FIRSTWORLD COMMUNICATIONS INC, 10-Q, 2000-05-12

FIRSTWORLD COMMUNICATIONS INC
10-Q, 2000-05-12
TELEPHONE COMMUNICATIONS (NO RADIOTELEPHONE)

Previous: CH ENERGY GROUP INC, 10-Q, 2000-05-12

Next: BAUPOST GROUP LLC/MA, 13F-HR, 2000-05-12

<PAGE>
================================================================================

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

COMMISSION FILE NUMBER 0-24953

FIRSTWORLD COMMUNICATIONS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

DELAWARE 33-0521976
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NUMBER)
INCORPORATION OR ORGANIZATION)

________________

8390 E. CRESCENT PARKWAY
SUITE 300
GREENWOOD VILLAGE, CO 80111
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(ZIP CODE)

(303) 874-8010
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)

(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL
YEAR, IF CHANGED SINCE LAST REPORT)
________________

INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS:

[X] YES [ ] NO

AS OF MAY 1, 2000, THE REGISTRANT'S OUTSTANDING COMMON STOCK CONSISTED OF
5,101,831 SHARES OF SERIES A COMMON STOCK AND 46,162,613 SHARES OF SERIES B
COMMON STOCK.

================================================================================

<PAGE>

FIRSTWORLD COMMUNICATIONS, INC.
INDEX

<TABLE>
<CAPTION>
PAGE
----

<S> <C>
FORWARD-LOOKING STATEMENTS 3

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements
Consolidated Balance Sheets at March 31, 2000 (unaudited) and
December 31, 1999.......................................................... 4
Consolidated Statements of Operations (unaudited) for the
three months ended March 31, 2000 and 1999................................. 5
Consolidated Statements of Stockholders' Equity (Deficit) (unaudited)
for the three months ended March 31, 2000.................................. 6
Consolidated Statements of Cash Flows (unaudited) for the
three months ended March 31, 2000 and 1999................................. 7
Notes to Consolidated Financial Statements................................... 8

Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................................... 12

Item 3. Quantitative and Qualitative Disclosures about Market Risk............. 18

PART II. OTHER INFORMATION

Item 1. Legal Matters.......................................................... 18
Item 6. Exhibits and Reports on Form 8-K....................................... 19

SIGNATURES...................................................................... 20
</TABLE>

2
<PAGE>

FORWORD-LOOKING STATEMENTS

All statements contained herein, as well as statements made in press
releases and oral statements that may be made by the Company or by officers,
directors or employees of the Company acting on its behalf, that are not
statements of historical fact constitute "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. Such forward-
looking statements involve known and unknown risks, uncertainties and other
factors that could cause the actual results of the Company to be materially
different from historical results or from any future results expressed or
implied by such forward-looking statements. Among the factors that could cause
actual results to differ materially are the following: an increase in
competition; the introduction of new technologies and competitors into the
internet and telephony business; a merger of existing internet and telephony
competitors; a change in the regulations governing the industry; general
business and economic conditions; an adverse change of the Company's
relationships with vendors; failure to open or open timely any Internet data
center; an unexpected business interruption due to the failure of third parties
to remediate Year 2000 issues; the inability of the Company to retain necessary
authorizations from the Federal Communications Commission ("FCC") or state
public utility commissions; and other risk factors described from time to time
in the Company's registration statements or reports filed with the United
States Securities and Exchange Commission. In addition to statements that
explicitly describe such risks and uncertainties, readers are urged to consider
statements that include the terms "believes," "belief," "expects," "plans,"
"anticipates," "intends" or the like to be uncertain and forward-looking. All
cautionary statements made herein should be read as being applicable to all
forward-looking statements wherever they appear. In this connection, investors
should consider the risks described herein. The Company assumes no obligation to
update forward-looking statements.

<PAGE>

PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

FIRSTWORLD COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<S> <C> <C>
MARCH 31, DECEMBER 31,
2000 1999
--------- ------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents................................................................ $ 230,956 $ 28,608
Marketable securities.................................................................... 58,865 20,615
Accounts receivable, net of allowance for doubtful accounts of
$1,456 and $2,568, respectively.................................................... 16,066 11,551
Due from affiliates...................................................................... - 3,240
Prepaid expenses and other............................................................... 7,212 3,773
Revenues in excess of billings........................................................... 1,195 1,628
--------- ------------
Total current assets............................................................... 314,294 69,415
--------- ------------

Property and equipment, net................................................................ 145,652 123,161
Goodwill and intangibles, net.............................................................. 46,442 48,858
Long haul rights, not in service........................................................... 11,060 11,060
Deferred financing costs, net.............................................................. 7,118 7,340
Other assets............................................................................... 3,556 1,949
--------- ------------
Total assets....................................................................... $ 528,122 $ 261,783
========= ============

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

Current liabilities:
Accounts payable......................................................................... $ 26,785 $ 28,521
Deferred revenue......................................................................... 4,390 3,950
Accrued payroll related liabilities...................................................... 3,475 3,994
Other accrued expenses................................................................... 3,220 9,913
Capital lease obligations, current portion............................................... 418 468
Long-term debt, current portion.......................................................... 77 87
--------- ------------
Total current liabilities.......................................................... 38,365 46,933
--------- ------------

Long-term debt, net of current portion and discount........................................ 303,717 294,034
Compensation payable....................................................................... 8,537 -
Capital lease obligations, including interest, net of current portion...................... 7,517 7,616
--------- ------------
Total liabilities.................................................................. 358,136 348,583
--------- ------------

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;
5,101,831 and 10,135,164 shares issued and outstanding at March 31, 2000
and December 31, 1999, respectively............................................. 1 1
Series B, 89,864,836 shares designated;
45,938,241 and 18,663,358 shares issued and outstanding at March 31, 2000 and
December 31, 1999, respectively................................................... 6 2

Additional paid-in capital............................................................... 408,847 85,703
Deferred stock compensation.............................................................. (16,689) -
Stockholder receivables.................................................................. (45) (45)
Accumulated deficit...................................................................... (222,134) (172,461)
--------- ------------
Total stockholders' equity (deficit)............................................... 169,986 (86,800)
--------- ------------
Total liabilities and stockholders' equity (deficit)............................... $ 528,122 $ 261,783
========= ============
</TABLE>

See notes to consolidated financial statements.

4
<PAGE>

FIRSTWORLD COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------
<S> <C> <C>
MARCH 31, MARCH 31,
2000 1999
----------- -----------
Revenue:
Internet data center and web hosting....................................................... $ 1,995 $ 338
Digital subscriber line.................................................................... 1,119 128
Dedicated Internet services and other...................................................... 6,257 1,946
Web integration and consulting services.................................................... 8,895 5,207
Telephony services......................................................................... 1,575 643
----------- -----------
Total revenue............................................................................ 19,841 8,262
----------- -----------

Cost and expenses:
Network and service costs.................................................................. 15,453 5,696
Selling, general and administrative expenses, excluding compensation charges
resulting from initial public offering and amortization of deferred stock 23,314 10,912
compensation.............................................................................
Compensation charges resulting from initial public offering................................ 9,554 -
Amortization of deferred stock compensation................................................ 1,791 -
Depreciation and amortization.............................................................. 10,482 2,989
----------- -----------
Total costs and expenses................................................................. 60,594 19,597
----------- -----------

Loss from operations........................................................................ (40,753) (11,335)

Other income (expense):
Interest income............................................................................ 1,176 2,401
Interest expense........................................................................... (10,096) (8,830)
----------- -----------
Total other expense...................................................................... (8,920) (6,429)
----------- -----------

Net loss.................................................................................... $ (49,673) $ (17,764)
=========== ===========

Basic and diluted net loss per common share................................................. $ (1.38) $ (.67)
=========== ===========

Weighted average shares outstanding, basic and diluted...................................... 35,899,164 26,711,867
=========== ===========
</TABLE>

See notes to consolidated financial statements.

5
<PAGE>

FIRSTWORLD COMMUNICATIONS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT) (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)

Total
Series A Series B Stock Stock-
Common Stock Common Stock Additional Deferred holder Accum- holders'
------------------ ------------------ Paid-in Stock Compen- Receiv- ulated Equity
Shares Amount Shares Amount Capital sation ables Deficit (Deficit)
---------- ------ ---------- ------ --------- ------------ -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 2000..... 10,135,164 $ 1 18,663,358 $ 2 $ 85,703 $ - $ (45) $(172,461) $ (86,800)
Series A common stock
converted to Series B
common stock................. (5,033,333) - 5,033,333 - - - - - -
Issuance of common stock in
conjunction with initial
public offering, net of
offering costs of $1,759.... - - 11,500,000 4 181,055 - - - 181,059
Issuance of common stock in
conjunction with private
placements................... - - 5,787,476 - 91,500 - - - 91,500
Issuance of common stock in
conjunction with 1999
Equity Investment............ - - 3,333,333 - 25,000 - - - 25,000
Issuance of common stock
upon exercise of options and - - 1,620,741 - 4,708 - - - 4,708
warrants.....................
Warrants issued in
conjunction with private - - - - 2,401 - - - 2,401
placements...................
Deferred compensation from
conversion of stock
appreciation rights and
grants of stock options...... - - - - 18,480 (18,480) - - -
Amortization of deferred
stock compensation........... - - - - - 1,791 - - 1,791
Net loss....................... - - - - - - - (49,673) (49,673)
---------- ------ ---------- ------ --------- ------------ -------- --------- ---------
Balance at March 31, 2000...... 5,101,831 $ 1 45,938,241 $ 6 $ 408,847 $ (16,689) $ (45) $(222,134) $ 169,986
========== ====== ========== ====== ========= ============ ======== ========= =========
</TABLE>

See notes to consolidated financial statements.

6
<PAGE>

FIRSTWORLD COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)

<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------
MARCH 31, MARCH 31,
2000 1999
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................................................. $ (49,673) $ (17,764)
Adjustments to reconcile net loss
to net cash provided (used) by operating activities:
Depreciation and amortization expense................................................... 10,482 2,989
Accretion of senior notes............................................................... 9,513 8,484
Compensation charges resulting from initial public offering............................. 8,537 -
Amortization of deferred stock compensation............................................. 1,791 -
Amortization of deferred financing costs................................................ 222 203
Other non-cash charges.................................................................. 295 -
Changes in assets and liabilities, net of effects of acquisitions:
Accounts receivable................................................................... (1,187) 328
Other assets.......................................................................... (2,416) 941
Accounts payable...................................................................... 2,454 (5,945)
Deferred revenue...................................................................... 440 60
Accrued payroll and related liabilities............................................... (519) 1,440
Other liabilities..................................................................... (1,933) 475
--------- ---------
Net cash used by operating activities............................................... (26,994) (8,789)
--------- ---------

Cash flows from investing activities:
Purchases of held-to-maturity marketable securities....................................... (58,865) (84,235)
Maturities of held-to-maturity marketable securities...................................... 20,615 170,030
Purchase of property and equipment........................................................ (31,797) (8,792)
Acquisitions, net of cash acquired........................................................ - (17,789)
Acquisition of assets and intangibles..................................................... (2,400) -
--------- ---------
Net cash provided (used) by investing activities.................................... (72,447) 59,214
--------- ---------

Cash flows from financing activities:
Net proceeds from initial public offering................................................. 181,059 -
Proceeds from private placements.......................................................... 91,500 -
Net proceeds from 1999 Equity Investment.................................................. 20,000 -
Proceeds from exercise of stock options and warrants...................................... 4,513 342
Principal payments of debt and capital leases............................................. (283) (263)
--------- ---------
Net cash provided by financing activities........................................... 296,789 79
--------- ---------

Net increase in cash and cash equivalents................................................... 202,348 50,504
Cash and cash equivalents, beginning of period.............................................. 28,608 29,659
--------- ---------
Cash and cash equivalents, end of period.................................................... $ 230,956 $ 80,163
========= =========

Supplemental cash flow information:
Effects of acquisitions:
Assets acquired.......................................................................... $ - $ 22,551
Liabilities assumed...................................................................... - (1,927)
Common stock issued...................................................................... - (2,835)
Less cash paid........................................................................... - (17,940)
--------- ---------
Net cash acquired from acquisitions................................................. $ - $ (151)
========= =========
</TABLE>

See notes to consolidated financial statements.

7
<PAGE>

FIRSTWORLD COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION

The consolidated financial statements include the accounts of FirstWorld
Communications, Inc. and its wholly owned subsidiaries, (collectively, the
"Company", "FirstWorld", "we" and "our"). All significant intercompany
transactions and balances have been eliminated in consolidation.

As the Company pursues acquisitions and expansion of its network to
additional areas or if the Company's available cash resources are not sufficient
to fund all of the Company's operating expenses and capital expenditures, the
Company will require additional capital. In addition, depending on market
conditions, the Company may decide to raise additional capital from time to
time. The Company may obtain additional funding through the public or private
sale of debt and/or equity securities or through securing vendor financing
and/or a bank credit facility. However, there can be no assurance that the
Company will obtain such funding.

In the opinion of management, the accompanying consolidated financial
statements include all adjustments (consisting of normal recurring items)
necessary for a fair presentation of results for the interim periods presented
of the Company. The results of operations for any interim period are not
necessarily indicative of results for the full year. The consolidated financial
statements and footnote disclosures should be read in conjunction with the
audited consolidated financial statements and related notes thereto filed with
the Company's Annual Report on Form 10-K for the year ended December 31, 1999.
Certain 1999 amounts have been reclassified to conform to the 2000 basis of
presentation.

2. ACCOUNTING POLICIES

Loss per share of common stock

The Company calculates net loss per share in accordance with SFAS No. 128,
"Earnings Per Share." In accordance with SFAS No. 128, basic loss per share is
computed using the weighted average number of common shares outstanding during
the period. Diluted loss 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 and warrants using the treasury stock method.
SFAS No. 128 dictates that the computation of earnings per share shall not
assume conversion, exercise or contingent issuance of securities that would have
an anti-dilutive effect on earnings per share. Since the Company has incurred
only net losses, the inclusion of any stock options or warrants in the
calculation of loss per share would be anti-dilutive. However, if the securities
were not anti-dilutive they would increase the number of shares outstanding by
approximately 7.5 million options and approximately 25.2 million warrants for
the three months ended March 31, 2000 compared to approximately 5.1 million
options and approximately 24.1 million warrants for the three months ended March
31, 1999.

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. The Company
is in the process of testing the long-haul network and anticipates the network
connecting the first three cities will be placed into service during the third
quarter of 2000 with the network connecting up to 12 additional cities being
placed into service in accordance with our agreement with Enron Communications,
Inc.

3. EQUITY TRANSACTIONS

Initial Public Offering

Private Placements

On March 8, 2000, concurrent with the initial public offering, we completed
four private placements (discussed below) by selling our Series B common stock
at a price $15.81, which is the initial public offering price net of the
underwriting discount, resulting in aggregate proceeds to the Company of $91.5
million. Summaries of each of these private placements are as follows:

. Texas Pacific Group. TPG FirstWorld I LLC, an affiliate of Texas Pacific
Group purchased 3,162,555 shares of our Series B common stock at a price
of $15.81 per share, resulting in proceeds of $50.0 million.

. Microsoft Corporation. Microsoft purchased 759,013 shares of our Series
B common stock at a price of $15.81 per share, resulting in proceeds of
$12.0 million. Concurrent with the transaction, Microsoft received a
five-year warrant to purchase 529,260 shares of Series B common stock,
at a price of $21.25 per share and the Company also entered into a
business relationship with Microsoft. As a result, we recorded a
deferred, non-cash charge related to this warrant of approximately $2.4
million, determined using the Black-Scholes Option Pricing Model. Such
deferred, non-cash charge will be amortized into selling, general and
administrative expense over the term of the agreement expected to be two
to three years.

. SAIC Venture Capital Corporation. SAIC Venture Capital Corporation, an
affiliate of Science Applications International Corporation, purchased
1,233,397 shares of our Series B common stock at a price of $15.81 per
share, resulting in proceeds of $19.5 million.

. Lucent Technologies Inc. Lucent purchased 632,511 shares of our Series B
common stock at a price of $15.81 per share, resulting in proceeds of
$10.0 million.

1999 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 a
1999 Equity Investment agreement with Colorado Spectra 4, LLC ("Spectra 4"),
which is an affiliate of Donald L. Sturm, Chairman of the Board. This 1999
Equity Investment 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. In
addition, the agreement also provided that if at any time the value of the cash,
cash equivalents and marketable securities we held fell below $20.0 million, we
would be deemed to have automatically exercised $25.0 million of this
commitment. On February 7, 2000 we gave 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 and paid Spectra 4 the $5.0 commitment fee. This agreement expired upon
the closing of our initial public offering.

Deferred Stock Compensation

The Company recorded a Deferred Stock Compensation charge of approximately
$18.5 million related to the conversion of Stock Appreciation Rights ("SARs") to
stock options and options granted during the first quarter of 2000 at less than
fair market value. This Deferred Stock Compensation charge was based upon the
difference between the strike price and the fair market value on the date of
conversion for the SARs or the grant date for the stock options. The converted
SARs and options vest over approximately four years and accordingly, the
Company will recognize a quarterly expense until the end of the vesting period.

4. COMPENSATION CHARGES RESULTING FROM INITIAL PUBLIC OFFERING

Compensation charges resulting from initial public offering relates to
certain compensation which the Company's Chief Executive Officer ("CEO") has
received or may be eligible to receive, as a result of the Company's closing of
the initial public offering. First, due to the closing of an initial public
offering with gross proceeds for at least $20.0 million and a price of at least
$10.00 per share prior to April 1, 2000, the CEO earned a $1.0 million cash
bonus. This bonus was paid in March 2000. In addition, upon completion of our
initial public offering, the CEO became eligible to receive, if certain
conditions are met, an $8.4 million cash bonus payable on September 30, 2001.
The Company accrued $8.4 million in March 2000 associated with this bonus we
believe payment of this bonus is probable. Lastly, if the Company's Series B
common stock trades in excess of $20.00 for a period of 20 consecutive trading
days before October 1, 2001, the CEO may be eligible to receive, if certain
conditions are met, an additional $8.4 million cash bonus also payable on
September 30, 2001.

5. BUSINESS ACQUISITIONS

FastLane

On January 14, 2000, the Company purchased certain equipment, intangible
assets and liabilities from FastLane Communications, Inc. ("FastLane"), an
Internet service provider and consultant in the Dallas/Fort Worth, Texas market.
The purchase price was $2.4 million of cash. The total consideration of cash and
acquired net liabilities of approximately

8
<PAGE>

$161,000 resulted in total consideration of approximately $2.6 million, which
was recorded as goodwill and is being amortized on a straight-line basis over
three years.

Pro forma acquisition information

Pro forma acquisition information represents unaudited results of
operations of the Company as if the acquisitions occurring after March 31, 1999,
(Hypercon, Inc.; Internet Express, LLC; inQuo, Inc.; Oregon Professional
Services, Inc., d/b/a Transport Logic; and Intelenet Communications, Inc.) had
occurred on January 1, 1999. For the three months ended March 31, 1999, revenue,
net loss and net loss per common share would have been $13.2 million, $21.9
million and $(0.82), respectively. 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, nor are they necessarily indicative of the
results of future operations.

6. 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 Internet data center
services; including co-location, access, application hosting, and monitoring
services; high-speed Internet access such as dedicated access and digital
subscriber line ("DSL"); dial-up Internet access and related equipment sales.
The Web integration segment primarily represents 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 and 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.

9
<PAGE>

<TABLE>
<CAPTION>
Internet/ Web
Quarter Ended March 31, 2000 Data Integration Other Total
- -------------------------------------------------------------------------------- ---------- -------------- ---------- ----------
(in thousands)
Revenue:
<S> <C> <C> <C> <C>
Internet data center and web hosting........................................... $ 1,963 $ - $ 32 $ 1,995
Digital subscriber line........................................................ 939 - 180 1,119
Dedicated Internet services and other.......................................... 5,377 - 880 6,257
Web integration and consulting services........................................ - 8,502 393 8,895
Telephony services............................................................. - - 1,575 1,575
---------- -------------- ---------- ----------
Total revenue................................................................. 8,279 8,502 3,060 19,841
Gross margin.................................................................... 3,110 1,178 100 4,388
Selling, general and administrative, excluding compensation charges
resulting from initial public offering and amortization of deferred
stock compensation............................................................ 6,368 1,740 15,206 23,314
Compensation charges resulting from initial public offering..................... - - 9,554 9,554
Amortization of deferred stock compensation..................................... - - 1,791 1,791
Deprecation and amortization.................................................... 5,878 267 4,337 10,482
Interest income................................................................. - - 1,176 1,176
Interest expense................................................................ - - 10,096 10,096
---------- -------------- ---------- ----------
Net loss........................................................................ $ (9,136) $ (829) $ (39,708) $ (49,673)
========== ============== ========== ==========

Internet/ Web
Quarter Ended March 31, 1999 Data Integration Other Total
- -------------------------------------------------------------------------------- ---------- -------------- ---------- ----------
(in thousands)
Revenue:
Internet data center and web hosting........................................... $ 338 $ - $ - $ 338
Digital subscriber line........................................................ 128 - - 128
Dedicated Internet services and other.......................................... 1,482 - 464 1,946
Web integration and consulting services........................................ - 4,812 395 5,207
Telephony services............................................................. - - 643 643
---------- -------------- ---------- ----------
Total revenue................................................................. 1,948 4,812 1,502 8,262
Gross margin.................................................................... 1,308 1,566 (308) 2,566
Selling, general and administrative............................................. 1,077 1,634 8,201 10,912
Deprecation and amortization.................................................... 1,309 354 1,326 2,989
Interest income................................................................. - - 2,401 2,401
Interest expense................................................................ - - 8,830 8,830
---------- -------------- ---------- ----------
Net loss........................................................................ $ (1,078) $ (422) $ (16,264) $ (17,764)
========== ============== ========== ==========
</TABLE>

7. RECENT ACCOUNTING PRONOUNCEMENTS

On December 6, 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
101"). This Staff Accounting Bulletin provides guidance in applying generally
accepted accounting principles to revenue recognition in the financial
statements. The Company is required to adopt SAB 101 during the quarter ended
June 30, 2000 and apply the principles retroactively on transactions occurring
after December 31, 1999. The Company will also be required to report the
cumulative effect of the application of SAB 101 for periods prior to December
31, 1999, however, such cumulative effect is not expected to be material. The
Company is in the process of determining the impact of adopting of SAB 101. The
Company believes there will be an impact in 2000; however the effect on the
results of its operations and financial position are not expected to be
material.

8. SUBSEQUENT EVENTS

Authorized shares of common stock

On April 7, 2000, the Board approved an amendment to the Company's
Certificate of Incorporation, subject to stockholder approval, to increase the
authorized number of shares of common stock of the Company from 100,000,000
shares, $0.0001 par value, to 500,000,000 shares, $0.0001 par value per share,
and to increase the number of shares designated as Series B common stock from
89,864,836 to 489,864,836.

Amendment of the 1999 Equity Incentive Plan

On April 7, 2000, the Board approved an amendment, subject to stockholder
approval, to increase the number of shares reserved for issuance under the
Company's 1999 Equity Incentive Plan (the "Plan") by 8,200,000 shares bringing
the total number of shares reserved under the Plan to 13,200,000.

10
<PAGE>

9. OTHER MATTERS

City of Anaheim

See the Company's Annual Report filed on Form 10-K for the year ended
December 31, 1999 for prior discussion of litigation with the City of Anaheim.
On March 22, 2000, the City of Anaheim filed a Statement of Claim with the
American Arbitration Association ("AAA") asserting that certain FirstWorld
parties repudiated and committed material breaches of the UTS Agreements by (i)
refusing to pay certain sums except under protest, (ii) failing to timely
commence or complete construction of a Demonstration Center, (iii) failing to
comply with certain auditing procedures, and (iv) improperly claiming that
certain maintenance and repair expenses could be offset against other payments.
The City also asserted that the FirstWorld parties have breached an implied
covenant of good faith and fair dealing based on the claims described above and
by allegedly failing to pursue customers, by changing its business direction to
that of a national Internet Service Provider and by failing to pursue contracts
with neighboring municipalities. In addition to damages, the City seeks a
judicial determination of its rights regarding the above matters. The City seeks
such additional relief as is appropriate, including attorneys fees and costs.
The FirstWorld parties filed a general denial with the AAA on April 17, 2000
denying the City's allegations and asserting a counterclaim relating to
restitution of certain City employee reimbursements not properly earned under
the Participation Agreement. The City filed a general denial of FirstWorld's
Counterclaim on May 5, 2000. The Company believes that the FirstWorld parties
are not in breach as alleged and intend 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.

Transport Logic

In February and March of 2000, the shareholders from whom FirstWorld
purchased the stock of Oregon Professional Services, Inc. doing business as
Transport Logic, filed lawsuits in the Circuit Court of Oregon for the County of
Multnomah, asserting claims for mandatory injunctive relief and estoppel. They
assert, based upon a claim of misrepresentation, that they are entitled to an
additional 326,778 shares of Series B common stock. The Company removed the
lawsuits to federal court and the cases were subsequently consolidated. On April
19, 2000, the court dismissed the consolidated cases and ordered that the
matters be submitted to arbitration. To date, no arbitrations have been
commenced. Although litigation is inherently uncertain and there can be no
assurance of the ultimate outcome of these matters, we believe we have
meritorious defenses to the claims and intend to vigorously defend any actions.
We cannot presently determine what impact, if any, the outcome of these matters
would have on our financial position, results of operations or liquidity.

Other

The Company is engaged in other legal actions arising in the ordinary
course of its business and believes that the outcome of these actions will not
have a material adverse effect on its results of operations, liquidity or
financial position.

11
<PAGE>

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

Overview

FirstWorld is a growing network-based provider of Internet, data and
communications services. Our service offerings include Internet data center
services, including colocation, access, application hosting, and monitoring
services; high-speed Internet access such as dedicated access and digital
subscriber line ("DSL"); dial-up Internet access; web hosting and design; e-
commerce solutions; and web integration and consulting services. To complement
our data services, the Company also provides local and long distance telephony
services in the Los Angeles metropolitan market. We have five Internet data
centers ("IDCs") and are in the process of constructing several additional IDCs
that will provide space for customers to colocate their equipment and house our
data and Internet equipment. FirstWorld's business strategy is to offer its
customers a single source solution to meet the full range of their increasingly
complex Internet, data and communications needs. Using a consultative sales
approach, the Company markets its services to small- and medium-sized
businesses, and also selectively to larger businesses, consumers and wholesale
customers.

To date, the Company has experienced significant operating and net losses
and negative cash flow from operations. To achieve positive operating margins
over time, the Company must significantly increase the number of customers and
increase the products and services that it can provide to its customers. It is
anticipated that operating and net losses and negative cash flow from operations
will continue for at least the next several years as the Company implements its
growth strategy of expanding its operations. On March 8, 2000, FirstWorld
completed an initial public offering and four private placement transactions.
See "--Liquidity and Capital Resources."

Revenue

The Company currently derives revenue from five primary product categories:
Internet data center and web hosting, Digital Subscriber Lines, Dedicated
Internet services and other, Web integration and consulting services, and
Telephony services.

Internet data center and web hosting

IDC revenue is generated primarily by providing Internet access,
application hosting, managed services, colocation and monitoring services. Our
IDCs contain scalable space with redundant, scalable, 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 per week monitoring and high levels of security. We also provide
colocation services in other various locations throughout the United States. The
monthly 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. We typically charge a one-time set-up fee,
which is recognized at the time of installation. IDC customers typically sign a
contract for at least a one-year initial service period. For web hosting
revenue, we typically charge a flat rate monthly fee for shared and dedicated
web hosting services based on the customer's server and network capacity
requirements. We also receive fees for additional services provided to
customers, such as remote monitoring and management and providing information on
their site performance.

Digital Subscriber Line

DSL delivers Internet access at speeds up to 50 times faster than a
standard 56K modem. DSL revenue includes monthly recurring charges based on the
modem speed and additional features. DSL 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. Typically there are fees associated with the
equipment and set-up of the DSL modems. These fees are frequently waived due to
market competition. In the event we charge for the equipment and set-up, the
revenue is currently recognized at the time the equipment is delivered and/or
the installation is complete.

Dedicated Internet services and other

12
<PAGE>

Dedicated Internet services and other revenue is derived from providing
high-speed dedicated Internet access, (DS-1, DS-3, T1, frame relay, point-to-
point, etc.) and dial-up access. This category includes both the monthly
recurring revenue for all dedicated services other than DSL, as well as one-time
equipment sales primarily related to IDCs. Dedicated Internet and dial-up access
customers pay fixed monthly charges. High-speed dedicated Internet access
customers pay fixed monthly charges, and when market conditions permit, pay a
one-time equipment charge and a one-time set-up fee. These charges vary
depending on the type of service, the length of contract and local market
conditions. Dedicated 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.

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 engage 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 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 service is provided.
Amounts billed related 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 backbone transport charges, 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. Service costs
include labor and materials associated with web integration and consulting
services. Network and service operations costs include rent and utilities
associated with IDCs, 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, excluding compensation charges resulting
from initial public offering and amortization of deferred stock compensation

13
<PAGE>

Selling, general and administrative, excluding compensation charges
resulting from initial public offering and amortization of deferred stock
compensation ("SG&A") expenses are expected to increase in the future as we
expand operations into new markets and execute our long-term business plan.
Sales and marketing expenses include marketing salaries and benefits,
commissions paid in connection with our sales programs, travel expenses, trade
show expenses and promotional costs. Also included are costs associated with
acquiring additional customers such as telemarketing, brochures and targeted
advertising and promotional campaigns. We expect that sales and marketing
expenses will continue to increase as we add additional sales and marketing
personnel and further implement our business plan. General and administrative
expenses include, among other things, office rent, salaries and related expenses
of management and support services personnel, billing and collections, occupancy
fees, consulting fees and general corporate administrative expenses. We also
include non-capitalizable costs associated with the development, support and
expected growth of our operational support system platforms.

Compensation charges resulting from initial public offering

Compensation charges resulting from initial public offering relates to
certain compensation which the Company's Chief Executive Officer ("CEO") has
received or may be eligible to receive as a result of the closing of the
Company's initial public offering. First, due to the closing of an initial
public offering with gross proceeds for at least $20.0 million and a price of at
least $10.00 per share prior to April 1, 2000, the CEO earned a $1.0 million
cash bonus. This bonus was paid in March 2000. In addition, upon completion of
our initial public offering the CEO became eligible to receive, if certain
conditions are met, an $8.4 million cash bonus payable on September 30, 2001.
The Company accrued $8.4 million in March 2000 associated with this bonus as we
believe payment of this bonus is probable. Lastly, if the Company's Series B
common stock trades in excess of $20.00 for a period of 20 consecutive trading
days before October 1, 2001, the CEO may be eligible to receive, if certain
conditions are met, an additional $8.4 million cash bonus also payable on
September 30, 2001.

Amortization of deferred stock compensation

Amortization of deferred stock compensation represents the first quarter
non-cash expense attributable to the conversion of Stock Appreciation Rights
("SARs") to stock options and options granted during the first quarter of 2000
at less than fair market value. The Company recorded a Deferred Stock
Compensation charge of approximately $18.5 million based upon the difference
between the strike price and the fair market value on the date of conversion for
the SARs or the grant date for the stock options. The converted SARs and options
vest over approximately four years and accordingly, the Company will continue to
recognize similar quarterly expenses until the end of the vesting period.

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 30 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. 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.

Interest income 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 and commercial paper 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.

14
<PAGE>

Results of Operations

Quarter Ended March 31, 2000 Compared With Quarter Ended March 31, 1999

Revenues

Total revenue increased from $8.3 million for the quarter ended March 31,
1999 to $19.8 million for the quarter ended March 31, 2000, an increase of $11.6
million or 140%. The increase was primarily due to product expansion and
customer growth in IDC and web hosting, DSL and Dedicated Internet access and
increases in web integration and consulting projects. Contributing to these
increases were the customers acquired as a result of the Company's 1999
acquisitions and the asset acquisition of FastLane in early 2000.

IDC and web hosting. IDC and web hosting increased from $338,000 for the
quarter ended March 31, 1999 to $2.0 million for the quarter ended March 31,
2000, an increase of $1.7 million or 490%. IDC revenue for the quarter ended
March 31, 2000 was $1.1 million. There was no IDC revenue for the quarter ended
March 31, 1999. Web hosting increased from $338,000 for the quarter ended March
31, 1999 to $865,000 for the quarter ended March 31, 2000, an increase of
$527,000 or 156%. The increase in IDC revenue is due to the opening of our IDCs
as well as an increase in colocation and managed services provided at other
facilities. The increase in web hosting revenue is primarily due to a 30%
growth in accounts, which is primarily attributable to the acquisitions made
during the latter part of 1999.

DSL. DSL increased from $128,000 for the quarter ended March 31, 1999 to
$1.1 million for the quarter ended March 31, 2000, an increase of $1.0 million
or 774%. The increase in DSL revenue is primarily due to an increase of
approximately 870% in installed DSL lines since March 31, 1999, of which
approximately 65% is attributable to our acquisitions.

Dedicated Internet services and other. Dedicated Internet services and
other increased from $1.9 million for the quarter ended March 31, 1999 to $6.3
million for the quarter ended March 31, 2000, an increase of $4.3 million or
222%. The increase in Dedicated Internet services and other is due to an 830%
growth in dedicated access lines since March 31, 1999, of which approximately
71% of the growth is attributable to our acquisitions.

Web integration and consulting services. Web integration and consulting
services increased from $5.2 million for the quarter ended March 31, 1999 to
$8.9 million for the quarter ended March 31, 2000, an increase of $3.7 million
or 71%. The increase was primarily due to increased sales of data related
equipment compared to March 31, 1999.

Telephony services. Telephony services increased from $643,000 for the
quarter ended March 31, 1999 to $1.6 million for the quarter ended March 31,
2000, an increase of $932,000 or 145%. The increase in Telephony services is due
to a 90% increase in customer base and a 115% increase in line count compared to
March 31, 1999.

Operating Expenses

Network and service costs. Network and service costs increased from $5.7
million for the quarter ended March 31, 1999 to $15.5 million for the quarter
ended March 31, 2000, an increase of $9.8 million or 171%. The increase in
network and service costs is due to the opening of our IDCs, the increase in our
customer base, including those customers acquired through the acquisitions and
increased sales of data related equipment. The support of the customers
acquired in those acquisitions increased network and service costs in aggregate
by approximately $3.3 million for the quarter ended March 31, 2000.

Selling, general and administrative, excluding compensation charges
resulting from initial public offering and amortization of deferred compensation
stock ("SG&A"). SG&A expenses increased from $10.9 million for the quarter ended
March 31, 1999 to $23.3 million for the quarter ended March 31, 2000, an
increase of $12.4 million or 114%. The SG&A of our acquisitions increased SG&A
by an aggregate of approximately $3.4 million for the quarter ended March 31,
2000. Salaries and other related expenses, excluding the acquisitions, increased
approximately $4.5 million for the quarter ended March 31, 2000. The increase
was primarily due to the addition of 380 employees, 93 of whom were hired
through acquisition activities, representing a total increase of approximately
93% when compared to the same prior year period. Also, sales and marketing
expenses increased approximately $1.3 million for the quarter ended March 31,
2000 primarily due to targeted

15
<PAGE>

advertising and promotional campaigns. The remaining increase was due to higher
overall expenses resulting from expansion of operations in accordance with the
execution of our business plan.

Compensation charges resulting from initial public offering. The $9.6
million compensation charges resulting from the initial public offering consist
of expenses related to compensation that the CEO has received or may be eligible
to receive as a result of the Company's initial public offering on March 8,
2000. Of the $9.6 million, $1.0 million was paid in March 2000 with the
remaining amount payable, if certain conditions are met, on September 30, 2001.

Amortization of deferred stock compensation. The $1.8 million
amortization of deferred stock compensation represents the first quarter non-
cash expense attributable to the conversion of SARs to stock options and options
granted during the first quarter at less than fair market value.

Depreciation and amortization. Depreciation and amortization expenses
increased from $3.0 million for the quarter ended March 31, 1999 to $10.5
million for the quarter ended March 31, 2000, an increase of $7.5 million or
251%. This increase is primarily due to a $3.7 million increase in amortization
of goodwill compared to March 31, 1999, which is associated with our
acquisitions. The remaining $3.8 million increase relates primarily to
depreciation associated with the IDCs and communications equipment placed in
service since March 31, 1999.

Other

Interest income. Interest income decreased from $2.4 million for the
quarter ended March 31, 1999 to $1.2 million for the quarter ended March 31,
2000, a decrease of $1.2 million or 51%. The weighted average cash, cash
equivalents and marketable securities balance during the quarter ended March 31,
1999 was approximately $180.7 million and decreased to a weighted average
balance of approximately $77.4 million during the quarter ended March 31, 2000.

Interest expense. Interest expense increased from $8.8 million for the
quarter ended March 31, 1999 to $10.1 million for the quarter ended March 31,
2000, an increase of $1.3 million or 14%. This increase relates primarily to
interest expense associated with the senior notes. The Company is not currently
scheduled to make any cash interest payments on the senior notes until the year
2003. Capitalized interest for the quarters ended March 31, 2000 and 1999 was
$188,000 and $141,000, respectively.

Liquidity and Capital Resources

The Company's existing operations have required and will continue to
require substantial capital investment for the construction of IDCs,
installation of DSL equipment and other electronics and related equipment and
the continued development of operational support system platforms. In addition,
we expect to incur operating losses for at least the next several years. Such
expansion will require significant additional capital for the 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 and through an initial public offering
of our Series B common stock. From our inception through March 31, 2000, we
raised approximately $360.2 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 2, 1999 in order to secure additional financing that was
expected to become necessary during the first quarter of 2000, we entered into a
1999 Equity Investment agreement with Colorado Spectra 4, LLC ("Spectra 4"),
which is an affiliate of Donald L. Sturm, Chairman of the Board. This 1999
Equity Investment 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. In
addition, the agreement also provided that if at any time the value of the cash,
cash equivalents and marketable securities we held fell below $20.0 million, we
would be deemed to have automatically exercised $25.0 million of this
commitment. On February 7, 2000 we gave 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 and paid Spectra 4 the $5.0 million commitment fee. This agreement
expired upon the closing of our initial public offering.

16
<PAGE>

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. On March 8, 2000 we issued 800,000 shares of
Series B common stock upon the exercise of a warrant at a price of $3.00 per
share, resulting in proceeds to the Company of $2.4 million.

On March 8, 2000, we completed an initial public offering by selling 11.5
million shares of Series B common stock at a price of $15.81 per share, net of
underwriting discount of $1.19 per share, resulting in net proceeds to the
Company of $181.1 million. Concurrent with the initial public offering, we
completed four private placements (discussed below) by selling our Series B
common stock at a price $15.81, which is the initial public offering price net
of the underwriting discount, resulting in aggregate proceeds to the Company of
$91.5 million. Summaries of each of these private placements are as follows:

. Microsoft Corporation. Microsoft purchased 759,013 shares of our Series
B common stock at a price of $15.81 per share, resulting in proceeds of
$12.0 million. Concurrent with this transaction, Microsoft received a
five-year warrant to purchase 529,260 shares of Series B common stock,
at a price of $21.25 per share and the Company also entered into a
business relationship with Microsoft. As a result, we recorded a
deferred, non-cash charge related to this warrant of approximately $2.4
million, determined using the Black-Scholes Option Pricing Model. Such
deferred, non-cash charge will be amortized into SG&A over the term of
this relationship expected to be two to three years.

. Lucent Technologies Inc. Lucent purchased 632,511 shares of our Series B
common stock at a price of $15.81 per share, resulting in proceeds of
$10.0 million.

As of March 31, 2000, we had $289.8 million of cash, cash equivalents and
marketable securities, and an accumulated deficit of $222.1 million.

For the quarters ended March 31, 2000 and 1999, capital expenditures were
$31.8 million and $8.8 million, respectively. Our Statements of Cash Flows for
the quarters ended March 31, 2000 and 1999 have been adjusted to remove accruals
associated with capital expenditures. Capital expenditures represent the cash
paid for property and equipment. Capital expenditures, including accounts
payable accruals, were $27.8 million and $5.7 million for the quarter ended
March 31, 2000 and 1999, respectively.

The Company believes that 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.

17
<PAGE>

The Company's most significant sources and uses of funds for the three
months ended March 31, 2000 are as follows (000s):

Sources of funds:
<S> <C>
Net proceeds from initial public offering $181,059
Proceeds from private placements 91,500
Maturities of held-to-maturity marketable securities 20,615
Net proceeds from 1999 Equity Investment 20,000
Proceeds from the exercise of stock options and warrants 4,513
--------
Total sources of cash $317,687
========

Uses of funds:
Purchases of held-to-maturity marketable securities $ 58,865
Purchase of property and equipment 31,797
Net cash used by operating activities 21,994
Acquisition of assets and intangibles 2,400
Payments associated with debt and capital leases 283
--------
Total uses of cash $115,339
========

</TABLE>

The substantial capital investment and the funding of the Company's
operations have resulted in negative cash flow since its inception. The Company
expects to continue to experience negative cash flow for the foreseeable future
due to its capital expenditure plan and continued operating losses and other
activities associated with the development of the Company's markets. There can
be no assurance that break-even cash flow can be attained in subsequent periods.
Until sufficient cash flow is generated, the Company will be required to use its
current and future capital resources to meet its cash flow requirements and may
be required to issue additional debt and/or equity securities. The Company
believes that it currently has sufficient capital to support 2000 operations and
to execute its capital expenditure plan into early 2001.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company has limited exposure to financial market risks, including
changes in interest rates. The fair value of our investment portfolio or related
income would not be significantly impacted by a small increase or decrease in
interest rates due mainly to the short-term nature of the major portion of our
investment portfolio. Our investment portfolio primarily consists of money
market funds and commercial paper. An increase or decrease in interest rates
would not significantly increase or decrease interest expense on debt
obligations due to the fixed nature of our debt obligations. We do not currently
have any significant foreign operations and thus are not currently materially
exposed to foreign currency fluctuations.

PART II. OTHER INFORMATION

ITEM 1. Legal Proceedings

City of Anaheim

Transport Logic

Other

The Company is engaged in other legal actions arising in the ordinary course of
its business and believes that the outcome of these actions will not have a
material adverse effect on its results of operations, liquidity or financial
position.

18
<PAGE>

ITEM 6. Exhibits and Reports on Form 8-K

(a) Exhibits:

Exhibit 27.1 Financial Data Schedule

(b) No reports on Form 8-K were filed in the three-month period ended
March 31, 2000.

19
<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

FIRSTWORLD COMMUNICATIONS, INC.,
a Delaware corporation
(Registrant)

SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>

/s/ SHELDON S. OHRINGER President, Chief Executive Officer and Director May 12, 2000
- ----------------------------------------------
Sheldon S. Ohringer (Principal Executive Officer)

/s/ PAUL C. ADAMS Vice President of Finance, Treasurer and Assistant May 12, 2000
- ----------------------------------------------
Paul C. Adams Secretary (Principal Financial and Accounting
Officer)
</TABLE>

<PAGE>
<ARTICLE> 5

<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 230,956
<SECURITIES> 58,865
<RECEIVABLES> 17,522
<ALLOWANCES> 1,456
<INVENTORY> 0
<CURRENT-ASSETS> 314,294
<PP&E> 164,185
<DEPRECIATION> 18,533
<TOTAL-ASSETS> 528,122
<CURRENT-LIABILITIES> 38,365
<BONDS> 303,717
0
0
<COMMON> 7
<OTHER-SE> 169,979
<TOTAL-LIABILITY-AND-EQUITY> 528,122
<SALES> 19,841
<TOTAL-REVENUES> 19,841
<CGS> 15,453
<TOTAL-COSTS> 60,594
<OTHER-EXPENSES> 0
<LOSS-PROVISION> (40,753)
<INTEREST-EXPENSE> (10,096)
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> (49,673)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (49,673)
<EPS-BASIC> (1.38)
<EPS-DILUTED> (1.38)

</TABLE>