildings, subject to the
rights of The Irvine Company's tenants and to reasonable requirements and
procedures imposed by The Irvine Company. Except with respect to buildings
that are leased to a single tenant, The Irvine Company is required to provide
FWOC with a reasonable amount of equipment room space in each building,
sufficient to enable FWOC to install Cable and Equipment and deliver
services. FWOC's rights to a building are non-exclusive, meaning that The
Irvine Company can grant similar licenses to other service providers.
Although all the Cable becomes the property of The Irvine Company upon
termination of the License Agreement, FWOC has the right to remove and retain
ownership of the Equipment, subject to The Irvine Company's election to
purchase the Equipment at a price to be negotiated by the parties.
Subject to certain qualifications, FWOC will have the obligation to provide
telecommunications services to any tenant who wishes to subscribe with FWOC
for those services, and FWOC is required to install Cable and Equipment in
that tenant's building if FWOC owns or leases Conduit located within 1,000
feet of that building. Under certain circumstances, FWOC may be required to
provide completion and performance bonds to The Irvine Company in connection
with that work. To the extent that FWOC provides fiber optic service to a
building, it is required to achieve and maintain standards of minimum
reliability. Subject to force majeure, if there is a system-wide failure to
provide such service that exceeds five consecutive days, The Irvine Company
has the right to use the network (and if necessary bring in an alternative
service provider) and to charge its costs to FWOC.
Whenever FWOC is the first competitive access provider to a building, it is
required to install a building entrance conduit system (which connects the
building to the street access point) (a BECS), with a capacity equal to 200%
of the capacity required by FWOC to service the building. The Irvine Company
can grant other providers the right to use that BECS, but must pay or cause
that provider to pay FWOC 50% of FWOC's cost of installing the BECS, which
costs are subject to increase based on a CPI calculation. Where a BECS
already exists, The Irvine Company must make any excess capacity therein
available to FWOC.
OTHER COMMITMENTS
The Company is party to a contract with a long distance carrier pursuant to
which the Company is committed to minimum service fees. Such minimum fees
aggregate $487,500 and $1,437,500 during fiscal 1999 and 2000, respectively.
The Company is party to a network services agreement with a provider of
voicemail and data services under which future minimum payments aggregate
$239,040, $286,560 and $23,880 during fiscal 1999, 2000 and 2001,
respectively. Additionally, the Company is party to an agreement with a
provider of data processing and billing services under which future minimum
payments aggregate $150,000 during each of fiscal 1999, 2000 and 2001.
During fiscal 1998, the Company entered into separate management consulting
service agreements with its two majority shareholders (or affiliates thereof)
whereby such parties will provide general management consulting services to
the Company for a period of three years commencing January 1, 1998. Pursuant
to such agreements, as
F-17
<PAGE>
amended, the Company is required to pay to the related parties aggregate
consulting fees totaling $500,000 per annum. Related party consulting fees
recorded by the Company during fiscal 1998 totaled $840,000. Future minimum
consulting fees under these agreements aggregate $1,000,000, $1,000,000 and
$250,000 during each of fiscal 1999, 2000 and 2001, respectively.
The Company is party to an arrangement with the owner of a retail development
located in Orange County, California, whereby it is required to remit to the
owner of such development a percentage of "adjusted gross revenues", as
defined, derived from serving tenant customers located within such
development.
NOTE 8 - CEO EMPLOYMENT AGREEMENT
On September 28, 1998, the Company entered into an Employment Agreement (the
Employment Agreement) pursuant to which the Company retained the services of
a new President and Chief Executive Officer (the CEO) effective October 1,
1998 (the Commencement Date). The Employment Agreement has a three-year term
ending on the close of business on September 30, 2001, unless terminated
earlier by either party, and provides an initial annual base salary of
$200,000 per annum. Additionally, the Employment Agreement granted the CEO an
Equalization Payment (as defined within the Employment Agreement) in the
amount of $4,000,000, payable in three separate installments. The first
$2,000,000 installment became due and was paid on October 1, 1998, the
employment Commencement Date, while the second and third $1,000,000
installments are due and payable on October 1, 1999 and October 1, 2000,
respectively. The CEO must be employed by the Company on the date that the
second and third installments become due to be eligible to receive such
payments unless the Company terminates the CEO's employment other than for
cause or the CEO terminates his own employment for good reason (as defined in
the Employment Agreement) prior to the installment date. In addition, the CEO
may elect to receive all or any portion of the second and third installment
payments in the form of the Company's Series B common stock. If the CEO
elects to receive any of the second or third installment payments in Series B
common stock, such stock shall be valued at $5.00 and $7.50 per share,
respectively.
The Employment Agreement stipulates that the CEO will also be eligible for
the following performance-based bonuses: (i) if the Company consummates a
Qualified Initial Public Offering (as defined in the Employment Agreement)
with a price of at least $10.00 per share (subject to adjustment as set forth
in the Employment Agreement) within the first 18 months after the
Commencement Date, the Company will pay the CEO a $1,000,000 cash bonus; (ii)
if the Company consummates a Qualified Initial Public Offering with a price
of at least $10.00 per share (subject to adjustment as set forth in the
Employment Agreement) within the first 12 months after the Commencement Date,
the Company will be obligated to pay the CEO a $4,207,500 cash bonus on
September 30, 2001 (unless otherwise accelerated as described in the
Employment Agreement); (iii) if the Company consummates a Qualified Initial
Public Offering with a price of at least $12.50 per share (subject to
adjustment as set forth in the Employment Agreement) within the first 24
months after the Commencement Date, the Company will be obligated to pay the
CEO a $8,415,000 cash bonus on September 30, 2001 (unless otherwise
accelerated as described in the Employment Agreement); provided that if the
CEO earns the payment described in this clause (iii) he will not be entitled
to receive the payment described in clause (ii) above; and (iv) if the
Company has a market capitalization of at least $1.2 billion (as adjusted as
described in the Employment Agreement) for a period of 20 consecutive trading
days during a three-year period beginning on the Commencement Date, the
Company will be obligated to pay the CEO a cash payment equal to $16,830,000
minus any amounts he receives pursuant to clause (ii) or (iii) above on
September 30, 2001 (unless otherwise accelerated as described in the
Employment Agreement).
The Employment Agreement also granted the CEO on October 1, 1998 an option to
purchase 2,805,000 shares of Series B common stock at an exercise price of
$6.00 per share (subject to anti-dilution protections set forth in the
Employment Agreement). The option vests (i) with respect to 1/3 of the shares
covered by the option on the Commencement Date, (ii) with respect to 1/3 of
the shares covered by the option on the first anniversary of the Commencement
Date and (iii) with respect to the remaining 1/3 of the shares covered by the
option on the second anniversary of the Commencement Date (unless otherwise
accelerated in accordance with the terms of the Employment Agreement).
F-18
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
(formerly SpectraNet International)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 9 - STOCKHOLDERS' EQUITY
EQUITY RECAPITALIZATION
On December 30, 1997, the Company (i) converted its three existing classes of
preferred stock into common stock in accordance with the automatic conversion
provision of its then existing charter in order to simplify the Company's
capital structure and to eliminate the rights, preferences and privileges of
the preferred stock; (ii) amended its Articles of Incorporation to
substantially increase the Company's authorized capital; and (iii) amended
its Articles of Incorporation to designate two series of common stock, with
the investors in the below-referenced private placement occurring on December
30, 1997 receiving Series A common stock and all then existing shares of
common stock (including common stock issued upon conversion of the then
existing preferred stock) being designated as Series B common stock. The
Series A common stock and Series B common stock are identical in all material
respects, except that the holders of Series A common stock possess ten votes
per share on all matters subject to a vote of shareholders while the holders
of Series B common stock possess one vote per share. Pursuant to the amended
Articles of Incorporation, the Company may also issue Preferred stock from
time to time in one or more series. As of September 30, 1998, no such
preferred stock has been issued.
PRIVATE PLACEMENTS
On April 13, 1998, the Company consummated a private placement of equity
securities with Spectra 3 and Enron (the Additional Equity Investment)
pursuant to the exercise of an existing option held by Spectra 3 and Enron.
Pursuant to the Additional Equity Investment, the Company sold to each of
Spectra 3 and Enron 3,333,333 shares of Series B common stock, resulting in
aggregate offering proceeds totaling $18,800,000, net of offering
commissions. In connection with this private placement, the Company also
issued to Spectra 3 and Enron warrants to purchase an additional 3,333,333
shares of Series B common stock (Note 10).
On December 30, 1997, the Company consummated a private placement of equity
securities with Colorado Spectra 3, LLC (Spectra 3) and Enron Capital & Trade
Resources Corp. (Enron). In connection with this placement, the Company
issued 5,000,000 shares of newly created Series A common stock to each of
Spectra 3 and Enron at an issue price of $3.00 per share pursuant to a common
stock purchase agreement by and among the Company, Enron, Spectra 3 and the
holders (the Noteholders) of $405,500 in principal amount of the Company's
convertible subordinated bridge notes (Note 6). The Company also issued an
aggregate of 135,164 shares of Series A common stock to the Noteholders upon
the automatic conversion of the bridge notes pursuant to the terms thereof at
a conversion price of $3.00 per share. Aggregate proceeds from this offering,
exclusive of the conversion of the bridge notes, totaled
$26,136,309, net of offering commissions and certain other advisory fees paid
in connection with the consummation of this equity placement. In connection
with this private placement, the Company also issued i) to each of Spectra 3
and Enron warrants to purchase 5,000,000 shares of newly created Series B
common stock, and ii) to the Noteholders warrants to purchase an aggregate of
135,164 shares of such Series B common stock (Note 10).
On January 31, 1997, in connection with a private placement offering, the
Company issued 2,600,000 shares of Series C preferred stock, consisting of
1,044,700 shares issued for cash proceeds totaling $4,518,862, net of
placement agent commissions and related fees, and 1,555,300 shares issued
through the retirement of convertible bridge notes at $5.00 per share. In
connection with this offering, the holders of Series C shares also received
warrants for the purchase of 520,000 shares of common stock (Note 10).
During fiscal 1996, in connection with various private placement offerings,
the Company issued 1,142,304 shares of Series B preferred stock for proceeds
totaling $2,355,226.
F-19
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
(formerly SpectraNet International)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
DELAWARE REINCORPORATION
Effective June 26, 1998, the Company changed its state of incorporation from
California to Delaware. In connection therewith, a par value equal to $.0001
per share was assigned to each series of common and preferred stock. As a
result, the Consolidated Statement of Stockholders' Equity for fiscal 1998
reflects a reclassification to additional paid-in capital for the amounts in
excess of par value.
NOTE 10 - WARRANTS
During fiscal 1998, 1997 and 1996, the Company's non-employee warrant
activity was as follows:
In connection with the High Yield Debt Offering which was consummated on
April 13, 1998, the Company issued to the initial purchasers of the Notes
warrants to purchase 3,713,094 shares of Series B common stock at an exercise
price of $0.01 per share. Such warrants are exercisable at any time on or
after the earlier to occur of May 1, 1999, an initial public offering of the
Company's common stock or in the event of a change in control, as defined in
the warrant agreement, and expire on April 15, 2008. Such warrants contain
customary adjustments to protect against dilution, as well as certain
additional anti-dilutive adjustments as defined in the warrant agreement. As
of September 30, 1998, all of these warrants remain outstanding.
In connection with the April 13, 1998 private placement of Series B common
stock, the Company issued warrants for the purchase of 6,666,666 shares of
Series B common stock to the investors therein. Such warrants were issued with
an exercise price of $3.00 per share, contain customary adjustments to
protect against dilution, and may be exercised at any time prior to the first
to occur of (i) April 13, 2005; (ii) the merger of the Company with or into
another entity in which the shareholders of the Company immediately prior to
the merger own less than 50% of the voting securities of the surviving entity
immediately following the merger; and (iii) the sale by the Company of all or
substantially all of its assets. As of September 30, 1998, all of these
warrants remain outstanding.
In connection with the December 1997 private placement of Series A common
stock, the Company issued warrants for the purchase of 10,135,164 shares of
Series B common stock to the investors therein. Such warrants were issued
with an exercise price of $3.00 per share, contain customary adjustments to
protect against dilution, and may be exercised at any time prior to the first
to occur of (i) December 30, 2004; (ii) the merger of the Company with or
into another entity in which the shareholders of the Company immediately
prior to the merger own less than 50% of the voting securities of the
surviving entity immediately following the merger; and (iii) the sale by the
Company of all or substantially all of its assets. As of September 30, 1998,
all of these warrants remain outstanding.
In connection with the private placement of Series A common stock referred to
above, the Company also issued to certain financial advisors warrants to
purchase 17,500 and 30,000 shares of Series B common stock at exercise prices
of $6.00 and $5.00, respectively, all of which have terms of five years and
contain customary adjustments to protect against dilution. As of September
30, 1998, all of these warrants remain outstanding.
During fiscal 1997, in connection with the attainment of a revolving credit
facility, the Company issued to the lender warrants to purchase 800,000
shares of common stock. Such warrants were issued with an exercise price of
$6.00 per share, a term of five years, and contain customary adjustments to
protect against dilution, as well as certain additional anti-dilutive
adjustments as defined in the warrant agreement. As a result of the capital
transaction and the equity recapitalization which occurred on December 30,
1997, these warrants are currently exercisable into 800,000 shares of Series
B common stock at an exercise price of $3.00 per share. As of September 30,
1998, all of these warrants remain outstanding.
In connection with the consummation of the credit facility described above,
the Company also issued to certain financial advisors warrants to purchase
83,400 shares of common stock, which warrants have an exercise price of $6.00
and a term of five years. As a result of the equity recapitalization which
occurred on December 30, 1997, these warrants are currently exercisable into
shares of Series B common stock. As of September 30, 1998, all of these
warrants remain outstanding.
During fiscal 1997, in connection with the attainment of short-term bridge
financing, the Company issued to the lender warrants to purchase 300,000
shares of common stock. Such warrants were issued with an exercise price of
$6.00 per share, a term of seven years, and contain customary adjustments to
protect against dilution, as well as certain additional anti-dilutive
adjustments as defined in the warrant agreements. As a result of the capital
transaction and the equity recapitalization which occurred on December 30,
1997 and the capital transaction occurring on April 13, 1998, such warrants
are currently exercisable into 470,092 shares of Series B common stock
F-20
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
(formerly SpectraNet International)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
at an exercise price of $3.83 per share. As of September 30, 1998, all of
these warrants remain outstanding.
During fiscal 1997, in connection with the issuance of convertible bridge
notes, warrants for the purchase of 33,789 shares of common stock were issued
to the note holders. Such warrants, which expire in July 2002, have an
exercise price of $6.00 per share and contain customary adjustments to
protect against dilution. As a result of the equity recapitalization which
occurred on December 30, 1997, these warrants are currently exercisable into
shares of Series B common stock. As of September 30, 1998, all of these
warrants remain outstanding.
During fiscal 1997, the Company issued to certain legal service providers
warrants to purchase 19,000 and 5,000 shares of common stock at exercise
prices of $.50 and $5.00, respectively. Such warrants have terms of five
years and contain customary adjustments to protect against dilution. As a
result of the equity recapitalization which occurred on December 30, 1997,
these warrants are currently exercisable into shares of Series B common
stock. As of September 30, 1998, all of these warrants remain outstanding.
During fiscal 1997, the Company issued a warrant for the purchase of 800,000
shares of common stock to a single investor for cash proceeds totaling
$200,000, which warrant has a term of five years. As issued, the original
warrant agreement contained a complex anti-dilution provision pursuant to
which the number of underlying common shares and exercise price per common
share would have been adjusted based upon the occurrence of certain future
events, as defined in the warrant agreement. On December 30, 1997, the
warrant agreement was amended whereby the number of shares purchasable under
the warrant was set at 2,110,140 shares of Series B common stock with an
exercise price of $1.80 per share. This warrant, as amended, remains subject
to certain customary adjustments to protect against dilution. As of September
30, 1998, no shares have been issued pursuant to this warrant.
In connection with a fiscal 1997 private placement of Series C preferred
stock, the Company issued warrants for the purchase of 520,000 shares of
common stock to the investors. Such warrants were issued with an exercise
price of $5.00 per share, a term of five years, and contain customary
adjustments to protect against dilution, as well as certain additional
anti-dilutive adjustments as defined in the warrant agreements. As a result
of the capital transactions which occurred on December 30, 1997 and April 13,
1998, such warrants are currently exercisable into 736,564 shares of Series B
common stock at an exercise price of $3.53 per share. As of September 30,
1998, all of these warrants remain outstanding.
In connection with the private placement of Series C preferred stock referred
to above, the Company also issued to certain financial advisors warrants to
purchase 218,118 and 15,000 shares of common stock at exercise prices of
$5.00 and $.50, respectively, all of which have terms of five years and
contain customary adjustments to protect against dilution. During fiscal
1997, 5,000 of the $.50 warrants were exercised for proceeds totaling $2,500.
As a result of the equity recapitalization which occurred on December 30,
1997, the remaining outstanding warrants are currently exercisable into
shares of Series B common stock. As of September 30, 1998, all of the
remaining warrants remain outstanding.
As a result of the equity recapitalization which occurred on December 30,
1997, outstanding warrants to purchase 139,494 shares of Series B preferred
stock at $1.50 per share, as previously issued in fiscal 1994, are currently
exercisable into shares of Series B common stock. Such warrants expire in
April 1, 1999 and contain customary adjustments to protect against dilution.
As of September 30, 1998, all of these warrants remain outstanding.
The fair value of the above-referenced warrants was determined at their time
of grant via application of the Black-Scholes option pricing model or, with
respect to those warrants issued in connection with the High Yield Debt
Offering, based on an independent valuation.
F-21
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
(formerly SpectraNet International)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
The following table summarizes information about warrants outstanding at
September 30, 1998:
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
--------------------------------------------------------- ---------------------------------
NUMBER WEIGHTED- NUMBER
OUTSTANDING AVERAGE WEIGHTED- EXERCISABLE WEIGHTED-
RANGE OF AS OF REMAINING AVERAGE AS OF AVERAGE
EXERCISE SEPTEMBER 30, CONTRACTUAL EXERCISE SEPTEMBER 30, EXERCISE
PRICES 1998 LIFE (YEARS) PRICE 1998 PRICE
<S> <C> <C> <C> <C> <C>
$.01 3,713,094 9.6 $.01 - -
$.50 29,000 3.3 $.50 29,000 $.50
$1.50-1.80 2,249,634 3.1 $1.78 2,249,634 $1.78
$3.00-3.83 18,808,486 6.1 $3.04 18,808,486 $3.04
$5.00-6.00 387,807 3.6 $5.35 387,807 $5.35
----------------- ----------------
25,188,021 21,474,927
----------------- ----------------
----------------- ----------------
</TABLE>
NOTE 11 - STOCK OPTIONS AND PURCHASE RIGHTS
The Company has a 1995 Incentive Stock Option Plan (the 1995 Plan) and a 1997
Stock Plan (the 1997 Plan) (collectively, the Plans) under which stock options
or stock purchase rights to acquire an aggregate of 1,500,000 shares and
1,500,000 shares, respectively, of Series B common stock may be granted to
employees and directors of the Company, as well as to non-employee consultants
of the Company under the 1997 Plan. Both plans provide for the granting of
incentive stock options (within the meaning of Section 422A of the Internal
Revenue Code) while the 1997 Plan also provides for the granting of
non-statutory stock options. Additionally, stock purchase rights may also be
granted under the 1997 Plan.
The terms of stock options granted under the Plans are determined by the Board
of Directors. Stock options may be granted for periods of up to ten years at a
price per share not less than the fair market value of the Company's Series B
common stock at the date of grant for incentive stock options and not less than
85% of the fair market value of the Company's Series B common stock at the date
of grant for non-statutory stock options. In the case of incentive and
non-statutory stock options granted under Plans to employees, directors or
consultants who, at the time of grant of such options, own stock representing
more than 10% of the voting power of all classes of stock of the Company, the
exercise price shall be no less than 110% of the fair market value of the
Company's Series B common stock at the date of grant. Additionally, the term of
incentive stock option grants under the Plans is limited to five years if the
grantee owns in excess of 10% of the voting power of all classes of stock of the
Company at the time of grant. Options granted under the Plans generally vest to
the option holder ratably over a period of four to five years beginning on the
grant date. The terms of stock purchase rights granted under the 1997 Plan are
determined by the Board of Directors. Such purchase rights may be issued either
alone, in addition to, or in tandem with other awards granted under the 1997
Plan and/or cash awards made outside of the 1997 Plan.
The Company has a 1998 Stock Purchase Plan (the 1998 Plan) pursuant to which it
may grant to key employees and directors stock purchase rights to acquire an
aggregate of 500,000 shares of Series B common stock. The terms of stock
purchase rights granted under the 1998 Plan are determined by the Board of
Directors. Under the 1998 Plan, up to 50% of the aggregate purchase price for
shares subject to stock purchase rights may be paid by the offeree in the form
of a promissory note to the Company.
The Company measures compensation expense for its stock-based employee
compensation plans using the intrinsic value method and provides pro forma
disclosures of net loss as if the minimum value method had been applied in
measuring compensation expense. Had compensation cost for the Company's
stock-based compensation plans been determined based on the minimum value method
at the grant dates for awards under this plan consistent with the method
prescribed by Statement of Financial Accounting Standards No. 123, the Company's
net loss would have been increased to the pro forma amounts indicated below:
F-22
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
(formerly SpectraNet International)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
1998 1997 1996
<S> <C> <C> <C>
NET LOSS:
As reported $33,355,793 $9,552,838 $3,856,192
Pro forma $33,434,078 $9,564,128 $3,859,992
</TABLE>
The minimum value of each option and stock purchase right grant is estimated on
the date of grant using the Black-Scholes option pricing model with the
following weighted average assumptions used for grants during fiscal 1998, 1997
and 1996: dividend yield of 0.0% for all periods; volatility of 0.0% for all
periods; risk-free interest rates of 5.88%, 6.07% and 5.79%; and an expected
life of 5.0 years for all periods, except with respect to stock purchase rights
granted during fiscal 1998, which rights have a term of .17 years. The weighted
average fair value of options and stock purchase rights granted during fiscal
1998, 1997 and 1996 was approximately $.57, $.09 and $.06, respectively.
Stock option and stock purchase right transactions during the three fiscal years
ended September 30, 1998, all of which relate to employee transactions, are
summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
AVERAGE STOCK AVERAGE
EXERCISE PURCHASE EXERCISE
OPTIONS PRICE RIGHTS PRICE
<S> <C> <C> <C> <C>
Outstanding at September 30, 1995 763,333 $ .15 - -
Granted 788,667 $ .25 - -
Exercised (330,000) $ .22 - -
Canceled (432,000) $ .21 - -
--------------- ----------------
Outstanding at September 30, 1996 790,000 $ .18 - -
Granted 489,400 $ .82 - -
Exercised (101,900) $ .22 - -
Canceled (138,700) $ .48 - -
--------------- ----------------
Outstanding at September 30, 1997 1,038,800 $ .44 - -
Granted 1,420,766 $3.71 300,000 $4.50
Exercised (350,517) $ .35 - -
Canceled (75,854) $2.44 - -
--------------- ----------------
Outstanding at September 30, 1998 2,033,195 $2.66 300,000 $4.50
--------------- ----------------
--------------- ----------------
</TABLE>
F-23
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
(formerly SpectraNet International)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
The following table summarizes information about stock options and stock
purchase rights outstanding at September 30, 1998:
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
--------------------------------------------------------- ---------------------------------
NUMBER WEIGHTED- NUMBER
OUTSTANDING AVERAGE WEIGHTED- EXERCISABLE WEIGHTED-
RANGE OF AS OF REMAINING AVERAGE AS OF AVERAGE
EXERCISE SEPTEMBER 30, CONTRACTUAL EXERCISE SEPTEMBER 30, EXERCISE
PRICES 1998 LIFE (YEARS) PRICE 1998 PRICE
<S> <C> <C> <C> <C> <C>
STOCK OPTIONS
$ .15 -.25 301,000 7.2 $ .22 253,600 $ .22
$ .50 341,400 8.2 $ .50 153,840 $ .50
$ 3.00 721,960 9.2 $3.00 453,753 $3.00
$ 4.50 668,835 9.8 $4.50 181,196 $4.50
----------------- ----------------
2,033,195 1,042,389
----------------- ----------------
----------------- ----------------
STOCK PURCHASE RIGHTS
$ 4.50 300,000 .13 $4.50 300,000 $4.50
----------------- ----------------
----------------- ----------------
</TABLE>
The Company's Board of Directors approved a repricing of stock options in
December 1997, pursuant to which the exercise price of certain stock options
designated at $3.20 per share was reduced to $3.00 per share.
NOTE 12 - INCOME TAXES
Deferred tax assets (liabilities) are comprised of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
1998 1997
<S> <C> <C>
Net operating loss carryforwards $ 11,523,433 $ 4,733,931
High yield debt interest deductible when paid 4,945,868 -
Accrued employee costs 70,009 39,834
Depreciation and amortization (1,537,964) (78,845)
---------------- ----------------
15,001,346 4,694,920
Valuation allowance (15,001,346) (4,694,920)
---------------- ----------------
Deferred tax assets (liabilities), net $ - $ -
---------------- ----------------
---------------- ----------------
</TABLE>
As of September 30, 1998, the Company has federal and state net operating loss
carryforwards of approximately $37,436,000 and $23,997,000 respectively, which
amounts expire beginning in fiscal 2009 and fiscal 2000, respectively. As a
result of the private equity placement which occurred on December 30, 1997 (Note
9), which resulted in a change of ownership as defined by Section 382 of the
Internal Revenue Code, the Company's utilization of net operating loss
carryforwards generated through December 30, 1997 will be subject to an annual
limitation of approximately $878,000 for both federal and state tax purposes,
the effect of which has been reflected in the summary of deferred tax assets
above. Additionally, if the Company is able to recognize certain built-in gains
F-24
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
(formerly SpectraNet International)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
in the future, the annual utilization rate of the net operating losses would be
increased. If the Company were to recognize certain built-in losses, they will
be subject to the annual utilization limitation when recognized.
Based upon the Company's lack of prior earnings history and other available
evidence, management has recorded a full valuation allowance for the benefit
of deferred tax assets. A reconciliation of the income tax benefit computed
using the U.S. federal statutory rate (34%) and the Company's effective tax
rate follows:
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
1998 1997 1996
<S> <C> <C> <C>
Computed expected federal tax benefit $ (11,340,970) $ (3,247,965) $ (1,311,105)
Non-deductible high yield debt interest 684,111 - -
State income taxes, net of federal benefit (1,069,310) 161,439 (356,087)
Change in valuation allowance 10,306,426 2,426,858 1,689,863
Section 382 net operating loss limitations 1,457,713 557,451 -
Other (37,970) 102,217 (22,671)
--------------- ---------------- ----------------
$ - $ - $ -
--------------- ---------------- ----------------
--------------- ---------------- ----------------
</TABLE>
NOTE 13 - LEGAL PROCEEDINGS
On October 16, 1998, the Company filed a declaratory relief action in San Diego
Superior Court, asking the Court to find that the Company is not obligated to
offer stock to Dina Partners L.P. (Dina) with respect to the December 30, 1997
equity investment by Spectra 3 and Enron (Note 9). Dina had previously indicated
in conversations with FirstWorld officers and counsel and in writing that it
believed the Company had breached a certain Amended and Restated Investor Rights
Agreement to which the Company and Dina were parties by refusing to allow Dina
to purchase additional stock in the Company. On December 3, 1998, in answer to
the Company's complaint, Dina filed a general denial with the court. Although
the ultimate resolution of this dispute is subject to the uncertainties inherent
in litigation, the Company does not believe that the resolution of the
declaratory relief action will have a material adverse effect on the Company's
results of operations, liquidity or financial position.
NOTE 14 - SUBSEQUENT EVENTS
On October 8, 1998, the Company commenced an offer to exchange (the Exchange
Offer) its outstanding 13% Senior Discount Notes due 2008 (the Original Notes)
for a new issue of 13% Senior Discount Notes due 2008, which were registered
with the Securities and Exchange Commission pursuant to a Registration Statement
on Form S-4 (the Exchange Notes). The Exchange Offer expired on November 9,
1998. Under the terms of the Exchange Offer, the Company accepted for exchange
all $470,000,000 in aggregate principal amount at maturity of Original Notes
and caused the cancellation of the Original Notes and
the issuance of the Exchange Notes.
On October 16, 1998, the Board of Directors of the Company elected to change the
Company's fiscal year end from September 30 to December 31, commencing with the
short fiscal year ending on December 31, 1998. The Company intends to file a
transition report on Form 10-Q with the Securities and Exchange Commission for
the period from October 1, 1998 through December 31, 1998.
On November 1, 1998, the Company adopted a 401(k) retirement plan (the Plan)
pursuant to which eligible employees may elect to defer up to 20% of their
compensation into the Plan up to a maximum of $10,000 per annum. The Plan also
stipulates that the Company may provide discretionary matching contributions to
the
F-25
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
(formerly SpectraNet International)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
participants of the Plan, which matching contributions would be allocated to
the participants on December 31 of each Plan year and would vest to the
participants at the rate of 25% per annum. All administrative expenses of the
Plan will be borne by the Company.
On November 24, 1998, pursuant to a Stock Purchase Agreement between the Company
and Enron Communications, Inc. (ECI), the Company purchased for cash all of the
outstanding capital stock of Optec, Inc. (Optec) from ECI. ECI is the parent
company of Enron Capital & Trade Resources Corp., a principal stockholder of the
Company. Optec is a telecommunications systems integrator with operations in
Oregon and Washington. Simultaneous to such transaction, the Company also
purchased from ECI an indefeasible right of use to fiber optic cable in a
metropolitan area network serving Portland with routes connecting Beaverton and
Hillsboro, Oregon. In addition, the Company obtained rights to OC-3 level
capacity on a wide area network being developed by ECI that will connect up to
15 cities nationwide. The Company paid an aggregate of $18,000,000 for the Optec
capital stock, the indefeasible rights of use and the wide area network rights.
The Company also repaid at closing approximately $4,000,000 of Optec's
indebtedness to ECI. The Company has deposited $1,000,000 of the total purchase
price into an escrow account to be held for a three year period for the purpose
of satisfying any claim made by the Company for breach of any representations,
warranties or covenants made by ECI in the agreement relating to the Company's
purchase of the Optec capital stock.
During the period October 1998 to December 1998, the Company entered into
certain employment agreements with key executive officials. Future minimum
salaries prescribed by such agreements, inclusive of equalization payments (as
defined in such agreements), total $688,000, $805,000, $421,000 and $31,000
during each of fiscal 1999, 2000, 2001 and 2002, respectively. Pursuant to such
agreements, the Company has also granted or committed to grant to the executives
a total of 950,000 options to purchase Series B common stock at exercise prices
that range from $4.50 to $7.50 per share.
F-26
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
(FORMERLY SPECTRANET INTERNATIONAL)
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Balance at Balance at
beginning of end of
period Additions Deductions period
------------- ------------ ---------- ----------
<S> <C> <C> <C> <C>
DEFERRED TAX ASSET VALUATION ALLOWANCE:
Year ended September 30, 1996 .. 578,199 1,689,863 -- 2,268,062
Year ended September 30, 1997 .. 2,268,062 2,426,858 -- 4,694,920
Year ended September 30, 1998 .. 4,694,920 10,306,426 -- 15,001,346
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
Year ended September 30, 1996 .. -- -- -- --
Year ended September 30, 1997 .. -- -- -- --
Year ended September 30, 1998 .. -- 9,765 -- 9,765
</TABLE>
F-27
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (No. 333-68195, No. 333-65861 and No. 333-76325) of
FirstWorld Communications, Inc. of our report dated December 11, 1998
appearing on page F-2 of this Form 10-K/A.
PRICEWATERHOUSECOOPERS LLP
San Diego, California
April 15, 1999
