<PAGE>
As filed with the Securities and Exchange Commission on February 16, 2000
Registration No. 333-93357
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------
AMENDMENT NO. 1 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------
FirstWorld Communications, Inc.
(Exact name of registrant as specified in its charter)
Delaware 4813 33-0521976
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Identification
incorporation or Classification Code Number)
organization) Number)
--------------
8390 E. Crescent Parkway, Suite 300
Greenwood Village, CO 80111
(303) 874-8010
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
--------------
Jeffrey L. Dykes, Esq.
Senior Vice President, General Counsel and Secretary
FirstWorld Communications, Inc.
8390 E. Crescent Parkway, Suite 300
Greenwood Village, CO 80111
(303) 874-8010
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copies To:
Michael L. Platt, Esq. James S. Scott, Sr., Esq.
Michael D. Stack, Esq. John T. Blatchford, Esq.
Cooley Godward llp Shearman & Sterling
2595 Canyon Boulevard, Suite 250 599 Lexington Avenue
Boulder, CO 80302-6737 New York, NY 10022-6069
(303) 546-4000 (212) 848-4000
--------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this registration statement.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
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- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Proposed Proposed Maximum Amount of
Maximum Aggregate Additional
Title of Securities Amount to be Offering Price Offering Registration
To be Registered Registered (1) Per Unit (2) Price (1) (2) Fee (3)
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Series B Common Stock,
$.0001 par value...... 11,500,000 $13.00 $149,500,000 $13,068
- ------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
(1) Includes shares that the underwriters have the option to purchase solely to
cover over-allotments, if any.
(2) Estimated solely for the purpose of calculating the amount of the
registration fee pursuant to Rule 457(a).
(3) $13,068 paid herewith, and $26,400 paid in connection with the initial
filing of this registration statement.
The Registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
Explanatory Note: This registration statement contains two forms of
prospectus: one to be used in connection with an offering in the United States
and Canada and one to be used in a concurrent offering outside the United
States and Canada. The prospectuses are identical except for the front and
back cover pages. The U.S. prospectus is included in this registration
statement and is followed by the alternate pages to be used in the
international prospectus. The alternate pages for the international prospectus
included herein are labeled "Alternate Page for International Prospectus."
Final forms of each prospectus will be filed with the Securities and Exchange
Commission under Rule 424(b).
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and it is not soliciting an offer to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion, dated February 16, 2000
PROSPECTUS
10,000,000 Shares
FirstWorld Communications, Inc.
Series B Common Stock
---------------------------------------------------
This is our initial public offering of shares of common stock. No public market
currently exists for our shares. Of the 10,000,000 shares being offered, we
are offering 8,500,000 shares in the United States and Canada and 1,500,000
shares outside the United States and Canada. We have made application to have
our Series B common stock approved for listing on the Nasdaq National Market
under the symbol "FWIS". We anticipate the public offering price to be
between $11.00 and $13.00 per share.
Investing in the shares involves risks. Risk Factors begin on page 8.
<TABLE>
<CAPTION>
Per Share Total
--------- ---------
<S> <C> <C>
Public Offering Price....................................... $ $
Underwriting Discount....................................... $ $
Proceeds to FirstWorld Communications....................... $ $
</TABLE>
We have granted the underwriters the right to purchase up to 1,500,000
additional shares within 30 days to cover any over-allotments.
In addition to the shares offered by this prospectus, Texas Pacific Group has
agreed to purchase $50,000,000 of our Series B common stock, SAIC Venture
Capital Corporation has agreed to purchase $19,500,000 of our Series B common
stock, Microsoft Corporation has agreed to purchase $12,000,000 of our Series B
common stock, and Lucent Technologies Inc. has agreed to purchase $10,000,000
of our Series B common stock, in each case at the public offering price net of
the underwriting discount, in concurrent private placements.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
Lehman Brothers expects to deliver the shares on or about , 2000.
---------------------------------------------------
Lehman Brothers
Bear, Stearns & Co. Inc.
Deutsche Banc Alex. Brown
PaineWebber Incorporated
Fidelity Capital Markets
a division of National
Financial Services
Corporation
, 2000
<PAGE>
[FirstWorld Logo]
As e-real as it gets.
<PAGE>
<PAGE>
[Graphical depiction of FirstWorld's backbone network, overlayed on a map
of the United States. The map identifies the metropolitan areas in which
FirstWorld currently has a sales presence, including:
.Denver;
.Salt Lake City;
.San Francisco;
.Los Angeles;
.Houston;
.Portland;
.Chicago;
.Dallas; and
.San Diego
Finally, the map identifies Seattle as a metropolitan area in which
FirstWorld expects to have a sales presence by the end of 2000.
The map also identifies Denver as FirstWorld's headquarters. In addition,
the map depicts cities in which we intend to use Enron's long-haul network to
serve our customers.]
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary.................. 1
Summary Consolidated Financial Data
and Summary Unaudited Pro Forma
Condensed Combined Financial Data.. 6
Risk Factors........................ 8
Special Note Regarding Forward-
Looking Statements; Market Data.... 19
Use of Proceeds..................... 20
Dividend Policy..................... 20
Capitalization...................... 21
Dilution............................ 23
Selected Consolidated Financial
Data............................... 25
Unaudited Pro Forma Condensed
Combined Financial Data............ 27
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 29
</TABLE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Business............................................................... 42
Management............................................................. 63
Principal Stockholders................................................. 75
Certain Transactions................................................... 77
Description of Capital Stock........................................... 81
Shares Eligible for Future Sale........................................ 86
Certain United States Federal Tax Consequences for Non-U.S. Investors.. 87
Underwriting........................................................... 90
Legal Matters.......................................................... 94
Experts................................................................ 94
Where You Can Find Additional Information.............................. 94
Table of Contents to Consolidated Financial Statements................. F-1
</TABLE>
----------------
We were originally incorporated in the State of California in July 1992
under the name of Sigma Link. We changed our name to Lambda Link International
in May 1993, to SpectraNet International in September 1993, and to FirstWorld
Communications, Inc. in January 1998. We were reincorporated in the State of
Delaware in June 1998. In October 1998, we changed our fiscal year end from
September 30 to December 31.
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell shares of Series B
common stock and seeking offers to buy shares of Series B common stock only in
jurisdictions where offers and sales are permitted. The information contained
in this prospectus is accurate only as of the date of this prospectus,
regardless of the time of delivery of this prospectus or of any sale of the
Series B common stock.
In this prospectus, FirstWorld, we, us and our refer to FirstWorld
Communications, Inc. and its subsidiaries, unless the context otherwise
requires. The term Enron refers to Enron Corp. and its direct and indirect
subsidiaries collectively. The term Texas Pacific Group refers to Texas
Pacific Group and its affiliates. In addition, unless otherwise indicated, all
information contained in this prospectus:
. assumes the underwriters' over-allotment option is not exercised;
. assumes no exercise of outstanding options and warrants to purchase
shares of our Series B common stock after December 31, 1999;
. does not give effect to the shares issued or issuable in the concurrent
private placements or under the Sturm equity investment agreement; and
. assumes the conversion of outstanding stock appreciation rights into
options simultaneously with the closing of this offering.
Our logo and some titles and logos of our products and services mentioned
in this prospectus are either trademarks or servicemarks that we own or that
have been licensed to us. Each trademark, tradename or servicemark of any
other company appearing in this prospectus belongs to its holder.
Until (25 days after the date of this prospectus), all dealers
effecting transactions in the common stock, whether or not participating in
this distribution, may be required to deliver a prospectus. This delivery
requirement is in addition to the obligation of dealers to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
<PAGE>
PROSPECTUS SUMMARY
This summary highlights selected information from this prospectus and may
not contain all of the information that you should consider before deciding to
purchase our Series B common stock. For a more complete understanding of
FirstWorld and the shares of Series B common stock offered by this prospectus,
you should read the entire prospectus, including the risk factors and our
consolidated financial statements and accompanying notes.
The Company
We are a rapidly growing network-based provider of Internet, data and
communications services. Our service offerings include high-speed Internet
access, such as dedicated access and digital subscriber line, or DSL; dial-up
Internet access; web hosting and design; data center services, including co-
location, access, application hosting, and monitoring services; e-commerce
solutions; and web integration and consulting services. To complement our data
services, we also provide telephony services in selected markets. Our strategy
is to offer our customers a single source solution to meet a broad range of
their increasingly complex Internet, data and communications needs. We
primarily market our services, using a consultative sales approach, to small-
and medium-sized businesses, and also selectively to larger businesses,
wholesale customers and consumers.
We currently offer our services in the San Francisco, Los Angeles, San
Diego, Portland, Denver, Houston, Salt Lake City, Dallas and Chicago
metropolitan markets and are expanding our service offering in each of these
markets. We also plan to enter the Seattle market in 2000. We currently operate
data centers in Glendale, San Diego, Santa Clara, Irvine and Denver, and plan
to open six additional centers in 2000, which will bring our total data center
space to over 290,000 square feet. We reported 1999 revenue of $54.5 million
and ended the year with approximately 2,300 DSL lines, 1,300 dedicated access
lines, 55,100 dial-up Internet accounts, 10,600 web hosting accounts, 325 web
integration customers and 1,200 telephony accounts.
We deliver our services over a communications network that utilizes advanced
packet-switching technology and the communications protocol known as Internet
Protocol, or IP, that enables us to provide cost-effective services to our
customers. Our network combines equipment housed in our own facilities and
equipment interconnected to the incumbent local exchange carrier's central
office with redundant, high-speed connectivity to the Internet. We seek to
establish these interconnections in areas with a high density of small- and
medium-sized businesses. In addition, we have rights to use certain routes in a
nationwide, long-haul, fiber-optic network currently under construction by
Enron.
In October 1998, Sheldon S. Ohringer joined FirstWorld as President and
Chief Executive Officer and the leader of a new management team. Mr. Ohringer
was formerly the President of ICG Telecom Group, Inc., the principal operating
subsidiary of ICG Communications, Inc. Since that time we have expanded our
management team significantly, adding a number of experienced data and
communications executives. Our equity sponsors include entities controlled by
Donald L. Sturm. Mr. Sturm is a private equity investor and the former Vice
Chairman of Peter Kiewit Sons' Inc. Mr. Sturm, who participated in the decision
by Peter Kiewit Sons' to invest in MFS Communications and who owns a
significant interest in Level 3 Communications, controls entities which have
invested approximately $55.0 million in FirstWorld. On December 2, 1999, we
entered into an equity investment agreement with an entity controlled by Mr.
Sturm under which we can require this entity to purchase up to 6,666,667 shares
of Series B common stock. On February 10, 2000 this entity purchased 3,333,333
of our Series B common stock pursuant to the automatic trigger provisions of
this agreement for an aggregate purchase price of $25.0 million. On February
11, 2000 Texas Pacific Group agreed to purchase from Enron for $129.1 million
8,236,083 shares of our common stock and warrants to purchase 5,236,083 shares
of Series B common stock. Concurrently with this offering, we are selling an
aggregate amount of $91.5 million of our Series B common stock to Texas Pacific
Group, SAIC Venture Capital Corporation, Microsoft Corporation and Lucent
Technologies Inc., as more fully discussed below.
1
<PAGE>
The FirstWorld Opportunity
Data communications is the fastest growing segment of the communications
industry. Forrester Research, Inc. projects that the total market for Internet
access and hosting will grow from $3.7 billion in 1998 to approximately $56.6
billion by 2003. The Internet's rapid growth as an essential communications
medium has created a substantial market opportunity for companies such as ours
that provide Internet, data and communications services. We believe this market
opportunity is due to the convergence of a number of factors, including the
following:
. Growing Demand for Single Source Internet and Data Solutions. Most
companies, particularly small- and medium-sized businesses, lack the
expertise, capital or personnel required to install, maintain and monitor
their own web infrastructure. These companies are increasingly demanding
a single source solution for their Internet, data and communications
requirements and are finding it more cost-effective to outsource these
services.
. Growth of Small- and Medium-Sized Business Internet Market. Data
communications, particularly through the Internet, have made it possible
for smaller companies to compete more effectively with larger
competitors. Demand for data communications services from small- and
medium-sized businesses is growing, however, these businesses have
traditionally been underserved by the larger communications providers.
. Increasing Demand for High-Speed Internet Access. The growth in
bandwidth-intensive applications, and the increasing number of remote
office workers is increasing the demand for high-speed Internet
connections.
. Emergence of Third Party Co-location Services. Internet infrastructure
and applications platforms are complex and sensitive to environmental
factors, leading many businesses to rely on third parties to house,
monitor and maintain the equipment that supports their web sites, e-
commerce platforms and other business-critical applications. Third party
co-location services also allow them the flexibility to rapidly add
additional servers as their businesses grow.
Our Strategy
We intend to capitalize on the market opportunity outlined above and the key
elements of our strategy include:
. Providing single source Internet and data services to meet our customers'
needs;
. Focusing on small- and medium-sized business customers;
. Employing a consultative sales approach and superior customer care;
. Deploying flexible, cost-effective networks and expanding our market
footprint; and
. Pursuing a focused acquisition strategy to increase the breadth of our
product offerings, accelerate our penetration into new markets and grow
our customer base.
2
<PAGE>
Recent Agreements Relating to Investments in our Common Stock.
We have recently entered into agreements to sell to the following investors,
in private placements concurrent with this offering, an aggregate of $91.5
million of our Series B common stock at a price per share equal to the public
offering price net of the underwriting discount in this offering.
<TABLE>
<CAPTION>
Amount
Investor Invested
-------- -------------
(in millions)
<S> <C>
Texas Pacific Group.......................................... $50.0
SAIC Venture Capital Corporation............................. 19.5
Microsoft Corporation........................................ 12.0
Lucent Technologies Inc...................................... 10.0
-----
$91.5
=====
</TABLE>
Microsoft's investment includes an additional amount of warrants to purchase
our common stock. In a separate transaction, Texas Pacific Group has recently
agreed to purchase from Enron 8,236,083 shares of our common stock, together
with warrants to purchase an additional 5,236,083 shares of our Series B common
stock, for an aggregate purchase price of $129.1 million, resulting in an
aggregate proposed investment by Texas Pacific Group in our company of $179.1
million, $50.0 million of which will be proceeds to FirstWorld. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Recent Developments."
Our principal executive offices are located at 8390 E. Crescent Parkway,
Suite 300, Greenwood Village, Colorado 80111, and our telephone number is (303)
874-8010. Our World Wide Web address is www.firstworld.com. The information on
our web site is not incorporated by reference into this prospectus.
3
<PAGE>
THE OFFERING
<TABLE>
<S> <C> <C> <C>
Series B common stock offered in the:
United States offering........................ 8,500,000 shares
International offering........................ 1,500,000 shares
----------
10,000,000 shares
Series B common stock offered in the concurrent
private placements (assuming a public offering
price of $12.00)............................... 8,198,925 shares
----------
Total....................................... 18,198,925 shares
==========
Common stock to be outstanding after this
offering and the concurrent private
placements:
Series A common stock......................... 10,135,164 shares(1)
Series B common stock......................... 40,678,388 shares(1)
----------
Total....................................... 50,813,552 shares
==========
</TABLE>
<TABLE>
<S> <C>
Over-allotment option........................ 1,500,000 shares of Series B common stock
Voting rights:
Series A common stock...................... Ten votes per share
Series B common stock...................... One vote per share
Use of proceeds.............................. We will receive net proceeds from the
public offering of approximately $111.3
million assuming an offering price of
$12.00 per share and $91.5 million from the
private placements. We intend to use the
net proceeds to expand our sales and
marketing efforts, fund our operating
losses, hire additional personnel, fund
potential acquisitions, fund our capital
expenditures and product development,
provide working capital and for general
corporate purposes. See "Use of Proceeds."
Dividend policy.............................. We have not paid any dividends on our
common stock and do not intend to pay
dividends on our common stock in the
foreseeable future. We plan to retain any
earnings for use in the operation of our
business and to fund future growth. See
"Dividend Policy." We have not generated
net income and do not expect to do so for
at least the next several years.
Proposed Nasdaq National Market symbol....... FWIS
</TABLE>
(1) Following completion of the proposed sale by Enron of 5,000,000 shares of
our Series A common stock to Texas Pacific Group, there will be 5,135,164
shares of Series A common stock outstanding and 45,678,388 shares of Series
B common stock outstanding.
4
<PAGE>
The foregoing information is based on 32,614,627 shares of Series A and
Series B common stock outstanding as of February 10, 2000 and excludes:
. 7,702,352 shares of Series B common stock (including stock appreciation
rights that are anticipated to be converted into stock options to
purchase 968,325 shares of Series B common stock) issuable upon the
exercise of outstanding stock options as of December 31, 1999 at exercise
prices ranging from $.25 to $7.50 per share, with a weighted average
exercise price of $6.90 per share;
. Any exercise of our remaining rights and obligations under an agreement
with an entity controlled by Mr. Sturm that allows us to sell up to an
additional 3,333,334 shares of Series B common stock at a price of $7.50
per share;
. 24,578,435 shares of Series B common stock issuable upon the exercise of
outstanding warrants at exercise prices ranging from $.01 to $6.00 per
share, with a weighted average exercise price of $2.50 per share--we have
received notice that warrants to purchase 800,000 shares of Series B
common stock will be exercised immediately prior to closing of the
offering;
. 1,544,652 shares of Series B common stock reserved for issuance under our
stock plans; and
. 806,452 shares of Series B common stock issuable upon exercise of a
warrant to be issued to Microsoft in connection with the concurrent
private placement to Microsoft, assuming a public offering price of
$12.00. See "Management's Discussion and Analysis - Recent Developments."
5
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA AND
SUMMARY UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA
The following table sets forth our summary consolidated financial data and
summary unaudited pro forma condensed combined financial data. These data do
not present all of our financial information. You should read this information
together with the consolidated financial statements and the notes to those
statements appearing elsewhere in this prospectus and the information under
"Selected Consolidated Financial Data," "Unaudited Pro forma Condensed Combined
Financial Data," and "Management's Discussion and Analysis of Financial
Condition and Results of Operations." The historical data for each of the two
years ended September 30, 1998, the three month transition period ended
December 31, 1998, and the year ended December 31, 1999, have been derived from
the audited financial statements appearing elsewhere in this prospectus. The
pro forma financial information for the year ended December 31, 1999 assumes
that our acquisitions of Slip.Net, Sirius, Hypercon, Internet Express, inQuo,
Transport Logic and Intelenet, which were completed in 1999, had occurred on
January 1, 1999 and are not necessarily indicative of historical actual results
or future results which would have been achieved had these acquisitions
occurred on this date. See "Unaudited Pro Forma Condensed Combined Financial
Data" for a more detailed presentation of our pro forma financial information.
Certain prior period amounts have been reclassified to conform to the 1999
basis of presentation.
<TABLE>
<CAPTION>
Year Ended September Three Months Year Ended
30, Ended December 31, 1999
--------------------- December 31, -----------------------
1997 1998 1998 Historical Pro forma
--------- ---------- ------------ ---------- ----------
(in thousands, except share and per share data)
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenue:
Internet services...... $ -- $ -- $ 123 $ 21,246 $ 30,896
Web integration and
consulting services.... -- -- 2,285 28,512 28,512
Telephony services..... 171 1,091 565 4,738 4,738
--------- ---------- ---------- ---------- ----------
Total revenue........ 171 1,091 2,973 54,496 64,146
--------- ---------- ---------- ---------- ----------
Operating expenses:
Network and service
costs................. 474 1,029 2,707 39,606 NA
Selling, general and
administrative........ 7,421 16,113 10,812 67,128 NA
Depreciation and
amortization.......... 501 2,425 1,812 23,411 30,860
--------- ---------- ---------- ---------- ----------
Total operating
expenses............ 8,396 19,567 15,331 130,145 146,946
--------- ---------- ---------- ---------- ----------
Loss from operations.... (8,225) (18,476) (12,358) (75,649) (82,800)
Other income (expense):
Interest income........ 149 6,749 3,227 6,960 6,423
Interest expense....... (1,372) (16,898) (8,600) (37,928) (38,084)
--------- ---------- ---------- ---------- ----------
Loss before
extraordinary item..... (9,448) (28,625) (17,731) (106,617) $ (114,461)
Extraordinary loss--
extinguishment of
debt................... (105) (4,731) -- -- --
--------- ---------- ---------- ---------- ----------
Net loss................ $ (9,553) $ (33,356) $ (17,731) $ (106,617) $ (114,461)
========= ========== ========== ========== ==========
Basic and diluted loss
per common share:
Loss before
extraordinary item.... $ (2.95) $ (1.56) $ (.68) $ (3.83) $ (4.01)
Extraordinary loss--
extinguishment of
debt.................. (.03) (.25) -- -- --
--------- ---------- ---------- ---------- ----------
Net loss per common
share................. $ (2.98) $ (1.81) $ (.68) $ (3.83) $ (4.01)
========= ========== ========== ========== ==========
Weighted average shares
outstanding:
Basic and diluted...... 3,209,450 18,395,172 26,196,664 27,804,356 28,553,268
========= ========== ========== ========== ==========
Other Data:
EBITDA.................. $ (7,724) $ (16,051) $ (10,546) $ (50,346) $ (50,048)
Capital expenditures.... 12,647 23,041 14,453 63,085 NA
Consolidated Cash Flow
Data:
Net cash used by
operating activities... $ (7,446) $ (13,160) $ (931) $ (41,656) NA
Net cash provided (used)
by investing
activities............. (12,647) (188,632) (41,199) 41,672 NA
Net cash provided (used)
by financing
activities............. 20,557 273,295 (250) (1,067) NA
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
September 30, December 31, 1999
---------------- ---------------------
December 31, As
1997 1998 1998 Actual Adjusted
------- ------- ------------ ------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash
equivalents ........... $ 536 $72,039 $29,659 $28,608 $253,255
Marketable Securities... --- 165,591 170,030 20,615 20,615
Working capital
(deficit).............. (3,319) 233,059 190,589 22,482 252,129
Property and equipment,
net.................... 20,331 44,020 61,247 123,161 123,161
Total assets............ 25,321 294,105 294,816 261,783 488,847
Long-term debt,
including capital lease
obligations, net of
current portions....... 18,964 255,841 265,093 301,650 301,650
Total stockholders'
equity (deficit)....... 2,264 29,373 11,794 (86,800) 145,264
</TABLE>
The Statement of Operations data for the three months ended December 31,
1998 presented above include our results for the entire three months and for
Optec for the period from November 24, 1998, the date of our acquisition of
Optec, through December 31, 1998. The Statement of Operations data for the year
ended December 31, 1999 presented above include the results for FirstWorld and
Optec for the entire year and for Slip.Net, Sirius, Hypercon, Internet Express,
inQuo, Transport Logic and Intelenet, beginning with their respective
acquisition dates through December 31, 1999.
EBITDA, shown above under "Other Data," consists of earnings before
interest, income taxes, extraordinary loss, depreciation and amortization and a
one-time, non-cash litigation charge during the year ended December 31, 1999 of
$1.9 million. We have included information concerning EBITDA in this prospectus
because this type of information is commonly used in the communications
industry as one measure of a company's operating performance and liquidity.
EBITDA is not determined using generally accepted accounting principles and,
therefore, EBITDA is not necessarily comparable to EBITDA as calculated by
other companies. EBITDA also does not indicate cash provided by operating
activities. You should not use our EBITDA as a measure of our operating income
and cash flows from operations under generally accepted accounting principles.
Both of those measures are presented above. You also should not look at our
EBITDA in isolation, as an alternative to or as more meaningful than measures
of performance determined in accordance with generally accepted accounting
principles.
Capital expenditures, shown above under "Other Data,"represent the cash paid
for property and equipment. Capital expenditures including accounts payable
accruals were approximately $12.6 million, $26.1 million, $15.5 million and
$65.9 million for and the years ended September 30, 1997 and 1998, the three
months ended December 31, 1998, and the year ended December 31, 1999,
respectively.
The as adjusted balance sheet information presented above gives effect to
the issuance and sale of 10,000,000 shares of Series B common stock offered in
this offering at an assumed initial public offering price of $12.00 per share,
after deducting the estimated underwriting discounts, commissions and offering
expenses, the consummation of the concurrent private placements based upon an
assumed public offering price of $12.00 per share, the exercise of a warrant
for 470,092 shares at an exercise price of $3.83 per share, the exercise of
12,680 stock options at an average exercise price of $3.74 per share and the
issuance of 3,333,333 shares of Series B common stock on February 10, 2000 to
an affiliate of Donald L. Sturm at a price of $7.50 per share pursuant to an
agreement we entered into on December 2, 1999, as well as the issuance of the
Microsoft warrant, valued at $2.4 million.
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RISK FACTORS
This offering and an investment in our common stock involve a high degree
of risk. You should carefully consider the risks and uncertainties described
below and the other information in this prospectus before you decide to buy
our common stock.
Evaluating Our Current Business Is Difficult Because Our Business Plan Is
Unproven and We Have a Limited Operating History
It is difficult to value our business and evaluate our prospects because we
are not aware of any other company that has generated net income from a
similar business plan. We have limited historical financial and operating data
related to our current business for you to review in evaluating our current
business and prospects. We did not begin to develop and offer Internet and
data services until December 1998. From October 1, 1994 through December 31,
1999, we generated net losses of approximately $172.5 million on revenue of
only approximately $59.2 million. Our unproven business plan creates a
significant risk that the value of our common stock will decline.
We Expect Our Losses and Negative Cash Flow to Continue
We expect to incur substantial operating and net losses and negative
operating cash flow for the foreseeable future. We intend to rapidly and
substantially increase our capital expenditures and operating expenses in an
effort to expand our network services. To date, we have incurred substantial
operating losses, net losses and negative operating cash flow. As of December
31, 1999, we had an accumulated deficit of $172.5 million. For the year ended
December 31, 1999, we had an operating loss of $75.6 million, a net loss of
$106.6 million and cash flow used by operations of $41.7 million. We have
funded our operations through the private sale of debt and equity securities
and have not generated any income from our business to date. If we fail to
generate positive cash flows and net income, there will be a significant risk
that the value of our common stock will decline.
The Market for Our Data and Internet Solutions Is New and Evolving and We
Cannot Predict Whether the Market in General or the Market for Our Services
Will Continue to Grow
The market for Internet, data and communications services is new and
rapidly evolving. Although we expect demand for these services to grow, we
cannot assure you that this growth will occur. Certain critical issues
concerning commercial viability of these services, including security,
reliability, ease and cost of access and quality of service, may remain
unresolved and may negatively impact our growth. To be successful, we must
develop and market our services in a rapidly changing marketplace. Therefore,
there is a risk that our services will become obsolete before they can be
profitably sold. If the market for our services grows more slowly than we
anticipate or becomes saturated with competitors, there will be a significant
risk that the value of our common stock will decline.
As a Young Company, We May Not Be Able to Effectively Execute Our Business
Plan
You should consider our business and prospects in light of the risks and
difficulties typically encountered by companies in their early stages of
development, particularly those in rapidly evolving and intensively
competitive markets such as ours. Some of the specific risks include whether
we will be able to:
. attract and retain customers;
. accurately assess potential markets and effectively respond to
competitive developments;
. continue to develop and integrate our operational support systems and
other back office systems;
. raise additional capital;
. enter into interconnection, co-location agreements and working
arrangements with incumbent carriers, substantially all of whom we expect
to be our competitors;
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. develop and expand our acquired businesses;
. rapidly expand the geographic coverage of our services;
. deploy an effective network infrastructure;
. effectively manage our expanding operations;
. comply with evolving governmental regulatory requirements;
. increase awareness of our services; and
. attract, retain and motivate qualified personnel.
We may not be successful in addressing these and other risks, and our
failure to do so would create a significant risk that the value of our common
stock will decline.
We Are Subject to Intense Price Competition
For many Internet, data and communications services, including the services
we offer, there is a negligible marginal cost of providing an additional unit
of service. As a result, there have been rapid and continuing price
reductions, particularly for Internet access services. Accordingly, we may
need to reduce our prices to remain competitive. Price competition could
result in lower margins and therefore create a significant risk that the value
of our common stock will decline.
We May Not Be Able to Compete Successfully
We face significant competition in providing our services. Most of our
competitors, as well as a number of our potential competitors, have
significantly greater financial, sales and marketing resources, larger
customer bases, longer operating histories, greater name recognition, embedded
infrastructure and more established relationships with vendors, distributors
and partners than we have. These factors place us at a disadvantage when we
respond to our competitors' pricing strategies, technological advances and
other initiatives. Additionally, our competitors may develop services that are
superior to ours or that achieve greater market acceptance.
We expect the level of competition to intensify, particularly given the
current regulatory environment. We have not obtained significant market share
in any of the areas where we offer or intend to offer services, nor do we
expect to do so given the size of the Internet, data and communications
market, the intense competition and the diversity of customer needs. In each
market area in which we provide services, we compete or will compete with
several other service providers and the technologies they use. We may not be
able to compete successfully with these current or future competitors, which
creates a significant risk that the value of our common stock will decline.
Please refer to "Business--Competition" for further discussion of our
competitive environment.
We Face Risks Involving Acquired Businesses and Potential Acquisitions
We have grown rapidly by acquiring other businesses. In the year ended
December 31, 1999, we acquired seven businesses and in January 2000 we
purchased the customer base and certain assets of an eighth business. We
expect that a portion of our future growth will result from additional
acquisitions, some of which may be material. Growth through acquisitions
entails numerous risks, including:
. significant strain on our financial, management and operational
resources, including the distraction of our management team in
identifying potential acquisition targets, conducting due diligence and
negotiating acquisition agreements;
. difficulties in integrating the network, operations, personnel, products,
technologies and financial, computer, payroll and other systems of the
acquired businesses;
. difficulties in enhancing our customer support resources to adequately
service our existing customers and the customers of the acquired
businesses;
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. the potential loss of key employees or customers of the acquired
businesses;
. entering geographic and business markets in which we have little or no
prior experience;
. unanticipated liabilities or contingencies of acquired businesses;
. fluctuations in our operating results caused by incurring considerable
expenses to acquire businesses before receiving the anticipated revenues
expected to result from the acquisitions;
. reduced earnings due to increased goodwill amortization from acquired
businesses; and
. dilution to existing stockholders if we use stock to acquire businesses.
Many of our acquired businesses were operating at or near the capacity of
their operating platforms at the time of acquisition. We are currently in the
process of integrating these businesses and expanding their respective
platforms, and we do not expect these businesses, as a whole, to experience
significant growth until such time as their platforms are expanded.
We cannot assure you that we will be able to successfully complete the
integration of the businesses which we have already acquired or successfully
integrate any businesses that we might acquire in the future. If we fail to do
so, or if our acquired businesses do not experience significant growth, there
will be a significant risk that the value of our common stock will decline.
Industry Consolidation Could Make It More Difficult to Compete
Companies offering Internet, data and communications services are
increasingly consolidating. As a company with a limited operating history, we
may not be able to compete successfully with businesses that have combined, or
will combine, to produce companies with substantially greater financial, sales
and marketing resources, larger customer bases, extended networks and
infrastructures and more established relationships with vendors, distributors
and partners than we have. In addition, this consolidation trend could prevent
or hinder our ability to further grow our operations through acquisitions.
With these heightened competitive pressures, there is a significant risk that
the value of our common stock will decline.
We Need Significant Additional Capital
We believe that our current capital resources, including the proceeds of
this offering, the Sturm equity investment agreement and the concurrent
private placements, will be sufficient to fund our capital expenditures and
working capital requirements, including operating losses, for the next 12
months. We will need significant additional financing after that. In addition,
our actual funding requirements may differ materially if our assumptions
underlying this estimate turn out to be incorrect. We may seek additional
financing earlier than we currently anticipate if:
. we alter the schedule, proposed markets or scope of our network rollout
plan;
. we acquire other businesses; or
. we are unable to generate revenues in the amount and in the time frame we
expect or we experience unexpected cost increases.
Such additional financing may be in the form of additional debt, which would
increase our leverage, or the issuance of additional stock, which would be
dilutive to our stockholders.
We may not be able to raise sufficient additional capital at all or on
terms that we consider acceptable. If we are unable to obtain adequate funds
on acceptable terms and on a timely basis, our ability to operate and deploy
our networks, fund our expansion or respond to competitive pressures would be
significantly impaired. This limitation could create a significant risk that
the value of our common stock will decline.
We Have a Substantial Amount of Debt
We are highly leveraged, and we may seek additional debt funding in the
future. As of December 31, 1999, we had approximately $302.2 million of
outstanding debt and an accumulated deficit of $172.5 million. We have $470.0
million in principal amount at maturity of 13% senior discount notes due 2008
outstanding. Payment of cash interest on these notes does not begin until
October 15, 2003. Instead, they accrete, which means they
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effectively increase in principal amount, to $470.0 million at April 15, 2003.
We are not generating sufficient revenue to fund our operations or to repay
our debt. Our existing substantial leverage poses, and any future leverage may
pose, the risk that:
. we may be unable to repay our debt;
. we may be unable to obtain additional financing;
. we must dedicate a substantial portion of our cash flow from operations,
if any, to pay interest on our debt generally beginning in 2003, and if
any cash flow remains after that, it may not be adequate to fund our
operations; and
. we may be more vulnerable during economic downturns, less able to
withstand competitive pressures and less flexible in responding to
changing business and economic conditions.
Additionally, our outstanding debt imposes significant restrictions on how
we can conduct our business. For example, the restrictions prohibit or limit
our ability to incur additional debt and make dividend payments. The
restrictions may materially and adversely affect our ability to finance future
operations or capital needs or conduct additional business activities. Any
future debt that we may incur would also likely impose restrictions on us. If
we fail to comply with any of these restrictions, we would be in default. If
we default, the holders of the applicable debt could demand that we pay the
debt, including interest, immediately. This would create a significant risk
that the value of our common stock will decline.
Our Failure to Manage Our Growth Could Impair Our Business
We have rapidly and significantly expanded our operations principally
through our acquistions. We anticipate further significant expansion of our
operations in an effort to achieve our network rollout and deployment
objectives. Our expansion to date has strained our management, financial
controls, operational support systems, personnel and other resources. Any
future expansion could increase these strains. If our marketing strategy is
successful, we may experience difficulties responding to customer demand for
services and technical support in a timely manner and in accordance with their
expectations. As a result, rapid growth of our business would make it
difficult to implement our strategy successfully and to provide superior
customer service. We may not be able to manage growth of our operations if we
do not:
. improve existing and implement new operational, financial and management
information controls, reporting systems and procedures;
. hire, train and manage additional qualified personnel;
. expand and upgrade our network and technologies; and
. effectively manage multiple relationships with our customers, suppliers
and other third parties.
We may not be able to install management information and control systems in
an efficient and timely manner, and our current or planned personnel, systems,
procedures and controls may not be adequate to support our future operations.
Failure to manage our future growth effectively could adversely affect the
expansion of our customer base and service offerings. Any failure to
successfully address these issues could create a significant risk that the
value of our common stock will decline.
We May Not Be Able to Grow Our Business Unless We Keep Pace with Rapidly
Changing Technologies
Our industry is characterized by:
. rapid technological change;
. changing customer needs;
. frequent new product and service introductions; and
. evolving industry standards.
These market characteristics could render our existing services,
technologies, network infrastructure and systems obsolete. We may be unable to
obtain access to new technologies on acceptable terms or at all, and we may be
unable to adapt to new technologies and offer services in a competitive
manner. New technologies,
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industry standards and products may not be compatible with our existing
technologies and current business plan, and we cannot predict the effect of
technological changes on our business. As a result, there is a significant
risk that the value of our common stock will decline.
Our Business Could Suffer if High Quality Network Capacity, Services and
Products That We Obtain from Third Parties Are Not Available or Cost More Than
We Expect
We depend on third parties to maintain and provide us key components of our
network infrastructure. Our business, prospects, financial condition and
operating results may suffer if the third parties we depend on to provide
network services and infrastructure fail to maintain the operational integrity
of their networks or increase their cost. In part, we rely on and will
continue to rely on third parties, including certain of our competitors and
potential competitors, for the development of and access to communications and
networking technologies. We expect that new products and technologies
applicable to our market will emerge. For example, we depend on data
communications equipment providers and network providers, such as Pacific
Bell, UUNET, Sprint, NorthPoint, Covad, Lucent and Cisco to provide the data
and communications capacity and equipment we, and our customers, require. If
these components are unavailable or cost more than we expect, there is a
significant risk that the value of our common stock will decline.
Our Business Could Suffer if We Are Unable to Expand and Adapt Our Network
Infrastructure to Meet Our Customers' Demands
We must continue to expand and adapt our network. We also plan to expand
the number of data centers we operate that house our Internet, data and voice
equipment. If we are unable to expand and adapt our network infrastructure and
build our data centers on a cost-effective and timely basis, we may lose
customers. We have had limited deployment of our services and limited
experience in building data center facilities. Accordingly, we do not know
whether our network and data center facilities will be able to handle, connect
and manage large numbers of users at high transmission speeds. In addition,
future attempts to increase our network capacity and data center facilities
may be delayed or cause further network complications. We may encounter
equipment or software incompatibility, among other things, if we upgrade our
network to increase its capacity. These problems may cause delays in our
attempts to expand or improve our services.
In order to generate additional revenue, we must continue to expand and
adapt our network infrastructure as the number of users and their bandwidth
demands increase and as customer requirements change. We cannot be sure that
we will be able to do so on a timely basis, at a commercially reasonable cost,
or at all. Any such failure would create a significant risk that the value of
our common stock will decline.
We Are Dependent on the Incumbent Local Exchange Carriers
We rely on the incumbent local exchange carriers for copper and fiber optic
telephone lines and co-location space. In some cases, we also rely on them for
transmission between our co-located offices and our data centers. These
carriers compete with us in providing DSL and other services and, accordingly,
may be reluctant to make capital expenditures to purchase and install
additional equipment or cooperate with us in meeting our supply needs. The
Federal Communications Commission requires incumbent local exchange carriers
to take affirmative steps to enable competitive carriers to offer service over
the incumbent local exchange carriers' networks. The FCC's rules give the
incumbent carriers flexibility regarding the timing, technical standards and
charges, which the incumbent carriers may use to delay performance of loop
conditioning that we may need to provide service.
Additionally, we plan to co-locate our equipment and facilities at the
central offices of many of the incumbent local exchange carriers. Co-location
space may not be available in a particular central office, and we may face
competition from other communications companies to obtain available space. The
incumbent carriers may reject some of our co-location applications, and we may
experience delays. The Telecommunications Act of 1996 requires that, in order
to qualify for authority to sell long distance services, the former Bell
operating
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company incumbent local carriers must cooperate with other communications
companies in establishing co-location facilities. These incumbent carriers
will probably be less cooperative with us after such authority is granted.
These incumbent carriers are not subject to similar legal requirements in
providing transmission facilities to our data center facilities. If the
incumbent carriers do not provide us with transmission facilities on a timely
basis and we are unable to obtain transmission facilities from other
providers, the rollout of our network may be delayed, which could create a
significant risk that the value of our common stock will decline.
Interference or Claims of Interference Could Delay our Rollout or Harm our DSL
Services
All transport technologies deployed on copper telephone lines have the
potential to interfere with, or to be interfered with, by other transport
technologies on copper telephone lines. We believe that our DSL technologies,
like other transport technologies, do not interfere with existing telephony
services. Nevertheless, incumbent carriers may claim that the potential for
interference permits them to restrict or delay our deployment of DSL services.
Interference could degrade the performance of our services or make us unable
to provide service on selected lines. The procedures to resolve interference
issues between competitive carriers and incumbent carriers are still being
developed, and these procedures may not be effective. We may be unable to
successfully negotiate interference resolution procedures with incumbent
carriers. Moreover, incumbent carriers may make claims regarding interference
or unilaterally take action to resolve interference issues to the detriment of
our services. State or federal regulators could also institute responsive
actions. Interference, or claims of interference, if widespread, would
adversely affect our speed of deployment and customer satisfaction and
retention which could cause the value of our common shares to decline.
Our Business is Dependent on Our Ability to Negotiate and Enter Into
Interconnection Agreements With Incumbent Telephone Companies
We must negotiate and enter into interconnection agreements with each
incumbent local carrier in whose service area we wish to do business.
Interconnection agreements address the price and terms for the co-location of
our equipment in the incumbent carriers' central office and our lease of
copper telephone lines. We have obtained interconnection agreements with
Pacific Bell, GTE, and U S WEST. These interconnection agreements are
generally short term, and we may be unable to renew the interconnection
agreements on acceptable terms or at all. In addition, we cannot be sure that
the incumbent carriers will abide by their obligations under those agreements.
Delays in obtaining interconnection agreements will delay our entry into new
markets. In addition, disputes may arise between us and incumbent carriers
with respect to interconnection agreements, and we may be unable to resolve
those disputes in our favor or in a timely manner. If we are unable to enter
into, or experience a delay in obtaining, interconnection agreements, our
business could be adversely affected.
We Are Unable to Control the Terms or Timing of Extending Our Interconnection
Agreements
Our access to the incumbent local carriers' co-location and transmission
facilities and copper and fiber optic lines depends on our ability to maintain
interconnection agreements with the incumbent carriers. Many of our
interconnection agreements provide that if the term expires before we have a
replacement agreement, we may continue on the rates, terms and conditions of
the original interconnection agreement on a month-to-month basis, but we may
not be able to take advantage of any lower prices that the incumbent carriers
may offer. Some of our other interconnection agreements provide that if the
term expires before we have a replacement agreement, the rates, terms and
conditions of the original interconnection agreement may be superseded by more
generic and potentially less favorable rates, terms and conditions. In
addition, we may not be able to negotiate new agreements on terms favorable to
us.
State regulatory commissions, the FCC and the courts oversee our
interconnection agreements as well as the terms and conditions under which we
gain access to incumbent local carrier copper and fiber optic telephone lines
and transmission facilities and co-location. These governmental entities may
modify the terms or prices applicable to our interconnection agreements and
the terms governing our access to copper and fiber optic
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telephone lines, transmission facilities, and co-location in ways that would
be adverse to our business. These issues may create a significant risk that
the value of our common stock will decline.
Some of our Switching Technologies and Equipment Have a Very Limited
Performance History
Some of the switching technologies and equipment that we intend to use in
our network services are relatively new, have not been commercially proven and
may be unreliable. For example, our telephony switching platform incorporates
the Lucent PathStar, which is a new technology that has a very limited
operating history. We were one of the first companies to deploy this new
technology for local switching and currently have deployed it in only one of
our markets. We intend to install two additional Lucent PathStars by the end
of 2000. Any deficiency in the design, functionality or operation of the
PathStar, or any failure by Lucent to provide these switches to us on a timely
basis would adversely affect our services and our business plan.
If any of our switching technologies contain design faults or "bugs,"
interruption of service to our customers or delay in our deployment could
negatively affect our financial performance. We cannot assure you that our
switching platforms will perform as expected or that we will be successful in
deploying them in all of our markets in a timely manner. These factors could
result in a significant risk that the value of our common stock will decline.
A System Failure or Breach of Network Security Could Cause Delays or
Interruptions of Service to Our Customers Which Could Materially and Adversely
Affect Our Business
Our success in marketing our services to business customers requires that
we provide reliable, continuous and secure service. Interruptions in service,
capacity limitations or security breaches could have a material adverse effect
on our reputation and customer acceptance of our services. Our networks and
those of third parties on whom we rely are subject to damage from human error,
earthquakes, floods, other natural disasters, power loss, capacity
limitations, software defects, breaches of security (by computer virus, break-
ins or otherwise) and other factors. In addition, our operations may be
disrupted by unannounced or unexpected changes in transmission protocols or
other technological issues that may not be easily resolved. These problems
could result in unanticipated and extended system disruptions, slower response
times, impaired quality and reduced levels of customer service, any of which
could create a significant risk that the value of our common stock will
decline.
Despite our design and implementation of a variety of network security
measures, breaches such as unauthorized access, computer viruses, or other
disruptions could occur. In addition, we may incur significant costs to
prevent breaches in security or to alleviate problems caused by such breaches.
Any breaches that may occur could result in liability to us, loss of existing
customers and the deterrence of future customers.
We May Encounter Difficulty in Upgrading Our Billing and Operational Support
Systems
We are in the process of upgrading our billing and operational support
systems to accommodate our planned expansion and to achieve operating
efficiencies. Although we have selected vendors with established software
packages for these upgrades, the installation and implementation of the new
billing and operational support systems involve a significant commitment of
resources and are subject to a number of risks, including:
. the potential incurrence of substantial third party consulting costs;
. delays in implementation;
. undetected software errors;
. conflicts with our existing hardware and software systems; and
. difficulties arising from continuing business operations during
implementation.
The failure to successfully install and implement new billing and
operational support systems in a timely fashion could create a significant
risk that the value of our common stock will decline.
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Our Success Depends on Our Retention of Certain Key Personnel and Our Ability
to Hire Additional Key Personnel
Competition in the Internet, data and communications services industries is
intense for qualified executives, and technical, sales and marketing
personnel. Moreover, these industries have a high level of employee mobility
and aggressive recruiting of key personnel. As a result of these factors, we
may not be able to attract and retain the qualified personnel on whom our
future success depends.
In addition, our success depends on the performance of our officers and key
employees, especially our Chief Executive Officer. Members of our senior
management team have worked together at our company for only a short period of
time. Any of our executive officers may terminate their employment with us at
any time.
We Rely Primarily on a Direct Sales Method Which May Not Be Cost-Effective
We market our products and services primarily through our own staff. Our
markets are new, and our direct marketing efforts may not be an effective
means of selling Internet, data and communications services. Many of our
competitors are selling their services indirectly through Internet service
providers, carriers, resellers and integrators. Our direct method may prove to
be a more costly approach. We may not achieve a level of sales sufficient to
justify maintaining our own marketing force and sales staff.
An Unfavorable Outcome of a Lawsuit Filed Against Us by the City of Anaheim
Could Harm Us
On May 13, 1999, the City of Anaheim filed a lawsuit in Orange County
Superior Court, against us and one of our subsidiaries, FirstWorld Anaheim.
The City alleges that we and our subsidiary repudiated our respective
contractual obligations under a series of agreements that we entered into with
the City in February 1997 primarily relating to the development of a fiber-
optic network located in Anaheim, California. In addition, the City alleges,
among other things, that we materially breached certain of our obligations
under these agreements. The City alleges that it is entitled to damages in
excess of $45 million. The City also seeks specific performance compelling us
to completely perform some or all of our obligations under the agreements. In
response to the lawsuit, we filed a motion to compel arbitration and requested
a stay of the court proceeding. On October 6, 1999 the court entered a written
order finding that there is a valid arbitration provision in the agreements
and that the City had not established that we unequivocally repudiated the
agreements. The court action has been stayed pending the completion of the
arbitration.
The City provided notice to commence arbitration on January 7, 2000 in
which the City seeks, among other things, an order that we are obligated to
make certain payments of not less than $1.0 million per year under one of the
agreements and that such sums be paid forthwith, plus interest, as provided in
the agreement, that we allow the City to conduct an audit of our books and
records relative to the operation of our Anaheim system, and that we
specifically perform pursuant to the agreement with respect to construction
and operation of a demonstration center. On January 27, 2000, we delivered our
response and raised an additional matter for the arbitration regarding
restitution of certain City employee reimbursements not properly earned under
the agreement. Both parties have selected their respective arbitrators who
will then select a third arbitrator. We believe that we are not in breach as
alleged and intend to vigorously defend the City's claims. However, the
outcome of this dispute is uncertain and cannot be predicted at this time. Any
adverse result could have a material adverse effect on our financial condition
and results of operations and could result in a significant risk that the
value of our common stock will decline. See "Business--Litigation."
Our Services Are Subject to Federal, State and Local Government Laws and
Regulation, and Changes in These Laws or Regulations Could Adversely Affect
the Way We Operate Our Business
We are subject to regulation by the FCC, state public service and public
utility commissions and local governments as a provider of communications
services. Changes in existing policies or regulations in the states and
localities in which we provide services or by the FCC could create a
significant risk that the value of our common stock will decline, particularly
if those regulatory or policy changes make it more difficult to obtain
unbundled network elements from the incumbent local exchange carriers at
competitive prices, restrict access to
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public rights of way or otherwise increase the cost and regulatory burdens of
providing our services. There can be no assurance that local regulatory
authorities in the areas we serve or the FCC will not take actions having an
adverse effect on the value of our common stock. The Telecommunications Act
has significantly altered regulation of the telecommunications industry by
preempting state and local laws to the extent that they prevent competition
and by imposing a variety of new duties on local exchange carriers and the
incumbent local carriers in order to promote competition in local exchange and
access services. Although we believe that the Telecommunications Act and other
trends in federal and state legislation and regulation that favor increased
competition are to our advantage, there can be no assurance that the increased
competitive opportunities or other changes in current regulations or future
regulations at the federal or state level will not create a significant risk
that the value of our common stock will decline.
Challenges to Governmental Regulation Could Increase Our Operating Costs
The Telecommunications Act of 1996, which, among other things, requires
incumbent local carriers to unbundle network elements and to allow competitors
to co-locate their equipment in the incumbent central offices, is the subject
of ongoing proceedings, litigation and legislation at the federal, state and
local levels. In addition, the FCC rules governing pricing standards for
access to the networks of the incumbent carriers are currently being
challenged in federal court. We cannot predict the outcome of the various
proceedings, litigation and legislation or whether, or to what extent, these
proceedings, litigation and legislation may adversely affect our business and
operations. In addition, decisions by the FCC and state telecommunications
regulators will determine some of the terms of our relationships with
incumbent carriers, including the terms and prices of interconnection
agreements, and access fees and surcharges on gross revenue from interstate
and intrastate services. State telecommunications regulators determine whether
and on what terms we will be authorized to operate as a competitive local
exchange carrier in their state. In addition, local municipalities may require
us to obtain various permits or franchises or to pay franchise fees which
could increase the cost of services or delay development of our network.
Future federal, state and local regulations and legislation may be less
favorable to us than current regulations and legislation and may adversely
affect our business and operations.
We May Be Liable for Information Disseminated through Our Network
The law relating to the liability of Internet service providers and private
network operators for information carried on or disseminated through the
facilities of their networks is currently unsettled. The costs incurred in
defending against any claims and potential adverse outcomes of such claims
could have a material adverse effect on the value of our common stock. Several
lawsuits seeking a judgment of such liability are pending. While such claims
have not been asserted against us, we cannot be sure that such claims will not
be asserted against us in the future, or if asserted, will not be successful.
The Telecommunications Act prohibits and imposes criminal penalties and civil
liability for using an interactive computer service for transmitting certain
types of information and content, such as obscene communications. Numerous
states have adopted or are currently considering similar types of legislation.
The imposition upon us of potential liability for materials carried on or
disseminated through our systems could require us to implement measures to
reduce our exposure to such liability, which may require the expenditure of
substantial resources or the discontinuation of certain product or service
offerings. We believe that it is currently unclear whether the
Telecommunications Act prohibits or imposes liability for any of our services
should the content of information transmitted be subject to the statute.
Our Limited Ability to Protect Our Intellectual Property Rights May Adversely
Affect Our Ability to Compete
Trademarks, service marks, trade secrets and copyrights are important to
our success and competitive position. Our efforts to protect our proprietary
rights may be inadequate and may not prevent others from claiming violations
of their proprietary rights. If we invoke legal proceedings to enforce our
proprietary rights, the proceedings could be burdensome and expensive. Our
technology may be misappropriated or a third party may independently develop
technologies that are substantially equivalent or superior to ours.
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We May be Subject to Claims Alleging Infringement of Third Parties'
Intellectual Property Rights
We may be subject to claims alleging that we have infringed third party
proprietary rights. If we were to discover that any of our services infringed
a third party's rights, we may not be able to obtain permission to use those
rights on commercially reasonable terms. If we must defend against alleged
infringements, the proceedings could be burdensome and expensive and could
involve a high degree of risk. Any of these events could create a significant
risk that the value of our common stock will decline.
Our management personnel were previously employees of other Internet, data
and communications companies. In many cases, these individuals are performing
activities for us in areas similar to those in which they were involved prior
to joining us. As a result, we or our employees could be subject to
allegations of trade secret violations and other similar claims. If such
claims materialize, there is a significant risk that the value of our common
stock will decline.
Our Principal Stockholders and Management Own a Significant Percentage of Our
Company and Will Be Able to Exercise Significant Influence Over Our Company
As of February 10, 2000, four limited liability companies controlled by
Donald L. Sturm (the "Sturm Entities") beneficially owned approximately 54.6%
of our outstanding common stock, including 49.3% of our outstanding Series A
common stock (assuming only the exercise of outstanding warrants held by the
Sturm Entities). The Series A common stock has ten votes per share, as
compared to one vote per share for the Series B common stock. By virtue of
these super-voting rights of the Series A common stock, the Sturm Entities
control approximately 51.0% of the voting power of our outstanding common
stock. As of February 10, 2000, Enron beneficially owned approximately 40.3%
of our outstanding common stock, including 49.3% of our Series A common stock.
By virtue of the super-voting rights of the Series A common stock, Enron
controls approximately 46.5% of the outstanding voting power of our common
stock. These rights terminate on the second anniversary of the closing of this
offering. As a result of their respective ownership interests and Board
designees, the Sturm Entities and Enron control our company. The Sturm
Entities and Enron have the ability to control the election of at least a
majority of our directors and any other major decisions involving our company
or its assets. On February 10, 2000 we sold 3,333,333 shares of Series B
common stock to one of the Sturm Entities, under the automatic trigger
provision of the Sturm equity investment agreement. If we exercise additional
rights under this equity investment agreement, the beneficial ownership of the
Sturm Entities will be increased. This agreement is discussed in the section
of this prospectus entitled "Certain Transactions - Sturm Equity Investment
Agreement."
Enron has informed us that it intends to sell all of its Series A and
Series B common stock and all but 3.0 million of its warrants to Texas Pacific
Group. Upon this sale Enron's shares of Series A common stock will
automatically convert to Series B common stock. Because holders of Series B
common stock are entitled to only one vote per share, the voting power of the
Sturm entities will be effectively increased to 63.7% upon completion of such
sale by Enron, and the issuance of 10,000,000 shares in this offering and
8,198,925 shares in the concurrent private placements.
In addition to their investments in our company, the Sturm Entities and
Enron have investments, and may in the future make investments, in other
Internet, data and communications companies and ventures, including our
competitors. We, the Sturm Entities and Enron have agreed that the Sturm
Entities and Enron are under no obligation to bring to our company any
investment or business opportunities of which they become aware, even if such
opportunities are within our scope and objectives, and that the Sturm Entities
and Enron may compete with us. As a result, the Sturm Entities and/or Enron
may compete with us to obtain business or for the acquisitions of companies.
Our Capital Structure and Some of Our Anti-Takeover Provisions May Discourage
Our Acquisition by Others and Thus Depress Our Stock Price
The ownership and voting interests possessed by the Sturm Entities and
Enron make it impossible for a third party to acquire control of us without
their consent. In addition, some of the provisions that are included in
17
<PAGE>
our certificate of incorporation and bylaws may discourage, delay or prevent a
merger or acquisition at a premium price. These provisions include:
. authorizing the issuance of "blank check" preferred stock;
. eliminating the ability of stockholders to call a special meeting of
stockholders;
. limiting the removal of directors by the stockholders to removal for
cause; and
. requiring a super-majority stockholder vote to effect certain amendments.
The indenture governing our outstanding senior notes requires us to offer
to repurchase all senior discount notes at a premium, within 30 days after a
change of control. This could also discourage an acquisition.
Future Sales of Our Common Stock in the Public Market Could Depress Our Stock
Price
Sales of substantial amounts of common stock in the public market following
this offering, or the appearance that a large number of shares is available
for sale, could adversely affect the market price for the common stock. The
number of shares of common stock available for sale in the public market will
be limited by lock-up agreements under which our executive officers, directors
and certain stockholders, who will collectively hold 39,259,998 shares, or
77.26% of our common stock after this offering and the concurrent private
placements, (or 75.05%) if the underwriters exercise their over-allotment
option in full, have agreed not to sell or otherwise dispose of any of their
shares for a period of 180 days after the date of this prospectus without the
prior written consent of Lehman Brothers. Lehman Brothers has agreed, however,
to release an aggregate of 90,000 of such shares after 30 days from the date
of this prospectus and an additional 45,000 of such shares after 60 days from
the date of this prospectus. Holders of 1,340,861 additional shares are
contractually prohibited from selling their shares for a period of 180 days
after the date of this prospectus pursuant to the terms of their agreements
with our company. The remaining 10,212,693 shares (including the 10,000,000
shares sold pursuant to this offering) of our Series B common stock to be
outstanding at the completion of this offering may be freely resold by the
holders thereof upon completion of this offering. In addition to the adverse
effect a price decline could have on holders of common stock, that decline
would likely impede our ability to raise capital through the issuance of
additional shares of common stock or other equity securities.
After this offering, the holders of 22,439,589 shares of common stock will
have the right to require us to register the sale of their shares, subject to
limitations and to the lock-up agreements with the underwriters. The sale of
these additional shares into the public market may further adversely affect
the market price of our common stock.
You Will Incur Immediate and Substantial Dilution of the Book Value of Your
Shares
Prior investors paid a lower per share price than the price in this
offering. The initial public offering price is substantially higher than the
as adjusted net negative tangible book value per share of the outstanding
common stock immediately after this offering. Accordingly, if you purchase
common stock in this offering, you will incur immediate and substantial
dilution of $10.29 per share in the as adjusted net negative tangible book
value per share of the common stock from the price you pay for the common
stock in this offering. See "Dilution."
18
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS; MARKET DATA
Some of the statements contained in this prospectus are not historical
facts, including some statements made in the sections of this prospectus
entitled "Prospectus Summary," "Risk Factors," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business" and
are statements of future expectations and other forward-looking statements. We
use words such as expect, intend, plan, project, believe, estimate and
anticipate, and variations of these words and similar expressions to identify
such forward-looking statements. These statements are based on management's
current views and assumptions and involve known and unknown risks and
uncertainties that could cause actual results, performance or events to differ
materially from those expressed or implied in those statements, including:
. the rate of expansion of our network and/or customer base;
. inaccuracies in our internal forecasts of communications traffic or
customers;
. the loss of a customer or distributor that provides us with significant
revenues;
. highly competitive market conditions;
. changes in or developments under laws, regulations, licensing
requirements or telecommunications standards;
. changes in the availability of co-location and transmission facilities;
. changes in retail or wholesale communications rates;
. changes in technology;
. the loss of the services of key officers, such as Sheldon S. Ohringer,
our Chief Executive Officer; and
. general economic conditions.
The foregoing important factors should not be construed as exhaustive. We
undertake no obligations to update or revise any forward-looking statements,
whether as a result of new information, future events or otherwise. See also
"Risk Factors" for additional cautionary statements identifying important
factors with respect to forward-looking statements contained in this
prospectus that could cause actual results to differ materially from results
or expectations referred to in the forward-looking statements.
This prospectus contains market data related to us and our industry. These
data have been included in the studies of market research firms International
Data Corporation, Forrester Research and eStats. These market research firms
assume certain events, trends and activities will occur and they project
information on those assumptions. We do not know all of the assumptions made
by these firms and are not able to assess the basis for their assumptions. In
particular, we do not know what level of growth in the U.S. economy these
firms have assumed, or whether they have assumed that there would be a
recession. If the market research firms are wrong about any of their
assumptions, then their projections may also be wrong. Other market research
firms, whose projections we have not included in this prospectus, make
different assumptions and different projections than those made by
International Data Corporation, Forrester Research and eStats.
19
<PAGE>
USE OF PROCEEDS
We estimate that we will receive approximately $111.3 million in net
proceeds from the public offering, or $128.3 million if the underwriters'
overallotment option is exercised in full, based upon an assumed initial
public offering of $12.00 per share, plus $91.5 million in the concurrent
private placements to Texas Pacific Group, SAIC Venture Capital Corporation,
Microsoft Corporation and Lucent Technologies Inc.
We expect to use the net proceeds to:
. expand our sales and marketing efforts;
. fund our capital expenditures and product development;
. hire additional personnel;
. fund our operating losses;
. fund potential acquisitions; and
. provide working capital and for other general corporate purposes.
The amounts we actually spend in these areas may vary significantly and
will depend on a number of factors, including our future revenues. We may also
use a portion of the net proceeds to acquire or invest in complimentary
businesses, technologies, services or products.
Pending such uses, we will invest the net proceeds of this offering in
short term, interest bearing, investment grade securities.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock. We
currently intend to retain any future earnings to finance the growth and
development of our business and therefore do not anticipate paying any cash
dividends in the foreseeable future. The terms of our outstanding indebtedness
limit our ability to pay dividends. Any future determination to pay cash
dividends will be at the discretion of our board of directors and will depend
upon our financial condition, operating results, capital requirements and
other factors that our board of directors deems relevant.
20
<PAGE>
CAPITALIZATION
The following table sets forth our cash, cash equivalents and marketable
securities and capitalization as of December 31, 1999:
. on actual basis;
. on a pro forma basis after giving effect to the sale 3,333,333 shares
sold under the Sturm equity investment agreement (net of a $5.0 million
commitment fee), the exercise of warrants into 470,092 shares of Series B
common stock at an exercise price of $3.83 per share and the exercise of
12,680 stock options at an average exercise price of $3.74 per share
subsequent to December 31, 1999.
. on a pro forma as adjusted basis for the sale of the shares of Series B
common stock offered hereby at an assumed initial public offering price
of $12.00 per share, after deducting underwriting discounts and estimated
offering costs, the issuance of 8,198,925 Series B common stock in the
concurrent private placements based on an assumed initial public offering
price of $12.00 per share, and the effect of the issuance of the
Microsoft warrant, valued at $2.4 million, based upon the assumed initial
public offering price.
This table should be read together with the financial statements and notes
to those statements appearing in this prospectus.
<TABLE>
<CAPTION>
December 31, 1999
----------------------------
Pro
Pro Forma As
Actual Forma Adjusted
-------- -------- --------
(in thousands, except
share data)
<S> <C> <C> <C>
Cash, cash equivalents and marketable securities
(1)............................................. $ 49,223 $ 71,070 $273,870
======== ======== ========
Long-term obligations:
Long-term debt, net of current portion and
discount...................................... 294,034 294,034 294,034
Capital lease obligations, net of current
portion....................................... 7,616 7,616 7,616
-------- -------- --------
Total long-term debt......................... 301,650 301,650 301,650
-------- -------- --------
Stockholders' equity (deficit):
Preferred stock, $.0001 par value, 10,000,000
shares authorized; no shares issued or
outstanding...................................
Common stock, $.0001 par value, 100,000,000
shares authorized; 10,135,164 designated
Series A and 89,864,836 designated Series B
Series A, 10,135,164 shares issued and
outstanding, actual, pro forma and pro forma
as adjusted (2)............................. 1 1 1
Series B, 18,663,358 shares issued and
outstanding, actual; 22,479,463 shares
issued and outstanding, pro forma; and
40,678,388 shares issued and outstanding,
pro forma as
adjusted (2)................................ 2 2 4
Additional paid-in capital....................... 53,740 80,864 283,662
Warrants......................................... 31,963 31,686 34,103
Stockholder receivables.......................... (45) (45) (45)
Accumulated deficit.............................. (172,461) (172,461) (172,461)
-------- -------- --------
Total stockholders' equity (deficit) (1)..... (86,800) (59,953) 145,264
-------- -------- --------
Total capitalization....................... $214,850 $241,697 $446,914
======== ======== ========
</TABLE>
(1) The Pro Forma As Adjusted cash balance is inclusive of estimated net
cash proceeds from the offering of $111.3 million (after deducting
underwriting discounts and estimated offering costs) and cash proceeds from
the Private Placements of $91.5 million. The Pro Forma As Adjusted
stockholders' equity balance is inclusive of the aforementioned transactions,
as well as the issuance of the Microsoft warrant, valued at $2.4 million.
(2) Following the completion of the proposed sale by Enron of 5.0 million
shares of our Series A common stock to Texas Pacific Group, the 5.0 million
Series A common stock will automatically convert to our Series B common stock,
leaving 5,135,164 shares of Series A common stock outstanding and 45,678,388
shares of Series B common stock outstanding, each on a pro forma as adjusted
basis.
21
<PAGE>
The number of shares of common stock to be outstanding after this offering
is based on the number of shares outstanding as of February 10, 2000. We are
permitted, and in some cases obligated, to issue shares of common stock in
addition to the common stock to be outstanding, including:
. 7,702,352 shares of Series B common stock (including stock appreciation
rights that are anticipated to be converted into stock options to
purchase 968,325 shares of Series B common stock) issuable upon exercise
of stock options outstanding as of December 31, 1999 (2,546,402 of which
are exercisable as of December 31, 1999) at exercise prices ranging from
$.25 to $7.50 per share, with a weighted average exercise price of $6.42
per share;
. 3,333,334 shares of Series B common stock which we may sell to Colorado
Spectra 4, LLC at a price of $7.50 per share under the agreement
discussed in the section of this prospectus entitled "Certain
Transactions--Sturm Equity Investment Agreement";
. 24,578,435 shares of Series B common stock subject to issuance upon
exercise of outstanding warrants at exercise prices ranging from $ .01 to
$6.00 per share, with a weighted average exercise price of $2.50 per
share. We have received notice that a warrant to purchase 800,000 shares
of Series B common stock will be exercised immediately prior to closing
of the offering; and
. 1,544,652 shares of Series B common stock reserved for issuance under our
stock option plans.
22
<PAGE>
DILUTION
Our pro forma negative net tangible book value as of December 31, 1999 was
approximately $116.2 million, or negative $3.56 per share. Our negative net
tangible book value represents the amount of our total tangible assets reduced
by the amount of our total liabilities. Pro forma negative tangible book value
gives effect to the sale of 3,333,333 shares of Series B common stock to an
affiliate of Donald L. Sturm for $7.50 per share on February 10, 2000 and the
exercise of warrants subsequent to December 31, 1999 into 470,092 shares of
Series B common stock at an exercise price of $3.83 per share and the exercise
of 12,680 stock options at an average exercise price of $3.74 per share
subsequent to December 31, 1999. Without taking into account any other changes
in the pro forma negative net tangible book value after December 31, 1999
other than to give effect to the sale of 10 million shares of Series B common
stock in this offering, assuming an initial public offering price of $12.00
per share, less estimated underwriting discounts and commissions and other
expenses of this offering and issuance of 8,198,925 shares of Series B common
stock in the concurrent private placements (based on an assumed initial public
offering price of $12.00 per share, after reduction of seven percent
representing the underwriting discount) our pro forma as adjusted net tangible
book value as of December 31, 1999 would have been $1.71 per share. This
represents an immediate increase in net tangible book value per share of $5.27
to the existing stockholders after taking into account the pro forma effect of
transactions described above and immediate dilution in net tangible book value
of $10.29 per share to new investors in this offering and the concurrent
private placements. The following table illustrates the per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................ $12.00
Pro forma negative net tangible book value per share as of
December 31, 1999............................................ $(3.56)
Increase in pro forma negative net tangible book value per
share attributable to new investors in this offering......... 3.45
Increase in pro forma negative net tangible book value per
share attributable to investors in the concurrent private
placements................................................... 1.82
Pro forma as adjusted net tangible book value per share after
this offering and the concurrent private placements........... 1.71
------
Dilution per share to new investors............................ $10.29
======
</TABLE>
The following table summarizes, on the as adjusted basis described above as
of December 31, 1999, the differences between existing stockholders, new
investors in this offering and new investors from concurrent private
placements and warrant exercises with respect to:
. the number of shares of common stock purchased from us;
. the total consideration paid to us; and
. the average price per share paid, before deducting estimated discounts
and commissions and estimated offering expenses payable by us.
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
------------------ -------------------- Average Price
Number Percent Amount Percent Per Share
---------- ------- ------------ ------- ------------- ---
<S> <C> <C> <C> <C> <C> <C>
Existing stockholders
pro forma ............. 32,614,627 64.2% $ 80,866,000 27.6% $2.48
New investors in this
offering............... 10,000,000 19.7 120,000,000 41.0 12.00
New investors in the
concurrent private
placements............. 8,198,925 16.1 91,500,000 31.4 11.16
---------- ----- ------------ -----
Total................. 50,813,552 100.0% $292,366,000 100.0%
========== ===== ============ =====
</TABLE>
The foregoing discussion and tables assume a public offering price of
$12.00 and no exercise of the underwriters' over-allotment option or of any
outstanding stock options or warrants after February 10, 2000 and exclude:
. 7,702,352 shares of Series B common stock (including stock appreciation
rights that are anticipated to be converted into stock options to
purchase 968,325 shares of Series B common stock) issuable upon
23
<PAGE>
exercise of stock options outstanding as of December 31, 1999 (2,546,402
of which were exercisable as of December 31, 1999) at exercise prices
ranging from $.25 to $7.50 per share, with a weighted average exercise
price of $6.42 per share;
. Any exercise of our remaining agreement with Colorado Spectra 4, LLC that
allows us to sell up to an additional 3,333,334 shares of Series B common
stock at a price of $7.50 per share discussed in the section of this
prospectus entitled "Certain Transactions--Sturm Equity Investment
Agreement;"
. 24,578,435 shares of Series B common stock subject to issuance upon
exercise of outstanding warrants at exercise prices ranging from $ .01 to
$6.00 per share, with a weighted average exercise price of $2.50 per
share. We have received notice that warrants to purchase 800,000 shares
of Series B common stock will be exercised immediately prior to closing
of the offering; and
. 1,544,652 shares of Series B common stock reserved for issuance under our
stock plans.
24
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The financial data set forth below should be read together with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our financial statements and related notes included elsewhere
in this prospectus. The data for each of the two years ended September 30,
1998, the three months ended December 31, 1998, and the year ended December
31, 1999, have been derived from the audited financial statements appearing
elsewhere in this prospectus. The data for the three months ended December 31,
1997 have been derived from the unaudited financial statements appearing
elsewhere in this prospectus. The selected financial data for the years ended
September 30, 1995 and 1996 have been derived from audited financial
statements not included in this prospectus. The results of operations for the
three months ended December 31, 1997 and 1998 are not necessarily indicative
of the results of operations that may be expected for a full year. In our
management's opinion, the accompanying consolidated unaudited financial
statements include all adjustments (consisting of normal recurring items)
necessary for a fair presentation of our results of operations and financial
position. Certain prior period amounts have been reclassified to conform to
the 1999 basis of presentation.
<TABLE>
<CAPTION>
Three Months Ended Year Ended
Year Ended September 30, December 31, December 31,
------------------------------------------- ---------------------- ------------
1995 1996 1997 1998 1997 1998 1999
--------- --------- --------- ---------- ----------- ---------- ------------
(unaudited)
(in thousands, except share and per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenue:
Internet services...... $ -- $ -- $ -- $ -- $ -- $ 123 $ 21,246
Web integration and
consulting services... -- -- -- -- -- 2,285 28,512
Telephony services..... 97 354 171 1,091 114 565 4,738
--------- --------- --------- ---------- --------- ---------- ----------
Total revenue........ 97 354 171 1,091 114 2,973 54,496
--------- --------- --------- ---------- --------- ---------- ----------
Operating expenses:
Network and service
costs................. 188 247 474 1,029 144 2,707 39,606
Selling, general and
administrative........ 740 3,870 7,421 16,113 2,248 10,812 67,128
Depreciation and
amortization.......... 39 75 501 2,425 478 1,812 23,411
--------- --------- --------- ---------- --------- ---------- ----------
Total operating
expenses............ 967 4,192 8,396 19,567 2,870 15,331 130,145
--------- --------- --------- ---------- --------- ---------- ----------
Loss from operations.... (870) (3,838) (8,225) (18,476) (2,756) (12,358) (75,649)
Other income (expense):
Interest income........ -- 9 149 6,749 7 3,227 6,960
Interest expense....... (38) (27) (1,372) (16,898) (1,349) (8,600) (37,928)
--------- --------- --------- ---------- --------- ---------- ----------
Loss before
extraordinary item..... (908) (3,856) (9,448) (28,625) (4,098) (17,731) (106,617)
Extraordinary loss--
extinguishment of
debt................... -- -- (105) (4,731) -- -- --
--------- --------- --------- ---------- --------- ---------- ----------
Net loss................ $ (908) $ (3,856) $ (9,553) $ (33,356) $ (4,098) $ (17,731) $ (106,617)
========= ========= ========= ========== ========= ========== ==========
Basic and diluted loss
per common share:
Loss before
extraordinary item.... $ (.34) $ (1.38) $ (2.95) $ (1.56) $ (1.25) $ (.68) $ (3.83)
Extraordinary loss--
extinguishment of
debt.................. -- -- (.03) (.25) -- -- --
--------- --------- --------- ---------- --------- ---------- ----------
Net loss per common
share................. $ (.34) $ (1.38) $ (2.98) $ (1.81) $ (1.25) $ (.68) $ (3.83)
========= ========= ========= ========== ========= ========== ==========
Weighted average shares
outstanding:
Basic and diluted...... 2,706,000 2,792,250 3,209,450 18,395,172 3,265,567 26,196,664 27,804,356
========= ========= ========= ========== ========= ========== ==========
</TABLE>
25
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
<CAPTION>
Three Months Ended Year Ended
Year Ended September 30, December 31, December 31,
----------------------------------- -------------------- ------------
1995 1996 1997 1998 1997 1998 1999
----- ------- -------- --------- ----------- -------- ------------
(unaudited)
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Other Data:
EBITDA.................. $(831) $(3,763) $ (7,724) $ (16,051) $ (2,278) $(10,546) $(50,346)
Capital expenditures.... 25 908 12,647 23,041 2,490 14,453 63,085
Consolidated Cash Flow
Data:
Net cash used by
operating activities... (781) (2,168) (7,446) (13,160) (1,117) (931) (41,656)
Net cash provided (used)
by investing
activities............. 45 (923) (12,647) (188,632) (2,490) (41,199) 41,672
Net cash provided (used)
by financing
activities............. 827 3,156 20,557 273,295 3,291 (250) (1,067)
</TABLE>
<TABLE>
<CAPTION>
September 30,
--------------------------------- December 31, December 31,
1995 1996 1997 1998 1998 1999
----- ------- ------- -------- ------------ ------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash, and cash
equivalents ........... $ 6 $ 72 $ 536 $ 72,039 $ 29,659 $ 28,608
Marketable Securities... --- --- --- 165,591 170,030 20,615
Working capital
(deficit).............. (192) (1,801) (3,319) 233,059 190,589 22,482
Property and equipment,
net.................... 122 1,088 20,331 44,020 61,247 123,161
Total assets............ 173 1,427 25,321 294,105 294,816 261,783
Long-term debt,
including current
portion of debt and
capital lease
obligations............ 106 1,009 19,684 256,659 265,427 302,205
Total stockholders'
equity (deficit)....... (68) (1,541) 2,264 29,373 11,794 (86,800)
</TABLE>
The Statement of Operations data for the three months ended December 31,
1998 presented above include our results for the entire three months and for
Optec for the period from November 24, 1998, the date of our acquisition of
Optec, through December 31, 1998. The Statement of Operations data for the
year ended December 31, 1999 presented above include our results for
FirstWorld and Optec for the entire year and for Slip.Net, Sirius, Hypercon,
Internet Express, inQuo, Transport Logic and Intelenet, beginning with their
respective acquisition dates through December 31, 1999.
EBITDA, shown above under "Other Data," consists of earnings before
interest, income taxes, extraordinary loss, depreciation and amortization and
a one-time, non-cash litigation charge for the year ended December 31, 1999 of
$1.9 million. We have included information concerning EBITDA in this
prospectus because this type of information is commonly used in the
communications industry as one measure of a company's operating performance
and liquidity. EBITDA is not determined using generally accepted accounting
principles and, therefore, EBITDA is not necessarily comparable to EBITDA as
calculated by other companies. EBITDA also does not indicate cash provided by
operating activities. You should not use our EBITDA as a measure of our
operating income and cash flows from operations under generally accepted
accounting principles. Both of those measures are presented above. You also
should not look at our EBITDA in isolation, as an alternative to or as more
meaningful than measures of performance determined in accordance with
generally accepted accounting principles.
Capital expenditures shown above under "Other Data" represent the cash paid
for property and equipment. Capital expenditures, including accounts payable
accruals, were $12.6 million, $26.1 million, $15.5 million and $65.9 million
for the years ended September 30, 1997 and 1998, the three months ended
December 31, 1998 and the year ended December 31, 1999, respectively.
26
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA
The following table sets forth selected historical consolidated financial
information and unaudited pro forma condensed combined financial data for the
year ended December 31, 1999. The pro forma information reflects our
acquisitions of Slip.Net, Sirius, Hypercon, Internet Express, inQuo, Transport
Logic and Intelenet, using the purchase method of accounting, and the effects
of those acquisitions. We have presented this pro forma information to give
you a better understanding of what our business might have looked like had we
owned these acquired companies since January 1, 1999. These companies may have
performed differently if they had actually been combined with our operations
during these periods. You should not rely on the unaudited pro forma
information as indicative of the historical results that we would have had or
the future results that we will experience after the acquisitions. These pro
forma results do not necessarily represent results that would have occurred if
the consolidated acquisitions had taken place as of January 1, 1999. A pro
forma condensed combined balance sheet as of December 31, 1999 is not
presented as the effects of all acquisitions are included in the historical
consolidated balance sheet data as of December 31, 1999 presented in "Selected
Consolidated Financial Data--Balance Sheet Data."
The historical column includes our results for the entire period. In
addition, the historical column includes data for each of the acquisitions
beginning on their respective acquisition date through the end of the year.
The acquisitions column includes the data for the acquired entities from the
beginning of the period through their respective acquisition date. Thus, the
Unaudited Pro Forma Condensed Combined Statements of Operations, inclusive of
adjustments, give effect to all acquisitions as if they had occurred on
January 1, 1999.
The pro forma adjustments are based upon available information and certain
adjustments that our management believes are reasonable. Additionally, our
management believes that all adjustments have been made to present fairly the
unaudited pro forma condensed combined financial data.
Historical financial statements of the individual acquired companies are
not included in this prospectus because they are not significant either
individually or in the aggregate.
27
<PAGE>
Unaudited Pro Forma Condensed Combined Statement of Operations
For the Year Ended December 31, 1999
<TABLE>
<CAPTION>
Pro Forma
Historical Acquisitions Adjustments Pro Forma
---------- ------------ ----------- ----------
(in thousands)
<S> <C> <C> <C> <C>
Revenue:
Internet services........ $ 21,246 $9,650 $ -- $ 30,896
Web integration and
consulting services..... 28,512 -- -- 28,512
Telephony services....... 4,738 -- -- 4,738
---------- ------ ------- ----------
Total revenue.......... 54,496 9,650 -- 64,146
---------- ------ ------- ----------
Costs and expenses:
Operating expenses....... 106,734 9,352 -- 116,086
Depreciation and
amortization............ 23,411 883 6,566(a) 30,860
---------- ------ ------- ----------
Total operating
expense............... 130,145 10,235 6,566 146,946
---------- ------ ------- ----------
Loss from operations... (75,649) (585) (6,566) (82,800)
---------- ------ ------- ----------
Other income (expense):
Other income (expense)... 6,960 325 (862)(b) 6,423
Interest expense......... (37,928) (156) -- (38,084)
---------- ------ ------- ----------
Total other income
(expense)............. (30,968) 169 (862) (31,661)
---------- ------ ------- ----------
Net loss from
continuing
operations............ $ (106,617) $ (416) $(7,428) $ (114,461)
========== ====== ======= ==========
Net loss from continuing
operations per share:
Basic and diluted........ $ (3.83) $ (4.01)
========== ==========
Weighted average shares
outstanding:
Basic and diluted........ 27,804,356 748,912(c) 28,553,268
========== ======= ==========
</TABLE>
- --------
The following pro forma adjustments have been made to the above.
(a) Represents the recognition of amortization of goodwill associated with
the various acquisitions as if they had been acquired on January 1,
1999. $56.0 million of goodwill is amortized on a straight-line basis
over the estimated useful life of three years for all acquired
companies except Optec, which is amortized over ten years.
(b) Represents interest income reflected in the historical FirstWorld
statement of operations that would not have been earned if the
acquisitions had occurred on January 1, 1999.
(c) Represents the adjustment to reflect the effect of the pro forma shares
being outstanding for the entire year.
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with "Selected
Consolidated Financial Data" and the financial statements and related notes
included elsewhere in this prospectus. This discussion contains forward-
looking statements that involve risks and uncertainties. Our actual results
may differ materially from those indicated in such forward looking statements.
Please see "Risk Factors" and "Special Note Regarding Forward-Looking
Statements; Market Data" elsewhere in this prospectus.
Overview
We are a rapidly growing network-based provider of Internet, data and
communications services. Our service offerings include high-speed Internet
access, such as dedicated access and DSL; dial-up Internet access; web hosting
and design; data center services, including co-location, access, application
hosting, and monitoring services; e-commerce solutions; and web integration
and consulting services. To complement our data services, we also provide
telephony services in selected markets. Our strategy is to offer our customers
a single source solution to meet a broad range of their increasingly complex
Internet, data and communications needs. We primarily market our services,
using a consultative sales approach, to small- and medium-sized businesses,
and also selectively to larger businesses, wholesale customers and consumers.
We currently provide services in nine metropolitan markets and intend to
expand our market footprint into the Seattle market in 2000.
Prior to 1997, we were engaged in the business of engineering, designing
and installing fiber optic communications networks for third parties. Revenue
generated from these activities has been shown as telephony services revenue.
In 1997, we stopped bidding on engineering contracts in order to focus on the
design and construction of our own communications network to service the Los
Angeles metropolitan market. We commenced network operations in August 1997.
Substantially all of our revenues generated in 1997 and 1998 resulted from
providing telephony services to customers in the Los Angeles metropolitan
market. In October 1998, Sheldon S. Ohringer joined our company as President
and Chief Executive Officer. Since that time, we have expanded our management
team significantly, adding a number of experienced data and communications
executives.
To capitalize on the growing demand for Internet and data services, the
fastest growing segment of the communications industry, we made a strategic
decision in the fourth quarter of 1998 to expand our services and emphasize
Internet and data services and expand our market footprint. As a result of
this decision, we began to acquire data communications companies beginning in
November 1998. Since that time, we have acquired eight data communications and
Internet companies in seven metropolitan markets and the customer base of a
ninth company in an additional market. These acquisitions have significantly
expanded our market presence and substantially increased our revenue.
We currently provide selected Internet and data services in the San
Francisco, San Diego, Portland, Denver, Houston, Salt Lake City, Dallas and
Chicago metropolitan markets, and provide Internet, data and communications
services in the Los Angeles metropolitan market. We are expanding our service
offering in each of the markets we have entered in the last year to offer a
broad range of data products and services. In addition to entering new markets
on our own, we plan to acquire data communications companies in additional
markets.
From October 1, 1994 through December 31, 1999, we generated cumulative net
losses of approximately $172.5 million and approximately $65.3 million of
negative cash flow from operations. We expect that operating and net losses
and negative operating cash flow will continue for at least the next several
years and will increase significantly as we implement our growth strategy of
expanding into new markets.
In October 1998, we changed our fiscal year end from September 30 to
December 31. We had a three-month transition period from October 1, 1998
through December 31, 1998.
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<PAGE>
Recent Acquisitions
Optec
On November 24, 1998, we acquired Optec, Inc., a company with operations in
Oregon and Washington that provides web integration services to businesses,
from Enron. As part of this acquisition, we also acquired rights to use fiber
optic cable in parts of Oregon and rights to OC-3 level capacity to connect up
to 15 cities on a nationwide long-haul network being developed by Enron. As
consideration for the acquisition, we paid $18.3 million in cash and repaid
$4.0 million of Optec's outstanding debt. We assigned values of $11.1 million,
$9.2 million and $2.0 million to the long-haul network rights, Optec and the
Oregon fiber optic rights, respectively. Since the long-haul network rights
have not yet been placed into service, we are not amortizing this asset. We
accounted for the acquisition of Optec under the purchase method of
accounting. Approximately $5.6 million was recorded as goodwill and is being
amortized on a straight-line basis over 10 years. We will amortize the fiber
optic rights on a straight-line basis over 20 years.
Slip.Net
On January 7, 1999, we purchased all of the outstanding capital stock of
Accelerated Information, Inc., the parent company of Slip.Net, Inc., an
Internet service company providing Internet access, web hosting services, e-
commerce solutions and co-location services, primarily in the San Francisco
Bay Area. The purchase price consisted of approximately $10.5 million in cash
and 187,500 shares of our Series B common stock. We accounted for the
acquisition under the purchase method of accounting. Approximately $10.8
million was recorded as goodwill and is being amortized on a straight-line
basis over three years.
Sirius
On March 2, 1999, we purchased all of the outstanding capital stock of
Sirius Solutions, Inc., d/b/a Sirius Connections, an Internet service company
providing Internet access, web hosting services, e-commerce solutions and co-
location services, primarily in the San Francisco Bay Area. The purchase price
consisted of approximately $7.5 million in cash and 285,000 shares of our
Series B common stock. We accounted for the acquisition under the purchase
method of accounting. Approximately $8.5 million was recorded as goodwill and
is being amortized on a straight-line basis over three years.
Hypercon
On June 1, 1999, we purchased all of the outstanding capital stock of
Hypercon, Inc., an Internet service company providing Internet access, web
hosting services, e-commerce solutions and co-location services in the Houston
metropolitan area. The purchase price consisted of approximately $2.0 million
in cash and 49,993 shares of our Series B common stock. Subsequent to the
acquisition, we repaid approximately $215,000 in debt. We accounted for the
acquisition under the purchase method of accounting. The total consideration
of cash, stock and assumption of net liabilities was approximately $2.8
million. Approximately $2.8 million was recorded as goodwill and is being
amortized on a straight-line basis over three years.
Internet Express
On June 14, 1999, we purchased all of the outstanding membership interests
of Internet Express, LLC, an Internet service company providing Internet
access and web hosting services in the Denver/Front Range metropolitan area,
including Colorado Springs and Fort Collins. The purchase price consisted of
approximately $1.0 million in cash and 30,000 shares of our Series B common
stock. Subsequent to the acquisition, we repaid approximately $959,000 in
various liabilities of Internet Express, LLC. We accounted for the acquisition
under the purchase method of accounting. The total consideration of cash,
stock and assumption of certain net liabilities was approximately $2.2
million. Approximately $2.2 million was recorded as goodwill and is being
amortized on a straight-line basis over three years.
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<PAGE>
inQuo
On June 22, 1999, we purchased all of the outstanding capital stock of
inQuo, Inc., an Internet service company providing dedicated Internet access
in the Salt Lake City metropolitan area. The purchase price was approximately
$844,000 of cash. We accounted for the acquisition under the purchase method
of accounting. The total consideration of cash and acquired net liabilities of
approximately $150,000 resulted in total consideration of approximately $1.0
million, which we recorded as goodwill and is being amortized on a straight-
line basis over three years.
Transport Logic
On July 7, 1999, we acquired all of the outstanding capital stock of Oregon
Professional Services, Inc., d/b/a Transport Logic, Inc., an Internet service
company providing Internet access, web hosting services, e-commerce solutions
and co-location services in the western and northwestern United States. The
purchase price consisted of approximately $7.2 million in cash and 392,935
shares of our Series B common stock. We accounted for the acquisition under
the purchase method of accounting. The total consideration of cash, stock and
assumption of certain liabilities of approximately $1.0 million resulted in
consideration of $10.5 million, which we recorded as goodwill and is being
amoritzed on a straight-line basis over three years.
Intelenet
On July 14, 1999, we purchased all of the outstanding capital stock of
Intelenet Communications, Inc., an Internet service company providing advanced
connectivity, data center services and networking consulting in Southern
California. The purchase price consisted of approximately $16.0 million in
cash and 875,000 shares of our Series B common stock. We accounted for the
acquisition under the purchase method of accounting. Approximately $20.2
million was recorded as goodwill and is being amortized on a straight-line
basis over three years.
Fastlane
On January 14, 2000 we purchased certain Internet assets of FastLane
Communications, Inc. an Internet service provider and consultant in the
Dallas/Fort Worth market, for a total consideration of $2.4 million.
Many of the above acquired businesses were operating at or near the
capacity of their operating platforms at the time we acquired them. We are
currently in the process of integrating these businesses and expanding their
platforms. Intergrating acquired businesses involves significant risks. See
the section of this prospectus entitled "Risk Factors -- We Face Risks
Involving Acquired Businesses and Potential Acquistions." We are devoting
substantial resources towards expanding the platforms of these acquired
businesses, and expect these businesses to experience increased rates of
growth once these platforms are expanded and their operations are fully
intergrated into those of our company.
Recent Developments
Sturm Equity Investment
On December 2, 1999 in order to secure additional financing that was
expected to become necessary during the first quarter of 2000, we entered into
an equity investment agreement with Colorado Spectra 4, LLC, which is an
affiliate of Donald L. Sturm. This agreement allowed us to require Spectra 4
to purchase up to $50.0 million of our Series B common stock at a price of
$7.50 per share. In return for this agreement Spectra 4 received a $5.0
million commitment fee.
The agreement expires on the earlier of June 18, 2000 or the closing of our
initial public offering, and sets forth three dates upon which we may require
Spectra 4 to make a purchase of Series B common stock: February 15, March 31,
2000 and the date on which the agreement ultimately expires. In addition, the
agreement provides that if at any time the value of the cash, cash equivalents
and marketable securities we hold falls below $20.0 million, we will be deemed
to have automatically exercised $25.0 million of this commitment. On February
7, 2000 we gave
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<PAGE>
notice that this condition had been met and on February 10, 2000 we sold
3,333,333 shares of Series B common stock to Spectra 4 under the automatic
trigger provision of the agreement for $25.0 million. We may exercise the
right to cause Spectra 4 to purchase the remaining $25.0 million at a later
date.
Private Placements
We have recently entered into agreements to sell to the following
investors, in private placements concurrent with this offering, an aggregate
of $91.5 million of our Series B common stock at a price per share equal to
93% of the public offering price, which is approximately equal to the net of
the underwriting discount in this offering.
. Texas Pacific Group. This agreement calls for TPG FirstWorld I LLC, an
affiliate of Texas Pacific Group, to purchase $50.0 million of our
Series B common stock. FirstWorld has been informed that Enron and this
partnership have entered into an unrelated agreement pursuant to which
Texas Pacific Group will purchase all of Enron's Series A and Series B
common stock. The Series A common stock will, in accordance with the
terms of our certificate of incorporation, convert automatically to
Series B common stock. Based on a public offering price of $12.00, the
partnership will purchase 4,480,227 shares of Series B common stock in
the private placement, and will hold an aggregate of 12,716,310 shares
of Series B common stock and warrants to purchase an additional
5,236,038 shares of Series B common stock after the closing of this
offering. This agreement is subject to customary closing conditions and
is terminable at the investor's option if we have not consummated this
offering by May 12, 2000.
. Microsoft Corporation. This agreement calls for Microsoft to purchase
$10.0 million of our Series B common stock. In return for this
investment, Microsoft will receive a five-year warrant to purchase 75%
of the number of shares of Series B common stock purchased at a price
equal to 125% of the public offering price. Based on an assumed public
offering price of $12.00, Microsoft will purchase 1,075,269 shares, and
the warrant will be exercisable for 806,452 shares at a per share strike
price of $15.00. This agreement is subject to customary closing
conditions.
. SAIC Venture Capital Corporation. Our agreement with SAIC Venture
Capital Corporation, an affiliate of Science Applications International
Corporation, calls for SAIC to purchase $19.5 million of our Series B
common stock. This agreement is terminable at SAIC's option if we have
not consummated this offering as of May 12, 2000, among other customary
closing conditions. Based on an assumed public offering price of $12.00,
SAIC will purchase 1,747,312 shares of Series B common stock.
. Lucent Technologies Inc. This agreement calls for Lucent to purchase
$12.0 million of our Series B common stock. Based on an assumed public
offering price of $12.00, Lucent will purchase 896,057 shares of Series
B common stock. This agreement is subject to customary closing
conditions.
Assuming an initial offering price of $12.00 per share, these concurrent
private placements are likely to result in a total non-cash charge of
approximately $7.0 million, equal to the difference between the gross public
offering price per share and the price per share paid in the private
placements, times the number of shares sold in the private placements. In
addition, we anticipate that a deferred charge of approximately $2.4 million
will be recorded in connection with a business relationship entered into
concurrently with the private placements. This deferred charge would be
amortized to earnings over the duration of this business relationship.
Revenue
We currently derive revenue from three primary product categories: Internet
services, web integration and consulting services and telephony services.
Internet Services
Internet services revenue is derived from providing high-speed Internet
access, such as dedicated access and DSL, web hosting services, data center
services and dial-up access. We first generated revenue from providing
Internet services in December of 1998.
Dial-up Internet access customers pay fixed monthly charges. High-speed
Internet access customers, including dedicated access and DSL customers, when
market conditions permit, pay us equipment charges, a
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<PAGE>
one-time set-up fee and thereafter, fixed monthly charges. These charges vary
depending on the type of service, the length of contract and local market
conditions. High-speed Internet access customers typically sign a contract for
a one year initial service period which becomes a month-to-month contract
thereafter. These contracts may be terminated at any time; however, our
customers generally remain obligated to pay for the initial contract period if
they terminate within that period.
For web hosting services, we typically charge a flat rate fee for shared
and dedicated web hosting services based on the customer's server and network
capacity requirements. We typically charge a one-time set-up fee and recurring
fees based on the amount of data transmitted. We also receive fees for
additional services provided to customers, such as remote monitoring and
management and providing information on their site performance.
Data center services revenue is derived from customers co-locating their
file servers and equipment within our facilities. The fee paid by a customer
is primarily based on the amount of space required to house their equipment
and the related Internet connectivity as well as any value-added services
provided.
Revenue for all services is recognized as the service is provided. Amounts
billed relating to future periods are recorded as deferred revenue and are
recognized as revenue as services are rendered. To encourage potential
customers to adopt our services, we sometimes offer reduced prices for an
initial period. Internet services revenue is primarily affected by the number
of customers, price and service competition. Prices for these services have
been falling and we expect prices to continue to fall.
Web Integration and Consulting Services
Web integration and consulting services revenue is derived from network
consulting, design, integration and equipment sales. Revenues are recognized
under the percentage-of-completion method of accounting based upon the ratio
that costs incurred bear to the total estimated costs for each contract. Web
integration and consulting services revenue is primarily affected by the
number of customers, price and service competition, price of equipment,
product offering and timing of sales. While we believe that offering web
integration and consulting services will provide us with access to a broader
customer base, we expect this revenue to decrease as a percentage of total
revenue in the future as we grow our Internet service offerings.
Telephony Services
Telephony services revenue is generated from local, long distance and other
telephone services. We currently provide telephony services in the Los Angeles
metropolitan market. We are installing switching equipment in the San
Francisco Bay Area and in San Diego and expect to begin offering telephony
services to customers in these markets during the second half of 2000. We
generate telephony services revenue by replacing the basic telephony services
currently provided by incumbent local exchange carriers, interexchange
carriers and competitive local exchange carriers, including local, long
distance and other telephony services.
We recognize telephony services revenue in the month services are provided.
Amounts billed relating to future periods are recorded as deferred revenue,
and are recognized as revenue when services are rendered. Telephony services
revenue is primarily affected by number of customers, price and service
competition. Prices for these services have been falling and we expect prices
to continue to fall.
Costs and Expenses
Network and Service Costs
Network and service costs include a variety of service and network
operations costs. Network costs consist of payments to other communications
carriers and DSL wholesalers for monthly recurring and non-recurring
communications line charges incurred to provide DSL, integrated services
digital network, frame relay and telephony services as well as backbone
transport charges. Service costs include labor and materials associated
33
<PAGE>
with web integration and consulting services. Network and service operations
costs include rent and utilities associated with co-locations, points of
presence and network operations centers. We currently enter into operating
leases for a significant portion of our infrastructure and we expect this
practice to continue as we enter into new markets. Labor associated with line
repair and maintenance is also included in network and service costs.
Selling, General and Administrative
Our selling, general and administrative, or SG&A, expenses consist of costs
related to selling, marketing, customer care, provisioning, billing and
collections, information technology, general management and overhead and other
administrative expenses. We expect that SG&A expenses will increase
significantly in the future as we expand operations into new markets and grow
our sales and marketing staff.
Depreciation and Amortization
Depreciation and amortization expenses include charges relating to
depreciation of property and equipment, which consists principally of network
infrastructure, communications equipment, buildings and leasehold
improvements, furniture and equipment, and amortization of intangibles,
including goodwill. We depreciate our assets and network infrastructure on a
straight-line basis over the estimated useful life of each asset. Estimated
useful lives for our assets currently range from three to 20 years. In
addition, we have recorded goodwill in connection with our acquisitions, which
we will amortize over a period generally expected to be three years, with the
exception of goodwill associated with the acquisition of Optec, which is being
amortized over 10 years.
Interest
Interest expense consists of interest expense associated with our debt. We
incurred minimal interest expense prior to 1997. Interest expense during the
fiscal year ended September 30, 1997 was primarily related to a revolving
credit facility that we terminated on April 13, 1998. On April 13, 1998, we
completed the issuance of our senior notes. Interest expense subsequent to
this date primarily relates to our senior notes and capital leases. We are not
currently scheduled to make any cash interest payments on our senior notes
until the year 2003.
Prior to 1998, interest income was minimal. Interest income during 1998 and
subsequent to 1998 primarily represents interest earned on our investments in
high-grade, short-term marketable securities and cash equivalents. Marketable
securities consist of commercial paper with original maturities greater than
three months but less than six months. Cash equivalents consist of money
market instruments, commercial paper and government agency issues with
maturities less than three months. We have classified our marketable
securities as held-to-maturity, as we have the intent and ability to hold
these securities to maturity.
Year Ended December 31, 1999 Compared with Year Ended September 30, 1998
Revenues
Total revenues increased from $1.1 million for the year ended September 30,
1998 to $54.5 million for the year ended December 31, 1999, an increase of
$53.4 million. The increase was primarily a result of increases in the
aggregate number of our data communications customers. These customers were
acquired as a result of our acquisitions of Optec, Slip.Net, Sirius, Hypercon,
Internet Express, inQuo, Transport Logic and Intelenet. The remaining increase
was due to the continued expansion of our customer base in the Los Angeles
metropolitan area.
Internet services. Internet services revenue was $21.2 million for the year
ended December 31, 1999. There were no revenues for Internet services during
the year ended September 30, 1998. Internet services revenue associated with
our acquisitions was $18.6 million for the year ended December 31, 1999. The
remaining increase is due to the provision of Internet services to our
customer base in the Los Angeles metropolitan area.
Web integration and consulting services. Web integration and consulting
services revenue was $28.5 million for the year ended December 31, 1999. There
were no revenues for Web integration and consulting services
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<PAGE>
revenue during the year ended September 30, 1998. Web integration and
consulting services revenue associated with our acquisitions was $26.3 million
for the year ended December 31, 1999. The remaining increase is due to
expansion of our services in the Los Angeles metropolitan area.
Telephony services. Telephony services increased from $1.1 million for the
year ended September 30, 1998 to $4.7 million for the year ended December 31,
1999, an increase of $3.6 million. This increase is due to the continued
market penetration and expansion of our customer base in the Los Angeles
metropolitan area.
Operating Expenses
Network and service costs. Network and service costs increased from $1.0
million for the year ended September 30, 1998 to $39.6 million for the year
ended December 31, 1999, an increase of $38.6 million. Our acquisitions and
the support of the customers acquired in those acquisitions increased network
and service costs in aggregate by approximately $28.7 million for the year
ended December 31, 1999. The remaining increase is due to the cost of
providing service to our expanded customer base in the Los Angeles
metropolitan area.
Selling, general and administrative. SG&A expenses increased from $16.1
million for the year ended September 30, 1998 to $67.1 million for the year
ended December 31, 1999, an increase of $51.0 million. The SG&A of acquired
businesses increased our SG&A by an aggregate of approximately $18.5 million
for the year ended December 31, 1999. Salaries and other related expenses,
excluding the acquisitions, increased approximately $18.2 million for the year
ended December 31, 1999, primarily due to higher staffing levels at our
headquarters. Also, sales and marketing expenses, excluding the acquisitions,
increased approximately $3.1 million for the year ended December 31, 1999,
primarily due to various advertising campaigns. In addition, as further
discussed in Note 14 in the accompanying financial statements for the year
ended December 31, 1999, in accordance with Securities and Exchange Commission
Staff Accounting Bulletin No. 79, we recorded a one-time capital contribution
and corresponding one-time non-cash litigation charge during the year ended
December 31, 1999 in the amount of $1.9 million. The remaining increase was
due to higher overall expenses resulting from expansion of operations in
accordance with the execution of our business plan.
Depreciation and amortization. Depreciation and amortization expenses
increased from $2.4 million for the year ended September 30, 1998 to $23.4
million for the year ended December 31, 1999, an increase of $21.0 million.
The majority of the increase in depreciation and amortization is due to the
amortization of goodwill and depreciation expense associated with our various
acquisitions. Amortization of the goodwill and depreciation associated with
these acquisitions approximated $12.8 million and $1.9 million, respectively,
for the year ended December 31, 1999. The remaining increase related primarily
to depreciation associated with communications equipment placed in service.
Other
Interest income. Interest income increased from $6.7 million for the year
ended September 30, 1998 to $7.0 million for the year ended December 31, 1999,
an increase of $211,000. In April 1998, the Company completed a debt offering
of senior notes raising approximately $250.0 million in proceeds. The increase
in interest earned is due to a higher average return on investments in
marketable securities.
Interest expense. Interest expense increased from $16.9 million for the
year ended September 30, 1998 to $37.9 million for the year ended December 31,
1999, an increase of $21.0 million. This increase relates primarily to
interest expense associated with the senior notes, partially offset by a
reduction in interest expense associated with a revolving credit facility,
which was terminated in April 1998. The Company is not currently scheduled to
make any cash interest payments on the senior notes until the year 2003.
Capitalized interest for the year ended December 31, 1999 and September 30,
1998 was $843,000 and $450,000, respectively.
Extraordinary loss. An extraordinary loss of $4.7 million on the
extinguishment of debt was recorded in the year ended September 30, 1998. The
Company reported no extraordinary loss in the year ended December 31,
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<PAGE>
1999. On September 16, 1997, the Company entered into a revolving credit
facility with a syndicate of lenders to provide financing for the construction
of telecommunication networks and for general working capital purposes. The
Company terminated the credit facility concurrently with the closing of the
senior notes and paid the syndicate of lenders a $1.0 million termination fee
pursuant to the terms thereof. This loss was inclusive of the termination fee
and the write-off of unamortized debt discount and deferred financing costs.
Quarter Ended December 31, 1998 Compared With Quarter Ended December 31,
1997
Revenue
Total revenue increased from $114,000 for the quarter ended December 31,
1997 to $3.0 million for the quarter ended December 31, 1998, an increase of
$2.9 million. Our revenue increased primarily as a result of our acquisition
of Optec, which generated $2.3 million of revenue in the quarter ended
December 31, 1998.
Internet services. Internet services revenue was $123,000 for the quarter
ended December 31, 1998. We had no Internet services revenue for the quarter
ended December 31, 1997. Our Internet services revenue increased primarily as
a result of the addition of the resale of high-speed Internet access to our
product mix in the Los Angeles metropolitan market.
Web integration and consulting services. Web integration and consulting
services revenue was $2.3 million for the quarter ended December 31, 1998. We
had no web integration and consulting services revenue for the quarter ended
December 31, 1997. Our web integration and consulting services revenue related
entirely to our acquisition of Optec.
Telephony services. Telephony services increased from $114,000 for the
quarter ended December 31, 1997 to $565,000 for the quarter ended December 31,
1998, an increase of $451,000. This increase was due to market penetration and
expansion of our customer base in the Los Angeles metropolitan market.
Costs and Expenses
Network and service costs. Network and service costs increased from
$144,000 for the quarter ended December 31, 1997 to $2.7 million for the
quarter ended December 31, 1998, an increase of $2.6 million. This increase
resulted from the following factors: the acquisition of Optec, which resulted
in the addition of $1.8 million in operating costs; personnel costs associated
with the expansion of our operations and network deployment groups; and
increased operating costs relating to our expanded customer base in the Los
Angeles metropolitan market.
Selling, general and administrative. SG&A expenses increased from $2.2
million for the quarter ended December 31, 1997 to $10.8 million for the
quarter ended December 31, 1998, an increase of $8.6 million. Significant
factors contributing to the overall increase in SG&A expenses included an
increase of approximately $4.5 million in personnel costs associated with
increased staffing, executive signing bonuses and personnel bonuses; and an
increase of approximately $558,000 associated with the operations of Optec.
Depreciation and amortization. Depreciation and amortization expenses
increased from $478,000 for the quarter ended December 31, 1997 to $1.8
million for the quarter ended December 31, 1998, an increase of $1.3 million.
This increase primarily related to depreciation expense associated with new
equipment purchases for our central office in Orange County, California. Also,
during the quarter ended December 31, 1998, we recorded a charge of
approximately $328,000 related to the write-down of certain unused
telecommunications equipment.
Other
Interest income. Interest income increased from $7,000 for the quarter
ended December 31, 1997 to $3.2 million for the quarter ended December 31,
1998. The increase in interest income is primarily attributable to the
investment of the net proceeds from the sale of our outstanding senior notes.
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<PAGE>
Interest expense. Interest expense increased from $1.3 million for the
quarter ended December 31, 1997 to $8.6 million for the quarter ended December
31, 1998, an increase of $7.3 million. The increase in interest expense
related primarily to additional interest expense associated with our
outstanding senior notes, partially offset by a reduction in interest expense
associated with a revolving credit facility which was terminated in April
1998. During the quarter ended December 31, 1998, interest costs of $333,000
were capitalized. No interest was capitalized for the quarter ended December
31, 1997.
Year Ended September 30, 1998 Compared With Year Ended September 30, 1997
Revenue
Telephony services. Telephony services revenue increased from $171,000 for
the fiscal year ended September 30, 1997 to $1.1 million for the fiscal year
ended September 30, 1998, an increase of $929,000. Telephony services revenue
increased as a result of our Orange County network being operational for a
full year. This network began servicing customers in August 1997. Prior to the
commencement of operations of the Orange County network, telephony services
revenue consisted principally of reimbursable engineering, design and
construction costs associated with the design of fiber optic communications
networks and royalties from the license of a patent for fiber optic
connectors. We did not generate revenue from any other source during this
period.
Costs and Expenses
Network and service costs. Network and service costs increased from
$474,000 for the fiscal year ended September 30, 1997 to $1.0 million for the
fiscal year ended September 30, 1998, an increase of $565,000. This increase
was principally due to increased personnel costs associated with operating and
deploying our Orange County operations.
Selling, general and administrative. SG&A expenses increased from $7.4
million for the fiscal year ended September 30, 1997 to $16.1 million for the
fiscal year ended September 30, 1998, an increase of $8.7 million. The
increase primarily resulted from the commencement of operations of our
communications network in the Los Angeles metropolitan market. The increase
also resulted in part from our management consulting obligations with an
entity controlled by Donald L. Sturm and with Enron, pursuant to which we
incurred costs aggregating $840,000 for the year ended September 30, 1998. See
"Certain Transactions."
Depreciation and amortization. Depreciation and amortization expenses
increased from $501,000 for the fiscal year ended September 30, 1997 to $2.4
million for the fiscal year ended September 30, 1998, an increase of $1.9
million. This increase primarily related to depreciation expense associated
with equipment purchased for our central office in Orange County as well as
the built and leased elements of our fiber optic network and office and other
equipment associated with our general operations.
Other
Interest income. Interest income increased from $149,000 for the fiscal
year ended September 30, 1997 to $6.7 million for the fiscal year ended
September 30, 1998, an increase of $6.6 million. The increase in interest
income was primarily attributable to the investment of the net proceeds from
the sale of our outstanding senior notes.
Interest expense. Interest expense increased from $1.4 million for the
fiscal year ended September 30, 1997 to $16.9 million for the fiscal year
ended September 30, 1998, an increase of $15.5 million. The increase in
interest expense related primarily to additional interest expense associated
with our outstanding senior notes, partially offset by a reduction in interest
expense associated with a revolving credit facility that was terminated in
April 1998. Interest expense incurred during fiscal 1998 and fiscal 1997 was
offset by approximately $450,000 and $52,000, respectively, of capitalized
interest.
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<PAGE>
Quarterly Results of Operations
The following table sets forth certain unaudited consolidated statements of
operations data for our most recent nine quarters. This information has been
derived from our unaudited consolidated financial statements. In our
management's opinion, this unaudited information has been prepared on the same
basis as the audited annual consolidated financial statements and includes all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the results of operations for the quarters presented.
This information should be read in conjunction with the audited consolidated
financial statements and the related notes included elsewhere in this
prospectus. The operating results for any quarter are not necessarily
indicative of results for any future period. Certain prior period amounts have
been reclassified to conform to the 1999 basis of presentation.
<TABLE>
<CAPTION>
Dec. 31 Mar. 31 June 30 Sep. 30 Dec. 31 Mar. 31 June 30 Sep. 30 Dec. 31
1997 1998 1998 1998 1998 1999 1999 1999 1999
------- ------- -------- ------- -------- -------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Internet services...... $ -- $ -- $ -- $ -- $ 123 $ 2,412 $ 3,865 $ 6,926 $ 8,043
Web integration and
consulting services... -- -- -- -- 2,285 5,207 7,124 7,682 8,499
Telephony services..... 114 130 416 431 565 643 1,189 1,414 1,492
------- ------- -------- ------- -------- -------- -------- -------- --------
Total revenue........ 114 130 416 431 2,973 8,262 12,178 16,022 18,034
------- ------- -------- ------- -------- -------- -------- -------- --------
Costs and expenses:
Network and service
costs................. 144 192 247 446 2,707 5,696 8,886 11,194 13,830
Selling, general and
administrative........ 2,248 2,525 4,898 6,442 10,812 10,912 13,723 21,320 21,173
Depreciation and
amortization.......... 478 551 811 585 1,812 2,989 4,325 7,610 8,487
------- ------- -------- ------- -------- -------- -------- -------- --------
Total costs and
expenses............ 2,870 3,268 5,956 7,473 15,331 19,597 26,934 40,124 43,490
------- ------- -------- ------- -------- -------- -------- -------- --------
Loss from operations.... (2,756) (3,138) (5,540) (7,042) (12,358) (11,335) (14,756) (24,102) (25,456)
Other income (expense):
Interest income........ 7 49 3,191 3,502 3,227 2,401 2,047 1,481 1,031
Interest expense....... (1,349) (1,131) (8,592) (5,826) (8,600) (8,830) (9,698) (9,597) (9,803)
------- ------- -------- ------- -------- -------- -------- -------- --------
Total other expense.. (1,342) (1,082) (5,401) (2,324) (5,373) (6,429) (7,651) (8,116) (8,772)
------- ------- -------- ------- -------- -------- -------- -------- --------
Loss before
extraordinary item..... (4,098) (4,220) (10,941) (9,366) (17,731) (17,764) (22,407) (32,218) (34,228)
Extraordinary item--
extinguishment of
debt................... -- -- (4,731) -- -- -- -- -- --
------- ------- -------- ------- -------- -------- -------- -------- --------
Net loss................ $(4,098) $(4,220) $(15,672) $(9,366) $(17,731) $(17,764) $(22,407) $(32,218) $(34,228)
======= ======= ======== ======= ======== ======== ======== ======== ========
</TABLE>
We could experience quarterly variations in revenue and operating income as
a result of many factors, including:
. changes in our revenue mix among our various service offerings;
. the introduction of new services by us;
. actions taken by competitors;
. the timing of an acquisition or loss of customers; and
. the timing of additional SG&A expenses incurred to acquire and support
new or additional business.
Liquidity and Capital Resources
Our existing operations have required and will continue to require
substantial capital investment for the construction of data center facilities,
installation of communications equipment, DSL equipment, incumbent local
exchange carrier co-locations, fiber optics and other electronics and related
equipment. In addition, we expect to incur operating losses for at least
several years. Such expansion will require significant additional capital for
the
38
<PAGE>
design, development and construction of our network, business acquisitions and
the funding of operating losses as a result of expanding the network into new
markets.
To date, we have satisfied our cash requirements through the private
placements of debt and equity securities. From our inception through December
31, 1999, we raised approximately $63.7 million in net proceeds from the sale
of equity securities and $241.8 million in net proceeds from the sale of debt
securities.
On December 30, 1997, we consummated a private placement of our Series A
common stock to an entity controlled by Donald L. Sturm and Enron. Aggregate
proceeds from this offering totaled approximately $26.5 million, net of
offering commissions and certain other advisory fees, and were received on
January 6, 1998. On April 13, 1998, concurrent with our senior notes offering
discussed below, we completed an additional $18.8 million, net of offering
commissions and other fees, private placement of capital stock to an entity
controlled by Donald L. Sturm and Enron. In addition, we have raised
approximately $16.2 million, net of offering commission and other fees, from
the issuance of Series A, B and C preferred stock and $1.1 million from the
exercise of options to purchase our Series B common stock. All shares of
preferred stock have subsequently been converted to Series B common stock.
On April 13, 1998, we completed an offering of senior notes pursuant to
Rule 144A under the Securities Act of 1933. In this debt offering, we sold
470,000 units consisting of 13% Senior Discount Notes due 2008 and warrants to
purchase, at $.01 per share, an aggregate of 3,713,094 shares of our Series B
common stock. The aggregate net proceeds of the debt offering were $241.8
million.
On December 2, 1999, we entered into an equity investment agreement with
Spectra 4, LLC, an entity controlled by Donald L. Sturm, for a $50.0 million
equity commitment. This agreement allows us to require that Spectra 4 purchase
up to $50.0 million of Series B common stock priced at $7.50 per share. The
agreement expires on June 19, 2000, or upon the closing of this offering.
The equity investment agreement contains three dates on which we can
require Spectra 4 to purchase our Series B common stock. These dates are:
February 15, 2000; March 31, 2000; and the expiration date of the Agreement.
Additionally, if our cash, cash equivalents and marketable securities position
is $20.0 million or less, we will automatically exercise $25.0 million of the
commitment. Under the terms of the Sturm equity investment agreement, we have
agreed to pay Spectra 4 a non-refundable $5.0 million commitment fee not later
than the closing of this offering. On February 10, 2000, pursuant to the
automatic trigger provisions of this agreement, we sold 3,333,333 shares to
Spectra 4 for cash proceeds of $25.0 million.
In February, 2000 we entered into separate agreements with Microsoft
Corporation, Lucent Technologies Inc., SAIC Venture Capital Corp., and Texas
Pacific Group. These agreements call for the purchase of an aggregate of $91.5
million of our Series B common stock. These agreements and their related
accounting are discussed in more detail under "Management's Discussion and
Analysis--Recent Developments."
On February 3, 2000 we issued 470,092 shares of Series B common stock upon
the exercise of a warrant at a price of $3.83 per share, resulting in proceeds
to FirstWorld of $1.8 million. An additional warrant holder has notified us
that, prior to the closing of this offering, it intends to exercise a warrant
to purchase 800,000 shares of Series B common stock at a price of $3.00 per
share, which will result in proceeds to us of $2.4 million.
As of December 31, 1999, we had $49.2 million of cash, cash equivalents and
marketable securities, and an accumulated deficit of $172.5 million.
For the year ended September 30, 1998, the three months ended December 31,
1998 and the year ended December 31, 1999, capital expenditures were $23.0
million, $14.5 million and $63.1, respectively. In addition, we had
expenditures related to acquisitions of $44.8 million for the year ended
December 31, 1999. FirstWorld's Statements of cash flows for the year ended
September 30, 1998 and the three months ended December 31, 1998 have been
adjusted to remove accruals associated with capital expenditures.
39
<PAGE>
We have a number of commitments, including certain contractual obligations
with the City of Anaheim, the Irvine Company, and a long distance carrier. See
further discussion in Note 7 - "Commitments and Contingent Liabilities" in the
accompanying financial statements for the year ended December 31, 1999.
We believe that the net proceeds of this offering, together with the
proceeds of the Sturm equity investment agreement, and the concurrent private
placements, our existing cash, cash equivalents and marketable securities,
will be sufficient to meet our anticipated cash needs for working capital and
capital expenditures for the next 12 months. Thereafter, we may require
additional funds to support our working capital and capital expenditure
requirements and may seek to raise additional funds through public or private
equity or debt financing or other sources for such requirements and
acquisitions of technologies, companies and development of our existing and
new services. Any additional financing we may need may not be available on
terms favorable to us, or at all.
Our sources and uses of funds were as follows:
<TABLE>
<CAPTION>
Year Ended Three Months
September 30, Ended Year Ended
------------------- December 31, December 31,
1997 1998 1998 1999
-------- --------- ------------ ------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Net cash used by operating
activities................ $ (7,446) $ (13,160) $ (931) $(41,656)
Net cash provided (used) by
investing activities...... (12,647) (188,632) (41,199) 41,672
Net cash provided (used) by
financing activities ..... 20,557 273,295 (250) (1,067)
</TABLE>
Net cash used in operations for the year ended December 31, 1999, the three
months ended December 31, 1998 and the fiscal years ended September 30, 1998
and 1997 were primarily due to net operating losses, offset in part by, non-
cash items, consisting mainly of depreciation and amortization.
Net cash provided by investing activities for the year ended December 31,
1999 was primarily a result of the maturity of short-term investments,
partially offset by the purchase of short-term investments, acquisitions and
capital expenditures. Net cash used by investing activities for the three
months ended December 31, 1998 was primarily the result of acquisitions and
capital expenditures. Net cash used by investing activities for the fiscal
year ended September 30, 1998 was primarily a result of the purchase of short-
term investments and capital expenditures partially offset by the maturity of
short-term investments. Net cash used by investing activities for the year
ended September 30, 1997 was primarily a result of our capital expenditures.
Net cash used by financing activities for the year ended December 31, 1999
was primarily a result of the repayment of debt assumed in our acquisitions,
partially offset by proceeds from the exercise of stock options and warrants.
Net cash provided by financing activities for the year ended September 30,
1998 was primarily due to proceeds from the issuance of our outstanding senior
notes. Net cash provided by financing activities for the year ended September
30, 1997 was primarily due to proceeds from the issuance of equity securities
and borrowings under a credit facility.
Quantitative and Qualitative Disclosures about Market Risk
We are exposed to fluctuations in interest rates and market value of our
investments. Our exposure to fluctuations in interest rates and market values
of our investments relates primarily to our short-term investment portfolio,
which is included in cash and cash equivalents and marketable securities. We
have not used derivative financial instruments in our investment portfolio. We
invest our excess cash in high-grade commercial paper, money market
instruments and government agency issues and we limit the amount of credit
exposure to any one issuer. Due to the short-term nature of our investments,
the impact of interest rate changes would not be expected to have a
significant impact on the value of these investments. The effect of interest
rate and investment risk on us has not been significant.
40
<PAGE>
Investments in fixed rate interest earning instruments carry a degree of
interest rate risk. Fixed rate securities may have their fair market value
adversely impacted due to a rise in interest rates. Because of this, our
future investment income may fall short of expectations due to changes in
interest rates or we may suffer losses in principal if we are forced to sell
securities that have declined in market value due to changes in interest
rates.
Management believes that the carrying amounts shown for our financial
instruments reasonably approximate their fair values.
Year 2000 Readiness Disclosure
All references to Year 2000 within this prospectus are provided as "Year
2000 Statements" within the meaning of the Year 2000 Information and Readiness
Disclosure Act.
We instituted a comprehensive internal Year 2000 compliance program
designed to enable us to continue our business without interruption as we
moved into the Year 2000. We established our Year 2000 compliance program to
address the impact of the Year 2000 date transition on our operations. This
program covered not only our internal information systems and other
information technology facilities such as data and telephony communications,
building management, and security systems, but also the readiness and
compliance programs of our key suppliers.
We completed our evaluation of all of our systems and applications for Year
2000 compliance prior to the end of 1999. These systems and applications
included internal information technology applications (such as billing and
customer service), network infrastructure (such as corporate local- and wide
area networks, user workstations and off-shelf software applications),
customer Internet service provider platform, customer telephony platform, and
corporate facilities (such as offices, phone systems and voice mail). In most
cases, we obtained these systems and applications from third parties. Our
evaluation consisted of extensive review of product Year 2000 compliance
information on vendor supplied items and services available online, in vendor
literature and through trade group resources, and inquiries made to our
significant third-party business partners, suppliers and vendors to determine
whether their products were Year 2000 compliant. As a result of our
evaluation, we generally executed vendor prescribed methodologies, where
applicable, to make these items Year 2000 compliant. Since the century date
change, we have not experienced any significant disruption in our business due
to Year 2000 issues.
To date, our expenses associated with our Year 2000 compliance program have
been approximately $350,000. Our expenses have generally related to the
operation costs associated with time spent by our employees and consultants in
the evaluation process and Year 2000 compliance in general.
Recent Accounting Pronouncements
In June 1998 and June 1999, the Financial Accounting Standards Board issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities"
("SFAS No. 133"), and SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities--Deferral of the Effective Date of FASB No. 133" ("SFAS No.
137"). We are required to adopt SFAS No. 133 and SFAS No. 137 in the year
ended December 31, 2001. These pronouncements establish methods of accounting
for derivative financial instruments and hedging activities related to those
instruments as well as other hedging activities. To date, we have not entered
into any derivative financial instruments or hedging activities.
41
<PAGE>
BUSINESS
The Company
We are a rapidly growing network-based provider of Internet, data and
communications services. Our service offerings include high-speed Internet
access, such as dedicated access and digital subscriber line, or DSL; dial-up
Internet access; web hosting and design; data center services including co-
location, access, application hosting and monitoring services; e-commerce
solutions; and web integration and consulting services. To complement our data
services offerings, we also provide telephony services in selected markets.
Our strategy is to offer our customers a single source solution to meet a
broad range of their increasingly complex Internet, data and communications
needs. We primarily market our services, using a consultative sales approach,
to small- and medium-sized businesses, and also selectively to larger
businesses, wholesale customers and consumers.
Prior to 1998, we offered telephony and network construction services in
the Los Angeles metropolitan market. To capitalize on the growing demand for
Internet and data services, the fastest growing segment of the communications
industry, we made a strategic decision in 1998 to broaden our service
offering, emphasize Internet and data services and expand our market
footprint. Since that time, we have acquired eight companies and the customer
base and certain assets of a ninth company to enhance our Internet and data
service offerings and expand our market presence. In November 1998, we
expanded into the Portland area by acquiring Optec, a company providing web
integration services to businesses. In early 1999, we entered the San
Francisco Bay Area through the acquisition of two Internet service providers,
Slip.Net and Sirius. We continued our market expansion with the acquisition of
four Internet service providers in June and July 1999, giving us a market
presence in Houston, Denver and Salt Lake City, and expanding our existing
presence in Portland. In July 1999 we acquired Intelenet, an Irvine,
California-based provider of data center and managed services with operations
in the Los Angeles basin and the Chicago metropolitan area. Most recently, in
January 2000, we entered the Dallas market by acquiring the Internet customer
base of FastLane Communications.
We currently offer selected Internet and data services in the San
Francisco, San Diego, Portland, Denver, Houston, Salt Lake City, Dallas and
Chicago metropolitan markets and provide Internet, data and communications
services in the Los Angeles metropolitan market. We operate data centers in
Glendale, San Diego, Santa Clara, Irvine and Denver, totaling approximately
66,000 square feet. We are in the process of expanding our service offering in
each of the markets we have entered in the last year to include a broad range
of data products and services. We plan to open data centers in each of the
markets we currently serve and intend to expand our service offerings into the
Seattle metropolitan market in 2000. The data centers we plan to open in 2000
will bring our total operational data center space to over 290,000 square
feet. As of December 31, 1999, we had approximately 2,300 DSL lines, 1,300
dedicated access lines, 55,100 dial-up accounts, 10,600 web hosting accounts,
325 web integration customers and 1,200 telephony accounts.
We deliver our services over a communications network that utilizes
advanced packet-switching technology and the communications protocol known as
Internet Protocol, or IP, that enables us to provide cost-effective services
to our customers. Our network combines equipment housed in our own facilities
and equipment interconnected to the incumbent local exchange carrier's central
office with redundant, high-speed connectivity to the Internet backbone. Key
components of our network architecture are our Internet data centers. These
centers house our own Internet platform, support our shared and dedicated
server hosting products and provide co-location space for our customers'
equipment.
As part of the Optec acquisition, we acquired rights to use capacity to
connect up to 15 cities on a nationwide, long-haul fiber-optic network
currently under construction by Enron. We plan to expand into selected cities
served by the Enron network as cities on this network come on-line. In January
2000, Enron advised us that capacity on this network is available in Portland,
Los Angeles and Salt Lake City. Enron is also obligated to deliver capacity to
Denver, Houston, Dallas and Miami.
42
<PAGE>
We have been certified as a competitive local exchange carrier in
California, Colorado, Oregon, Texas, Washington and Utah and have an
application pending in Illinois. We plan to seek certification in additional
states as we expand our services into new markets.
In October 1998, Sheldon S. Ohringer joined FirstWorld as President and
Chief Executive Officer and the leader of a new management team. Mr. Ohringer
was formerly the President of ICG Telecom Group, Inc., the principal operating
subsidiary of ICG Communications, Inc. Since that time we have expanded our
management team significantly, adding a number of experienced data and
communications executives. Our equity sponsors include entities controlled by
Donald L. Sturm. Mr. Sturm is a private equity investor and the former Vice
Chairman of Peter Kiewit Sons' Inc. Mr. Sturm, who participated in the
decision by Peter Kiewit Sons' to invest in MFS Communications and who owns a
significant interest in Level 3 Communications, controls entities which have
invested approximately $55 million in FirstWorld, including the recent
purchase of 3,333,333 shares of Series B common stock pursuant to the
automatic trigger provisions of the Sturm equity investment agreement.
On February 10, 2000, Texas Pacific Group entered into a purchase agreement
with Enron to purchase all of Enron's shares of our Series A and Series B
common stock and warrants to purchase an additional 5,236,038 shares of our
Series B common stock from Enron for aggregate consideration of $129.1
million.
Concurrently with this offering, we are also offering shares of our Series
B common stock to Texas Pacific Group for $50.0 million, SAIC Venture Capital
Corporation for $19.5 million, Microsoft Corporation for $12.0 million
(including warrants exercisable for 806,452 shares at an exercise price of
$15.00 per share, assuming a $12.00 IPO price) and Lucent Technologies Inc.
for $10.0 million.
Industry Overview
Data communications is the fastest growing segment of the communications
industry. The Internet, in particular, has emerged as one of the fastest
growing communications medium in history and is dramatically changing how
businesses and individuals communicate and share information. International
Data Corporation estimates that the number of Internet users worldwide will
grow from 97 million at the end of 1998 to 320 million by 2002. Forrester
Research, Inc. projects that the total market for Internet access and hosting
will grow from $3.7 billion in 1998 to approximately $56.6 billion by 2003.
The Internet's rapid growth as an essential communications medium has
created a substantial market opportunity for companies such as ours that
provide Internet, data and communications services. We believe we are well
positioned to capitalize on this opportunity due to the convergence of the
following factors:
. Growing Demand for Single Source Internet and Data Solutions. Many
companies, particularly small- and medium-sized businesses, lack the
expertise, capital or personnel required to install, maintain and monitor
their own web servers, web sites and access facilities. In addition,
these businesses must contend with the cost and complexity of retaining
multiple vendors for their data needs: Internet service providers for
Internet access and web hosting, data center companies for co-location
and data center services, and equipment integrators for network
configuration and installation. We believe that these businesses can
benefit from, and are increasingly demanding, a single source solution
for their Internet and data requirements.
. Small- and Medium-Sized Businesses Expected to Fuel Growth. We believe
that a significant portion of the growth in data communications will be
generated by small- and medium-sized businesses, which we believe have
traditionally been underserved by the larger communications providers.
Data communications, particularly through the Internet, have made it
possible for smaller companies to compete more effectively with larger
competitors by reducing their costs of communicating with employees,
customers and suppliers. eStats estimates that less than 10% of small-
sized businesses and less than 30% of medium-sized businesses currently
maintain their own web site, and that less than 15% of these businesses
in total are currently conducting sales on-line. In addition, according
to eStats, less than 25% of small-sized businesses and less than 50% of
medium-sized businesses are currently connected to the Internet.
. Emergence of Third Party Co-location Services. Internet infrastructure
and applications platforms are complex and sensitive to environmental
factors, such as temperature and power fluctuations. These
43
<PAGE>
factors, together with the need for increased bandwidth, have led many
businesses to rely on third parties to house, monitor and maintain the
equipment that supports their web sites, e-commerce platforms and other
business-critical applications at secure climate controlled facilities.
Housing these platforms at third party sites also allows for easier
maintenance and operation. In addition, by locating equipment in another
provider's facility, customers can more easily increase their Internet
capacity, allowing them to scale their presence more quickly.
An increasing number of new businesses are conducting a significant
portion of their operations on the Internet. These businesses have an
expanding need for co-location space that allows them the flexibility to
rapidly add additional servers as their businesses grow. Many of these
companies are also building redundancy into their web presence by housing
their equipment at multiple locations to protect against a network or
server failure at any single location.
. Increasing Demand for High-Speed Internet Access. The rapidly expanding
number of Internet users and the growth in bandwidth-intensive
applications, combined with the availability of reasonably priced high-
speed access products, such as DSL, is increasing demand for high-speed
Internet connections, particularly among small- and medium-sized
businesses and individual consumers. Higher access speeds enable
businesses to maintain complex web sites, including web sites that allow
them to access critical business information, conduct electronic
business, or e-commerce, and communicate more efficiently with business
partners, customers and employees. Additionally, many companies are
supporting increasing numbers of remote offices and workers who require
high-speed access to network resources.
Traditionally, small- and medium-sized businesses, telecommuters and
individuals have relied on low speed lines for data transport. For
example, according to International Data Corporation, approximately 78%
of Internet access revenue derived from small- and medium-sized business
in 1997 was generated using relatively slow 28.8 to 56 kilobits per
second dial-up modems or integrated services digital networks, or ISDN,
lines. In the future, we believe there will be an increasing demand for
high-speed connectivity as businesses, telecommuters and individuals seek
solutions with higher data transmission speeds.
. Trend Toward Outsourcing of Internet Operations. Our customers are
increasingly finding that investing in the resources and personnel
required to maintain their web infrastructure is cost-prohibitive and
extremely difficult given the shortage of technical talent and the risk
of technological obsolescence. As a result of these factors, many small-
and medium-sized businesses are seeking to outsource their web facilities
and system needs, to focus on their core competencies. Demand for web
hosting, co-location services and outsourced e-commerce solutions is
expected to grow. Forrester Research has estimated the demand for web
hosting services in the U.S. was approximately $875 million in 1998 and
is expected to grow to approximately $14.6 billion by 2003.
The FirstWorld Solution
We provide a variety of Internet, data and communications services,
including high-speed Internet access, dial-up Internet access, web hosting and
design, data center services, e-commerce solutions and web integration and
consulting services. To complement our data services offerings, we also
provide telephony services in selected markets. Our strategy is designed to
offer our customers a single source solution to meet a broad range of their
increasingly complex Internet, data and communications needs. We primarily
market our services, using a consultative sales approach, to small- and
medium-sized businesses, and secondarily to larger businesses, wholesale
customers and consumers. We typically seek to bundle our services, but our
customers can select from the services we offer to tailor the most appropriate
solution for their needs. We believe the FirstWorld solution offers a number
of benefits to our customers including:
. Single Source Data Solution. We currently provide a broad range of
Internet and data services that allow our customers to effectively
outsource their Internet and data needs to a single provider. Today, we
believe most service providers provide a subset of the services that we
offer and that we represent a new, single
44
<PAGE>
source Internet and data solution. We differentiate our services from our
competitors by providing our customers with sophisticated, integrated data
solutions and superior customer service. In addition, we attempt to bundle
our services which allows us to lower customer turnover, increase revenue
per customer and lower customer acquisition costs.
. Flexibility and Scalability. We have designed our service offerings to
enable customers to purchase the level of service, product set, access
speed and functionality that meet their existing requirements while at
the same time allowing them to easily upgrade services as their Internet
and communications needs grow. We provide flexible service pricing,
billing our customers according to their bandwidth and capacity
utilization, as opposed to traditional flat-rate billing.
. Small- and Medium-Sized Business Focus. Our primary target market is
small- and medium-sized businesses, which we believe have traditionally
been underserved by larger communications providers, have limited
resources and are increasingly looking to outsource their Internet, data
and communications requirements. Using a consultative sales approach, we
work with small- and medium-sized businesses to solve the full range of
these needs. These businesses typically lack the expertise to address all
of their Internet, and data requirements in-house and are therefore best
positioned to benefit from our solution.
. Reliable and Secure Data Centers. We currently operate five data centers
and are in the process of constructing six additional data centers to
meet the growing demand for third party co-location services. Our data
centers are technologically advanced facilities with redundant, high-
speed connectivity to the Internet, uninterruptible power supplies, back-
up generators, fire suppression, computer floors, separate cooling zones,
seismically braced racks, 24 hour / 7 days a week monitoring and high
levels of security. Through these centers we offer our customers a secure
environment in which to house their critical data communications
equipment and obtain access to high bandwidth connectivity to the
Internet.
. High-Speed, Cost-Effective Internet Access. We provide a full range of
high-speed Internet access products from a wide range of DSL service
options through DS-3 connectivity, allowing our customers to choose a
cost-effective solution that fits their high-speed access needs. We also
offer dial-up Internet access for those seeking entry-level connectivity
and remote access services.
. High Quality Service and Customer Support. We strive to provide our
customers with end-to-end solutions to their Internet, data and
communications needs. An important part of our solution is to provide our
customers with superior customer service and support. We believe that
this differentiates us from many of our competitors, particularly larger
service providers who have typically not focused on our market segment.
By organizing a direct sales organization around customers and focusing
on end-users' needs, we seek to attain a high level of customer
satisfaction, achieve customer loyalty and accelerate the adoption of our
services.
Growth Strategy
Our objective is to become a leading provider of a comprehensive range of
Internet, data and communications solutions. Key elements of our strategy
include:
. Provide Single Source Internet and Data Services. We seek to provide a
broad range of services to fulfill the Internet, data and communications
requirements of our customers. We believe that "one-stop shopping"
capabilities enable us to provide significant value to our customers and
ultimately reduce customer turnover. As such, we are in the process of
expanding our service offering in each of the markets we have entered. We
believe that our focus on data solutions differentiates us from other
communications companies, many of whom sell a limited number of data
services, and enables us to attract customers with intensive Internet and
data needs. We are also continuing to develop and expand our product set
with services and features that have technologically advanced and value-
added capabilities to serve the evolving needs of our customer base.
45
<PAGE>
. Focus on Small- and Medium-sized Business Customers. We target primarily
small- and medium-sized business customers. We believe these customers
have traditionally been underserved by larger communications providers.
In addition, many of them find it difficult and uneconomical to maintain
their web infrastructure and are increasingly looking to outsource their
Internet, data and communications requirements.
. Employ Consultative Sales Approach and Superior Customer Care. Our sales
personnel consult with our customers, offering them a broad array of
products and services and tailored Internet, data and communications
solutions to fit their business needs. Our direct sales force has been
trained to sell a broad range of Internet, data and communications
products. We believe that by actively consulting with customers to help
them identify and implement their data communications initiatives, we
develop close relationships with our customers, enhance customer
retention and differentiate ourselves from our competitors.
. Deploy Flexible, Cost-Effective Networks. To provide Internet, data and
communications solutions, we are deploying an advanced integrated
platform that utilizes standard, scalable resources and architecture
components. We have designed our networks to support a wide array of
services and to be compatible with technologies still under development
in the industry. We use a demand-driven approach to network deployment,
marketing our services to a geographically targeted cluster of businesses
before committing to implementation of network infrastructure.
Additionally, we seek to combine elements of our network with those of
other service providers to offer a more cost-effective solution to our
customers and expand our network reach.
. Pursue a Focused Acquisition Strategy. To date, we have acquired eight
companies and the customer base of a ninth to expand our Internet and
data product offerings and geographic market presence. We expect to
continue to pursue a strategy of acquiring Internet and data
communications companies that increases the breadth of our product
offering, accelerates our penetration into new markets and grows our
customer base. By pursuing market entry through acquisitions, we can
quickly acquire new customers in a given region, cross-sell additional
data services to existing customers and enhance our network utilization.
Our senior management team has significant experience in the acquisition
and integration of businesses.
Our Markets
We currently provide service in nine metropolitan areas in California,
Colorado, Illinois, Oregon, Texas and Utah. Additionally, we plan to deploy
our services in the Seattle market by the end of 2000. We evaluate new markets
based on their demographic profile, competitive landscape and the availability
of network facilities, including the availability of the Enron nationwide
long-haul network.
46
<PAGE>
The following table shows our existing and planned primary markets for 2000
as well as the services we currently offer and expect to offer in that time
frame. In the following table, the term Internet refers to high-speed Internet
access services including dedicated access and DSL; dial-up Internet access;
web hosting and design services; and e-commerce solutions. Additionally, we
define our primary markets as those in which we have or plan to have sales
staff resident in the market.
<TABLE>
<S> <C> <C> <C>
Primary Markets Market Entry Date Current Services Offered Future Services
- ---------------------------------------------------------------------------------------
Los Angeles (1) 3Q97 . Internet --
. Data center
. Voice
. Web integration
- ---------------------------------------------------------------------------------------
Portland (1) (2) 4Q98 . Internet . Data center
. Web integration
- ---------------------------------------------------------------------------------------
San Francisco Bay Area 1Q99 . Internet --
(1) (2) . Data center
. Web integration
- ---------------------------------------------------------------------------------------
Houston (1) (2) 2Q99 . Internet . Data center
. Web integration
- ---------------------------------------------------------------------------------------
Denver/Front Range (1) 2Q99 . Internet --
(2) . Data center
. Web integration
- ---------------------------------------------------------------------------------------
Salt Lake City (1) (2) 2Q99 . Internet . Data center
. Web integration
- ---------------------------------------------------------------------------------------
Chicago (1) (2) 3Q99 . Internet --
. Data center (3)
- ---------------------------------------------------------------------------------------
San Diego (1) 4Q99 . Internet --
. Data center
. Web integration
- ---------------------------------------------------------------------------------------
Dallas (1) (2) 1Q00 . Internet . Data center
. Web integration
- ---------------------------------------------------------------------------------------
Seattle (1) 4Q00 -- . Internet
. Web integration
</TABLE>
- --------
(1) Indicates that we have received or applied for competitive local exchange
carrier certification, meaning that we can provide telephony service
directly rather than by reselling services provided by other
communications companies.
(2) Indicates markets we entered through acquisition.
(3) Data center services in Chicago are currently provided out of a facility
owned and managed by a third party.
Our Products and Services
We provide a wide range of Internet, data and communications products and
services that enable our customers to increase the speed, efficiency and
reliability of their communications. These products and services include:
. Internet access services, including dial up, ISDN, DSL and dedicated
access;
. data center services;
. web hosting and design services;
. e-commerce solutions;
47
<PAGE>
. web integration and consulting services; and
. voice services.
Our products and services are designed to meet the evolving needs of our
customers and to support them as those needs grow, thus enhancing sales
efficiency and lowering customer turnover. We believe that our comprehensive
product and service offering enables us to provide single source solutions
that support our customers' Internet, data and communications needs throughout
their business lifecycle.
Internet Access Services. We offer a variety of Internet access solutions,
providing customers with reliable access to the Internet. With access speeds
ranging from 56 kilobits per second for entry-level dial-up customers to
dedicated services at 1.54 megabits per second (T-1) to 45 megabits per second
(DS-3) for large enterprise users and growing online businesses, we tailor our
Internet access offerings to meet the varying needs of our customers. Many new
customers are selecting advanced, high-speed access services such as DSL. DSL
services allow data transfer rates at speeds of up to 7.1 megabits per second
over existing copper telephone lines. Our access customers can also purchase
our enhanced web services, such as domain name registration, web hosting,
additional Internet protocol addressing, and multiple e-mail accounts. All of
our customers have access to technical support 24 hours a day, 7 days a week.
The following table describes several of our most popular Internet access
services:
<TABLE>
<CAPTION>
Description Speed Monthly Price
- ----------------------------------------------------------------------
<S> <C> <C>
Dial-Up Services
Basic . 56Kbps $19.95
Business . 56Kbps $34.95
- ----------------------------------------------------------------------
ISDN
Residential Flat-rate . 128Kbps $29.95
Business Flat Rate . 128Kbps $49.95
- ----------------------------------------------------------------------
DSL
Residential . 384Kbps-1.54Mbps download $49.95-$289.95
. 128Kbps-1.54Mbps upload
Business . 144Kbps-1.54Mbps download $119.95-$425.95
. 384Kbps-1.54Mbps upload
- ----------------------------------------------------------------------
Dedicated Access
Fixed Access . 128Kbps-45Mbps $399-$29,500
Burstable Access . Burst 128Kbps $599 +
. Burst 768Kbps $974 +
. Burst 6Mbps $5,000 +
</TABLE>
Data Center Services. We currently operate data centers in Glendale, Santa
Clara, San Diego, Irvine and Denver, totaling approximately 66,000 square
feet, and are constructing additional data centers in Dallas, San Francisco,
Irvine, Salt Lake City, Portland and Houston to meet the growing demand for
third-party co-location services. These new centers will bring our total
operational data center space to over 290,000 square feet. We also provide
data center services in the Chicago area using leased facilities. Our data
centers house our Internet, data and packet-switching equipment and provide
space for our customers to co-locate their own equipment. These facilities
provide a secure, monitored environment, coupled with high-speed connectivity
to the Internet. Our data centers have a number of features designed to assure
continuous, reliable service, including uninterruptible power supplies, back-
up generators, fire suppression, computer floors, separate cooling zones and,
where required, seismically braced racks. These centers are monitored 24 hours
a day, 7 days a week. We plan to open data centers in each of our markets to
offer our customers a full range of data center services.
Our data center customers require the higher performance, reliability and
security associated with housing their equipment at a third-party custom data
center. Customers have physical access to the equipment they co-
48
<PAGE>
locate in our facilities 24 hours a day, 7 days a week and remote access for
software maintenance and administration. Specialized services are also
available for those customers who want us to manage and administer their co-
located hardware or software.
We support most leading Internet hardware and software platforms, including
Ascend, Check Point Software, Cisco, Compaq, EMC, Lucent, Microsoft, Netscape
and Sun Microsystems. In addition, we can host a variety of software
applications in our data centers, making them available to customers in a
secure environment and with direct connectivity to the Internet. Standard
applications include advanced e-mail services, e-commerce applications, HTML
development, security and firewall services, remote monitoring and backup and
web authoring.
We are also providing application hosting services in our data centers. We
currently have agreements with Microsoft and Onyx Software to host some of
their software applications.
Web Hosting and Design. We offer a variety of shared and dedicated web
hosting services that allow customers to create and maintain high quality,
sophisticated Internet sites without purchasing, configuring, maintaining and
administering the necessary hardware, software and Internet connectivity that
would be necessary if they were to create and host the sites themselves.
Our shared web hosting services, targeted to small- and medium-sized
businesses, can be rapidly deployed and include standard levels of storage on
our servers and data transfer bandwidth that can be increased to accommodate
our customers' expanding needs. Our standard monthly prices range from $19.95
to $99.95 for these services. Additional development tools, such as Microsoft
FrontPage extensions, server-side scripting and custom interfaces, give
customers the ability to grow their Internet business. We also offer utility
programs that enable customers to control, maintain and update their sites
remotely, monitor site performance, create reports on site activity, check
billing information and evaluate the overall performance of their web site.
All shared hosting servers have regular back-up and recovery procedures to
protect customer files and are monitored with the same systems that we use to
monitor our own network systems and transport backbone.
Our dedicated server web hosting services are targeted to customers
desiring substantially more server and network capacity or for customers
desiring their own physical server. We support the two most common operating
systems, Windows NT and UNIX. Our customers can create and support
applications that are more complex, require higher throughput, and have
greater storage requirements while still outsourcing the maintenance and
monitoring of their site and equipment. In addition, we can typically create
and configure these platforms within several business days. Customers can
control and monitor these dedicated servers with all the same tools that are
available for our shared hosting customers.
E-commerce Solutions. Our e-commerce products and services are designed to
enable our customers to easily design a web site that allows them to sell
their products and services on-line and execute electronic transactions. We
have licensed advanced e-commerce software from Intershop that provides an
application platform that allows our customers to establish their own e-
commerce sites without the significant capital investment and expert personnel
usually required in e-commerce web site creation. Using our application
platform, a customer can quickly create an e-commerce site that includes
product descriptions, graphics, a credit card transaction system, security,
encryption and back-end marketing support utilities. Additionally, we have the
ability to create custom web sites for our larger customers requiring features
or functionality not available from our standard Intershop package. Custom
service offerings are typically priced on a per-hour basis. We plan to deploy
Intershop by the end of the second quarter of 2000.
49
<PAGE>
We plan to offer the following categories of e-commerce products with
varying price and feature categories to address a range of customer needs.
<TABLE>
<CAPTION>
Product Features Monthly Price
- -------------------------------------------------------------------------------
<S> <C> <C>
First eBusiness 1 . 25 products $ 34.95
. 3 departments
- -------------------------------------------------------------------------------
First eBusiness 2 . 100 products $ 79.95
. 10 departments
- -------------------------------------------------------------------------------
First eBusiness 3 . Unlimited products $139.95
. 1,000 departments
. Some reporting features
- -------------------------------------------------------------------------------
First eBusiness 4 . Unlimited products & departments $255.95
. Advanced reporting tools
. Custom development tools
- -------------------------------------------------------------------------------
First eBusiness . Hosting features Varies based on project
Community
. Co-location requirements
. NT or Unix platforms
- -------------------------------------------------------------------------------
</TABLE>
As our customers' needs grow, they can easily upgrade to a more
sophisticated e-commerce solution while maintaining the same development
environment.
Web Integration and Consulting. As part of our acquisitions of Optec and
Intelenet, we acquired considerable expertise in planning, designing and
implementing advanced network solutions. These solutions include high-speed
Internet access, router and server design and configuration, and security and
operational support systems. Our services include client/server consulting,
implementation, support services, network management and monitoring and
equipment sales. For high-end customers needing sophisticated network
solutions, such as large enterprise customers, corporate or regional
headquarters locations and state and local government agencies, we have a
consulting practice that provides an integrated solution to complex
communications problems.
Our web integration services involve enterprise network design and
consulting, specification, purchase, installation and maintenance of servers,
routers and related infrastructure. We provide these web integration and
consulting services to complement our existing products and services in
selected markets. While we believe that offering web integration and
consulting services will provide us with access to a broader customer base, we
expect consulting and equipment sales to decrease as a percentage of total
revenue in the future as we grow our data services offerings.
Telephony Services. We currently offer telephony service in the Los Angeles
metropolitan market, including local, long distance and private line services.
Our Customers
We market our services primarily to small- and medium-sized businesses. We
also selectively market our services to larger businesses, consumers and
wholesale customers. We employ a market segmentation strategy, which involves
tailoring our service offerings, sales and marketing techniques and network
deployment to meet the varying needs of small- and medium-sized businesses,
larger businesses, consumers and wholesale customers. Our consulting, sales
and marketing initiatives and tailored product offerings are designed to
reflect the varying customer buying patterns and address competitive factors
in our target market.
50
<PAGE>
Small- and Medium-sized Businesses. Small- and medium-sized businesses
typically have between two and 1,000 employees and often access the Web using
slower speed dial-up access, or have no Internet access at all. Many of these
businesses maintain either a very limited web site, or none at all, and an
extremely small percentage of these businesses are conducting e-commerce. We
believe we add significant value to small- and medium-sized business customers
by offering them a broad range of Internet and data services. Moreover, we
believe our ability to understand customers' needs through consultative sales
efforts and to meet those needs through bundled service offerings will enhance
our reputation for value and ultimately result in additional revenues.
Major Accounts. Major accounts include larger businesses as well as
companies whose primary activities take place on the Web. We believe that
these customers are increasingly looking to outsource the housing of the
equipment that supports their web site, e-commerce platform and content
applications, as well as the monitoring and maintenance of this equipment, at
secure, environmentally sound third-party locations. Our data center services
offer these customers a variety of solutions to meet their needs.
Wholesale. We market our wholesale product line primarily to Internet
service providers and other service providers such as web developers and
content providers. Our primary wholesale service offerings include products
such as dial-up, DSL and dedicated access, as well as co-location services and
dedicated Internet services. We believe that smaller service providers will
continue to find it cost effective to purchase services on a wholesale basis
from larger providers such as FirstWorld. Additionally, these accounts allow
us to leverage the fixed cost components of our network by adding traffic
quickly to our network.
Consumer. Consumer customers are individual, home office and single
employee businesses requiring services that range from dial-up access to
broadband DSL access to value-added Internet services, such as e-mail
applications, web hosting and design, basic e-commerce and file transfer
services. We believe that these customers will increasingly demand higher
speed access and more sophisticated web functionality and will look to their
Internet provider to facilitate such services.
As of December 31, 1999, we had approximately 2,300 DSL lines, 1,300
dedicated access lines, 55,100 dial-up accounts, 10,600 web hosting accounts,
325 web integration customers and 1,200 telephony accounts.
Sales and Marketing
We market our services primarily through our direct sales force, employing
a consultative approach. We believe that our direct sales strategy allows us
to develop close relationships with our customers and manage the sales and
service process more effectively. Small- and medium-sized businesses, in
particular, often do not have a dedicated, in-house communications manager and
consequently prefer to purchase services from an integrated or a single source
solution provider. As a result, we believe that our ability to provide a
comprehensive range of Internet and data solutions and act as an experienced
consultant is attractive to our current and potential customers. We have also
developed a sales methodology and a training program that we believe to be a
key ingredient in our ability to successfully compete for the data
communications requirements of our customers.
51
<PAGE>
Direct Sales Channels
As of December 31, 1999, we had 130 sales and technical personnel and 14
sales offices supporting our sales efforts as indicated in the following
table:
<TABLE>
<CAPTION>
Target Market Sales Channel
<S> <C>
Small- and medium- . Account manager (by territory)
sized businesses
. Indirect agents
. Leads through telemarketing
-------------------------------------------------------------------------
Major accounts . National account manager (by product)
-------------------------------------------------------------------------
Wholesale customers . Wholesale account manager
-------------------------------------------------------------------------
Consumer . Web site presence
. Advertising and direct mail
. Inbound telemarketing
</TABLE>
-----------------------------------------------------------------------
Our direct sales force consists of:
. Account Managers. Account managers focus on selling our end-to-end
Internet and data services to small- and medium-sized businesses. Account
managers qualify customer leads and establish initial appointments.
Account managers are supported by sales engineers who assist in pre- and
post-sale technical consulting. Sales managers and regional sales
directors also provide local sales leadership to the account teams in
each market.
. National Account Managers. National account managers focus on selling our
services to larger accounts, typically technology intensive businesses
with multiple locations and large numbers of distributed workers and to
businesses who conduct a significant amount of business on the Web.
National account managers primarily focus on selling our data center
solutions to these customers. Our national account managers seek to work
directly with the chief information officer and the communications
manager responsible for Internet services in the target account. National
account managers are supported by regional sales directors who provide
leadership and sales strategy, as well as sales and network engineers to
assist with custom, sophisticated solutions.
. Wholesale Account Managers. Wholesale account managers focus on selling
our services to Internet service providers and other service providers.
Our wholesale account managers sell dial-up and DSL Internet access, co-
location services and dedicated Internet services. Wholesale account
managers are supported by regional sales directors who provide leadership
and sales strategy.
Indirect Sales Channels
We also market our services through indirect channels, including network
service providers, independent agents and value-added resellers. We offer each
service provider the ability to select those services that it would like to
bundle with its own service offerings to offer a total solution to its
customers. As of December 31, 1999, we had two sales and technical personnel
supporting our indirect sales efforts.
Marketing
Our marketing team develops and implements our positioning, branding,
pricing and promotional strategies. We have formulated detailed criteria for
identifying target customers for each of our services and have created a
bundle of services to be offered to each segment of our potential customer
base. In particular, we are focused on building our brand identification as we
roll out our service offerings. We promote our brands through direct mail to
targeted accounts, outdoor advertising, radio advertisements, print
advertisements and our general public relations effort.
52
<PAGE>
Network Architecture and Technology
We deliver our services over a network that utilizes advanced packet-
switching technology and the communications protocol known as Internet
Protocol, or IP, that enables us to provide cost-effective services to our
customers. Our network combines equipment housed in our data centers and
equipment interconnected to the telephone company's central offices with
redundant, high-speed connectivity to the Internet backbone. Our metropolitan
networks consist of elements we own as well as elements we lease from third
parties. We believe that this approach allows us to deploy a network that is
both cost-effective and responsive to our customers' needs. Our metropolitan
networks will be connected via the long-haul capacity we purchased from Enron
as part of the Optec acquisition, or via capacity purchased from other long-
haul carriers, to create a national platform for the provision of our
services.
Our current infrastructure includes Internet equipment in all of our
markets, fiber in Portland and the Los Angeles basin, Lucent PathStar local
packet switches in Southern California, a Nortel DMS 500 local switch housed
in Anaheim, and DSL access equipment located in incumbent carriers' central
offices. The Cisco BPX, our core ATM switch, connects our central office co-
locations to our data centers and serves as our primary backbone switch.
As part of the Optec acquisition we acquired rights to use 15 OC-3 level
data network capacity increments in cities located on Enron's long-haul
network currently under construction. An OC-3 level data network capacity
increment represents the capacity to transport 155 million bits of information
per second from one point to another. Enron has advised us that capacity is
available in Portland, Los Angeles and Salt Lake City. Enron is obligated to
deliver capacity to Denver, Houston, Dallas and Miami by November 24, 2001. If
capacity is not delivered by this date we may extend the agreement. We may
select capacity increments in additional cities or increase capacity in
selected cities which in the aggregate does not exceed 15 OC-3 level
increments. Our rights terminate on the earlier of November 24, 2005 or four
years after the date capacity is made available to the last of the cities
listed above.
Data Center Facilities. We maintain facilities in each of our markets to
house our network platforms. In each of our markets we have expanded or plan
to expand these facilities into Internet data centers, or IDCs, which include
space for customers who want to co-locate their equipment with ours. We
currently operate five data center facilities in four markets and we are
building additional data center facilities in each of our markets. We plan to
have 11 data center facilities operational by the end of 2000. These centers
will support our Internet gateway platform, allowing a broad range of Internet
access, shared- and dedicated-server hosting products, as well as co-location
space for our customers' equipment.
Telephone Company Central Office Facilities. We establish our central
office co-locations by installing equipment in the incumbent local exchange
carrier's central offices. We use DSL technology to transmit high-speed data
over copper lines between our customers and a central office. We install an
endpoint device at the customer's premises to manage the transmission of data
from the customer's internal information technology system to a central
office. We plan to install ATM switches in each of our data centers to more
efficiently aggregate and consolidate data in our markets. From the data
center, traffic is transported on our network to major Internet traffic
exchange points or the public switched transport networks. Leasing existing
transport services from other providers, including the copper wire to our
customers' premises wherever possible, allows us to focus our capital outlay
on the value-added elements of our network, including equipment, ATM switches,
routers and data centers.
Digital Subscriber Line, or DSL, Technologies. We use a variety of DSL
technologies that we purchase from multiple vendors. We provide DSL services
utilizing our own network as well as reselling the networks of others. DSL
switching technology provides for high-speed transmission of information over
existing copper telephone lines by encoding the information in a digital
format. This allows us to offer connection speeds ranging from 128Kbps to
7.1Mbps. Actual speeds are a function of the distance from the end user or
local area network
53
<PAGE>
to the central office and the quality of the copper line. We describe the
basic features and the market positioning of our primary DSL technologies
below.
. Rate Adaptive Digital Subscriber Line, or RADSL. RADSL technology allows
for speeds up to 7.1 Mbps downstream and up to 1.1 Mbps upstream if the
end user or local area network is within 15,000 feet, or approximately
2.8 miles, of the central office. We use this technology for end users or
local area networks needing very high access speeds. Our target customers
for RADSL connections consist of small- and medium-sized businesses and
branch offices of large businesses needing T-1 or higher speeds. We
believe that these businesses often find the cost of dedicated private
line or frame relay services to be prohibitive. We believe our RADSL
connection competes favorably on a price/performance basis relative to
traditional fractional T-1 and frame relay services. The service also
provides the highest speed of any DSL service for bandwidth intensive
applications.
. Symmetric Digital Subscriber Line, or SDSL. SDSL technology allows end
users to achieve up to 1.5 Mbps speeds both downstream and upstream.
Depending on the quality of the copper line, 1.5 Mbps can be achieved if
the end user or local area network is within 8,000 feet, or approximately
1.5 miles, from the central office.
. Integrated Digital Subscriber Line, or IDSL. IDSL technology allows us to
reach end users or local area networks up to 28,000 feet, or
approximately 5.3 miles, from a central office. IDSL service operates at
up to 144 Kbps in each direction. This service can use existing ISDN
equipment at the end user site, and is targeted at the integrated
services digital network replacement market. For information intensive
users, we believe that IDSL compares favorably with integrated services
digital network on a price/performance basis when the monthly flat rate
IDSL charge is compared with the per minute integrated services digital
network charge.
National Operations Center. Our network is managed from our National
Operations Center in Denver. The center is staffed 24 hours a day and 7 days a
week, and monitors the integrity and performance of the entire network,
including environmental and security systems. Our monitoring network is
independent from our transport network, providing complete independence for
fault monitoring. Our monitoring capabilities extend from our data centers
through the telephone company central offices to the customer premise
equipment. This monitoring system is backed up by our secondary network
operations center in Anaheim.
Information Technology and Support Systems
We currently have billing and other back-office systems to support our
different lines of business. We are in the process of upgrading many of those
systems to support our planned expansion, end-to-end customer relationship
management and cross-product bundling. We expect that these upgrades will
provide us with a scalable system that will not only provide greater
efficiencies for supporting a large diverse customer base, but also
differentiate the value proposition we offer to customers. We expect to
substantially complete this upgrade by early 2000, and expect to perform
ongoing upgrades as our business expands.
Our approach to systems focuses on implementing mature, best-of-class,
commercial off-the-shelf applications that we integrate through an advanced
messaging protocol that allows consistent communication and coordination
throughout our entire network. Web-based user interfaces are designed to be
used by both internal and external customers for such activities as account
activation, billing presentment, trouble ticket and sales funnel management.
We plan to leverage our internal expertise with that of outside vendors to
assist with project/program management and implementation/integration
services.
54
<PAGE>
We have selected leading application and hardware vendors for key
functional requirements, including:
<TABLE>
<CAPTION>
Vendor Function
<C> <S>
Boardtown Internet service provider billing
--------------------------------------------------------------------------
Cisco Enterprise and ISP routers and switches
--------------------------------------------------------------------------
Compaq Network servers
--------------------------------------------------------------------------
Hewlett Packard Network management
--------------------------------------------------------------------------
Kenan Integrated voice, data and Internet services billing
--------------------------------------------------------------------------
Lucent Switch interfaces, IP services
--------------------------------------------------------------------------
Macromedia, Allaire Web development
--------------------------------------------------------------------------
Microsoft SQL Server, mail/groupware, NT Server and
desktop applications
--------------------------------------------------------------------------
Onyx Sales force automation, customer management and
enterprise web portal
--------------------------------------------------------------------------
Oracle Relational database management system and internet
directory platform
--------------------------------------------------------------------------
Peoplesoft Accounting, finance and human resources enterprise
resource planning
--------------------------------------------------------------------------
Quintessent Third-party gateways and provisioning support
--------------------------------------------------------------------------
Sun Microsystems Enterprise and web application servers
--------------------------------------------------------------------------
Vitria Application integration, process mapping
--------------------------------------------------------------------------
</TABLE>
Although we are using standard commercial applications to address major
functionality of such processes as billing and customer care, we are
integrating these applications to provide strategic and operating advantages
such as direct customer access to account information and integrated
provisioning for all products and services. In addition, certain of our
trading partners and application providers are working with us to jointly
develop specialized applications to support such processes as flow-through
provisioning, supply chain management and web-based processes. We expect these
activities to give us significant strategic advantages.
Competition
In each market area in which we offer or plan to offer services we compete
or will compete with several other service providers. Most of our competitors
have long-standing relationships with customers and suppliers in their
respective industries, greater name recognition and significantly greater
financial, technical, marketing and other resources than we do. We expect to
compete on the breadth, quality and reliability of our service offering; the
quality and responsiveness of our customer services; and price.
Internet Services. The Internet services market is extremely competitive,
and we expect competition in this market to intensify in the future. We
compete, or in the future we expect to compete, directly or indirectly with
the following categories of companies:
. national and regional Internet service providers;
. high-speed Internet access providers, including DSL and cable modem
companies;
. web hosting and data center companies;
. computer software and technology companies;
. national and regional telecommunications companies, including regional
bell operating companies and competitive local exchange carriers; and
. wireless service providers.
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The entry of new participants from these categories and the potential entry
of competitors from other categories, such as computer hardware manufacturers,
would result in substantially greater competition for us.
Web Integration and Consulting. In the markets for web integration and
consulting, we compete against a number of companies focused on the data
integration and consulting market, including USWeb/CKS, Sapient, Electronic
Data Services and IBM, as well as a number of small systems and network
integration service providers. In particular, we will be required to compete
with companies that design and manufacture products for the local and wide
area network markets and large system integrators.
Telephony. Our telephony services compete principally with the services
offered by incumbent telephone companies in the markets in which we operate,
including GTE, PacificBell and U S WEST. We also compete with various
competitive local exchange carriers including MFS Communications, NEXTLINK
Communications, ICG Communications, GST Telecommunications, and Teleport
Communications Group. The incumbent telephone company dominates each of the
markets targeted by us and possesses ubiquitous infrastructure and the
financial wherewithal to offer service at subsidized prices to maintain key
customers. We compete with incumbent telephone companies on the basis of
price, customer support and the ability to offer and provide value-added,
integrated service bundles. We compete with competitive local exchange
carriers by providing a variety of voice, data and Internet services in
different combinations to address the needs of different market segments.
Governmental Regulation
The following summary of regulatory developments and legislation describes
material telecommunications regulations and legislation directly affecting our
industry in general.
The facilities and services that we obtain from incumbent local exchange
carriers in order to provide DSL and other services are regulated extensively
by the FCC and state telecommunications regulatory agencies. To a lesser
extent, the FCC and state telecommunications regulators exercise direct
regulatory control over the terms under which we provide our services to the
public. Municipalities also regulate limited aspects of our telecommunications
business by imposing zoning requirements, permits or right-of-way procedures
or fees, among other regulations. The FCC and state regulatory agencies
generally have the authority to condition, modify, cancel, terminate or revoke
operating authority for failure to comply with applicable laws, or rules,
regulations or policies. Fines or other penalties also may be imposed for such
violations.
We cannot assure you that regulators or third parties will not raise issues
regarding our compliance or non-compliance with applicable laws and
regulations. We believe that we operate our business in compliance with
applicable laws and regulations of the various jurisdictions in which we
operate and that we possess the approvals necessary to conduct our current
operations.
Federal Regulation. The Telecommunications Act of 1996 departs
significantly from prior legislation in the telecommunications industry by
establishing competition as a national policy in all telecommunications
markets. The Telecommunications Act removes many state regulatory barriers to
competition in telecommunications markets dominated by incumbent local
exchange carriers and directs the FCC to preempt, after notice and an
opportunity to comment, state and local laws restricting competition in those
markets. Among other things, the Telecommunications Act also greatly expands
the interconnection requirements applicable to incumbent carriers. It requires
the incumbents to:
. provide interconnection at any technically feasible point;
. allow customers to retain the same telephone number when they switch
providers (this is also required of us);
. provide collocation, which allows competitive telecommunications
companies to install and maintain their own network termination equipment
in telephone company central offices;
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. unbundle and provide access to components of their service networks to
other providers of telecommunications services;
. establish "wholesale" rates for the services they offer at retail prices
to promote resale by competitive telecommunications companies;
. provide nondiscriminatory access to telephone poles, ducts, conduits and
rights of way; and
. establish reciprocal compensation arrangements for transport and
termination of telecommunication services.
Incumbent carriers also are required by the Telecommunications Act to
negotiate interconnection agreements in good faith with carriers requesting
any or all of the above arrangements. If a requesting carrier cannot reach an
agreement within the prescribed time, either carrier may request binding
arbitration by the state telecommunications regulatory agency.
The FCC and state telecommunications regulators also are required by the
Telecommunications Act to fulfill certain duties to implement the regulatory
policy changes prescribed by the Telecommunications Act. The outcome of
various ongoing proceedings against industry participants to carry out these
responsibilities, or judicial appeals of these proceedings, could materially
affect our business, operating results and financial condition.
In July 1997, the United States Court of Appeals for the Eighth Circuit
overruled some of the rules initially adopted by the FCC to implement the
Telecommunications Act, including rules:
. requiring incumbents to combine network elements and make them available
for use by competitive telecommunication companies;
. providing the detailed standard that state telecommunications regulators
must use in prescribing the price that incumbents charge for collocation
and for the copper telephone lines and other network elements that
competitive telecommunications companies must obtain from traditional
telephone companies in order to provide service; and
. giving competitive telecommunications companies the right to "pick-and-
choose" interconnection provisions by requiring that an incumbent carrier
enter into interconnection agreements with competitive telecommunications
companies that combine provisions from a variety of interconnection
agreements between that incumbent carrier and other competitive
telecommunications companies.
The FCC and others appealed this decision to the U.S. Supreme Court. In
January 1999, the U.S. Supreme Court reversed much of the Eighth Circuit's
decision, finding that the FCC has broad authority to interpret the
Telecommunications Act and issue rules for its implementation, including
authority to establish the methodology that state telecommunications
regulators must use in setting the price that incumbent carriers charge
competitive telecommunications companies for collocation, copper telephone
lines and other network elements. The Supreme Court also reversed the Eighth
Circuit's holding invalidating the FCC's "pick-and-choose" rule. However, the
Supreme Court found that the FCC was not adequately justified under the
Telecommunications Act in defining the individual network elements incumbents
must make available to competitive telecommunications companies, and required
the FCC to reconsider its delineation of these elements. It sent the matter
back to the FCC with instructions to consider further the question of which
parts of an incumbent network must be provided to competitors. The FCC
released an order on November 5, 1999 that sought to follow the Supreme
Court's instructions in delineating the particular network elements that
incumbent carriers must make available to competitors. The FCC's November
decision reaffirms its earlier holding that incumbents must make available the
particular inputs that we need in order to provide our services (including,
but not limited to, copper telephone lines, transmission facilities between
incumbent central offices and various back-office support services). In
addition, the FCC's November order requires, upon the request of competitive
telecommunications companies like us, that incumbents provide competitive
carriers with certain other inputs (such as "subloops" and, in
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limited cases, packet switching) that may prove useful as we expand our
services into new geographic areas, especially into more suburban areas.
The Supreme Court's determination in its January 1999 order that the FCC,
rather than state telecommunications regulators, has jurisdiction to determine
pricing methodology also could be helpful to us since the FCC has adopted a
pricing standard that appears to be more beneficial to competitive
telecommunications companies in some respects than the pricing standards that
some state telecommunications regulators have employed. However, it remains
unclear whether the particular pricing methodology prescribed by the FCC will
be fully implemented because some parties have challenged the lawfulness of
that methodology in the U.S. Court of Appeals for the Eighth Circuit. That
litigation is still pending.
In an order released March 31, 1999, the FCC adopted new regulations that
are designed to clarify the obligations of an incumbent local exchange carrier
in providing space inside its central offices to competitors like us so that
they can access the telephone company's copper telephone lines and connect
those lines to the competitor's electronic equipment located inside that
telephone company's central office. Another rule adopted in that order is
intended to help ensure that the customers of companies who provide services
like our Internet access services do not receive or cause harmful interference
from or to other users of the traditional telephone company network on which
the service is provided.
An FCC order released on December 9, 1999 is designed to make it easier for
companies like ours to market high-speed data services like ours to customers.
Under this "line-sharing" order, incumbent carriers are required to let a
competitor use the same copper telephone line for providing the customer with
data service that the telephone company uses for providing the same customer
with local telephone service. At present, the incumbent carriers provide
customers with local phone service and high-speed Internet access service over
a single phone line, but require competitors like us to lease a separate phone
line to provide high-speed Internet access to any customer when that customer
obtains local phone service from the incumbent. The FCC's December 9, 1999
order is designed to make it easier for companies like ours to compete with
the incumbent carriers in the high-speed Internet access market by permitting
competitors to reduce significantly their costs to serve this market. However,
it is not yet clear that the FCC's order will achieve its intended objective
since it will take several months before the incumbents put in place the
policies and procedures necessary to implement the order. It also is possible
that the order will be appealed to the courts on grounds that the FCC's new
line sharing requirements are unlawful. If appealed, we have no way of
determining whether the FCC's requirements will be affirmed.
The FCC made another potentially favorable ruling for competitive carriers
in another recent case. That case involved the question of whether a
telecommunications service that provides high-speed dedicated connection to
the Internet is an interstate service or an intrastate service. An interstate
service must be provided subject to FCC regulatory controls, whereas an
intrastate service must be provided subject to regulatory controls of the
telecommunications regulatory agency of the state where the service is
offered. In its decision, the FCC held that such services are predominantly
interstate from a jurisdictional standpoint and therefore must be provided on
terms and conditions set by the FCC rather than state telecommunications
regulators. This ruling is potentially advantageous to us because it could
reduce the number of telecommunications regulatory agencies that control the
terms under which we can provide our primary services. It also is potentially
advantageous because FCC regulatory controls in many respects are less
burdensome than state regulatory controls. For example, the Telecommunications
Act authorizes the FCC to forbear from regulating the terms under which
carriers classified as "non-dominant" provide interstate telecommunications
service. The FCC has exercised its forbearance authority by issuing rulings
that exempt non-dominant domestic carriers like us from obtaining a
certificate from the FCC prior to providing any interstate service or from
filing a tariff setting forth the terms under which they provide any
interstate access service. Because we believe that our services constitute
predominantly interstate service, we believe that we may not need a
certificate from state telecommunications regulatory agencies to provide them.
However, we have generally filed tariffs with state authorities for our high-
speed Internet services where requested by those agencies.
Many of these FCC decisions have been appealed. We do not know how the
courts will decide these appeals, but any decision that invalidates one or
more of these rules could adversely affect our Internet access business.
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On May 8, 1997, in compliance with the requirements of the
Telecommunications Act, the FCC released an order establishing a new federal
universal service support fund, which provides support to carriers that
provide service to customers in high-cost or low-income areas and to companies
that provide telecommunications services for schools and libraries and to
rural health care providers. We are required to contribute to the universal
service fund and also may be required to contribute to state universal service
funds. The new universal service rules are administered jointly by the FCC,
the fund administrator, and state regulatory authorities, many of which are
still in the process of establishing their administrative rules. We cannot
determine the net revenue effect of these regulations at this time.
On November 2, 1999, the FCC determined that a statute requiring that
incumbent carriers offer their retail services at a wholesale price to
competitors like us does not apply when these incumbents provide a discounted
DSL service directed to Internet service providers. In that case, while
competitors may purchase the incumbent carriers' Internet service provider-
directed DSL offering on the same terms as the Internet service providers, the
FCC ruled that competitors have no legal right to a wholesale discount off the
price paid by Internet service providers. This ruling could adversely affect
us if it gives Internet service providers an economic incentive to meet all of
their DSL needs by subscribing to the incumbents' Internet service provider-
directed discounted DSL offerings rather than by subscribing to DSL services
offered by competitors like us.
Various incumbent carriers have requested that the FCC substantially
deregulate the retail price charged for various types of telecommunications
services, including high-speed data services. The FCC recently issued a
decision in response that establishes a procedure by which incumbent carriers
may apply for certain pricing flexibility. We cannot yet determine the precise
extent to which incumbents will qualify for this pricing flexibility. The
ultimate impact of the FCC's order also is uncertain because the order has
been appealed to the U.S. Court of Appeals. If the FCC were to substantially
eliminate price regulation of the high-speed data services that incumbents
provide in competition with us, our business could be adversely affected.
The FCC also has proposed to permit incumbent carriers to provide advanced
services like DSL through separate affiliates or subsidiaries on a deregulated
basis. This proposal could permit the separate affiliates to provide advanced
services free of the requirements relating to interconnection, unbundling,
resale and collocation imposed by the Telecommunications Act. Bills have been
introduced in Congress that would grant regional Bell operating companies
regulatory relief to provide data services in areas where they are currently
restricted from doing so.
State Regulation. While it is clear from the January 1999 Supreme Court
decision that the FCC has broad authority to implement provisions in the
Telecommunications Act that are intended to open all telecommunications
markets to competition, state telecommunications regulators also have
substantial authority in this area. For example, although the Supreme Court's
decision validated the FCC's jurisdiction to prescribe the methodology
incumbents must use in setting the price of copper telephone wires and other
network elements, the FCC has exercised that jurisdiction by adopting a
pricing standard and has given state regulators substantial authority to apply
that standard in order to determine actual prices. Many states have set only
temporary prices for some network elements that are critical to the provision
of DSL services because they have not yet completed the regulatory proceedings
necessary to determine permanent prices. Other states have begun proceedings
to set new permanent prices based on more current data. The results of these
proceedings will determine the price we pay for, and whether it is
economically attractive for us to use, these network elements and services.
The Telecommunications Act also gives state telecommunications regulators
broad authority to approve or reject interconnection agreements that
competitive telecommunications companies enter into with incumbent carriers
and broad authority to resolve disputes that arise under these interconnection
agreements. Under the Telecommunications Act, if we request, incumbent
providers have a statutory duty to negotiate in good faith with us for
agreements for interconnection and access to unbundled network elements. A
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separate agreement is signed for each of the states in which we operate.
During these negotiations either the incumbent or we may submit disputes to
the state regulatory commissions for mediation and, after the expiration of
the statutory negotiation period provided in the Telecommunications Act, we
may submit outstanding disputes to the states for arbitration. The
Telecommunications Act also allows state regulators to supplement FCC
regulations as long as the state regulations are not inconsistent with FCC
requirements.
In addition, DSL may, as to some customers, be classified as intrastate
service subject to state regulation. All of the states where we operate, or
will operate, require some degree of state regulatory commission approval to
provide certain intrastate services. We have obtained non-expiring state
authorizations to provide intrastate services from the state regulatory agency
in all states where we currently provide our service. We also have obtained
non-expiring certificates to provide intrastate service in many of the states
where we may provide our services in the future. In most states, intrastate
tariffs are also required for various intrastate services, although non-
dominant carriers like us are not typically subject to price or rate of return
regulation for tariffed intrastate services. In some states, pursuant to state
statutes and regulations, regulated telecommunications carriers such as our
company may be required to obtain prior approval for certain actions, such as
issuing stock, incurring indebtedness, or transferring control of the company
holding a state certification. Actions by state telecommunications regulatory
agencies could cause us to incur substantial legal and administrative
expenses. It is possible that laws and regulations could be adopted that
address other matters that affect our business. We are unable to predict what
laws or regulations may be adopted in the future, to what extent existing laws
and regulations may be found applicable to our business, or the impact such
new or existing laws or regulations may have on our business. In addition,
laws or regulations could be adopted in the future that may decrease the
growth and expansion of the Internet's use, thereby decreasing demand for our
services.
Local Government Regulation. In certain instances, we may be required to
obtain various permits and authorizations, including the payment of certain
fees to certain local municipalities, from municipalities in which we operate
our own facilities. The extent to which such actions by local governments pose
barriers to entry for competitive telecommunications companies that may be
preempted by the FCC is the subject of litigation. Although our network
consists primarily of unbundled network elements of the incumbent local
exchange carriers, in certain instances we may deploy our own facilities and
therefore may need to obtain certain municipal permits or other
authorizations. The actions of municipal governments in imposing conditions on
the grant of permits or other authorizations or their failure to act in
granting such permits or other authorizations could have a material adverse
effect on our business, operating results and financial condition.
Intellectual Property
We regard our products, services and technology as proprietary and attempt
to protect them with copyrights, trademarks, trade secret laws, restrictions
on disclosure and other methods. These methods may not be sufficient to
protect our intellectual property. We also generally enter into
confidentiality agreements with our employees and consultants, and generally
control access to and distribution of our documentation and other proprietary
information. Despite these precautions, it may be possible for a third-party
to copy or otherwise obtain and use our products, services or technology
without authorization, or to develop similar technology independently.
Further, effective copyright, trademark and trade secret protection may be
unavailable or limited in certain foreign countries. The global nature of the
Internet makes it virtually impossible to control the ultimate destination of
our proprietary information. Steps taken by us may not prevent
misappropriation or infringement of our technology. In addition, litigation
may be necessary in the future to enforce our intellectual property rights to
protect our trade secrets or to determine the validity and scope of
proprietary rights of others. Such litigation could result in substantial
costs and diversion of resources.
Employees
As of December 31, 1999, we had 704 employees (excluding temporary
personnel and consultants), employed in engineering, sales and marketing,
customer support and general and administrative functions. None
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of our employees are represented by a labor union, and we consider our
relations with our employees to be good. Our ability to achieve our financial
and operational objectives depends in large part upon the continued service of
our senior management and key technical, sales, marketing and managerial
personnel, and our continuing ability to attract and retain highly qualified
technical, sales, marketing and managerial personnel. Competition for such
qualified personnel is intense, particularly in software development, network
engineering and product management.
Facilities
Our headquarters are located in Greenwood Village, a suburb of Denver,
Colorado. We have entered into a lease for approximately 42,000 square feet
which expires July 2002. We have an option to renew the lease for up to five
years. In addition, we have leases for various terms for our smaller regional
offices. We consider our headquarters and regional office space adequate for
our current operations. We also lease space in a number of traditional
telephone central offices and private facilities in which we locate our
Internet, data and communications equipment. The following table lists our
Internet data center leases:
<TABLE>
<CAPTION>
Lease Approximate
Location Expiration Square Footage
-------- ------------- --------------
<S> <C> <C>
San Francisco, CA November 2009 40,000
Dallas, TX March 2010 38,000
Portland, OR January 2010 35,000
Salt Lake City, UT January 2010 30,000
Denver, CO August 2009 21,500
San Diego, CA March 2014 20,000
Santa Clara, CA April 2009 18,900
Glendale, CA July 2008 5,000
Irvine, CA April 2008 1,000
</TABLE>
We currently have plans to open additional data centers in Houston, TX and
Irvine, CA.
Litigation
On May 13, 1999, the City of Anaheim filed a complaint in Orange County
(California) Superior Court, Case Number 809281, against FirstWorld and our
wholly-owned subsidiary, FirstWorld Anaheim. The City alleges that we and our
subsidiary repudiated our respective obligations under a series of agreements
that we entered into with the City in February 1997 primarily regarding the
development of a fiber-optic network located in Anaheim, California. The City
specifically alleged that we materially breached certain of our respective
obligations under those agreements by failing to:
.commence construction and operation of a demonstration center;
. provide verification that phase I of the construction of the network is
substantially complete;
. provide a Subsequent Implementation Program, a report that specifies
construction, operation and maintenance activities;
. comply with certain specified auditing procedures; and
. make a quarterly payment under the agreements.
The City alleges that it is entitled to damages in excess of $45 million as
well as costs, pre-judgment interest and such other relief as the court deems
proper. The City also seeks specific performance compelling us to completely
perform some or all of our obligations under the agreements.
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In response to the lawsuit, we filed a motion to compel arbitration and
requested a stay of the court proceeding. The Court granted our motion on
September 16, 1999. On October 6, 1999, the court entered a written order
finding that there is a valid arbitration provision in the agreements and that
the City had not established that the FirstWorld parties unequivocally
repudiated the agreements. The court action has been stayed pending completion
of the arbitration. On January 7, 2000, the City gave notice of a dispute
under the network construction agreement and initiated arbitration with
respect to the following issues:
. the City seeks a declaration that we are obligated to make revenue
sharing payments to the City in the amount of the greater of 5% of the
revenues generated under the agreement or $1.0 million per year for the
remaining 27 years of the agreement and that all sums shall be paid
forthwith, plus interest as provided in the agreement;
. the City seeks an award in the amount of $145,000 corresponding to the
amount we withheld for certain maintenance and repair expenses charged
to the City;
. the City seeks a declaration that the City is entitled to conduct an
audit of our books and records and an order that we have failed to
disclose information and cooperate with the City in connection with the
audit requirements of the agreements; and
. in addition to damages, the City seeks specific performance with respect
to the construction and operation of a demonstration center.
The notice also identified the City's appointed arbitrator. On January 27,
2000, we responded, identifying our appointed arbitrator and identified an
additional matter for the arbitration relating to certain City employee
reimbursements not properly earned under the network construction agreement.
We believe that we are not in breach of the agreements as alleged and intend
to vigorously defend any such claims by the City. However, the outcome of this
dispute is uncertain and cannot be predicted at this time. Any adverse result
could have a material adverse effect on our financial condition and results of
operations.
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MANAGEMENT
Executive Officers and Directors
Our directors, executive officers and key employees and their ages as of
December 31, 1999 are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<C> <C> <S>
Donald L. Sturm (1)........... 68 Chairman of the Board
Sheldon S. Ohringer (1) (4)... 42 President, Chief Executive Officer and
Director
David J. Gandini.............. 41 Executive Vice President
Marion K. Jenkins............. 46 Executive Vice President of Web
Technologies and Chief Technology Officer
Jeffrey L. Dykes.............. 44 Senior Vice President, General Counsel and
Secretary
Scott M. Chase................ 31 Senior Vice President, Corporate and
Government Affairs and Assistant Secretary
Paul C. Adams................. 37 Vice President of Finance, Treasurer and
Assistant Secretary
C. Kevin Garland (1) (3) (4).. 31 Director
Stephen R. Horn (2)........... 42 Director
James O. Spitzenberger (2).... 56 Director
John C. Stiska (2)............ 57 Director
Melanie L. Sturm (3).......... 38 Director
</TABLE>
- --------
(1) Member of the Chairman's Committee
(2) Member of the Audit Committee
(3) Member of the Compensation Committee
(4) Member of the Equity Investment Committee
Donald L. Sturm. Mr. Sturm has been Chairman of our board of directors and
head of the Chairman's Committee since January 1998. Mr. Sturm served as
President from January 1998 through September 1998 and as Chief Executive
Officer from March 1998 through September 1998. Since December 1991, Mr. Sturm
has been a private equity investor, with interests in telecommunications,
banking and real estate, among others. Mr. Sturm currently serves as chairman
of the board of three bankholding companies with nine banks that he owns in
the Rocky Mountain area and the Midwest. Mr. Sturm was a member of the group
that brought Continental Airlines out of bankruptcy in 1993, and currently is
a significant stockholder and director of Continental. Prior to December 1991,
Mr. Sturm served as Vice Chairman of Peter Kiewit Sons' Inc., a construction,
coal mining and telecommunications company that has made significant
investments in other industries. In 1984, Mr. Sturm led Peter Kiewit Sons'
$3.5 billion acquisition of The Continental Group Inc. and became the
Continental Group's Chairman and Chief Executive Officer, positions he held
until Peter Kiewit Sons' sold the Continental Group in 1991. While Vice
Chairman of Peter Kiewit Sons', Mr. Sturm participated in decisions to invest
in MFS Communications which was taken public in 1993 and sold to MCI WorldCom,
Inc. in 1996 for approximately $14.4 billion. Mr. Sturm owns significant
ownership interests in MCI WorldCom, Level 3 Communications, Inc., HarvardNet
and KAPT, a Paris, France based telecommunications company.
Sheldon S. Ohringer. Mr. Ohringer has been Chief Executive Officer,
President, a director of FirstWorld and a member of the Chairman's Committee
since October 1, 1998 and a member of the Equity Investment Committee since
November 1999. Beginning in November 1994, Mr. Ohringer served in various
capacities for ICG Communications, Inc., most recently as Executive Vice
President--Telecom of ICG Communications and President of ICG Telecom Group,
Inc., an operating subsidiary of ICG Communications. Before working for ICG,
Mr. Ohringer was Senior Vice President of Sales and Business Development for
U.S. Long Distance Corp. from May 1991 until October 1994. From May 1984 until
August 1990, Mr. Ohringer held key management and executive positions with
Telecom* USA, a long distance carrier which was acquired by MCI WorldCom in
1990. In 1999, Mr. Ohringer was appointed Commissioner to the Colorado
Commission on Science and Technology. As Commissioner, Mr. Ohringer advises
the Governor of Colorado on Internet and telecommunications issues.
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Mr. Ohringer in an executive member of the board of directors for the
Association for Local Telecommunications Services (ALTS), the leading local
competitive telecommunications association in the United States of America.
Mr. Ohringer received a B.A. degree in Business Administration from the
University of Iowa in December 1979.
David J. Gandini. Mr. Gandini has been Executive Vice President of
FirstWorld since November 1998. Mr. Gandini is responsible for sales and field
operations. From 1996 to October 1998, Mr. Gandini served in various
capacities at ICG Telecom, most recently as Senior Vice President of Wholesale
Services and President of Long Distance Operations. During this period, Mr.
Gandini directed the construction of a 166-node network, one of the largest
voice/data/Internet Protocol domestic networks. Before joining ICG Telecom,
Mr. Gandini was the President of Pace Network Services. Mr. Gandini received a
B.A. degree in telecommunications from Michigan State University.
Marion K. Jenkins, Ph.D. Dr. Jenkins has been Executive Vice President of
Web Technologies and Chief Technology Officer since January 2000. Previously,
Dr. Jenkins had been Senior Vice President of Information Technology and Chief
Information Officer of FirstWorld since November 1998. For the previous two
years, Dr. Jenkins held various executive offices, most recently as Vice
President of Strategic Client Applications at Qwest Communications
International, Inc., Vice President of Sales Operations at LCI International
and Chief Information Officer at U.S. Long Distance Corp. Dr. Jenkins worked
in these various positions as a result of the acquisition of LCI by Qwest and
the acquisition of USLD by LCI. Dr. Jenkins also served as Vice President of
Sales for American Telco, Inc. from 1986 through 1996. Dr. Jenkins holds M.S.
and Ph.D. degrees in mechanical engineering from Stanford University, and a
B.S. degree, with honors, in mechanical engineering from Utah State
University.
Jeffrey L. Dykes. Mr. Dykes has been Senior Vice President and General
Counsel of FirstWorld since January 1999 and is responsible for all of our
legal affairs. In March 1999, Mr. Dykes was appointed Secretary of FirstWorld.
From February 1996 through January 1999, Mr. Dykes served in various
capacities in the legal department at ICG Communications, most recently as
Assistant General Counsel. From 1991 through 1995, Mr. Dykes served in various
positions at the Denver and Regional Offices of the Resolution Trust
Corporation, most recently as Senior Attorney. In 1997, Mr. Dykes received a
Certificate of Advanced Studies in Telecommunications from University College
at the University of Denver. Mr. Dykes obtained his law degree from the
University of Denver College of Law in 1981 and graduated cum laude from
Western State College of Colorado with a B.A. degree in English.
Scott M. Chase. Mr. Chase has been our Senior Vice President of Corporate
and Government Affairs of FirstWorld since October 1998. In March 1999, Mr.
Chase was appointed Assistant Secretary of FirstWorld. Mr. Chase worked in
various capacities for ICG Communications from March 1997 to September 1998,
most recently as Vice President, Corporate Communications and Government
Affairs. After graduating from the University of Colorado in 1991 and until he
joined ICG Communications in March 1997, Mr. Chase served in various
government capacities and was actively involved in a number of local, state
and federal electoral campaigns, including serving as the Deputy Political
Director for the Colorado campaign to elect Clinton/Gore in 1992. During this
period, Mr. Chase also served as a senior policy and political advisor for
several public officials, including U.S. Senator Tim Wirth and former Governor
of Colorado Roy Romer.
Paul C. Adams. Mr. Adams has been Vice President of Finance and Treasurer
of FirstWorld since January 1999. In March 1999, Mr. Adams was appointed
Assistant Secretary of FirstWorld. From 1993 to 1998, Mr. Adams was employed
by Western Gas Resources, Inc., most recently as Controller. From 1987 to
1993, Mr. Adams was employed by PricewaterhouseCoopers LLP, most recently as
Manager of Business Assurance. Mr. Adams is the principal financial and
accounting officer of FirstWorld. He received a B.S. degree in Business from
the University of Colorado in 1987 and a B.A. degree in Economics from the
University of Alberta in 1985. He is a Certified Public Accountant.
C. Kevin Garland. Mr. Garland has been a director of FirstWorld and has
been a member of our Compensation Committee since January 1998 and a member of
the Equity Investment Committee since November 1999. Mr. Garland joined Enron
in 1995. He currently serves as Vice President of Equity Investments
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for a division of Enron Broadband Services, Inc. and is responsible for
overseeing minority and control investments in the communications area for
Enron. From June 1993 to December 1994, Mr. Garland served as senior associate
in mergers and acquisitions for Parker & Parsley, an independent oil and gas
company.
Stephen R. Horn. Mr. Horn is a director of FirstWorld and has been a member
of the Audit Committee since June 1999. Mr. Horn was appointed to our board of
directors in April 1999 to fill the vacancy created by the resignation of Mr.
Rodney D. Malcolm. Mr. Horn has been a Vice President and Group Head of the
Principal Investments Group of Enron North America Corp. since 1996. Prior to
1996, Mr. Horn was a principal of Yellowstone Energy Partners, a private
equity investing firm in Houston, Texas, where he commenced work in 1994. Mr.
Horn holds an M.B.A. degree from Harvard University and a B.S. degree from
Texas A&M University.
James O. Spitzenberger. Mr. Spitzenberger has been a director of FirstWorld
and a member of the Audit Committee since January 1998 and Chairman of the
Audit Committee since June 1999. Since July 1996, Mr. Spitzenberger has been a
private equity investor. Prior to July 1996, Mr. Spitzenberger was a Vice
President of Peter Kiewit Sons' Inc, which he joined in February 1981. While
at Peter Kiewit Sons' Inc., Mr. Spitzenberger served as Director of Taxation.
Prior to joining Peter Kiewit Sons' Inc, Mr. Spitzenberger was a tax manager
with Arthur Andersen LLP.
John C. Stiska. Mr. Stiska has been a director of FirstWorld since
September 1997, and was appointed a member of the Audit Committee in June
1999. Mr. Stiska currently is Chairman of Commercial Bridge Capital, LLC. From
February 1996 to February 1998, he served as Corporate Senior Vice President
and General Manager of the Technology Applications Division of QUALCOMM
Incorporated, a leading developer and manufacturer of telecommunications
technology. Prior to 1996, Mr. Stiska was President and then Chairman and
Chief Executive Officer of Triton Group Ltd., where he worked since 1990.
During that time, he also served on the board of directors of Triton's
subsidiaries, two of which were publicly traded: Mission West Properties and
Ridgewood Properties, Inc. Mr. Stiska has practiced law for over 25 years,
specializing in corporate law, mergers and acquisitions and securities law. In
July 1998, Mr. Stiska joined the law firm of Latham & Watkins as of-counsel.
Mr. Stiska serves on the board of directors of several companies, including
Laser Power Corporation, a publicly traded company.
Melanie L. Sturm. Ms. Sturm has been a director of FirstWorld and a member
of our Compensation Committee since January 1998. Ms. Sturm is a private
equity investor and currently serves on the board of directors of MD Network,
a private healthcare concern, and Little Switzerland, Inc., a publicly traded
duty-free retailer. From 1990 to 1996, Ms. Sturm served as an Investment
Officer at International Finance Corporation, the private sector affiliate of
the World Bank. From 1984 to 1988, Ms. Sturm worked in the Mergers &
Acquisitions departments of Drexel, Burnham Lambert and Morgan Stanley. Ms.
Sturm graduated magna cum laude with a B.A. degree in International Relations
and a B.S. degree in Economics from Tufts University and has an M.B.A. degree
from INSEAD of Fontainebleau, France. Ms. Sturm is Donald L. Sturm's daughter.
Messrs. Sturm and Spitzenberger and Ms. Sturm were appointed to our board
of directors as the three directors that Colorado Spectra 1, Colorado Spectra
2 and Colorado Spectra 3 are entitled to appoint under the securityholders
agreement discussed below. Likewise, Messrs. Garland and Horn were appointed
to the board of directors as the two directors that Enron is entitled to
appoint pursuant to the securityholders agreement. Mr. Stiska is the board
member elected by the holders of the Series B common stock.
Board Structure
We currently have seven authorized directors. Our current certificate of
incorporation provides that six of the members of our board shall be elected
by the holders of the Series A common stock and Series B common stock, voting
together as a class (currently held by Messrs. Sturm, Ohringer, Garland,
Spitzenberger, Horn and Ms. Sturm) and that one of the members of the board of
directors shall be elected by the holders of the Series B common stock
(currently held by Mr. Stiska). Members of the board of directors currently
hold office and serve
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until our next annual meeting of stockholders or until their respective
successors have been elected. See "Description of Capital Stock."
Committees of the Board
Chairman's Committee. Our chairman's committee consists of Messrs. Sturm,
Ohringer and Garland. The chairman's committee is empowered to conduct all
activities that may be conducted by the board of directors, subject only to
limitations imposed by applicable corporation law.
Compensation Committee. Our compensation committee consists of Ms. Sturm
and Mr. Garland. The compensation committee reviews salaries, bonuses and
stock options of our executive officers, administers our executive
compensation policies, stock option plans and the bonus program and makes
recommendations to the board for approval of certain actions.
Audit Committee. Our audit committee consists of Messrs. Spitzenberger,
Horn and Stiska. The audit committee is primarily concerned with the
effectiveness of our accounting policies and practices, financial reporting
and internal controls. Specifically, the audit committee makes recommendations
to the board of directors on appointing our independent public accountants;
reviews and approves the scope of the annual examination of our books and
records, reviews the audit findings and changes recommended by the independent
public accountants, monitors the extent to which we have implemented changes
recommended by the independent public accountants or the audit committee, and
provides oversight with respect to accounting principles to be employed in our
financial reporting.
Equity Investment Committee. Our Equity Investment Committee consists of
Messrs. Ohringer and Garland. The committee is empowered to make all decisions
regarding the Sturm equity investment agreement, exercise our rights and
perform other necessary actions under that agreement.
Director Compensation
Directors who are also our employees receive no directors' fees. Mr.
Stiska, one of our non-employee directors, receives a retainer of $1,000 per
month and options to purchase 5,000 shares of Series B common stock per year
under our 1997 Stock Option Plan. All non-employee directors are reimbursed
for their reasonable out-of-pocket travel expenditures. Our directors are also
eligible to receive grants of stock options under our 1997 Stock Option Plan.
Compensation Committee Interlocks and Insider Participation
During fiscal 1999, FirstWorld's Compensation Committee consisted of Mr.
Garland and Ms. Sturm. Mr. Garland is an officer of an Enron affiliate. As
such, Mr. Garland has an indirect interest in the arrangements and
relationships between FirstWorld and Enron and its affiliates. For information
about these arrangements and relationships, please see "Certain Transactions--
December 1997 Equity Investment."
Employment Agreements
We have employment agreements with Sheldon S. Ohringer, David J. Gandini,
Jeffrey L. Dykes, Marion K. Jenkins, Douglas L. Kramer, Scott M. Chase and
Paul C. Adams, among others.
Sheldon S. Ohringer
We entered into an employment agreement on September 28, 1998, and amended
the agreement on May 20, 1999, with Sheldon S. Ohringer pursuant to which Mr.
Ohringer agreed to join FirstWorld as our President and Chief Executive
Officer on October 1, 1998. This employment agreement has a three year term
ending on
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September 30, 2001 and thereafter will automatically renew for one year
periods, unless terminated earlier by either party. It also provides that Mr.
Ohringer will be nominated to serve as a director of FirstWorld during the
term of the agreement. The agreement provides for an initial annual base
salary of $200,000 which will be reviewed annually beginning October 1999, and
an annual cash bonus of not more than 50% of Mr. Ohringer's base salary. Also,
to compensate Mr. Ohringer for certain benefits that he would have received
from his previous employer, we have agreed to pay Mr. Ohringer a cash payment
of $4.0 million in three separate installments. The first installment in the
amount of $2.0 million was paid on October 1, 1998, the second $1.0 million
installment was paid on October 1, 1999 and the final $1.0 million installment
is due on October 1, 2000. Under his employment agreement, Mr. Ohringer must
be employed by FirstWorld on the date an installment becomes due to be
eligible to receive the installment payment unless FirstWorld terminates Mr.
Ohringer's employment other than for cause or Mr. Ohringer terminates his own
employment for good reason prior to the installment date. In addition, Mr.
Ohringer may elect to receive all or any portion of the third installment
payment in the form of Series B common stock in lieu of a cash payment, in
which case the stock will be valued at $7.50 per share, respectively.
In addition, under his employment agreement, Mr. Ohringer will be eligible
for the following bonuses:
Initial Public Offering Bonus. If we complete an initial public offering
with gross proceeds to FirstWorld of at least $20.0 million, referred to below
as a qualified public offering, with a price of at least $10.00 per share
before April 1, 2000, we will pay Mr. Ohringer a single sum of $1.0 million as
a cash bonus.
Deferred Cash Bonus. In addition to the initial public offering bonus
discussed above, Mr. Ohringer may be entitled to receive the following
compensation:
. If we complete a qualified public offering with a price of at least
$10.00 per share before April 1, 2000, we will pay Mr. Ohringer a $4.2
million cash bonus on September 30, 2001.
. If we complete a qualified public offering with a price of at least
$12.50 per share before October 1, 2000, we will pay Mr. Ohringer an
$8.4 million cash bonus on September 30, 2001 instead of the bonus
described in the first bulleted paragraph above.
. If FirstWorld has a market capitalization of at least $1.2 billion for a
period of 20 consecutive trading days prior to October 1, 2001, then on
September 30, 2001 we will pay Mr. Ohringer a cash payment equal to
$16.8 million minus any amounts he receives under either of the two
bulleted paragraphs above.
The payments described in the three paragraphs above are referred to as the
"deferred cash bonus." Upon a change of control or the termination of Mr.
Ohringer's employment by FirstWorld without cause, voluntarily by Mr. Ohringer
for good reason or upon his death, any deferred cash bonus previously earned
by Mr. Ohringer that has not yet been paid shall be paid within 30 days of the
date of termination. In no event will the termination of Mr. Ohringer's
employment, including termination by FirstWorld for cause or disability or Mr.
Ohringer's voluntary termination of his employment without good reason, affect
Mr. Ohringer's right to receive the deferred cash bonus earned prior to that
termination.
Mr. Ohringer also has been granted 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 his employment agreement. The option
has a term of seven years from October 1, 1998 and vested with respect to one-
third of the shares on October 1, 1998 and 1999, and will vest with respect to
the remaining one-third on October 1, 2000. In addition, all of the shares
subject to the option shall immediately vest immediately prior to the
effectiveness of a change of control, if FirstWorld's Series B common stock
trades at a price in excess of $20.00 for a period of 20 consecutive trading
days prior to October 1, 2001, or if Mr. Ohringer is terminated by FirstWorld
without cause or Mr. Ohringer voluntarily terminates his employment with
FirstWorld for good reason. Subject to certain exceptions, Mr. Ohringer has
agreed to hold 40% of the shares he acquires upon exercise of the option for
at least one year from the date of exercise; provided, however, that this
provision will not apply if there is a change in control, merger,
consolidation or other transaction where FirstWorld is not the surviving
entity and where all of FirstWorld's shareholders receive cash or other
consideration for their shares as a result of the transaction.
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Mr. Ohringer also has been granted a right of first refusal which allows
him to maintain his percentage ownership interest, assuming the exercise in
full of the option described above, with respect to certain future equity
issuances. This right of first refusal terminates on the earlier of (i)
January 31, 2004, (ii) the day immediately prior to the closing of a qualified
public offering or (iii) the date of his termination. Mr. Ohringer may also
participate in the employee benefit plans generally available to other
executive officers of FirstWorld including pension, retirement,
hospitalization, insurance, disability or medical services.
Depending on how Mr. Ohringer's employment with FirstWorld terminates, Mr.
Ohringer or his estate may be eligible to receive certain termination payments
and Mr. Ohringer or his family and dependents would also be entitled to
continuation of certain benefits for a specified period of time. In addition,
if Mr. Ohringer's employment is terminated by FirstWorld without cause or by
Mr. Ohringer for good reason, which includes a change of control of
FirstWorld, FirstWorld will pay Mr. Ohringer a severance payment equal to two
times his annual base salary and bonus plus certain accrued vacation, all
options awarded to him will fully vest and the non-compete covenant discussed
below will not apply. Mr. Ohringer can also elect, in his sole discretion, to
reduce any severance benefits and payments made to him on such a termination
of employment, to the extent that such payments would cause Mr. Ohringer's
total termination benefits to constitute an excess parachute payment under
Section 280G of the Code and by reason of such excess parachute payment, Mr.
Ohringer would be subject to an excise tax under Section 4999(a) of the Code.
Mr. Ohringer is subject to a one year non-compete covenant if his
employment is terminated by FirstWorld for cause or for disability or if Mr.
Ohringer voluntarily terminates his employment without good reason.
Other Employment Agreements
On January 27, 1999, we entered into a one-year employment agreement with
Paul C. Adams, our Vice President of Finance, Treasurer and Assistant
Secretary. We renewed this agreement on January 27, 2000. This agreement
currently provides for a base salary of $132,000 and a discretionary bonus of
up to 25% of the base salary. Mr. Adams was granted an option to purchase
100,000 shares of Series B common stock, vesting as to one quarter of the
shares on each of the first, second, third and fourth anniversary of the
agreement. The exercise price of the option is $6.00 per share with respect to
the first installment, $6.50 for the second installment, $7.00 for the third
installment and $7.50 for the fourth installment. Mr. Adam's options vest
immediately upon a change of control of the company.
On January 4, 1999, we entered into a two-year employment agreement with
Jeffrey L. Dykes, our General Counsel and Secretary. This agreement currently
provides for an initial base salary of $168,000 and a discretionary bonus of
up to 35% of the base salary. In addition, Mr. Dykes received a signing bonus
of $30,000. Mr. Dykes was granted an option to purchase 150,000 shares of
Series B common stock, vesting as to one quarter of the shares on each of the
first, second, and fourth anniversary of the agreement. The exercise price of
the option is $6.00 per share with respect to the first installment, $6.50 for
the second installment, $7.00 for the third installment and $7.50 for the
fourth installment. Mr. Dykes' options vest immediately upon a change of
control of the company or upon termination by us without cause or by Mr. Dykes
for good reason.
On November 30, 1998, we entered into a three-year employment agreement
with David Gandini, our Executive Vice President Sales. This agreement
currently provides for a base salary of $196,280 and a discretionary bonus of
up to 40% of the base salary. In addition, Mr. Gandini received a signing
bonus of $500,000, payable in three annual installments beginning on January
1, 1999. Mr. Gandini was granted an option to purchase 500,000 shares of
Series B common stock, vesting as to one quarter of the shares on each of the
first, second, and fourth anniversary of the agreement. The exercise price of
the option is $6.00 per share with respect to the first installment, $6.50 for
the second installment, $7.00 for the third installment and $7.50 for the
fourth installment. Mr Gandini's options vest immediately upon a change of
control of the company.
On November 9, 1998, we entered into a three-year employment agreement with
Dr. Marion K. Jenkins, our Executive Vice President of Web Technologies and
Chief Technology Officer. This agreement currently provides for a current base
salary of $170,000 and a discretionary bonus of up to 50% of the base salary.
Mr.
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Jenkins was granted an option to purchase 250,000 shares of Series B common
stock, vesting as to one quarter of the shares on each of the first, second,
and fourth anniversary of the agreement. The exercise price of the option is
$6.00 per share with respect to the first installment, $6.50 for the second
installment, $7.00 for the third installment and $7.50 for the fourth
installment.
Executive Compensation
The following table sets forth all compensation awarded to, earned by or
paid to the three people who served as our Chief Executive Officer and our
four other most highly compensated executive officers whose annual salary and
bonus exceeded $100,000 for services rendered in all capacities to us during
1999 (collectively, the "named executive officers").
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Annual Compensation (1) Compensation
----------------------------------- ------------
Twelve Other Annual Securities
Name and Principal Months Compensation Underlying
Position(s) Ended Salary ($) Bonus ($) ($) Options (#)
- ------------------ ---------- ---------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Sheldon S. Ohringer
(2).................... 12/31/1999 202,518 100,000(3) 1,000,000(4)
President and Chief
Executive Officer 12/31/1998 50,006 -- 2,000,000 2,805,000
David J. Gandini (5).... 12/31/1999 185,000 27,273(6) 100,000(7) 10,000
Executive Vice
President 12/31/1998 15,417 -- -- 500,000
Marion K. Jenkins (8)... 12/31/1999 160,000 26,051(6) -- 40,000
Executive Vice
President of Web 12/31/1998 23,077 250,000
Technologies and Chief
Information
Officer
Jeffrey L. Dykes (9).... 12/31/1999 159,487 20,201(6) 30,000 160,000
Senior Vice President,
General 12/31/1998 -- -- -- --
Counsel and Secretary
Douglas L. Kramer (10).. 12/31/1999 135,000 16,823(6) 30,000 10,000
Senior Vice President 12/31/1998 9,259 -- -- 125,000
</TABLE>
- --------
(1) Other compensation in the form of perquisites and other personal benefits
has been omitted in those cases where the aggregate amount of such
perquisites and other personal benefits constituted less than the lesser
of $50,000 or 10% of total annual salary and bonus for the Named Executive
Officers for such year.
(2) Mr. Ohringer became FirstWorld's Chief Executive Officer on October 1,
1998.
(3) Pursuant to the terms of Mr. Ohringer's employment agreement Mr. Ohringer
is entitled to receive a bonus up to 50% of his base pay on each of his
employment anniversary dates. As a result, Mr. Ohringer was paid a bonus
on October 1, 1999.
(4) Pursuant to the terms of Mr. Ohringer's employment agreement Mr. Ohringer
is entitled to a cash payment of $4.0 million for certain benefits that he
would have been eligible to receive from his former employer. The cash
payment of $4.0 million is payable in three separate installments, the
first installment in the amount of $2.0 million was paid to Mr. Ohringer
on October 1, 1998 and the second installment of $1.0 million was paid to
Mr. Ohringer on October 1, 1999.
(5) Mr. Gandini became a FirstWorld employee on December 1, 1998.
(6) Payment represents cash bonus pursuant to the Quarterly Bonus Program.
(7) Pursuant to the terms of Mr. Gandini's employment agreement, Mr. Gandini
is entitled to a cash payment of $500,000 for certain benefits he would
have been eligible to receive from his former employer. The $500,000 cash
payment is payable in three installments on each of January 1, 1999, 2000
and 2001. The first installment of $100,000 was paid on January 1, 1999
and the second installment of $200,000 was paid on January 1, 2000.
(8) Dr. Jenkins became a FirstWorld employee on November 9, 1998.
(9) Mr. Dykes became a FirstWorld employee on January 4, 1999.
(10) Mr. Kramer became a FirstWorld employee on December 7, 1998.
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Option Grants During 1999
The following table sets forth certain information with respect to options
to purchase Series B common stock granted during the twelve-month period ended
December 31, 1999 to certain of our executive officers.
<TABLE>
<CAPTION>
Potential
Realizable
Value
at Assumed
Number of % of Total Annual Rates of
Securities Options Granted Exercise Stock Price
Underlying to Employees Price Appreciation
Options Granted in Fiscal Year per Share Expiration for Option Term
Name (#) (%) ($/SH) Date ---------------
---- --------------- --------------- ---------- ----------<S> <C>
5% 10%
----------------------- -------
Sheldon S. Ohringer..... -- -- -- -- -- --
David S. Gandini........ 10,000 * 7.50 12/31/06 30,533 71,154
Marion K. Jenkins....... 40,000 1.0 7.50 12/31/06 122,130 284,615
Jeffrey L. Dykes........ 37,500 6.00 01/04/06 91,598 213,461
37,500 6.50 01/04/06 72,848 194,711
37,500 7.00 01/04/06 54,098 175,961
37,500 7.50 01/04/06 35,348 157,211
10,000 7.50 12/31/06 30,533 71,154
------- ------- -------
160,000 3.8 284,425 812,498
Douglas L. Kramer....... 30,000 * 7.50 12/31/06 30,533 71,154
</TABLE>
- --------
* Less than 1%
Options were granted at an exercise price equal to or greater than the fair
market value of our Series B common stock. Exercise prices are determined by
our board of directors on the date of grant.
The 5% and 10% assumed annual rates of compounded stock price appreciation
shown above are mandated by rules of the SEC. These values do not take into
account amounts required to be paid as income taxes and any applicable state
laws or option provisions providing for termination of an option following
termination of employment, non-transferability or vesting, and do not reflect
our estimate of future stock price growth, if any, of the shares of Series B
common stock.
Options Exercised During 1999 and Option Values
The following table sets forth certain information with respect to the
exercise of options to purchase Series B common stock during the twelve-month
period ended December 31, 1999, and the unexercised options held and the value
thereof at that date, for each of the named executive officers.
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised In-
Shares Options at Fiscal Year the-Money Options at
Acquired Value End(#) Fiscal Year End($)
on Exercise Realized ------------------------- -------------------------
Name (#) ($) Exercisable Unexercisable Exercisable Unexercisable
---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Sheldon S. Ohringer..... -- -- 1,870,000 935,000 2,805,000 1,402,500
David J. Gandini........ -- -- 125,000 385,000 187,500 187,500
Marion K. Jenkins....... -- -- 62,500 227,500 93,750 93,750
Jeffrey L. Dykes........ -- -- -- 160,000 -- 112,500
Douglas L. Kramer....... -- -- 31,250 103,750 46,875 46,875
</TABLE>
- --------
In the table above, the value of unexercised in-the-money options is based
on the fair market value of our Series B common stock as of December 31, 1999
(determined by the board of directors to be $7.50 per share), minus the per
share exercise price, multiplied by the number of shares underlying the
option.
Stock Option Plans, Stock Purchase Plans and Bonus Program
As of the closing of this offering we have six stock option and stock
purchase plans currently in place: the 1995 Stock Option Plan, the 1997 Stock
Option Plan and the 1999 Equity Incentive Plan, the 1998 Stock
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Purchase Plan, the 1999 Employee Stock Purchase Plan and the Quarterly Bonus
Program. We also offer our employees the opportunity to participate in our
401(k) Plan.
1995 Stock Option Plan. Under the SpectraNet International 1995 Stock
Option Plan we are authorized to issue incentive stock options to acquire up
to an aggregate of 1,500,000 shares of Series B common stock. Subject to the
limitations set forth in the 1995 Stock Option Plan, the board of directors or
a committee thereof comprised of at least three board members has the
authority, subject to certain limitations, to select the employees of
FirstWorld or its subsidiaries to whom grants are made, to designate the
number of shares to be covered by each option, to establish vesting schedules,
and to specify other terms of the options. No person will be granted an option
to the extent that the aggregate fair market value of the shares for which
such option is exercisable for the first time by the optionee during a
calendar year exceeds $100,000. Generally, options vest over a four and one
half year period and expire ten years from the date of grant. Options granted
under the 1995 Stock Option Plan are nontransferable and expire 90 days after
the termination of an optionee's employment with FirstWorld, unless such
optionee's service with FirstWorld is terminated by death or disability, in
which case the options expire six months and one year, respectively. Upon the
occurrence of a sale, merger or consolidation, where FirstWorld is the
surviving corporation, each option issued under the 1995 Stock Option Plan
will terminate, unless those options are assumed by FirstWorld; provided, that
upon a merger or consolidation, if such options are not assumed by FirstWorld,
the optionee may exercise his or her options to the extent already vested,
until 15 days prior to the merger or consolidation transaction. Upon the
occurrence of a merger or consolidation where FirstWorld is not the surviving
corporation, each option issued under the 1995 Stock Option Plan, to the
extent not already vested, will vest 30 days prior to that transaction unless
assumed by the successor corporation. As of December 31, 1999, options to
purchase an aggregate of 60,800 shares of Series B common stock at prices
ranging from $0.25 to $4.50 were outstanding under the 1995 Stock Option Plan
and 237,400 shares remained available for future grant under this plan.
1997 Stock Option Plan. Under the SpectraNet International 1997 Stock
Option Plan we are authorized to issue an aggregate of 1,500,000 options to
purchase Series B common stock. The 1997 Stock Option Plan provides for the
grant of incentive stock options and nonqualified stock options and the award
of stock purchase rights. Subject to the terms and conditions of the 1997
Stock Option Plan and applicable law, the board of directors or a duly
appointed committee of the board has the authority to determine, among other
things, which employees, officers, directors or consultants should be awarded
options, the type of options to be awarded, the number of shares covered by
option awards, the exercise price applicable to options awarded and the
vesting schedule of such options. Generally, options granted to officers,
directors and consultants will become exercisable at a rate of not less than
20% per year over a period of five years from their date of grant. Options
awarded under the 1997 Stock Option Plan are nontransferable and generally
expire ten years from the date of grant. Unless otherwise indicated in the
applicable stock option agreement, the vested portion of options awarded
pursuant to the 1997 Stock Option Plan will remain exercisable for three
months after the termination of the optionee's service to FirstWorld. However,
if the optionee's service to FirstWorld ends because of death or disability,
unless otherwise indicated in the stock option agreement, the optionee has 12
months to exercise the vested portion of his or her options. In the event of a
merger or sale of substantially all of the assets of FirstWorld, all
outstanding options and stock purchase rights will be assumed or substituted
with an equivalent number of options or rights from the successor corporation,
and in the event that the successor corporation refuses to assume or
substitute the options or the stock purchase rights, the option or right will
become fully vested, whether exercisable or not, for a period of 15 days from
the date that the optionee receives notice that the options and rights have
accelerated. The 1997 Stock Option Plan also provides that the board or the
committee may, at any time, offer to buy out, for a payment in cash or shares,
an option previously granted to any optionee on such terms and conditions as
they may determine. As of December 31, 1999, options to purchase an aggregate
of 587,407 shares of Series B common stock at exercise prices ranging from
$3.00 to $7.50 were outstanding under the 1997 Stock Option Plan and 569,077
remained available for future grant under this plan. The 1997 Stock Option
Plan does not contain any provisions as to maximum number of options or stock
purchase rights that may be granted to any one individual, and will terminate
ten years from the date it was adopted by the Board.
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1999 Equity Incentive Plan. Under our 1999 Equity Incentive Plan we are
authorized to issue options to purchase up to 5,000,000 shares of our Series B
common stock. The 1999 Equity Incentive Plan provides for the grant of
incentive stock options, nonqualified stock options and stock appreciation
rights. Subject to limitations contained in the 1999 Equity Incentive Plan and
approval by the board of directors, the compensation committee of the board of
directors determines which of our employees or consultants are to receive
grants under the 1999 Equity Incentive Plan, designate the number of options
or stock appreciation rights to be granted, and make any decisions necessary
to administer the plan. No more than 500,000 options can be granted to any
individual under the terms of the 1999 Equity Incentive Plan. Unless the board
determines otherwise, payment upon the exercise of any options or stock
appreciation rights must be made in cash at the time of exercise. Prior to a
public offering of FirstWorld, options granted under the plan are non-
transferable and expire 90 days after an employee or consultant relationship
with the company is terminated for any reason other than for death, disability
or cause. After a public offering of First World, options will expire 30 days
after an employee or consultant relationship with the company is terminated
for any reason other than for death, disability or cause. Where, however, the
employee or consultant relationship is terminated for cause, the board of
directors or a committee, in its discretion, may terminate the optionee's
right to exercise his or her option. Where the optionee dies or becomes
disabled, the optionee will have 12 months to exercise his or her options.
Options generally vest over a period of not more than four years, and expire
five or seven years after the grant date, based on compliance with certain
securities laws. In the event of a change in control, the board of directors
may provide (i) that all awards granted under the 1999 Equity Incentive Plan
become fully exercisable, or (ii) that the resulting or surviving corporation
assume the awards granted, or (iii) that the surviving corporation substitute
such awards for an option to purchase its shares on the same terms and
conditions. As of December 31, 1999, options covering an aggregate of
3,293,500 shares of FirstWorld's Series B common stock were outstanding under
the 1999 Equity Incentive Plan at exercise prices ranging from $6.00 to $7.50.
In addition, as of December 31, 1999, stock appreciation rights covering an
aggregate of 968,325 shares of our Series B common stock were outstanding
under the 1999 Equity Incentive Plan, 738,175 shares remained available for
future grant under the 1999 Equity Incentive Plan. The 1999 Equity Incentive
Plan became effective on March 8, 1999 and terminates automatically on March
8, 2004, unless it is terminated sooner. In December 1999, the board approved
the conversion of stock appreciation rights into options as of the date of
this offering.
1998 Stock Purchase Plan. Under our 1998 Stock Purchase Plan we are
authorized to issue rights to purchase up to 500,000 shares of our Series B
common stock to directors and employees. Administration of the 1998 Stock
Purchase Plan has been delegated to the compensation committee of the board of
directors, subject to certain limitations. That committee may determine the
offerees to whom purchase rights are to be granted, the number of such rights
to be granted, the price per share of the purchase rights and the time limit
for exercise of the purchase rights. Shares granted under the 1998 Stock
Purchase Plan may be purchased using a promissory note for up to 50% of the
purchase price of the stock. If the purchaser elects to use a promissory note
as any part of the purchase price, the shares purchased must be pledged to
secure that note. In September 1998, FirstWorld offered rights to purchase an
aggregate of 300,000 shares of Series B common stock to 17 offerees. Prior to
the stated expiration of the stock purchase rights in November 1998, five
employees purchased 42,250 shares of Series B common stock at a price of $4.50
per share. No stock purchase rights have been granted under the 1998 Stock
Purchase Plan since September 1998. The 1998 Stock Purchase Plan has a term of
ten years and terminates automatically on September 18, 2008 unless it is
terminated sooner.
1999 Employee Stock Purchase Plan. In December 1999 the board adopted the
1999 Employee Stock Purchase Plan covering an aggregate of 1,000,000 shares of
common stock. The 1999 Employee Stock Purchase Plan is intended to qualify as
an "employee stock purchase plan" within the meaning of Section 423 of the
Internal Revenue Code. Under the 1999 Employee Stock Purchase Plan, the board
may authorize participation by eligible employees, including officers, in
periodic offerings following the adoption of the 1999 Employee Stock Purchase
Plan. The 1999 Employee Stock Purchase Plan is administered by the board or a
committee authorized by the board to act on its behalf.
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The 1999 Employee Stock Purchase Plan provides a means by which employees
of FirstWorld may purchase Series B common stock through payroll deductions.
The 1999 Employee Stock Purchase Plan is implemented by offering rights to
purchase to eligible employees. The first offering will begin on the effective
date of the initial public offering and will end on January 31, 2001.
Purchases will occur on January 31, 2000, July 31, 2000 and on each subsequent
January 31 and July 31 thereafter. Unless otherwise determined by the board,
Series B common stock is purchased for accounts of employees participating in
the 1999 Employee Stock Purchase Plan at a price per share equal to the lower
of (i) 85% of the fair market value of a share of Series B common stock on the
first offering date of each purchase period or (ii) 85% of the fair market
value of a share of Series B common stock on the date of purchase.
Generally, all regular employees, including executive officers, who work at
least 20 hours per week and are employed by FirstWorld or by an affiliate of
FirstWorld for at least five months per calendar year may participate in the
1999 Employee Stock Purchase Plan and may authorize payroll deductions of up
to 15% of their base compensation for the purchase of Series B common stock
under the 1999 Employee Stock Purchase Plan.
Eligible employees may be granted rights only if the rights, together with
any other rights granted under any FirstWorld employee stock purchase plan, do
not permit such employee to purchase stock of FirstWorld with a fair market
value in excess of $25,000 for each calendar year in which such rights are
outstanding. In addition, no employee will be eligible for the grant of any
rights under the 1999 Employee Stock Purchase Plan if immediately after such
rights are granted, such employee would have voting power of more than 5% of
the outstanding capital stock of FirstWorld.
Where the employee's employment terminates for any reason, the employee's
rights under the 1999 Employee Stock Purchase Plan will immediately terminate
and FirstWorld will distribute to the employee all of his or her accumulated
payroll deductions, without interest. In the event of certain changes of
control, the board has discretion to provide that each right to purchase
Series B common stock will be assumed or an equivalent right substituted by
the successor corporation, or the board may shorten the offering period and
provide for all sums collected by payroll deductions to be applied to purchase
stock immediately prior to the change in control. The 1999 Employee Stock
Purchase Plan will terminate at the direction of the board or when all of the
shares reserved for issuance have been purchased. As of December 31, 1999 no
shares were issued pursuant to this plan.
Quarterly Bonus Program. Our Quarterly Bonus Program was adopted by the
board of directors on May 3, 1999 and amended in December 1999. The bonus plan
is administered by the compensation committee. Eligible participants include
employees who are scheduled to work 40 or more hours per week. Temporary
contract employees are not eligible to participate in the bonus plan. This
bonus plan is intended to lead to increased individual productivity and
employee retention. A bonus earned by each eligible employee in the bonus plan
is based in part on the productivity of that participant's profit and loss
center and in part on that participant's individual performance. Year end
bonuses, in addition to the fourth quarter bonus, include an amount equal to
the sum of the recipient's first quarter, second quarter and third quarter
bonuses. A recipient must be employed by FirstWorld on the day the bonus check
is issued in order to be eligible to receive a bonus. If however, the
participant's employment is terminated due to a reduction in force, the
participant will be entitled to a pro rata share of any bonus for which he or
she would otherwise qualify under the bonus plan. We incurred expenses of
approximately $3.2 million for the year ended December 31, 1999. Certain
executive officers may elect to receive shares of stock in FirstWorld in lieu
of a cash bonus payment under the bonus plan. An aggregate of 200,000 shares
of Series B common stock will be available for issuance under the bonus plan
for this purpose. As of December 31, 1999, 14,116 shares of Series B common
stock had been issued under the Quarterly Program. The bonus plan was amended
by the board in December 1999 for the year 2000 to provide that the bonus
earned will be based on FirstWorld's overall year-to-date performance rather
than the participant's profit and loss center as measured on a quarter-by-
quarter stand-alone basis.
401(k) Plan. On November 1, 1998, we adopted a 401(k) retirement plan,
pursuant to which eligible employees may elect to defer up to 20% of their
compensation into the 401(k) Plan up to a maximum of $10,000 per annum. The
401(k) Plan also stipulates that we may provide discretionary matching
contributions to the
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participants of the 401(k) Plan, which matching contributions would be
allocated to the participants as of December 31 of each 401(k) Plan year and
would vest to the participants at the rate of 25% per year of service. All
administrative expenses of the 401(k) Plan will be borne by us. On December
13, 1999, the board approved a matching contribution in cash in the amount
equal to 50% of each participant's contribution to the 401(k) Plan, up to a
maximum contribution of 6% of the participant's eligible compensation for the
1999 plan year. We incurred an expense of $400,000 as a result of this match.
Matching contributions in future plan years will be made at the discretion of
the board.
Annual Grant of Stock Options and Stock Appreciation Rights. On December
13, 1999, our board of directors approved an annual grant of stock options and
stock appreciation rights under our 1999 Equity Incentive Plan to our eligible
employees. On December 31, 1999, stock options and stock appreciation rights
were granted. Any future grants will be at the discretion of the board, and
will be based on the position and individual performance of the employee
within FirstWorld in the respective year.
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PRINCIPAL STOCKHOLDERS
The following table sets forth information with respect to beneficial
ownership of our common stock as of December 31, 1999 for:
. each person known to us to own beneficially more than 5% of the common
stock;
. each of our directors;
. each of the executive officers named in the summary compensation table;
and
. all of our directors and executive officers as a group.
<TABLE>
<CAPTION>
Series A Common Stock(1) Series B Common Stock(1) Total Common Stock(1)
------------------------------- ------------------------------- ----------------------------------
Percent of Class Percent of Class Percent of Equity
No. of ------------------ No. of ------------------ No. of ---------------------
Shares Prior to Following Shares Prior to Following Shares Prior to Following
Beneficially the the Beneficially the the Beneficially the the
Owned Offering Offering Owned Offering Offering Owned Offering Offering (1)
------------ -------- --------- ------------ -------- --------- ------------ -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Donald L.
Sturm(2)....... 5,000,000 49.33% 49.33% 15,258,349 52.09% 29.74% 20,258,349 51.38% 32.97%
Enron(3)........ 5,000,000 49.33 49.33 11,472,166 42.65 23.45 16,472,166 44.48 27.9
C. Kevin
Garland(4)..... 0 * * 0 * * 0 * *
Stephen R.
Horn(5)........ 0 * * 0 * * 0 * *
Sheldon S.
Ohringer(6).... 0 * * 1,870,000 9.11 4.39 1,870,000 6.10 3.55
James O.
Spitzenberger(7).. 0 * * 0 * * 0 * *
John C.
Stiska(8)...... 0 * * 35,000 * * 35,000 * *
Melanie L.
Sturm(9)....... 0 * * 0 * * 0 * *
David J.
Gandini(10).... 0 * * 128,741 * * 128,741 * *
Marion
Jenkins(11).... 0 * * 66,421 * * 66,421 * *
Jeffrey L.
Dykes(12)...... 0 * * 38,625 * * 1,125 * *
Douglas L.
Kramer(13)..... 0 * * 32,839 * * 32,839 * *
All directors
and executive
officers as a
group (13
persons)(14)... 5,000,000 49.33% 49.33% 17,477,714 76.12% 32.67% 22,477,714 54.00% 35.32%
<CAPTION>
% of Voting
Power
Following
the
Offering(1)
-----------
<S> <C>
Donald L.
Sturm(2)....... 45.95%
Enron(3)........ 43.28
C. Kevin
Garland(4)..... *
Stephen R.
Horn(5)........ *
Sheldon S.
Ohringer(6).... 1.32
James O.
Spitzenberger(7).. *
John C.
Stiska(8)...... *
Melanie L.
Sturm(9)....... *
David J.
Gandini(10).... *
Marion
Jenkins(11).... *
Jeffrey L.
Dykes(12)...... *
Douglas L.
Kramer(13)..... *
All directors
and executive
officers as a
group (13
persons)(14)... 47.51%
</TABLE>
- --------
* Less than one percent beneficially owned
(1) In accordance with SEC rules, the table gives effect to the shares of
common stock that could be issued upon the exercise of outstanding options
and warrants prior to February 29, 2000. Unless otherwise noted in the
footnotes to the table and subject to community property laws where
applicable, the individuals have sole voting and investment control with
respect to the shares beneficially owned by them. Unless otherwise
indicated, the business address for each of the individuals or entities
listed below is c/o FirstWorld Communications, Inc., 8390 E. Crescent
Parkway, Suite 300, Greenwood Village, Colorado 80111. In accordance with
SEC rules, a person is deemed to be a "beneficial owner" of a security if
he or she has or shares the power to vote or direct the voting of such
security or the power to dispose or direct the disposition of such
security. More than one person may be deemed to be a beneficial owner of
the same securities. The percentage ownership of each stockholder is
calculated based on the total number of outstanding shares of Series A
common stock and Series B common stock as of December 31, 1999 and those
shares of Series A common stock or Series B common stock that may be
acquired by such stockholder within 60 days of such date. Consequently,
the denominator for calculating such percentage may be different for each
stockholder. The table above is based upon information supplied by
directors, executive officers and principal stockholders. See "Description
of Capital Stock." The percentage ownership and percentage of voting power
after the offering gives effect to both the shares of Series B common
stock sold in the offering and in the concurrent private placements.
(2) Shares listed include: (a) 5,000,000 shares of Series A common stock held
of record by Colorado Spectra 3, LLC; (b) 1,392,757 shares of Series B
common stock held of record by Colorado Spectra 1, LLC; (c) 3,236,083
shares of Series B common stock held of record by Spectra 3; and (d)
10,629,509 shares of Series B common stock subject to currently
exercisable warrants held of record by Spectra 1, Colorado Spectra 2, LLC
and Spectra 3. Spectra 1, 2 and 3 are referred to as the "Sturm Entities."
Beneficial
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ownership of the foregoing shares is attributable to Mr. Sturm because he
is the managing member of the Sturm Entities and is therefore deemed to
exercise voting power and investment authority with respect to the shares.
On February 10, 2000, pursuant to the automatic trigger provisions of the
Sturm equity investment agreement, we sold to Colorado Spectra 4, LLC,
3,333,333 shares of Series B common stock. Because the sale occurred after
December 31, 1999 these shares are not reflected in the table above.
Assuming completion of the sale of securities from Enron to Texas Pacific
Group, Mr. Sturm's total voting power will increase to 67.26%
(3) Shares listed include: (a) 652,639 shares of Series A common stock held of
record by ECT Merchant Investments Corp. ("ECT"); (b) 4,347,361 shares of
Series A common stock held of record by Nina I, L.L.C. ("Nina"); and (c)
3,236,083 shares of Series B common stock held by Nina; (d) warrants to
purchase 8,236,083 shares of Series B common stock held by Nina. Enron has
informed FirstWorld that it intends to divest itself and its affiliates of
all of its capital stock and all but 3,000,000 warrants to purchase
capital stock of FirstWorld. The shares of Series A common stock will
automatically convert to Series B common stock upon this transfer. A
portion of the warrants being transferred will not be exercisable until
the occurence of certain contingencies.
(4) Excludes the securities owned by ECT and Nina described in Footnote (3)
above. Mr. Garland is an officer of Enron Broadband Services, Inc., a
Delaware corporation and an affiliate of Enron Corp., but disclaims
beneficial ownership of the shares owned by its affiliates, ECT and Nina.
(5) Excludes the securities owned by ECT and Nina described in Footnote (3)
above. Mr. Horn is an officer of Enron North America Corp., but disclaims
beneficial ownership of the shares owned by its affiliates, ECT and Nina.
(6) Shares listed include 1,870,000 shares of Series B common stock subject to
currently exercisable options held by Mr. Ohringer at an exercise price of
$6.00.
(7) Excludes shares of Series A common stock and Series B common stock
beneficially owned by the Sturm Entities (described in note 2). Mr.
Spitzenberger, together with trusts established for the benefit of Mr.
Spitzenberger's children, owns 10.0%, 10.0% and 6.67% of the membership
interests in Spectra 1, Spectra 2 and Spectra 3, respectively. Mr.
Spitzenberger disclaims beneficial ownership of such shares.
(8) Shares listed include: (a) 10,000 shares of Series B common stock held
directly by Mr. Stiska; and (b) 25,000 shares of Series B common stock
subject to currently exercisable options held by Mr. Stiska at an exercise
price of $3.00.
(9) Excludes shares of Series A common stock and Series B common stock
beneficially owned by the Sturm Entities (described in note 2). Ms. Sturm
owns membership interests in certain of the Sturm Entities, through a
revocable trust of which she is a co-trustee. Ms. Sturm disclaims
beneficial ownership of such shares.
(10) Shares listed include: 125,000 shares of Series B common stock subject to
currently exercisable options held by Mr. Gandini at an exercise price of
$6.00 and 3,741 shares acquired pursuant to FirstWorld's Quarterly Bonus
Program.
(11) Shares listed include: 62,500 shares of Series B common stock subject to
currently exercisable options held by Mr. Jenkins at an exercise price of
$6.00 and 3,921 shares acquired pursuant to FirstWorld's Quarterly Bonus
Program.
(12) Shares listed include: 37,500 shares of Series B common stock subject to
currently exercisable options held by Mr. Dykes at an exercise price of
$6.00 and 1,125 shares acquired by Mr. Dykes pursuant to FirstWorld's
Quarterly Bonus Program.
(13) Shares listed include: 31,250 shares of Series B common stock subject to
currently exercisable options held by Mr. Kramer at an exercise price of
$6.00 and 1,589 shares acquired pursuant to FirstWorld's Quarterly Bonus
Program.
(14) Of the 17,447,714 shares of Series B common stock beneficially owned by
the directors and executive officers as a group, 13,115 shares of Series
B common stock were acquired by certain executive officers pursuant to
FirstWorld's Quarterly Bonus Program.
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CERTAIN TRANSACTIONS
December 1997 Equity Investment
General. On December 30, 1997, we issued 5,000,000 shares of newly created
Series A common stock to each of Spectra 3 and ECT for $3.00 per share
pursuant to a common stock purchase agreement. We also issued for no
additional consideration warrants to purchase 5,000,000 shares of Series B
common stock at $3.00 per share to each of Spectra 3 and Enron. The Series A
common stock and Series B common stock are identical in all respects, except
that the Series A common stock possesses ten votes per share on all matters
subject to a vote of stockholders while the Series B common stock possesses
one vote per share. See "Description of Capital Stock." Spectra 3, an entity
controlled by Donald L. Sturm, was formed for the purpose of participating in
this equity investment. Spectra 3 is an affiliate of Spectra 1 and Spectra 2,
entities that owned equity securities of FirstWorld prior to the equity
investment. See "Principal Stockholders of Certain Beneficial Owners and
Management." Spectra 1, 2 and 3 are referred to as the "Sturm Entities."
The stock purchase agreement also granted Spectra 3 and Enron the right to
invest an additional $20.0 million in the aggregate on the same terms
applicable to their purchases of Series A common stock, except that any
additional shares of common stock to be acquired would be Series B common
stock. Spectra 3 and Enron exercised this option in April 1998 and acquired an
aggregate of shares of Series B common stock at an exercise price of $3.00 per
share.
Investor Rights Agreement. In connection with the closing of the equity
investment discussed above, we entered into an amended and restated investor
rights agreement which entitles Spectra 3, Enron and other prior investors to
the demand and piggyback registration rights in the section of this prospectus
entitled "Description of Capital Stock--Registration Rights." In addition, the
Sturm Entities and Enron were granted rights of first refusal that permit them
to maintain their respective percentage ownership interest in FirstWorld with
respect to certain future equity issuances. Under the terms of his employment
agreement, Mr. Ohringer was also granted a right to maintain his percentage
ownership interest in FirstWorld with respect to certain future equity
issuances.
In connection with the additional investment of $20.0 million discussed
above, we further amended and restated the investor rights agreement in order
to allow for, and coordinate with, the registration rights granted by the
warrant registration rights agreement dated April 13, 1998 between FirstWorld
and the initial purchasers of those warrants and to make certain other
revisions to the previous version of the investor rights agreement. Also, in
connection with the hiring of Mr. Ohringer as our President and Chief
Executive Officer in October 1998, we amended the investor rights agreement to
waive the right of first refusal with respect to the issuance of options
pursuant to Mr. Ohringer's employment agreement.
In connection with the Sturm equity investment agreement, the investor
rights agreement was amended to waive the right of first refusal held by
certain parties with respect to the acquisition of the Series B common stock
by Spectra 4 under that agreement, to provide Spectra 4 the same rights and
obligations as the "Sturm Entities" under the investor rights agreement, and
to provide the same registration rights to Spectra 4 as are provided to other
holders under the agreement. Upon consummation of the concurrent private
placements, the investor rights agreement will be amended to provide Lucent,
Microsoft, SAIC and Texas Pacific Group with the demand, S-3 and piggy back
registration rights set forth in the investor rights agreement.
Amendment to Sturm Warrant. On January 31, 1997 FirstWorld, Spectra 1 and
Spectra 2 entered into a warrant purchase/right to maintain agreement pursuant
to which we sold to Spectra 2 a warrant that was initially exercisable for
800,000 shares of common stock at an aggregate exercise price of $3.8 million.
This warrant contained an anti-dilution provision pursuant to which the number
of shares that could be purchased could be increased based upon the weighted
average issuance price of equity securities issued by FirstWorld prior toApril
1, 1999. In connection with the closing of the 1997 equity investment, this
warrant was amended to provide for the issuance upon exercise of up to
2,110,140 shares of Series B common stock with an exercise price of $1.80 per
share, amounting to an aggregate exercise price of approximately $3.8 million.
The warrant is subject to customary adjustment on stock splits, stock
dividends, subdivisions or combinations, but is not otherwise subject to
adjustment. In addition, Spectra 1 and Spectra 2 waived their maintenance
rights provided under the warrant purchase/right to maintain agreement.
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<PAGE>
Board of Directors. Upon the closing of the December 1997 equity
investment, FirstWorld's board of directors was reconstituted with seven
directors as follows: three designees of the Sturm Entities--Donald L. Sturm,
Melanie L. Sturm and James O. Spitzenberger; two designees of Enron Capital--
C. Kevin Garland and Rodney D. Malcolm (Mr. Malcolm resigned in April 1999 and
was replaced by Mr. Horn); one management representative--Robert E. Randall;
and John C. Stiska, an existing director, as an independent member of the
board. Pursuant to the stock purchase agreement, the Series B common stock
holders became entitled to designate a director in lieu of the manager
representative.
Waiver of Business Opportunities. In connection with the 1997 equity
investment FirstWorld, the Sturm Entities and Enron entered into a business
opportunity agreement to address the fact that Enron and the Sturm Entities or
their affiliates own or participate in telecommunications businesses, and may
develop, finance or otherwise participate in such businesses in the future,
including businesses that may compete with FirstWorld. Enron advised
FirstWorld and the Sturm Entities that (a) FirstPoint Communications, Inc. and
its affiliates, which are affiliates of Enron, are engaged in the business of
providing telecommunications services, and may have developed or will develop,
finance or acquire interests in telecommunications and related companies that
compete with FirstWorld, and (b) FirstPoint was at the time of the investment
by Enron in FirstWorld pursuing a financing, acquisition or investment
opportunity in a competitor or potential competitor of FirstWorld.
This business opportunity agreement generally provides, except as agreed by
the parties and as set forth in that agreement, that (a) neither Enron, the
Sturm Entities nor any of their affiliates would have any obligation to pursue
any business opportunity jointly with FirstWorld or to offer any business
opportunity to FirstWorld, and any Enron or Sturm Entity representative on the
board would have no obligation to offer any business opportunity to
FirstWorld; (b) Enron, the Sturm Entities and their affiliates would be free
to pursue business opportunities jointly with parties other than FirstWorld,
including opportunities that might involve telecommunications; and (c) Enron,
the Sturm Entities and their affiliates would be free to compete with
FirstWorld and would have no obligation to refrain from engaging in any
business.
The business opportunity agreement also provides that we will, during an
exclusivity period, grant Enron and its affiliates the exclusive right to
pursue jointly with us any "joint application opportunity" that includes both
telecommunications and utility applications, for example, the marketing of
natural gas, electricity or water and the provision of related services. The
exclusivity period began on the closing of the December 1997 equity investment
and continues until the earlier of December 30, 2000 or the date upon which
Enron and any of its affiliates hold less than 5% of the capital stock or
warrants of FirstWorld (determined on a fully-diluted basis). During this
exclusivity period, we are obligated to provide Enron notice of any joint
application opportunity that we want to pursue anywhere in the United States.
If Enron notifies us that it desires to participate, then we cannot pursue the
joint application opportunity without the participation of Enron. If Enron
elects not to participate, then we are free to pursue independently the
telecommunications portion of the joint application opportunity without the
participation of Enron, but we cannot pursue the joint application opportunity
with any other person (except for provision of the telecommunications portion
thereof on a subcontract basis only), and Enron is free to pursue the joint
application opportunity (including the utility applications and/or the
telecommunications applications) on its own or with any party other than
FirstWorld. This agreement is expected to terminate on the closing of Enron's
sale of its Series A and Series B common stock.
Securityholders Agreement. The Sturm Entities and Enron entered into a
securityholders agreement, to which FirstWorld is also a party, in connection
with the closing of the December 1997 equity investment. This contains
agreements among the Sturm Entities and Enron with respect to the designation,
election, removal and replacement of the members of the board other than those
elected by the holders of our Series B common stock. It also contains
agreements among the Sturm Entities and Enron (a) providing for rights of
first offer with respect to certain proposed transfers of common stock or
warrants of FirstWorld by any of the Sturm Entities or Enron, (b) providing
for rights to purchase the common stock and warrants held by a party to the
securityholders agreement, other than FirstWorld, that experiences a change of
control or other triggering event and (c) providing for rights to participate
in certain proposed dispositions of common stock or warrants by any of the
Sturm Entities or Enron. In connection with the Sturm equity investment
agreement, the Securityholders
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Agreement was amended to add Spectra 4 as a Holder and a member of the Sturm
Group as those terms are defined under that agreement. This agreement is
expected to be terminated upon Enron's sale of its Series A and Series B
common stock.
Transaction Fees and Expenses. We paid Spectra 3 and Enron a transaction
fee equal to six percent of the gross amount invested by them in the December
1997 equity investment and the additional $20 million in April 1998--$1.5
million for each of Spectra 3 and Enron. In addition, FirstWorld reimbursed
all reasonable costs and expenses of the Sturm Entities and Enron incurred in
connection with the stock purchase agreement, up to a maximum of $50,000 for
the Sturm Entities and $50,000 for Enron, plus the $90,000 of required filing
fees under the Hart-Scott-Rodino Act.
Management Services Agreements. FirstWorld entered into separate management
consulting services agreements with each of Enron and Corporate Managers, LLC,
a Colorado limited liability company which is an affiliate of the Sturm
Entities. Pursuant to this agreement, Enron and Corporate Managers will
provide management services to FirstWorld for three years following the
closing of the 1997 equity investment in exchange for an annual management
fee. Both management consulting services agreements initially provided for
annual management fees of $500,000 plus out of pocket expenses. The Company
amended the management consulting services agreement with Corporate Managers
in March 1998 to provide for an annual management fee of $620,000 plus out of
pocket expenses because Mr. Sturm had taken a more active management role with
FirstWorld than originally anticipated. On October 1, 1998, FirstWorld further
amended that management consulting services agreement to reduce the
compensation payable to Corporate Managers thereunder to $500,000 per year.
This reduction was intended to reflect the reduced role Mr. Sturm was expected
to take effective with the retention of Mr. Ohringer as FirstWorld's new Chief
Executive Officer and President. Corporate Managers and Enron each has the
right in its discretion to terminate its management consulting services
agreement with FirstWorld. Enron is expected to terminate this agreement upon
its sale of Series A and Series B common stock.
Optec Capacity Agreement
As part of the Optec acquisition we acquired rights to use 15 OC-3 level
data network capacity increments in cities located on Enron's long haul
network currently under construction. Enron has advised us that capacity is
available in Portland, Los Angeles and Salt Lake City. Enron is obligated to
deliver capacity to Denver, Houston, Dallas and Miami by November 24, 2001. If
capacity is not delivered by this date we may extend the agreement. We may
select capacity increments in additional cities or increase our capacity in
selected cities which in the aggregate does not exceed 15 OC-3 level
increments. Our rights terminate on the earlier of November 24, 2005 or 4
years after the date capacity is made available to the last of the cities
listed above. In addition, we obtained a right to use 48 fiber strands in
three routes in the Portland metropolitan area for the economically useful
life of the fiber.
Network Equipment Sale
In November 1999 we agreed to sell approximately $3.4 million worth of
network equipment to Enron Leasing, an affiliate of Enron.
Sturm Equity Investment Agreement
On December 2, 1999, the Company entered into an Equity Investment
Agreement with Colorado Spectra 4, LLC, an affiliate of the Sturm Entities,
for a $50.0 million equity commitment. The Agreement allows us to
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require that Spectra 4 purchase up $50.0 million of Series B common stock
priced at $7.50 per share. The Agreement will expire on the earlier of June
18, 2000 or the closing of an initial public offering by us.
The agreement contains three dates on which we can require that Spectra 4
purchase the Series B common stock. These dates are: February 15, 2000, March
31, 2000 and the expiration date of the agreement. Additionally, if at any
time the amount of cash, cash equivalents and marketable securities we hold
falls below $20.0 million, we will be deemed to have automatically exercised
$25.0 million of the commitment. Under the terms of the agreement, we are
required to pay Spectra 4 a non-refundable $5.0 million fee for the commitment
no later than the closing of this offering.
On February 7, 2000 we gave notice to Spectra 4 that our cash, cash
equivalents and marketable securities position had fallen below $20.0 million,
and on February 10, 2000, pursuant to this automatic trigger provision, we
sold 3,333,333 shares of Series B common stock to Spectra 4 for $25 million
and paid the $5.0 million commitment fee as required by the agreement.
Subsequent Transfer of Certain Interests and Obligations of Enron
The FirstWorld securities purchased by Enron were subsequently transferred
to various affiliates of Enron. Enron or its affiliates currently continue to
be parties to the business opportunity agreement, the management consulting
services agreement, the securityholders agreement and the investor rights
agreement. Enron has informed us that it intends to divest itself of all of
its common stock and all but 3 million of its warrants. On February 10, 2000,
Enron entered into a definitive agreement to sell 8,236,083 shares of common
stock and warrants to purchase additional 5,236,083 shares of our common stock
to an affiliate of Texas Pacific Group. A portion of the warrants transferred
will not be exercisable until the occurence of certain contingencies.
Legal Matters
John C. Stiska, one of FirstWorld's directors, accepted an of counsel
position with Latham & Watkins in July 1998. During 1999, Latham & Watkins
provided legal services to FirstWorld.
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DESCRIPTION OF CAPITAL STOCK
Effective on the closing of this offering, FirstWorld's authorized capital
stock will consist of: (i) 100,000,000 shares of common stock and (ii)
10,000,000 shares of preferred stock, $.0001 par value per share. Of the
authorized common stock, 10,135,164 shares have been designated Series A
common stock and 89,864,836 have been designated Series B common stock. As of
December 31, 1999, no shares of preferred stock, 10,135,164 shares of Series A
common stock, 18,663,358 shares of Series B common stock and warrants to
purchase 25,048,527 shares of Series B common stock were issued and
outstanding.
Except as otherwise required by law, actions taken at FirstWorld's
stockholder meetings require the affirmative vote of a majority of the shares
represented at the meeting and that a quorum be present. The holders of common
stock have no preemptive rights. See "Certain Transactions--December 1997
Equity Investment--Investor Rights Agreement." In the event of a liquidation,
dissolution or winding up of FirstWorld, holders of common stock are entitled
to share ratably in the assets of the company which are legally available for
distribution, if any, remaining after the payment of all debts and liabilities
of FirstWorld and the liquidation preference of any then outstanding preferred
stock. At present there is no established market for FirstWorld's common
stock.
Series A Common Stock.
Each share of FirstWorld's Series A common stock entitles the holder to ten
votes on all matters submitted to a vote of stockholders. Each share of Series
A common stock is convertible at any time at the option of the holder into one
share of Series B common stock in accordance with the terms of our certificate
of incorporation. In addition, each share of Series A common stock
automatically converts into one share of Series B common stock,
. upon a sale or transfer of any Series A common stock to anyone other than
(1) a natural person who is qualified as an accredited investor under
applicable securities laws and who is a member, manager or officer of
Spectra 3 or an affiliate of any such member, manager or officer (a
"Permitted Transferee") or (2) an affiliate of Donald L. Sturm or Enron,
or
. with respect to shares of Series A Common Stock held by Spectra 3, upon a
transfer of a controlling interest in Spectra 3 to any person or entity
other than Enron, Donald L. Sturm, a Permitted Transferee or one of their
affiliates.
Spectra 3 and Enron, the two principal holders of Series A common stock,
are parties to the Securityholders Agreement, which, among other things,
contains agreements with respect to the designation, election, removal and
replacement of the members of FirstWorld's board of directors other than the
director elected by the holders of the FirstWorld's Series B common stock. See
"Certain Transactions--December 1997 Equity Investment--Securityholders
Agreement."
Series B Common Stock
Each share of Series B common stock entitles the holder thereof to one vote
on all matters submitted to a vote of stockholders. The holders of Series B
Common Stock voting as a class are entitled to elect one director at each
meeting called for the election of directors. Any vacancy occurring because of
the death, resignation or removal of a director elected by holders of Series B
common stock shall be filled by the vote or written consent of a majority of
the shares of Series B common stock or, in the absence of such action by the
holders of Series B common stock, by the action of the remaining directors
then in office. All other directors shall be elected by the holders of Series
A common stock and Series B common stock voting together.
Preferred Stock
Our board of directors is authorized, without further stockholder approval,
to issue up to an aggregate of 10,000,000 shares of preferred stock in one or
more series. The board of directors may fix or alter the
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designations, preferences, rights and any qualifications, limitations or
restrictions of the shares of each such series, and the dividend rights,
dividend rates, conversion rights, voting rights, terms of redemption,
redemption price or prices and liquidation preferences. The issuance of
preferred stock could:
. adversely affect the voting power of holders of common stock,
. adversely affect the likelihood that the holders of common stock will
receive dividend payments and payments upon liquidation, and
. delay, defer or prevent a change in control of FirstWorld.
We have no present plans to issue any shares of preferred stock.
Warrants
Private Note Warrants. In April 1998 FirstWorld sold 470,000 units each
consisting of a $1,000 principal amount at maturity of notes and a warrant to
purchase 7.9002 shares of the Company's Series B common stock (subject to
adjustment). These warrants, referred below as "Private Note Warrants," have
an exercise price of $.01 per share, are exercisable at any time on or after
the earlier to occur of an initial public offering of our Series B common
stock or a change of control of FirstWorld, and expire on April 15, 2008.
These warrants have the registration rights set forth below under the caption
"--Registration Rights."
Other Warrants. On September 16, 1997, in connection with a financing
transaction, we issued to Foothill Capital Corporation a five year warrant to
purchase 800,000 shares of Series B common stock at a price of $3.00 per
share. On January 31, 1997 we issued a five year warrant to one of the Sturm
Entities currently exercisable for 2,110,140 shares of Series B common stock
with an exercise price of $1.80 per share. This warrant is discussed more
fully in the section of this prospectus entitled "Certain Transactions--
December 1997 Equity Investment--Amendment to Sturm Warrant." In connection
with the equity investments of December 1997 and April 1998 by Spectra 3, and
Enron and certain other investors, we issued to those entities seven year
warrants to purchase an aggregate of 16,801,830 shares of Series B common
stock at a price of $3.00. In connection with our Series C preferred stock
financing, we issued five year warrants currently exercisable for an aggregate
of 964,682 shares of Series B common stock for an average exercise price of
$3.83. In January 1997, we issued warrants currently exercisable for an
aggregate of 107,400 shares of Series B common stock at a weighted average
exercise price of $4.98 per share to certain of our legal and financial
advisors. In connection with the private placement of our Series A common
stock, we issued warrants currently exercisable for 30,000 shares of Series B
common stock at an exercise price of $5.00 per share to certain of our
financial advisors. In July 1997 we issued warrants currently exercisable for
33,789 shares of Series B common stock at an exercise price of $6.00 per share
to our noteholders.
In connection with one of the concurrent private placements we expect to
issue a five-year warrant to Microsoft Corporation. Based on an assumed public
offering price of $12.00, this warrant will be exercisable for 806,452 shares
at a price of $15.00 per share.
Registration Rights
Several agreements provide registration rights to certain of FirstWorld's
investors.
The Investor Rights Agreement. The Amended and Restated Investor Rights
Agreement grants demand and "piggyback" registration rights to the Sturm
Entities, Enron and certain other investors with respect to 22,439,589 shares
of Series B common stock. Subject to certain exceptions and requirements, the
parties to the investor rights agreement are entitled to demand three long-
form registrations; provided, however, that FirstWorld is not required to
effect demand registrations prior to the earlier to occur of January 31, 2000
or FirstWorld's first firm commitment underwritten public offering of its
Series B common stock. In addition, subject to certain exceptions and
requirements, the parties to the investor rights agreement are entitled to
demand
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unlimited short-form registrations once such short-form registration becomes
available to FirstWorld. The parties to the investor rights agreement also
possess "piggyback" registration rights which entitle them to have their
shares registered on registration statements relating to primary or secondary
registered public offerings of FirstWorld's securities, subject to certain
cutback restrictions in connection with any public offerings of FirstWorld's
equity securities. Upon consummation of the concurrent private placement,
Lucent, Microsoft, SAIC and the TPG partnerships will become parties to the
investor rights agreement with respect to the demand, S-3 and piggyback
registration rights. At an assumed public offering price of $12.00, these
investors will purchase an aggregate of 8,198,925 shares and a warrant to
purchase 806,452 shares in the concurrent private placement.
Foothill Warrant. The holder of a warrant to purchase 800,000 shares of
Series B common stock issued to a lender of FirstWorld is entitled, subject to
certain limitations, to demand two registrations. FirstWorld is not required
to effect such demand registrations prior to the consummation of this
offering. The holder of this warrant also possesses "piggyback" registration
rights which entitle it to have its shares registered on registration
statements relating to primary or secondary registered public offerings of
FirstWorld's securities. The holder of this warrant is subject to certain
cutback restrictions in connection with any public offerings of FirstWorld's
equity securities. Foothills has notified us that it will exercise the
warrant, contingent upon the closing of this offering.
Private Note Warrants. Beginning the earlier of April 15, 2003 or 180 days
after the consummation of this offering, the holders of 25% or more of the
Private Note Warrants and the shares issued upon exercise of those warrants,
referred to as "Warrant Shares," will be entitled to require FirstWorld to
effect one demand registration of the Warrant Shares. The Private Note
Warrants are currently excersiable for 3,713,094 shares of Series B common
stock. Subject to certain conditions and limitations, upon a demand,
FirstWorld will notify the holders of all Private Note Warrants and Warrant
Shares that a demand registration has been requested, and prepare and file
within 120 days of such demand a registration statement in respect of all of
the Warrant Shares which holders request to have included therein. Holders of
Warrant Shares have priority for inclusion in a demand registration over any
other security holders seeking to include securities in such registration.
Holders of Private Note Warrants and Warrant Shares also have the right,
subject to certain limitations, to include the Warrant Shares in any
registration statement under the Securities Act filed by FirstWorld either for
our own account or for the account or other security holders on the same terms
and conditions whenever such a registration statement is filed under the
Securities Act. In the case of a such a "piggy-back registration," a holder's
right to include shares in a underwritten registration is subject to the
ability of the underwriters to limit the number of shares included in such
offering, except that (a) 800,000 shares of Series B common stock issuable
upon exercise of the Foothills Warrant discussed above generally have priority
for inclusion over the Warrant Shares and securities having registration
rights under the Amended and Restated Investor Rights Agreement and (b) in the
case of a demand registration under the Amended and Restated Investor Rights
Agreement, holders of demand registration rights thereunder have priority over
the Warrant Shares and securities issuable upon exercise of a the Foothills
Warrant.
If FirstWorld has complied with all its obligations with respect to a
demand registration or a piggy-back registration relating to an underwritten
public offering, all holders of Warrants and Warrant Shares, upon request of
the lead managing underwriter with respect to such underwritten public
offering, generally will be required to not sell or otherwise dispose of any
warrants or underlying shares for a period not to exceed 180 days from the
consummation of such underwritten public offering.
Anti-Takeover Effects of Certain Provisions of Delaware Law and Our
Certificate of Incorporation and Bylaws
We are subject to the provisions of Section 203 of the Delaware General
Corporation Law, which generally prohibits a publicly-held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction in
which the person became an interested
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stockholder, unless the interested stockholder attained that status with the
approval of the corporation's board of directors or unless the business
combination is approved in a prescribed manner. "Business combinations"
include mergers, asset sales and other transactions resulting in a financial
benefit to the interested stockholder. With certain exceptions, an "interested
stockholder" is a person who, together with affiliates and associates, owns,
or within three years did own, fifteen percent (15%) or more of a
corporation's voting stock. This statute could prohibit or delay the
accomplishment of mergers or other takeover or change-in-control attempts and,
accordingly, may discourage attempts to acquire us.
The following provisions of our certificate of incorporation, as amended,
and bylaws, as amended, may have an anti-takeover effect and may delay or
prevent a tender offer or takeover attempt that a stockholder might consider
to be in its best interest, including attempts that might result in a premium
over the market price for the common stock:
Board of Director Vacancies. The board of directors will be authorized to
fill vacant directorships and to increase the size of the board of directors.
This may deter a stockholder from removing incumbent directors and
simultaneously gaining control of the board of directors by filling the
resulting vacancies with its own nominees.
Stockholder Action; Special Meetings of Stockholders. Prior to the
consummation of this offering, our stockholders will be permitted to take
action by written consent, but only at duly called annual or special meetings
of stockholders. In addition, special meetings of stockholders may be called
only by the chairman of the board, the chief executive officer or a majority
of the board of directors.
Advance Notice Requirements for Stockholder Proposals and Director
Nominations. Stockholders seeking to bring business before an annual meeting
of stockholders, or to nominate candidates for election as directors at an
annual meeting of stockholders, must deliver a written notice to our principal
executive offices within a prescribed time period. Our bylaws, as amended,
also set forth specific requirements as to the form and content of a
stockholder's notice. These provisions may preclude stockholders from bringing
matters before an annual meeting of stockholders or from making nominations
for the election of directors at an annual meeting of stockholders.
Authorized but Unissued Shares. The authorized but unissued shares of
common stock and preferred stock are available for future issuance without
stockholder approval, subject to limitations imposed by the Nasdaq National
Market. We may use these additional shares for a variety of corporate
purposes, including future public offerings to raise additional capital,
acquisitions and employee benefit plans. The existence of authorized but
unissued and unreserved common stock and preferred stock could render more
difficult or discourage an attempt to obtain control of us by means of a proxy
contest, tender offer, merger or otherwise.
Limitations on Liability and Indemnification Matters
Our bylaws, as amended, provide that we will indemnify our directors and
executive officers to the fullest extent permitted by Delaware law and may
indemnify our other officers, employees and other agents to the fullest extent
permitted by Delaware law.
In addition, our certificate of incorporation, as amended, provides that,
to the fullest extent permitted by Delaware law, our directors will not be
personally liable to us or our stockholders for monetary damages for any
breach of fiduciary duty as directors. This provision of the certificate of
incorporation, as amended, does not eliminate the directors' duty of care. In
appropriate circumstances, equitable remedies such as an injunction or other
forms of non-monetary relief are available under Delaware law. This provision
also does not affect the directors' responsibilities under any other laws,
such as the federal securities laws and state and federal environmental laws.
Each director will continue to be subject to liability for:
. breach of a director's duty of loyalty to us and our stockholders;
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. acts or omissions not in good faith, accompanied by circumstances of
gross negligence or that involve intentional misconduct or a knowing
violation of law;
. unlawful payments of dividends or unlawful stock repurchases or
redemptions; and
. any transaction from which a director derived an improper personal
benefit.
We have entered into indemnification agreements with our directors and
executive officers and have obtained directors' and officers' liability
insurance.
There is no pending litigation or proceeding involving any of our directors
or officers as to which indemnification is being sought. We are not aware of
any pending or threatened litigation that may result in a claim for
indemnification.
Listing
We have applied for listing of the common stock on the Nasdaq National
Market under the trading symbol "FWIS."
Transfer Agent and Registrar
We have appointed Norwest Bank Minnesota, NA to serve as the transfer agent
and registrar for the common stock.
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our common
stock. We cannot predict what effect, if any, market sales of shares or the
availability of shares for sale will have on the market price of our common
stock prevailing from time to time. Nevertheless, sales of substantial amounts
of common stock in the public market, or the perception that such sales could
occur, could adversely affect the market price of the common stock and could
impair our future ability to raise capital through the sale of our equity
securities.
Upon the closing of this offering, we will have a total of 50,813,552
shares of Series A and Series B common stock outstanding, assuming no exercise
of the underwriters' over-allotment option and no exercise of options or
warrants. Of the outstanding shares, the 10,000,000 shares being sold in this
offering will be freely tradable, except that any shares held by our
"affiliates" may only be sold in compliance with the limitations described
below. The remaining 40,813,552 shares of common stock will be "restricted
securities" that may be sold in the public market only if they are registered
under the Securities Act or if they qualify for an exemption from registration
under Rule 144, 144(k) or 701 promulgated under the Securities Act.
Subject to the lock-up agreements described below and the provisions of
Rules 144, 144(k) and 701, additional shares will become available for sale in
the public market as follows:
<TABLE>
<CAPTION>
Number of
Shares Date
--------- ----
<C> <S>
1,140,943 Upon the date of this prospectus (shares eligible for resale under
Rule 144(k) and not subject to lock-up agreements)
412,611 90 days following the date of this prospectus (shares eligible for
resale under Rules 144 and 701 and not subject to lock-up
agreements)
180 days following the date of this prospectus (lock-up agreements
25,499,045 released)
13,760,953 Upon the expiration of the one year holding periods
</TABLE>
In general, under Rule 144, a person (or persons whose shares are required
to be aggregated), including an affiliate, who has beneficially owned shares
for at least one year is entitled to sell, within any three-month period
commencing 90 days after the date of this prospectus, a number of shares that
does not exceed the greater of (i) 1% of the then-outstanding shares of common
stock (approximately 508,136 shares immediately after this offering) or (ii)
the average weekly trading volume of the common stock during the four calendar
weeks preceding the date on which notice of that sale is filed. In addition, a
person who is not considered an affiliate of ours at any time during the 90
days preceding a sale and who has beneficially owned the shares proposed to be
sold for at least two years is entitled to sell such shares under Rule 144(k)
without regard to the volume limitations described above.
Accordingly, shares issued under those plans will become eligible for
resale in the public market from time to time, subject to the lock-up
agreements described below and, in the case of affiliates of FirstWorld, the
volume limitations of Rule 144 described above. As of the date of this
prospectus, options and purchase rights to acquire a total of 7,702,352 shares
of common stock are outstanding under our stock plans, of which approximately
2,658,182 are currently exercisable.
Directors, officers and stockholders of FirstWorld holding an aggregate of
39,259,998 shares of common stock have agreed that they will not sell any
shares of common stock without the prior written consent Lehman Brothers Inc.
for a period of 180 days from the date of this prospectus. Lehman Brothers
Inc. has agreed, however, to release an aggregate of 90,000 of such shares
after 30 days from the date of this prospectus and an additional 45,000 of
such shares after 60 days from the date of this prospectus. Please refer to
our discussion in "Underwriting" for further discussion of these agreements.
We have agreed not to sell or otherwise dispose of any shares of common
stock during the 180-day period following the date of this prospectus, other
than the grant of options and purchase rights under our stock plans and the
issuance of common stock pursuant thereto.
Following this offering, certain of our stockholders will have rights to
have their shares of common stock registered for resale under the Securities
Act. Please refer to "Description of Capital Stock" for further discussion of
these registration rights.
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CERTAIN UNITED STATES FEDERAL TAX CONSEQUENCES FOR NON-U.S. INVESTORS
Introduction
The following is a summary of certain United States federal income and
estate tax consequences to non-U.S. investors of owning and disposing of
Series B common stock. In this summary, a "non-U.S. investor" is a beneficial
owner of our Series B common stock that is, for United States federal income
tax purposes:
. a nonresident alien individual,
. a foreign corporation,
. a nonresident alien fiduciary of a foreign estate or trust, or
. a foreign partnership.
This summary does not address all of the United States federal income and
estate tax consequences that may be relevant to you in light of your
particular circumstances and also does not discuss any state, local or foreign
tax consequences to you of owning and disposing of Series B common stock. This
summary is based on current provisions of the Internal Revenue Code of 1986,
as amended, existing and proposed Treasury regulations thereunder, and
judicial and administrative interpretations thereof, all as in effect on the
date hereof and all of which are subject to change, possibly with retroactive
effect. If you are considering buying Series B common stock, you should
consult your tax advisor with respect to the tax consequences of owning and
disposing of the Series B common stock.
Distributions
For United States federal income tax purposes dividends are distributions
paid out of our current or accumulated earnings and profits. Dividends paid to
a non-U.S. investor generally will be subject to withholding of United States
federal income tax at a 30% rate or such lower rate as may be specified by an
applicable income tax treaty. To receive a reduced treaty rate, you must
furnish to us or our paying agent a completed Form 1001 or W-8BEN (or
substitute form) certifying that you qualify for a reduced rate. Dividends
that are effectively connected with the conduct of a trade or business within
the United States of a non-U.S. investor and, if a treaty applies,
attributable to a permanent establishment of a non-U.S. investor within the
United States, will be exempt from withholding if you provide us with a Form
4224 or Form W-8ECI (or substitute form). Dividends exempt from withholding
because they are effectively connected or attributable to a U.S. permanent
establishment of a non-U.S. investor will instead be taxed at ordinary United
States federal income tax rates on a net income basis. Further, if the non-
U.S. investor is a corporation, this effectively connected dividend income may
also be subject to an additional branch profits tax equal to 30% of its
effectively connected earnings and profits for the taxable year, as adjusted
for certain items, unless an applicable treaty provides otherwise. Under
current Treasury regulations, dividends paid before January 1, 2001 to an
address outside the United States are presumed to be paid to a resident of the
country of address for purposes of the withholding discussed above and for
purposes of determining the applicability of a tax treaty rate.
For dividends paid after December 31, 2000, a non-U.S. investor generally
will be subject to United States backup withholding tax at a 31 percent rate
under the backup withholding rules described below, rather than at a 30
percent rate or a reduced rate under an income tax treaty, as described above,
unless the non-U.S. investor complies with certain Internal Revenue Service
("IRS") certification procedures or, in the case of payments made outside the
United States with respect to an offshore account, certain IRS documentary
evidence procedures. Further, to claim the benefit of a reduced rate of
withholding under an income tax treaty for dividends paid after December 31,
2000, a non-U.S. investor must comply with certain modified IRS certification
requirements. Special rules also apply to dividend payments made after
December 31, 2000 to foreign intermediaries, United States or foreign wholly
owned entities that are disregarded for federal tax purposes and entities that
are treated as fiscally transparent in the United States, the applicable
income tax treaty jurisdiction, or both. You should consult your own tax
advisor concerning the effect, if any, of the rules affecting post-December
31, 2000 dividends on your possible investment in our common stock.
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If a distribution is made that is not a dividend for United States federal
income tax purposes, it will first constitute a return of capital that is
applied against the non-U.S. investor's basis in the Series B common stock and
any remaining amount will be treated as gain from the sale or exchange of
stock. Currently, withholding of United States federal income tax is generally
imposed on the gross amount of a distribution, regardless of whether we have
sufficient current and accumulated earnings and profits to cause the
distribution to be a dividend for United States federal income tax purposes.
However, withholding on distributions made after December 31, 2000 may be
imposed on less than the gross amount of the distribution if the distribution
exceeds a reasonable estimate by us of our accumulated and current earnings
and profits.
Sale or Other Disposition of Series B Common Stock
A non-U.S. investor generally will not be subject to United States federal
income tax on any gain recognized on the sale or other disposition of Series B
common stock, except in the following circumstances:
(1) The gain is effectively connected with a trade or business of the
non-U.S. investor within the United States and, if a treaty applies, is
attributable to a U.S. permanent establishment of the non-U.S. investor.
Unless an applicable treaty provides otherwise, the non-U.S. investor will
be taxed on its net effectively connected gains derived from the sale under
the regular graduated United States federal income tax rates. If the non-
U.S. investor is a foreign corporation, it may be subject to an additional
branch profits tax equal to 30% of its effectively connected earnings and
profits for the taxable year, as adjusted for certain items, unless an
applicable treaty provides otherwise.
(2) The non-U.S. investor is an individual who holds the Series B common
stock as a capital asset, is present in the United States for 183 or more
days in the taxable year of the sale or other disposition, and certain
other conditions are met. In this case, the non-U.S. investor will be
subject to a flat 30% tax on the gain derived form the sale, which may be
offset by certain United States capital losses.
(3) United States federal income tax laws applicable to certain
expatriates applies to the non-U.S. investor.
(4) We are or have been a "United States real property holding
corporation" at any time during the five-year period ending on the date of
disposition (or, if shorter, the non-U.S. investor's holding period),
unless both (i) the non-U.S. investor held, actually or constructively, no
more than 5 percent of the outstanding Series B common stock and (ii) our
stock is "regularly traded on an established securities market," for
purposes of these rules. We believe that we will not constitute a United
States real property holding corporation immediately after the offering and
do not expect to become a United States real property holding corporation;
however, we can give no assurance in this regard.
Backup Withholding and Information Reporting
Dividends. United States backup withholding tax generally will not apply to
dividends paid before January 1, 2001, to a non-U.S. investor at an address
outside the United States, or to dividends paid after December 31, 2000 if the
non-U.S. investor certifies that it is a non-U.S. investor on a Form W-8BEN or
otherwise establishes an exemption. We must report annually to the IRS and to
each non-U.S. investor the amount of dividends paid to such investor and the
amount, if any, of tax withheld with respect to such dividends. This
information may also be made available to the tax authorities in the non-U.S.
investor's country of residence.
Sale through a U.S. office of a broker. Upon the sale or other disposition
of Series B common stock by a non-U.S. investor to or through a United States
office of a broker, the broker must backup withhold at a rate of 31% and
report the sale to the IRS, unless the non-U.S. investor certifies its foreign
status under penalties of perjury or otherwise establishes an exemption from
backup withholding.
Sale through a foreign office of a broker. The proceeds of a sale or other
disposition of Series B common stock by a non-U.S. investor to or through a
foreign office of a United States or foreign broker will not be subject
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to backup withholding. However, if the broker is a U.S. person or a foreign
person with certain types of relationships with the United States, it must
report the sale or other disposition to the IRS unless the broker has
documentary evidence in its files that the seller is a non-U.S. investor and
certain other conditions are met, or the holder otherwise establishes an
exemption.
Backup withholding is not an additional tax. Amounts withheld under the
backup withholding rules are generally allowable as a refund or credit against
the non-U.S. investor's United States federal income tax liability, if any,
provided, that the required information is timely furnished to the IRS.
Federal Estate Taxes
Series B common stock owned or treated as owned by an individual who is not
a citizen or resident of the United States, as defined for United States
federal estate tax purposes, at the time of death, will be included in such
individual's gross estate for United States federal estate tax purposes,
unless an applicable estate tax treaty provides otherwise.
The foregoing discussion is a summary of certain United States federal
income and estate tax consequences of the ownership, sale or other disposition
of our Series B common stock by non-U.S. investors. You are urged to consult
you own tax advisor with respect to the particular tax consequences to you of
the ownership and disposition of our Series B common stock, including the
effect of any state, local, foreign or other tax laws.
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UNDERWRITING
Under the underwriting agreement, which is filed as an exhibit to the
registration statement relating to this prospectus, each of the U.S.
underwriters named below, for which Lehman Brothers Inc., Bear, Stearns & Co.
Inc., Deutsche Bank Securities Inc, PaineWebber Incorporated and Fidelity
Capital Markets, a division of National Financial Services Corporation are
acting as U.S. representatives, and each of the international managers named
below, for which Lehman Brothers International (Europe), Bear, Stearns
International Limited, Deutsche Bank AG London and PaineWebber International
(U.K.) Ltd. are acting as lead managers, have agreed to purchase from us,
severally, the number of shares of Series B common stock shown opposite its
name below:
<TABLE>
<CAPTION>
Number of
U.S. Underwriters Shares
----------------- ---------
<S> <C>
Lehman Brothers Inc................................................
Bear, Stearns & Co. Inc............................................
Deutsche Bank Securites Inc. ......................................
PaineWebber Incorporated...........................................
Fidelity Capital Markets,
a division of National Financial Services Corporation.............
-------
Subtotal.........................................................
-------
<CAPTION>
Number of
International Managers Shares
---------------------- ---------
<S> <C>
Lehman Brothers International (Europe).............................
Bear, Stearns International Limited................................
Deutsche Bank AG London............................................
PaineWebber International (U.K.) Ltd. .............................
-------
Subtotal.........................................................
-------
Total............................................................
=======
</TABLE>
We refer to the U.S. underwriters and international managers as the
underwriters and the U.S. representatives and international lead managers as
the representatives.
The underwriting agreement provides that the obligations of the
underwriters to purchase shares of common stock depend on the satisfaction of
the conditions contained in the underwriting agreement. The underwriting
agreement also provides that if any of the shares of Series B common stock are
purchased by the underwriters, then all of the shares of Series B common stock
which the underwriters have agreed to purchase under the underwriting
agreement must be purchased. The conditions contained in the underwriting
agreement include the requirement that:
. the representations and warranties made by us to the underwriters are
true;
. there is no material change in the financial markets; and
. we deliver to the underwriters customary closing documents.
The representatives have advised us that the underwriters propose to offer
the shares of Series B common stock directly to the public at the public
offering price shown on the cover page of this prospectus, and to dealers, who
may include the underwriters, at the public offering price less a selling
concession not in excess of $ per share. The underwriters may allow, and the
dealers may reallow, a concession not in excess of $ per share to brokers
and dealers. After the offering, the underwriters may change the offering
price and other selling terms.
We have granted the U.S. underwriters an option to purchase up to an
aggregate of 1,500,000 additional shares of Series B common stock, exercisable
solely to cover over-allotments, if any, at the public offering price
90
<PAGE>
less the underwriting discount shown on the cover page of this prospectus. The
U.S. underwriters may exercise this option at any time until 30 days after the
date of the underwriting agreement. If the option is exercised, each U.S.
underwriter will be committed, so long as the conditions of the underwriting
agreement are satisfied, to purchase a number of additional shares of Series B
common stock proportionate to the U.S. underwriter's initial commitment as
indicated in the table above, and we will be obligated, under the over-
allotment option, to sell the shares of Series B common stock to the U.S.
underwriters.
Each of FirstWorld and the directors, executive officers and certain other
stockholders of FirstWorld have agreed that, without the prior written consent
of Lehman Brothers Inc. on behalf of the underwriters, it will not, during the
period ending 180 days after the date of this prospectus:
. offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase, lend or otherwise transfer or dispose of
directly or indirectly, any shares of Series B common stock or any
securities convertible into or exercisable or exchangeable for Series B
common stock; or
. enter into any swap or other arrangement that transfers to another, in
whole or in part, any of the economic consequences of ownership of the
Series B common stock,
whether any transaction described above is to be settled by delivery of Series
B common stock or such other securities, in cash or otherwise.
The restrictions described in this paragraph do not apply to:
. the sale of shares to the underwriters;
. the issuance by FirstWorld of shares of Series B common stock upon the
exercise of an option or a warrant or the conversion of a security
outstanding on the date of this prospectus of which the underwriters have
been advised in writing; or
. transactions by any person other than FirstWorld relating to shares of
Series B common stock or other securities acquired in open market
transactions after the completion of the offering of the shares.
The U.S. underwriters and the international managers have entered into an
agreement among U.S. underwriters and international managers. In this
agreement, each U.S. underwriter has agreed that,
. it is not purchasing any of these shares for the account of anyone other
than a U.S. Person, and
. it has not offered or sold, will not offer, sell, resell or deliver,
directly or indirectly, any of these shares or distribute any prospectus
to anyone other than a U.S. Person.
In addition, under the agreement, each international manager has agreed
that,
. it is not purchasing any of these shares for the account of a U.S.
Person, and
. it has not offered or sold, and will not offer, sell, resell, or deliver,
directly or indirectly, any of these shares or distribute any prospectus
to any U.S. Person.
The limitations described above do not apply to stabilization transactions
or to certain other transactions specified in the underwriting agreement and
the agreement among U.S. underwriters and international managers, including
. certain purchases and sales between U.S. underwriters and the
international managers,
. certain offers, sales, resales, deliveries or distributions to or through
investment advisors or other persons exercising investment discretion,
. purchases, offers or sales by a U.S. underwriter who is also acting as an
international manager or by an international manager who is also acting
as a U.S. underwriter and
91
<PAGE>
. other transactions specifically approved by the representatives.
As used in this section, the term "U.S. Person" means any resident or
national of the United States or Canada, any corporation, partnership or other
entity created or organized in or under the laws of the United States or
Canada, or any estate or trust the income of which is subject to United States
or Canadian federal income taxation regardless of the source. The term "United
States" means the United States of America, including the District of
Columbia, and its territories, its possessions and other areas subject to its
jurisdiction, and the term "Canada" means Canada, its provinces, its
territories, its possessions and other areas subject to its jurisdiction.
According to the agreement among the U.S. underwriters and international
managers, sales may be made between the U.S. underwriters and the
international managers of the number of shares of Series B common stock as may
be mutually agreed. The price of any shares so sold shall be the public
offering price as then in effect for the shares of Series B common stock being
sold by the U.S. underwriters and the international managers less an amount
equal to the selling concession allocable to those shares of Series B common
stock, unless otherwise determined by mutual agreement. To the extent that
there are sales between the U.S. underwriters and the international managers
under the agreement among the U.S. underwriters and the international
managers, the number of shares of Series B common stock available for sale by
the U.S. underwriters or by the international managers may be more or less
than the amount specified in the table above.
Before this offering, there has been no public market for shares of our
Series B common stock. The initial public offering price will be negotiated
between the representatives and us. In determining the initial public offering
price of the Series B common stock, the representatives will consider, among
other things and in addition to prevailing market conditions:
. our capital structure;
. estimates of our business potential and earning prospects;
. an overall assessment of our management; and
. the consideration of the above factors in relation to market valuations
of companies in related businesses.
We have applied for quotation of our common stock on the Nasdaq National
Market under the trading symbol "FWIS."
We have agreed to indemnify the underwriters against liabilities, including
liabilities under the Securities Act and liabilities arising from breaches of
the representations and warranties contained in the underwriting agreement. We
have also agreed to contribute to payments that the underwriters may be
required to make for these liabilities. The underwriters have agreed to
reimburse us for certain of the expenses incurred in connection with this
offering.
Until the distribution of the Series B common stock is complete, rules of
the Securities and Exchange Commission may limit the ability of the
underwriters and selling group members to bid for and purchase shares of
Series B common stock. As an exception to these rules, the representatives are
permitted to engage in transactions that stabilize the price of the Series B
common stock. These transactions may consist of bids or purchases for the
purposes of pegging, fixing or maintaining the price of the Series B common
stock.
The underwriters may create a short position in the Series B common stock
in connection with the offering. This means that they may sell more shares
than are shown on the cover page of this prospectus. If the underwriters
create a short position, then the representatives may reduce that short
position by purchasing Series B common stock in the open market. The
representatives also may elect to reduce any short position by exercising all
or part of the over-allotment option. The underwriters have informed us that
they do not intend to confirm sales to discretionary accounts that exceed 5%
of the total number of shares of Series B common stock offered by them.
92
<PAGE>
The representatives also may impose a penalty bid on underwriters and
selling group members. This means that, if the representatives purchase shares
of Series B common stock in the open market to reduce the underwriters' short
position or to stabilize the price of the Series B common stock, they may
reclaim the amount of the selling concession from the underwriters and selling
group members that sold those shares as part of the offerings.
In general, purchases of a security for the purpose of stabilization or to
reduce a syndicate short position could cause the price of the security to be
higher than it might otherwise be in the absence of these purchases. The
imposition of a penalty bid might have an effect on the price of a security to
the extent that it were to discourage resales of the security by purchasers in
an offering.
Neither we nor any of the underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the
transactions described above may have on the price of the Series B common
stock. In addition, neither we nor any of the underwriters makes any
representation that the representatives will engage in these transactions or
that these transactions, once commenced, will not be discontinued without
notice.
Each international manager has represented and agreed that:
. it has not offered or sold and, prior to the date six months after the
date of issue of the shares of common stock, will not offer to sell any
shares of common stock to persons in the United Kingdom except to persons
whose ordinary activities involve them in acquiring, holding, managing or
disposing of investments (as principal or agent) for the purposes of
their businesses or otherwise in circumstances which have not resulted
and will not result in an offer to the public in the United Kingdom
within the meaning of the Public Offers of Securities Regulations 1995;
. it has complied and will comply with all applicable provisions of the
Financial Services Act 1986 and the Regulation with respect to anything
done by it in relation to the shares of common stock in, from or
otherwise involving the United Kingdom; and
. it has only issued or passed on, and will only issue or pass on, to any
person in the United Kingdom any document received by it in connection
with the issue of the shares of common stock if that person is of a kind
described in Article 11(3) of the Financial Services Act 1986 (Investment
Advertisements) (Exemptions) Order 1996 or is a person to whom these
documents may otherwise be issued or passed upon.
Any offers in Canada will be made only under an exemption from the
requirements to file a prospectus in the relevant province of Canada in which
the sale is made.
Purchasers of the shares of Series B common stock offered in this
prospectus may be required to pay stamp taxes and other charges under the laws
and practices of the country of purchase, in addition to the public offering
price shown on the cover page of this prospectus.
At our request, the underwriters have reserved up to approximately 600,000
shares of the Series B common stock offered by this prospectus for sale to our
officers, directors, employees and their family members and to our business
associates. These shares will be offered at the public offering price shown on
the cover page of this prospectus. These persons must commit to purchase no
later than the close of business on the day following the date of this
prospectus. The number of shares available for sale to the general public will
be reduced to the extent these persons purchase the reserved shares.
93
<PAGE>
LEGAL MATTERS
The validity of the shares of common stock offered hereby will be passed
upon for FirstWorld by Cooley Godward LLP, Boulder, Colorado, and for the
underwriters by Shearman & Sterling, New York, New York.
EXPERTS
The consolidated financial statements as of December 31, 1998 and 1999, for
each of the two years in the period ended September 30, 1998, for the three
months ended December 31, 1998, and for the year ended December 31, 1999,
included in this prospectus, have been so included in reliance on the report
of PricewaterhouseCoopers LLP, independent accountants, given on the authority
of said firm as experts in auditing and accounting.
The statements in this Prospectus under the captions "Risk Factors - Our
Services Are Subject to Federal, State and Local Government Laws and
Regulations, and Changes in These Laws or Regulations Could Adversely Affect
the Way We Operate Our Business," "Challenges to Governmental Regulation Could
Increase Our Operating Costs" and "Business -- Government Regulation," solely
insofar as they constitute summaries of federal, state, and local
telecommunications regulatory provisions, have been reviewed and approved by
Blumenfeld & Cohen, as experts on such matters, and are included herein in
reliance upon that review and approval.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We are subject to the information requirements of the Securities Act, and,
in accordance therewith, we file reports and other information with the SEC.
Such reports and other information can be inspected and copied at the public
reference facilities maintained by the SEC at: Room 1024, Judiciary Plaza, 450
Fifth Street, N.W., Washington D.C. 20549; Northwestern Atrium Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661, and Seven World
Trade Center, 13th Floor, New York, New York 10048. Copies of such material
also can be obtained from the Public Reference Section of the SEC, at
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. Please call the SEC at 1-800-SEC-0330 for further information about the
public reference room. The SEC also maintains a web site that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the SEC. The address of this site is
http://www.sec.gov. We have applied to have our common stock approved for
quotation on the Nasdaq National Market, and such reports, proxy and
information statements and other information also can be inspected at the
office of Nasdaq Operations, 1735 K Street, N.W., Washington, D.C. 20006.
We have filed with the SEC a registration statement on Form S-1 under the
Securities Act with respect to the common stock sold in this offering. This
prospectus does not contain all of the information set forth in the
registration statement and the exhibits to the registration statement. For
further information with respect to our company and the common stock to be
sold in this offering, reference is made to the registration statement and the
exhibits and schedules filed as a part of the registration statement.
Statements contained in this prospectus concerning the contents of any
contract or any other document to which this prospectus refers are not
necessarily complete. Each such statement is qualified in all respects by any
underlying contract or document filed as an exhibit to the registration
statement. The registration statement, including its exhibits and schedules,
may be inspected without charge at the SEC's principal office in Washington,
D.C., and copies of all or any part thereof may be obtained from such office
after payment of fees prescribed by the SEC.
We intend to provide our stockholders with annual reports containing
consolidated financial statements audited by an independent public accounting
firm.
94
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
TABLE OF CONTENTS TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C> <C> <C>
Audited Financial Statements:
Report of Independent Accountants.............................. F--3
Consolidated Balance Sheets at December 31, 1998 and 1999...... F--4
Consolidated Statements of Operations for each of the years
ended September 30, 1997 and 1998, the three months ended
December 31, 1998 and the year ended December 31, 1999........ F--5
Consolidated Statements of Stockholders' Equity (Deficit) for
each of the years ended September 30, 1997 and 1998, the three
months ended December 31, 1998 and the year ended December 31,
1999.......................................................... F--6
Consolidated Statements of Cash Flows for each of the years
ended September 30, 1997 and 1998, the three months ended
December 31, 1998 and the year ended December 31, 1999........ F--8
Notes to Consolidated Financial Statements..................... F--9
Unaudited Interim Financial Statements:
Consolidated Statement of Operations (Unaudited) for the three
months ended December 31, 1997................................ F--39
Consolidated Statement of Stockholders' Equity (Deficit)
(Unaudited) for the three months ended December 31, 1997...... F--40
Consolidated Statement of Cash Flows (Unaudited) for the three
months ended December 31, 1997................................ F--42
Notes to Consolidated Financial Statements (Unaudited) ........ F--43
</TABLE>
F-1
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
F-2
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of FirstWorld Communications, Inc.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of stockholders' equity
(deficit) and of cash flows present fairly, in all material respects, the
financial position of FirstWorld Communications, Inc. and its subsidiaries at
December 31, 1998 and 1999, and the results of their operations and their cash
flows for each of the years ended September 30, 1997 and 1998, the three
months ended December 31, 1998 and the year ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States.
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 auditing standards generally accepted in the United States 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
Denver, Colorado
February 11, 2000
F-3
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
December 31, December 31,
1998 1999
------------ ------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents........................... $ 29,659 $ 28,608
Marketable securities............................... 170,030 20,615
Accounts receivable, net of allowance for doubtful
accounts of $120 and $2,568,
respectively....................................... 4,656 11,551
Due from affiliates................................. 7 3,240
Prepaid expenses and other.......................... 2,627 3,773
Revenues in excess of billings...................... 1,539 1,628
-------- --------
Total current assets............................... 208,518 69,415
-------- --------
Property and equipment, net......................... 61,247 123,161
Goodwill and intangibles, net of accumulated amorti-
zation of $97, and $12,903,
respectively....................................... 5,350 48,858
Long-haul network rights, not in service............ 11,060 11,060
Deferred financing costs, net....................... 8,259 7,340
Other assets........................................ 382 1,949
-------- --------
Total assets....................................... $294,816 $261,783
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.................................... $ 13,573 $ 28,521
Other accrued liabilities........................... 2,866 13,863
Accrued payroll and related liabilities............. 1,156 3,994
Capital lease obligations, current portion.......... 259 468
Long-term debt, current portion..................... 75 87
-------- --------
Total current liabilities.......................... 17,929 46,933
-------- --------
Long-term debt, net of current portion and
discount........................................... 258,135 294,034
Capital lease obligations, including interest, net
of current portion................................. 6,958 7,616
-------- --------
Total liabilities.................................. 283,022 348,583
-------- --------
Commitments and contingent liabilities (Notes 7 and
14)
Stockholders' equity (deficit):
Preferred stock, $.0001 par value per share,
10,000,000 shares authorized; no shares
outstanding........................................ -- --
Common stock, voting, $.0001 par value, 100,000,000
shares authorized;
Series A, 10,135,164 shares designated; 10,135,164
shares issued
and outstanding.................................... 1 1
Series B, 89,864,836 shares designated; 16,137,958
and 18,663,358
shares issued and outstanding at December 31, 1998
and 1999,
respectively....................................... 2 2
Additional paid-in capital.......................... 45,830 53,740
Warrants............................................ 31,963 31,963
Stockholder receivables............................. (158) (45)
Accumulated deficit................................. (65,844) (172,461)
-------- --------
Total stockholders' equity (deficit)............... 11,794 (86,800)
-------- --------
Total liabilities and stockholders' equity
(deficit)......................................... $294,816 $261,783
======== ========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
Year Ended Three Months
--------------------------- Ended Year Ended
September 30, September 30, December 31, December 31,
1997 1998 1998 1999
------------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
Revenue:
Internet services...... $ -- $ -- $ 123 $ 21,246
Web integration and
consulting services
(Note 2).............. -- -- 2,285 28,512
Telephony services..... 171 1,091 565 4,738
--------- ---------- ---------- ----------
Total revenue......... 171 1,091 2,973 54,496
--------- ---------- ---------- ----------
Operating expenses:
Network and service
costs................. 474 1,029 2,707 39,606
Selling, general and
administrative (Note
14)................... 7,421 16,113 10,812 67,128
Depreciation and
amortization.......... 501 2,425 1,812 23,411
--------- ---------- ---------- ----------
Total operating
expenses............. 8,396 19,567 15,331 130,145
--------- ---------- ---------- ----------
Loss from operations.... (8,225) (18,476) (12,358) (75,649)
Other income (expense):
Interest income........ 149 6,749 3,227 6,960
Interest expense....... (1,372) (16,898) (8,600) (37,928)
--------- ---------- ---------- ----------
Total other expense... (1,223) (10,149 (5,373) (30,968)
--------- ---------- ---------- ----------
Loss before
extraordinary item..... (9,448) (28,625) (17,731) (106,617)
Extraordinary item--
extinguishment of
debt................... (105) (4,731) -- --
--------- ---------- ---------- ----------
Net loss................ $ (9,553) $ (33,356) $ (17,731) $ (106,617)
========= ========== ========== ==========
Basic and diluted loss
per common share:
Loss before
extraordinary item.... $ (2.95) $ (1.56) $ (.68) $ (3.83)
Extraordinary item-
extinguishment of
debt.................. (.03) (.25) -- --
--------- ---------- ---------- ----------
Net Loss per common
share................. $ (2.98) $ (1.81) $ (.68) $ (3.83)
========= ========== ========== ==========
Weighted average shares
outstanding basic and
diluted................ 3,209,450 18,395,172 26,196,664 27,804,356
========= ========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
Series A Series B
Common Stock Common Stock Additional
------------------- ------------------- Paid-in
Shares Amount Shares Amount Capital
---------- -------- ---------- -------- ----------
(Note 1) (Note 1)
<S> <C> <C> <C> <C> <C>
Balance at October 1,
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 $706.............. -- -- -- -- --
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 the fiscal year
ended September 30, 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
$3.9 million............... 10,135,164 16,914 -- -- --
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 --
Series B preferred stock and
common stock; conversion
ratio of 1:1............... -- -- 5,545,638 3,486 --
Series A preferred stock;
conversion ratio of 1:10... -- -- 11,867 395 --
Issuance of Series B common
stock with warrants to
purchase 6,666,666 shares
of Series B common stock,
net of offering costs of
$1.8 million............... -- -- 6,666,666 12,467 --
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 56 --
Establishment of $.0001 par
value for Series A and B
common stock in connection
with Delaware
reincorporation............ -- (16,913) -- (28,681) 45,594
Exercise of options to
purchase Series B common
stock--post Delaware
Reincorporation............ -- -- 16,500 -- 23
Net loss for the fiscal year
ended September 30, 1998... -- -- -- -- --
---------- -------- ---------- -------- -------
Balance at September 30,
1998....................... 10,135,164 1 15,929,708 2 45,617
Proceeds from issuance of
stock and related
warrants................... -- -- 42,250 -- 190
Shares issued in connection
with the exercise of
options.................... -- -- 166,000 -- 23
Net loss for the three
months ended December 31,
1998....................... -- -- -- -- --
---------- -------- ---------- -------- -------
Balance at December 31,
1998....................... 10,135,164 1 16,137,958 2 45,830
Shares issued in connection
with acquisitions.......... -- -- 1,820,428 -- 9,924
Exercise of options and
warrants to purchase Series
B common stock............. ---- -- 704,972 -- 1,364
Charge associated with
equity investment (Note
1)......................... -- -- -- -- (5,270)
Charge associated with stock
sold by shareholders (Note
14)........................ -- -- -- -- 1,892
Write-off of stockholder
receivables................ -- -- -- -- --
Net loss for the year ended
December 31, 1999.......... -- -- -- -- --
---------- -------- ---------- -------- -------
Balance at December 31,
1999....................... 10,135,164 $ 1 18,663,358 $ 2 $53,740
========== ======== ========== ======== =======
</TABLE>
See accompanying notes to
F-6
<PAGE>
<TABLE>
<CAPTION>
Series C Series B Series A
Convertible Convertible Convertible Total
Preferred Stock Preferred Stock Preferred Stock Common Stock Accumu- Stockholders'
- ------------------- ------------------ ---------------- ------------------ Stockholder lated Equity
Shares Amount Shares Amount Shares Amount Shares Amount Warrants Receivables Deficit (Deficit)
------ ------- ---------- ------ -------- ------ ---------- ------ -------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
-- $ -- 2,016,638 $3,670 118,667 $ 395 3,246,000 $( 229) $ -- $(173) $ (5,204) $ (1,541)
-- -- -- -- -- -- (90,000) (23) -- 23 -- --
-- -- -- -- -- -- -- -- -- 53 -- 53
2,600,000 12,279 -- -- -- -- -- -- 16 -- -- 12,295
-- -- -- -- -- -- -- -- 37 -- -- 37
-- -- -- -- -- -- -- -- 200 -- -- 200
-- -- -- -- -- -- 106,900 25 -- -- -- 25
-- -- -- -- -- -- -- -- 748 -- -- 748
-- -- -- -- -- -- -- -- -- -- (9,553) (9,553)
- ----------- ------- ---------- ------ -------- ------ ---------- ------ ------- ----- --------- --------
2,600,000 12,279 2,016,638 3,670 118,667 395 3,262,900 (227) 1,001 (97) (14,757) 2 ,264
-- -- -- -- -- -- 266,100 43 -- -- -- 43
-- -- -- -- -- -- -- -- 9,628 -- -- 26,542
(2,600,000) (12,279) -- -- -- -- -- -- -- -- -- --
-- -- (2,016,638) (3,670) -- -- (3,529,000) 184 -- -- -- --
-- -- -- -- (118,667) (395) -- -- -- -- -- --
-- -- -- -- -- -- -- -- 6,333 -- -- 18,800
-- -- -- -- -- -- -- -- 15,001 -- -- 15,001
-- -- -- -- -- -- -- -- -- -- -- 56
-- -- -- -- -- -- -- -- -- -- -- --
-- -- -- -- -- -- -- -- -- -- -- 23
-- -- -- -- -- -- -- -- -- -- (33,356) (33,356)
- ----------- ------- ---------- ------ -------- ------ ---------- ------ ------- ----- --------- --------
-- -- -- -- -- -- -- -- 31,963 (97) (48,113) 29,373
-- -- -- -- -- -- -- -- -- (61) -- 129
-- -- -- -- -- -- -- -- -- -- -- 23
-- -- -- -- -- -- -- -- -- -- (17,731) (17,731)
- ----------- ------- ---------- ------ -------- ------ ---------- ------ ------- ----- --------- --------
-- -- -- -- -- -- -- -- 31,963 (158) (65,844) 11,794
-- -- -- -- -- -- -- -- -- -- -- 9,924
-- -- -- -- -- -- -- -- -- -- -- 1,364
-- -- -- -- -- -- -- -- -- -- -- (5,270)
-- -- -- -- -- -- -- -- -- -- -- 1,892
-- -- -- -- -- -- -- -- -- 113 -- 113
-- -- -- -- -- -- -- -- -- -- (106,617) (106,617)
- ----------- ------- ---------- ------ -------- ------ ---------- ------ ------- ----- --------- --------
-- $ -- -- $ -- -- $ -- -- $ -- $31,963 $ (45) $(172,461) $(86,800)
=========== ======= ========== ====== ======== ====== ========== ====== ======= ===== ========= ========
</TABLE>
consolidated financial statements
F-7
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended Three Months
--------------------------- Ended Year Ended
September 30, September 30, December 31, December 31,
1997 1998 1998 1999
------------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
Cash flows from
operating activities:
Net loss................ $(9,553) $(33,356) $(17,731) $(106,617)
Adjustments to
reconcile net loss to
net cash used by
operating activities:
Depreciation and
amortization
expense............... 501 2,425 1,812 23,411
Amortization of
deferred financing
costs................. 61 1,203 243 919
Non-cash interest
expense............... 38 293 -- --
Write-off of
stockholder
receivable............ -- -- -- 113
Accretion of senior
notes................. 58 14,571 8,323 35,200
Charge associated with
stock sold by
Stockholders.......... -- -- -- 1,892
Extraordinary loss--
extinguishment of
debt.................. 105 3,731 -- --
Changes in assets and
liabilities, net of
effects of
acquisitions:
Restricted cash
related to operating
activities........... (50) 50 -- --
Accounts receivable... 30 (420) (1,449) (8,024)
Other assets.......... (98) (3,330) 962 (1,332)
Accounts payable...... 1,462 1,100 5,054 9,728
Accrued payroll
related liabilities.. -- 17 555 2,421
Revenue in excess of
billings............. -- -- -- (746)
Other liabilities..... -- 556 1,300 1,379
------- -------- -------- ---------
Net cash used by
operating
activities........... (7,446) (13,160) (931) (41,656)
------- -------- -------- ---------
Cash flows from
investing activities:
Purchases of held-to-
maturity marketable
securities............ -- (236,701) (127,212) (189,606)
Maturities of held-to-
maturity marketable
securities............ -- 71,110 122,773 339,021
Purchase of property
and equipment......... (12,647) (23,041) (14,453) (63,085)
Acquisitions, net of
cash acquired......... -- -- (22,307) (44,761)
Proceeds from sale of
assets................ -- -- -- 103
------- -------- -------- ---------
Net cash provided
(used) by investing
activities........... (12,647) (188,632) (41,199) 41,672
------- -------- -------- ---------
Cash flows from
financing activities:
Proceeds from issuance
of Senior Discount
Notes and related
warrants.............. -- 250,205 -- --
Principal payments on
debt, capital leases
and relatedwarrants... (641) (817) (117) (2,431)
Proceeds from exercise
of stock options and
warrants.............. 25 122 23 1,364
Proceeds from issuance
of Series A common
stock and related
warrants net of
offering costs........ -- 26,136 -- --
Proceeds from issuance
of Series B common
stock and related
warrants, net of
offering costs........ -- 18,800 129 --
Proceeds from issuance
of Series C preferred
stock andrelated
warrants.............. 4,529 -- -- --
Proceeds from issuance
of common stock
warrants.............. 200 -- -- --
Proceeds from
collection of
stockholder
receivables........... 53 -- -- --
Proceeds from issuance
of convertible bridge
notes................. 7,347 -- -- --
Proceeds from draws
under revolving
credit facility and
related warrants...... 12,172 3,796 -- --
Proceeds from short-
term borrowings....... 1,000 -- -- --
Principal payments on
revolving credit
facility.............. -- (16,300) -- --
Payment of deferred
financing costs....... (4,128) (8,647) (285) --
------- -------- -------- ---------
Net cash provided
(used) by financing
activities........... 20,557 273,295 (250) (1,067)
------- -------- -------- ---------
Net increase (decrease)
in cash and cash
equivalents............ 464 71,503 (42,380) (1,051)
Cash and cash
equivalents, beginning
of period.............. 72 536 72,039 29,659
------- -------- -------- ---------
Cash and cash
equivalents, end of
period................. $ 536 $ 72,039 $ 29,659 $ 28,608
======= ======== ======== =========
Supplemental cash flow
information:
Effects of
acquisition:
Assets acquired........ $ -- $ -- $ 24,617 $ 63,341
Liabilities assumed.... -- -- (2,310) (8,656)
Common stock issued.... -- -- -- (9,924)
Less cash paid......... -- -- (22,307) (45,431)
------- -------- -------- ---------
Net cash acquired from
acquisitions......... $ -- $ -- $ -- $ (670)
======= ======== ======== =========
Cash paid for interest.. $ 440 $ 1,293 $ 110 $ 943
======= ======== ======== =========
</TABLE>
See notes to consolidated financial statements
F-8
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--THE COMPANY
FirstWorld Communications, Inc. (together with its wholly owned
subsidiaries, the "Company" or "FirstWorld") commenced operations in July
1992. On January 29, 1998, the Company changed its name to FirstWorld
Communications, Inc. from SpectraNet International. Effective June 26, 1998,
the Company changed its state of incorporation from California to Delaware. On
October 16, 1998, the Board of Directors of the Company (the "Board") voted to
change the Company's fiscal year end from September 30 to December 31,
beginning with a transition period ending on December 31, 1998. Accordingly,
the Company has included audited financial information for the three months
ended December 31, 1998.
FirstWorld is a network-based provider of Internet, data and communications
services. The Company's service offerings include data center co-locations;
high-speed Internet access, such as dedicated access and digital subscriber
line ("DSL"); web hosting and design; dial-up Internet access; and web
integration and consulting services. To complement its data services
offerings, FirstWorld also provides local, long distance and other telephony
services in the Los Angles metropolitan market. The Company's strategy is to
offer its customers a single source solution to meet the increasingly complex
Internet, data and communications needs. The Company markets its services,
using a consultative sales approach, to small- and medium-sized businesses,
and also selectively to larger businesses, consumers and wholesale customers.
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 Certificate of
Incorporation to substantially increase the Company's authorized capital; and
(iii) amended its Certificate of Incorporation to designate two series of
common stock (See December 30, 1997 Private Placement below). 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 Certificate
of Incorporation, the Company may also issue preferred stock from time to time
in one or more series. As of December 31, 1999, no such preferred stock had
been issued.
Private Placements
January 31, 1997 private placement. 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 $4.5 million, net of placement agent commissions and related fees,
and 1,555,300 shares issued through the retirement of certain convertible
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
Series B common stock (Note 12).
December 30, 1997 private placement. On December 30, 1997, the Company
consummated a private placement of equity securities with entities controlled
by a majority shareholder (the "Sturm Entities") and Enron North America Corp.
("ENA"). In connection with this placement, the Company issued 5,000,000
shares of Series A common stock to each of the Sturm Entities and ENA at an
issue price of $3.00 per share. The Company also issued an aggregate of
135,164 shares of Series A common stock to noteholders upon the
F-9
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
automatic conversion of certain 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 notes, totaled $26.5 million, net of
offering commission fees paid in connection with the consummation of this
equity placement. In connection with this private placement, the Company also
issued to each of the Sturm Entities and ENA warrants to purchase 5,000,000
shares of Series B common stock; and to noteholders, warrants to purchase an
aggregate of 135,164 shares of such Series B common stock (Note 12).
April 13, 1998 private placement. On April 13, 1998, the Company
consummated a private placement of equity securities with the Sturm Entities
and Enron Communications, Inc. ("Enron Communications") pursuant to the
exercise of an existing option held by the Sturm Entities and Enron
Communications. Pursuant to this option, the Company sold to each of the Sturm
Entities and Enron Communications 3,333,333 shares of Series B common stock,
resulting in aggregate offering proceeds totaling $18.8 million, net of
offering commissions. In connection with this private placement, the Company
also issued to each of the Sturm Entities and Enron Communications warrants to
purchase an additional 3,333,333 shares of Series B common stock (Note 12).
December 2, 1999 equity investment agreement. On December 2, 1999, the
Company entered into an Equity Investment Agreement (the "Agreement") with one
of the Sturm Entities, for a $50.0 million equity commitment. The Agreement
allows the Company to require that the Sturm Entity purchase up to $50.0
million of Series B common stock priced at $7.50 per share. The Agreement will
expire on the earlier of June 18, 2000 or the closing of an initial public
offering by the Company. The Agreement contains three dates on which the
Company can require that the Sturm Entity purchase the Company's Series B
common stock. These dates are: February 15, 2000, March 31, 2000 and the
expiration date of the Agreement. Additionally, if the cash, cash equivalents
and marketable securities position of the Company is $20.0 million or less,
the Company will be deemed to have automatically exercised $25.0 million of
the commitment. The Company is required to pay the Sturm Entity a $5.0 million
fee for the commitment upon the earlier of the (i) closing of an initial
public offering by the Company; (ii) first purchase date under the Agreement;
(iii) or a sale of the Company as defined in the Agreement. Such commitment
fee and related costs of approximately $270,000 was accounted for as a current
liability and a permanent reduction of equity as of December 31, 1999. See
Note 15--Subsequent Events.
February 10, 2000 equity transaction. Effective February 10, 2000, ENA and
an affiliate of Enron Communications agreed to sell substantially all of their
Series A and Series B common shares, as well as all but three million of their
warrants to purchase shares of Series B common stock to a third party, subject
to customary closing conditions. The Series A shares will convert to Series B
shares upon transfer. Concurrent with this transaction, certain restrictions
were put in place with respect to the exercise of a warrant to purchase
approximately 375,000 shares, such that this warrant cannot be exercised prior
to the earlier of sixty-one days following the close of an initial public
offering, or February 15, 2001.
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 (deficit)
reflects a reclassification to additional paid-in capital for the amounts in
excess of par value.
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.
F-10
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 that consist of money market instruments, commercial paper and
government agency issues.
Marketable Securities
Marketable securities consist principally of commercial paper with original
maturities greater than 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.
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
government agencies and high credit-quality financial institutions while
commercial paper investments are placed with investment grade 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 due to the diversification of the Company's
customer base. For purchases of equipment for resale, the Company bears the
credit risk of such purchases independent of sales by the Company to its
customers. For all customers with monthly recurring or non-recurring monthly
revenue in excess of $250, for all DSL customers and all customers of resale
equipment, credit is extended based on an evaluation of the customer's
financial condition and generally, collateral is not required. The Company
maintains allowances for potential credit losses from such customers.
Property and Equipment
Property and equipment is recorded at cost and depreciated using the
straight-line method generally over the estimated useful lives of the assets.
Costs capitalized in connection with the development of communication networks
include expenses associated with network infrastructure, data centers,
communications equipment, construction, capitalized labor and capitalized
interest. Labor costs incurred to construct or make assets ready for their
intended use are capitalized. 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. Depreciation of
communications networks commences when the applicable network becomes
commercially operational. Data centers are comprised of several different
assets with varying useful lives, accordingly, depreciation is determined
based on each asset's classification. Certain of the Company's assets are held
under capital leases. Assets held under capital leases are depreciated over
the lesser of the term of the lease or the estimated useful life of the asset.
The Company capitalizes certain costs of developing software for internal
use in accordance with Statement of Position No. 98-1, "Accounting for the
Cost of Computer Software Developed or Obtained for Internal Use." Such costs
generally include personnel and related costs incurred during the application
and development stage of purchased software packages. In addition, the Company
also capitalizes costs associated with purchased software. Such costs are
amortized on a straight-line basis over the estimated useful lives of the
assets, generally five years.
F-11
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The estimated useful lives of the Company's principal classes of assets are
as follows:
<TABLE>
<S> <C>
Building and improvements.................. 30 years
Network infrastructure..................... 20 years
Telecommunications equipment............... 5-7 years
Furniture, office equipment and other...... 3-7 years
Leasehold improvements..................... Shorter of estimated useful life or lease term
</TABLE>
Goodwill and Intangibles
Goodwill and intangibles consists substantially of goodwill associated with
acquisitions completed since November 1998. All acquisitions are accounted for
using the purchase method of accounting. Accordingly, the excess of total
consideration, including cash, stock and any assumed liabilities, over the
fair value of the assets and liabilities acquired is recorded as goodwill and
is generally being amortized over a three year life, with the exception of
Optec, Inc., doing business as FirstWorld Northwest, Inc. ("Optec"), which is
being amortized over 10 years. The effects of the acquired businesses are
included in the Company's consolidated financial statements from the
respective dates of acquisition. See further discussion in Note 3--Business
Acquisitions.
Long-Haul Network Rights
The long-haul network rights to OC-3 level capacity to connect up to 15
cities on a nationwide long-haul network being developed by Enron
Communications, have not yet been placed into service and are not being
amortized as the network is not yet available. The Company anticipates that
these long-haul network rights will be placed into service during the first
quarter of 2000. See further discussion in Note 3--Business Acquisitions.
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. Assets to
be disposed of are carried at the lower of their carrying amount or fair value
less costs to sell.
Debt Discount and Deferred Financing Costs
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. 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.
Revenue Recognition
The Company derives revenue from three primary sources: Internet services,
web integration and consulting services, and telephony services.
Internet services revenue is derived from providing high-speed Internet
access, such as dedicated access and DSL, web hosting services, data center
co-location services, related equipment sales and dial-up access. Revenue for
all Internet services is recognized when the service is provided. Amounts
billed relating to future periods are recorded as deferred revenue and are
recognized in revenue when services are rendered.
F-12
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Web integration and consulting services revenue is derived from network
consulting, design, integration and equipment sales. Revenue is recognized
under the percentage-of-completion method of accounting based upon the ratio
that costs incurred bear to the total estimated cost for each contract.
Included in revenue for the year ended December 31, 1999 is approximately $3.4
million relating to an equipment sale to Enron Communications Leasing
Corporation, a related party.
Telephony services revenue is generated from local and long distance
telephone services. The Company generates telephony services revenue by
replacing the basic telephony services currently provided by incumbent local
exchange carriers, interexchange carriers and competitive local exchange
carriers, including local, long distance and other telephony services. Revenue
is recognized in the month telephony services are provided. Amounts billed
relating to future periods are recorded as deferred revenue and are recognized
in revenue when services are rendered.
As of December 31, 1999, deferred revenue included in "Other Current
Liabilities" totaled $2.8 million.
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 fair value method had been applied in
measuring compensation expense. Compensation charges for non-employee, stock-
based compensation are 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.
Earnings Per Share
The Company calculates net loss per share in accordance with SFAS No. 128,
"Earnings Per Share." In accordance with SFAS No. 128, basic earnings per
share is computed using the weighted average number of common shares
outstanding during the period. Diluted earnings per share is determined in the
same manner as basic earnings per share except that the number of shares is
increased assuming exercise of dilutive stock options, purchase rights and
warrants using the treasury stock method and conversion of the Company's
convertible preferred stock using the if-converted method.
<TABLE>
<CAPTION>
Three months
September 30 ended Year ended
------------------------ December 31, December 31,
1997 1998 1998 1999
---------- ---------- ------------ ------------ --- ---
<S> <C> <C> <C> <C> <C> <C>
Potential Common Shares
Underlying:
Options 1,038,800 2,033,195 151,245 1,277,429
Purchase Rights -- 300,000 -- --
Warrants 2,928,801 25,188,021 25,188,021 25,048,527
Convertible Preferred
Series A 11,867 (A) -- -- --
Convertible Preferred
Series B 2,016,638 (B) -- -- --
Convertible Preferred
Series C 3,621,120 (C) -- -- --
---------- ---------- ---------- ----------
9,617,226 27,521,216 25,339,266 26,325,956
========== ========== ========== ==========
</TABLE>
Footnotes on Following page.
F-13
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(A) 118,667 Series A preferred shares at September 30, 1997 converted at a
ratio of 1:10.
(B) 2,016,638 Series B preferred shares at September 30, 1997 converted at a
ratio of 1:1.
(C) 2,600,000 Series C preferred Shares at September 30, 1997 converted at a
ratio of approximately 1.39:1.
Segment Reporting
The Company has adopted Statement of Financial Accounting Standard No. 131,
"Disclosure About Segments of an Enterprise and Related Information" ("SFAS
No. 131"). The Company has disclosed the business segments in which it
operates as well as certain financial information used by management in
measuring the performance of those segments (Note 11).
Reclassifications
Certain prior period amounts have been reclassified to conform to the 1999
basis of presentation.
Recent Accounting Pronouncements
In June 1998 and June 1999 respectively, the Financial Accounting Standards
Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS No. 133"), and SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities--Deferral of the Effective Date of FASB No.
133" ("SFAS No. 137"). The Company is required to adopt SFAS No. 133 and SFAS
No. 137 in the year ended December 31, 2001. These pronouncements establish
methods of accounting for derivative financial instruments and hedging
activities related to those instruments as well as other hedging activities.
To date, the Company has not entered into any derivative financial instruments
or hedging activities.
NOTE 3--BUSINESS ACQUISITIONS
Optec
On November 24, 1998, the Company acquired Optec, a company with operations
in Oregon and Washington that provides web integration services to businesses,
from Enron Communications. As part of this acquisition, the Company also
acquired rights to use fiber optic cable in parts of Oregon and rights to OC-3
level capacity to connect up to 15 cities on a nationwide long-haul network
being developed by Enron Communications. As consideration for the acquisition,
FirstWorld paid $18.3 million in cash and repaid $4.0 million of Optec's
outstanding debt. The Company assigned values of $11.1 million, $9.2 million
and $2.0 million to the long-haul network rights, Optec and the Oregon fiber
optic rights, respectively. The long-haul network rights, included as a
separate line in the accompanying consolidated balance sheets, have not yet
been placed into service and therefore the Company is not amortizing this
asset. Approximately $5.6 million of the $9.2 million associated with Optec
was recorded as goodwill and is being amortized on a straight-line basis over
10 years. The Company is amortizing the Oregon fiber optic rights on a
straight-line basis over 20 years.
F-14
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Slip.Net
On January 7, 1999, the Company purchased all of the outstanding capital
stock of Accelerated Information, Inc., the parent company of Slip.Net, Inc.
("Slip.Net"), an Internet service company providing Internet access, web
hosting services, and co-location services, primarily in the San Francisco Bay
Area. The purchase price consisted of approximately $10.5 million in cash and
187,500 shares of FirstWorld's Series B common stock. In order to determine
the total consideration paid, the Company assigned a value, based on a
valuation performed by an independent third party, of $3.68 per share to the
Series B common stock. This resulted in total consideration of $11.1 million.
Approximately $10.8 million was recorded as goodwill and is being amortized on
a straight-line basis over three years.
Sirius
On March 2, 1999, the Company purchased all of the outstanding capital
stock of Sirius Solutions, Inc., d/b/a Sirius Connections ("Sirius"), an
Internet service company providing Internet access, web hosting services, and
co-location services, primarily in the San Francisco Bay Area. The purchase
price consisted of approximately $7.5 million in cash and 285,000 shares of
FirstWorld's Series B common stock. In order to determine the total
consideration paid, the Company assigned a value, based on a valuation
performed by an independent third party, of $4.02 per share to the Series B
common stock. This resulted in total consideration of $8.6 million.
Approximately $8.5 million was recorded as goodwill and is being amortized on
a straight-line basis over three years.
Hypercon
On June 1, 1999, the Company purchased all of the outstanding capital stock
of Hypercon, Inc. ("Hypercon"), an Internet service company providing Internet
access, web hosting services, e-commerce solutions and co-location services in
the Houston metropolitan area. The purchase price consisted of approximately
$2.0 million in cash and 49,993 shares of FirstWorld's Series B common stock.
Subsequent to the acquisition, the Company repaid approximately $215,000 in
debt. In order to determine the total consideration paid, the Company assigned
a value, based on a valuation performed by an independent third party, of
$6.00 per share to the Series B common stock. The total consideration of cash,
stock and assumption of net liabilities was approximately $2.8 million.
Approximately $2.8 million was recorded as goodwill and is being amortized on
a straight-line basis over three years.
Internet Express
On June 14, 1999, the Company purchased all of the outstanding membership
interests of Internet Express, LLC ("Internet Express"), an Internet service
company providing Internet access and web hosting services in the Denver/Front
Range metropolitan area, including Colorado Springs and Fort Collins. The
purchase price consisted of approximately $1.0 million in cash and 30,000
shares of FirstWorld's Series B common stock. Subsequent to the acquisition,
the Company repaid approximately $959,000 in various liabilities of Internet
Express. In order to determine the total consideration paid, the Company
assigned a value, based on a valuation performed by an independent third
party, of $6.00 per share to the Series B common stock. The total
consideration of cash, stock and assumption of certain net liabilities was
approximately $2.2 million. Approximately $2.2 million was recorded as
goodwill and is being amortized on a straight-line basis over three years.
inQuo
On June 22, 1999, the Company purchased all of the outstanding capital
stock of inQuo, Inc. ("inQuo"), an Internet service company providing
dedicated Internet access in the Salt Lake City metropolitan area. The
F-15
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
purchase price was approximately $844,000 of cash. The total consideration of
cash and acquired net liabilities of approximately $150,000 resulted in total
consideration of approximately $1.0 million, which was recorded as goodwill
and is being amortized on a straight-line basis over three years.
Transport Logic
On July 7, 1999, the Company acquired all of the outstanding capital stock
of Oregon Professional Services, Inc., d/b/a Transport Logic, Inc. ("Transport
Logic"), an Internet service company providing Internet access, web hosting
services, and co-location services in the western and northwestern United
States. The purchase price consisted of approximately $7.2 million in cash and
392,935 shares of FirstWorld's Series B common stock. In order to determine
the total consideration paid, the Company assigned a value, based on a
valuation performed by an independent third party, of $6.00 per share to the
Series B common stock. The total consideration of cash, stock and assumption
of certain liabilities of approximately $1.0 million resulted in consideration
of approximately $10.5 million, which was recorded as goodwill and is being
amoritzed on a straight-line basis over three years
Intelenet
On July 14, 1999, the Company purchased all of the outstanding capital
stock of Intelenet Communications, Inc. ("Intelenet"), an Internet service
company providing advanced connectivity, data center services and networking
consulting in Southern California. The purchase price consisted of
approximately $16.0 million in cash and 875,000 shares of FirstWorld's Series
B common stock. In order to determine the total consideration paid, the
Company assigned a value, based on a valuation performed by an independent
third party, of $6.00 per share to the Series B common stock. This resulted in
total consideration of approximately $21.3 million. Approximately $20.2
million was recorded as goodwill and is being amortized on a straight-line
basis over three years.
Pro Forma Acquisition Information (Unaudited)
The following unaudited condensed pro forma information presents the
unaudited consolidated results of operations of the Company as if the
acquisitions of the above mentioned companies in 1999 and 1998 had occurred on
the first day of the respective periods presented:
<TABLE>
<CAPTION>
Year Ended Three Months Year Ended
September 30, December 31, December 31,
1998 1998 1999
------------- ------------ ------------
(in thousands)
<S> <C> <C> <C>
Revenue............................... $ 34,434 $ 12,168 $ 64,146
Loss before extraordinary item........ (51,457) (24,463) (114,461)
Net loss.............................. (56,188) (24,463) (114,461)
Basic and diluted loss per common
share
Loss before extraordinary item....... $ (2.55) $ (.87) $ (4.01)
Extraordinary item - extinguishment
of debt............................. (.23) -- --
---------- ---------- ----------
Net loss per common share............ $ (2.78) $ (.87) $ (4.01)
========== ========== ==========
Weighted average shares outstanding -
basic and diluted 20,215,600 28,017,092 28,553,268
========== ========== ==========
</TABLE>
The above mentioned companies may have performed differently if they had
actually been combined with the Company's operations during these periods. No
reliance should be placed on the unaudited pro forma information as indicative
of the historical results that the Company would have had or the future
results that it will experience after the acquisitions.
F-16
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 4--SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
Three Months
Year Ended Year Ended Ended Year Ended
September 30, September 30, December 31, December 31,
1997 1998 1998 1999
------------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
Non-cash investing and
financing activities
were as follows:
Cash paid during the
period for interest..... $ 440 $1,293 $ 110 $ 943
Non-cash transactions:
Property and equipment
purchased under
capitalized leases..... 7,097 45 -- --
Conversion of
convertible bridge
notes into Series C
preferred stock and
related warrants....... 7,777 -- -- --
Conversion of
convertible bridge
notes into Series A
common stock and
related warrants....... -- 405 -- --
Issuance of common stock
warrants as finders
fees................... 10 -- --
Non-cash deferred
financing costs........ 27
Issuance of note payable
to vendor for up-front
service fees........... -- 150 -- --
Issuance of note payable
for consulting services
received............... 50 -- -- --
Cancellation of
stockholder receivable
for stock repurchased.. 23 -- -- --
Vendor financing for
asset purchase......... -- -- -- 1,599
Charge associated with
equity investment...... -- -- -- 5,270
Accruals associated with
capital expenditures... -- 3,027 1,065 2,788
</TABLE>
The Company's statements of cash flows for the year ended September 30, 1998
and the three months ended December 31, 1998 have been adjusted to remove
accruals associated with capital expenditures.
NOTE 5--PROPERTY AND EQUIPMENT
Property and equipment, including assets under capital lease, consists of
the following:
<TABLE>
<CAPTION>
December 31, December 31,
1998 1999
------------ ------------
(in thousands)
<S> <C> <C> <C>
Network infrastructure......................... $28,000 $ 34,340
Telecommunications equipment................... 18,480 42,544
Building and improvements...................... 1,092 922
Furniture, office equipment and other.......... 6,129 34,979
Leasehold improvements......................... 726 1,551
Construction in process........................ 11,217 21,887
------- --------
65,644 136,223
Accumulated depreciation....................... (4,397) (13,062)
------- --------
$61,247 $123,161
======= ========
</TABLE>
F-17
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following is a summary of property and equipment acquired under capital
leases, included in the above:
<TABLE>
<CAPTION>
December 31, December 31,
1998 1999
------------ ------------
(in thousands)
<S> <C> <C> <C>
Network infrastructure (Note 6)................ $6,000 $6,000
Telecommunications equipment................... 219 625
Building and improvements...................... 321 321
Furniture, office equipment and other.......... 470 350
------ ------
7,010 7,296
Accumulated depreciation....................... (706) (240)
------ ------
$6,304 $7,056
====== ======
</TABLE>
During the year ended September 30, 1998, the three months ended December
31, 1998 and the year ended December 31, 1999, the Company capitalized
approximately $450,000, $333,000 and $843,000 respectively, in interest costs
associated with the development of the Company's data centers and
communications networks. The Company did not capitalize any interest costs
during the year ended September 30, 1997. Depreciation expense was $421,000,
$2.4 million, $1.4 million and $10.6 million for the years ended September 30,
1997 and 1998, the three months ended December 31, 1998 and the year ended
December 31, 1999, respectively.
NOTE 6--DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31, December 31,
1998 1999
------------ ------------
(in thousands)
<S> <C> <C>
13% Senior Notes, net of unamortized discount
totaling $212.1 million at December 31, 1998 and
$ 176.0 million at December 31, 1999............ $ 257,919 $293,962
9.03% term loan secured by certain assets;
monthly installments of principal and interest
payable through July 2002 129 96
14% unsecured term note with a vendor............ 150 --
Other............................................ 12 63
--------- --------
258,210 294,121
Less current portion............................. (75) (87)
--------- --------
$ 258,135 $294,034
========= ========
</TABLE>
Aggregate principal maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
(in thousands)
--------------
<S> <C>
2000.......................................................... $ 87
2001.......................................................... 46
2002.......................................................... 26
2003.......................................................... --
2004.......................................................... --
Thereafter.................................................... 470,000
---------
470,159
Less unamortized discount on the 13% Senior Notes............. (176,038)
---------
$ 294,121
=========
</TABLE>
F-18
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Senior 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, for gross
proceeds of $250.2 million (the "Senior Notes Debt Offering"). In the Senior
Notes Debt Offering, the Company sold 470,000 units consisting of 13% Senior
Discount Notes due 2008 (the "Senior Notes") and warrants to purchase an
aggregate of 3,713,094 shares of the Company's Series B common stock (Note
12). The Company allocated $235.2 million of the proceeds to the Senior Notes
and $15.0 million to the warrants, representing their estimated fair value at
the date of issuance as determined via an independent valuation.
The Senior Notes will accrete in value through April 15, 2008 at a rate of
13% per annum, compounded semi-annually, at which time $470.0 million in
aggregate principal amount at maturity will be outstanding. Cash interest will
neither accrue nor be payable prior to April 15, 2003. Thereafter, cash
interest on the Senior Notes will accrue and will be payable semi-annually 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 Senior Notes prior to
maturity. The Senior 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 Senior Notes, the holders of the Senior Notes will
have the right to require the Company to purchase their Senior 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 Senior 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 was in compliance with
such covenants at December 31, 1998 and 1999.
Revolving Credit Facility
On September 16, 1997, the Company entered into a five-year $23.0 million
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 Senior Notes Debt
Offering, and paid the Lenders a $1.0 million termination fee pursuant to the
terms thereof. The Company recorded an extraordinary loss of $4.7 million
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.
Short-term Bridge Notes
On August 29, 1997, the Company obtained a $1.0 million, 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, 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 $105,000. 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.
F-19
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 7--COMMITMENTS AND CONTINGENT LIABILITIES
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 March 2014. Rent payments
under noncancelable operating leases totaled $361,000, $549,000, $393,000 and
$2.9 million during the years ended September 30, 1997 and 1998, the three
months ended December 31, 1998 and the year ended December 31, 1999,
respectively.
The Company has procured certain of its property and equipment, including
its Anaheim network central office switching facility, through capital leases
that expire through October 2006. Additionally, the Company has accounted for
certain agreements with the City of Anaheim, as more fully described below and
which extend through January 2027, as both capital leases and executory
contracts in the accompanying financial statements.
Listed below are the future minimum payments under capital leases
(inclusive of the minimum payments allocated from the agreements with the City
of Anaheim) and noncancelable operating leases for each of the years ending
December 31,
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
------- ---------
(in thousands)
------------------
<S> <C> <C>
2000................................................... $ 1,820 $ 6,391
2001................................................... 1,543 6,560
2002................................................... 1,352 5,343
2003................................................... 1,346 4,182
2004................................................... 1,349 3,770
Thereafter............................................. 28,570 17,201
------- -------
Total minimum lease payments........................... 35,980 $43,447
=======
Amount representing interest........................... (27,896)
-------
Present value of minimum lease payments................ $ 8,084
=======
</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 (the "UTS Agreement") with the City of Anaheim,
California (the "City"), under which FWA agreed to design, construct and
operate a fiber-optic telecommunications network in cooperation with the City.
The UTS Agreement provides for 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 $1.0 million 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 described
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 $6.0 million reserve account
F-20
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
for debt service and capital improvements. As of December 31, 1999, 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, 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 of approximately $114,000. In
addition, the Company is obligated to pay its pro rata share (62.5%) of the
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 are as follows:
<TABLE>
<CAPTION>
(in thousands)
--------------
<S> <C> <C>
2000....................................................... $ 373
2001....................................................... 373
2002....................................................... 373
2003....................................................... 373
2004....................................................... 373
Thereafter................................................. 8,491
---------
$ 10,356
=========
</TABLE>
The UTS Agreement also sets forth requirements for the completion of
network design and the commencement of network construction related to certain
phases of the citywide network. The first phase, which extended service to
identified municipal facilities, was substantially completed in October 1997.
The second phase extended the network to allow service to be provided within
six months following execution of a customer service agreement to commercial,
industrial and governmental customers within certain defined service areas. It
is the Company's position that the second phase was substantially completed by
December 1998. The City
F-21
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
initially rejected the Company's position regarding completion of the second
phase and is conducting an independent analysis of the completion. In the
event that FWA did not meet the specified performance deadlines related to
completion of the first and second phases of the Anaheim network, the City
could elect to either terminate the Operating Property Agreement if FWA agreed
to return the leased fiber, 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 would 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 would allow
service to be extended, within six months of a customer service agreement, to
all customers within the city, including residential customers. The third
phase will be commenced only after a feasibility study for the third phase,
prepared by an independent consultant, validates the business plan for the
third phase and financing is arranged. The UTS Agreement provides for an
initial feasibility study with respect to the third phase to be completed no
later than January 1, 2000, and thereafter for FWA to commission annual
studies to determine whether the business plan for the third phase can be
validated. The City has approved the consultant selected by the Company to
prepare the feasibility study. The delivery of the study will occur after
January 1, 2000. The UTS Agreement provides for 180 days to cure any potential
default and the Company believes it could cure any potential default within
the applicable cure period. 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 Company commenced operation of a demonstration center in the City's
downtown area in May 1999. Although the Company believes 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. See
Note 14--Legal Proceedings for a discussion of the legal proceeding between
the City and FWA and the Company.
Pursuant to a Development Fee Arrangement dated simultaneous to the
aforementioned City agreements, for a period of five years, commencing with
the earlier to occur of the closing of the financing for or the commencement
of construction of the first Additional Network (as defined below), the
Company must pay to the City a lump sum development fee for each Additional
Network which the Company develops ($300,000 for each Additional Network
financed in the first year; $200,000 for each Additional Network financed in
the second year; and $100,000 for each Additional Network financed in the
third, fourth and fifth years, which amounts must be paid within thirty days
following the closing of the principal financing for an Additional Network or
the commencement of construction of such Additional Network, whichever occurs
first). "Additional Network" means (a) any expansion of the Anaheim network
into one or more adjacent or nearby cities where FWA enters into a revenue
sharing agreement with any such city, and (b) any separate communications
system developed by any other subsidiary of the Company that holds a
Certificate of Public Convenience and Necessity issued by the Public Utilities
Commission and enters into a revenue sharing agreement with one or more public
entities. See Note 14--Legal Proceedings for a discussion of the legal
proceeding between the City and FWA and the Company.
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.
F-22
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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
(the "Additional Areas"). The term of the Conduit Lease runs through December
31, 2027.
The Conduit Lease obligates FWOC to install fiber optic cable (the "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 Irvine Company will own the
Cable. If FWOC fails to complete installation of the required Cable within 18
months following March 5, 1998, The Irvine Company may, until such
installation is completed, terminate the Conduit Lease. The Company is
currently verifying the completion of the required installation.
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.
The License Agreement requires FWOC to pay The Irvine Company a license fee
each calendar quarter, subject to an annual consumer price index ("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. Such fee totaled approximately $103,000
and $88,000 per calendar quarter as of
F-23
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999 and 1998, respectively. 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, are as follows:
<TABLE>
<CAPTION>
(in thousands)
--------------
<S> <C>
2000.......................................................... $ 420
2001.......................................................... 429
2002.......................................................... 437
2003.......................................................... 446
2004.......................................................... 455
Thereafter.................................................... 13,383
-------
$15,570
=======
</TABLE>
The License Agreement provides FWOC with the right to install, maintain,
operate, replace and remove Cable and associated communications equipment (the
"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.
Employment Agreements
The Company has entered into employment agreements with key executive
officers, including its Chief Executive Officer ("CEO"). In general, the
employment agreements for the key officers ("Key Officers"), other than the
CEO, provide for annual salaries and eligibility for a bonus based on a
certain percentage of each Key Officers' annual salary. In certain instances
the employment agreements also provide for cash payments of up to $500,000 to
compensate an executive for certain benefits that would have been received
from previous employers. In addition, under these employment agreements,
options to acquire a certain number of shares of the Company's Series B common
stock are typically granted to the executive. If the Company terminates any
Key
F-24
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Officers' employment during the term of his employment agreement without cause
or the executive terminates employment for good reason the executive would
generally be entitled to receive a severance payment. During 1999, the Company
paid key officers $1.0 million in compensation under these agreements and is
committed to pay $687,000 for the year ended December 31, 2000. However,
actual amounts paid during 2000 will likely be higher as each key officer is
eligible to receive a bonus under as determined under The Bonus Program (see
Note 13--Employee Benefit Plans).
On September 28, 1998, the Company entered into an Employment Agreement, as
amended May 20, 1999, (the "Employment Agreement") pursuant to which the
Company retained the services of a new President and 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, and thereafter will
renew for one year periods 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 $4.0 million, payable in
three separate installments. The first $2.0 million installment and the second
$1.0 million installment became due and were paid in cash on October 1, 1998
and October 1, 1999, respectively, while the third $1.0 million installment is
due and payable on October 1, 2000. The CEO must be employed by the Company on
the date that the third installment becomes due to be eligible to receive the
payment 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 third installment payment in
the form of the Company's Series B common stock. If the CEO elects to receive
any of the third installment payment in Series B common stock, such stock
shall be valued at $7.50 per share.
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) before April 1, 2000, the Company will pay the
CEO a $1.0 million 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) before April 1, 2000, the
Company will be obligated to pay the CEO a $4.2 million 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) before October 1, 2000,
the Company will be obligated to pay the CEO an $8.4 million 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 before October 1, 2001, the Company
will be obligated to pay the CEO a cash payment equal to $16.8 million 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-25
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Other Commitments
The Company is party to a three year contract commencing July 7, 1999 with
a long distance carrier pursuant to which the Company is committed to minimum
service fees. Such minimum fees aggregate $1.7 million, $2.8 million and $1.8
million during the years ending December 31, 2000, 2001 and 2002,
respectively.
The Company entered into separate management consulting service agreements
with two significant 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 amended, the Company is required to pay to the related parties aggregate
consulting fees totaling $1.0 million per annum. Related party consulting fees
recorded by the Company as part of selling, general and administrative
expenses during the year ended September 30, 1998, the three months ended
December 31, 1998 and the year ended December 31, 1999 totaled $840,000,
$250,000 and $1.0 million, respectively. Future minimum consulting fees under
these agreements aggregate $1.0 million for year 2000.
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--FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments have been
determined by the Company using available market information and valuation
methodologies. Considerable judgment is required to develop the estimates of
fair value; thus the estimates provided herein are not necessarily indicative
of the amount that the Company could realize upon the sale or refinancing of
such financial instruments. Carrying value for cash and cash equivalents,
marketable securities, accounts receivable and accounts payable approximates
fair value due to their short-term nature. At December 31, 1999, the fair
value and the carrying value of the long-term debt, net of discount, was
approximately $314.9 million and $294.1 million, respectively. The fair value
of the long-term debt represents the amount at which the instrument could be
exchanged in a current arms-length transaction.
NOTE 9--MAJOR CUSTOMER
Revenue earned from one contract with a variety of the State of Oregon
governmental agencies amounted to approximately $1.6 million (53%) and $8.3
million (15%), of total revenue for the three months ended December 31, 1998
and the year ended December 31, 1999, respectively. This revenue is part of
the Company's web integration segment. Also, approximately $1.6 million and
$1.1 million included in accounts receivable is related to this contract as of
December 31, 1998 and 1999, respectively.
F-26
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 10--INCOME TAXES
Deferred tax assets (liabilities) are comprised of the following:
<TABLE>
<CAPTION>
December 31, December 31,
1998 1999
------------ ------------
(in thousands)
<S> <C> <C>
Current:
Accrued liabilities................................. $ 319 $ 1,576
Non-current:
Net operating loss carryforwards.................... 15,251 40,795
Interest ........................................... 7,788 19,855
Depreciation and amortization....................... (2,236) (7,157)
-------- --------
21,122 55,069
Valuation allowance................................. (21,122) (55,069)
-------- --------
Deferred tax assets (liabilities), net.............. $ -- $ --
======== ========
</TABLE>
Based upon the Company's lack of prior earnings history and evaluation of
other available evidence, management has recorded a full valuation allowance
against the benefit of deferred tax assets.
As of December 31, 1999, the Company has federal and state net operating
loss carryforwards of approximately $113.5 million and $74.1 million,
respectively. Federal losses expire beginning in 2008 and state losses expire
beginning in 2000. As a result of a change in ownership, as defined in the
Internal Revenue Code, which occurred on December 31, 1997, the Company's
utilization of approximately $13.0 million of the net operating loss
carryforwards is subject to an annual limitation of approximately $878,000 for
both federal and state tax purposes. If the Company is able to recognize
certain built-in gains in the future the annual utilization rate of the net
operation losses would be increased. If the Company were to realize certain
built-in losses they would be subject to the annual utilization limitation
when recognized. Additional changes in the Company's equity may further limit
the utilization of net operating losses.
A reconciliation of the income tax benefit computed using the U.S. federal
statutory rate and the Company's effective tax rate follows:
<TABLE>
<CAPTION>
Year Ended Three Months
--------------------------- Ended Year Ended
September 30, September 30, December 31, December 31,
1997 1998 1998 1999
------------- ------------- ------------ ------------
(in thousands)
<S> <C> <C> <C> <C>
Computed expected
federal tax benefit.... $ (3,248) $ (11,341) $ (6,028) $ (37,316)
State income taxes, net
of federal benefit..... 161 (1,069) (591) (2,629)
Increase in valuation
allowance.............. 2,427 10,306 6,121 33,947
Section 382 net
operating loss
limitations............ 557 1,457 -- --
Permanent differences... 5 693 521 6,887
Net operating loss
carryforwards from
Subsidiaries........... -- -- (113) (277)
Deferred tax rate change
to 35%................. -- -- -- (648)
Other................... 98 (46) 90 36
-------- --------- -------- ---------
$ -- $ -- $ -- $ --
======== ========= ======== =========
</TABLE>
F-27
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 11--BUSINESS SEGMENTS
The Company operates in the United States of America and conducts
transactions through three primary segments: Internet/Data, Web Integration
and Other. Senior management evaluates and makes operating decisions about
each of these operating segments. The Company does not report assets by
business segment and, therefore, asset information is not presented by
segment. Inter-segment revenues were not material for any period presented.
The Company's Internet/Data segment represents the operations of Slip.Net,
Sirius, Hypercon, Internet Express, inQuo, Transport Logic and Intelenet. The
primary operations of these entities include high-speed Internet access,
dedicated access, data center co-location and related equipment sales. The Web
integration segment primarily represents Optec's operations and includes
activities related to network consulting, design, integration and equipment
sales. The selling, general and administrative expenses shown for the
Internet/Data and Web Integration segments represent direct costs associated
with the segment. These costs include, among other things, office rent,
certain sales and support staff housed in the various locations.
The Other segment includes transactions primarily associated with the
Company's operations in Southern California and its corporate headquarters.
The Other segment also includes all eliminating intercompany transactions.
Direct and indirect costs incurred by the corporate headquarters are not
allocated among the business segments. Accordingly, selling, general and
administrative expense presented for the Other segment includes, among other
items, costs related to selling, marketing, customer care, provisioning,
billing and collections, information technology, general management and
overhead and other administrative expenses.
<TABLE>
<CAPTION>
Three Months Internet/ Web
Ended December 31, 1998 Data Integration Other Total
- ------------------------------------- --------- ----------- -------- --------
(in thousands)
<S> <C> <C> <C> <C>
Revenue:
Internet services.................. $ -- $ -- $ 123 $ 123
Web integration and consulting
services.......................... -- 2,157 128 2,285
Telephony.......................... -- -- 565 565
------- ------- -------- --------
Total revenue...................... -- 2,157 816 2,973
Gross margin......................... -- 327 (61) 266
Selling, general and administrative.. -- 559 10,253 10,812
Deprecation and amortization......... -- 56 1,756 1,812
Interest income...................... -- -- 3,227 3,227
Interest expense..................... -- 1 8,599 8,600
------- ------- -------- --------
Net loss............................. $ -- $ (289) $(17,442) $(17,731)
======= ======= ======== ========
</TABLE>
<TABLE>
<CAPTION>
Year Ended Internet/ Web
December 31, 1999 Data Integration Other Total
- ----------------------------------- --------- ----------- --------- ---------
(in thousands)
<S> <C> <C> <C> <C>
Revenue
Internet services................ $19,040 $ -- $ 2,206 $ 21,246
Web integration and consulting
services........................ -- 26,297 2,215 28,512
Telephony........................ -- -- 4,738 4,738
------- ------- --------- ---------
Total revenue.................... 19,040 26,297 9,159 54,496
Gross margin....................... 10,676 5,008 (794) 14,890
Selling, general and
administrative.................... 13,308 6,061 47,759 67,128
Deprecation and amortization....... -- -- 23,411 23,411
Interest income.................... -- -- 6,960 6,960
Interest expense................... 104 -- 37,824 37,928
------- ------- --------- ---------
Net loss........................... $(2,736) $(1,053) $(102,828) $(106,617)
======= ======= ========= =========
</TABLE>
F-28
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Prior to November 24, 1998, when the Company purchased Optec, all of the
operations were located in Southern California, with the primary focus on the
telephony business. Accordingly, the Company operated in only one segment
prior to that date.
NOTE 12 --WARRANTS
The following table summarizes information about non-employee warrants
outstanding at December 31, 1999:
<TABLE>
<CAPTION>
Outstanding and Exercisable
----------------------------------
Number as of Weighted-Average
December 31, Remaining Contractual
Exercise Prices 1999 Life (years)
--------------- ------------ ---------------------
<S> <C> <C>
$ .01..................................... 3,713,094 8.3
$ .50..................................... 29,000 2.1
$1.80..................................... 2,110,140 2.1
$3.00..................................... 17,601,830 5.0
$3.53..................................... 736,564 2.1
$3.83..................................... 470,092 4.3
$5.00..................................... 253,118 2.2
$6.00..................................... 134,689 2.8
----------
25,048,527 6.4
==========
</TABLE>
The fair value of the warrants discussed below were determined at their
time of grant via application of the Black-Scholes option pricing model, and
with respect to those warrants issued in connection with the Senior Notes Debt
Offering, based on an independent valuation.
$.01 Warrants
In connection with the Senior Notes Debt Offering, which was consummated on
April 13, 1998, the Company issued to the initial purchasers of the Senior
Notes warrants to purchase 3,713,094 shares of Series B common stock at an
exercise price of $0.01 per share. As of December 31, 1999, such warrants are
currently exercisable 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 December 31, 1999, all of these warrants remain outstanding.
$.50 Warrants
During January 1997, the Company issued to certain legal service providers
warrants to purchase 19,000 shares of common stock at an exercise price of
$.50. 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 December 31, 1999, all of these
warrants remain outstanding.
In connection with the private placement of Series C preferred stock
referred to above, during January 1997 the Company also issued to certain
financial advisors warrants to purchase 15,000 shares of common stock at an
exercise price of $.50, which have terms of five years and contain customary
adjustments to protect against dilution. During March 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
F-29
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
currently exercisable into shares of Series B common stock. As of December 31,
1999, all of the remaining warrants remain outstanding.
$1.80 Warrants
During January 1997, the Company issued a warrant for the purchase of
800,000 shares of common stock to the Sturm Entities 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 December
31, 1999, no shares have been issued pursuant to this warrant.
$3.00 Warrants
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 December 31, 1999, all of these
warrants remain outstanding.
In connection with the December 30, 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 December 31,
1999, all of these warrants remain outstanding. Effective February 10, 2000,
concurrent with the sale of warrants by ENA and an affiliate of Enron
Communications to a third party (Note 1), certain restrictions were put in
place with respect to the exercise of a warrant to purchase approximately
375,000 shares, such that the warrant cannot be exercised prior to the earlier
of sixty-one days following the close of an initial public offering, or
February 15, 2001.
During January 1997, the Company issued to a 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 December
31, 1999, all of these warrants remain outstanding.
$3.53 Warrants
In connection with a private placement of Series C preferred stock in
January 1997, 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
F-30
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 December 31, 1999,
all of these warrants remain outstanding.
$3.83 Warrants
During August 1997, the Company issued a 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 at an exercise price of $3.83 per share. As of December 31, 1999, all of
these warrants remain outstanding. On February 3, 2000, all such warrants were
exercised and accordingly, the Company received $1.8 million in cash.
$5.00 Warrants
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 30,000 shares of Series B common stock at an exercise price of $5.00,
all of which have terms of five years and contain customary adjustments to
protect against dilution. As of December 31, 1999, all of these warrants
remain outstanding.
During January 1997, the Company issued to certain legal service providers
warrants to purchase 5,000 shares of common stock at an exercise price of
$5.00. 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 December 31,
1999, all of these warrants remain outstanding.
In connection with the private placement of Series C preferred stock
referred to above, during January 1997 the Company also issued to certain
financial advisors warrants to purchase 218,118 shares of common stock at an
exercise price of $5.00, which 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, the outstanding warrants
are currently exercisable into shares of Series B common stock. As of December
31, 1999, all of the remaining warrants remain outstanding.
$6.00 Warrants
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 of Series B common stock at an exercise price of $6.00, all of
which have terms of five years and contain cutomary adjustments to protect
against dilution. As of December 31, 1999, all of these warrants remain
outstanding.
During January 1997, the Company issued to a 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 December
31, 1999, all of these warrants remain outstanding. During February 2000, the
Company received notice from such lender that they intend to exercise these
warrants.
F-31
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
During January 1997, the Company issued warrants to purchase 83,400 shares
of common stock to certain financial advisors, 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 December 31,
1999, all of these warrants remain outstanding.
During July 1997, warrants to purchase 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 December 31, 1999, all of these warrants remain
outstanding.
Warrants--Other
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 and 122,828 and 16,666 warrants issued during April 1994 and July 1994,
respectively, have been exercised into shares of Series B common stock. During
the year ended December 31, 1999, 109,495 shares of Series B Common Stock were
issued pursuant to warrants exercised for total proceeds of $152,000 and
29,999 warrants expired.
NOTE 13--EMPLOYEE BENEFIT PLANS
401(k) Plans
The Company has several 401(k) plans due to its various acquisitions.
Effective January 1, 2000, the plans associated with the acquisitions were
merged with the FirstWorld Communications, Inc. 401(k) Retirement Plan
("401(k) Plan"). This 401(k) Plan was adopted on November 1, 1998, pursuant to
which eligible employees may elect to defer up to 20% of their compensation
into the 401(k) Plan up to a maximum allowable, as determined by the Internal
Revenue Service. The 401(k) Plan also stipulates that the Company may provide
discretionary matching contributions to the participants of the 401(k) Plan,
which matching contributions would be allocated to the participants as of
December 31 of each 401(k) Plan year and would vest to the participants at the
rate of 25% per year of service. All administrative expenses of the 401(k)
Plan will be borne by the Company. On December 13, 1999, the Board approved a
matching contribution in cash in the amount equal to 50% of each eligible
participants contribution to the 401(k) Plan, up to a maximum contribution of
6% of the participant eligible compensation for the 1999 plan year. The
Company recorded a selling, general and administrative expense of
approximately $400,000 associated with the match for the year ended December
31, 1999. Matching contributions in future plan years will be made at the
discretion of the Board.
The Bonus Program
The Quarterly Bonus Program of the Company (the "Bonus Program") was
adopted by the Board on May 3, 1999, and amended by the Board in December
1999, and also approved by the Company's stockholders at the Company's 1999
Annual Meeting of Stockholders held on June 3, 1999. The Bonus Program is
intended to incentivize both individual productivity and employee retention. A
bonus paid out to each eligible employee in the Bonus Program is based in part
on the productivity of that participant's profit and loss center and in part
on that participant's individual performance. Certain executive officers may
elect to receive shares, in lieu of a cash bonus payment under the Bonus
Program. An aggregate of 200,000 Shares will be available for issuance under
the Bonus Program. As of December 31, 1999, the Company has issued 14,116
shares associated with the Bonus Program. The compensation expense associated
with the issuance of these shares was calculated based on the fair value of
the shares at the time of issuance. The Company incurred expenses related to
the Bonus Program
F-32
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
of approximately $3.2 million for the year ended December 31, 1999. Such costs
are reflected in selling, general and administrative expenses in the
consolidated statement of income.
1999 Equity Incentive Plan
The 1999 Equity Incentive Plan (the "Incentive Plan") was adopted by the
Board on March 8, 1999, and approved by the Company's stockholders at the
Company's 1999 Annual Meeting of Stockholders held on June 3, 1999. The
principal purposes of the Incentive Plan are to provide incentives for key
employees and consultants of the Company through granting of options and stock
appreciation rights ("SARs"). Unless the Board determines otherwise, payment
upon the exercise of any options or SARs must be made in cash at the time of
exercise. Options granted under the plan are non-transferable and expire 90
days after an employee or consultant relationship with the Company is
terminated. Options generally vest over a period of not more than 4 years, and
expire 5 or 7 years after the grant date, based on compliance with certain
securities laws. As of December 31, 1999, options covering an aggregate of
4,261,825 shares of the Company's Series B common stock, at exercise prices
ranging from $6.00 to $7.50, were outstanding under the Incentive Plan.
Included in the 4,261,825 options as of December 31, 1999, were outstanding
SARs covering an aggregate of 968,325 shares of the Company's Series B common
stock and 738,175 shares remained available for future grant under the
Incentive Plan. The Incentive Plan terminates automatically on March 8, 2004,
unless terminated sooner. The aggregate number of shares of Series B common
stock of the Company or the equivalent in other equity securities that may be
issued upon exercise of options may not exceed 5,000,000.
1999 Employee Stock Purchase Plan
In December 1999 the Board adopted the 1999 Employee Stock Purchase Plan
covering an aggregate of 1,000,000 shares of common stock. The 1999 Employee
Stock Purchase Plan is intended to qualify as an "employee stock purchase
plan" within the meaning of Section 423 of the Internal Revenue Code. Under
the 1999 Employee Stock Purchase Plan, the Board may authorize participation
by eligible employees, including officers, in periodic offerings following the
adoption of the 1999 Employee Stock Purchase Plan. The 1999 Employee Stock
Purchase Plan is administered by the Board or a committee authorized by the
Board to act on its behalf. The 1999 Employee Stock Purchase Plan will
terminate at the direction of the Board or when all of the shares reserved for
issuance have been purchased.
1998 Stock Purchase Plan
Under the Company's 1998 Stock Purchase Plan (the "Stock Purchase Plan")
the Company is authorized to issue rights to purchase up to 500,000 shares of
its Series B common stock to employees. Administration of the Stock Purchase
Plan has been delegated to the compensation committee of the Board, subject to
certain limitations. That committee may determine to whom purchase rights are
to be granted, the number of such rights to be granted, the price per share of
the purchase rights and the time limit for exercise of the purchase rights.
Shares granted under the Stock Purchase Plan may be purchased using a
promissory note for up to 50% of the purchase price of the stock. If the
purchaser elects to use a promissory note as any part of the purchase price,
the shares purchased must be pledged to secure that note. Unless the
compensation committee determines otherwise, shares purchased through the
Stock Purchase Plan shall be subject to a right of repurchase on behalf of the
Company. The right of repurchase must lapse not more slowly than 20% per year.
In September 1998, the Company offered rights to purchase an aggregate of
300,000 shares of Series B common stock to 17 employees. Prior to the stated
expiration of the stock purchase rights in November 1998, five employees
purchased 42,250 shares of Series B common stock at a price of $4.50 per
share. No stock purchase rights have been granted under
F-33
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
the Stock Purchase Plan since September 1998. The Stock Purchase Plan
terminates automatically on September 18, 2008 unless it is terminated sooner.
1997 Stock Option Plan
Under the SpectraNet International 1997 Stock Plan the Company is
authorized to issue an aggregate of 1,500,000 options to purchase Series B
common stock. The 1997 Stock Option Plan provides for the grants of incentive
stock options ("ISOs") and nonqualified stock options and the award of stock
purchase rights. Subject to the terms and conditions of the 1997 Stock Option
Plan and applicable law, the Board or a duly appointed committee of the Board
has the authority to determine, among other things, which employees, directors
or consultants should be awarded options, the type of options to be awarded,
the number of shares covered by option awards, the exercise price applicable
to options awarded and the vesting schedule of such options. Options awarded
under the 1997 Stock Option Plan are nontransferable and generally expire ten
years from the date of grant. Unless otherwise indicated in the applicable
stock option agreement, the vested portion of options awarded pursuant to the
1997 Stock Option Plan generally remain exercisable for three months after the
termination of the optionee's service with the Company. However, if the
optionee's service with the Company ends because of death or disability,
unless otherwise indicated in the Stock Option Agreement, the optionee has 12
months to exercise the vested portion of his or her options. As of December
31, 1999, options to purchase an aggregate of 587,407 shares of Series B
common stock at exercise prices ranging from $3.00 to $7.50 were outstanding
under the 1997 Stock Option Plan.
1995 Stock Option Plan
Under the SpectraNet International 1995 Incentive Stock Option Plan the
Company is authorized to issue ISOs to acquire up to an aggregate of 1,500,000
shares of Series B common stock. Subject to the limitations set forth in the
1995 Stock Option Plan, the Board or a committee thereof comprised of at least
three directors has the authority, subject to certain limitations, to select
the employees of the Company to whom grants are made, to designate the number
of shares to be covered by each option, to establish vesting schedules, and to
specify other terms of the options. Generally, options vest over a four and
one half-year period and expire ten years from the date of grant. Options
granted under the 1995 Stock Option Plan are nontransferable and expire 90
days after the termination of an optionee's employment with the Company,
unless such optionee's service with the Company is terminated by death or
disability, in which case the options expire six months and one year,
respectively, after the optionee's employment with the Company is terminated.
As of December 31, 1999, options to purchase an aggregate of 60,800 shares of
Series B common stock at prices ranging from $.25 to $4.50 were outstanding
under the 1995 Stock Option Plan.
F-34
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Stock option, SARs, and stock purchase right transactions beginning October
1, 1996 through the year ended December 31, 1999, all of which relate to
employee transactions, are summarized as follows:
<TABLE>
<CAPTION>
Weighted- Weighted Stock Weighted-
Average Stock Average Appre- Average
Stock Exercise Purchase Exercise ciation Exercise
Options Price Rights Price Rights Price
--------- --------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at October
1, 1996................ 790,000 $ .18 -- -- -- --
Granted............... 489,400 $ .82 -- -- -- --
Exercised............. (101,900) $ .22 -- -- -- --
Forfeited............. (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 -- -- -- --
Forfeited............. (75,854) $2.44 -- -- -- --
--------- ----- -------- ----- -------- -----
Outstanding at September
30, 1998............... 2,033,195 $2.66 300,000 $4.50 -- --
Granted............... 3,173,275 $5.96 -- -- 168,550 $6.75
Exercised............. (166,000) $ .20 (42,250) $4.50 -- --
Forfeited............. (268,017) $3.82 (257,750) $4.50 -- --
--------- ----- -------- ----- -------- -----
Outstanding at December
31, 1998............... 4,772,453 $4.88 -- -- 168,550 $6.75
Granted............... 3,158,290 $6.20 -- -- 999,125 $7.24
Exercised............. (601,399) $1.52 -- -- -- --
Forfeited............. (582,637) $3.16 -- -- (199,350) $6.81
--------- ----- -------- ----- -------- -----
Outstanding at December
31, 1999............... 6,746,707 $6.29 -- -- 968,325 $7.32
========= ===== ======== ===== ======== =====
</TABLE>
The following table summarizes information about stock options and stock
appreciation rights outstanding as of December 31, 1999:
<TABLE>
<CAPTION>
Outstanding Exercisable
---------------------------------- ----------------------
Weighted-
Average
Remaining Weighted- Weighted-
Number as of Contractual Average Number as of Average
December 31, Life Exercise December 31, Exercise
Range of Exercise Prices 1999 (years) Price 1999 Price
- ------------------------ ------------ ----------- --------- ------------ ---------
<S> <C> <C> <C> <C> <C>
$ .25 2,000 5.9 $ .25 -- $ .00
$ .50 30,500 4.9 $ .50 23,800 $ .50
$ 3.00 282,582 7.9 $3.00 224,408 $3.00
$ 4.50 323,125 8.8 $4.50 118,320 $4.50
$ 6.00-7.50 7,076,825 6.5 $6.68 2,180,174 $6.00
---------- ----------
7,715,032 6.4 $6.42 2,546,702 $5.61
========== ==========
</TABLE>
F-35
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 fair 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 fair value method at the
grant dates for awards under this plan consistent with the method prescribed
by Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation," the Company's net loss would have been increased to the
pro forma amounts indicated below:
<TABLE>
<CAPTION>
Year Ended
------------------------------------- Three Months Ended Year Ended
September 30, 1997 September 30, 1998 December 31, 1998 December 31, 1999
------------------ ------------------ ------------------ -----------------
(in thousands)
<S> <C> <C> <C> <C>
Net loss:
As reported........... $9,553 $33,356 $17,731 $106,617
Pro forma............. $9,557 $33,515 $17,883 $107,765
</TABLE>
The fair 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 the years ended
September 30, 1997 and 1998, the three months ended December 31, 1998 and the
year ended December 31, 1999: dividend yield of 0.0% for all periods;
volatility of 45% for all periods; risk-free interest rates of 6.07%, 5.88%,
4.53% and 5.53%, respectively; and an expected life of 5.0 years for all
periods, except with respect to stock purchase rights granted during the year
ended September 30, 1998, which rights have a term of 10 years. The weighted
average fair value of options and stock purchase rights granted during the
years ended September 30, 1997 and 1998, three months ended December 31, 1998
and the year ended December 31,1999 was approximately $.09, $.57, $4.94 and
$7.00, respectively.
NOTE 14--LEGAL PROCEEDINGS
City of Anaheim
On May 13, 1999, the City filed a lawsuit in Orange County Superior Court,
Case Number 809281, against FirstWorld and FirstWorld Anaheim (collectively
"FirstWorld Parties"). The City alleged that the FirstWorld Parties repudiated
their contractual obligations under the Universal Telecommunications System
Participation Agreement (the "Participation Agreement"), the Agreement for Use
of Operating Property (the "Operating Property Agreement") and the Development
Fee Agreement (the "Development Agreement," and together with the
Participation Agreement and the Operating Property Agreement, the "UTS
Agreements"). In addition, the City alleged, among other things, that the
FirstWorld Parties materially breached their obligations under the UTS
Agreements by: (i) failing to commence construction of a demonstration center
in downtown Anaheim and that the FirstWorld Parties would not commence
operation of this downtown demonstration center by June 30, 1999 under the UTS
Agreements; (ii) failing to provide verification that Substantial Completion
of Phase I, as each such term is defined in the UTS Agreements, had been
achieved; (iii) failing to provide a "Subsequent Implementation Program" (as
defined in the UTS Agreements); (iv) failing to comply with various auditing
procedures in the UTS Agreements; and (v) failing to make a quarterly payment
due under the Participation Agreement. The City alleged that it is entitled to
damages in excess of $45.0 million as well as costs, pre-judgment interest and
such other relief as the Court deems proper. The City also sought specific
performance compelling FirstWorld Parties to completely perform certain
obligations under the UTS Agreements.
In response to the lawsuit, the FirstWorld Parties filed a Motion to Compel
Arbitration. The Court granted the FirstWorld Parties' Motion on September 16,
1999. On October 6, 1999, the Court entered a written Order finding that there
is a valid arbitration provision in the agreements and that the City had not
established that the FirstWorld Parties unequivocally repudiated the UTS
Agreements. The court action has been stayed pending
F-36
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
completion of the arbitration. On January 7, 2000, the City gave notice of a
dispute under the Participation Agreement and initiated arbitration against
the Company and FWA with respect to the following alleged disputes: (i) the
City seeks a declaration and order that the FirstWorld Parties are obligated
to make all payments to the City pursuant to section 6.2 of the Participation
Agreement and that all sums shall be paid forthwith, plus interest, as
provided in the Participation Agreement; (ii) the City seeks an award from the
FirstWorld Parties in the amount of $145,000, corresponding to the amount
withheld by the FirstWorld Parties for certain maintenance and repair expenses
charged to the City; (iii) in addition to damages, the City seeks a
declaration and order to the effect that the City is entitled to conduct a
full and complete audit of the FirstWorld Parties' books and records and a
declaration and order to the effect that the FirstWorld Parties have failed to
fulfill their obligations to disclose information and cooperate with the City
in connection with the Annual Operations Audit and the Annual Compliance Audit
provided for in the UTS Agreements; (iv) in addition to damages, the City
seeks a declaration and order to the effect that the FirstWorld Parties
specifically perform pursuant to the Participation Agreement with respect to
building a fully operational Demonstration Center within a specified region of
the City. The City seeks such additional relief as is appropriate, including
attorneys fees and costs. The notice also identified the City's appointed
arbitrator. On January 27, 2000, the FirstWorld Parties delivered their
response identifying their appointed arbitrator and, in addition to the issues
raised by the City, identiying an additional matter for the arbitration
relating to restitution of certain City employee reimbursements not properly
earned under the Participation Agreement. The two party appointed arbitrators
are to meet to select a third arbitrator. The Company believes that the
FirstWorld Parties are not in breach as alleged and intends to vigorously
defend the City's allegations; however, there can be no assurance that an
unfavorable outcome of this dispute would not have a material adverse effect
on the Company's results of operations, liquidity or financial position.
Dina Partners L.P.
On October 16, 1998, the Company filed a declaratory relief action in San
Diego Superior Court, asking the Court to find that the Company was not
obligated to offer stock to Dina Partners, L.P. ("Dina") in connection with
the December 30, 1997 equity investment by the Sturm Entities and ENA. On
September 3, 1999, the lawsuit was dismissed with prejudice. The Company did
not contribute any consideration to the settlement.
Prior to the dismissal of the lawsuit, certain shareholders of the Company
agreed to sell certain securities to Dina. In accordance with Securities and
Exchange Commission Staff Accounting Bulletin No. 79, the Company recorded a
capital contribution and corresponding one-time, non-cash charge during the
year ended December 31, 1999 in connection with this transaction in the amount
of $1.9 million.
Other
The Company is engaged in other legal matters arising in the ordinary
course of its business and believes that the outcome of these actions will not
have a material adverse effect on its results of operations, liquidity or
financial positions.
NOTE 15--SUBSEQUENT EVENTS
Private Placements. In February 2000, the Company entered into four
definitive private placement agreements (the "Private Placements"). The
closing of the Private Placements is contingent upon and will not be effective
until the closing of an initial public offering. If the private placements
close, they will result in proceeds of approximately $91.5 million. The number
of shares purchased will be based upon the initial public offering price, less
7%, which represents the underwriters' discount. In connection with one of the
private placements, the Company has also agreed to issue a warrant to purchase
Series B Common Shares equal to 75% of the shares purchased by such investor.
The warrant will have a five year term and an exercise price equal to 125% of
the initial public offering price.
F-37
<PAGE>
In the event that these transactions are consummated, assuming an intitial
public offering price of $12 per share, the Company anticipates that a non-
cash charge of approximately $7.0 million will be recorded. This charge will
be equal to the difference between the gross public offering price per share
and the price per share paid in the Private Placements, times the number of
shares sold in the Private Placements. In addition, the Company anticipates
that a deferred charge of approximately $2.4 million will be recorded in
connection with a business relationship entered into concurrently with one of
the Private Placements. Such deferred charge would be amortized to earnings
over the duration of the business relationship.
December 2, 1999 equity investment agreement. On February 7, 2000, the
Company's cash, cash equivalents and marketable securities position fell below
$20.0 million and as a result the Company gave notice to require the Sturm
Entity to purchase $25.0 million of Series B common stock. The Company
received the funds and paid the related commitment fee of $5.0 million on
February 10, 2000.
FastLane Communications. On January 14, 2000, the Company purchased certain
equipment and intangible assets of FastLane Communications, Inc., an Internet
service provider and consultant in the Dallas/Fort Worth, Texas market for a
total cash consideration of $2.4 million.
F-38
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited)
(in thousands, except share data)
<TABLE>
<CAPTION>
Three Months
Ended
December 31,
1997
------------
<S> <C>
Revenue:
Internet services................................................ $ --
Web integration and consulting services.......................... --
Telephony services............................................... 114
---------
Total revenue.................................................. 114
---------
Cost and expenses:
Network and service costs........................................ 144
Selling, general and administrative expenses..................... 2,248
Depreciation and amortization.................................... 478
---------
Total costs and expenses....................................... 2,870
---------
Loss from operations............................................... (2,756)
Other income (expense):
Interest income.................................................. 7
Interest expense................................................. (1,349)
---------
Total other expense............................................ (1,342)
---------
Net loss before extraordinary item................................. (4,098)
Extraordinary item--extinguishment of debt......................... --
---------
Net loss........................................................... $ (4,098)
=========
Basic and diluted loss per common share:
Loss before extraordinary item................................... $ (1.25)
Extraordinary item-extinguishment of debt........................ --
---------
Net loss per common share........................................ $ (1.25)
=========
Weighted average shares outstanding--basic and diluted............. 3,265,567
=========
</TABLE>
See notes to consolidated financial statements.
F-39
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT) (Unaudited)
(in thousands, except share data)
<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, 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--
December 30, 1997........... 10,135,164 20,778 -- -- --
Conversion of Series C
preferred stock, Series B
preferred stock, Series A
preferred stock and common
stock to Series B common
stock--December 30, 1997; as
follows:
Series C preferred stock;
conversion ratio of 1.39:1,
including anti-dilutive
adjustments................. -- -- 3,621,120 12,279 --
Series B preferred stock and
common stock; conversion
ratio of 1:1................ -- -- 5,545,638 3,486 --
Series A preferred stock;
conversion ratio of 1:10.... -- -- 11,867 395 --
Net loss for the three-month
period ended December 31,
1997........................ -- -- -- -- --
---------- ------- ---------- ------- ----
Balance at December 31,
1997........................ 10,135,164 $20,778 $9,178,625 $16,160 $--
========== ======= ========== ======= ====
</TABLE>
See notes to consolidated financial statements.
F-40
<PAGE>
<TABLE>
<CAPTION>
Series C Series B Series A Deficit
Convertible Convertible Convertible Accumulated Total
Preferred Stock Preferred Stock Preferred Stock Common Stock During Shareholders'
- --------------------- ------------------- ----------------- ------------------ Shareholder Development Equity
Shares Amount Shares Amount Shares Amount Shares Amount Warrants Receivables Stage (Deficit)
------ -------- ---------- ------- --------- ------ ---------- ------ -------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
2,600,000 $ 12,279 2,016,638 $ 3,670 118,667 $ 395 3,262,900 $(227) $ 1,001 $ (97) $(14,757) $ 2,264
-- -- -- -- -- -- 266,100 43 -- -- -- 43
-- -- -- -- -- -- -- -- 9,628 (30,000) -- 406
(2,600,000) (12,279) -- -- -- -- -- -- -- -- -- --
-- -- (2,016,638) (3,670) -- -- (3,529,000) 184 -- -- -- --
-- -- -- -- (118,667) (395) -- -- -- -- -- --
-- -- -- -- -- -- -- -- -- -- (4,098) (4,098)
- ---------- -------- ---------- ------- --------- ----- ---------- ----- ------- -------- -------- -------
-- $ -- -- $ -- -- $ -- -- $ -- $10,629 $(30,097) $(18,855) $(1,385)
========== ======== ========== ======= ========= ===== ========== ===== ======= ======== ======== =======
</TABLE>
F-41
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Three Months
Ended
December 31,
1997
------------
<S> <C>
Cash flows from operating activities:
Net loss......................................................... $(4,098)
Adjustments to reconcile net loss to net cash provided (used) by
operating activities:
Depreciation and amortization expense............................ 478
Amortization of deferred financing costs......................... 358
Accretion of senior notes........................................ 120
Non-cash interest expense........................................ 293
Extraordinary loss on extinguishment of debt.....................
Changes in assets and liabilities, net of effects of
acquisitions:
Restricted cash.................................................. --
Accounts receivable............................................. (3)
Interest receivable............................................. --
Other assets.................................................... (17)
Accounts payable................................................ --
Other liabilities............................................... 1,752
-------
Net cash (used) provided by operating activities............... (1,117)
-------
Cash flows from investing activities:
Purchases of held-to-maturity marketable securities.............. --
Maturities of held-to-maturity marketable securities............. --
Purchase of property and equipment............................... (2,490)
-------
Net cash (used) provided by investing activities............... (2,490)
-------
Cash flows from financing activities:
Proceeds from issuance of senior discount notes and related
warrants........................................................ --
Proceeds from issuance of Series A Common Stock and related
warrants........................................................ --
Proceeds from issuance of Series B Common Stock and related
warrants........................................................ 43
Proceeds from exercise of stock options and warrants............. --
Principal payments on debt and capital leases.................... (70)
Payments on revolving credit facility............................ --
Proceeds from short-term borrowings and related warrants......... 3,370
Payment of deferred financing costs.............................. --
Principal payments on borrowings................................. (52)
-------
Net cash provided (used) by financing activities............... 3,291
-------
Net (decrease) increase in cash and cash equivalents.............. (316)
Cash and cash equivalents, beginning of period.................... 536
-------
Cash and cash equivalents, end of period.......................... $ 220
=======
</TABLE>
See notes to consolidated financial statements.
F-42
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
NOTE 1--BASIS OF PRESENTATION
The consolidated financial statements include the accounts of FirstWorld
Communications, Inc. ("FirstWorld") and its wholly owned subsidiaries
(collectively, the "Company"). All significant intercompany transactions and
balances have been eliminated in consolidation.
In the opinion of management, the accompanying consolidated financial
statements include all adjustments (consisting of normal recurring items)
necessary for a fair presentation of results for the interim periods presented
for the Company. The results of operations for any interim period are not
necessarily indicative of results for the full year. The consolidated
financial statements and footnote disclosures should be read in conjunction
with the audited consolidated financial statements and related notes thereto
included elsewhere in this prospectus. Certain 1998 amounts have been
reclassified to conform to the 1999 basis of presentation.
NOTE 2--EARNINGS PER SHARE
The Company calculates net loss per share in accordance with SFAS No. 128,
"Earnings Per Share." In accordance with SFAS No. 128, basic earnings per
share is computed using the weighted average number of common shares
outstanding during the period. Diluted earnings per share is determined in the
same manner as basic earnings per share except that the number of shares is
increased assuming exercise of dilutive stock options, purchase rights and
warrants using the treasury stock method and conversion of the Company's
convertible preferred stock using the if-converted method.
<TABLE>
<CAPTION>
Three Months
Ended
December 31, 1997
-----------------
<S> <C>
Potential Common Shares Underlying:
Options...................................................... 98,388
Purchase rights.............................................. --
Warrants..................................................... 14,421,605
Convertible Preferred Series A............................... 11,867 (A)
Convertible Preferred Series B............................... 2,016,638 (B)
Convertible Preferred Series C............................... 3,621,120 (C)
----------
20,169,618
==========
</TABLE>
(A) 118,667 Series A preferred shares at December 31, 1997 converted at a
ratio of 1:10.
(B) 2,016,638 Series B preferred shares at December 31, 1997 converted at a
ratio of 1:1.
(C) 2,600,000 Series C preferred shares at December 30, 1997 converted at a
ratio of approximately 1.39:1.
NOTE 3--OTHER MATTERS
The Company is engaged in other legal matters arising in the ordinary
course of its business and believes that the outcome of these actions will not
have a material adverse effect on its results of operations, liquidity or
financial position.
F-43
<PAGE>
[Description of inside back cover]
[Graphic entitled FirstWorld Internet Data Center, depicting our data center
architecture including:
.Redundant Infrastructure;
.Gateway/Network platforms ;
.Customer Co-location Cabinets;
.Access platform;
.Operations Center;
.Managed servers; and
.Customer co-location Suites.]
[FirstWorld Logo]
<PAGE>
10,000,000 Shares
[Firstworld Communications Logo Appears Here]
FirstWorld Communications, Inc.
Series B Common Stock
-------------
PROSPECTUS
, 2000
-------------
Lehman Brothers
Bear, Stearns & Co. Inc.
Deutsche Banc Alex. Brown
PaineWebber Incorporated
Fidelity Capital Markets
a division of National Financial Services Corporation
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and it is not soliciting an offer to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion, dated February 16, 2000
PROSPECTUS
10,000,000 Shares
FirstWorld Communications, Inc.
Series B Common Stock
----------------------------------------------------
This is our initial public offering of shares of common stock. No public market
currently exists for our shares. Of the 10,000,000 shares being offered, we
are offering 1,500,000 shares outside the United States and Canada and
8,500,000 shares in the United States and Canada. We have made application
to have our Series B common stock approved for listing on the Nasdaq
National Market under the symbol "FWIS". We anticipate the public offering
price to be between $11.00 and $13.00 per share.
Investing in the shares involves risks. Risk Factors begin on page 8.
<TABLE>
<CAPTION>
Per Share Total
--------- ---------
<S> <C> <C>
Public Offering Price....................................... $ $
Underwriting Discount....................................... $ $
Proceeds to FirstWorld Communications....................... $ $
</TABLE>
We have granted the underwriters the right to purchase up to 1,500,000
additional shares within 30 days to cover any over-allotments.
In addition to the shares offered by this prospectus, Texas Pacific Group has
agreed to purchase $50,000,000 of our Series B common stock, SAIC Venture
Capital Corporation has agreed to purchase $19,500,000 of our Series B common
stock, Microsoft Corporation has agreed to purchase $12,000,000 of our Series B
common stock, and Lucent Technologies Inc. has agreed to purchase $10,000,000
of our Series B common stock, in each case at the public offering price net of
the underwriting discount, in concurrent private placements.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
Lehman Brothers expects to deliver the shares on or about , 2000.
----------------------------------------------------
Lehman Brothers
Bear, Stearns International Limited
Deutsche Bank
PaineWebber International
, 2000
<PAGE>
10,000,000 Shares
[Firstworld Communications Logo Appears Here]
FirstWorld Communications, Inc.
Series B Common Stock
-------------
PROSPECTUS
, 2000
-------------
Lehman Brothers
Bear, Stearns International Limited
Deutsche Bank
PaineWebber International
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The following table sets forth the costs and expenses, other than the
underwriting discount and commissions, payable by the registrant in connection
with the sale of the common stock being registered hereby. All amounts shown
are estimates, except the Securities and Exchange Commission registration fee,
the NASD filing fee and the Nasdaq National Market listing fee.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee.......... $ 39,468
NASD filing fee.............................................. 10,500
Nasdaq National Market listing application fee............... 5,000
Blue Sky fees and expenses................................... 5,000
Printing and engraving expenses.............................. 300,000
Legal fees and expenses...................................... 300,000
Accounting fees and expenses................................. 250,000
Directors' and officers' insurance........................... 300,000
Transfer agent and registrar fees............................ 10,000
Miscellaneous expenses....................................... 80,032
----------
TOTAL...................................................... $1,300,000
==========
</TABLE>
Item 14. Indemnification of Directors and Officers.
The registrant's bylaws, as amended, provide that the company will
indemnify its directors and executive officers to the fullest extent permitted
by Delaware law and may indemnify its other officers, employees and other
agents to the fullest extent permitted by Delaware law.
In addition, the registrant's certificate of incorporation, as amended
provides that, to the fullest extent permitted by Delaware law, its directors
will not be personally liable to the registrant or its stockholders for
monetary damages for any breach of fiduciary duty as directors. This provision
of the certificate of incorporation, as amended does not eliminate the
directors' duty of care. In appropriate circumstances, equitable remedies such
as an injunction or other forms of non-monetary relief are available under
Delaware law. This provision also does not affect the directors'
responsibilities under any other laws, such as the federal securities laws and
state and federal environmental laws.
Each director will continue to be subject to liability for:
. breach of a director's duty of loyalty to the company and its
stockholders;
. acts or omissions not in good faith, gross negligence, or that involve
intentional misconduct or a knowing violation of law;
. unlawful payments of dividends or unlawful stock repurchases or
redemptions; and
. any transaction from which a director derived an improper personal
benefit.
The registrant has entered into indemnification agreements with its
directors and executive officers and has obtained directors' and officers'
liability insurance.
There is no pending litigation or proceeding involving any of the company's
directors or officers as to which indemnification is being sought. The company
is not aware of any pending or threatened litigation that may result in a
claim for indemnification.
Item 15. Recent Sales of Unregistered Securities.
The company has issued and sold the following securities since December 1,
1996:
II-1
<PAGE>
Between December 1996 and January 2000, 1,182,836 shares of the Company's
Series B common stock were issued upon exercise of stock options granted under
the Company's 1995 Stock Option Plan and 1997 Stock Option Plan, at exercise
prices between $0.15 and $7.50 per share.
On January 29, 1997, the Company issued and sold an aggregate of 1,044,700
shares of its Series C preferred stock for cash and issued 1,555,300 upon
retirement of certain convertible bridge notes. In addition, warrants to
purchase an aggregate of 520,000 shares of common stock were issued to such
investors and note holders at an initial exercise price of $5.00 per share.
Upon consummation of the equity restructuring of the Company, however, the
shares and warrants were converted into an aggregate of 3,621,120 shares of
Series B common stock and warrants to purchase 736,564 shares of Series B
common stock at a purchase price of $3.53 per share. In connection with this
private placement, the Company also issued to financial advisors warrants to
purchase 218,118 and 15,000 shares of common stock at purchase prices of $5.00
and $0.50, respectively. In March 1997, 5,000 shares of common stock were
issued upon exercise of one of the financial advisor warrants at a purchase
price of $0.50 per share. As a result of the equity restructuring, these
warrants were converted into warrants to purchase shares of Series B common
stock.
On January 29, 1997, the Company issued warrants to purchase 800,000 shares
of common stock to a single investor at an initial purchase price of $4.75 per
share. On December 30, 1997, the warrant was amended to increase the number of
shares exercisable to 2,110,140 shares of Series B common stock and to
decrease the purchase price to $1.80 per share.
Warrants to purchase 19,000 and 5,000 shares of common stock at prices of
$0.50 and $5.00, respectively, were issued in January 1997 in consideration
for legal services provided to the Company. As a result of the equity
restructuring, these warrants were converted into warrants to purchase shares
of Series B common stock.
On May 29, 1997, 60,000 shares of common stock were issued upon conversion
of Series B preferred stock. These shares were converted to Series B common
stock upon consummation of the Company's equity restructuring.
During August and September 1997, in connection with a short-term bridge
financing, the Company issued to a certain lender a warrant to purchase
300,000 shares of common stock at an initial purchase price of $6.00 per
share. As a result of the equity restructuring of the Company, this warrant
was converted into a warrant to purchase 470,092 shares of Series B common
stock at a purchase price of $3.83 per share.
On September 16, 1997, 156,208 shares of Series A preferred stock, which
were later converted to 1,562 shares of Series B common stock as a result of
the equity restructuring, were issued to an entity as compensation for
services rendered to the Company.
During July and September 1997, warrants to purchase 33,789 shares of
common stock were issued at a purchase price of $6.00 per share to the holders
of certain convertible bridge notes issued in July 1997. As a result of the
equity restructuring, these warrants were converted into warrants to purchase
shares of Series B common stock.
On September 17, 1997, the lender involved in the Company's revolving
credit facility was issued a warrant to purchase 800,000 shares of Series B
common stock at an initial purchase price of $6.00 per share. This warrant was
later amended and replaced on December 30, 1997 and on April 13, 1998. The
current purchase price of the warrant is $3.00 per share. Upon consummation of
the revolving credit facility, the Company also issued warrants to certain
financial advisors to purchase 83,400 shares of common stock at a purchase
price of $6.00 per share. As a result of the equity restructuring, these
warrants were converted into warrants to purchase shares of Series B common
stock.
In connection with the equity restructuring of the Company on December 30,
1997, all outstanding shares of the Company's previously issued common stock,
Series A preferred stock, Series B preferred stock and Series C preferred
stock were converted into 9,178,625 shares of Series B common stock.
II-2
<PAGE>
On December 30, 1997, 10,000,000 shares of Series A common stock and
warrants to purchase 10,000,000 shares of Series B common stock at a purchase
price of $3.00 per share were issued by the Company to certain investors. At
the same time, 135,164 shares of Series A common stock and warrants to
purchase 135,164 shares of Series B common stock at a purchase price of $3.00
per share were issued upon automatic conversion to the holders of certain
convertible subordinated bridge notes. In connection with the Series A common
stock private placement, warrants were also issued to certain financial
advisors to purchase 17,500 and 30,000 shares of Series B common stock at
purchase prices of $6.00 and $5.00 per share, respectively.
On April 13, 1998, 6,666,666 shares of Series B common stock and warrants
to purchase 6,666,666 shares of Series B common stock at a purchase price of
$3.00 per share were issued to two existing investors pursuant to the exercise
of options held by them in connection with the Company's December 30, 1997
private placement.
In connection with the issuance and sale of its debt offering on April 13,
1998, the Company issued warrants to purchase 3,713,094 shares of Series B
common stock, at a purchase price of $0.01 per share.
On January 7, 1999, 187,500 shares of Series B common stock were issued
pursuant to the Company's acquisition of Accelerated Information, Inc.
On February 11, 1999, 42,250 shares of Series B common stock were issued to
employees of the Company who participated in the 1998 Employee Stock Purchase
Plan in November 1998.
The Company issued 285,000 shares of Series B common stock in connection
with its acquisition of Sirius Solutions, Inc. on March 2, 1999.
In connection with the Hypercon acquisition on June 2, 1999, the Company
issued 49,993 shares of Series B common stock.
On June 14, 1999, the Company issued 30,000 shares of Series B common stock
in connection with its acquisition of Internet Express.
Between March and December 1999, 109,495 shares of the Company's Series B
common stock were issued upon exercise of common stock Purchase Warrants, at a
purchase price of $1.50 per share.
In February 2000, 470,092 shares of the Company's Series B common stock
were issued upon exercise of common stock Purchase Warrants, at a purchase
price of $3.83 per share.
In connection with the Transport Logic acquisition, the Company issued
392,935 shares of Series B common stock on July 7, 1999.
The Company issued 875,000 shares of Series B common stock on July 14, 1999
in connection with its acquisition of Intelenet.
On February 10, 2000 we sold 3,333,333 shares of Series B common stock to
an existing investor at a purchase price of $7.50 per share.
As of December 31, 1999, 14,116 shares of Series B common stock have been
issued to certain employees under the Company's quarterly stock bonus program.
All of the above transactions were completed without registration in
reliance upon the exemption provided by Section 4(2) of the Securities Act of
1933, as amended, for transactions not involving a public offering. All of the
above-referenced option shares and bonus shares were subsequently registered
on Form S-8s filed with the Commission on October 10, 1998, April 14, 1999 and
May 17, 1999.
Item 16. Exhibits and Financial Statement Schedules.
(a) Exhibits.
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S> <C>
1.1 Form of Underwriting Agreement
3.1 Certificate of Incorporation of the Registrant, as amended.
(2)
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S> <C>
3.3 Bylaws of the Registrant, as amended. (2)
4.1 Reference is made to Exhibits 3.1 through 3.3
4.2 Specimen stock certificate representing shares of Series B
Common Stock of the Registrant.
4.3 Purchase Agreement, dated April 6, 1998, among the
Registrant, Bear, Stearns & Co. Inc., ING Baring (U.S.)
Securities, Inc., J.P. Morgan Securities, Inc. and Merrill
Lynch, Pierce, Fenner & Smith Incorporated. (1)
4.4 Indenture, dated as of April 13, 1998, between the
Registrant and The Bank of New York. (1)
4.5 Form of 13% Senior Discount Notes due 2008 and schedule of
13% Senior Discount Notes due 2008. (1)
4.6 Registration Rights Agreement, dated as of April 13, 1998,
among the Registrant and the Initial Purchasers. (1)
5.1 Opinion of Cooley Godward LLP regarding the legality of the
securities being registered.
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 Bank of New York 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 Registrant'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, as amended. (2)
10.9 Securityholders Agreement, dated as of December 20, 1997,
among the Registrant, Enron Capital & Trade Resources Corp.,
Colorado Spectra 1, LLC, Colorado Spectra 2, LLC and
Colorado Spectra 3, LLC, as amended. (2)
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)
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S> <C>
10.11 Management Consulting Services Agreement, dated as of
December 30, 1997, 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 that 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, 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. (4)
10.19** Telecommunications System License Agreement, dated as of
March 5, 1998, between FirstWorld Orange Coast and The
Irvine Company. (4)
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 dated as
of January 31, 1997. (3)
10.23 System Acquisition Agreement dated as of June 19, 1997
between ACE*COM and the Registrant. (3)
10.24 Employment Agreement dated as of September 28, 1998 between
the Registrant and Sheldon S. Ohringer. (4)
10.25 Stock Option Agreement dated as of September 28, 1998
between the Registrant and Sheldon S. Ohringer. (5)
10.26 Employment Agreement dated as of October 1, 1998 between the
Registrant and Scott Chase. (6)
10.27 Employment Agreement dated as of November 9, 1998 between
the Registrant and Marion K. Jenkins. (6)
10.28 Employment Agreement dated as of November 30, 1998 between
the Registrant and David Gandini. (6)
10.29 Employment Agreement dated as of December 7, 1998 between
the Registrant and Doug Kramer. (6)
10.30 Lease between the Registrant and The Prudential Insurance
Company of America, dated as of December 1, 1999. (6)
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. (6)
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S> <C>
10.32 First Amendment to Amended and Restated Investors 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. (6)
10.33 Employment Agreement, as amended, between the Registrant and
Jeffrey L. Dykes dated December 14, 1998. (7)
10.34 Employment Agreement dated January 27, 2000, between the
Company and Paul C. Adams. (8)
10.35 First Amendment to Lease between the Registrant and the
Prudential Insurance Company of America dated March 1, 1999.
(8)
10.36 FirstWorld Communications, Inc. Quarterly Bonus Program
adopted as of May 3, 1999. (9)
10.37 The 1999 Equity Incentive Plan of FirstWorld Communications,
Inc. (the "1999 Plan") effective as of March 8, 1999. (10)
10.38 Form of Incentive Stock Option Agreement of FirstWorld
Communications, Inc. under the 1999 Plan. (10)
10.39 Form of Non-Qualified Stock Option Agreement of FirstWorld
Communications, Inc. under the 1999 Plan. (10)
10.40 Form of Stock Appreciation Right Award Agreement of
FirstWorld Communications, Inc. under the 1999 Plan. (10)
10.41 First Amendment to Employment Agreement, dated as of May 20,
1999, between the Registrant and Sheldon S. Ohringer. (11)
10.42 Office Lease, dated June 28, 1999, between Board of
Administration as Trustee for the Police and Fire Department
Retirement Fund and the Registrant. (11)
10.43 Equity Investment Agreement, effective as of December 22,
1999, as amended, between the Registrant and Colorado
Spectra 4, LLC. (12)
10.44 Stock Purchase Agreement dated February 3, 2000 between the
Registrant and Lucent Technologies Inc.
10.45 Stock Purchase Agreement dated February 3, 2000 between the
Registrant and SAIC Venture Capital Corporation.
10.46 Stock Purchase Agreement dated February 9, 2000 between the
Registrant and Microsoft Corporation.
10.47 Stock Purchase Agreement dated February 11, 2000 between the
Registrant and TPG FirstWorld 1, LLC.
10.48 First Amendment to Employment Agreement dated January 27,
2000 between the Registrant and Paul C. Adams.
21.1 Subsidiaries of the Registrant, as amended. (12)
23.1 Consent of PricewaterhouseCoopers LLP.
23.2 Consent of Cooley Godward LLP (included in Exhibit 5.1).
23.3 Consent of Blumenfeld & Cohen
24.1 Power of Attorney. (12)
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.
II-6
<PAGE>
(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) Original agreement incorporated by reference to the Registrant's
Registration Statement on Form S-4 (No. 333-57829) filed with the
Securities and Exchange Commission on August 24, 1998; amendment dated
December 22, 1999 incorporated herein by reference to the Registrant's
Registration Statement on Form S-1 filed with the Securities and Exchange
Commission on December 22, 1999.
(3) 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.
(4) 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) Incorporated herein by reference to the Registrant's Registration
Statement on Form S-8 (No. 333-68195) filed with the Securities and
Exchange Commission on December 1, 1998.
(6) Incorporated herein by reference to the Registrant's Annual Report on Form
10-K filed with the Securities and Exchange Commission on December 22,
1998.
(7) Incorporated herein by reference to the Registrant's Quarterly Report on
Form 10-Q filed with the Securities and Exchange Commission on February
12, 1999.
(8) Incorporated herein by reference to the Registrant's Quarterly Report on
Form 10-Q filed with the SEC on May 17, 1999.
(9) Incorporated herein by reference to the Registrant's Registration
Statement on Form S-8 (No. 333-78611) filed with the Securities and
Exchange Commission on May 17, 1999.
(10) Incorporated herein by reference to the Registrant's Registration
Statement on Form S-8 (No. 333-76325) filed with the Securities and
Exchange Commission on April 14, 1999.
(11) Incorporated herein by reference to the Registrant's Quarterly Report on
Form 10-Q filed with the Securities and Exchange Commission on August 16,
1999.
(12) Incorporated herein by reference to the Registration Statement on Form S-
1 (No. 333-93357) filed with the Securities and Exchange Commission on
December 22, 1999.
(b) Financial Statement Schedules.
Schedule II: Valuation and qualifying accounts and reserves and
accompanying audit opinion.
Item 17. Undertakings.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to provisions described in Item 14 or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act
and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment to the Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Greenwood Village, County of Arapahoe, State of Colorado, on February
16, 2000.
/s/ Jeffrey L. Dykes
By: _________________________________
Jeffrey L. Dykes
Senior Vice President, General
Counsel and Secretary
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment to the Registration Statement has been signed by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<C> <S> <C>
* President and Chief February 16, 2000
____________________________________ Executive Officer
Sheldon S. Ohringer (Principal Executive
Officer)
* Vice President, Finance, February 16, 2000
____________________________________ Treasurer and Assistant
Paul C. Adams Secretary (Principal
Financial and Accounting
Officer)
* Chairman of the Board February 16, 2000
____________________________________
Donald L. Sturm
* Director February 16, 2000
____________________________________
C. Kevin Garland
* Director February 16, 2000
____________________________________
Stephen R. Horn
* Director February 16, 2000
____________________________________
James O. Spitzenberger
* Director February 16, 2000
____________________________________
John C. Stiska
* Director February 16, 2000
____________________________________
Melanie L. Sturm
*/s/ Jeffrey L. Dykes As Attorney-in-fact February 16, 2000
____________________________________
Jeffrey L. Dykes
</TABLE>
II-8
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S> <C>
1.1 Form of Underwriting Agreement
3.1 Certificate of Incorporation of the Registrant, as amended.
(2)
3.3 Bylaws of the Registrant, as amended. (2)
4.1 Reference is made to Exhibits 3.1 through 3.3
4.2 Specimen stock certificate representing shares of Series B
Common Stock of the Registrant.
4.3 Purchase Agreement, dated April 6, 1998, among the
Registrant, Bear, Stearns & Co. Inc., ING Baring (U.S.)
Securities, Inc., J.P. Morgan Securities, Inc. and Merrill
Lynch, Pierce, Fenner & Smith Incorporated. (1)
4.4 Indenture, dated as of April 13, 1998, between the
Registrant and The Bank of New York. (1)
4.5 Form of 13% Senior Discount Notes due 2008 and schedule of
13% Senior Discount Notes due 2008. (1)
4.6 Registration Rights Agreement, dated as of April 13, 1998,
among the Registrant and the Initial Purchasers. (1)
5.1 Opinion of Cooley Godward LLP regarding the legality of the
securities being registered.
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 Bank of New York 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 Registrant'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, as amended. (2)
10.9 Securityholders Agreement, dated as of December 20, 1997,
among the Registrant, Enron Capital & Trade Resources Corp.,
Colorado Spectra 1, LLC, Colorado Spectra 2, LLC and
Colorado Spectra 3, LLC, as amended. (2)
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)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S> <C>
10.11 Management Consulting Services Agreement, dated as of December
30, 1997, 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
that 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, 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. (4)
10.19** Telecommunications System License Agreement, dated as of March
5, 1998, between FirstWorld Orange Coast and The Irvine Company.
(4)
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 dated as of
January 31, 1997. (3)
10.23 System Acquisition Agreement dated as of June 19, 1997 between
ACE*COM and the Registrant. (3)
10.24 Employment Agreement dated as of September 28, 1998 between the
Registrant and Sheldon S. Ohringer. (4)
10.25 Stock Option Agreement dated as of September 28, 1998 between
the Registrant and Sheldon S. Ohringer. (5)
10.26 Employment Agreement dated as of October 1, 1998 between the
Registrant and Scott Chase. (6)
10.27 Employment Agreement dated as of November 9, 1998 between the
Registrant and Marion K. Jenkins. (6)
10.28 Employment Agreement dated as of November 30, 1998 between the
Registrant and David Gandini. (6)
10.29 Employment Agreement dated as of December 7, 1998 between the
Registrant and Doug Kramer. (6)
10.30 Lease between the Registrant and The Prudential Insurance
Company of America, dated as of Deceber 1, 1999. (6)
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. (6)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S> <C>
10.32 First Amendment to Amended and Restated Investors 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. (6)
10.33 Employment Agreement, as amended, between the Registrant and
Jeffrey L. Dykes dated December 14, 1998. (7)
10.34 Employment Agreement dated January 27, 2000, between the
Company and Paul C. Adams. (8)
10.35 First Amendment to Lease between Registrant and the
Prudential Insurance Company of America dated March 1, 1999.
(8)
10.36 FirstWorld Communications, Inc. Quarterly Bonus Program
adopted as of May 3, 1999. (9)
10.37 The 1999 Equity Incentive Plan of FirstWorld Communications,
Inc. (the "1999 Plan") effective as of March 8, 1999. (10)
10.38 Form of Incentive Stock Option Agreement of FirstWorld
Communications, Inc. under the 1999 Plan. (10)
10.39 Form of Non-Qualified Stock Option Agreement of FirstWorld
Communications, Inc. under the 1999 Plan. (10)
10.40 Form of Stock Appreciation Right Award Agreement of
FirstWorld Communications, Inc. under the 1999 Plan. (10)
10.41 First Amendment to Employment Agreement, dated as of May 20,
1999, between the Registrant and Sheldon S. Ohringer. (11)
10.42 Office Lease, dated June 28, 1999, between Board of
Administration as Trustee for the Police and Fire Department
Retirement Fund and the Registrant. (11)
10.43 Equity Investment Agreement, effective as of December 22,
1999, as amended, between the Registrant and Colorado
Spectra 4, LLC. (12)
10.44 Stock Purchase Agreement dated February 3, 2000 between the
Registrant and Lucent Technologies Inc.
10.45 Stock Purchase Agreement dated February 3, 2000 between the
Registrant and SAIC Venture Capital Corporation.
10.46 Stock Purchase Agreement dated February 9, 2000 between the
Registrant and Microsoft Corporation.
10.47 Stock Purchase Agreement dated February 11, 2000 between the
Registrant and TPG FirstWorld 1, LLC.
10.48 First Amendment to Employment Agreement dated January 27,
2000 between the Registrant and Paul C. Adams.
21.1 Subsidiaries of the Registrant, as amended. (12)
23.1 Consent of PricewaterhouseCoopers LLP.
23.2 Consent of Cooley Godward LLP (included in Exhibit 5.1).
24.1 Power of Attorney. (12)
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.
<PAGE>
(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) Original agreement incorporated by reference to the Registrant's
Registration Statement on Form S-4 (No. 333-57829) filed with the
Securities and Exchange Commission on August 24, 1998; amendment dated
December 22, 1999 incorporated herein by reference to the Registrant's
Registration Statement on Form S-1 filed with the Securities and Exchange
Commission on December 22, 1999.
(3) 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.
(4) 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) Incorporated herein by reference to the Registrant's Registration
Statement on Form S-8 (No. 333-68195) filed with the Securities and
Exchange Commission on December 1, 1998.
(6) Incorporated herein by reference to the Registrant's Annual Report on Form
10-K filed with the Securities and Exchange Commission on December 22,
1998.
(7) Incorporated herein by reference to the Registrant's Quarterly Report on
Form 10-Q filed with the Securities and Exchange Commission on February
12, 1999.
(8) Incorporated herein by reference to the Registrant's Quarterly Report on
Form 10-Q filed with the SEC on May 17, 1999.
(9) Incorporated herein by reference to the Registrant's Registration
Statement on Form S-8 (No. 333-78611) filed with the Securities and
Exchange Commission on May 17, 1999.
(10) Incorporated herein by reference to the Registrant's Registration
Statement on Form S-8 (No. 333-76325) filed with the Securities and
Exchange Commission on April 14, 1999.
(11) Incorporated herein by reference to the Registrant's Quarterly Report on
Form 10-Q filed with the Securities and Exchange Commission on August 16,
1999.
(12) Incorporated herein by reference to the Registration Statement on Form S-
1 (No. 333-93357) filed with the Securities and Exchange Commission on
December 22, 1999.
<PAGE>
Report of Independent Accountants on Financial Statement Schedule
To The Board of Directors and Stockholders of FirstWorld Communications, Inc.:
Our audits of the consolidated financial statements referred to in our report
dated February 11, 2000 appearing in the Registration Statement on Form S-1
(333-93357) of FirstWorld Communications, Inc. also included an audit of the
financial statement schedule included in such Form S-1. In our opinion, this
financial statement schedule presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements.
PRICEWATERHOUSECOOPERS LLP
Denver, Colorado
February 11, 2000
1
<PAGE>
FirstWorld Communications, Inc.
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, 1997... $ 2,268 $ 2,427 $ -- $ 4,695
Year ended September 30, 1998... 4,695 10,306 -- 15,001
Three months ended December 31,
1998........................... 15,001 6,121 -- 21,122
Year ended December 31, 1999.... 21,122 33,947 -- 55,069
Allowance for Doubtful Accounts:
Year ended September 30, 1997... $ -- $ -- $ -- $ --
Year ended September 30, 1998... -- 10 -- 10
Three months ended December 31,
1998........................... 10 110 -- 120
Year ended December 31, 1999.... 120 2,544 96 2,568
</TABLE>
<PAGE>
EXHIBIT 1.1
SERIES B COMMON STOCK
(par value $.0001 per share)
UNDERWRITING AGREEMENT
[__________], 2000
<PAGE>
[_____________],2000
Lehman Brothers Inc.
Bear Stearns & Co. Inc.
Deutsche Bank Securities Inc.
PaineWebber Incorporated
Fidelity Capital Markets
c/o Lehman Brothers Inc.
3 World Financial Center
New York, New York 10285
Lehman Brothers International (Europe)
Bear Stearns International Limited
Deutsche Bank AG London
PaineWebber International Inc.
c/o Bear Stearns International Limited
1 Broadgate, 6th Floor
London, EC2M7HA
England
Dear Sirs and Mesdames:
FIRSTWORLD COMMUNICATIONS, INC., a Delaware corporation (the "Company"),
proposes to issue and sell to the several Underwriters (as defined below)
[________________] shares of its Series B Common Stock, par value $.0001 per
share (the "Firm Shares").
It is understood that, subject to the conditions hereinafter stated,
[____________] Firm Shares (the "U.S. Firm Shares") will be sold to the several
U.S. Underwriters named in Schedule I hereto (the "U.S. Underwriters") in
connection with the offering and sale of such U.S. Firm Shares in the United
States and Canada to United States and Canadian Persons (as such terms are
defined in the Agreement Between U.S. and International Underwriters of even
date herewith), and [__________] Firm Shares (the "International Shares") will
be sold to the several International Underwriters named in Schedule II hereto
(the "International Underwriters") in
<PAGE>
connection with the offering and sale of such International Shares outside the
United States and Canada to persons other than United States and Canadian
Persons. Lehman Brothers Inc., Bear Stearns & Co. Inc., Deutsche Bank Securities
Inc., PaineWebber Incorporated and Fidelity Capital Markets shall act as
representatives (the "U.S. Representatives") of the several U.S. Underwriters,
and Lehman Brothers International (Europe), Bear Stearns International Limited,
Deutsche Bank AG London and PaineWebber International Inc. shall act as
representatives (the "International Representatives") of the several
International Underwriters. The U.S. Underwriters and the International
Underwriters are hereinafter collectively referred to as the Underwriters.
The Company also proposes to issue and sell to the several U.S.
Underwriters not more than an additional [__________] shares of its Series B
Common Stock, par value $.0001 per share (the "Additional Shares"), if and to
the extent that the U.S. Representatives shall have determined to exercise, on
behalf of the U.S. Underwriters, the right to purchase such shares of common
stock granted to the U.S. Underwriters in Section 2 hereof. The Firm Shares and
the Additional Shares are hereinafter collectively referred to as the "Shares".
The shares of Series B Common Stock, par value $.0001 per share, and the shares
of Series A Common Stock, par value $.0001 per share, of the Company to be
outstanding after giving effect to the sales contemplated hereby are hereinafter
collectively referred to as the "Common Stock".
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement relating to the Shares. The registration
statement contains two prospectuses to be used in connection with the offering
and sale of the Shares: the U.S. prospectus, to be used in connection with the
offering and sale of Shares in the United States and Canada to United States and
Canadian Persons, and the international prospectus, to be used in connection
with the offering and sale of Shares outside the United States and Canada to
persons other than United States and Canadian Persons. The international
prospectus is identical to the U.S. prospectus except for the outside front
cover page. The registration statement as amended at the time it becomes
effective, including the information (if any) deemed to be part of the
registration statement at the time of effectiveness pursuant to Rule 430A under
the Securities Act of 1933, as amended (the "Securities Act"), is hereinafter
referred to as the "Registration Statement"; the U.S. prospectus and the
international prospectus in the respective forms first used to confirm sales of
Shares are hereinafter collectively referred to as the "Prospectus". If the
Company has filed an abbreviated registration statement to register additional
shares of Common Stock pursuant to Rule 462(b) under the Securities Act (the
"Rule 462 Registration Statement"), then any reference herein to the term
"Registration Statement" shall be deemed to include such Rule 462 Registration
Statement.
Lehman Brothers Inc. ("Lehman Bothers") has agreed to reserve up to
[______] Shares to be purchased by it under this Agreement for sale to the
Company's directors, officers,
2
<PAGE>
employees and business associates and other parties related to the Company
(collectively, "Participants"), as set forth in the Prospectus under the heading
"Underwriters" (the "Directed Share Program"). The Shares to be sold by Lehman
Brothers and its affiliates pursuant to the Directed Share Program are referred
to hereinafter as the "Directed Shares". Any Directed Shares not orally
confirmed for purchase by any Participant by the end of the business day on
which this Agreement is executed will be offered to the public by the
Underwriters as set forth in the Prospectus.
1. Representations and Warranties. The Company represents and
warrants to and agrees with each of the Underwriters that:
(a) The Registration Statement has become effective; no stop order
suspending the effectiveness of the Registration Statement is in effect,
and no proceedings for such purpose are pending before or threatened by the
Commission.
(b) (i) The Registration Statement, when it became effective,
did not contain and, as amended or supplemented, if applicable, will not
contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements
therein not misleading, (ii) the Registration Statement and the Prospectus
comply and, as amended or supplemented, if applicable, will comply in all
material respects with the Securities Act and the applicable rules and
regulations of the Commission thereunder and (iii) the Prospectus does not
contain and, as amended or supplemented, if applicable, will not contain
any untrue statement of a material fact or omit to state a material fact
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading, except that the representations
and warranties set forth in this paragraph do not apply to statements or
omissions in the Registration Statement or the Prospectus based upon
information relating to any Underwriter furnished to the Company in writing
by such Underwriter through you expressly for use therein.
(c) The Company has been duly incorporated, is validly existing as
a corporation in good standing under the laws of the State of Delaware, has
the corporate power and authority to own its property and to conduct its
business as described in the Prospectus and is duly qualified to transact
business and is in good standing in each jurisdiction in which the conduct
of its business or its ownership or leasing of property requires such
qualification, except to the extent that the failure to be so qualified or
be in good standing would not have a material adverse effect on the Company
and its subsidiaries, taken as a whole.
3
<PAGE>
(d) Each subsidiary of the Company has been duly
incorporated, is validly existing as a corporation in good standing under
the laws of the jurisdiction of its incorporation, has the corporate power
and authority to own its property and to conduct its business as described
in the Prospectus and is duly qualified to transact business and is in good
standing in each jurisdiction in which the conduct of its business or its
ownership or leasing of property requires such qualification, except to the
extent that the failure to be so qualified or be in good standing would not
have a material adverse effect on the Company and its subsidiaries, taken
as a whole; all of the issued shares of capital stock of each subsidiary of
the Company have been duly and validly authorized and issued, are fully
paid and non-assessable and are owned directly by the Company, free and
clear of all liens, encumbrances, equities or claims.
(e) This Agreement has been duly authorized, executed and
delivered by the Company.
(f) The authorized capital stock of the Company conforms as
to legal matters to the description thereof contained in the Prospectus.
(g) The shares of Common Stock outstanding prior to the
issuance of the Shares have been duly authorized and are validly issued,
fully paid and nonassessable and the issuance of the shares of Common Stock
outstanding prior to the issuance of the Shares were not subject to any
rights of first refusal, preemptive rights or similar rights.
(h) The Shares have been duly authorized and, when issued and
delivered in accordance with the terms of this Agreement, will be validly
issued, fully paid and nonassessable, and the issuance of such Shares will
not be subject to any rights of first refusal, preemptive rights or similar
rights.
(i) The execution and delivery by the Company of, and the
performance by the Company of its obligations under, this Agreement will
not contravene any provision of applicable law or the certificate of
incorporation or bylaws of the Company or any agreement or other instrument
binding upon the Company or any of its subsidiaries, or any judgment, order
or decree of any governmental body, agency or court having jurisdiction
over the Company or any subsidiary, and no consent, approval, authorization
or order of, or qualification with, any governmental body or agency is
required for the performance by the Company of its obligations under this
Agreement, except such as may be required by the securities or Blue Sky
laws of the various states in connection with the offer and sale of the
Shares.
4
<PAGE>
(j) There has not occurred any material adverse change, or
any development involving a prospective material adverse change, in the
condition, financial or otherwise, or in the earnings, business or
operations of the Company and its subsidiaries, taken as a whole, from that
set forth in the Prospectus (exclusive of any amendments or supplements
thereto subsequent to the date of this Agreement).
(k) There are no legal or governmental proceedings pending or
threatened to which the Company or any of its subsidiaries is a party or to
which any of the properties of the Company or any of its subsidiaries is
subject that are required to be described in the Registration Statement or
the Prospectus and are not so described or any statutes, regulations,
contracts or other documents that are required to be described in the
Registration Statement or the Prospectus or to be filed as exhibits to the
Registration Statement that are not described or filed as required.
(l) Each preliminary prospectus filed as part of the
registration statement as originally filed or as part of any amendment
thereto, or filed pursuant to Rule 424 under the Securities Act, complied
when so filed in all material respects with the Securities Act and the
applicable rules and regulations of the Commission thereunder.
(m) The Company is not and, after giving effect to the
offering and sale of the Shares and the application of the proceeds thereof
as described in the Prospectus, will not be an "investment company" as such
term is defined in the Investment Company Act of 1940, as amended.
(n) The Company and its subsidiaries (i) are in compliance
with any and all applicable foreign, federal, state and local laws and
regulations relating to the protection of human health and safety, the
environment or hazardous or toxic substances or wastes, pollutants or
contaminants ("Environmental Laws"), (ii) have received all permits,
licenses or other approvals required of them under applicable Environmental
Laws to conduct their respective businesses and (iii) are in compliance
with all terms and conditions of any such permit, license or approval,
except where such noncompliance with Environmental Laws, failure to receive
required permits, licenses or other approvals or failure to comply with the
terms and conditions of such permits, licenses or approvals would not,
singly or in the aggregate, have a material adverse effect on the Company
and its subsidiaries, taken as a whole.
(o) There are no costs or liabilities associated with
Environmental Laws (including, without limitation, any capital or operating
expenditures required for cleanup, closure of properties or compliance with
Environmental Laws or any permit, license or approval, any related
constraints on operating activities and any potential liabilities to third
5
<PAGE>
parties) which would, singly or in the aggregate, have a material adverse
effect on the Company and its subsidiaries, taken as a whole.
(p) The Company has reviewed its operations and those of its
subsidiaries to evaluate the extent to which the business or operations of
the Company or any of its subsidiaries will be affected by the Year 2000
Problem (that is, any significant risk that computer hardware or software
applications used by the Company and its subsidiaries will not, in the case
of dates or time periods occurring after December 31, 1999, function at
least as effectively as in the case of dates or time periods occurring
prior to January 1, 2000); as a result of such review, (i) the Company has
no reason to believe, and does not believe, that (A) there are any issues
related to the Company's preparedness to address the Year 2000 Problem that
are of a character required to be described or referred to in the
Registration Statement or Prospectus which have not been accurately
described in the Registration Statement or Prospectus and (B) the Year 2000
Problem will have a material adverse effect on the condition, financial or
otherwise, or on the earnings, business or operations of the Company and
its subsidiaries, taken as a whole, or result in any material loss or
interference with the business or operations of the Company and its
subsidiaries, taken as a whole; and (ii) the Company reasonably believes,
after due inquiry, that the suppliers, vendors, customers or other material
third parties used or served by the Company and such subsidiaries are
addressing or will address the Year 2000 Problem in a timely manner, except
to the extent that a failure to address the Year 2000 Problem by any
supplier, vendor, customer or material third party would not have a
material adverse effect on the condition, financial or otherwise, or on the
earnings, business or operations of the Company and its subsidiaries, taken
as a whole.
(q) There are no contracts, agreements or understandings
between the Company and any person granting such person the right to
require the Company (i) to file a registration statement under the
Securities Act with respect to any securities of the Company except as
described in the Prospectus, or (ii) to include such securities with the
Shares registered pursuant to the Registration Statement except such rights
which have been validly waived.
(r) Subsequent to the respective dates as of which
information is given in the Registration Statement and the Prospectus, (i)
the Company and its subsidiaries have not incurred any material liability
or obligation, direct or contingent, nor entered into any material
transaction not in the ordinary course of business; (ii) the Company has
not purchased any of its outstanding capital stock, nor declared, paid or
otherwise made any dividend or distribution of any kind on its capital
stock other than ordinary and customary dividends; and (iii) there has not
been any material change in the capital stock, short-term
6
<PAGE>
debt or long-term debt of the Company and its subsidiaries, except in each
case as described in the Prospectus.
(s) The Company and its subsidiaries have good and marketable
title in fee simple to all real property and good and marketable title to
all personal property owned by them which is material to the business of
the Company and its subsidiaries, in each case free and clear of all liens,
encumbrances and defects except such as are described in the Prospectus or
such as, individually or in the aggregate, do not materially affect the
value of such property and do not interfere with the use made and proposed
to be made of such property by the Company and its subsidiaries; and any
real property and buildings held under lease by the Company and its
subsidiaries are held by them under valid, subsisting and enforceable
leases with such exceptions, individually or in the aggregate, as are not
material and do not interfere with the use made and proposed to be made of
such property and buildings by the Company and its subsidiaries, in each
case except as described in the Prospectus.
(t) The Company and its subsidiaries own or possess, or can
acquire on reasonable terms, all material patents, patent rights, licenses,
inventions, copyrights, know-how (including trade secrets and other
unpatented and/or unpatentable proprietary or confidential information,
systems or procedures), trademarks, service marks and trade names currently
employed by them in connection with the business now operated by them, and
neither the Company nor any of its subsidiaries has received any notice of
infringement of or conflict with asserted rights of others with respect to
any of the foregoing which, singly or in the aggregate, if the subject of
an unfavorable decision, ruling or finding, would have a material adverse
effect on the Company and its subsidiaries, taken as a whole.
(u) No material labor dispute with the employees of the
Company or any of its subsidiaries exists, except as described in the
Prospectus, or, to the knowledge of the Company, is imminent; and the
Company is not aware of any existing, threatened or imminent labor
disturbance by the employees of any of its principal suppliers,
manufacturers or contractors that could have a material adverse effect on
the Company and its subsidiaries, taken as a whole.
(v) The Company and its subsidiaries are insured by insurers
of recognized financial responsibility against such losses and risks and in
such amounts as are prudent and customary in the businesses in which they
are engaged; neither the Company nor any of its subsidiaries has been
refused any insurance coverage sought or applied for; and neither the
Company nor any of its subsidiaries has any reason to believe that it will
not be able to renew its existing insurance coverage as and when such
coverage expires or to obtain similar coverage from similar insurers as may
be necessary to continue its business at a cost
7
<PAGE>
that would not have a material adverse effect on the Company and its
subsidiaries, taken as a whole, except as described in the Prospectus.
(w) The Company and its subsidiaries possess all
certificates, authorizations and permits issued by the appropriate federal,
state or foreign regulatory authorities necessary to conduct their
respective business, and neither the Company nor any of its subsidiaries
has received any notice of proceedings relating to the revocation or
modification of any such certificate, authorization or permit which, singly
or in the aggregate, if the subject of an unfavorable decision, ruling or
finding, would have a material adverse effect on the Company and its
subsidiaries, taken as a whole, except as described in the Prospectus.
(x) The Company and each of its subsidiaries maintain a
system of internal accounting controls sufficient to provide reasonable
assurance that (i) transactions are executed in accordance with
management's general or specific authorizations; (ii) transactions are
recorded as necessary to permit preparation of financial statements in
conformity with generally accepted accounting principles and to maintain
asset accountability; (iii) access to assets is permitted only in
accordance with management's general or specific authorization; and (iv)
the recorded accountability for assets is compared with the existing assets
at reasonable intervals and appropriate action is taken with respect to any
differences.
(y) The historical financial statements (including the
related notes and supporting schedules) filed as part of the Registration
Statement or included in the Prospectus present fairly in all material
respects the financial condition and results of operations of the entities
purported to be shown thereby, at the dates and for the periods indicated,
and have been prepared in conformity with generally accepted accounting
principles applied on a consistent basis throughout the periods involved.
The unaudited pro forma financial information set forth in the Prospectus
presents fairly, on the basis stated in the Prospectus, the information set
forth therein, has been prepared in accordance with the applicable rules
and regulations and the guidelines of the Commission with respect to pro
forma financial statements, has been properly compiled on the pro forma
bases set forth therein and the assumptions used in the preparation thereof
are reasonable and the adjustments used therein are appropriate to give
effect to the transactions or circumstances referred to therein.
Furthermore, the Company represents and warrants to the Underwriters and
their respective affiliates that (i) the Registration Statement, the Prospectus
and any preliminary prospectus comply, and any further amendments or supplements
thereto will comply, with any applicable laws or regulations of foreign
jurisdictions in which the Prospectus or any preliminary
8
<PAGE>
prospectus, as amended or supplemented, if applicable, are distributed in
connection with the Directed Share Program, and (ii) no authorization, approval,
consent, license, order, registration or qualification of or with any
government, governmental instrumentality or court, other than such as have been
obtained, is necessary under the securities laws and regulations of foreign
jurisdictions in which the Directed Shares are offered outside the United
States.
The Company has not offered, or caused the Underwriters or any of
their respective affiliates to offer, Shares to any person pursuant to the
Directed Share Program with the specific intent to unlawfully influence (i) a
customer or supplier of the Company to alter the customer's or supplier's level
or type of business with the Company, or (ii) a trade journalist or publication
to write or publish favorable information about the Company or its products.
2. Agreements to Sell and Purchase. The Company hereby agrees to
sell to the several Underwriters, and each Underwriter, upon the basis of the
representations and warranties herein contained, but subject to the conditions
hereinafter stated, agrees, severally and not jointly, to purchase from the
Company the respective numbers of Firm Shares set forth in Schedules I and II
hereto opposite its name at U.S.$[_____] a share ("Purchase Price").
On the basis of the representations and warranties contained in this
Agreement, and subject to its terms and conditions, the Company agrees to sell
to the U.S. Underwriters the Additional Shares, and the U.S. Underwriters shall
have a one-time right to purchase, severally and not jointly, up to [__________]
Additional Shares at the Purchase Price. If the U.S. Representatives, on behalf
of the U.S. Underwriters, elect to exercise such option, the U.S.
Representatives shall so notify the Company in writing not later than 30 days
after the date of this Agreement, which notice shall specify the number of
Additional Shares to be purchased by the U.S. Underwriters and the date on which
such shares are to be purchased. Such date may be the same as the Closing Date
(as defined below) but not earlier than the Closing Date nor later than ten
business days after the date of such notice. Additional Shares may be purchased
as provided in Section 4 hereof solely for the purpose of covering
overallotments made in connection with the offering of the Firm Shares. If any
Additional Shares are to be purchased, each U.S. Underwriter agrees, severally
and not jointly, to purchase the number of Additional Shares (subject to such
adjustments to eliminate fractional shares as the U.S. Representatives may
determine) that bears the same proportion to the total number of Additional
Shares to be purchased as the number of U.S. Firm Shares set forth in Schedule I
hereto opposite the name of such U.S. Underwriter bears to the total number of
U.S. Firm Shares.
The Company hereby agrees that, without the prior written consent of
Lehman Brothers on behalf of the Underwriters, it will not, during the period
ending 180 days after the date of the Prospectus, (i) offer, pledge, sell,
contract to sell, sell any option or contract to purchase, purchase any option
or contract to sell, grant any option, right or warrant to purchase, lend, or
9
<PAGE>
otherwise transfer or dispose of, directly or indirectly, any shares of Common
Stock or any securities convertible into or exercisable or exchangeable for
Common Stock or (ii) enter into any swap or other arrangement that transfers to
another, in whole or in part, any of the economic consequences of ownership of
the Common Stock, whether any such transaction described in clause (i) or (ii)
above is to be settled by delivery of Common Stock or such other securities, in
cash or otherwise. The foregoing sentence shall not apply to (A) the Shares to
be sold hereunder or (B) the issuance by the Company of shares of Common Stock
upon the exercise of an option or warrant or the conversion of a security
outstanding on the date hereof of which the Underwriters have been advised in
writing.
3. Terms of Public Offering. The Company is advised by you that the
Underwriters propose to make a public offering of their respective portions of
the Shares as soon after the Registration Statement and this Agreement have
become effective as in your judgment is advisable. The Company is further
advised by you that the Shares are to be offered to the public initially at
U.S.$[_____] a share (the "Public Offering Price") and to certain dealers
selected by you at a price that represents a concession not in excess of
U.S.$[____] a share under the Public Offering Price, and that any Underwriter
may allow, and such dealers may reallow, a concession, not in excess of
U.S.$[____] a share, to any Underwriter or to certain other dealers.
4. Payment and Delivery. Payment for the Firm Shares shall be made
to the Company in Federal or other funds immediately available in New York City
against delivery of such Firm Shares for the respective accounts of the several
Underwriters at a closing to be held at the offices of Shearman & Sterling, 599
Lexington Avenue, New York, New York at 10:00 a.m., New York City time, on
[____________], 2000, or at such other time on the same or such other date, not
later than [_________], 2000, as shall be designated in writing by you. The
time and date of such payment are hereinafter referred to as the "Closing Date".
Payment for any Additional Shares shall be made to the Company in
Federal or other funds immediately available in New York City against delivery
of such Additional Shares for the respective accounts of the several
Underwriters at a closing to be held at the offices of Shearman & Sterling, 599
Lexington Avenue, New York, New York at 10:00 a.m., New York City time, on the
date specified in the notice described in Section 2 or at such other time on the
same or on such other date, in any event not later than [_______], 2000, as
shall be designated in writing by the U.S. Representatives. The time and date
of such payment are hereinafter referred to as the "Option Closing Date".
Certificates for the Firm Shares and Additional Shares shall be in
definitive form and registered in such names and in such denominations as you
shall request in writing not later than one full business day prior to the
Closing Date or the Option Closing Date, as the case may be. The certificates
evidencing the Firm Shares and Additional Shares shall be delivered to you
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on the Closing Date or the Option Closing Date, as the case may be, for the
respective accounts of the several Underwriters, with any transfer taxes payable
in connection with the transfer of the Shares to the Underwriters duly paid,
against payment of the Purchase Price therefor.
5. Conditions to the Underwriters' Obligations. The obligations of
the Company to sell the Shares to the Underwriters and the several obligations
of the Underwriters to purchase and pay for the Shares on the Closing Date are
subject to the condition that the Registration Statement shall have become
effective not later than [_______] (New York City time) on the date hereof.
The several obligations of the Underwriters are subject to the
following further conditions:
(a) Subsequent to the execution and delivery of this Agreement
and prior to the Closing Date:
(i) there shall not have occurred any downgrading, nor
shall any notice have been given of any intended or potential
downgrading or of any review for a possible change that does not
indicate the direction of the possible change, in the rating accorded
any of the Company's securities by any "nationally recognized
statistical rating organization," as such term is defined for purposes
of Rule 436(g)(2) under the Securities Act; and
(ii) there shall not have occurred any change, or any
development involving a prospective change, in the condition,
financial or otherwise, or in the earnings, business or operations of
the Company and its subsidiaries, taken as a whole, from that set
forth in the Prospectus (exclusive of any amendments or supplements
thereto subsequent to the date of this Agreement) that, in your
judgment, is material and adverse and that makes it, in your judgment,
impracticable to market the Shares on the terms and in the manner
contemplated in the Prospectus.
(b) The Underwriters shall have received on the Closing Date a
certificate, dated the Closing Date and signed by an executive officer of
the Company, to the effect set forth in Section 5(a)(i) above and to the
effect that the representations and warranties of the Company contained in
this Agreement are true and correct as of the Closing Date and that the
Company has complied with all of the agreements and satisfied all of the
conditions on its part to be performed or satisfied hereunder on or before
the Closing Date.
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The officer signing and delivering such certificate may rely upon
the best of his or her knowledge as to proceedings threatened.
(c) The Underwriters shall have received on the Closing Date an
opinion of Cooley Godward LLP, outside counsel for the Company, dated the
Closing Date, to the effect that:
(i) the Company has been duly incorporated, is validly
existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation, has the corporate power and
authority to own its property and to conduct its business as described
in the Prospectus and is duly qualified to transact business and is in
good standing in each jurisdiction in which the conduct of its
business or its ownership or leasing of property requires such
qualification, except to the extent that the failure to be so
qualified or be in good standing would not have a material adverse
effect on the Company and its subsidiaries, taken as a whole;
(ii) each subsidiary of the Company has been duly
incorporated, is validly existing as a corporation in good standing
under the laws of the jurisdiction of its incorporation, has the
corporate power and authority to own its property and to conduct its
business as described in the Prospectus and is duly qualified to
transact business and is in good standing in each jurisdiction in
which the conduct of its business or its ownership or leasing of
property requires such qualification, except to the extent that the
failure to be so qualified or be in good standing would not have a
material adverse effect on the Company and its subsidiaries, taken as
a whole;
(iii) the authorized capital stock of the Company conforms
as to legal matters to the description thereof contained in the
Prospectus;
(iv) the shares of Common Stock outstanding prior to the
issuance of the Shares have been duly authorized and are validly
issued, fully paid and nonassessable and the issuance of the shares of
Common Stock outstanding prior to the issuance of the Shares were not
subject to any rights of first refusal, preemptive rights or similar
rights;
(v) all of the issued shares of capital stock of each
subsidiary of the Company have been duly and validly authorized and
issued, are fully paid and non-assessable and are owned directly by
the Company, free and clear of all liens, encumbrances, equities or
claims;
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(vi) the Shares have been duly authorized and, when
issued and delivered in accordance with the terms of this Agreement,
will be validly issued, fully paid and nonassessable, and the issuance
of such Shares will not be subject to any rights of first refusal,
preemptive rights or similar rights;
(vii) this Agreement has been duly authorized, executed
and delivered by the Company;
(viii) the execution and delivery by the Company of, and
the performance by the Company of its obligations under, this
Agreement will not contravene any provision of applicable law or the
certificate of incorporation or bylaws of the Company or, to the best
of such counsel's knowledge, any agreement or other instrument binding
upon the Company or any of its subsidiaries, or, to the best of such
counsel's knowledge, any judgment, order or decree of any governmental
body, agency or court having jurisdiction over the Company or any
subsidiary, and no consent, approval, authorization or order of, or
qualification with, any governmental body or agency is required for
the performance by the Company of its obligations under this
Agreement, except such as may be required by the securities or Blue
Sky laws of the various states in connection with the offer and sale
of the Shares by the U.S. Underwriters;
(ix) the statements (A) in the Prospectus under the
captions "Description of Capital Stock", "Certain United States Tax
Consequences for Non- U.S. Investors" and "Underwriters" and (B) in
the Registration Statement in Items 14 and 15, in each case insofar as
such statements constitute summaries of the legal matters, documents
or proceedings referred to therein, fairly present the information
called for with respect to such legal matters, documents and
proceedings and fairly summarize the matters referred to therein;
(x) after due inquiry, such counsel does not know of any
legal or governmental proceedings pending or threatened to which the
Company or any of its subsidiaries is a party or to which any of the
properties of the Company or any of its subsidiaries is subject that
are required to be described in the Registration Statement or the
Prospectus and are not so described or of any statutes, regulations,
contracts or other documents that are required to be described in the
Registration Statement or the Prospectus or to be filed as exhibits to
the Registration Statement that are not described or filed as
required;
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(xi) the Company is not and, after giving effect to the
offering and sale of the Shares and the application of the proceeds
thereof as described in the Prospectus, will not be an "investment
company" as such term is defined in the Investment Company Act of
1940, as amended;
(xii) such counsel (A) is of the opinion that the
Registration Statement and Prospectus (except for financial statements
and schedules and other financial and statistical data included
therein as to which such counsel need not express any opinion) comply
as to form in all material respects with the Securities Act and the
applicable rules and regulations of the Commission thereunder, (B) has
no reason to believe that (except for financial statements and
schedules and other financial and statistical data as to which such
counsel need not express any belief) the Registration Statement and
the prospectus included therein at the time the Registration Statement
became effective contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or
necessary to make the statements therein not misleading and (C) has no
reason to believe that (except for financial statements and schedules
and other financial and statistical data as to which such counsel need
not express any belief) the Prospectus when issued contained, or as of
the date such opinion is delivered, contains, any untrue statement of
a material fact or omitted or omits to state a material fact necessary
in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
With respect to Section 5(c)(xii) above, Cooley Godward LLP may
state that their opinion and belief are based upon their participation in
the preparation of the Registration Statement and Prospectus and any
amendments or supplements thereto and review and discussion of the contents
thereof, but are without independent check or verification, except as
specified.
The opinion of Cooley Godward LLP described in Section 5(c) above
shall be rendered to the Underwriters at the request of the Company and
shall so state therein.
(d) The Underwriters shall have received on the Closing Date an
opinion of Brobeck Phleger & Harrison LLP, special litigation counsel for
the Company, dated the Closing Date, to the effect that the descriptions in
the Prospectus relating to the pending litigation between the Company and
the City of Anaheim, including, without limitation, those under the caption
"Business--Legal Proceedings" and "Risk Factors--[Litigation]", to the
extent that they constitute matters of law or legal conclusions, have been
reviewed by them and fairly present the information disclosed therein in
all material respects, and
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nothing has come to their attention which leads them to believe that (A)
the information set forth in the Registration Statement under the captions
referred to above as of the time the Registration Statement became
effective under the Securities Act, and as of the Closing Date, contained
an untrue statement of a material fact or omitted to state a material fact
necessary to make the statements therein not misleading and (B) the
information set forth in the Prospectus under the captions referred to
above as of its date and as of the Closing Date, contained an untrue
statement of a material fact or omitted to state a material fact, necessary
to make the statements therein, in the light of the circumstances under
which they were made, not misleading.
(e) The Underwriters shall have received on the Closing Date an
opinion of Blumenfeld & Cohen, special regulatory counsel for the Company,
dated the Closing Date, to the effect that:
(i) (1)the execution and delivery of the Underwriting
Agreement by the Company and the consummation of the transactions
contemplated thereby do not violate (ii) the Communications Act
of 1934, as amended, including amendments made by the
Telecommunications Act of 1996, 47 U.S.C. (S) 151 et seq.
("Communications Act"); any laws governing the telecommunications
of any state where the Company offers its services or is
otherwise subject to regulation; (iii) any rules, regulations and
orders of state regulatory commissions ("State
Telecommunications Laws") applicable to the Company and it's
subsidiaries, or (iv) to their knowledge, any decree from any
court; and (2) no authorization of the Federal Communications
Commission ("FCC") or any State regulatory commission ("State
Commission") that has not already been received from, or prior
filing that has not already been made with, such agency is
necessary for the execution and delivery of the Underwriting
Agreement by the Company and the consummation of the transactions
contemplated thereby in accordance with the terms thereof;
(ii) to their knowledge: (1) each of the Company and its
subsidiaries has made all reports and filings, and paid all fees,
required by the FCC and the State Commissions, and has all
certificates, orders, permits, licenses, authorizations,
consents, and approvals of and from, and has made all filings and
registrations, with the FCC and the State Commissions necessary
to own, lease, license and use its properties and assets and to
conduct its business in the manner described in the Prospectus;
and (2) neither the Company nor any of its subsidiaries has
received any notice of proceedings relating to the violation,
revocation or modification of
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any such certificates, orders, permits, licenses, authorizations,
consents, or approvals, or the qualification or rejection of any
such filing or registration, the effect of which, singly or in
the aggregate, would have a material adverse effect on the
prospects or condition, financial or otherwise, or on the
earnings, business or operations of the Company and its
subsidiaries, taken as a whole;
(iii) to their knowledge, neither the Company nor any of
its subsidiaries is in violation of, or in default under, any
provision of the Communications Act or State Telecommunications
Laws, the effect of which, singly or in the aggregate, would have
a material adverse effect on the condition, financial or
otherwise, or on the earnings, business or operations of the
Company and its subsidiaries, taken as a whole;
(iv) to their knowledge: (i) no adverse judgment,
decree or order of the FCC or any State Commission has been
issued against the Company or any of its subsidiaries and (ii) no
litigation, proceeding (other than application proceedings
initiated by the Company or its subsidiaries), inquiry or
investigation has been commenced or threatened against the
Company or any of its subsidiaries before or by the FCC or any
State Commission which, if decided adversely to the Company's
interest, would, singly or in the aggregate, have a material
adverse effect on the condition, financial or otherwise, or on
the earnings, business or operations of the Company and its
subsidiaries, taken as a whole; and
(v) the statements in the Prospectus under the captions
"Risk Factors -- We Are Dependent on the Incumbent Local Exchange
Carrier for Copper and Fiber Optic Telephone Lines, Co-Location
Space and Transmission Facilities, and the Incumbent Telephone
Companies' Reluctance to Corporate with Us or Inability to
Provide the Services or Facilities We Need Could Adversely Affect
Our Business; Interference or Claims of Interference Could Delay
our Rollout or Harm our Services; We Are Unable to Control the
Terms and Conditions under which We Gain Access to the Incumbent
Local Carriers Co-Location and Transmission Facilities; We Are
Unable to Control the Terms or Timing of Extending Our
Interconnection Agreements; Our Services Are Subject to
Government Regulation, and Changes in Current or Future Laws or
Regulations Could Restrict the Way We Operate Our Business;
Challenges to Governmental Regulation Could Increase Our
Operating Costs; A Recent U.S. Supreme Court Decision Has Raised
Questions About Our Ability to Obtain Essential
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<PAGE>
Facilities From Incumbent Local Carriers, Which May Hurt Our
Business; We May Be Liable for Information Disseminated through
Our Network and Business - Government Regulation", to the extent
that they discuss federal, state, and local statutes, regulations
and proceedings with respect to telecommunications regulatory
matters, have been reviewed by them and fairly present the
information disclosed therein in all material respects, and
nothing has come to their attention which leads them to believe
that (A) the information set forth in the Registration Statement
under the captions referred to above as of the time the
Registration Statement became effective under the Securities Act,
and as of the Closing Date, contained an untrue statement of a
material fact or omitted to state a material fact necessary to
make the statements therein not misleading and (B) the
information set forth in the Prospectus under the captions
referred to above as of its date and as of the Closing Date,
contained an untrue statement of a material fact or omitted to
state a material fact, necessary to make the statements therein,
in the light of the circumstances under which they were made, not
misleading.
(vi) except as disclosed in the Prospectus, there are no
rulemakings or other administrative proceedings pending before
the FCC or the State Commissions which (x) are generally
applicable to telecommunications services and (y) if decided
adversely to the interests of the Company, would have a material
adverse effect on the Company and its subsidiaries, taken as a
whole; and
(f) The Underwriters shall have received on the Closing Date an
opinion of Shearman & Sterling, counsel for the Underwriters, dated the
Closing Date, in form and substance satisfactory to you.
(g) The Underwriters shall have received, on each of the date
hereof and the Closing Date, a letter dated the date hereof or the Closing
Date, as the case may be, in form and substance satisfactory to the
Underwriters, from PricewaterhouseCoopers LLP, independent public
accountants, containing statements and information of the type ordinarily
included in accountants' "comfort letters" to underwriters with respect to
the financial statements and certain financial information contained in the
Registration Statement and the Prospectus; provided that the letter
delivered on the Closing Date shall use a "cut-off date" not earlier than
the date hereof.
(h) The "lockup" agreements, each substantially in the form of
Exhibit A hereto, between you and certain shareholders, officers and
directors of the Company relating to sales and certain other dispositions
of shares of Common Stock or certain other
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securities, delivered to you on or before the date hereof, shall be in full
force and effect on the Closing Date.
(i) The Common Stock shall have been approved for listing on the
Nasdaq National Market, subject only to official notice of issuance.
(j) You shall have received such other documents and
certificates as are reasonably requested by you or your counsel.
The several obligations of the U.S. Underwriters to purchase
Additional Shares hereunder are subject to the delivery to the U.S.
Representatives on the Option Closing Date of such documents as they may
reasonably request with respect to the good standing of the Company, the due
authorization and issuance of the Additional Shares and other matters related to
the issuance of the Additional Shares.
6. Covenants of the Company. In further consideration of the
agreements of the Underwriters herein contained, the Company covenants with each
Underwriter as follows:
(a) To furnish to you, without charge, [_____] signed copies of
the Registration Statement (including exhibits thereto) and for delivery to
each other Underwriter a conformed copy of the Registration Statement
(without exhibits thereto) and to furnish to you in New York City, without
charge, prior to 10:00 a.m. New York City time on the business day next
succeeding the date of this Agreement and during the period mentioned in
Section 6(c) below, as many copies of the Prospectus and any supplements
and amendments thereto or to the Registration Statement as you may
reasonably request.
(b) Before amending or supplementing the Registration Statement
or the Prospectus, to furnish to you a copy of each such proposed amendment
or supplement and not to file any such proposed amendment or supplement to
which you reasonably object, and to file with the Commission within the
applicable period specified in Rule 424(b) under the Securities Act any
prospectus required to be filed pursuant to such Rule.
(c) If, during such period after the first date of the public
offering of the Shares as in the opinion of counsel for the Underwriters
the Prospectus is required by law to be delivered in connection with sales
by an Underwriter or dealer, any event shall occur or condition exist as a
result of which it is necessary to amend or supplement the Prospectus in
order to make the statements therein, in the light of the circumstances
when the Prospectus is delivered to a purchaser, not misleading, or if, in
the opinion of counsel for the Underwriters, it is necessary to amend or
supplement the Prospectus to comply with applicable law, forthwith to
prepare, file with the Commission and furnish, at its own
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<PAGE>
expense, to the Underwriters and to the dealers (whose names and addresses
you will furnish to the Company) to which Shares may have been sold by you
on behalf of the Underwriters and to any other dealers upon request, either
amendments or supplements to the Prospectus so that the statements in the
Prospectus as so amended or supplemented will not, in the light of the
circumstances when the Prospectus is delivered to a purchaser, be
misleading or so that the Prospectus, as amended or supplemented, will
comply with law.
(d) To endeavor to qualify the Shares for offer and sale under
the securities or Blue Sky laws of such jurisdictions as you shall
reasonably request.
(e) To make generally available to the Company's security
holders and to you as soon as practicable an earning statement covering the
twelve-month period ending , 2000 that satisfies the provisions
of Section 11(a) of the Securities Act and the rules and regulations of the
Commission thereunder.
(f) Whether or not the transactions contemplated in this
Agreement are consummated or this Agreement is terminated, to pay or cause
to be paid all expenses incident to the performance of its obligations
under this Agreement, including: (i) the fees, disbursements and expenses
of the Company's counsel and the Company's accountants in connection with
the registration and delivery of the Shares under the Securities Act and
all other fees or expenses in connection with the preparation and filing of
the Registration Statement, any preliminary prospectus, the Prospectus and
amendments and supplements to any of the foregoing, including all printing
costs associated therewith, and the mailing and delivering of copies
thereof to the Underwriters and dealers, in the quantities hereinabove
specified, (ii) all costs and expenses related to the transfer and delivery
of the Shares to the Underwriters, including any transfer or other taxes
payable thereon, (iii) the cost of printing or producing any Blue Sky or
Legal Investment memorandum in connection with the offer and sale of the
Shares under state securities laws and all expenses in connection with the
qualification of the Shares for offer and sale under state securities laws
as provided in Section 6(d) hereof, including filing fees and the
reasonable fees and disbursements of counsel for the Underwriters in
connection with such qualification and in connection with the Blue Sky or
Legal Investment memorandum, (iv) all filing fees and the reasonable fees
and disbursements of counsel to the Underwriters incurred in connection
with the review and qualification of the offering of the Shares by the
National Association of Securities Dealers, Inc., (v) all fees and expenses
in connection with the preparation and filing of the registration statement
on Form 8-A relating to the Common Stock and all costs and expenses
incident to listing the Shares on the Nasdaq National Market (vi) the cost
of printing certificates representing the Shares, (vii) the costs and
charges of any transfer agent, registrar or depositary, (viii) the costs
and expenses of the Company relating to investor presentations on any "road
show" undertaken in connection with the marketing of
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the offering of the Shares, including, without limitation, expenses
associated with the production of road show slides and graphics, fees and
expenses of any consultants engaged in connection with the road show
presentations with the prior approval of the Company, travel and lodging
expenses of the representatives and officers of the Company and any such
consultants, and the cost of any aircraft chartered in connection with the
road show, and (ix) all other costs and expenses incident to the
performance of the obligations of the Company hereunder for which provision
is not otherwise made in this Section. It is understood, however, that
except as provided in this Section, Section 7 entitled "Indemnity and
Contribution", and the last paragraph of Section 9 below, the Underwriters
will pay all of their costs and expenses, including fees and disbursements
of their counsel, stock transfer taxes payable on resale of any of the
Shares by them and any advertising expenses connected with any offers they
may make.
(g) that in connection with the Directed Share Program, the
Company will ensure that the Directed Shares will be restricted to the
extent required by the National Association of Securities Dealers, Inc.
(the "NASD") or the NASD rules from sale, transfer, assignment, pledge or
hypothecation for a period of three months following the date of the
effectiveness of the Registration Statement. Lehman Brothers will notify
the Company as to which Participants will need to be so restricted. The
Company will direct the transfer agent to place stop transfer restrictions
upon such securities for such period of time.
(h) to pay all fees and disbursements of counsel incurred by the
Underwriters in connection with the Directed Share Program and stamp
duties, similar taxes or duties or other taxes, if any, incurred by the
Underwriters in connection with the Directed Share Program.
Furthermore, the Company covenants with Lehman Brothers and its affiliates
that the Company will comply with all applicable securities and other
applicable laws, rules and regulations in each foreign jurisdiction in
which the Directed Shares are offered in connection with the Directed Share
Program.
7. Indemnity and Contribution. (a) The Company agrees to indemnify
and hold harmless each Underwriter and each person, if any, who controls any
Underwriter within the meaning of either Section 15 of the Securities Act or
Section 20 of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), from and against any and all losses, claims, damages and liabilities
(including, without limitation, any legal or other expenses reasonably incurred
in connection with defending or investigating any such action or claim) which
arise out of, or are based upon, (i) any untrue statement or alleged untrue
statement of a material fact contained (A) in the Registration Statement or any
amendment thereof, any preliminary prospectus or the
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Prospectus (as amended or supplemented if the Company shall have furnished any
amendments or supplements thereto), or(B) in any materials or information
provided to investors by, or with the approval of, the Company in connection
with the marketing of the offering of the Shares, including any "roadshow" or
other presentation made to investors by the Company (whether in person or
electronically) ("Roadshow materials"), (ii) any omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading or (iii) any act or failure to act or any
alleged act or failure to act by any underwriter in connection with, or relating
in any manner to, the Shares or the offering thereof, and which is included as
part of or referred to in any loss, claim, damage liability or action arising
out of or based upon matters covered by clause (i) or (ii) above (provided that
the Company shall not be liable under this clause (iii) to the extent that it is
determined in a final judgment by a court of competent jurisdiction that such
loss, claim, damage, liability or action resulted directly from any such acts or
failures to act undertaken or omitted to be taken by such Underwriter through
its gross negligence or wilful misconduct) except insofar as such losses,
claims, damages or liabilities are caused by any such untrue statement or
omission or alleged untrue statement or omission based upon information relating
to any Underwriter furnished to the Company in writing by such Underwriter
through you expressly for use therein.
(b) Each Underwriter agrees, severally and not jointly, to indemnify
and hold harmless the Company, its directors, its officers who sign the
Registration Statement and each person, if any, who controls the Company within
the meaning of either Section 15 of the Securities Act or Section 20 of the
Exchange Act to the same extent as the foregoing indemnity in clauses (a)(i) and
(a)(ii) above from the Company to such Underwriter, but only with reference to
information relating to such Underwriter furnished to the Company in writing by
such Underwriter through you expressly for use in the Registration Statement,
any preliminary prospectus, the Prospectus or any amendments or supplements
thereto.
(c) In case any proceeding (including any governmental investigation)
shall be instituted involving any person in respect of which indemnity may be
sought pursuant to Section 7(a) or 7(b), such person (the "indemnified party")
shall promptly notify the person against whom such indemnity may be sought (the
"indemnifying party") in writing and the indemnifying party, upon request of the
indemnified party, shall retain counsel reasonably satisfactory to the
indemnified party to represent the indemnified party and any others the
indemnifying party may designate in such proceeding and shall pay the fees and
disbursements of such counsel related to such proceeding. In any such
proceeding, any indemnified party shall have the right to retain its own
counsel, but the fees and expenses of such counsel shall be at the expense of
such indemnified party unless (i) the indemnifying party and the indemnified
party shall have mutually agreed to the retention of such counsel or (ii) the
named parties to any such proceeding (including any impleaded parties) include
both the indemnifying party and the indemnified party and representation of both
parties by the same counsel would be inappropriate due to actual or potential
differing interests
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between them. It is understood that the indemnifying party shall not, in respect
of the legal expenses of any indemnified party in connection with any proceeding
or related proceedings in the same jurisdiction, be liable for the fees and
expenses of more than one separate firm (in addition to any local counsel) for
all such indemnified parties and that all such fees and expenses shall be
reimbursed as they are incurred. Such firm shall be designated in writing by
Lehman Brothers in the case of parties indemnified pursuant to Section 7(a), and
by the Company, in the case of parties indemnified pursuant to Section 7(b). The
indemnifying party shall not be liable for any settlement of any proceeding
effected without its written consent, but if settled with such consent or if
there be a final judgment for the plaintiff, the indemnifying party agrees to
indemnify the indemnified party from and against any loss or liability by reason
of such settlement or judgment. Notwithstanding the foregoing sentence, if at
any time an indemnified party shall have requested an indemnifying party to
reimburse the indemnified party for fees and expenses of counsel as contemplated
by the second and third sentences of this paragraph, the indemnifying party
agrees that it shall be liable for any settlement of any proceeding effected
without its written consent if (i) such settlement is entered into more than 30
days after receipt by such indemnifying party of the aforesaid request and (ii)
such indemnifying party shall not have reimbursed the indemnified party in
accordance with such request prior to the date of such settlement. No
indemnifying party shall, without the prior written consent of the indemnified
party, effect any settlement of any pending or threatened proceeding in respect
of which any indemnified party is or could have been a party and indemnity could
have been sought hereunder by such indemnified party, unless such settlement
includes an unconditional release of such indemnified party from all liability
on claims that are the subject matter of such proceeding.
(d) To the extent the indemnification provided for in Section 7(a) or
7(b) is unavailable to an indemnified party or insufficient in respect of any
losses, claims, damages or liabilities referred to therein, then each
indemnifying party under such paragraph, in lieu of indemnifying such
indemnified party thereunder, shall contribute to the amount paid or payable by
such indemnified party as a result of such losses, claims, damages or
liabilities (i) in such proportion as is appropriate to reflect the relative
benefits received by the Company on the one hand and the Underwriters on the
other hand from the offering of the Shares or (ii) if the allocation provided by
clause 7(d)(i) above is not permitted by applicable law, in such proportion as
is appropriate to reflect not only the relative benefits referred to in clause
7(d)(i) above but also the relative fault of the Company on the one hand and of
the Underwriters on the other hand in connection with the statements or
omissions that resulted in such losses, claims, damages or liabilities, as well
as any other relevant equitable considerations. The relative benefits received
by the Company on the one hand and the Underwriters on the other hand in
connection with the offering of the Shares shall be deemed to be in the same
respective proportions as the net proceeds from the offering of the Shares
(before deducting expenses) received by the Company and the total underwriting
discounts and commissions received by the Underwriters, in each case as set
forth in the table on the cover of the Prospectus, bear to the aggregate Public
Offering Price of the
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Shares. The relative fault of the Company on the one hand and the Underwriters
on the other hand shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Company or by the Underwriters and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission. The Underwriters' respective obligations to contribute
pursuant to this Section 7 are several in proportion to the respective number of
Shares they have purchased hereunder, and not joint.
(e) The Company and the Underwriters agree that it would not be just
or equitable if contribution pursuant to this Section 7 were determined by pro
rata allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation that does not take account of the
equitable considerations referred to in Section 7(d). The amount paid or
payable by an indemnified party as a result of the losses, claims, damages and
liabilities referred to in the immediately preceding paragraph shall be deemed
to include, subject to the limitations set forth above, any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. Notwithstanding the
provisions of this Section 7, no Underwriter shall be required to contribute any
amount in excess of the amount by which the total price at which the Shares
underwritten by it and distributed to the public were offered to the public
exceeds the amount of any damages that such Underwriter has otherwise been
required to pay by reason of such untrue or alleged untrue statement or omission
or alleged omission. No person guilty of fraudulent misrepresentation (within
the meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. The remedies provided for in this Section 7 are not
exclusive and shall not limit any rights or remedies which may otherwise be
available to any indemnified party at law or in equity.
(f) The indemnity and contribution provisions contained in this
Section 7 and the representations, warranties and other statements of the
Company contained in this Agreement shall remain operative and in full force and
effect regardless of (i) any termination of this Agreement, (ii) any
investigation made by or on behalf of any Underwriter or any person controlling
any Underwriter or by or on behalf of the Company, its officers or directors or
any person controlling the Company and (iii) acceptance of and payment for any
of the Shares.
8. Directed Share Program Indemnification. (a) The Company agrees
to indemnify and hold harmless Lehman Brothres and its affiliates and each
person, if any, who controls Lehman Brothers or its affiliates within the
meaning of either Section 15 of the Securities Act or Section 20 of the Exchange
Act ("Lehman Brothers Entities"), from and against any and all losses, claims,
damages and liabilities (including, without limitation, any legal or other
expenses reasonably incurred in connection with defending or investigating any
such action or claim) (i) caused by any untrue statement or alleged untrue
statement of a material fact contained in any
23
<PAGE>
material prepared by or with the consent of the Company for distribution to
Participants in connection with the Directed Share Program or caused by any
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading; (ii)
caused by the failure of any Participant to pay for and accept delivery of
Directed Shares that the Participant agreed to purchase; or (iii) related to,
arising out of, or in connection with the Directed Share Program, other than
losses, claims, damages or liabilities (or expenses relating thereto) that are
finally judicially determined to have resulted from the bad faith or gross
negligence of Lehman Brothers Entities.
(b) In case any proceeding (including any governmental investigation)
shall be instituted involving any Lehman Brothers Entity in respect of which
indemnity may be sought pursuant to Section 8(a), the Lehman Brothres Entity
seeing indemnity, shall promptly notify the Company in writing and the Company,
upon request of the Lehman Brothers Entity, shall retain counsel reasonably
satisfactory to the Lehman Brothers Entity to represent the Lehman Brothers
Entity and any others the Company may designate in such proceeding and shall pay
the fees and disbursements of such counsel related to such proceeding. In any
such proceeding, any Lehman Brothers Entity shall have the right to retain its
own counsel, but the fees and expenses of such counsel shall be at the expense
of such Lehman Brothers Entity unless (i) the Company shall have agreed to the
retention of such counsel or (ii) the named parties to any such proceeding
(including any impleaded parties) include both the Company and the Lehman
Brothers Entity and representation of both parties by the same counsel would be
inappropriate due to actual or potential differing interests between them. The
Company shall not, in respect of the legal expenses of the Lehman Brothers
Entities in connection with any proceeding or related proceedings in the same
jurisdiction, be liable for the fees and expenses of more than one separate firm
(in addition to any local counsel) for all Lehman Brothers Entities. Any such
separate firm for the Lehman Brothers Entities shall be designated in writing by
Lehman Brothers. The Company shall not be liable for any settlement of any
proceeding effected without its written consent, but if settled with such
consent or if there be a final judgment for the plaintiff, the Company agrees to
indemnify the Lehman Brothers Entities from and against any loss or liability by
reason of such settlement or judgment. Notwithstanding the foregoing sentence,
if at any time a Lehman Brothers Entity shall have requested the Company to
reimburse it for fees and expenses of counsel as contemplated by the second and
third sentences of this paragraph, the Company agrees that it shall be liable
for any settlement of any proceeding effected without its written consent if (i)
such settlement is entered into more than 30 days after receipt by the Company
of the aforesaid request and (ii) the Company shall not have reimbursed the
Lehman Brothers Entity in accordance with such request prior to the date of
such settlement. The Company shall not, without the prior written consent of
Lehman Brothers effect any settlement of any pending or threatened proceeding in
respect of which any Lehman Brothers Entity is or could have been a party and
indemnity could have been sought hereunder by such Lehman Brothers Entity,
unless such settlement includes an unconditional
24
<PAGE>
release of the Lehman Brothers Entitites from all liability on claims that are
the subject matter of such proceeding.
(c) To the extent the indemnification provided for in Section 8(a) is
unavailable to a Lehman Brothers Entity or insufficient in respect of any
losses, claims, damages or liabilities referred to therein, then the Company in
lieu of indemnifying the Lehman Brothers Entity thereunder, shall contribute to
the amount paid or payable by the Lehman Brothers Entity as a result of such
losses, claims, damages or liabilities (i) in such proportion as is appropriate
to reflect the relative benefits received by the Company on the one hand and the
Lehman Brothers Entities on the other hand from the offering of the Directed
Shares or (ii) if the allocation provided by clause 8(c)(i) above is not
permitted by applicable law, in such proportion as is appropriate to reflect not
only the relative benefits referred to in clause 8(c)(i) above but also the
relative fault of the Company on the one hand and of the Lehman Brothers
Entities on the other hand in connection with any statements or omissions that
resulted in such losses, claims, damages or liabilities, as well as any other
relevant equitable considerations. The relative benefits received by the
Company on the one hand and the Lehman Brothers Entities on the other hand in
connection with the offering of the Directed Shares shall be deemed to be in the
same respective proportions as the net proceeds from the offering of the
Directed Shares (before deducting expenses) and the total underwriting discounts
and commissions received by the Lehman Brothers Entities for the Directed
Shares, bear to the aggregate Public Offering Price of the Directed Shares. If
the loss, claim, damage or liability is caused by an untrue or alleged untrue
statement of a material fact or the omission or alleged omission to state a
material fact, the relative fault of the Company on the one hand and the Lehman
Brothers Entities on the other hand shall be determined by reference to, among
other things, whether the untrue or alleged untrue statement or the omission or
alleged omission relates to information supplied by the Company or by the Lehman
Brothers Entities and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
(d) The Company and the Lehman Brothers Entities agree that it would
not be just or equitable if contribution pursuant to this Section 8 were
determined by pro rata allocation (even if the Lehman Brothers Entities were
treated as one entity for such purpose) or by any other method of allocation
that does not take account of the equitable considerations referred to in
Section 8(c). The amount paid or payable by the Lehman Brothers Entities as a
result of the losses, claims, damages and liabilities referred to in the
immediately preceding paragraph shall be deemed to include, subject to the
limitations set forth above, any legal or other expenses reasonably incurred by
the Lehman Brothers Entities in connection with investigating or defending any
such action or claim. Notwithstanding the provisions of this Section 8, no
Lehman Brothers Entity shall be required to contribute any amount in excess of
the amount by which the total price at which the Directed Shares distributed to
the public were offered to the public exceeds the amount of any damages that
such Lehman Brothers Entity has otherwise been required to pay. The remedies
25
<PAGE>
provided for in this Section 8 are not exclusive and shall not limit any rights
or remedies which may otherwise be available to any indemnified party at law or
in equity.
(e) The indemnity and contribution provisions contained in this
Section 8 shall remain operative and in full force and effect regardless of (i)
any termination of this Agreement, (ii) any investigation made by or on behalf
of any Lehman Brothers Entity or the Company, its officers or directors or any
person controlling the Company and (iii) acceptance of and payment for any of
the Directed Shares.
9. Termination. This Agreement shall be subject to termination by
notice given by you to the Company, if (a) after the execution and delivery of
this Agreement and prior to the Closing Date (i) trading generally shall have
been suspended or materially limited on or by, as the case may be, any of the
New York Stock Exchange, the American Stock Exchange, the National Association
of Securities Dealers, Inc., the Chicago Board of Options Exchange, the Chicago
Mercantile Exchange or the Chicago Board of Trade, (ii) trading of any
securities of the Company shall have been suspended on any exchange or in any
over the counter market, (iii) a general moratorium on commercial banking
activities in New York shall have been declared by either Federal or New York
State authorities or (iv) there shall have occurred any outbreak or escalation
of hostilities or any change in financial markets or any calamity or crisis
that, in your judgment, is material and adverse and (b) in the case of any of
the events specified in clauses 9(a)(i) through 9(a)(iv), such event, singly or
together with any other such event, makes it, in your judgment, impracticable to
market the Shares on the terms and in the manner contemplated in the Prospectus.
10. Effectiveness; Defaulting Underwriters. This Agreement shall
become effective upon the execution and delivery hereof by the parties hereto.
If, on the Closing Date or the Option Closing Date, as the case may
be, any one or more of the Underwriters shall fail or refuse to purchase Shares
that it has or they have agreed to purchase hereunder on such date, and the
aggregate number of Shares which such defaulting Underwriter or Underwriters
agreed but failed or refused to purchase is not more than one-tenth of the
aggregate number of the Shares to be purchased on such date, the other
Underwriters shall be obligated severally in the proportions that the number of
Firm Shares set forth opposite their respective names in Schedule I or Schedule
II bears to the aggregate number of Firm Shares set forth opposite the names of
all such non-defaulting Underwriters, or in such other proportions as you may
specify, to purchase the Shares which such defaulting Underwriter or
Underwriters agreed but failed or refused to purchase on such date; provided
that in no event shall the number of Shares that any Underwriter has agreed to
purchase pursuant to this Agreement be increased pursuant to this Section 10 by
an amount in excess of one-ninth of such number of Shares without the written
consent of such Underwriter. If, on the Closing Date, any Underwriter or
Underwriters shall fail or refuse to purchase Firm Shares and the aggregate
number of Firm Shares with respect to which
26
<PAGE>
such default occurs is more than one-tenth of the aggregate number of Firm
Shares to be purchased, and arrangements satisfactory to you and the Company for
the purchase of such Firm Shares are not made within 36 hours after such
default, this Agreement shall terminate without liability on the part of any
non-defaulting Underwriter or the Company. In any such case either you or the
Company shall have the right to postpone the Closing Date, but in no event for
longer than seven days, in order that the required changes, if any, in the
Registration Statement and in the Prospectus or in any other documents or
arrangements may be effected. If, on the Option Closing Date, any Underwriter or
Underwriters shall fail or refuse to purchase Additional Shares and the
aggregate number of Additional Shares with respect to which such default occurs
is more than one-tenth of the aggregate number of Additional Shares to be
purchased, the non-defaulting Underwriters shall have the option to (i)
terminate their obligation hereunder to purchase Additional Shares or (ii)
purchase not less than the number of Additional Shares that such non-defaulting
Underwriters would have been obligated to purchase in the absence of such
default. Any action taken under this paragraph shall not relieve any defaulting
Underwriter from liability in respect of any default of such Underwriter under
this Agreement.
If this Agreement shall be terminated by the Underwriters, or any of
them, because of any failure or refusal on the part of the Company to comply
with the terms or to fulfill any of the conditions of this Agreement, or if for
any reason the Company shall be unable to perform its obligations under this
Agreement, the Company will reimburse the Underwriters or such Underwriters as
have so terminated this Agreement with respect to themselves, severally, for all
out-of-pocket expenses (including the fees and disbursements of their counsel)
reasonably incurred by such Underwriters in connection with this Agreement or
the offering contemplated hereunder.
11. Counterparts. This Agreement may be signed in two or more
counterparts, each of which shall be an original, with the same effect as if the
signatures thereto and hereto were upon the same instrument.
12. Applicable Law. This Agreement shall be governed by and
construed in accordance with the internal laws of the State of New York.
27
<PAGE>
13. Headings. The headings of the sections of this Agreement have
been inserted for convenience of reference only and shall not be deemed a part
of this Agreement.
Very truly yours,
FIRSTWORLD COMMUNICATIONS, INC.
By:_______________________
Name:
Title:
Accepted as of the date hereof
LEHMAN BROTHERS INC.
Bear Sterns & Co. Inc.
Deutsche Bank Securities Inc.
PaineWebber Incorporated
Fidelity Capital Markets
Acting severally on behalf of themselves
and the several U.S. Underwriters
named in Schedule I hereto.
By: Lehman Brothers Inc.
By:___________________________
Name:
Title:
LEHMAN BROTHERS INTERNATIONAL (EUROPE)
Bear Sterns International Limited
Deutsche Bank AG London
PaineWebber International Inc.
Acting severally on behalf of themselves
and the several International Underwriters
named in Schedule II hereto.
By:Lehman Brothers International (Europe)
By: ____________________________
Name:
Title:
28
<PAGE>
SCHEDULE I
U.S. UNDERWRITERS
Number of
Firm Shares
Underwriter To Be Purchased
---------------
Lehman Brothers Inc.
Bear Sterns & Co. Inc.
Deutsche Bank Securities Inc.
PaineWebber Incorporated
Fidelity Capital Markets
_______________
Total U.S. Firm Shares ..............
======================
<PAGE>
SCHEDULE II
INTERNATIONAL UNDERWRITERS
Number of
Firm Shares
Underwriter To Be Purchased
---------------
Lehman Brothers International (Europe)
Bear Stearns International Limited
Deutsche Bank AG London
PaineWebber International Inc.
_______________
Total International Firm Shares ......
===============================
<PAGE>
EXHIBIT A
[FORM OF LOCK-UP LETTER]
[____________], 1999
Lehman Brothers Inc.
Bear Stearns & Co. Inc.
Deutsche Bank Securities Inc.
PaineWebber Incorporated
Fidelity Capital Markets
c/o Lehman Brothers Inc.
3 World Financial center
New York, NY 10285
Lehman Brothers International (Europe)
Bear Stearns International Limited
Deutsche Bank AG London
PaineWebber International Inc.
c/o Lehman Brothres international (Europe)
1 Broadgate, 6th Floor
London EC2 M7HA
England
Dear Sirs and Mesdames:
The undersigned understands that Lehman Brothers Inc. ("Lehman Brothers")
and Lehman Brothers International (Europe) ("LBIE") propose to enter into an
Underwriting Agreement (the "Underwriting Agreement") with FirstWorld
Communications, Inc., a Delaware corporation (the "Company"), providing for the
public offering (the "Public Offering") by the several Underwriters, including
Lehman Brothers and LBIE (the "Underwriters") of shares (the "Shares") of the
Series B Common Stock, par value $.0001 per share of the Company (the "Common
Stock").
To induce the Underwriters that may participate in the Public Offering to
continue their efforts in connection with the Public Offering, the undersigned
hereby agrees that, without the prior written consent of Lehman Brothers on
behalf of the Underwriters, it will not, during the period commencing on the
date hereof and ending 180 days after the date of the final prospectus relating
to the Public Offering (the "Prospectus"), (1) offer, pledge, sell, contract to
sell, sell any option or contract to purchase, purchase any option or contract
to sell, grant any option, right or warrant to purchase, lend, or otherwise
transfer or dispose of, directly or indirectly, any shares
<PAGE>
of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock, or (2) enter into any swap or other arrangement
that transfers to another, in whole or in part, any of the economic consequences
of ownership of the Common Stock, whether any such transaction described in
clause (1) or (2) above is to be settled by delivery of Common Stock or such
other securities, in cash or otherwise. The foregoing sentence shall not apply
to (a) the sale of any Shares to the Underwriters pursuant to the Underwriting
Agreement or (b) transactions relating to shares of Common Stock or other
securities acquired in open market transactions after the completion of the
Public Offering. In addition, the undersigned agrees that, without the prior
written consent of Lehman Brothers on behalf of the Underwriters, it will not,
during the period commencing on the date hereof and ending 180 days after the
date of the Prospectus, make any demand for or exercise any right with respect
to, the registration of any shares of Common Stock or any security convertible
into or exercisable or exchangeable for Common Stock.
In addition, the undersigned hereby waives, on its own behalf and on behalf
of any other parties to such agreements or understandings, any and all notice
requirements and rights with respect to registration of securities pursuant to
any agreement, understanding or otherwise setting forth the terms of any
security of the Company held by the undersigned, including any registration
rights agreement to which the undersigned and the Company may be party; provided
that such waiver shall apply only to the Public Offering, and any other action
taken by the Company in connection with the Public Offering.
The undersigned hereby agrees that, to the extent that the terms of this
Lock-Up Agreement conflict with or are in any way inconsistent with any
registration rights or other agreement to which the undersigned and the Company
may be party, this Lock-Up Agreement supersedes such agreement.
Whether or not the Public Offering actually occurs depends on a number of
factors, including market conditions. Any Public Offering will only be made
pursuant to an Underwriting Agreement, the terms of which are subject to
negotiation between the Company and the Underwriters.
Very truly yours,
_________________________
(Name)
_________________________
(Address)
A-2
<PAGE>
EXHIBIT 4.2
FIRSTWORLD COMMUNICATIONS, INC.
A statement of the powers, designations, preferences and relative,
participating, optional or other special rights of each class of stock or series
thereof and the qualifications, limitations or restrictions of such preferences
and/or rights as established, from time to time, by the Certificate of
Incorporation of the Corporation, as now or hereafter amended, and by any
certificate of determination, the number of shares constituting each class and
series, and the designations thereof, may be obtained by the holder hereof upon
written request and without charge to the Secretary of the Corporation at the
principal office of the Corporation. The following abbreviations, when used in
the inscription on the face of this certificate, shall be construed as though
they were written out in full according to applicable laws or regulations:
TEN COM - as tenants in common UNIF GIFT MIN ACT - Custodian
TEN ENT - as tenants by the entireties --------------
JT TEN - as joint tenants with right of (Cust) (Minor)
survivorship and not as tenants under Uniform Gifts to Minors Act
in common ---------------------------------
(State)
Additional abbreviations may also be used though not in the above list.
For value received, ______________________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- --------------------------------------------------------------------------------
(Please print or typewrite name, address and relationship of Assignee
and number of shares)
_________________________________________________________________________ shares
represented by the within Certificate and, if said number of shares shall not be
all the shares represented by the within Certificate, that a new Series B Common
Stock Certificate for the shares not transferred be registered in the name of
the undersigned, and is hereby irrevocably constituted and appointed as Attorney
to transfer such shares as aforesaid on the books of the Corporation, with full
power of substitution in the premises.
______________________________
DATED
NOTICE: The signature to this assignment
must correspond with the name as written
upon the face of the Certificate, in every
particular, without alteration or enlargement,
or any change whatever.
Signature(s) Guaranteed: _______________________________________________________
THE SIGNATURE(S) MUST BE GUARANTEED
BY AN ELIGIBLE GUARANTOR INSTITUTION
(BANKS, STOCKBROKERS, SAVINGS AND LOAN
ASSOCIATIONS AND CREDIT UNIONS WITH
MEMBERSHIP IN AN APPROVED SIGNATURE
GUARANTEE MEDALLION PROGRAM), PURSUANT
TO S.E.C. RULE 17Ad-15.
KEEP THIS CERTIFICATE IN A SAFE PLACE. IF IT IS LOST, STOLEN,
MUTILATED OR DESTROYED, THE CORPORATION WILL REQUIRE A BOND
OF INDEMNITY AS A CONDITION TO THE ISSUANCE OF A
REPLACEMENT CERTIFICATE.
<PAGE>
FIRSTWORLD COMMUNICATIONS, INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
SERIES B
COMMON STOCK
CUSIP 337625 30 5
SEE REVERSE FOR CERTAIN DEFINITIONS AND A STATEMENT AS TO THE RIGHTS,
PREFERENCES, PRIVILEGES AND RESTRICTIONS ON TRANSFER THIS CERTIFIES
THAT
is the owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF SERIES B COMMON STOCK, OF THE PAR VALUE
OF $.0001 PER SHARE, OF FIRSTWORLD COMMUNICATIONS, INC.
transferable on the books of the Corporation by the holder thereof, in person or
by duly authorized attorney upon surrender of this Certificate properly
endorsed. This Certificate and the shares represented hereby are issued under
and shall be held subject to all the provisions of the Certificate of
Incorporation of the Corporation and the By-laws as now or hereafter amended.
This Certificate is not valid unless countersigned by the Transfer Agent and
registered by the Registrar.
Witness the seal of the Corporation and the facsimile signatures of its duly
authorized officers.
Dated:
COUNTERSIGNED AND REGISTERED:
NORWEST BANK MINNESOTA, N.A.
BY AUTHORIZED SIGNATURE
- -----------------------
SECRETARY
- -----------------------
PRESIDENT
<PAGE>
EXHIBIT 5.1
[Cooley Godward LLP Letterhead]
February 15, 2000
FirstWorld Communications, Inc.
8390 E. Crescent Parkway
Suite 300
Greenwood Village, Colorado 80111
Ladies and Gentlemen:
You have requested our opinion with respect to certain matters in connection
with the filing by FirstWorld Communications, Inc. (the "Company") of a
Registration Statement on Form S-1 (the "Registration Statement") with the
Securities and Exchange Commission (the "Commission"), including a prospectus to
be filed with the Commission pursuant to Rule 424(b) of Regulation C promulgated
under the Securities Act of 1933, as amended, and the underwritten public
offering of up to 11,500,000 shares of the Company's Series B Common Stock,
$.0001 par value (the "Shares"), which amount includes 1,500,000 shares for
which the underwriters have been granted an over-allotment option.
In connection with this opinion, we have (i) examined and relied upon the
Registration Statement and related Prospectus; (ii) reviewed the Company's
Certificate of Incorporation and Bylaws, and the originals or copies certified
to our satisfaction of such records, documents, certificates, memoranda and
other instruments as in our judgment were necessary or appropriate to enable us
to render the opinion expressed below; and (iii) assumed that the Shares to be
sold to the underwriters by the Company will be sold at a price established by
the Board of Directors of the Company or the Pricing Committee thereof in
accordance with Section 153 of the Delaware General Corporation Law. We have
assumed the genuineness and authenticity of all documents submitted to us as
originals, the conformity to originals of all documents submitted to us as
copies thereof, and the due execution and delivery of all documents where due
execution and delivery are a prerequisite to the effectiveness thereof.
On the basis of the foregoing and in reliance thereon, we are of the opinion
that the Shares, when issued and sold in accordance with the Registration
Statement, will be validly issued, fully paid and nonassessable.
<PAGE>
[Cooley Godward LLP Letterhead]
FirstWorld Communications, Inc.
February 11, 2000
Page Two
We consent to the reference to our firm under the caption "Legal Matters" in the
prospectus included in the Registration Statement and to the filing of this
opinion as an exhibit to the Registration Statement.
Sincerely,
Cooley Godward LLP
/s/ Michael L. Platt
- --------------------
Michael L. Platt
<PAGE>
EXHIBIT 10.44
STOCK PURCHASE AGREEMENT
<PAGE>
TABLE OF CONTENTS
Page No.
--------
1. Purchase and Sale of Stock.................................... 1
1.1 Sale and Issuance of Stock............................. 1
1.2 The Closing............................................ 1
2. Representations and Warranties of the Company................. 1
2.1 Organization and Good Standing........................... 1
2.2 Authorization............................................ 1
2.3 Valid Issuance of Stock.................................. 2
2.4 Title to Property and Assets............................. 2
2.5 Compliance with Other Documents.......................... 2
2.6 Registration Statement................................... 2
2.7 Capitalization........................................... 2
2.8 Litigation............................................... 2
2.9 Intellectual Property.................................... 2
2.10 Financial Statements..................................... 3
2.11 Changes.................................................. 3
2.12 Taxes.................................................... 3
2.13 Compliance with Laws and Other Instruments............... 3
2.14 Registration Rights Agreement............................ 3
2.15 Contracts................................................ 3
3. Representations and Warranties of the Investor................ 3
3.1 Authorization............................................ 3
3.2 Investigation............................................ 3
3.3 Qualified Institutional Buyer............................ 3
3.4 Purchase Entirely for Own Account........................ 3
3.5 Restricted Securities.................................... 3
4. Conditions to the Investor's Obligation at Closing............ 4
4.1 Representations and Warranties........................... 4
4.2 Securities Laws.......................................... 4
4.3 Authorizations........................................... 4
4.4 Initial Public Offering of Common Stock.................. 4
5. Conditions to the Company's Obligations at Closing............ 4
5.1 Representations and Warranties........................... 4
5.2 Securities Laws.......................................... 4
5.3 Authorizations........................................... 4
5.4 Initial Public Offering of Common Stock.................. 4
5.5 Payment of Purchase Price................................ 4
6. Covenants of the Company and the Investor..................... 5
6.1 Agreement Not Transfer................................... 5
6.2 Market Stand-Off......................................... 5
6.3 Notice of Intention to Transfer.......................... 5
6.4 Registration of Stock.................................... 5
6.5 Publicity................................................ 6
7. Miscellaneous................................................. 6
7.1 Governing Law............................................ 6
7.2 Survival; Additional Securities.......................... 6
i
<PAGE>
7.3 Successors and Assigns.................................... 6
7.4 Entire Agreement.......................................... 6
7.5 Notices................................................... 6
7.6 Amendments and Waivers.................................... 6
7.7 Legal Fees................................................ 7
7.8 Expenses.................................................. 7
7.9 Titles and Subtitles...................................... 7
7.10 Counterparts.............................................. 7
7.11 Severability.............................................. 7
7.12 Confidentiality........................................... 7
ii
<PAGE>
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT is made as of the 3rd day of February, 2000,
by and between FirstWorld Communications, Inc., a Delaware corporation (the
"Company") and Lucent Technologies Inc., a Delaware corporation (the
"Investor").
WHEREAS, the Investor has indicated a desire to purchase the number of
shares of the Company's Series B Common Stock ("Common Stock") obtained by
dividing $10,000,000 by 93% of the per share price paid by the public for the
Company's Common Stock in the Company's initial public offering (the "IPO").
WHEREAS, the Company has indicated a desire to sell the number of shares of
the Company's Common Stock obtained by dividing $10,000,000 by 93% of the per
share price paid by the public for the Company's Common Stock in the Company's
IPO to the Investor on the terms set forth herein.
WHEREAS, the Company and the Investor have agreed that this Agreement shall
constitute the entire understanding and agreement between the parties with
regard to the subject matter hereof.
NOW, THEREFORE, THE PARTIES HEREBY AGREE AS FOLLOWS:
1. Purchase and Sale of Stock.
1.1 Sale and Issuance of Stock. Subject to the terms and conditions of
this Agreement, the Company agrees to sell to the Investor and the Investor
agrees to purchase from the Company the number of shares of the Company's Common
Stock obtained by dividing $10,000,000 by 93% of the per share price paid by the
public for the Company's Common Stock in the Company's IPO (the "Stock"), having
the rights, preferences, privileges and restrictions set forth in the Amended
and Restated Certificate of Incorporation of the Company (the "Restated
Certificate") on file with the Delaware Secretary of State as of the Closing (as
defined below).
1.2 The Closing. The purchase and sale of the Stock shall be held at the
Company's offices immediately following the closing of the Company's IPO (the
"Closing"). At the Closing, the Company will deliver the Stock to the Investor
against payment of the purchase price therefor by check payable to the order of
the Company or by wire transfer. The per share purchase price for the Stock
shall be 93% of the per share price paid by the public for the Company's Common
Stock in the IPO.
2. Representations and Warranties of the Company. Except as set forth on
the schedule of exceptions delivered herewith, the Company hereby represents and
warrants to the Investor that:
2.1 Organization and Good Standing. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware and has all requisite corporate power and authority to carry on its
business as now conducted. The Company is duly qualified to transact business
and is in good standing in each jurisdiction in which the failure to so qualify
would have a material adverse effect on its business or properties.
2.2 Authorization. All corporate action on the part of the Company, its
officers, directors and stockholders necessary for the authorization, execution
and delivery of this Agreement, the performance of all obligations of the
Company hereunder, and the authorization, issuance, sale and delivery of the
Stock has been taken or will be taken prior to the Closing, and this Agreement
constitutes a valid and legally binding obligation of the Company, enforceable
in accordance with its terms, except (i) as limited by applicable bankruptcy,
insolvency, reorganization, moratorium, and other laws of general application
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affecting enforcement of creditors' rights generally and (ii) as limited by laws
relating to the availability of specific performance, injunctive relief, or
other equitable remedies.
2.3 Valid Issuance of Stock. The Stock, when issued, sold and delivered
in accordance with the terms hereof for the consideration expressed herein, will
be duly and validly issued, fully paid and nonassessable and will be free of
restrictions on transfer other than restrictions on transfer under this
Agreement and under applicable state and federal securities laws. Subject in
part to the truth and accuracy of the Investor's representations set forth in
Section 3 of this Agreement, the offer, sale and issuance of the Stock as
contemplated by this Agreement are exempt from the registration requirements of
any applicable state and federal securities laws.
2.4 Title to Property and Assets. The Company owns its property and
assets free and clear of all mortgages, liens, loans and encumbrances, except
such encumbrances and liens that arise in the ordinary course of business and do
not materially impair the Company's ownership or use of such property or assets.
With respect to the property and assets it leases, the Company is in compliance
with such leases, except to the extent such non-compliance would not materially
impair the Company's business or prospects and, to the best of its knowledge,
holds a valid leasehold interest free of any liens, claims or encumbrances. The
Company is subject to the debt covenants and other terms and conditions set
forth in the Indenture dated April 13, 1998 between the Company and the Bank of
New York as Trustee (the "Indenture").
2.5 Compliance with Other Documents. The execution and delivery of this
Agreement, consummation of the transactions contemplated hereby, and compliance
with the terms and provisions hereof will not conflict with or result in a
breach of the terms and conditions of, or constitute a default under the
Restated Certificate or Bylaws of the Company or of any contract or agreement to
which the Company is now a party, except where such conflict, breach or default
of any such contract or agreement, either individually or in the aggregate,
would not have a material adverse effect on the Company's business, financial
condition or results of operations.
2.6 Registration Statement. The Company's registration statement on Form
S-1, as amended, (the "Registration Statement") shall not, at the time the
Registration Statement (including any amendments or supplements thereto) is
declared effective by the Securities and Exchange Commission ("SEC"), contain
any untrue statement of a material fact or omit to state any material fact
necessary in order to make the statements therein, in light of the circumstances
under which they were made, not misleading.
2.7 Capitalization. The Company's capitalization information contained in
the Registration Statement is complete and accurate as of the dates specified
therein.
2.8 Litigation. Except as disclosed in the Company's Registration
Statement, to the best of the Company's knowledge, there are no actions,
proceedings or investigations pending against the Company, that, either in any
case or in the aggregate, would result in any material adverse change in the
business, financial condition, or results of operations of the Company.
2.9 Intellectual Property. Except as disclosed in the Registration
Statement, the Company owns, possesses or can acquire on reasonable terms,
adequate trademarks, trade names and other rights to inventions, know-how,
patents, copyrights, confidential information and other intellectual property
(collectively, "Intellectual Property Rights") necessary to conduct the business
now operated by it, or presently employed by it, and has not received any notice
of infringement of or conflict with asserted rights of others with respect to
any intellectual property rights that, if determined adversely to the
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Company, would individually or in the aggregate have a material adverse effect
on the condition (financial or other), business, properties or results of
operations.
2.10 Financial Statements. The financial statements included in the
Registration Statement present fairly the financial position of the Company as
of the dates shown and its results of operations and cash flows for the periods
shown, and, except as otherwise disclosed in the Registration Statement, such
financial statements have been prepared in conformity with the generally
accepted accounting principles in the United States applied on a consistent
basis.
2.11 Changes. Except as disclosed in the Registration Statement, since the
date of the latest audited financial statements included in the Registration
Statement there has been no material adverse change, nor any development or
event involving a prospective material adverse change, in the condition
(financial or other), business, properties or results of operations of the
Company taken as a whole.
2.12 Taxes. The Company has filed on a timely basis all tax returns and
reports (including information returns and reports) as required by law. These
returns and reports are true and correct in all material respects except to the
extent that a reserve has been reflected on the Company's financial statements
in accordance with generally accepted accounting principles. The Company has
paid all taxes and other assessments due, except those contested by it in good
faith and except to the extent that a reserve has been reflected on the
Company's financial statements in accordance with generally accepted accounting
principles. The provision for taxes of the Company as shown in the Company's
financial statements is adequate for taxes due or accrued as of the date
thereof.
3. Representations and Warranties of the Investor. The Investor hereby
represents and warrants that:
3.1 Authorization. This Agreement constitutes the valid and legally
binding obligation of the Investor, enforceable in accordance with its terms,
subject to laws of general application relating to bankruptcy, insolvency and
the relief of debtors and by general principles of equity.
3.2 Investigation. The Investor acknowledges that it has had an
opportunity to discuss the business, affairs and current prospects of the
Company with the Company's chief executive officer. The Investor further
acknowledges having had access to information about the Company that it has
requested or considers necessary for purposes of purchasing the Stock. The
foregoing, however, does not limit or modify the representations and warranties
of the Company in Section 2 of this Agreement or the right of the Investors to
rely thereon.
3.3 Qualified Institutional Buyer. The Investor is a "Qualified
Institutional Buyer" as such term is defined in Rule 144A of the rules and
regulations promulgated under the Securities Act of 1933, as amended.
3.4 Purchase Entirely for Own Account. This Agreement is made with the
Investor in reliance upon the Investor's representation to the Company, which by
the Investor's execution of this Agreement the Investor hereby confirms, that
the Stock will be acquired for investment for the Investor's own account, not as
a nominee or agent, and not with a view to the resale or distribution of any
part thereof, and that the Investor has no present intention of selling,
granting any participation in, or otherwise distributing the same.
3.5 Restricted Securities. Investor understands that the Stock it is
purchasing are characterized as "restricted securities" under the federal
securities laws inasmuch as they are being acquired from the Company in a
transaction not involving a public offering and that under such laws and
applicable regulations such securities may be resold without registration under
the Act, only in certain
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limited circumstances. In this connection, Investor represents that it is
familiar with SEC Rule 144, as presently in effect, and understands the resale
limitations imposed thereby and by the Act.
4. Conditions to the Investor's Obligation at Closing. The obligation of
the Investor to purchase the Stock at the Closing is subject to the fulfillment
to the Investor's satisfaction on or prior to the Closing of the following
conditions:
4.1 Representations and Warranties. The representations and warranties
made by the Company in Section 2 hereof shall be true and correct when made, and
shall be true and correct as of the Closing with the same force and effect as if
they had been made on and as of such date, subject to changes contemplated by
this Agreement. The Chief Executive Officer of the Company shall deliver at the
Closing a certificate stating that the condition specified in the preceding
sentence has been fulfilled.
4.2 Securities Laws. The offer and sale of the Stock to the Investor
pursuant to this Agreement shall be exempt from the registration requirements of
the Securities Act of 1933, as amended (the "Act") and qualification
requirements of all applicable state securities laws.
4.3 Authorizations. All authorizations, approvals or permits, if any, of
any governmental authority or regulatory body that are required in connection
with the lawful issuance and sale of the Stock pursuant to this Agreement shall
have been duly obtained and shall be effective on and as of the Closing.
4.4 Initial Public Offering of Common Stock. The closing of the initial
public offering of the Company's Series B Common Stock shall have occurred.
5. Conditions to the Company's Obligations at Closing. The obligation of
the Company to sell the Stock at the Closing is subject to the fulfillment to
the Company's satisfaction on or prior to the Closing of the following
conditions:
5.1 Representations and Warranties. The representations and warranties of
the Investor contained in Section 3 hereof shall be true as of the Closing with
the same force and effect as if they had been made on and as of such date,
subject to changes contemplated by this Agreement. An authorized officer of the
Investor shall deliver at the Closing a certificate stating that the condition
specified in the preceding sentence has been fulfilled.
5.2 Securities Laws. The offer and sale of the Stock to the Investor
pursuant to this Agreement shall be exempt from the registration requirements of
the Act qualification requirements of all applicable state securities laws.
5.3 Authorizations. All authorizations, approvals or permits, if any, of
any governmental authority or regulatory body that are required in connection
with the lawful issuance and sale of the Stock pursuant to this Agreement shall
have been duly obtained and shall be effective on and as of the Closing.
5.4 Initial Public Offering of Series B Common Stock. The closing of the
initial public offering of the Company's Series B Common Stock shall have
occurred.
5.5 Payment of Purchase Price. The Investor shall have delivered to the
Company the purchase price for the Stock as set forth in Section 1.2 hereof.
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6. Covenants of the Company and the Investor.
6.1 Agreement Not to Transfer.
(a) Prior to 180 days after the Closing, the Investor shall not, directly
or indirectly, Transfer or offer to Transfer any shares of the Stock other than
to affiliates who agree to be bound by the terms of this Agreement, unless the
Company consents to such Transfer and the transferee agrees to be bound by this
Agreement.
(b) In order to enforce the Transfer Restrictions, the Company may impose
stop transfer instructions with respect to the Stock until the end of the
restricted period.
(c) As used in this Agreement, the term "Transfer" shall mean any sale,
transfer, assignment, hypothecation, encumbrance or other disposition, whether
voluntary or involuntary, of shares of the Stock. In the case of a
hypothecation, the Transfer shall be deemed to occur both at the time of the
initial pledge and at any pledgee's sale or a sale by any secured creditor or a
retention by thc secured creditor of the pledged shares of the Stock in complete
or partial satisfaction of the indebtedness for which the shares of the Stock
are security.
6.2 Market Stand-Off. In addition to the transfer restrictions set forth
in Section 6.1 above (which shall in no way be limited by the following), in
connection with any underwritten public offering by the Company of its equity
securities pursuant to an effective registration statement filed under the Act,
the Investor shall not Transfer or offer to Transfer any shares of the Stock
without the prior written consent of the Company and its underwriters. Such
restriction (the "Market Stand-Off') shall be in effect for such period of time
from and after the effective date of the final prospectus for the offering as
may be requested by the Company or such underwriters; provided, however, that
(i) such Market Stand-Off shall not exceed one hundred eighty (180) days, and
(ii) the Investor shall be subject to the Market Stand-Off only if the officers
and directors of the Company are also subject to similar restrictions. In order
to enforce the Market Stand-Off, the Company may impose stop-transfer
instructions with respect to the Stock until the end of the applicable stand-off
period.
6.3 Notice of Intention to Transfer. In the event the Investor plans to
Transfer shares of the Stock in one or more transactions, the Investor shall
inform the Company of such intention to Transfer such shares fifteen (15) days
prior to such Transfer. Investor shall agree that any transfer, sale or other
disposition of the Company's Common Stock shall be through an orderly
disposition, including, at the request of the Company, through a broker-dealer
recommended by the Company.
6.4 Registration of Stock. The Company agrees that, with regard to the
Stock, the Investor shall become subject to the Amended and Restated Investors
Rights Agreement attached as Exhibit A (the "Rights Agreement") for the sole
purpose of providing the Investor with the demand, piggyback and Form S-3
registration rights described in Sections 2.2, 2.3 and 2.4 of Rights
Agreement. Solely in connection with such demand, piggyback and S-3
registration rights set forth in Sections 2.2, 2.3 and 2.4, the Investor shall
be deemed to be a "Demand Holder" as defined in Section 1.1 of the Rights
Agreement and the shares of Series B common stock held by the Investor shall be
deemed to be "Demand Shares" and "Registrable Securities" as such terms are
defined in the Rights Agreement.
The Investor understands and agrees that (i) the Stock will be
characterized as "restricted securities" under the federal securities laws
inasmuch as it is being acquired from the Company in a transaction not involving
a public offering and that under such laws and applicable regulations such
securities may be resold without registration under the Act only in certain
limited circumstances, and (ii) each certificate representing the Stock and any
other securities issued in respect of the Stock upon any
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stock split, stock dividend, recapitalization, merger or similar event (unless
no longer required in the opinion of counsel for the Company) shall be stamped
or otherwise imprinted with appropriate legends mandated by federal and state
securities laws.
6.5 Publicity. Except as required by law, no press release, public
statement, advertisement or similar publicity from any party hereunder with
respect to the participation of the Investor in the transactions contemplated
hereby (or any other matter relating to the Company and the Investor or its
affiliates) shall be issued or made without the prior consent of Investor.
Notwithstanding the foregoing, the Company may disclose Investor's investment in
the Company and the terms thereof and such other information previously approved
by Investor for inclusion in the Registration Statement.
7. Miscellaneous.
7.1 Governing Law. This Agreement shall be governed in all respects by
the laws of the State of Delaware as applied to agreements among Delaware
residents entered into and to be performed entirely within Delaware, without
regard to the conflict of law provisions thereof.
7.2 Survival; Additional Securities. The representations and warranties
set forth in Sections 2 and 3 shall survive until the Closing. The covenants and
agreements set forth in Section 6 shall survive in accordance with their terms.
Any new, substituted or additional securities which are by reason of any stock
split, stock dividend, recapitalization or reorganization distributed with
respect to the Stock ("Stock Distributions") shall be immediately subject to the
covenants and agreements set forth in Section 6 to the same extent the Stock is
at such time covered by such provisions.
7.3 Successors and Assigns. Except as otherwise expressly provided
herein, the provisions hereof shall inure to the benefit of, and be binding
upon, the respective successors and assigns of the parties hereto. Nothing in
this Agreement, express or implied, is intended to confer upon any party other
than the parties hereto or their respective successors and assigns any rights,
remedies, obligations, or liabilities under or by reason of this Agreement,
except as expressly provided in this Agreement. Notwithstanding anything to the
contrary contained herein, the covenants set forth in Section 6 shall not be
binding upon any entity (other than an affiliate of the Investor) which acquires
any shares of the Stock or a Stock Distribution in a transaction permitted
hereunder.
7.4 Entire Agreement. This Agreement constitutes the entire understanding
and agreement between the parties with regard to the subject matter hereof.
7.5 Notices. Except as otherwise provided, all notices and other
communications required or permitted hereunder shall be in writing, shall be
effective when given, and shall in any event be deemed to be given upon receipt
or, if earlier, (i) five (5) days after deposit with the U.S. postal service or
other applicable postal service, if delivered by first class mail, postage
prepaid, (ii) upon delivery, if delivered by hand, (iii) one (1) business day
after the day of deposit with Federal Express or similar overnight courier,
freight prepaid, if delivered by overnight courier or (iv) one (1) business day
after the day of facsimile transmission, if delivered by facsimile transmission
with copy by first class mail, postage prepaid, and shall be addressed, (a) if
to the Investor, at the Investor's address set forth below its signature, or at
such other address as the Investor shall have furnished to the Company in
writing, or (b) if to the Company, at its address as set forth below its
signature, or at such other address as the Company shall have furnished to the
Investor in writing.
7.6 Amendments and Waivers. Any term of this Agreement may be amended and
the observance of any term of the Agreement may be waived (either generally or
in a particular instance and either retroactively or prospectively) only with
the written consent of the Company and the Investor.
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7.7 Legal Fees. In the event of any action at law, suit in equity or
arbitration proceeding in relation to this Agreement or the Stock or any Stock
Distribution, the prevailing party shall be paid by the other party a reasonable
sum for the attorneys' fees and expenses incurred by such prevailing party.
7.8 Expenses. Irrespective of whether the Closing is effected, the
Company and the Investor shall each pay their own costs and expenses incurred
with respect to the negotiation, execution, delivery and performance of this
Agreement.
7.9 Titles and Subtitles. The titles of the paragraphs and subparagraphs
of this Agreement are for convenience of reference only and are not to be
considered in construing this Agreement.
7.10 Counterparts. This Agreement may be executed in counterparts, each of
which shall be an original, but all of which together shall constitute one
instrument.
7.11 Severability. If one or more provisions of this Agreement are held to
be unenforceable under applicable law, such provision shall be excluded from
this Agreement and the balance of the Agreement shall be interpreted as if such
provision were so excluded and shall be enforceable in accordance with its
terms.
7.12 Confidentiality. The parties hereto agree that, except with the prior
written permission of the other party, it shall at all times keep confidential
and not divulge, furnish, or make accessible to anyone any confidential
information, knowledge, or data concerning or relating to the business or
financial affairs of such other party to which said party has been or shall
become privy by reason of this Agreement, discussions or negotiations relating
to this Agreement or the performance of its obligations hereunder.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
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IN WITNESS WHEREOF, the parties hereto have caused their duly authorized
officers to execute and deliver this Agreement as of the date first above
written.
FIRSTWORLD COMMUNICATIONS, INC.
By: /s/ Sheldon S. Ohringer
------------------------------------------
Name: Sheldon S. Ohringer
----------------------------------------
Title: President and Chief Executive Officer
---------------------------------------
LUCENT TECHNOLOGIES INC.
By: /s/ Curt Sanford
------------------------------------------
Name: Curt Sanford
----------------------------------------
Title: President - INS
---------------------------------------
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EXHIBIT A
---------
[FirstWorld Communications, Inc. Amended and Restated Investor Rights Agreement,
First Amendment to Amended and Restated Investor Rights Agreement, and
Second Amendment to Amended and Restated Investor Rights Agreement]
A-1
<PAGE>
EXHIBIT 10.45
STOCK PURCHASE AGREEMENT
<PAGE>
TABLE OF CONTENTS
Page No.
--------
1. Purchase and Sale of Stock................................ 1
1.1 Sale and Issuance of Stock........................... 1
1.2 The Closing.......................................... 1
2. Representations and Warranties of the Company............. 1
2.1 Organization and Good Standing....................... 1
2.2 Authorization........................................ 1
2.3 Valid Issuance of Stock.............................. 2
2.4 Registration Statement............................... 2
3. Representations and Warranties of the Investor............ 2
3.1 Authorization........................................ 2
3.2 Investigation........................................ 2
3.3 Qualified Institutional Buyer........................ 2
3.4 Purchase Entirely for Own Account.................... 2
3.5 Restricted Securities................................ 3
4. Conditions to the Investor's Obligation at Closing........ 3
4.1 Representations and Warranties....................... 3
4.2 Securities Laws...................................... 3
4.3 Authorizations....................................... 3
4.4 Initial Public Offering of Common Stock.............. 3
4.5 No Material Adverse Change........................... 3
5. Conditions to the Company's Obligations at Closing........ 3
5.1 Representations and Warranties....................... 3
5.2 Securities Laws...................................... 4
5.3 Authorizations....................................... 4
5.4 Initial Public Offering of Common Stock.............. 4
5.5 Payment of Purchase Price............................ 4
6. Covenants of the Company and the Investor................. 4
6.1 Agreement Not Transfer............................... 4
6.2 Market Stand-Off..................................... 4
6.3 Notice of Intention to Transfer...................... 4
6.4 Registration of Stock................................ 5
6.5 Publicity............................................ 5
7. Miscellaneous............................................. 5
7.1 Governing Law........................................ 5
7.2 Survival; Additional Securities...................... 5
7.3 Successors and Assigns............................... 5
7.4 Entire Agreement..................................... 6
7.5 Notices.............................................. 6
7.6 Amendments and Waivers............................... 6
7.7 Legal Fees........................................... 6
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7.8 Expenses............................................... 6
7.9 Titles and Subtitles................................... 6
7.10 Counterparts........................................... 6
7.11 Severability........................................... 6
7.12 Confidentiality........................................ 6
7.13 Termination............................................ 7
ii
<PAGE>
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT is made as of the 3rd day of February, 2000,
by and between FirstWorld Communications, Inc., a Delaware corporation (the
"Company") and SAIC Venture Capital Corporation, a Nevada corporation (the
"Investor").
WHEREAS, the Investor has indicated a desire to purchase the number of
shares of the Company's Series B Common Stock ("Common Stock") obtained by
dividing $19,500,000 by 93% of the per share price paid by the public for the
Company's Common Stock in the Company's initial public offering (the "IPO").
WHEREAS, the Company has indicated a desire to sell the number of shares of
the Company's Common Stock obtained by dividing $19,500,000 by 93% of the per
share price paid by the public for the Company's Common Stock in the Company's
IPO to the Investor on the terms set forth herein.
WHEREAS, the Company and the Investor have agreed that this Agreement shall
constitute the entire understanding and agreement between the parties with
regard to the subject matter hereof.
NOW, THEREFORE, THE PARTIES HERETO AGREE AS FOLLOWS:
1. Purchase and Sale of Stock.
-------------------- -----
1.1 Sale and Issuance of Stock. Subject to the terms and conditions of
this Agreement, the Company agrees to sell to the Investor and the Investor
agrees to purchase from the Company the number of shares of the Company's Common
Stock obtained by dividing $19,500,000 by 93% of the per share price paid by the
public for the Company's Common Stock in the Company's IPO (the "Stock"), having
the rights, preferences, privileges and restrictions set forth in the Amended
and Restated Certificate of Incorporation of the Company (the "Restated
Certificate") on file with the Delaware Secretary of State as of the Closing (as
defined below).
1.2 The Closing. The purchase and sale of the Stock shall be held at the
Company's offices immediately following the closing of the Company's IPO (the
"Closing"). At the Closing, the Company will deliver the Stock to the Investor
against payment of the purchase price therefor by check payable to the order of
the Company or by wire transfer. The per share purchase price for the Stock
shall be 93% of the per share price paid by the public for the Company's Common
Stock in the IPO.
2. Representations and Warranties of the Company. Except as set forth on the
schedule of exceptions delivered herewith, the Company hereby represents and
warrants to the Investor that:
2.1 Organization and Good Standing. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware and has all requisite corporate power and authority to carry on its
business as now conducted. The Company is duly qualified to transact business
and is in good standing in each jurisdiction in which the failure to so qualify
would have a material adverse effect on its business or properties.
2.2 Authorization. All corporate action on the part of the Company, its
officers, directors and stockholders necessary for the authorization, execution
and delivery of this Agreement, the performance of all obligations of the
Company hereunder, and the authorization, issuance, sale and delivery of the
Stock has been taken or will be taken prior to the Closing, and this Agreement
constitutes a valid and
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legally binding obligation of the Company, enforceable in accordance with its
terms, except (i) as limited by applicable bankruptcy, insolvency,
reorganization, moratorium, and other laws of general application affecting
enforcement of creditors' rights generally and (ii) as limited by laws relating
to the availability of specific performance, injunctive relief, or other
equitable remedies.
2.3 Valid Issuance of Stock. The Stock, when issued, sold and delivered
in accordance with the terms hereof for the consideration expressed herein, will
be duly and validly issued, fully paid and nonassessable and will be free of
restrictions on transfer other than restrictions on transfer under this
Agreement and under applicable state and federal securities laws. Subject in
part to the truth and accuracy of the Investor's representations set forth in
Section 3 of this Agreement, the offer, sale and issuance of the Stock as
contemplated by this Agreement are exempt from the registration requirements of
any applicable state and federal securities laws.
2.4 Registration Statement. The Company's registration statement on Form
S-1, as amended, (including any amendments or supplements thereto) (the
"Registration Statement") shall not, at the time the Registration Statement is
declared effective by the Securities and Exchange Commission ("SEC"), contain
any untrue statement of a material fact or omit to state any material fact
necessary in order to make the statements therein, in light of the circumstances
under which they were made, not misleading. The Company has provided Investor
with a copy of the Registration Statement as filed with the SEC on December 22,
1999 and will provide Investor with a copy of the Registration Statement as
filed with the SEC immediately prior to the Closing.
3. Representations and Warranties of the Investor. The Investor hereby
represents and warrants that:
3.1 Authorization. This Agreement constitutes the valid and legally
binding obligation of the Investor, enforceable in accordance with its terms,
subject to laws of general application relating to bankruptcy, insolvency and
the relief of debtors and by general principles of equity.
3.2 Investigation. The Investor acknowledges that it has had an
opportunity to discuss the business, affairs and current prospects of the
Company with the Company's chief executive officer. The Investor further
acknowledges having had access to information about the Company that it has
requested or considers necessary for purposes of purchasing the Stock. The
foregoing, however, does not limit or modify the representations and warranties
of the Company in Section 2 of this Agreement or the right of the Investors to
rely thereon.
3.3 Qualified Institutional Buyer. The Investor is a "Qualified
Institutional Buyer" as such term is defined in Rule 144A of the rules and
regulations promulgated under the Securities Act of 1933, as amended.
3.4 Purchase Entirely for Own Account. This Agreement is made with the
Investor in reliance upon the Investor's representation to the Company, which by
the Investor's execution of this Agreement the Investor hereby confirms, that
the Stock will be acquired for investment for the Investor's own account, not as
a nominee or agent, and not with a view to the resale or distribution of any
part thereof, and that the Investor has no present intention of selling,
granting any participation in, or otherwise distributing the same. Neither the
Investor nor Science Applications International Corporation, a Delaware
Corporation ("SAIC") nor any entity controlled by SAIC has a present intention
of participating in the formulation, determination or direction of the basic
business decisions of the Company or any entities controlled by the Company.
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3.5 Restricted Securities. Investor understands that the shares of Stock
it is purchasing are characterized as "restricted securities" under the federal
securities laws inasmuch as they are being acquired from the Company in a
transaction not involving a public offering and that under such laws and
applicable regulations such securities may be resold without registration under
the Act, only in certain limited circumstances. In this connection, Investor
represents that it is familiar with SEC Rule 144, as presently in effect, and
understands the resale limitations imposed thereby and by the Act.
4. Conditions to the Investor's Obligation at Closing. The obligation of the
Investor to purchase the Stock at the Closing is subject to the fulfillment to
the Investor's satisfaction on or prior to the Closing of the following
conditions:
4.1 Representations and Warranties. Except as set forth on the schedule
of exceptions delivered herewith, the representations and warranties made by the
Company in Section 2 hereof shall be true and correct when made, and shall be
true and correct as of the Closing with the same force and effect as if they had
been made on and as of such date. The Chief Executive Officer of the Company
shall deliver at the Closing a certificate stating that the condition specified
in the preceding sentence has been fulfilled.
4.2 Securities Laws. The offer and sale of the Stock to the Investor
pursuant to this Agreement shall be exempt from the registration requirements of
the Securities Act of 1933, as amended (the "Act") and qualification
requirements of all applicable state securities laws.
4.3 Authorizations. All authorizations, approvals or permits, if any, of
any governmental authority or regulatory body that are required in connection
with the lawful issuance and sale of the Stock pursuant to this Agreement shall
have been duly obtained and shall be effective on and as of the Closing.
4.4 Initial Public Offering of Common Stock. The closing of the initial
public offering of the Company's Series B Common Stock shall have occurred.
4.5 No Material Adverse Change. There shall have been no material adverse
change in the condition (financial or otherwise), business, business assets, or
results of operations of the Company since the date of this Agreement; provided,
however, that for purposes of determining whether there shall have been any such
material adverse change, (i) any adverse change resulting from or relating to
general business or economic conditions shall be disregarded, (ii) any adverse
change resulting from or relating to conditions generally affecting the industry
in which the Company competes shall be disregarded, and (iii) any adverse change
resulting from or relating to the taking of any action contemplated by this
Agreement shall be disregarded.
5. Conditions to the Company's Obligations at Closing. The obligation of
the Company to sell the Stock at the Closing is subject to the fulfillment to
the Company's satisfaction on or prior to the Closing of the following
conditions:
5.1 Representations and Warranties. Except as set forth on the schedule
of exceptions delivered herewith, the representations and warranties of the
Investor contained in Section 3 hereof shall be true as of the Closing with the
same force and effect as if they had been made on and as of such date. The
President or Secretary of the Investor shall deliver at the Closing a
certificate stating that the condition specified in the preceding sentence has
been fulfilled.
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5.2 Securities Laws. The offer and sale of the Stock to the Investor
pursuant to this Agreement shall be exempt from the registration requirements of
the Act and qualification requirements of all applicable state securities laws.
5.3 Authorizations. All authorizations, approvals or permits, if any, of
any governmental authority or regulatory body that are required in connection
with the lawful issuance and sale of the Stock pursuant to this Agreement shall
have been duly obtained and shall be effective on and as of the Closing.
5.4 Initial Public Offering of Series B Common Stock. The closing of the
initial public offering of the Company's Series B Common Stock shall have
occurred.
5.5 Payment of Purchase Price. The Investor shall have delivered to the
Company the purchase price for the Stock as set forth in Section 1.2 hereof.
6. Covenants of the Company and the Investor.
6.1 Agreement Not to Transfer.
(a) Prior to 180 days after the Closing, the Investor shall not, directly
or indirectly, Transfer or offer to Transfer any shares of the Stock other than
to Affiliates who agree to be bound by the terms of this Agreement, unless the
Company consents to such Transfer and the transferee agrees to be bound by this
Agreement. For purposes of this Agreement, the term "Affiliate" shall mean,
with respect to a person or entity, any person or entity controlling, controlled
by or under common control with such person or entity.
(b) In order to enforce the transfer restrictions set forth in this
Section 6, the Company may impose stop transfer instructions with respect to the
shares of Stock until the end of the restricted period.
(c) As used in this Agreement, the term "Transfer" shall mean any sale,
transfer, assignment, hypothecation, encumbrance or other disposition, whether
voluntary or involuntary, of shares of the Stock. In the case of a
hypothecation, the Transfer shall be deemed to occur both at the time of the
initial pledge and at any pledgee's sale or a sale by any secured creditor or a
retention by thc secured creditor of the pledged shares of the Stock in complete
or partial satisfaction of the indebtedness for which the shares of the Stock
are security.
6.2 Market Stand-Off. In addition to the transfer restrictions set forth
in Section 6.1 above (which shall in no way be limited by the following), in
connection with any underwritten public offering by the Company of its equity
securities pursuant to an effective registration statement filed under the Act,
the Investor shall not Transfer or offer to Transfer any shares of the Stock
without the prior written consent of the Company and its underwriters. Such
restriction (the "Market Stand-off") shall be in effect for such period of time
from and after the effective date of the final prospectus for the offering as
may be requested by the Company or such underwriters; provided, however, that
(i) such Market Stand-off shall not exceed one hundred eighty (180) days, and
(ii) the Investor shall be subject to the Market Stand-off only if the officers
and directors of the Company are also subject to similar restrictions. In order
to enforce the Market Stand-off, the Company may impose stop-transfer
instructions with respect to the Stock until the end of the applicable stand-off
period.
6.3 Notice of Intention to Transfer. In the event the Investor plans to
Transfer shares of the Stock in one or more transactions, the Investor shall
inform the Company of such intention to Transfer
4
<PAGE>
such shares five (5) days prior to such Transfer. Investor shall agree that any
transfer, sale or other disposition of the Company's Common Stock shall be
through an orderly disposition, including, at the request of the Company,
through a broker-dealer recommended by the Company.
6.4 Registration of Stock. The Company agrees that, with regard to the
Stock, the Investor shall become subject to the Amended and Restated Investors
Rights Agreement attached as Exhibit A (the "Rights Agreement") for the sole
purpose of providing the Investor with the demand, piggyback and Form S-3
registration rights described in Sections 2.2, 2.3 and 2.4 of the Rights
Agreement. Solely in connection with such demand, piggyback and S-3
registration rights set forth in Sections 2.2, 2.3 and 2.4, the Investor shall
be deemed to be a "Demand Holder" as defined in Section 1.1 of the Rights
Agreement and the shares of Series B common stock held by the Investor shall be
deemed to be "Demand Shares" and "Registrable Securities" as such terms are
defined in the Rights Agreement.
The Investor understands and agrees that (i) the Stock will be
characterized as "restricted securities" under the federal securities laws
inasmuch as it is being acquired from the Company in a transaction not involving
a public offering and that under such laws and applicable regulations such
securities may be resold without registration under the Act only in certain
limited circumstances, and (ii) each certificate representing the Stock and any
other securities issued in respect of the Stock upon any stock split, stock
dividend, recapitalization, merger or similar event (unless no longer required
in the opinion of counsel for the Company) shall be stamped or otherwise
imprinted with appropriate legends mandated by federal and state securities
laws.
6.5 Publicity. Except as required by law, no press release, public
statement, advertisement or similar publicity from any party hereunder with
respect to the participation of the Investor in the transactions contemplated
hereby (or any other matter relating to the Company and the Investor or its
affiliates) shall be issued or made without the prior consent of Investor.
Notwithstanding the foregoing, the Company may disclose Investor's investment in
the Company and the terms thereof and such other information previously approved
by Investor as of the date hereof for inclusion in the Registration Statement.
7. Miscellaneous.
7.1 Governing Law. This Agreement shall be governed in all respects by
the laws of the State of Colorado as applied to agreements among Colorado
residents entered into and to be performed entirely within Colorado, without
regard to the conflict of law provisions thereof.
7.2 Survival; Additional Securities. The representations and warranties
set forth in Sections 2 and 3 shall survive the execution and delivery of this
Agreement and the Closing until the applicable statute of limitation, upon which
a claim is brought, expires. The covenants and agreements set forth in Section
6 shall survive in accordance with their terms. Any new, substituted or
additional securities which are by reason of any stock split, stock dividend,
recapitalization or reorganization distributed with respect to the Stock ("Stock
Distributions") shall be immediately subject to the covenants and agreements set
forth in Section 6 to the same extent the Stock is at such time covered by such
provisions.
7.3 Successors and Assigns. Except as otherwise expressly provided
herein, the provisions hereof shall inure to the benefit of, and be binding
upon, the respective successors and assigns of the parties hereto. Nothing in
this Agreement, express or implied, is intended to confer upon any party other
than the parties hereto or their respective successors and assigns any rights,
remedies, obligations, or liabilities under or by reason of this Agreement,
except as expressly provided in this Agreement.
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Notwithstanding anything to the contrary contained herein, the covenants set
forth in Section 6 shall not be binding upon any entity (other than an affiliate
of the Investor) which acquires any shares of the Stock or a Stock Distribution
in a transaction permitted hereunder.
7.4 Entire Agreement. This Agreement constitutes the entire understanding
and agreement between the parties with regard to the subject matter hereof.
7.5 Notices. Except as otherwise provided, all notices and other
communications required or permitted hereunder shall be in writing, shall be
effective when given, and shall in any event be deemed to be given upon receipt
or, if earlier, (i) five (5) days after deposit with the U.S. postal service or
other applicable postal service, if delivered by first class mail, postage
prepaid, (ii) upon delivery, if delivered by hand, (iii) one (1) business day
after the day of deposit with Federal Express or similar overnight courier,
freight prepaid, if delivered by overnight courier or (iv) one (1) business day
after the day of facsimile transmission, if delivered by facsimile transmission
with copy by first class mail, postage prepaid, and shall be addressed, (a) if
to the Investor, at the Investor's address set forth below its signature, or at
such other address as the Investor shall have furnished to the Company in
writing, or (b) if to the Company, at its address as set forth below its
signature, or at such other address as the Company shall have furnished to the
Investor in writing.
7.6 Amendments and Waivers. Any term of this Agreement may be amended and
the observance of any term of the Agreement may be waived (either generally or
in a particular instance and either retroactively or prospectively) only with
the written consent of the Company and the Investor.
7.7 Legal Fees. In the event of any action at law, suit in equity or
arbitration proceeding in relation to this Agreement or the Stock or any Stock
Distribution, the prevailing party shall be paid by the other party a reasonable
sum for the attorneys' fees and expenses incurred by such prevailing party.
7.8 Expenses. Irrespective of whether the Closing is effected, the
Company and the Investor shall each pay their own costs and expenses incurred
with respect to the negotiation, execution, delivery and performance of this
Agreement.
7.9 Titles and Subtitles. The titles of the paragraphs and subparagraphs
of this Agreement are for convenience of reference only and are not to be
considered in construing this Agreement.
7.10 Counterparts. This Agreement may be executed in counterparts, each of
which shall be an original, but all of which together shall constitute one
instrument.
7.11 Severability. If one or more provisions of this Agreement are held to
be unenforceable under applicable law, such provision shall be excluded from
this Agreement and the balance of the Agreement shall be interpreted as if such
provision were so excluded and shall be enforceable in accordance with its
terms.
7.12 Confidentiality. The parties hereto agree that, except with the prior
written permission of the other party, it shall at all times keep confidential
and not divulge, furnish, or make accessible to anyone any confidential
information, knowledge, or data concerning or relating to the business or
financial affairs of such other party to which said party has been or shall
become privy by reason of this Agreement, discussions or negotiations relating
to this Agreement or the performance of its obligations hereunder.
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7.13 Termination. In the event that the Registration Statement relating to
the initial public offering of the Company's Series B Common Stock shall not
have been declared effective on or before May 12, 2000, then as of such date
Investor may, at its option, terminate this Agreement and upon such termination
this Agreement shall be of no further force or effect, and neither party shall
have any liability hereunder.
IN WITNESS WHEREOF, the parties hereto have caused their duly authorized
officers to execute and deliver this Agreement as of the date first above
written.
FIRSTWORLD COMMUNICATIONS, INC.
By: /s/ Sheldon S. Ohringer
-------------------------------------------
Name: Sheldon S. Ohringer
-----------------------------------------
Title: President and Chief Executive Officer
----------------------------------------
SAIC VENTURE CAPITAL CORPORATION
By: /s/ Ira J. Miller
-------------------------------------------
Name: Ira J. Miller
-----------------------------------------
Title: President and Treasurer
----------------------------------------
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EXHIBIT A
---------
[FirstWorld Communications, Inc. Amended and Restated Investor Rights Agreement,
First Amendment to Amended and Restated Investor Rights Agreement, and
Second Amendment to Amended and Restated Investor Rights Agreement]
A-1
<PAGE>
EXHIBIT 10.46
STOCK PURCHASE AGREEMENT
<PAGE>
TABLE OF CONTENTS
Page No.
--------
1. Purchase and Sale of Stock and Warrant.................... 1
1.1 Sale and Issuance of Stock and Warrant............... 1
1.2 The Closing.......................................... 1
2. Representations and Warranties of the Company............. 1
2.1 Organization and Good Standing....................... 1
2.2 Authorization........................................ 2
2.3 Valid Issuance of Stock.............................. 2
2.4 Title to Property and Assets......................... 2
2.5 Compliance with Other Documents...................... 2
2.6 Registration Statement............................... 2
2.7 Capitalization....................................... 2
2.8 Litigation........................................... 3
2.9 Intellectual Property................................ 3
2.10 Financial Statements................................. 3
2.11 Changes.............................................. 3
2.12 Taxes................................................ 3
2.13 Compliance with Laws and Other Instruments........... 3
2.14 Registration Rights Agreements....................... 4
2.15 Contracts............................................ 4
3. Representations and Warranties of the Investor............ 4
3.1 Authorization........................................ 4
3.2 Investigation........................................ 4
3.3 Qualified Institutional Buyer........................ 4
3.4 Purchase Entirely for Own Account.................... 4
3.5 Restricted Securities................................ 4
4. Conditions to the Investor's Obligation at Closing........ 4
4.1 Representations and Warranties....................... 4
4.2 Securities Laws...................................... 5
4.3 Authorizations....................................... 5
4.4 Initial Public Offering of Common Stock.............. 5
5. Conditions to the Company's Obligations at Closing........ 5
5.1 Representations and Warranties....................... 5
5.2 Securities Laws...................................... 5
5.3 Authorizations....................................... 5
5.4 Initial Public Offering of Common Stock.............. 5
5.5 Payment of Purchase Price............................ 5
6. Covenants of the Company and the Investor................. 5
6.1 Agreement Not Transfer............................... 5
6.2 Market Stand-Off..................................... 6
6.3 Notice of Intention to Transfer...................... 6
6.4 Registration of Stock................................ 6
6.5 Publicity............................................ 6
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7. Miscellaneous............................................. 7
7.1 Governing Law........................................ 7
7.2 Survival; Additional Securities...................... 7
7.3 Successors and Assigns............................... 7
7.4 Entire Agreement..................................... 7
7.5 Notices.............................................. 7
7.6 Amendments and Waivers............................... 7
7.7 Legal Fees........................................... 8
7.8 Expenses............................................. 8
7.9 Titles and Subtitles................................. 8
7.10 Counterparts......................................... 8
7.11 Severability......................................... 8
7.12 Confidentiality...................................... 8
ii
<PAGE>
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT is made as of the 9th day of February, 2000,
by and between FirstWorld Communications, Inc., a Delaware corporation located
at 8390 East Crescent Parkway, Suite 300, Greenwood Village, CO 80111 (the
"Company") and Microsoft Corporation, a Washington corporation located at One
Microsoft Way, Redmond, WA 98052 (the "Investor").
WHEREAS, the Investor has indicated a desire to purchase (i) the number of
shares of the Company's Series B Common Stock ("Common Stock") obtained by
dividing $12,000,000 by 93% of the per share price paid by the public (the "IPO
Price") for the Company's Common Stock in the Company's initial public offering
(the "IPO") and (ii) a five-year warrant to purchase the number of shares of
Common Stock equal to 75% of the shares obtained pursuant to (i) above at a per
share price equal to 125% of the IPO Price, substantially in the form attached
hereto as Exhibit B (the "Warrant").
WHEREAS, the Company has indicated a desire to sell (i) the number of
shares of the Company's Common Stock obtained by dividing $12,000,000 by 93% of
the IPO Price to the Investor on the terms set forth herein and (ii) the
Warrant.
WHEREAS, the Company and the Investor have agreed that this Agreement shall
constitute the entire understanding and agreement between the parties with
regard to the subject matter hereof.
NOW, THEREFORE, THE PARTIES HERETO AGREE AS FOLLOWS:
1. Purchase and Sale of Stock and Warrant.
1.1 Sale and Issuance of Stock and Warrant. Subject to the terms and
conditions of this Agreement, for a purchase price of $12,000,000, the Company
agrees to sell to the Investor and the Investor agrees to purchase from the
Company (i) the number of shares of the Company's Common Stock obtained by
dividing $12,000,000 by 93% of the IPO Price (the "Stock"), having the rights,
preferences, privileges and restrictions set forth in the Amended and Restated
Certificate of Incorporation of the Company (the "Restated Certificate") as on
file with the Delaware Secretary of State as of the Closing (as defined below),
and (ii) a five-year warrant to purchase 75% of the number of shares of Common
Stock obtained pursuant to 1.1(i) above at a per share strike price equal to
125% of the IPO Price, substantially in the form attached hereto as Exhibit B.
1.2 The Closing. The purchase and sale of the Stock and the Warrant shall
be held at the Company's offices immediately following the closing of the
Company's IPO (the "Closing"). At the Closing, the Company will deliver the
Stock and the Warrant to the Investor against payment of the purchase price
therefor by check payable to the order of the Company or by wire transfer.
2. Representations and Warranties of the Company. Except as set forth on the
Schedule of Exceptions delivered herewith, the Company hereby represents and
warrants to the Investor that:
2.1 Organization and Good Standing. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware and has all requisite corporate power and authority to carry on its
business as now conducted and as currently proposed to be conducted.
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The Company is duly qualified to transact business and is in good standing in
each jurisdiction in which the failure to so qualify would have a material
adverse effect on its business or properties.
2.2 Authorization. All corporate action on the part of the Company, its
officers, directors and stockholders necessary for the authorization, execution
and delivery of this Agreement, the performance of all obligations of the
Company hereunder, and the authorization, issuance, sale and delivery of the
Stock has been taken or will be taken prior to the Closing, and this Agreement
constitutes a valid and legally binding obligation of the Company, enforceable
in accordance with its terms, except (i) as limited by applicable bankruptcy,
insolvency, reorganization, moratorium, and other laws of general application
affecting enforcement of creditors' rights generally and (ii) as limited by laws
relating to the availability of specific performance, injunctive relief, or
other equitable remedies.
2.3 Valid Issuance of Stock. The Stock, when issued, sold and delivered
in accordance with the terms hereof for the consideration expressed herein, will
be duly and validly issued, fully paid and nonassessable and will be free of
restrictions on transfer other than restrictions on transfer under this
Agreement and under applicable state and federal securities laws. Subject in
part to the truth and accuracy of the Investor's representations set forth in
Section 3 of this Agreement, the offer, sale and issuance of the Stock as
contemplated by this Agreement are exempt from the registration requirements of
any applicable state and federal securities laws. The shares of Common Stock
issuable upon exercise of the Warrant have been duly reserved for issuance and
upon issuance in accordance with the terms of the Warrant will be duly and
validly issued, fully paid and non-assessable.
2.4 Title to Property and Assets. The Company owns its property and
assets free and clear of all mortgages, liens, loans and encumbrances, except
such encumbrances and liens that arise in the ordinary course of business and do
not materially impair the Company's ownership or use of such property or assets.
With respect to the property and assets it leases, the Company is in compliance
with such leases, except to the extent such non-compliance would not materially
impair the Company's business or prospects and, to the best of its knowledge,
holds a valid leasehold interest free of any liens, claims or encumbrances. The
Company is subject to the debt covenants and other terms and conditions set
forth in the Indenture dated April 13, 1998 between the Company and the Bank of
New York as Trustee (the "Indenture").
2.5 Compliance with Other Documents. The execution and delivery of this
Agreement, consummation of the transactions contemplated hereby, and compliance
with the terms and provisions hereof will not conflict with or result in a
breach of the terms and conditions of, or constitute a default under, the
Restated Certificate or Bylaws of the Company or of any contract or agreement to
which the Company is now a party, except where such conflict, breach or default
of any such contract or agreement, either individually or in the aggregate,
would not have a material adverse effect on the Company's business, financial
condition or results of operations.
2.6 Registration Statement. The Company's registration statement on Form
S-1, as amended, on file with the Securities and Exchange Commission ("SEC") as
of the date hereof (the "Registration Statement") shall not, at the time the
Registration Statement (including any amendments or supplements thereto) is
declared effective by the SEC, contain any untrue statement of a material fact
or omit to state any material fact necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading.
2.7 Capitalization. The Company's capitalization information contained in
the Registration Statement is complete and accurate as of the dates specified
therein and, except as disclosed in the
2
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Registration Statement, there are no existing options, warrants, calls,
commitments or other agreements to which the Company is a party or bound
requiring, and there are no convertible debt or other securities of the Company
outstanding which upon conversion would require, the issuance of any additional
shares of Common Stock or other securities convertible into Common Stock or the
purchase or redemption of any shares of Common Stock.
2.8 Litigation. Except as disclosed in the Company's Registration
Statement, to the best of the Company's knowledge there are no actions,
proceedings or investigations pending or threatened against the Company, that,
either in any case or in the aggregate, would result in any material adverse
change in the business, financial condition, or results of operations of the
Company.
2.9 Intellectual Property. Except as disclosed in the Registration
Statement, the Company owns, possesses or can acquire on reasonable terms,
adequate trademarks, trade names and other rights to inventions, know-how,
patents, copyrights, confidential information and other intellectual property
(collectively, "Intellectual Property Rights") necessary to conduct the business
now operated by it or as currently proposed to be operated by it, or presently
employed by it or as currently proposed to be employed by it , and has not
received any notice of infringement of or conflict with asserted rights of
others with respect to any intellectual property rights that, if determined
adversely to the Company, would individually or in the aggregate have a material
adverse effect on the condition (financial or other), business, properties or
results of operations.
2.10 Financial Statements. The financial statements included in the
Registration Statement present fairly the financial position of the Company as
of the dates shown and its results of operations and cash flows for the periods
shown, and, except as otherwise disclosed in the Registration Statement, such
financial statements have been prepared in conformity with the generally
accepted accounting principles in the United States applied on a consistent
basis.
2.11 Changes. Except as disclosed in the Registration Statement, since the
date of the latest audited financial statements included in the Registration
Statement there has not been: (i) any declaration, setting aside or payment of
any dividend or distribution (whether in cash, stock or property) with respect
to any of the Company's capital stock, (ii) any split, combination or
reclassification of any of its capital stock or any issuance or the
authorization of any issuance of any other securities in respect of, in lieu of
or in substitution for shares of its capital stock, or (iii) any material
adverse change, nor any development or event involving a prospective material
adverse change, in the condition (financial or other), business, properties or
results of operations of the Company taken as a whole.
2.12 Taxes. The Company has filed on a timely basis all tax returns and
reports (including information returns and reports) as required by law. These
returns and reports are true and correct in all material respects except to the
extent that a reserve has been reflected on the Company's financial statements
in accordance with generally accepted accounting principles. The Company has
paid all taxes and other assessments due, except those contested by it in good
faith and except to the extent that a reserve has been reflected on the
Company's financial statements in accordance with generally accepted accounting
principles. The provision for taxes of the Company as shown in the Company's
financial statements is adequate for taxes due or accrued as of the date
thereof.
2.13 Compliance with Laws and Other Instruments. The Company holds all
licenses, permits, and authorizations from all governmental entities necessary
for the lawful conduct of its business pursuant to all applicable statutes,
laws, ordinances, rules, and regulations of all such authorities having
jurisdiction
3
<PAGE>
over it or any part of its operations, excepting, however, when such failure to
hold would not have a material adverse effect on Company's business and
financial condition.
2.14 Registration Rights Agreement. Except as set forth in the
Registration Statement, the Company is not under any obligation to register any
presently outstanding securities, or any securities which may hereafter be
issued, under the Securities Act of 1933, as amended ("1933 Act").
2.15 Contracts. To the Company's knowledge all material contracts,
arrangements, plans, agreements, leases, licenses, franchises, permits,
indentures, authorizations, instruments and other commitments to which Company
is a party and which are material to its business are valid and in full force
and effect, and the Company has not, nor, to the best knowledge of Company, has
any other party thereto, breached any material provisions of, or is in default
in any material respect under the terms thereof, except where such breach or
default would not have a material adverse effect on the Company's business or
financial condition.
3. Representations and Warranties of the Investor. The Investor hereby
represents and warrants that:
3.1 Authorization. This Agreement constitutes the valid and legally
binding obligation of the Investor, enforceable in accordance with its terms,
subject to laws of general application relating to bankruptcy, insolvency and
the relief of debtors and by general principles of equity.
3.2 Investigation. The Investor acknowledges that it has had an
opportunity to discuss the business, affairs and current prospects of the
Company with the Company's chief executive officer. The Investor further
acknowledges having had access to information about the Company that it has
requested or considers necessary for purposes of purchasing the Stock. The
foregoing, however, does not limit or modify the representations and warranties
of the Company in Section 2 of this Agreement or the right of the Investors to
rely thereon.
3.3 Qualified Institutional Buyer. The Investor is a "Qualified
Institutional Buyer" as such term is defined in Rule 144A of the rules and
regulations promulgated under the Securities Act of 1933, as amended.
3.4 Purchase Entirely for Own Account. This Agreement is made with the
Investor in reliance upon the Investor's representation to the Company, which by
the Investor's execution of this Agreement the Investor hereby confirms, that
the Stock will be acquired for investment for the Investor's own account, not as
a nominee or agent, and not with a view to the resale or distribution of any
part thereof, and that the Investor has no present intention of selling,
granting any participation in, or otherwise distributing the same.
3.5 Restricted Securities. Investor understands that the Stock it is
purchasing are characterized as "restricted securities" under the federal
securities laws inasmuch as they are being acquired from the Company in a
transaction not involving a public offering and that under such laws and
applicable regulations such securities may be resold without registration under
the Act, only in certain limited circumstances. In this connection, Investor
represents that it is familiar with SEC Rule 144, as presently in effect, and
understands the resale limitations imposed thereby and by the Act.
4. Conditions to the Investor's Obligation at Closing. The obligation of the
Investor to purchase the Stock at the Closing is subject to the fulfillment to
the Investor's satisfaction on or prior to the Closing of the following
conditions:
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4.1 Representations and Warranties. The representations and warranties
made by the Company in Section 2 hereof shall be true and correct when made, and
shall be true and correct as of the Closing with the same force and effect as if
they had been made on and as of such date, subject to changes contemplated by
this Agreement. The Chief Executive Officer of the Company shall deliver at the
Closing a certificate stating that the condition specified in the preceding
sentence has been fulfilled.
4.2 Securities Laws. The offer and sale of the Stock to the Investor
pursuant to this Agreement shall be exempt from the registration requirements of
the Securities Act of 1933, as amended (the "Act") and qualification
requirements of all applicable state securities laws.
4.3 Authorizations. All authorizations, approvals or permits, if any, of
any governmental authority or regulatory body that are required in connection
with the lawful issuance and sale of the Stock pursuant to this Agreement shall
have been duly obtained and shall be effective on and as of the Closing.
4.4 Initial Public Offering of Common Stock. The closing of the initial
public offering of the Company's Series B Common Stock shall have occurred.
5. Conditions to the Company's Obligations at Closing. The obligation of the
Company to sell the Stock at the Closing is subject to the fulfillment to the
Company's satisfaction on or prior to the Closing of the following conditions:
5.1 Representations and Warranties. The representations and warranties of
the Investor contained in Section 3 hereof shall be true as of the Closing with
the same force and effect as if they had been made on and as of such date,
subject to changes contemplated by this Agreement. The Assistant Secretary of
the Investor shall deliver at the Closing a certificate stating that the
condition specified in the preceding sentence has been fulfilled.
5.2 Securities Laws. The offer and sale of the Stock to the Investor
pursuant to this Agreement shall be exempt from the registration requirements of
the Act qualification requirements of all applicable state securities laws.
5.3 Authorizations. All authorizations, approvals or permits, if any, of
any governmental authority or regulatory body that are required in connection
with the lawful issuance and sale of the Stock pursuant to this Agreement shall
have been duly obtained and shall be effective on and as of the Closing,
including, without limitation, the clearance of any applicable Hart-Scott-Rodino
filing, the cost of which shall be borne by the Investor.
5.4 Initial Public Offering of Common Stock. The closing of the initial
public offering of the Company's Series B Common Stock shall have occurred.
5.5 Payment of Purchase Price. The Investor shall have delivered to the
Company the purchase price for the Stock as set forth in Section 1.2 hereof.
6. Covenants of the Company and the Investor.
6.1 Agreement Not to Transfer.
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(a) Prior to 180 days after the Closing, the Investor shall not, directly
or indirectly, Transfer or offer to Transfer any shares of the Stock other than
to affiliates who agree to be bound by the terms of this Agreement, unless the
Company consents to such Transfer and the transferee agrees to be bound by this
Agreement.
(b) In order to enforce the Transfer Restrictions, the Company may impose
stop transfer instructions with respect to the Stock until the end of the
restricted period.
(c) As used in this Agreement, the term "Transfer" shall mean any sale,
transfer, assignment, hypothecation, encumbrance or other disposition, whether
voluntary or involuntary, of shares of the Stock. In the case of a
hypothecation, the Transfer shall be deemed to occur both at the time of the
initial pledge and at any pledgee's sale or a sale by any secured creditor or a
retention by the secured creditor of the pledged shares of the Stock in complete
or partial satisfaction of the indebtedness for which the shares of the Stock
are security.
6.2 Market Stand-Off. In addition to the transfer restrictions set forth
in Section 6.1 above (which shall in no way be limited by the following), in
connection with any underwritten public offering by the Company of its equity
securities pursuant to an effective registration statement filed under the Act,
the Investor shall not Transfer or offer to Transfer any shares of the Stock
without the prior written consent of the Company and its underwriters. Such
restriction (the "Market Stand-Off") shall be in effect for such period of time
from and after the effective date of the final prospectus for the offering as
may be requested by the Company or such underwriters; provided, however, that
(i) such Market Stand-Off shall not exceed one hundred eighty (180) days
following an initial public offering of equity securities and ninety (90) days
following any other offering of equity securities, and (ii) the Investor shall
be subject to the Market Stand-Off only if the officers and directors of the
Company, and each shareholder with beneficial ownership of at least 5% of the
Company's outstanding equity are also subject to similar restrictions. In order
to enforce the Market Stand-Off, the Company may impose stop-transfer
instructions with respect to the Stock until the end of the applicable stand-off
period.
6.3 Notice of Intention to Transfer. In the event the Investor plans to
Transfer shares of the Stock in one or more transactions other than through an
open-market transaction, the Investor shall inform the Company of such intention
to Transfer such shares fifteen (15) days prior to such Transfer. Provided,
however, that the foregoing sentence shall not apply to transactions effected
under Rule 144 of the 1933 Act or pursuant to a valid registration statement.
Investor shall agree that any transfer, sale or other disposition of the
Company's Common Stock shall be through an orderly disposition, including, at
the request of the Company, through a broker-dealer recommended by the Company.
6.4 Registration of Stock. The Company agrees that, with regard to the
Stock, and the Common Stock purchased upon exercise of the Warrant the Investor
shall become subject to the Amended and Restated Investors Rights Agreement
attached as Exhibit A (the "Rights Agreement") for the sole purpose of providing
the Investor with the demand, piggyback and Form S-3 registration rights
described in Sections 2.2, 2.3 and 2.4 of Rights Agreement. Solely in
connection with such demand, piggyback and S-3 registration rights set forth in
Sections 2.2, 2.3 and 2.4, the Investor shall be deemed to be a "Demand Holder"
as defined in Section 1.1 of the Rights Agreement and the shares of Series B
common stock held by the Investor shall be deemed to be "Demand Shares" and
"Registrable Securities" as such terms are defined in the Rights Agreement.
The Investor understands and agrees that (i) the Stock will be
characterized as "restricted securities" under the federal securities laws
inasmuch as it is being acquired from the Company in a
6
<PAGE>
transaction not involving a public offering and that under such laws and
applicable regulations such securities may be resold without registration under
the Act only in certain limited circumstances, and (ii) each certificate
representing the Stock and any other securities issued in respect of the Stock
upon any stock split, stock dividend, recapitalization, merger or similar event
(unless no longer required in the opinion of counsel for the Company) shall be
stamped or otherwise imprinted with appropriate legends mandated by federal and
state securities laws.
6.5 Publicity. Except as required by law, no press release, public
statement, advertisement or similar publicity from any party hereunder with
respect to the participation of the Investor in the transactions contemplated
hereby (or any other matter relating to the Company and the Investor or its
affiliates) shall be issued or made without the prior consent of Investor.
Notwithstanding the foregoing, the Company may disclose Investor's investment in
the Company and the terms thereof and such other information previously approved
by Investor as of the date hereof for inclusion in the Registration Statement.
7. Miscellaneous.
7.1 Governing Law. This Agreement shall be governed in all respects by
the laws of the State of Colorado as applied to agreements among Colorado
residents entered into and to be performed entirely within Colorado, without
regard to the conflict of law provisions thereof.
7.2 Survival; Additional Securities. The representations and warranties
set forth in Sections 2 and 3 shall survive until the Closing. The covenants and
agreements set forth in Section 6 shall survive in accordance with their terms.
Any new, substituted or additional securities which are by reason of any stock
split, stock dividend, recapitalization or reorganization distributed with
respect to the Stock ("Stock Distributions") shall be immediately subject to the
covenants and agreements set forth in Section 6 to the same extent the Stock is
at such time covered by such provisions.
7.3 Successors and Assigns. Except as otherwise expressly provided
herein, the provisions hereof shall inure to the benefit of, and be binding
upon, the respective successors and assigns of the parties hereto. Nothing in
this Agreement, express or implied, is intended to confer upon any party other
than the parties hereto or their respective successors and assigns any rights,
remedies, obligations, or liabilities under or by reason of this Agreement,
except as expressly provided in this Agreement. Notwithstanding anything to the
contrary contained herein, the covenants set forth in Section 6 shall not be
binding upon any entity (other than an affiliate of the Investor) which acquires
any shares of the Stock or a Stock Distribution in a transaction permitted
hereunder.
7.4 Entire Agreement. This Agreement constitutes the entire understanding
and agreement between the parties with regard to the subject matter hereof.
7.5 Notices. Except as otherwise provided, all notices and other
communications required or permitted hereunder shall be in writing, shall be
effective when given, and shall in any event be deemed to be given upon receipt
or, if earlier, (i) five (5) days after deposit with the U.S. postal service or
other applicable postal service, if delivered by first class mail, postage
prepaid, (ii) upon delivery, if delivered by hand, (iii) one (1) business day
after the day of deposit with Federal Express or similar overnight courier,
freight prepaid, if delivered by overnight courier or (iv) one (1) business day
after the day of facsimile transmission, if delivered by facsimile transmission
with copy by first class mail, postage prepaid, and shall be addressed, (a) if
to the Investor, at the Investor's address set forth below its signature, or at
such other address as the Investor shall have furnished to the Company in
writing, or (b) if
7
<PAGE>
to the Company, at its address as set forth below its signature, or at such
other address as the Company shall have furnished to the Investor in writing.
7.6 Amendments and Waivers. Any term of this Agreement may be amended and
the observance of any term of the Agreement may be waived (either generally or
in a particular instance and either retroactively or prospectively) only with
the written consent of the Company and the Investor.
7.7 Legal Fees. In the event of any action at law, suit in equity or
arbitration proceeding in relation to this Agreement or the Stock or any Stock
Distribution, the prevailing party shall be paid by the other party a reasonable
sum for the attorneys' fees and expenses incurred by such prevailing party.
7.8 Expenses. Irrespective of whether the Closing is effected, the
Company and the Investor shall each pay their own costs and expenses incurred
with respect to the negotiation, execution, delivery and performance of this
Agreement.
7.9 Titles and Subtitles. The titles of the paragraphs and subparagraphs
of this Agreement are for convenience of reference only and are not to be
considered in construing this Agreement.
7.10 Counterparts. This Agreement may be executed in counterparts, each of
which shall be an original, but all of which together shall constitute one
instrument.
7.11 Severability. If one or more provisions of this Agreement are held to
be unenforceable under applicable law, such provision shall be excluded from
this Agreement and the balance of the Agreement shall be interpreted as if such
provision were so excluded and shall be enforceable in accordance with its
terms.
7.12 Confidentiality. The parties hereto agree that, except with the prior
written permission of the other party, it shall at all times keep confidential
and not divulge, furnish, or make accessible to anyone any confidential
information, knowledge, or data concerning or relating to the business or
financial affairs of such other party to which said party has been or shall
become privy by reason of this Agreement, discussions or negotiations relating
to this Agreement or the performance of its obligations hereunder.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
8
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused their duly authorized
officers to execute and deliver this Agreement as of the date first above
written.
FIRSTWORLD COMMUNICATIONS, INC.
By: /S/ Sheldon S. Ohringer
_______________________________________________
Name: Sheldon S. Ohringer
_____________________________________________
Title: President and Chief Executive Officer
____________________________________________
MICROSOFT CORPORATION
By: /S/ John G. Connors
_______________________________________________
Name: John G. Connors
_____________________________________________
Title: Sr. Vice President, Chief Financial Officer
____________________________________________
9
<PAGE>
EXHIBIT A
---------
[FirstWorld Communications, Inc. Amended and Restated Investor Rights Agreement,
First Amendment to Amended and Restated Investor Rights Agreement, and
Second Amendment to Amended and Restated Investor Rights Agreement]
<PAGE>
EXHIBIT B
---------
Form of Warrant
<PAGE>
No. PW-____
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR
INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED OR ANY STATE SECURITIES LAWS. SUCH SECURITIES MAY NOT BE SOLD OR
TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER
SAID ACT AND ANY APPLICABLE STATE SECURITIES LAWS.
WARRANT TO PURCHASE _________ SHARES
OF SERIES B COMMON STOCK OF
FIRSTWORLD COMMUNICATIONS, INC.
(Void after ________ ___, ____)
This certifies that Microsoft Corporation or its assigns (the "Holder"),
for value received, is entitled to purchase from FirstWorld Communications,
Inc., a Delaware corporation (the "Company"), having a place of business at 8390
E. Crescent Parkway, Suite 300, Englewood CO 80111, a maximum of [75% of the
number of shares purchased under Section 1.1(i) of the Stock Purchase Agreement
between FirstWorld Communications, Inc. and Microsoft Corporation dated as of
___________ (the "Agreement")] fully paid and nonassessable shares of the
Company's Series B Common Stock ("Common Stock") for cash at a price equal to
$_______ ["IPO Price" as defined in the Agreement + 25%] (the "Stock Purchase
Price") at any time or from time to time up to and including 5:00 p.m. (Pacific
time) on the date that is five (5) years from the date of this such day being
referred to herein as the "Expiration Date", upon surrender to the Company at
its principal office (or at such other location as the Company may advise the
Holder in writing) of this Warrant properly endorsed with the Form of
Subscription attached hereto duly filled in and signed and, if applicable, upon
payment in cash or by check of the aggregate Stock Purchase Price for the number
of shares for which this Warrant is being exercised determined in accordance
with the provisions hereof. The Stock Purchase Price and the number of shares
purchasable hereunder are subject to adjustment as provided in Section 3 of this
Warrant.
This Warrant is subject to the following terms and conditions:
1. Exercise; Issuance of Certificates; Payment for Shares.
1.1 General. This Warrant is exercisable at the option of the
holder of record hereof, at any time or from time to time, up to the Expiration
Date for all or any part of the shares of Common Stock (but not for a fraction
of a share) which may be purchased hereunder. The Company agrees that the shares
of Common Stock purchased under this Warrant shall be and are deemed to be
issued to the Holder hereof as the record owner of such shares as of the close
of
<PAGE>
business on the date on which this Warrant shall have been surrendered, properly
endorsed, the completed, executed Form of Subscription delivered and payment
made for such shares. Certificates for the shares of Common Stock so purchased,
together with any other securities or property to which the Holder hereof is
entitled upon such exercise, shall be delivered to the Holder hereof by the
Company at the Company's expense within a reasonable time after the rights
represented by this Warrant have been so exercised. In case of a purchase of
less than all the shares which may be purchased under this Warrant, the Company
shall cancel this Warrant and execute and deliver a new Warrant or Warrants of
like tenor for the balance of the shares purchasable under the Warrant
surrendered upon such purchase to the Holder hereof within a reasonable time.
Each stock certificate so delivered shall be in such denominations of Common
Stock as may be requested by the Holder hereof and shall be registered in the
name of such Holder.
1.2 Net Exercise. In lieu of delivering the Stock Purchase Price in
cash upon exercise of this Warrant, the holder of this Warrant may elect to
receive shares equal to the value of this Warrant (or the portion thereof being
canceled) by surrender of this Warrant at the principal office of the Company
together with Notice of Exercise, in which event the Company shall issue to the
holder hereof a number of shares of Common Stock computed using the following
formula:
Y (A - B)
---------
X = A
Where
X -- The number of shares of Common Stock to be issued to the holder
of this Warrant.
Y -- The number of shares of Common Stock purchasable under this
Warrant.
A -- The fair market value of one share of the Company's Common
Stock.
B -- The Stock Purchase Price (as adjusted to the date of such
calculations).
For purposes of this Section 1.2, the fair market value of the Common
Stock shall mean the average of the closing bid and asked prices of the Common
Stock quoted in the over-the-counter market in which the Common Stock is traded
or the closing price quoted on any exchange on which the Common Stock is listed,
whichever is applicable, as published in the Western Edition of The Wall Street
Journal for the ten trading days prior to the date of determination of fair
market value (or such shorter period of time during which such stock was traded
over-the-counter or on such exchange). If the Common Stock is not traded on the
over-the-counter market or on an exchange, the fair market value shall be the
price per share that the
<PAGE>
Company could obtain from a willing buyer for shares of
Common Stock sold by the Company from authorized but unissued shares, as such
prices shall be determined in good faith by the Company's Board of Directors.
2. Shares to be Fully Paid; Reservation of Shares. The Company covenants
and agrees that all shares of Common Stock which may be issued upon the exercise
of the rights represented by this Warrant will, upon issuance, be duly
authorized, validly issued, fully paid and nonassessable and free from all
preemptive rights of any shareholder and free of all taxes, liens and charges
with respect to the issue thereof. The Company further covenants and agrees
that, during the period within which the rights represented by this Warrant may
be exercised, the Company will at all times have authorized and reserved, for
the purpose of issue or transfer upon exercise of the subscription rights
evidenced by this Warrant, a sufficient number of shares of authorized but
unissued Common Stock, or other securities and property, when and as required to
provide for the exercise of the rights represented by this Warrant. The Company
will take all such action as may be necessary to assure that such shares of
Common Stock may be issued as provided herein without violation of any
applicable law or regulation, or of any requirements of any domestic securities
exchange upon which the Common Stock may be listed; provided, however, that the
Company shall not be required to effect a registration under Federal or State
securities laws with respect to such exercise. The Company will not take any
action which would result in any adjustment of the Stock Purchase Price (as set
forth in Section 3 hereof) (i) if the total number of shares of Common Stock
issuable after such action upon exercise of all outstanding warrants, together
with all shares of Common Stock then outstanding and all shares of Common Stock
then issuable upon exercise of all options and upon the conversion of all
convertible securities then outstanding, would exceed the total number of shares
of Common Stock then authorized by the Company's Restated Certificate of
Incorporation, or (ii) if the total number of shares of Common Stock issuable
after such action upon the conversion of all such shares of Common Stock,
together with all shares of Common Stock then issuable upon exercise of all
options and upon the conversion of all such shares of Common Stock, together
with all shares of Common Stock then outstanding and all shares of Common Stock
then issuable upon exercise of all options and upon the conversion of all
convertible securities then outstanding would exceed the total number of shares
of Common Stock then authorized by the Company's Restated Certificate of
Incorporation.
3. Adjustment of Stock Purchase Price and Number of Shares. The Stock
Purchase Price and the number of shares purchasable upon the exercise of this
Warrant shall be subject to adjustment from time to time upon the occurrence of
certain events described in this Section 3. Upon each adjustment of the Stock
Purchase Price, the Holder of this Warrant shall thereafter be entitled to
purchase, at the Stock Purchase Price resulting from such adjustment, the number
of shares obtained by multiplying the Stock Purchase Price in effect immediately
prior to such adjustment by the number of shares purchasable pursuant hereto
immediately prior to such adjustment, and dividing the product thereof by the
Stock Purchase Price resulting from such adjustment.
2.
<PAGE>
3.1 Subdivision or Combination of Stock. In case the Company shall
at any time subdivide its outstanding shares of Common Stock into a greater
number of shares, the Stock Purchase Price in effect immediately prior to such
subdivision shall be proportionately reduced, and conversely, in case the
outstanding shares of Common Stock of the Company shall be combined into a
smaller number of shares, the Stock Purchase Price in effect immediately prior
to such combination shall be proportionately increased.
3.2 Dividends in Common Stock, Other Stock, Property,
Reclassification. If at any time or from time to time the Holders of Common
Stock (or any shares of stock or other securities at the time receivable upon
the exercise of this Warrant) shall have received or become entitled to receive,
without payment therefor,
(a) Common Stock or any shares of stock or other securities
which are at any time directly or indirectly convertible into or exchangeable
for Common Stock, or any rights or options to subscribe for, purchase or
otherwise acquire any of the foregoing by way of dividend or other distribution,
(b) any cash paid or payable otherwise than as a cash
dividend, or
(c) Common Stock or additional stock or other securities or
property (including cash) by way of spinoff, split-up, reclassification,
combination of shares or similar corporate rearrangement, (other than shares of
Common Stock issued as a stock split or adjustments in respect of which shall be
covered by the terms of Section 3.1 above), then and in each such case, the
Holder hereof shall, upon the exercise of this Warrant, be entitled to receive,
in addition to the number of shares of Common Stock receivable thereupon, and
without payment of any additional consideration therefor, the amount of stock
and other securities and property (including cash in the cases referred to in
clause (b) above and this clause (c)) which such Holder would hold on the date
of such exercise had he been the holder of record of such Common Stock as of the
date on which holders of Common Stock received or became entitled to receive
such shares or all other additional stock and other securities and property.
3.3 Reorganization, Reclassification, Consolidation, Merger or
Sale. If any capital reorganization or reclassification of the capital stock of
the Company, or any consolidation or merger of the Company with another entity,
or the sale of all or substantially all of the Company's assets to another
person or entity (collectively referred to as a "Transaction") shall be effected
in such a way that holders of Common Stock shall be entitled to receive stock,
securities, cash or assets with respect to or in exchange for Common Stock,
then, as a condition of such Transaction, reasonable, lawful and adequate
provisions shall be made whereby the holder of this Warrant shall thereafter
have the right to purchase and receive upon the basis and upon the terms and
conditions specified in this Warrant, upon exercise of this Warrant and in lieu
of the Warrant Shares immediately theretofore purchasable and receivable upon
the exercise of the rights represented hereby, such number, amount and like kind
of shares of stock, securities, cash or assets as may be issued or payable
pursuant to the terms of the Transaction with respect to or in exchange for the
number of shares of Common Stock immediately theretofore purchasable and
receivable upon the exercise of the rights represented hereby as if such shares
3.
<PAGE>
were outstanding immediately prior to the Transaction, and in any such case
appropriate provision shall be made with respect to the rights and interest of
the holders to the end that the provisions hereof (including, without
limitation, provisions for adjustments of the Exercise Price and of the number
of Warrant Shares purchasable and receivable upon the exercise of this Warrant)
shall thereafter be applicable, as nearly as may be practicable, in relation to
any shares of stock or securities thereafter deliverable upon the exercise
hereof.
3.4 Certain Events. If any change in the outstanding Common Stock
of the Company or any other event occurs as to which the other provisions of
this Section 3 are not strictly applicable or if strictly applicable would not
fairly protect the purchase rights of the Holder of the Warrant in accordance
with such provisions, then the Board of Directors of the Company shall make an
adjustment in the number and class of shares available under the Warrant, the
Stock Purchase Price or the application of such provisions, so as to protect
such purchase rights as aforesaid. The adjustment shall be such as will give the
Holder of the Warrant upon exercise for the same aggregate Stock Purchase Price
the total number, class and kind of shares as he would have owned had the
Warrant been exercised prior to the event and had he continued to hold such
shares until after the event requiring adjustment.
3.5 Notices.
(a) Immediately upon any adjustment in the number or class of
shares subject to this Warrant and of the Stock Purchase Price, the Company
shall give written notice thereof to the Holder, setting forth in reasonable
detail and certifying the calculation of such adjustment.
(b) The Company shall give written notice to the Holder at
least 10 business days prior to the date on which the Company closes its books
or takes a record for determining rights to receive any dividends or
distributions.
(c) The Company shall also give written notice to the Holder
at least 30 business days prior to the date, or as soon as is reasonably
practicable under the circumstances, on which an Organic Change or a Change of
Control shall take place.
4. Issue Tax. The issuance of certificates for shares of Common Stock
upon the exercise of the Warrant shall be made without charge to the Holder of
the Warrant for any issue tax (other than any applicable income taxes) in
respect thereof; provided, however, that the Company shall not be required to
pay any tax which may be payable in respect of any transfer involved in the
issuance and delivery of any certificate in a name other than that of the then
Holder of the Warrant being exercised.
5. Closing of Books. The Company will at no time close its transfer
books against the transfer of any warrant or of any shares of Common Stock
issued or issuable upon the exercise of any warrant in any manner which
interferes with the timely exercise of this Warrant.
4.
<PAGE>
6. No Voting or Dividend Rights; Limitation of Liability. Nothing
contained in this Warrant shall be construed as conferring upon the Holder
hereof the right to vote or to consent or to receive notice as a shareholder of
the Company or any other matters or any rights whatsoever as a shareholder of
the Company. No dividends or interest shall be payable or accrued in respect of
this Warrant or the interest represented hereby or the shares purchasable
hereunder until, and only to the extent that, this Warrant shall have been
exercised. No provisions hereof, in the absence of affirmative action by the
holder to purchase shares of Common Stock, and no mere enumeration herein of the
rights or privileges of the holder hereof, shall give rise to any liability of
such Holder for the Stock Purchase Price or as a shareholder of the Company,
whether such liability is asserted by the Company or by its creditors.
7. Warrants Non-Transferable. The Warrant shall not be transferable
without the express written consent of the Company, which may be withheld in its
sole discretion, except that Microsoft Corporation may transfer the Warrant to
any of its wholly-owned subsidiaries without first obtaining such consent. In
the event that the Company so consents (but without any obligation to grant such
consent), then subject to compliance with applicable federal and state
securities laws, this Warrant and all rights hereunder shall be transferable, in
whole or in part, without charge to the holder hereof (except for transfer
taxes), upon surrender of this Warrant properly endorsed. Each taker and holder
of this Warrant, by taking or holding the same, consents and agrees that this
Warrant, when endorsed in blank, shall be deemed negotiable, and that the holder
hereof, when this Warrant shall have been so endorsed, may be treated by the
Company, at the Company's option, and all other persons dealing with this
Warrant as the absolute owner hereof for any purpose and as the person entitled
to exercise the rights represented by this Warrant, or to the transfer hereof on
the books of the Company any notice to the contrary notwithstanding; but until
such transfer on such books, the Company may treat the registered owner hereof
as the owner for all purposes.
8. Market Stand-Off Agreement. Holder shall not sell, dispose of,
transfer, make any short sale of, grant any option for the purchase of, or enter
into any hedging or similar transaction with the same economic effect as a sale,
any Common Stock (or other securities) of the Company held by Holder, for a
period of time specified by the managing underwriter(s) (not to exceed one
hundred eighty (180) days following the effective date of the initial
registration statement of the Company filed under the Securities Act of 1933 and
for ninety (90) days following any subsequent public offering of equity
securities. Holder agrees to execute and deliver such other agreements as may be
reasonably requested by the Company and/or the managing underwriter(s) which are
consistent with the foregoing or which are necessary to give further effect
thereto. In order to enforce the foregoing covenant, the Company may impose
stop-transfer instructions with respect to such Common Stock (or other
securities) until the end of such period.
9. Rights and Obligations Survive Exercise of Warrant. The rights and
obligations of the Company, of the holder of this Warrant and of the holder of
shares of Common Stock issued upon exercise of this Warrant, shall survive the
exercise of this Warrant.
5.
<PAGE>
10. Modification and Waiver. This Warrant and any provision hereof may be
changed, waived, discharged or terminated only by an instrument in writing
signed by the party against which enforcement of the same is sought.
11. Notices. Any notice, request or other document required or permitted
to be given or delivered to the holder hereof or the Company shall be delivered
or shall be sent by certified mail, postage prepaid, to each such holder at its
address as shown on the books of the Company or to the Company at the address
indicated therefor in the first paragraph of this Warrant or such other address
as either may from time to time provide to the other.
12. Binding Effect on Successors. This Warrant shall be binding upon any
corporation succeeding the Company by merger, consolidation or acquisition of
all or substantially all of the Company's assets. All of the obligations of the
Company relating to the Common Stock issuable upon the exercise of this Warrant
shall survive the exercise and termination of this Warrant. All of the covenants
and agreements of the Company shall inure to the benefit of the successors and
assigns of the holder hereof.
13. Descriptive Headings and Governing Law. The description headings of
the several sections and paragraphs of this Warrant are inserted for convenience
only and do not constitute a part of this Warrant. This Warrant shall be
construed and enforced in accordance with, and the rights of the parties shall
be governed by, the laws of the State of Colorado.
14. Lost Warrants. The Company represents and warrants to the Holder
hereof that upon receipt of evidence reasonably satisfactory to the Company of
the loss, theft, destruction, or mutilation of this Warrant and, in the case of
any such loss, theft or destruction, upon receipt of an indemnity reasonably
satisfactory to the Company, or in the case of any such mutilation upon
surrender and cancellation of such Warrant, the Company, at its expense, will
make and deliver a new Warrant, of like tenor, in lieu of the lost, stolen,
destroyed or mutilated Warrant.
15. Fractional Shares. No fractional shares shall be issued upon exercise
of this Warrant. The Company shall, in lieu of issuing any fractional share, pay
the holder entitled to such fraction a sum in cash equal to such fraction
multiplied by the then effective Stock Purchase Price.
[THIS SPACE INTENTIONALLY LEFT BLANK]
6.
<PAGE>
In Witness Whereof, the Company has caused this Warrant to be duly executed
by its officers, thereunto duly authorized this ______ day of _____________,
2000.
Firstworld Communications, Inc.
a Delaware corporation
By:________________________________________
Title:_____________________________________
ATTEST:
_____________________________
Secretary
<PAGE>
EXHIBIT A
SUBSCRIPTION FORM
Date:_________________, 20___
FirstWorld Communications, Inc.
8390 E. Crescent Parkway, Suite 300
Englewood, CO 80111
Attn: President
Ladies and Gentlemen:
[_] The undersigned hereby elects to exercise the warrant issued to it by
FirstWorld Communications, Inc. (the "Company") and dated ___________
_____, ____ Warrant No. PW-___ (the "Warrant") and to purchase thereunder
__________________________________ shares of the Series B Common Stock of
the Company (the "Shares") at a purchase price of
___________________________________________ Dollars ($__________) per Share
or an aggregate purchase price of __________________________________
Dollars ($__________) (the "Purchase Price").
[_] The undersigned hereby elects to effect a net exercise of this Warrant,
exercising this Warrant [ ] in full or [ ] as to the following gross number
of Shares: __________. The undersigned understands that the actual number
of Shares issuable will be determined in accordance with Section 1 of this
Warrant.
Pursuant to the terms of the Warrant the undersigned has delivered the
Purchase Price herewith in full in cash or by certified check or wire transfer.
Very truly yours,
________________________________________
By:_____________________________________
Title:__________________________________
<PAGE>
STOCK PURCHASE AGREEMENT
<PAGE>
TABLE OF CONTENTS
Page No.
--------
1. Purchase and Sale of Stock..............................1
1.1 Sale and Issuance of Stock.........................1
1.2 The Closing........................................1
2. Representations and Warranties of the Company...........1
2.1 Organization and Good Standing.....................1
2.2 Authorization......................................1
2.3 Valid Issuance of Stock............................2
2.4 Title to Property and Assets.......................2
2.5 Compliance with Other Documents....................2
2.6 Registration Statement.............................2
2.7 Capitalization.....................................2
2.8 Litigation.........................................2
2.9 Intellectual Property..............................2
2.10 Financial Statements...............................3
2.11 Changes............................................3
2.12 Taxes..............................................3
3. Representations and Warranties of the Investor..........3
3.1 Authorization......................................3
3.2 Investigation......................................3
3.3 Institutional Accredited Investor..................3
3.4 Purchase Entirely for Own Account..................3
3.5 Restricted Securities..............................3
4. Conditions to the Investor's Obligation at Closing......4
4.1 Representations and Warranties.....................4
4.2 Securities Laws....................................4
4.3 Authorizations.....................................4
4.4 Initial Public Offering of Common Stock............4
5. Conditions to the Company's Obligations at Closing......4
5.1 Representations and Warranties.....................4
5.2 Securities Laws....................................4
5.3 Authorizations.....................................4
5.4 Initial Public Offering of Common Stock............4
5.5 Payment of Purchase Price..........................4
6. Covenants of the Company and the Investor...............5
6.1 Agreement Not Transfer.............................5
6.2 Market Stand-Off...................................5
6.3 Notice of Intention to Transfer....................5
6.4 Registration of Stock..............................5
6.5 Publicity..........................................6
7. Miscellaneous...........................................6
7.1 Governing Law......................................6
7.2 Survival; Additional Securities....................6
<PAGE>
7.3 Successors and Assigns.............................6
7.4 Entire Agreement...................................6
7.5 Notices............................................6
7.6 Amendments and Waivers.............................6
7.7 Legal Fees.........................................7
7.8 Expenses...........................................7
7.9 Titles and Subtitles...............................7
7.10 Counterparts.......................................7
7.11 Severability.......................................7
7.12 Confidentiality....................................7
7.13 Termination........................................7
<PAGE>
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT is entered into as of the 11th day of
February, 2000, by and between FirstWorld Communications, Inc., a Delaware
corporation (the "Company") and TPG FirstWorld I LLC, a Delaware limited
liability company (the "Investor").
WHEREAS, the Investor has indicated a desire to purchase the number of
shares of the Company's Series B Common Stock ("Common Stock") obtained by
dividing $50,000,000 by 93% of the per share price paid by the public for the
Company's Common Stock in the Company's initial public offering (the "IPO").
WHEREAS, the Company has indicated a desire to sell the number of shares of
the Company's Common Stock obtained by dividing $50,000,000 by 93% of the per
share price paid by the public for the Company's Common Stock in the Company's
IPO to the Investor on the terms set forth herein.
WHEREAS, the Company and the Investor have agreed that this Agreement shall
constitute the entire understanding and agreement between the parties with
regard to the subject matter hereof.
NOW, THEREFORE, THE PARTIES HEREBY AGREE AS FOLLOWS:
1. Purchase and Sale of Stock.
--------------------------
1.1 Sale and Issuance of Stock. Subject to the terms and conditions of
this Agreement, the Company agrees to sell to the Investor and the Investor
agrees to purchase from the Company the number of shares of the Company's Common
Stock obtained by dividing $50,000,000 by 93% of the per share price paid by the
public for the Company's Common Stock in the Company's IPO (the "Stock"), having
the rights, preferences, privileges and restrictions set forth in the
Certificate of Incorporation of the Company (the "Certificate") on file with the
Delaware Secretary of State as of the Closing (as defined below).
1.2 The Closing. The purchase and sale of the Stock shall be held at the
Company's offices immediately following the closing of the Company's IPO (the
"Closing"). At the Closing, the Company will deliver the Stock to the Investor
against payment of the purchase price therefor by check payable to the order of
the Company or by wire transfer. The per share purchase price for the Stock
shall be 93% of the per share price paid by the public for the Company's Common
Stock in the IPO.
2. Representations and Warranties of the Company. Except as set forth on
the schedule of exceptions delivered herewith, the Company hereby represents and
warrants to the Investor that:
2.1 Organization and Good Standing. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware and has all requisite corporate power and authority to carry on its
business as now conducted. The Company is duly qualified to transact business
and is in good standing in each jurisdiction in which the failure to so qualify
would have a material adverse effect on its business or properties.
2.2 Authorization. All corporate action on the part of the Company, its
officers, directors and stockholders necessary for the authorization, execution
and delivery of this Agreement, the performance of all obligations of the
Company hereunder, and the authorization, issuance, sale and delivery of the
Stock has been taken or will be taken prior to the Closing, and this Agreement
constitutes a valid and legally binding obligation of the Company, enforceable
in accordance with its terms, except (i) as limited by applicable bankruptcy,
insolvency, reorganization, moratorium, and other laws of general application
<PAGE>
affecting enforcement of creditors' rights generally and (ii) as limited by laws
relating to the availability of specific performance, injunctive relief, or
other equitable remedies.
2.3 Valid Issuance of Stock. The Stock, when issued, sold and delivered in
accordance with the terms hereof for the consideration expressed herein, will be
duly and validly issued, fully paid and nonassessable and will be free of
restrictions on transfer other than restrictions on transfer under this
Agreement and under applicable state and federal securities laws. Subject in
part to the truth and accuracy of the Investor's representations set forth in
Section 3 of this Agreement, the offer, sale and issuance of the Stock as
contemplated by this Agreement are exempt from the registration requirements of
any applicable state and federal securities laws.
2.4 Title to Property and Assets. The Company owns its property and assets
free and clear of all mortgages, liens, loans and encumbrances, except such
encumbrances and liens that arise in the ordinary course of business and do not
materially impair the Company's ownership or use of such property or assets.
With respect to the property and assets it leases, the Company is in compliance
with such leases, except to the extent such non-compliance would not materially
impair the Company's business or prospects and, to the best of its knowledge,
holds a valid leasehold interest free of any liens, claims or encumbrances. The
Company is subject to the debt covenants and other terms and conditions set
forth in the Indenture dated April 13, 1998 between the Company and the Bank of
New York as Trustee (the "Indenture").
2.5 Compliance with Other Documents. The execution and delivery of this
Agreement, consummation of the transactions contemplated hereby, and compliance
with the terms and provisions hereof will not conflict with or result in a
breach of the terms and conditions of, or constitute a default under the
Restated Certificate or Bylaws of the Company or of any contract or agreement to
which the Company is now a party, except where such conflict, breach or default
of any such contract or agreement, either individually or in the aggregate,
would not have a material adverse effect on the Company's business, financial
condition or results of operations.
2.6 Registration Statement. The Company's registration statement on Form
S-1, as amended, (the "Registration Statement") shall not, at the time the
Registration Statement (including any amendments or supplements thereto) is
declared effective by the Securities and Exchange Commission ("SEC"), contain
any untrue statement of a material fact or omit to state any material fact
necessary in order to make the statements therein, in light of the circumstances
under which they were made, not misleading.
2.7 Capitalization. The Company's capitalization information contained
in the Registration Statement is complete and accurate as of the dates specified
therein.
2.8 Litigation. Except as disclosed in the Company's Registration
Statement, to the best of the Company's knowledge, there are no actions,
proceedings or investigations pending against the Company, that, either in any
case or in the aggregate, would result in any material adverse change in the
business, financial condition, or results of operations of the Company.
2.9 Intellectual Property. Except as disclosed in the Registration
Statement, the Company owns, possesses or can acquire on reasonable terms,
adequate trademarks, trade names and other rights to inventions, know-how,
patents, copyrights, confidential information and other intellectual property
(collectively, "Intellectual Property Rights") necessary to conduct the business
now operated by it, or presently employed by it, and has not received any notice
of infringement of or conflict with asserted rights of others with respect to
any intellectual property rights that, if determined adversely to the
<PAGE>
Company, would individually or in the aggregate have a material adverse effect
on the condition (financial or other), business, properties or results of
operations.
2.10 Financial Statements. The financial statements included in the
Registration Statement present fairly the financial position of the Company as
of the dates shown and its results of operations and cash flows for the periods
shown, and, except as otherwise disclosed in the Registration Statement, such
financial statements have been prepared in conformity with the generally
accepted accounting principles in the United States applied on a consistent
basis.
2.11 Changes. Except as disclosed in the Registration Statement, since the
date of the latest audited financial statements included in the Registration
Statement there has been no material adverse change, nor any development or
event involving a prospective material adverse change, in the condition
(financial or other), business, properties or results of operations of the
Company taken as a whole.
2.12 Taxes. The Company has filed on a timely basis all tax returns and
reports (including information returns and reports) as required by law. These
returns and reports are true and correct in all material respects except to the
extent that a reserve has been reflected on the Company's financial statements
in accordance with generally accepted accounting principles. The Company has
paid all taxes and other assessments due, except those contested by it in good
faith and except to the extent that a reserve has been reflected on the
Company's financial statements in accordance with generally accepted accounting
principles. The provision for taxes of the Company as shown in the Company's
financial statements is adequate for taxes due or accrued as of the date
thereof.
3. Representations and Warranties of the Investor. The Investor hereby
represents and warrants that:
3.1 Authorization. This Agreement constitutes the valid and legally
binding obligation of the Investor, enforceable in accordance with its terms,
subject to laws of general application relating to bankruptcy, insolvency and
the relief of debtors and by general principles of equity.
3.2 Investigation. The Investor acknowledges that it has had an
opportunity to discuss the business, affairs and current prospects of the
Company with the Company's chief executive officer. The Investor further
acknowledges having had access to information about the Company that it has
requested or considers necessary for purposes of purchasing the Stock. The
foregoing, however, does not limit or modify the representations and warranties
of the Company in Section 2 of this Agreement or the right of the Investors to
rely thereon.
3.2 Institutional Accredited Investor. The Investor is a large
institutional accredited investor. "Accredited Investor" has the meaning
ascribed to it in Regulation D as promulgated under the Securities Act of 1933,
as amended.
3.4 Purchase Entirely for Own Account. This Agreement is made with the
Investor in reliance upon the Investor's representation to the Company, which by
the Investor's execution of this Agreement the Investor hereby confirms, that
the Stock will be acquired for investment for the Investor's own account, not as
a nominee or agent, and not with a view to the resale or distribution of any
part thereof, and that the Investor has no present intention of selling,
granting any participation in, or otherwise distributing the same.
3.5 Restricted Securities. Investor understands that the Stock it is
purchasing are characterized as "restricted securities" under the federal
securities laws inasmuch as they are being acquired from the Company in a
transaction not involving a public offering and that under such laws and
applicable regulations such securities may be resold without registration under
the Act, only in certain
<PAGE>
limited circumstances. In this connection, Investor represents that it is
familiar with SEC Rule 144, as presently in effect, and understands the resale
limitations imposed thereby and by the Act.
4. Conditions to the Investor's Obligation at Closing. The obligation of the
Investor to purchase the Stock at the Closing is subject to the fulfillment to
the Investor's satisfaction on or prior to the Closing of the following
conditions:
4.1 Representations and Warranties. The representations and warranties
made by the Company in Section 2 hereof shall be true and correct when made, and
shall be true and correct as of the Closing with the same force and effect as if
they had been made on and as of such date, subject to changes contemplated by
this Agreement. The Chief Executive Officer of the Company shall deliver at the
Closing a certificate stating that the condition specified in the preceding
sentence has been fulfilled.
4.2 Securities Laws. The offer and sale of the Stock to the Investor
pursuant to this Agreement shall be exempt from the registration requirements of
the Securities Act of 1933, as amended (the "Act") and qualification
requirements of all applicable state securities laws.
4.3 Authorizations. All authorizations, approvals or permits, if any, of
any governmental authority or regulatory body that are required in connection
with the lawful issuance and sale of the Stock pursuant to this Agreement shall
have been duly obtained and shall be effective on and as of the Closing.
4.4 Initial Public Offering of Common Stock. The closing of the initial
public offering of the Company's Series B Common Stock shall have occurred.
4.5 Condition to Close. The purchase of the Stock shall be subject to a
condition to closing as to any portion of the shares of Stock proposed to be
sold pursuant to this Agreement (and only that portion), that the purchase by
the Investor, individually, or taken together with all other all persons or
entities acting as a group within the meaning of Section 13(d)(3) and Section
14(d)(2) of the Securities Exchange Act of 1934, as amended, (collectively, the
"Group") not cause the Group to become the Beneficial Owner (as such term is
defined in the Company's Indenture dated April 13, 1998) of more than 35% of
Voting Stock (as such term is defined in the Indenture) of the Company.
5. Conditions to the Company's Obligations at Closing. The obligation of the
Company to sell the Stock at the Closing is subject to the fulfillment to the
Company's satisfaction on or prior to the Closing of the following conditions:
5.1 Representations and Warranties. The representations and warranties of
the Investor contained in Section 3 hereof shall be true as of the Closing with
the same force and effect as if they had been made on and as of such date,
subject to changes contemplated by this Agreement. An authorized officer of the
Investor shall deliver at the Closing a certificate stating that the condition
specified in the preceding sentence has been fulfilled.
5.2 Securities Laws. The offer and sale of the Stock to the Investor
pursuant to this Agreement shall be exempt from the registration requirements of
the Act qualification requirements of all applicable state securities laws.
5.3 Authorizations. All authorizations, approvals or permits, if any, of
any governmental authority or regulatory body that are required in connection
with the lawful issuance and sale of the Stock pursuant to this Agreement shall
have been duly obtained and shall be effective on and as of the Closing,
including without limitation filings and any necessary approvals under the Hart-
Scott-Rodino Anti-Trust Improvement Act.
<PAGE>
5.4 Initial Public Offering of Series B Common Stock. The closing of the
initial public offering of the Company's Series B Common Stock shall have
occurred.
5.5 Payment of Purchase Price. The Investor shall have delivered to the
Company the purchase price for the Stock as set forth in Section 1.2 hereof.
5.6 Condition to Close. The purchase of the Stock shall be subject to a
condition to closing as to any portion of the shares of Stock proposed to be
sold pursuant to this Agreement (and only that portion), that the purchase by
the Investor, individually, or taken together with all other all persons or
entities acting as a group within the meaning of Section 13(d)(3) and Section
14(d)(2) of the Securities Exchange Act of 1934, as amended, (collectively, the
"Group") not cause the Group to become the Beneficial Owner (as such term is
defined in the Company's Indenture dated April 13, 1998) of more than 35% of
Voting Stock (as such term is defined in the Indenture) of the Company.
6. Covenants of the Company and the Investor.
6.1 Agreement Not to Transfer.
(a) Prior to one hundred eighty (180) days after the Closing, the Investor
shall not, directly or indirectly, Transfer or offer to Transfer any shares of
the Stock other than to affiliates who agree to be bound by the terms of this
Agreement, unless the Company consents to such Transfer and the transferee
agrees to be bound by this Agreement.
(b) In order to enforce the transfer restrictions set forth in this
Section 6, the Company may impose stop transfer instructions with respect to the
Stock until the end of the restricted period.
(c) As used in this Agreement, the term "Transfer" shall mean any sale,
transfer, assignment, hypothecation, encumbrance or other disposition, whether
voluntary or involuntary, of shares of the Stock. In the case of a
hypothecation, the Transfer shall be deemed to occur both at the time of the
initial pledge and at any pledgee's sale or a sale by any secured creditor or a
retention by thc secured creditor of the pledged shares of the Stock in complete
or partial satisfaction of the indebtedness for which the shares of the Stock
are security.
6.2 Market Stand-Off. In addition to the transfer restrictions set forth
in Section 6.1 above (which shall in no way be limited by the following), in
connection with any underwritten public offering by the Company of its equity
securities pursuant to an effective registration statement filed under the Act,
the Investor shall not Transfer or offer to Transfer any shares of the Stock
without the prior written consent of the Company and its underwriters. Such
restriction (the "Market Stand-Off') shall be in effect for such period of time
from and after the effective date of the final prospectus for the offering as
may be requested by the Company or such underwriters; provided, however, that
(i) such Market Stand-Off shall not exceed one hundred eighty (180) days, and
(ii) the Investor shall be subject to the Market Stand-Off only if the officers
and directors of the Company are also subject to similar restrictions. In order
to enforce the Market Stand-Off, the Company may impose stop-transfer
instructions with respect to the Stock until the end of the applicable stand-off
period.
6.3 Notice of Intention to Transfer. In the event the Investor plans to
Transfer shares of the Stock in one or more transactions, the Investor shall
inform the Company of such intention to Transfer such shares fifteen (15) days
prior to such Transfer. Investor shall agree that any transfer, sale or other
disposition of the Company's Common Stock shall be through an orderly
disposition, including, at the request of the Company, through a broker-dealer
recommended by the Company.
<PAGE>
6.4 Registration of Stock. The Company agrees that, with regard to the
Stock, the Investor shall become a party to the Amended and Restated Investors
Rights Agreement attached as Exhibit A (the "Rights Agreement") for the sole
purpose of providing the Investor with the demand, piggyback and Form S-3
registration rights described in Sections 2.2, 2.3 and 2.4 of Rights Agreement.
Solely in connection with such demand, piggyback and S-3 registration rights set
forth in Sections 2.2, 2.3 and 2.4, the Investor shall be deemed to be a "Demand
Holder" as defined in Section 1.1 of the Rights Agreement and the shares of
Series B common stock held by the Investor shall be deemed to be "Demand Shares"
and "Registrable Securities" as such terms are defined in the Rights Agreement.
The Investor understands and agrees that (i) the Stock will be
characterized as "restricted securities" under the federal securities laws
inasmuch as it is being acquired from the Company in a transaction not involving
a public offering and that under such laws and applicable regulations such
securities may be resold without registration under the Act only in certain
limited circumstances, and (ii) each certificate representing the Stock and any
other securities issued in respect of the Stock upon any stock split, stock
dividend, recapitalization, merger or similar event (unless no longer required
in the opinion of counsel for the Company) shall be stamped or otherwise
imprinted with appropriate legends mandated by federal and state securities
laws.
6.5 Publicity. Except as required by law, no press release, public
statement, advertisement or similar publicity from any party hereunder with
respect to the participation of the Investor in the transactions contemplated
hereby (or any other matter relating to the Company and the Investor or its
affiliates) shall be issued or made without the prior consent of Investor.
Notwithstanding the foregoing, the Company may disclose Investor's investment in
the Company and the terms thereof and such other information previously approved
by Investor for inclusion in the Registration Statement.
7. Miscellaneous.
7.1 Governing Law. This Agreement shall be governed in all respects by the
laws of the State of Delaware as applied to agreements among Delaware residents
entered into and to be performed entirely within Delaware, without regard to the
conflict of law provisions thereof.
7.2 Survival; Additional Securities. The representations and warranties
set forth in Sections 2 and 3 shall survive until the Closing. The covenants and
agreements set forth in Section 6 shall survive in accordance with their terms.
Any new, substituted or additional securities which are by reason of any stock
split, stock dividend, recapitalization or reorganization distributed with
respect to the Stock ("Stock Distributions") shall be immediately subject to the
covenants and agreements set forth in Section 6 to the same extent the Stock is
at such time covered by such provisions.
7.3 Successors and Assigns. Except as otherwise expressly provided herein,
the provisions hereof shall inure to the benefit of, and be binding upon, the
respective successors and assigns of the parties hereto. Nothing in this
Agreement, express or implied, is intended to confer upon any party other than
the parties hereto or their respective successors and assigns any rights,
remedies, obligations, or liabilities under or by reason of this Agreement,
except as expressly provided in this Agreement. Notwithstanding anything to the
contrary contained herein, the covenants set forth in Section 6 shall not be
binding upon any entity (other than an affiliate of the Investor) which acquires
any shares of the Stock or a Stock Distribution in a transaction permitted
hereunder.
7.4 Entire Agreement. This Agreement constitutes the entire understanding
and agreement between the parties with regard to the subject matter hereof.
<PAGE>
7.5 Notices. Except as otherwise provided, all notices and other
communications required or permitted hereunder shall be in writing, shall be
effective when given, and shall in any event be deemed to be given upon receipt
or, if earlier, (i) five (5) days after deposit with the U.S. postal service or
other applicable postal service, if delivered by first class mail, postage
prepaid, (ii) upon delivery, if delivered by hand, (iii) one (1) business day
after the day of deposit with Federal Express or similar overnight courier,
freight prepaid, if delivered by overnight courier or (iv) one (1) business day
after the day of facsimile transmission, if delivered by facsimile transmission
with copy by first class mail, postage prepaid, and shall be addressed, (a) if
to the Investor, at the Investor's address set forth below its signature, or at
such other address as the Investor shall have furnished to the Company in
writing, or (b) if to the Company, at its address as set forth below its
signature, or at such other address as the Company shall have furnished to the
Investor in writing.
7.6 Amendments and Waivers. Any term of this Agreement may be amended and
the observance of any term of the Agreement may be waived (either generally or
in a particular instance and either retroactively or prospectively) only with
the written consent of the Company and the Investor.
7.7 Legal Fees. In the event of any action at law, suit in equity or
arbitration proceeding in relation to this Agreement or the Stock or any Stock
Distribution, the prevailing party shall be paid by the other party a reasonable
sum for the attorneys' fees and expenses incurred by such prevailing party.
7.8 Expenses. Irrespective of whether the Closing is effected, the
Company and the Investor shall each pay their own costs and expenses incurred
with respect to the negotiation, execution, delivery and performance of this
Agreement.
7.9 Titles and Subtitles. The titles of the paragraphs and subparagraphs
of this Agreement are for convenience of reference only and are not to be
considered in construing this Agreement.
7.10 Counterparts. This Agreement may be executed in counterparts, each of
which shall be an original, but all of which together shall constitute one
instrument.
7.11 Severability. If one or more provisions of this Agreement are held to
be unenforceable under applicable law, such provision shall be excluded from
this Agreement and the balance of the Agreement shall be interpreted as if such
provision were so excluded and shall be enforceable in accordance with its
terms.
7.12 Confidentiality. The parties hereto agree that, except with the prior
written permission of the other party, it shall at all times keep confidential
and not divulge, furnish, or make accessible to anyone any confidential
information, knowledge, or data concerning or relating to the business or
financial affairs of such other party to which said party has been or shall
become privy by reason of this Agreement, discussions or negotiations relating
to this Agreement or the performance of its obligations hereunder.
7.13 Termination. This Stock Purchase Agreement shall terminate and be of
no further force or effect on the date on which the Company's IPO is
consummated, if Investor has not received the necessary approval required to
effect the investment contemplated by this agreement under the Hart-Scott-Rodino
Anti-Trust Improvement Act or its successor. Notwithstanding the foregoing, if
the Closing has not occurred as of May 12, 2000, this agreement shall be
terminable at the option of the Investor.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused their duly authorized
officers to execute and deliver this Agreement as of the date first above
written.
FIRSTWORLD COMMUNICATIONS, INC.
By: /s/ Jeffrey L. Dykes
--------------------
Name: Jeffrey L. Dykes
----------------
Title: Senior Vice President
---------------------
TPG FirstWorld I LLC
By: /s/ Richard A. Ekleberry
------------------------
Name: Richard A. Ekleberry
--------------------
Title: Vice President and Secretary
----------------------------
<PAGE>
EXHIBIT A
---------
[FirstWorld Communications, Inc. Amended and Restated Investor Rights Agreement
A-1
<PAGE>
EXHIBIT 10.48
FIRST AMENDMENT TO EMPLOYMENT AGREEMENT
This First Amendment to Employment Agreement, dated as of January 27, 2000,
is by and between FirstWorld Communications, Inc., a Delaware corporation (the
"Company"), and Paul C. Adams ("Executive") (collectively, the "Parties").
Recitals
A. The Parties have previously entered into a written Employment
Agreement, dated as of January 21, 1999 (the "Agreement").
B. The period of employment of Executive by the Company under the
Agreement commenced on January 27, 1999, and continued through January 27, 2000.
C. The Parties mutually desire to extend the period of employment of
Executive by the Company for a period of one (1) year through January 27, 2001,
under the same terms and conditions as contained in the Agreement.
Agreement
In consideration of the foregoing, the mutual covenants contained herein
and other good and valuable consideration, the sufficiency of which is hereby
acknowledged, the Parties hereby agree to amend the Agreement as follows:
1. The first sentence of Section 2 of the Agreement is deleted in its
entirety and replaced with the following:
The period of employment of Executive by the Company
hereunder (the "Employment Period") shall commence on
January 28, 2000 (the "Commencement Date") and shall
continue through January 27, 2001 (the "Expiration Date").
2. Section 4(a) of the Agreement - delete "$120,000" and replace with
"$132,000".
3. Except as expressly modified herein, the Agreement shall remain in full
force and effect in accordance with its terms and conditions.
<PAGE>
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement, as
amended, as of the date and year first above written.
FirstWorld Communications, Inc.
By: /s/ Sheldon S. Ohringer
-----------------------
Sheldon S. Ohringer,
President and Chief Executive Officer
Paul C. Adams
/s/ Paul C. Adams
-----------------
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
----------------------------------
We hereby consent to the use in this Registration Statement on Form S-1 of our
reports dated February 11, 2000, relating to the financial statements and
financial statement schedule of FirstWorld Communications, Inc., which appear in
such Registration Statement. We also consent to the reference to us under the
heading "Experts" in such Registration Statement.
PRICEWATERHOUSECOOPERS LLP
Denver, Colorado
February 15, 2000
<PAGE>
BLUMENFELD & COHEN
Suite 1170
4 Embarcadero Center
San Francisco, CA 94111
-----
415.394.7500
facsimile 415.394.7505
-----
http://www.technologylaw.com
Suite 300
1625 Massachusetts Avenue, NW
Washington, DC 20036
-----
202.955.6300
facsimile 202.955.6460
EXHIBIT 23.3
CONSENT OF BLUMENFELD & COHEN
We hereby consent to the following language in reference to our firm under
the caption "Experts" in the Registration Statement on Form S-1 of FirstWorld
Communications Inc. related prospectus in connection with statements under the
captions "Risk Factors--Our Services Are Subject to Federal, State and Local
Government Laws and Regulations, and Changes in These Laws or Regulations Could
Adversely Affect the Way We Operate Our Business," "Challenges to Governmental
Regulation Could Increase Our Operating Costs" and "Business--Government
Regulation." The aforementioned portions of this Prospectus have been reviewed
by Blumenfeld & Cohen and are subject to an opinion to be rendered to the
Underwriters.
LANGUAGE TO BE INSERTED:
"The statements in this Prospectus under the captions "Risk Factors--Our
Services Are Subject to Federal, State and Local Government Laws and
Regulations, and Changes in These Laws or Regulations Could Adversely
Affect the Way We Operate Our Business," "Challenges to Government
Regulation Could Increase Our Operating Costs" and "Business--Government
Regulation," solely insofar as they constitute summaries of federal, state,
and local telecommunications regulatory provisions, have been reviewed and
approved by Blumenfeld & Cohen, as experts on such matters, and are
included herein in reliance upon that review and approval."
DATED this 15th day of February, 2000
BLUMENFELD & COHEN
By: /s/ Stephen P. Bowen
---------------------------------
Stephen P. Bowen
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 28,608
<SECURITIES> 20,615
<RECEIVABLES> 17,359
<ALLOWANCES> 2,568
<INVENTORY> 0
<CURRENT-ASSETS> 69,415
<PP&E> 136,223
<DEPRECIATION> 13,062
<TOTAL-ASSETS> 261,783
<CURRENT-LIABILITIES> 46,933
<BONDS> 294,034
0
0
<COMMON> 3
<OTHER-SE> (86,803)
<TOTAL-LIABILITY-AND-EQUITY> 261,783
<SALES> 54,496
<TOTAL-REVENUES> 54,496
<CGS> 39,606
<TOTAL-COSTS> 130,145
<OTHER-EXPENSES> 0
<LOSS-PROVISION> (75,649)
<INTEREST-EXPENSE> (37,928)
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> (106,617)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (106,617)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
