-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QQHi0osFRKVl1CLb/JOAtSnMnkOnEUcDzXszgjnf63IkvvNaxJRT/HKMvv2Eu77h gqvuWxt6zkufx6NEBCbURg== 0001047469-98-044789.txt : 19981228 0001047469-98-044789.hdr.sgml : 19981228 ACCESSION NUMBER: 0001047469-98-044789 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981222 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRSTWORLD COMMUNICATIONS INC CENTRAL INDEX KEY: 0001061583 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE COMMUNICATIONS (NO RADIO TELEPHONE) [4813] IRS NUMBER: 330521976 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-24953 FILM NUMBER: 98773726 BUSINESS ADDRESS: STREET 1: 9333 GENESEE AVE STREET 2: SUITE 200 CITY: SAN DIEGO STATE: CA ZIP: 92121 BUSINESS PHONE: 6195528010 MAIL ADDRESS: STREET 1: 9333 GENESEE AVE STREET 2: SUITE 200 CITY: SAN DIEGO STATE: CA ZIP: 92121 10-K 1 10-K U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934. (Mark One) /X/ Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 [NO FEE REQUIRED] for the fiscal year ended September 30, 1998. / / Transitional report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 [NO FEE REQUIRED] for the transition period from ___________ to ____________. COMMISSION FILE NUMBER: 0-24953 FIRSTWORLD COMMUNICATIONS, INC. (Exact name of registrant as specified in its charter) DELAWARE 33-0521976 (State of other jurisdiction of (I.R.S. Employer Identification Number) incorporation or organization) 7100 E. BELLEVIEW AVENUE, SUITE 210, GREENWOOD VILLAGE, COLORADO 80111 (Address of principal executive offices, Zip Code) Registrant's telephone number, including area code: (303) 874-8010 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: SERIES B COMMON STOCK, $.0001 PAR VALUE (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports, and (2) has been subject to such filing requirements for the past 90 days. Yes / / No /X/ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. /X/ The aggregate market value of the voting stock held by non-affiliates of the Registrant as of November 30, 1998 was approximately $46,338,420. As of November 30, 1998, 10,135,164 shares of Series A Common Stock and 16,137,958 shares of Series B Common Stock were outstanding. TABLE OF CONTENTS PAGE ---- PART I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 Business Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . .2 Market Segmentation Approach. . . . . . . . . . . . . . . . . . . . . .4 Products and Services . . . . . . . . . . . . . . . . . . . . . . . . .4 Sales and Marketing . . . . . . . . . . . . . . . . . . . . . . . . . .6 Strategic Relationships . . . . . . . . . . . . . . . . . . . . . . . .8 Network Architecture and Technology . . . . . . . . . . . . . . . . . .9 Information Technology and Support Systems. . . . . . . . . . . . . . .9 Network Status and Proposed Expansion . . . . . . . . . . . . . . . . 10 Competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Regulation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Agreements with the City of Anaheim and The Irvine Company. . . . . . 17 Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Risk Factors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Item 3. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . 32 Item 4. Submission of Matters to a Vote of Security Holders. . . . . . . 32 PART II. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Item 5. Market for Registrant's Common Equity and Related Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Item 6. Selected Financial Data. . . . . . . . . . . . . . . . . . . . . 33 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . 33 Overview. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . 35 Liquidity and Capital Resources . . . . . . . . . . . . . . . . . . . 38 Impact of the Year 2000 . . . . . . . . . . . . . . . . . . . . . . . 40 Item 7A. Quantitative and Qualitative Disclosures About Market Risk . . . 40 Item 8. Financial Statements and Supplementary Data. . . . . . . . . . . 40 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . 41 PART III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 Item 10. Directors and Executive Officers of the Registrant . . . . . . . 42 Retention of New Chief Executive Officer and President. . . . . . . . 45 Committees of the Board of Directors. . . . . . . . . . . . . . . . . 47 Compliance With Section 16(a) of the Securities Exchange Act. . . . . 48 Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . 48 Director Compensation . . . . . . . . . . . . . . . . . . . . . . . . 48 Executive Compensation. . . . . . . . . . . . . . . . . . . . . . . . 48 Item 12. Security Ownership of Certain Beneficial Owners and Management . 54 Item 13. Certain Relationships and Related Transactions . . . . . . . . . 57 Equity Investment . . . . . . . . . . . . . . . . . . . . . . . . . . 57 Legal Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 PART IV. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. 62 SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66 i PART I ITEM 1. BUSINESS The following discussion includes forward-looking statements that involve risks and uncertainties. All statements other than statements of historical facts included in this Form 10-K, including without limitation, certain statements under the captions "Business," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and located elsewhere herein regarding the financial position and operating strategy of FirstWorld Communications, Inc. ("FirstWorld" or the "Company"), may constitute forward-looking statements. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Important factors that could cause actual results to differ materially from the Company's expectations ("cautionary statements") include, without limitation, those described under the caption "--Risk Factors." INTRODUCTION FirstWorld is a facilities-based integrated communications provider ("ICP"). The key to the Company's business plan is a data-centric focus, with service offerings strategically bundled to address the increasingly complex data and voice communications needs of small and medium businesses. The Company uses a combination of both owned and managed facilities, with a digital network and related provisioning, billing and customer care applications. With targeted marketing and a consultative sales approach, the Company provides its customers with advanced, integrated data and voice communications solutions. Services offered include data connectivity, high speed Internet access, local and wide area network ("LAN/WAN") connectivity, web hosting, e-commerce and system integration services, as well as switch-based local and long distance telephone services. The Company began network operations in August 1997 and began providing services to commercial customers in November 1997. As of November 30, 1998, the Company had approximately 400 active customers. One of the Company's significant early customers, the City of Anaheim, relies on the Company to supply local dial tone, long distance, dedicated facilities and Internet service to substantially all of its municipal facilities. The Company is implementing advanced digital networks and related support systems that combine advanced hardware and software from leading vendors with its own proprietary systems. With a combination of both owned and managed network facilities, the Company provides its customers with an integrated approach to enhanced data and voice network services. The Company has designed its core processes to streamline provisioning, billing, network management and customer service, and has incorporated operational support systems that implement such processes into its network offerings. Among other things, these systems provide single-point-of-contact customer service and facilitate electronic exchanges of information with other network providers where possible. The Company is designing its systems to be compatible with voice over packet technologies such as voice over IP as such technologies are refined in the industry. The Company employs a demand-driven approach to network deployment. This approach is intended to minimize capital expenditures and to maximize flexibility to serve the higher margin data market as demand for high speed data communication services grows. The Company connects customers to its networks through direct fiber connections, digital subscriber lines ("DSL") or unbundled network 1 elements licensed from the incumbent local exchange carrier ("ILEC"), depending on the most cost-effective connection that will support the bundle of services provided to the customer. The Company believes that the market segments within its target markets have different customer buying patterns, are subject to different competitive factors and can best be served by different sales and marketing initiatives. For prime commercial customers (businesses with sophisticated communications needs), the Company utilizes a consultative selling approach that involves a systematic assessment of each customer's data communications, telephony, Internet and video applications needs. For basic commercial customers (businesses with primarily voice and Internet needs), the Company uses direct mail, telemarketing and targeted advertising and offers standardized product bundles consisting of switch-based local and long distance telephony and high speed Internet access. The Company also offers use of its network capabilities on a wholesale basis to other local exchange carriers ("LECs"), including competitive local exchange carriers ("CLECs"), inter-exchange carriers ("IXCs"), Internet service providers ("ISPs") and other communications providers. The following chart outlines the principal components of this approach:
MARKET SEGMENTS PRODUCT CATEGORIES SALES & MARKETING NETWORK ELEMENTS - --------------- ------------------ ----------------- ---------------- Prime Commercial Data, switch-based Consultative Fiber, DSL and voice, Internet, sales approach by unbundled loops e-commerce and direct account systems integration teams and agents Basic Commercial Voice and Internet Direct mail and DSL and unbundled telemarketing loops Wholesale Dedicated access Direct sales to Central office (DS-1, DS-3, OC-1 other service services and and OC-3), DSL and providers, IXCs, unbundled loops IP-based services ISPs, resellers and CLECs
The Company uses strategic relationships with property developers, service providers and others that provide the Company with brand identity, physical assets, new products or technologies, joint marketing synergies or other support. The Company believes its existing relationships with these entities provide the Company with significant advantages in marketing and network deployment. The Company intends to generate near-term revenue by replacing basic services currently provided by ILECs, IXCs and CLECs, including local, long distance and other voice services, dedicated access lines and commercial Internet access, as well as from advanced network services provided to select customers. The Company believes that it is positioned to generate additional revenue by providing advanced network services to a broader market as the demand for such services grows. BUSINESS STRATEGY The Company's strategy is designed to exploit a number of trends reshaping the $180 billion telecommunications industry, including: (i) increasing customer demand for high speed, broadband services, such as the Internet, data networks and video conferencing; (ii) integration of the markets for local exchange and long distance services; (iii) decreased cost of high bandwidth connectivity over the wide area; (iv) technical and product innovation associated with the Internet, transmission control protocol/Internet protocol ("TCP/IP") and voice over Internet technologies; (v) the further development of 2 server-based applications; (vi) the migration of existing business processes to electronic formats; and (vii) the erosion of margins and the commodity pricing of long distance services. The Company's goal is to become the premier ICP in the markets that it serves. The Company seeks to achieve a high degree of market penetration, focusing on high-margin services, forming long-term customer relationships and establishing a diversified revenue base. The principal elements of the Company's business strategy include: TAILOR SERVICE OFFERINGS AND SALES TECHNIQUES TO MARKET SEGMENTS. The Company employs a market segmentation strategy, which involves tailoring service offerings, sales and marketing techniques and network deployment to meet the different needs of prime commercial, basic commercial, and wholesale customers. The Company believes these market segments have different customer buying patterns, are subject to different competitive factors and can best be served by different sales and marketing initiatives. DEPLOY FLEXIBLE NETWORKS TO PROVIDE VOICE AND DATA SOLUTIONS. The Company deploys sophisticated switch-based networks capable of providing integrated data, voice, Internet and video solutions. The Company has designed its networks, including its central office service platform, to support a wide array of telecommunications services and to be compatible with technologies still under development in the industry, including server-based applications, such as virtual LANs, e-commerce and voice over Internet. PURSUE DEMAND-DRIVEN NETWORK DEPLOYMENT. The Company utilizes a demand-driven approach to network deployment. The Company markets its services to a geographically targeted cluster of businesses before committing to implementation of a new network. In addition, the Company connects customers to its networks through direct fiber connections, DSL, unbundled loops or T1s, depending on the product set and anticipated revenue and margin from the customers. GAIN EFFICIENCY THROUGH REGIONAL CONCENTRATION. The Company has adopted a targeted geographic approach to network deployment. The Company believes the benefits of implementing networks in areas with high business densities include (i) increased market penetration due to increased focus on management of market activities, support of sales activities and leverage of advertising or other brand equity, (ii) enhanced operating margin from a higher proportion of calls that both originate and terminate on the Company's network, (iii) increased leverage of centralized assets such as a central office or product platforms and (iv) reduced travel, regulatory and administrative expenses. EXPLOIT INTERNAL ENGINEERING AND PRODUCT EXPERTISE. The Company intends to leverage its substantial internal engineering and product expertise to enhance and expand the services it offers, decrease network costs, achieve a high degree of scalability, reduce operating costs, increase reliability and facilitate migration to new technologies over time. SELECTIVE ACQUISITION STRATEGY. The Company intends to aggressively pursue a strategy of selectively acquiring data and voice telecommunications companies that expand FirstWorld's marketing and service footprint, and its ability to serve additional customers. In particular, the Company seeks opportunities that provide synergies and strategic assets relating to products, services, demographics and technology which would enhance the value of existing assets and customer relationships. 3 MARKET SEGMENTATION APPROACH The Company believes that the segments within its target markets have different customer buying patterns, are subject to different competitive factors and can best be served by different sales and marketing initiatives. The Company tailors its data, Internet, voice and video offerings, sales and marketing approach and network development to provide cost-effective service to prime commercial, basic commercial and wholesale customers that it targets. PRIME COMMERCIAL. Prime commercial customers are large and medium sized businesses that demand a range of sophisticated data, Internet, voice and video services. Within the prime customer segment, the Company has chosen to focus on medium-sized businesses because the Company believes that such businesses generally are underinvested in LANs and computer systems and that their information technology needs are being undersupported by traditional telecommunications companies. The Company also has found that medium-sized businesses have not been aggressively targeted by the Company's competitors, which have tended to target large businesses. The Company believes that its consultative selling approach, diverse service offerings and customer service will offer prime customers integrated solutions to their telecommunications and information problems. The Company believes it adds significant value for prime customers by offering them a unique bundle of a broad array of advanced data, Internet, voice and video services. Moreover, the Company believes its ability to diagnose prime customers' needs through consultative sales efforts and to meet those needs through bundled service offerings will enhance the Company's reputation for value and build additional revenues. BASIC COMMERCIAL. Basic commercial customers typically are small to medium sized businesses with minimal demand for data services. The Company believes that it can best serve basic customers by providing service offerings limited to dial tone and high-speed Internet access and by using telemarketing, direct mail or indirect channels to minimize sales costs. In addition, the Company believes that by offering low-cost, limited service offerings to basic customers, it will establish relationships upon which the Company can base future efforts to sell more advanced services. The Company intends to rely primarily upon unbundled loops and T1s to connect basic customers to its network. WHOLESALE. The Company's wholesale sales force markets dedicated access and other connectivity services to other service providers such as out-of-region LECs, IXCs, other CLECs, ISPs and resellers. The primary services are DS-1, DS-3, OC-n and dedicated Internet and voice services. PRODUCTS AND SERVICES The Company currently offers a wide variety of data and voice services, including dedicated/high speed access service, application support services, Internet, switch-based local and long distance telephone service, video conferencing and basic information technology services, including system integration services and transparent LAN. The Company works with its prime commercial customers to develop integrated bundles of services to best meet their needs. For basic commercial customers, the Company typically offers a standardized bundle of local and long distance telephone service and Internet access service. 4 TELEPHONY The Company currently provides switch-based local and long distance telephone service and a full range of other narrowband telecommunications services. LOCAL EXCHANGE. The Company offers switch-based local exchange services, including local dial tone, with such features as call forwarding, call waiting and voice mail. These services are offered at highly competitive terms and rates packaged with other high margin products. CENTREX/PBX. The Company provides flexible solutions to customers with multiple telephones. The Company's Centrex services provide call forwarding, call waiting, line hunting, station conferencing, automatic call-back and call account tracking. The Company minimizes Centrex customers' capital expenditures by providing such services through Company-owned equipment housed at the central office. For large customers or customers with special needs, the Company integrates customer-owned private branch exchange ("PBX") systems with digital PBX trunks. LONG DISTANCE, TOLL FREE AND CALLING CARD SERVICES. The Company provides a complete suite of domestic and international switch-based long distance service, including advanced 8XX toll free services, enhanced call routing, operator services, conference calling, travel card services and debit/pre-paid calling cards. DEDICATED/HIGH SPEED ACCESS. The Company offers transport and protocol-specific services which allow customers to connect their facilities with their regional offices, customers, vendors or remote service providers. The Company offers a range of dedicated access services, including DS-1(T1) and DS-3 digital channels and optical carrier services up to and including OC-48. The Company also implements numerous transmission protocols, including Integrated Services Digital Network ("ISDN"), Asynchronous Transfer Mode ("ATM"), frame relay, DSL, native speed Ethernet (10Mbps) and private IP. APPLICATION SUPPORT SERVICES INTERNET. The Company currently provides high-speed Internet access at speeds ranging from 128Kbps to 10Mbps, allowing customers to select the access speed that best meets their needs. The Company allows customers to choose to pay based on a flat monthly rate or based upon the bandwidth used. VALUE-ADDED INTERNET SERVICES. The Company augments its Internet access services with e-mail, Web hosting (shared & dedicated server), file transfer and user-on-the-road support services. VIRTUAL PRIVATE NETWORK. The Company offers its Internet access customers a virtual private network service, which uses authentication and encryption software to provide a secure means of accessing corporate information using dial-up remote access. VIDEO CONFERENCING. The Company currently offers video conferencing services and tailors video quality and cost to meet customers' needs. 5 INFORMATION TECHNOLOGY SERVICES SYSTEMS INTEGRATION, INTRANET AND SERVER-BASED PRODUCTS. The Company offers systems integration services, including design, implementation and support of customer networks. The Company strives to improve functionality of customers' LANs and reduce their expenditures on LANs by utilizing elements of the Company's networks and central office. The Company's initial focus has been on bandwidth management, local area/wide area integration, voice and data integration and formation of intranets. TRANSPARENT LAN. The Company currently offers transparent LAN services that allow customers to interconnect LANs and support corporate intranets in metropolitan area networks ("MANs") while maintaining the functionality and, in many cases, the speed of a LAN. In most cases, the Company provides the customer-located equipment ("CLE") to make such interconnection possible. SALES AND MARKETING Consistent with its market segmentation strategy, the Company uses different sales channels to target customers within the three market segments identified by the Company. The Company uses direct sales efforts and a consultative selling approach with prime commercial customers, direct sales efforts for wholesale customers and more economical methods such as direct mail and telemarketing to target basic commercial customers. The Company has allocated responsibilities for such selling efforts among four different positions within its sales force structure: strategic account manager, wholesale account manager, inside sales representative and building entry manager. Strategic account managers are primarily responsible for selling a complete line of products and services to prime customers in their assigned territories. Wholesale account managers sell dedicated transport facilities, among other services, to wholesale customers. Inside sales representatives are responsible for telemarketing to potential customers on an ongoing basis to create appointments for strategic account managers and assisting with sales proposals. The Company's building entry manager is responsible for establishing relationships with property owners and building managers to gain introduction to their tenants. DIRECT SALES The Company uses direct sales efforts to make retail sales to prime commercial customers and to make wholesale sales of transport and central office functionality to IXCs, ISPs, other CLECs and resellers. PRIME COMMERCIAL. The Company bases its direct sales efforts to prime commercial customers on a consultative selling approach, which involves a systematic assessment of customers' telephony usage, their satisfaction with their existing LANs, if any, and their general communications needs. Strategic account managers work closely with customers and the Company's own systems engineers to develop and implement integrated telecommunications solutions. The Company attempts to position itself as a long-term business partner able to solve customers' problems by providing access to current and emerging technologies through the Company's networks and systems. The Company believes that this process results in the sale of value-added products in addition to commodity-like services such as local and long distance services. Moreover, the Company believes that this approach ultimately reduces customer turnover and differs from the approach adopted by many of the Company's competitors whose sales are based primarily on price discounting of basic dial tone services. The Company believes that its consultative sales approach will be particularly successful with respect to sales of the Company's value-added Internet, e-commerce and transparent LAN services. 6 WHOLESALE CUSTOMERS. The Company's wholesale account managers offer wholesale customers, such as IXCs, ISPs, CLECs, and resellers, a variety of services ranging from dedicated access to complete local service. Such sales allow the Company to earn incremental revenue while limiting the associated sales and marketing expenses. The Company's wholesale sales objective is to utilize third party sales channels and existing customer relationships. DIRECT MARKETING The Company uses direct mail and telemarketing to sell the Company's services to basic customers and to generate leads for sales to prime customers. Strategic account managers build upon such marketing efforts to close sales to basic customers. The Company typically offers basic customers a bundle of standard services at a competitive price. For example, the Company recently has offered basic customers one free year of Internet access service for entering into two-year contracts for switch-based local and long distance services. The Company believes that when it gains a sale through such methods, it not only generates revenue from the new customer but also establishes a relationship upon which the Company may base future add-on sales efforts to sell higher margin applications. MARKETING SUPPORT AND COMMUNICATIONS POLICY The Company supports its direct sales and marketing efforts through the use of targeted direct mail, targeted advertising and its Internet web page. The Company targets businesses for direct mail efforts through careful demographic analyses. The Company classifies and prioritizes customers on the basis of their standard industry classification ("SIC") codes, estimates of their telecommunications spending and their number of employees. The Company then uses databases to identify businesses' addresses and decision makers and mapping tools to pinpoint their locations. By targeting customers in this way, the Company believes that it can use direct mail in a cost-effective manner to promote understanding of the Company and its services and to stimulate qualified leads for the Company's retail sales force. The Company augments its direct mail efforts through the use of advertising aimed at the business community. Such advertising is designed to create a FirstWorld brand "umbrella" that reinforces sales efforts by generating additional leads, establishing brand awareness and differentiating the Company from its competitors. The Company also uses public relations to support the launch of new services as they are introduced to the marketplace. As of November 30, 1998, the Company employed 66 persons in sales and marketing. The Company is in the process of expanding its sales and marketing staff but intends to continue to be selective in its recruiting, requiring prospective salespeople to have demonstrated success in telecommunications or data communications sales. CUSTOMER RELATIONSHIPS The Company's goal is to become the premier ICP in the areas it serves, and to create service offerings that appeal to customers of varying sizes and in a variety of industries. Management believes that the customer's service purchase decision is based primarily on the strength of the value proposition offered, customer service and support, coupled with a price advantage for properly-designed Company services, relative to the customer's current installed service. The Company builds its customer relationships around its data-centric service focus, which represent higher year-over-year growth, lower churn and greater revenue per customer, than those of 7 traditional voice telecommunications services. In addition, the Company uses its high-touch customer service approach to create more value and to increase retention and add-on sales opportunities. STRATEGIC RELATIONSHIPS The Company actively pursues strategic relationships with property developers and service providers as part of its core business strategy. The Company believes that these relationships can provide enhanced brand identity, access to physical assets, new products and technologies, joint marketing synergies and other benefits, thereby accelerating market rollout and reducing asset deployment, sales costs and customer turnover. DEVELOPER RELATIONSHIPS The Company pursues relationships with property developers in order to gain access to prime commercial customers and to facilitate marketing of the Company's products and services. An example of this is the preferred provider relationship recently established with Orange City Mills Limited Partnership (a subsidiary of Mills Corporation) in Orange, California. This relationship with the Mills Corporation grants FirstWorld (through one of its wholly owned subsidiaries) the right to provide telecommunications services to the tenants of a retail development for a five year period, along with the ability to market services directly to the retail development's tenants. Prior to the expiration of the initial five year term, the parties have agreed to negotiate regarding an extension of the term. If the parties do not reach agreement during this exclusive negotiation period, FirstWorld retains a right of first refusal to match a proposal the Mills Corporation receives from any other service provider. SERVICE PROVIDER RELATIONSHIPS The Company has established and will continue to build relationships with service providers in complementary industries to create competitive or innovative products. The Company expects these service providers to contribute wholesale products, licenses of proprietary technologies, specialized knowledge, sales and technical support or uniquely situated fixed assets. In return, the Company will contribute its network platform, sales force channels, operational support, engineering expertise and wholesale purchases. ENRON. The Company and Enron Capital & Trade Resources Corp. ("Enron"), a subsidiary of Enron Corp., one of the world's leading integrated natural gas and electricity companies, have an informal collaborative relationship to jointly market telecommunications and utility services. The Company believes that this relationship can provide it with access to new markets, sales synergies and product development opportunities. In this regard, Enron has commenced a major initiative in California to compete with incumbent electric utilities to sell wholesale electricity and utilities management services. Neither the Company nor Enron is, however, obligated to pursue any opportunity or provide any service to customers. The Company, however, has granted Enron exclusive rights to pursue jointly with the Company any business opportunity with both telecommunications applications and utility applications, and has agreed not to pursue any such joint opportunity with any person other than Enron. See "Certain Relationships and Related Transactions--Equity Investment." NAVINET. The Company has entered into an agreement with Navi-Net Internet Services Corporation (formerly a division of Navi-Site Internet Services Corporation and a wholly owned subsidiary of College Marketing Group Incorporated), a national Internet protocol network ("NaviNet"), calling for the two companies to establish a remote access MegaPOP at the Company's Anaheim central office. The MegaPOP allows ISPs to provide local dial-up numbers to customers located within the Southern California area. Under the agreement, the Company provides power and space to NaviNet in the co-location room in the Company's Anaheim central office and helps manage and provision elements of network connectivity. In return, NaviNet has granted 8 the Company the right to resell NaviNet's "GeoDial" service to ISPs throughout California and has granted the Company "most favored purchaser" status, meaning that no other similarly situated LEC will receive better GeoDial pricing than the Company. NETWORK ARCHITECTURE AND TECHNOLOGY The Company has leveraged its substantial internal expertise with respect to engineering, network creation and business processes to design and construct a network architecture that it believes will result in enhanced product offerings and enable the Company to improve scalability, reduce operating cost and improve network profitability. The Company believes such expertise also will facilitate the Company's implementation of new technologies. CENTRAL OFFICE. The Company's central office in Anaheim is an integrated computer/telephony facility which serves as the network operating center. The facility houses a Nortel DMS-500 voice switch, the Company's Internet platform, product servers primarily related to the Company's data products and co-located equipment of strategic vendors. The facility has numerous elements of redundancy, disaster recovery and remote recovery in order to meet or exceed industry standards of reliability and best practices. The facility operates 24-hours a day and seven days a week. The Company believes the central office will be sufficient to support its operations throughout Orange County. Additional central office facilities are anticipated for Los Angeles/San Gabriel Valley, San Diego, the San Francisco bay area and other areas to support the Company's geographic expansion plans. TRANSPORT. The Company's networks are built and operated using various transmission technologies and topologies including fiber optics, leased transport and unbundled network elements procured from the ILEC. The Company targets areas with (i) high concentrations of customers with sophisticated communications needs and (ii) large numbers of smaller customers that can be aggregated to reduce the Company's cost of service. The Company leases unbundled loops from Pacific Bell and GTE Corporation ("GTE") pursuant to interconnection agreements. The interconnection agreements allow the parties to complete local and intraLATA toll calls on each other's network and establish rates, terms and conditions for access to unbundled network elements, resale of local exchange services, service provider number portability and access to operator service, directory service and 911 service. The Company currently is implementing direct interconnection with the major CLECs in Orange County, including MFS Communications ("MFS"), and the major IXCs. INFORMATION TECHNOLOGY AND SUPPORT SYSTEMS The Company currently has in place all the necessary systems to provide support for customer management. FirstWorld has deployed a sales force automation system and prospect database tools, an order entry, billing and customer care application and an internally-developed network management and interface application that allows the Company to remotely monitor customer circuits. Although the Company believes that its existing systems adequately support its service offerings, the Company is committed to developing and implementing fully integrated advanced internal information systems because it believes that such systems are crucial to support integrated communications services. Although no single solution currently exists for seamless, end-to-end handling of all aspects of customer service (i.e., from initial contact with a potential customer to service activation and finally to customer billing), FirstWorld believes that the development and implementation of an advanced single-source management system will further differentiate it from its competitors and will result in significant benefits to its customers. The overall aim is to create the necessary back-office integration to 9 allow FirstWorld to provide its customers with single-source service management. To achieve this end, the Company has embarked on an extensive evaluation of available systems, using a combination of existing legacy applications and newly-developed systems that are currently used by other integrated telecommunications providers. Particular emphasis is being placed on enhancing access through the Internet, so both Company field personnel and end user customers will have access to vital information quickly and easily. NETWORK STATUS AND PROPOSED EXPANSION LOS ANGELES BASIN/ORANGE COUNTY The Company currently provides on-fiber services to specific customers connected to fiber clusters in Anaheim and Irvine. In addition, the company continues to expand its network within the area of Irvine known as the Irvine Spectrum (the "Irvine Spectrum") area and has begun offering services to buildings in the Irvine Spectrum. The Company also currently provides service to customers located around several Pacific Bell central offices located in Los Angeles County and Orange County through Pacific Bell unbundled copper loops. The Company has applied for interconnections with additional Pacific Bell central offices in these areas by co-locating the Company's equipment at such central offices in order to expand the areas in which it can offer services. These interconnections, which the Company began establishing during the third quarter of 1998, will allow the Company to offer services through Pacific Bell unbundled loops to businesses in most parts of Los Angeles County and Orange County. PLANNED EXPANSION In addition to its networks in the Los Angeles basin and Orange County, the Company intends to expand into San Diego and the San Francisco bay area by replicating the primary tenets of its business plan. The Company will target future expansion based on analysis of the number and density of businesses with heavy telecommunications usage in a given area and current and anticipated competition from other telecommunications providers. The Company has identified additional cities which it believes would be attractive markets for future expansion. These target areas and their priority for expansion are subject to continual re-evaluation in response to refinements in the Company's expansion criteria and changes in the communications industry and in general economic conditions. 10 ACQUISITIONS One of the major tenets of FirstWorld's business plan is to selectively acquire companies that expand the Company's marketing and service footprint and its ability to serve additional customers. In November 1998, the Company completed the acquisition of Optec, Inc. ("Optec"), from Enron Communications, Inc. ("ECI"). Optec is a systems integrator with operations in Oregon and Washington and has approximately 90 employees in engineering, sales and operations. The Company also purchased from ECI an indefeasible right of use to fiber optic cable in a MAN serving Portland with routes connecting Beaverton and Hillsboro, Oregon. In addition, the Company obtained rights to OC-3 level capacity on a WAN being developed by ECI that will connect up to 15 cities nationwide. The Company has selected the first eight cities for WAN deployment (Portland, Los Angeles, the San Francisco Bay area, Salt Lake City, Denver, Dallas, Houston and Miami) and will select additional cities in 1999. The Company intends to complement this and other acquisitions with its existing capabilities to provide a highly competitive product bundle aimed at business customers. COMPETITION In each market area in which the Company is authorized to provide services, the Company competes or will compete with several other service providers and technologies. Most of the Company's competitors, particularly ILECs, 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 the Company. The Company expects to compete on the basis of service features, quality, price, reliability, customer service and rapid response to customer needs. TELEPHONY. The telephony services offered by the Company compete principally with the services offered by ILECs in the areas served by the Company's networks. The Company also competes with various CLECs in its target markets, including MFS, NEXTLINK Communications, Inc. ("NEXTLINK"), ICG Communications, Inc. ("ICG"), GST Telecommunications, Inc. ("GST") and Teleport Communications Group, Inc. ("Teleport"). The ILEC dominates each of the markets targeted by the Company. ILECs possess ubiquitous infrastructure and the financial wherewithal to subsidize unprofitable deals to maintain key customers. The Company competes with ILECs on the basis of price, customer support and the ability to offer and provide value-added, integrated service bundles. The Company has found that its CLEC competitors, unlike the ILEC, tend to focus on particular segments within the market. The Company competes with CLECs and ICPs by providing a variety of voice, data and Internet services in different combinations to address the needs of different market segments. The Company also faces, and expects to continue to face, competition from other current and potential market entrants, including AT&T Corp. ("AT&T"), MCI/WorldCom, Sprint and other IXCs, wireless telephone system operators and private networks built by large end users. AT&T has indicated its intention to offer local telecommunications services in certain U.S. markets, either directly or in conjunction with CLECs or cable operators. AT&T has acquired Teleport and plans to merge with Tele-Communications, Inc. ("TCI"), the nation's largest operator of cable television systems, and to provide telephone services over the TCI cable plant. Sprint has announced plans to deploy an advanced telecommunications network intended to boost speed and capacity, cut costs and provide an integrated platform to enter local markets, and has signed access agreements with a number of regional bell operating companies ("RBOCs") and GTE. WorldCom has acquired MFS (one of the company's CLEC competitors) and Brooks Fiber Properties, Inc., both major CLECs, and, most recently, MCI. Ameritech Corp. ("Ameritech") and US West, Inc. ("US West") have also announced 11 plans to enter the long distance market by forming joint sales ventures with Qwest Communications International Corp. ("Qwest"), a growing provider of fiber optic-based telecommunications services. Although these particular deals with Qwest have been declared unlawful by the Federal Communications Commission ("FCC") as a result of actions brought by AT&T and MCI/WorldCom, they remain subject to ongoing judicial and FCC review, and a continuing trend toward combinations and strategic alliances in the telecommunications industry, including combinations or potential consolidations among RBOCs or CLECs, or between IXCs and CLECs, could give rise to significant competitors for the Company. The Company also expects increased competition from ILECs operating outside of their current local service areas, cable television systems, electric utilities, microwave and other wireless carriers and satellite licensees. In addition, sweeping changes mandated by the Telecommunications Act of 1996 (the "Telecommunications Act") will facilitate entry by new competitors into local exchange and exchange access markets, including requirements that ILECs make available interconnection and unbundled network elements at cost-based rates, and resell their services to requesting competitors at wholesale discounts. INTERNET SERVICES. The Internet services market is extremely competitive, and the Company expects competition in this market to intensify in the future. The Company's current and prospective competitors include many large companies that have substantially greater market presence and financial, technical, marketing and other resources than the Company. The Company competes (or in the future is expected to compete) directly or indirectly with the following categories of companies: (i) national and regional ISPs; (ii) established on-line services; (iii) computer software and technology companies; (iv) national telecommunications companies; (v) RBOCs; (vi) cable operators; and (vii) nonprofit or educational ISPs. 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 the Company. ADVANCED NETWORK SERVICES. In the markets for data services and other advanced network services, the Company will face competition from a number of companies focused on the LAN and WAN market, including companies with significantly greater financial resources, more extensive business experience, and greater market and service capabilities than the Company. In particular, the Company will be required to compete with companies that design and manufacture products for the LAN and WAN markets and large system integrators. Substantially all of the Company's current and prospective competitors in the markets for advanced networking services have substantially greater market presence and financial, technical, marketing and other resources than the Company. See "--Risk Factors--Competition." REGULATION OVERVIEW The Company's services are subject to regulation by federal, state and local governmental agencies. The Company has obtained all authorizations and approvals necessary to conduct its operations as currently structured and believes that it is in compliance with all laws, rules and regulations governing its current operations. Nevertheless, changes in existing laws and regulations or any failure or significant delay in obtaining necessary future regulatory approvals, could have a material adverse effect on the Company's business, financial condition and results of operations. 12 At the federal level, the FCC has jurisdiction over interstate and international telecommunications services. State regulatory commissions have jurisdiction over intrastate communications. Municipalities and other local jurisdictions may regulate limited aspects of the Company's business by, for example, regulating the use of rights-of-way, imposing zoning and franchise requirements, and requiring installation permits. The Company also is subject to taxation at the federal and state levels and may be subject to varying taxes and fees from local jurisdictions. FEDERAL LEGISLATION THE TELECOMMUNICATIONS ACT OF 1996. The Telecommunications Act, enacted on February 8, 1996, substantially departs from prior legislation in the telecommunications industry by establishing local exchange competition as a national policy through the removal of state regulatory barriers to competition and the preemption of laws restricting competition in the local exchange market. The Telecommunications Act, among other things, mandates that (i) ILECs permit resale of their services and facilities on reasonable and nondiscriminatory terms and at wholesale rates, (ii) all LECs (including the Company) allow customers to retain the same telephone number ("number portability") when they switch local service providers, (iii) ILECs permit interconnection by competitors to an ILEC's network at any technically feasible point that is at least equal in quality to that which the ILEC provides to itself and pursuant to reasonable and nondiscriminatory terms and cost-based rates, (iv) ILECs unbundle their network services and facilities at any technically feasible point and permit competitors and others to use these facilities at cost-based, reasonable and nondiscriminatory rates, (v) all LECs ensure that an end user does not have to dial any more digits to reach customers of local competitors than to reach the ILEC's customers to the extent technically feasible ("dialing parity") and (vi) all LECs must establish reciprocal compensation arrangements for the transport and termination of telecommunications traffic. The Telecommunications Act permits RBOCs to provide out-of-region interLATA long distance services immediately, and also allows RBOCs to provide in-region interLATA services on a state-by-state basis once certain market-opening requirements are implemented and entry is determined to be in the public interest. The RBOCs, but not other ILECs, have an added incentive to open their local exchange networks to facilities-based competition because Section 271 of the Telecommunications Act provides for the removal of the current ban on RBOC provision of in-region interLATA toll service only after meeting certain requirements. The FCC, in consultation with the United States Department of Justice and the states, is given jurisdiction to determine whether to approve applications for RBOC entry into long distance. These provisions of the Telecommunications Act are designed in part to ensure that RBOCs take affirmative steps to level the playing field for their competitors so that others can compete effectively before the RBOC secures in-region long-distance entry. To date, three RBOCs have filed applications with the FCC for "in-region" long distance authority. The FCC denied the application of SBC Communications, Inc. ("SBC") with respect to Oklahoma in June 1997; denied the application of Ameritech in August 1997 with respect to Michigan; and denied applications filed by BellSouth for South Carolina and Louisiana in December 1997 and February 1998, respectively. Another application filed by BellSouth for Louisiana was denied by the FCC in October 1998, and the California Public Utilities Commission ("CPUC") determined that a draft application submitted to the CPUC by Pacific Bell in anticipation of its own FCC application did not satisfy Section 271 requirements. Several entities have sought reconsideration of the FCC's decisions and some have initiated litigation claiming, among other things, that Section 271 of the Telecommunications Act is unconstitutional, that the FCC has exceeded its jurisdiction, and that the FCC has violated the Eighth Circuit's ruling on the Interconnection Orders (discussed below) in several respects, e.g., by effectively promulgating national pricing standards. In addition, certain aspects of the Section 271 RBOC entry requirements remain subject to FCC review. See "--Federal Regulation." 13 RBOC entry into long distance services under Section 271 of the Telecommunications Act has, over the past year, also become a contentious political issue. Several ranking members of Congress, including Rep. John Dingell (D-MI) and Rep. W.J. "Billy" Tauzin (R-LA), have voiced strong frustration at what they allege is an unwillingness by the FCC to grant RBOC applications for long distance authority. In response, William Kennard, Chairman of the FCC, announced in early 1998 that the FCC will, in the future, take a more "cooperative" position with respect to RBOC applications under Section 271 of the Telecommunications Act and work closely with each RBOC to identify and resolve issues arising in connection with RBOC entry into the long distance service market. It is not certain at this time whether Chairman Kennard's announcement indicates that, in the future, the FCC is prepared to grant RBOC applications for in-region provision of interLATA long distance services. The U.S. District Court for the Northern District of Texas declared Section 271 unconstitutional in late December 1997. The district court's decision was reversed by the United States Court of Appeals for the Fifth Circuit in September 1997. However, if any subsequent United States Supreme Court review affirms the district court's ruling, Pacific Bell, among other RBOCs, will be able to provide more services to customers, making it an even more formidable competitor for the Company. See "--Risk Factors--Competition." Under the Telecommunications Act, states have begun and, in a number of cases, completed regulatory proceedings to determine the pricing of unbundled network elements and services, and the results of these proceedings will determine whether it is economically attractive to use these elements. FEDERAL REGULATION THE TELECOMMUNICATIONS ACT REGULATIONS. The Telecommunications Act in some sections is self-executing, but in most cases the FCC must issue regulations that identify specific requirements before the Company and its competitors can proceed to implement the changes the Telecommunications Act prescribes. The Company actively monitors pertinent FCC proceedings and has participated in some of these proceedings (including the restructuring of access charges, the application of access charges to Internet traffic and RBOC petitions for the deregulation of ILEC-provided DSL services). The outcome of these various ongoing FCC rulemaking proceedings or judicial appeals of such proceedings could materially affect the Company's business, financial condition and results of operations. As required by the Telecommunications Act, in July and August 1996 the FCC adopted orders issuing new rules to implement the interconnection and resale provisions of the Telecommunications Act (the "Interconnection Orders") which are intended to remove or minimize regulatory, economic and operational impediments to full competition for local services, including switched local exchange service. A number of parties filed petitions for review of the Interconnection Orders in Federal court seeking to vacate certain of the rules adopted therein. In a July 18, 1997 decision, the United States Court of Appeals for the Eighth Circuit vacated significant portions of the Interconnection Orders, including its provisions governing the pricing of local telecommunications services and unbundled network elements, its unbundling requirements and its "pick and choose" rule (which enabled a telecommunications carrier to demand any individual term of an ILEC's interconnection contract with another carrier). Another Eighth Circuit decision issued on October 14, 1997 vacated an FCC rule that obligated ILECs, under certain circumstances, to provide combinations of network elements, rather than provide them individually. This decision may make it more difficult or expensive for competitors to use combinations of ILEC unbundled elements. On August 22, 1997, the Eighth Circuit vacated the FCC's interconnection rules implementing the Telecommunications Act dialing parity requirement for LECs. In November 1997, the FCC, AT&T, 14 MCI/WorldCom, and a number of CLECs sought review of the Eighth Circuit's decisions by the Supreme Court. The RBOCs and GTE also cross-petitioned for Supreme Court review of several aspects of the Interconnection Orders that were upheld by the Eighth Circuit in the event Supreme Court review was granted. While these petitions were pending, the Eighth Circuit on January 23, 1998, found that the FCC had violated the terms of its July decision, and ordered the FCC to cease imposing its local pricing rules on RBOCs attempting to enter the long distance market under Section 271 of the Act. Cross-appeals were argued before the Supreme Court in October 1998. A Supreme Court decision in the cases is not expected until some time in 1999. The Eighth Circuit and Supreme Court decisions create uncertainty about individual state rules governing pricing and other terms and conditions of interconnection agreements and could make negotiating and enforcing such agreements in the future more difficult and protracted. They also could require renegotiation of relevant provisions of existing interconnection agreements, or subject them to additional court or regulatory proceedings. Although the Company generally believes that the outcome of these judicial proceedings will not have a material adverse effect on its business and operations, there can be no assurance that this will be the case. In July 1996, the FCC mandated that over the course of the next year responsibility for administering and assigning local telephone numbers be transferred from the RBOCs and a few other ILECs to a neutral entity. In August 1996, the FCC issued regulations which addressed certain of these issues, but left others for decision by the states and the neutral numbering plan administrator, Lockheed-Martin IMS, which in August 1997 was designated by the FCC. The FCC numbering decisions, among other things, (a) prohibit states from creating new area codes that could unfairly hinder LEC competitors (including the Company) by requiring their customers to use 10 digit dialing while existing ILEC customers use 7 digit dialing and (b) prohibit ILECs (which in many cases are still administering central office numbers pending an operational transition to the neutral administrator) from charging "code opening" fees to competitors (such as the Company) unless they charge the same fee to all carriers including themselves. In addition, each carrier is required to contribute to the cost of numbering administration through a formula based on net telecommunications revenues. In July 1996, the FCC released rules to permit both residential and business customers to retain their telephone numbers when switching from one local service provider to another (known as "number portability"). RBOCs were required to implement number portability in the top 100 markets in five phases beginning no later than March 31, 1998 and to complete it no later than December 1998, although the FCC has granted numerous waivers of these implementation deadlines. In smaller markets, RBOCs must implement number portability within six months of a request therefore commencing December 31, 1998. Non-RBOC ILECs are not required to implement number portability in any additional markets until December 31, 1998, and then only in markets where the feature is requested by another ILEC. In addition, pursuant to the Telecommunications Act, the FCC issued new regulations in 1997 regarding the implementation of the universal service program and the assessment of charges on carriers obtaining access to local exchange networks. Both the access charge and universal service regimes were substantially revised. As a result of these changes, the costs of business and multiple residential lines are expected to increase. The FCC is currently examining whether IXCs and CLECs will be permitted, and if so in what manner and to what extent, to pass through universal service charges to end users as line item surcharges on bills for telecommunications services. In addition, in June 1998 the FCC announced that it was restructuring and narrowing universal support for provision of Internet services to schools, libraries and rural health care providers. As a result of this rapidly changing environment, the Company is unable to predict how the 15 FCC's universal service and access charge reforms will be finally implemented or enforced, or what effect they will have on competition within the telecommunications industry, generally, or on the competitive position of the Company, specifically. The Company also is unable to accurately predict the final formula for universal service contribution or its own level of contribution in 1999 and beyond. The Telecommunications Act requires the FCC to streamline its regulation of ILECs and permits the FCC to forbear from regulating particular classes of telecommunications services or providers. Since the Company is a non-dominant carrier and, therefore, is not heavily regulated by the FCC, the potential for regulatory forbearance likely will be more beneficial to ILECs than the Company in the long run. In June 1997, the FCC granted the request of a CLEC that the FCC forbear from imposing tariff filing requirements on exchange access services provided by carriers other than ILECs. The FCC has sought further comment on whether to mandate the detariffing of exchange access services. The proceeding remains pending, and there can be no assurance how the FCC will rule on this issue, or what effect any such ruling may have on competition within the telecommunications industry generally, or on the competitive position of the Company specifically. There also is a risk that Telecommunications Act requirements that currently work in the Company's favor may be implemented differently in the future depending on marketplace developments. For example, many CLECs such as the Company have begun to acquire an increasing number of ISP customers. This development in turn has resulted in a rapid increase in Telecommunications Act-mandated reciprocal compensation charges paid by ILECs to CLECs to terminate the calls of ILEC customers to CLEC ISP customers. ILECs led by the RBOCs currently are pursuing action in the courts and before state PUCs and the FCC to address this issue. The outcome of such actions is uncertain, but could have a material adverse effect on the Company. Section 706 of the Telecommunications Act requires the FCC to initiate a proceeding to address the provision of "advanced telecommunications services" to all Americans. In early 1998, several RBOCs (Bell Atlantic, Ameritech, BellSouth and SBC) filed petitions with the FCC seeking forbearance from FCC and state regulation of their DSL high-speed data services. The RBOCs also seek an FCC ruling under Section 706 that elements of their DSL services are not subject to the interconnection, unbundling and resale requirements of the Telecommunications Act. In response to these petitions, the FCC on August 6, 1998 proposed that RBOCs be permitted to offer DSL services on an unregulated basis if certain separate subsidiary and interconnection requirements are met. Along with other significant DSL based CLECs, the Company participated in the DSL Access Telecomunications Alliance to support this FCC proposal. A final FCC decision is expected in January 1999. There can be no assurance that these or similar RBOC regulatory initiatives regarding broadband service provision would not have a material adverse effect on the Company's business, financial condition and results of operations. STATE REGULATION Many of the Company's services will be classified as intrastate services subject to state regulation. All of the states where the Company operates, or will operate, require some degree of state regulatory commission approval to provide certain intrastate services. In most states, intrastate tariffs are also required for various intrastate services, although the Company is not typically subject to price or rate of return regulation for tariffed intrastate services. The Company may also be subject to a variety of other state regulatory requirements, including interconnection, universal service, reporting and customer service requirements. The Telecommunications Act requires each state to remove barriers to entry and barriers to competition for ILEC competitors. While no assurance can be given as to how quickly and how effectively each state will act to implement this legislation, many state authorization processes are being streamlined 16 and the authorization time frames shortened considerably. Several states have allowed ILECs rate, special contract (selective discounting) and tariff flexibility, particularly for services deemed subject to completion. Such pricing flexibility increases the ability of the ILEC to compete with the Company and constrains the rates that the Company may charge for its services. In view of the additional competition expected to result from the Telecommunications Act, states may grant ILECs additional pricing flexibility. At the same time, some ILECs may request increases in local exchange rates to offset revenue losses due to competition. Under the Telecommunications Act, if a request is made by the Company, ILECs generally have a statutory duty to negotiate interconnection and access arrangements in good faith for the Company's provision of local service (unless they are exempted from such requirement as small or rural ILECs). The Company has completed interconnection agreements with Pacific Bell and GTE for California. During these negotiations, the Company or the ILEC may submit disputes to the state regulatory commissions for mediation and, after the expiration of the statutory negotiation period set forth in the Telecommunications Act, the parties may submit outstanding disputes to the states for arbitration. To date the Company has not submitted any disputes to the states for mediation or arbitration. LOCAL REGULATION The Company will need to interact with local governments in a variety of ways, and may be required to obtain various permits and authorizations from municipalities in which it operates. How diverse local governments will exercise traditional functions, including zoning, permitting and management of rights-of-ways, and address the expansion of telecommunications competition and varying means of entry in particular, is uncertain. The kinds and timing of approvals required to conduct aspects of the Company's business varies among local governments and may also vary with the specific technology or equipment configuration used by the Company. While the Telecommunications Act permits local governments to manage rights-of-way, the scope of that authority, including the circumstances when fees can be charged and the amount of such charges, has already been the subject of numerous disputes between telecommunications carriers and such local governments. In addition, some local governments have been requiring substantial filings and review before telecommunications carriers can operate in their licensed areas and have also required the payment of significant franchise fees or taxes. Some of these disputes involving licensing of telecommunications carriers and rights-of-way are in litigation and more administrative and court litigation is likely. The prohibition of entry barriers set forth in the Telecommunications Act and the FCC's power to preempt such barriers have been addressed in these cases, which to date have rejected local government efforts to impose "franchise" or tax obligations on CLECs and other telecommunications carriers. The FCC has recently preempted, and thereby prevented enforcement of, certain state and local regulations that had the effect of inhibiting local competition. Any inability or unwillingness by the FCC to preempt additional state and local regulations in a timely fashion could have a material adverse impact on the Company. AGREEMENTS WITH THE CITY OF ANAHEIM AND THE IRVINE COMPANY THE CITY OF ANAHEIM The Company, its wholly owned subsidiary, FirstWorld Anaheim ("FWA"), and the City of Anaheim (the "City") entered into a series of agreements in February 1997 regarding development of the first portion of the Company's initial network located within the City (the "Anaheim Network"). 17 AGREEMENT FOR USE OF OPERATING PROPERTY. Pursuant to an Agreement For Use of Operating Property (the "Operating Property Agreement"), FWA leases from the City 60 of 96 fiber strands contained in an approximately 50 mile long loop of fiber optic cable owned by the City, together with related facilities and rights. The term of the agreement runs through December 31, 2027, and during calendar year 2011 the parties are obligated to negotiate in good faith concerning a possible 15-year extension of the term (through December 31, 2042). The remaining 36 fiber strands within the cable (the "Reserved Fibers") are reserved by the City for its own use in providing municipal services (i.e., uses that are not competitive with FWA's commercial uses). If the City determines from time to time that some portion of the Reserved Fibers is not required for municipal services, then the City and FWA are to negotiate in good faith the terms and conditions on which that portion of the Reserved Fibers will be leased to FWA. In any event, the City can use the Reserved Fibers only for municipal services unless FWA fails to proceed with development of the third phase of the Anaheim Network (as described below) and the City proceeds with the development of the third phase of the Anaheim Network for its own account, as described below. As rent for the 60 strands of fiber, FWA is obligated to make quarterly payments to the City of approximately $114,000. In addition, FWA is obligated to pay all costs associated with operating and maintaining the leased property, including maintenance expenses, taxes, insurance premiums and pole usage fees. FWA also is obligated to maintain and insure the leased property and the City's Reserved Fibers (except to the extent the Reserved Fibers are located on certain identified City-owned premises, such as electrical substations), subject to the City's obligation to reimburse FWA for a pro rata share of maintenance and insurance costs (computed based on the number of Reserved Fibers relative to the total of 96 fibers). 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. FWA's interest in the leased property is not currently encumbered. UNIVERSAL TELECOMMUNICATIONS SYSTEM PARTICIPATION AGREEMENT. Concurrently with the execution of the Operating Property Agreement, the City, FWA and the Company executed the Universal Telecommunications System Participation Agreement (as amended, the "UTS Agreement") which sets forth guidelines for FWA's development and operation of the Anaheim Network and compensation payable to the City by FWA. The term of the UTS Agreement runs through December 31, 2027, and during calendar year 2011 the parties are obligated to negotiate in good faith concerning a possible 15-year extension of the term (through December 31, 2042). The UTS Agreement provides that FWA will construct the Anaheim Network in three phases. The first phase extended service to identified municipal facilities and was substantially completed in October 1997. The second phase requires service to be extended in the ordinary course of business (i.e., within six months following execution of a customer service agreement) to commercial, industrial and governmental customers within certain defined service areas. The Company was required to complete 44% of the first and second phases by April 1, 1998 and is further required to complete 90% of the first and second phases by December 31, 1998, plus a 180-day cure period in each case. The Company constructed and installed sufficient fiber to satisfy the 44% completion requirement and expects completion of the fiber clusters currently under construction and approved for construction to satisfy the 90% completion requirement in a timely manner. 18 The third phase of the Anaheim Network requires that service be extended in the ordinary course of business to all customers within Anaheim, including residential customers. This phase will be commenced only after the economic feasibility of the third phase is validated by an independent consultant's report and financing is arranged. FWA has agreed to cause a feasibility study with respect to the third phase to be completed by no later than January 1, 2000, and thereafter to prepare annual updates of the study if necessary. If FWA 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 (including in a business arrangement with third parties). If the City closes the principal financing for or commences construction of the third phase, then the provisions of the Operating Property Agreement prohibiting the City from using the Reserved Fibers for other than municipal services terminate. Under the UTS Agreement, the City is obligated, with specified exceptions, to utilize FWA as the provider of all of the City's telecommunications services, and to provide FWA with certain rights-of-way. The UTS Agreement requires FWA to pay to the City (i) an annual payment in lieu of a franchise fee based on a percentage of FWA's "adjusted gross revenues," as defined, related to the Anaheim Network, subject to a minimum annual payment of $1,000,000 for periods after June 30, 1999, (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, and not to exceed $350,000 per year thereafter (as adjusted annually to reflect changes in the cost of living) and (iv) $20,000 per year (adjusted annually to reflect changes in the cost of living) to support the City's presence on the Internet. The UTS Agreement also requires the Company to deposit an amount equal to up to 15% of "net revenues" derived from the Anaheim Network to maintain a $6,000,000 reserve account for debt service and capital improvements. The UTS Agreement requires FWA to commence construction of a demonstration center in the City's downtown area by November 30, 1998, and to complete the demonstration center by June 30, 1999. However, as a result of a change in the proposed scope of the project, FWA now contemplates leasing additional office space in the downtown area of Anaheim and housing a demonstration center in the leased facilities. The Company expects the demonstration center to be operational in the first quarter of 1999. Although the Company believes that it is in compliance with its obligations with respect to the demonstration center, the City has asserted its belief that the Company is not satisfying its obligations vis-a-vis the demonstration center. The parties are currently in the process of attempting to resolve these issues. The City has an option to purchase all of the issued and outstanding stock of FWA for appraised value (i) at any time after July 1, 2012 or (ii) if FWA fails to meet the specified performance deadlines related to completion of the first and second phases of the Anaheim Network as described above. 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. DEVELOPMENT FEE AGREEMENT. Pursuant to a Development Fee Agreement between the Company and the City, 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 fee for each Additional Network that the Company develops ($300,000 for each Additional Network financed in the first year; $200,000 for each Additional Network 19 financed in the second year; and $100,000 for each Additional Network financed in the third, fourth and fifth years) (each, a "Development Fee"). Each Development Fee must be paid within 30 days after 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 CPUC and enters into a revenue sharing agreement with one or more public entities. No such fee is due, however, with respect to the Company's relationship with The Irvine Company because it is not a public entity. THE IRVINE COMPANY FirstWorld Orange Coast ("FWOC"), a wholly-owned subsidiary of the Company, and The Irvine Company entered into two agreements in February 1998 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"). AGREEMENT FOR LEASE OF TELECOMMUNICATIONS CONDUIT. Pursuant to an Agreement for Lease of Telecommunications Conduit dated as of March 5, 1998 (the "Conduit Lease"), FWOC leases from The Irvine Company space within two underground telecommunications tubes (the "Conduit"), and, in connection therewith, has received the non-exclusive right to use undivided space within the pull boxes serving such Conduit (collectively, the "Leased Premises"). The Conduit Lease applies to (i) an existing Conduit system within certain already-developed areas in the Irvine Spectrum and (ii) Conduit to be constructed in the future in the as yet undeveloped areas of the Irvine Spectrum. The Irvine Company may also install Conduit in other areas it may develop in the cities of Irvine, Newport Beach and Tustin, and in unincorporated areas of Orange County, and such areas may in the future be incorporated into the Conduit Lease upon the mutual agreement of the parties ("Additional Areas"). The term of the Conduit Lease runs through December 31, 2027. The Conduit Lease obligates FWOC to install fiber optic cable ("Cable") in the Conduit pursuant to a phasing plan. A phase is completed when sufficient Cable has been installed to enable FWOC to connect and provide service (for that portion of the Irvine Network) to property abutting the Conduit. Upon termination of the Conduit Lease, the Cable will be owned by The Irvine Company. If FWOC fails to complete installation of the required Cable within 18 months, The Irvine Company may, until such installation is completed, terminate the Conduit Lease. FWOC is obligated to make quarterly rent payments to The Irvine Company based upon the "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. TELECOMMUNICATIONS SYSTEM LICENSE AGREEMENT. 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 20 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 CPI increase that will not be less than 2% or greater than 6%. The license fee will increase or decrease in the future based on the rentable square footage of the buildings that are from time to time subject to the License Agreement. The License Agreement provides FWOC with the right to install, maintain, operate, replace and remove Cable and associated communications equipment ("Equipment") in, as well as access rights to, such buildings, subject to the rights of The Irvine Company's tenants and to reasonable requirements and procedures imposed by The Irvine Company. Except with respect to buildings that are leased to a single tenant, The Irvine Company is required to provide FWOC with a reasonable amount of equipment room space in each building, sufficient to enable FWOC to install Cable and Equipment and deliver services. FWOC's rights to a building are non-exclusive, meaning that The Irvine Company can grant similar licenses to other service providers. Although all the Cable becomes the property of The Irvine Company upon termination of the License Agreement, FWOC has the right to remove and retain ownership of the Equipment, subject to The Irvine Company's election to purchase the Equipment at a price to be negotiated by the parties. Subject to certain qualifications, FWOC will have the obligation to provide telecommunications services to any tenant who wishes to subscribe with FWOC for those services, and FWOC is required to install Cable and Equipment in that tenant's building if FWOC owns or leases Conduit located within 1,000 feet of that building. Under certain circumstances, FWOC may be required to provide completion and performance bonds to The Irvine Company in connection with that work. To the extent that FWOC provides fiber optic service to a building, it is required to achieve and maintain standards of minimum reliability. Subject to force majeure, if there is a system-wide failure to provide such service that exceeds five consecutive days, The Irvine Company has the right to use the network (and if necessary bring in an alternative service provider) and to charge its costs to FWOC. Whenever FWOC is the first competitive access provider to a building, it is required to install a building entrance conduit system (which connects the building to the street access point) (a "BECS"), with a capacity equal to 200% of the capacity required by FWOC to service the building. The Irvine Company can grant other providers the right to use that BECS, but must pay or cause that provider to pay FWOC 50% of FWOC's cost of installing the BECS, which costs are subject to increase based on a CPI calculation. Where a BECS already exists, The Irvine Company must make any excess capacity therein available to FWOC. The Conduit Lease and the License Agreement both require FWOC to maintain certain minimum amounts of insurance coverage throughout the term of such agreements. The Company has guaranteed the payment obligations of FWOC under The Irvine Company agreements. EMPLOYEES As of November 30, 1998, the Company had 176 employees (not including employees related to the recently acquired business of Optec), of whom 65 were in network operations and development, 66 were in sales, marketing and product development and 45 were in administration. The Company believes that its future success will depend in part on its continued ability to attract, hire and retain qualified personnel. 21 Competition for such personnel is intense, and there can be no assurance that the Company will be able to identify, attract and retain such personnel in the future. None of the Company's employees are represented by a labor union or are the subject of a collective bargaining agreement. The Company has never experienced a work stoppage and believes that its employee relations are good. RISK FACTORS LIMITED HISTORY OF OPERATIONS; NEGATIVE CASH FLOW AND OPERATING LOSSES The Company was incorporated in July 1992, commenced operations in September 1993 and commenced commercial operation of its current network business in November 1997. The Company has provided services to customers for slightly more than one year, and as of November 30, 1998 had approximately 400 commercial customers under contract. The Company has generated substantial operating losses and negative cash flow from operating activities since its inception and expects that operating and net losses and negative operating cash flow will continue for at least the next several years and will increase significantly as the Company implements its growth strategy of expanding into other cities. To date, the Company has focused primarily on the development of its product line, the development and construction of its networks, the hiring of management and other key personnel, the raising of capital, the acquisition of equipment, the implementation of its sales and marketing strategy and the development of operating systems. The Company has a very limited operating history upon which to base estimates of the number of customers, the reliability of its network or the amount of revenues the Company's current and planned operations will generate. Given the Company's limited operating history, there can be no assurance that it will be able to achieve its goals or compete successfully in the telecommunications industry. The Company's prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies in new and rapidly evolving markets. To address these risks, the Company must, among other things, attract and retain customers, increase awareness of the Company's services, respond to competitive developments, continue to attract, retain and motivate qualified persons and continue to upgrade its technologies and commercialize its network services incorporating such technologies. There can be no assurance that the Company will be successful in addressing such risks and the failure to do so could have a material adverse effect on the Company's business, financial condition and results of operations. The Company's business strategy is unproved and, to be successful, the Company must, among other things, develop and market services that are widely accepted by customers at prices that will yield a profit. There can be no assurance that the Company and its services will achieve broad customer or commercial acceptance when compared to alternative telecommunications services. Given the dynamic nature of the marketplace for telecommunications services, the prices the Company charges for some or all of its services may from time to time be higher than those charged by providers for some competing services. Additionally, prices for telecommunications services have fallen historically, and prices in the industry in general, and for the services the Company offers and plans to offer in particular, are expected to continue to fall. Accordingly, it is difficult to predict whether the Company's pricing model will prove to be viable, whether demand for the Company's services will materialize at the prices it expects to charge or whether current or future pricing levels will be sustainable. The failure to achieve or sustain projected pricing levels or to achieve or sustain broad market acceptance could result in a material adverse effect on the Company's business, financial condition and results of operations. Because of the foregoing factors, among others, the Company may not be able to forecast its revenues or the rate at which it will add new customers or end-users with any degree of accuracy. The Company's annual and quarterly operating results may fluctuate significantly in the future as a result of numerous factors, many of which are outside the Company's control. Factors that may affect the Company's operating results include the 22 amount and timing of capital expenditures and other costs relating to the expansion of the Company's network, the introduction of new services by the Company or its competitors, price competition by competitors, technical difficulties or network downtime, general economic conditions and economic conditions specific to the Company's industry. The development of the Company's business and the deployment of its services and systems will require significant additional capital expenditures, a substantial portion of which will need to be incurred before the realization of significant revenues. Together with associated start-up operating expenses, these capital expenditures will result in substantial negative cash flow until an adequate revenue-generating customer base is established. The Company has incurred net losses in each quarter since it commenced operations in September 1993, with cumulative losses totaling approximately $48.1 million through September 30, 1998. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." The Company expects to continue to generate significant operating and net losses for at least the next several years. There can be no assurance that the Company will achieve or sustain profitability or generate sufficient positive cash flow to meet its working capital requirements. See "--Substantial Leverage; Ability to Service Indebtedness." SUBSTANTIAL LEVERAGE; ABILITY TO SERVICE INDEBTEDNESS The Company is highly leveraged. As of September 30, 1998, the Company had approximately $256.7 million of outstanding indebtedness, the Company's total debt as a percentage of capitalization was approximately 90% as of September 30, 1998 and the Company had a deficiency of earnings to fixed charges of $29.1 million for the year ended September 30, 1998. The Company's high degree of leverage could have material and adverse consequences, including, but not limited to, the following: (i) a substantial portion of the Company's sources of capital and cash flow from operations must be dedicated to debt service payments, thereby reducing the funds available to the Company for other purposes; (ii) the Company's ability to obtain additional debt financing in the future for working capital, capital expenditures, acquisitions, repayment of indebtedness or other purposes may be impaired, whether as a result of the covenants and other terms of its debt instruments or otherwise; (iii) the Company will be substantially more leveraged than certain of its competitors, which may place the Company at a competitive disadvantage; (iv) the Company's high degree of leverage may limit its ability to expand capacity and otherwise meet its growth objectives; and (v) the Company's high degree of leverage may hinder its ability to adjust rapidly to changing market conditions and could make it more vulnerable than its less leveraged competitors in the event of a downturn in general economic conditions or its business. In addition, pursuant to the terms of the indenture (the "Indenture") entered into in connection with the April 1998 debt offering, the Company is only permitted to incur additional indebtedness under certain conditions, and the Company expects that as it expands its networks beyond the areas currently designated for expansion, its capital requirements will require it to secure additional financing, including additional indebtedness. See "--Significant Capital Requirements." The Company's ability to make principal and interest payments on its indebtedness will depend upon, among other things, its ability to complete the roll-out of its networks on a timely and cost-effective basis, the market acceptance of, and the utilization, pricing and consumer demand for its services, its future operating performance and cash flow and its ability to obtain additional debt or equity financing, which are themselves dependent upon a number of economic, financial, competitive and regulatory conditions and other factors, many of which the Company is unable to control. There can be no assurance that the Company will have adequate sources of liquidity to make required payments of principal and interest on its indebtedness, whether at or prior to maturity, to finance anticipated capital expenditures and to fund working capital requirements. If the Company does not have sufficient available resources to repay 23 its outstanding indebtedness when it becomes due and payable, the Company may find it necessary to refinance such indebtedness, and there can be no assurance that refinancing will be available or that it will be available on favorable terms. Any failure by the Company to satisfy its obligations with respect to its indebtedness at maturity or prior thereto would constitute a default under such indebtedness and could cause a default under agreements governing other indebtedness, if any, of the Company. BUSINESS DEVELOPMENT AND EXPANSION RISKS; POSSIBLE INABILITY TO MANAGE GROWTH The Company's business plan will, if successfully implemented, result in rapid expansion of its operations. Rapid expansion of the Company's operations may place a significant strain on the Company's management, financial and other resources. The Company's ability to manage future growth, should it occur, will depend upon its ability to attract, train, assimilate and retain additional qualified personnel, to monitor operations, control costs, maintain regulatory compliance, maintain effective quality controls and significantly expand the Company's internal management, technical, information and accounting systems. There can be no assurance that the Company will successfully implement and maintain such operational and financial systems or that it will successfully obtain, integrate and utilize the management, operational and financial resources necessary to manage a developing and expanding business in an evolving, highly regulated and increasingly competitive industry. Any failure to expand these areas and to implement and improve such systems, procedures and controls in an efficient manner at a pace consistent with the growth of the Company's business could have a material adverse effect on the business, financial condition and results of operations of the Company. If the Company were unable to hire and train staff, purchase adequate supplies of equipment, increase the capacity of its operational and accounting information systems or successfully manage and integrate such additional resources, customers could experience delays in connection of service and lower levels of customer service. Failure by the Company to meet the demands of customers and to manage the expansion of its business and operations could have a material adverse effect on the Company's business, financial condition and results of operations. DEPENDENCE UPON NETWORK INFRASTRUCTURE The Company's success will depend upon the capacity, reliability and security of its networks. The Company expects that a substantial portion of its future revenues will be derived from the provision of tailored value-added network services to its customers. The Company must continue to expand and adapt its network infrastructure as the number of users and the amount of information they wish to transfer increase and as customer requirements change. There can be no assurance that the Company will be able to expand or adapt its network infrastructure to meet additional demand or its customers' changing requirements on a timely basis, at a commercially reasonable cost, or at all. Any failure of the Company to expand its network infrastructure on a timely basis or adapt it to either changing customer requirements or evolving industry standards could have a material adverse effect on the Company's business, financial condition and results of operations. The backbone of the Company's network within Anaheim, California is a 50-mile fiber loop owned by the City and leased and operated by the Company. Under the Operating Property Agreement between the City and FWA, the Company's lease of the loop is subject to termination upon customary default provisions, including failure to pay rent within the required time period or a breach of its other material duties or obligations thereunder. In addition, the UTS Agreement requires FWA to complete 90% of a designated portion of the Anaheim network by December 31, 1998, plus a 180 day cure period. The Company already has satisfied a requirement to complete 44% of such work by April 1, 1998. If FWA 24 fails to meet the 90% deadline, then the City may elect to terminate the Operating Property Agreement and the UTS Agreement, or, in the alternative, exercise its right to purchase all of FWA's outstanding stock. See "--Agreements with the City of Anaheim and The Irvine Company--The City of Anaheim." Any termination of the Operating Property Agreement or the UTS Agreement, or the exercise by the City of its right to purchase all of FWA's outstanding stock, would have a material adverse effect on the Company's business, financial condition and results of operations. RELIANCE ON THIRD PARTIES FOR ACCESS TO TELEPHONY SERVICES Because the Company expects to provide certain services through connections supplied by ILECs and other providers, it is dependent upon the cooperation of third party telecommunications providers, including certain of the Company's major competitors, such as Pacific Bell, in providing access to their services. The Company has entered into interconnection agreements with Pacific Bell and GTE, which, among other things, establish the terms and conditions for access to such networks for origination and termination of calls and set pricing for unbundled network elements. The Company will need to enter into similar agreements as it expands to areas where neither Pacific Bell nor GTE is the ILEC. There can be no assurance that the Company will be able to enter into additional interconnection agreements on favorable terms or at all. Even when the Company has entered into an interconnection agreement, there can be no assurance that the Company's orders for additional unbundled loops or other services will be fulfilled in a timely manner. Failure of other parties to interconnection agreements to maintain equipment and provide service in a reliable and timely manner may result in interrupted service to the Company's customers and risk of loss of business. In addition, there can be no assurance that the rates charged to the Company under interconnection agreements will continue to allow the Company to offer its services at competitive prices. The Company provides long distance service, operator services, directory assistance and calling card services under its own name pursuant to agreements with Sprint. The Company has obtained volume discounts for a variety of services the Company purchases from Sprint (including long distance), based on estimates of the Company's monthly usage of such services. If the Company fails to meet targeted usage (or in certain instances, exceeds targeted usage) the Company must pay Sprint various monthly surcharges with respect to such services. The most significant of these monthly surcharges relates to the required amount of long distance service the Company purchases from Sprint. Beginning in August 1998, the Company was required to purchase certain minimum monthly amounts of long distance service (which minimum requirements increase over time) or pay Sprint a penalty equal to a percentage of the Company's shortfall. To date, the Company has not purchased in any one month the amount of long distance service that the Company was required to purchase beginning in August 1998. The Company expects that its exposure to shortfall liabilities will be reduced throughout 1999 and nearly eliminated by the end of the third quarter of 1999 as a result of increased use of Sprint's services by its customers. However, there can be no assurance that this projected usage will be realized or when or if the Company will purchase the required amount of long distance service thereunder. RISKS OF IMPLEMENTATION, SITES, EQUIPMENT AND SUITABLE INTERCONNECT ARRANGEMENTS The Company intends to develop and expand the Company's business and enter new markets as described under the caption "--Network Status and Proposed Expansion." There can be no assurance the Company will be able to complete network deployment on the timetable and in the manner currently planned or that it will be able to expand to new areas in the manner currently contemplated. The development and expansion of the Company's business into new markets will be dependent, among other things, upon the 25 Company's ability to lease or purchase suitable sites for its equipment, its ability to negotiate suitable interconnection and co-location agreements with ILECs on satisfactory terms and conditions and its ability to finance such expansion. The failure by the Company to expand or enter new markets in accordance with its plans would have a material adverse effect on the Company's business, financial condition and results of operations. COMPETITION The telecommunications and Internet services industries are highly competitive. The Company has not obtained significant market share in any of the areas where it offers or intends to offer services, nor does it expect to do so in the near future given the size of the local telecommunications market, the intense competition therein and the diversity of customer requirements. In each market area in which the Company is authorized to provide services, the Company competes or will compete with several other service providers and technologies. Certain bases of competition in the Company's markets include price, performance, reliability of service, ease of access and use, services offered, product bundling, customer support, brand recognition and operating experience. Most of the Company's competitors, particularly the applicable ILEC, have longer operating histories, long-standing relationships with customers and suppliers in their respective industries, greater name recognition and significantly greater financial, technical and marketing resources than the Company. The Company faces intense competition with respect to each of the services it offers. The Company cannot predict the number of competitors that will emerge as a result of existing or new federal and state legislative actions. See "--Regulation." TELEPHONY. The Company's principal telephony competitors are the ILECs in the areas served by the Company's networks. While the Interconnection Orders of the FCC and the Telecommunications Act provide increased business opportunities to CLECs and ICPs such as the Company, they also provide the ILECs with increased pricing flexibility for their services and other regulatory relief, which could have a material adverse effect on CLECs and ICPs, including the Company. If the ILECs are allowed by regulators to lower their rates for their services, engage in substantial volume and term discount pricing practices for their customers, or seek to charge CLECs and ICPs substantial fees for interconnection to the ILECs' networks, the results of operations of CLECs and ICPs, including the Company, could be materially adversely affected. The legal framework governing competition in telephony has also been heavily impacted in recent years by a shifting series of judicial and administrative decisions. See "Regulation." 26 The Company also competes for telephony services with various CLECs in its target markets, including MFS, NEXTLINK, ICG, GST and Teleport. To date, the Company has not encountered a high level of competition from CLECs or ICPs for its targeted customers in its initial markets. The Company expects the level of such competition to increase substantially in the future, and there can be no assurance that the Company will be able to expand successfully, retain its existing customers or price its products profitably in the presence of such increased competition. The Company also faces, and expects to continue to face, competition from other current and potential market entrants, including AT&T, Sprint, MCI/WorldCom and other IXCs, wireless telephone system operators and private networks built by large end users. AT&T has indicated its intention to offer local telecommunications services in certain U.S. markets, either directly or in conjunction with CLECs or cable operators. AT&T has acquired Teleport and plans to merge with TCI, the nation's largest operator of cable television systems, and to provide telephone services over the TCI cable plant. Sprint has announced plans to deploy an advanced telecommunications network intended to boost speed and capacity, cut costs and provide an integrated platform to enter local markets, and has signed access agreements with a number of RBOCs and GTE. The Company expects additional competition from (i) industry consolidation and joint ventures, (ii) ILECs operating outside of their current local service areas, (iii) cable television systems, (iv) electric utilities, (v) microwave and other wireless carriers and (vi) satellite licensees. See "Competition--Telephony." INTERNET SERVICES. The Internet services market is extremely competitive, and the Company expects competition in this market to intensify in the future. The Company's current and prospective competitors include many large companies that have substantially greater market presence and financial, technical, marketing and other resources than the Company. The Company competes (or in the future is expected to compete) directly or indirectly with the following categories of companies: (i) national and regional ISPs; (ii) established on-line services; (iii) computer software and technology companies; (iv) national telecommunications companies; (v) RBOCs; (vi) cable operators; and (vii) nonprofit or educational ISPs. 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 the Company. ADVANCED NETWORK SERVICES. In the markets for LAN/WAN services and other advanced network services, the Company will face competition from a number of companies focused on the LAN and WAN market, including companies with significantly greater financial resources, more extensive business experience and greater market and service capabilities than the Company. In particular, the Company will be required to compete with companies that design and manufacture products for the LAN and WAN markets and large system integrators. The Company also competes with the ILEC for data connectivity services. Pacific Bell, for example, introduced DSL services over its 27 existing networks. Substantially all of the Company's current and prospective competitors in the markets for advanced network services have greater market presence and financial, technical, marketing and other resources than the Company. RISK OF SYSTEM FAILURE; SECURITY RISKS The Company's success in marketing its services to business customers requires the Company to provide reliable service. The Company's networks are subject to physical damage, power loss, capacity limitations, software defects, breaches of security (by computer virus, break-ins or otherwise) and other factors which may cause interruptions in service or reduced capacity for the Company's customers. FirstWorld utilizes various procedures to minimize security risks. The Company currently provides its customers their own physical and permanent virtual circuits throughout the FirstWorld network. The Company also utilizes a Fire Wall to protect its Internet customers. In addition, the Company's own fiber network is inaccessible, in that it has no electrical interfaces that allow the possibility of monitoring. All termination points and manholes within FirstWorld's own fiber network are locked and secured. There can be no assurance, however, that these security procedures will prove to be adequate. Moreover, the Company's current, and certain of its planned networks, are located in an area prone to earthquakes. An earthquake or other natural disaster affecting the normal operations of the Company or the ILECs with which the Company does business could seriously impair the Company's ability to provide service to customers. Interruptions in service, capacity limitations or security breaches could have a material adverse effect on customer acceptance and, therefore, on the Company's business. Certain aspects of the Company's network architecture involve new applications of equipment which may result in technical issues that may not be easily resolved. Although the Company generally seeks to limit its liability through its contracts with customers, there can be no assurance that the Company will not be held liable for damages resulting from service failures. Lapses in service or reliability also could lead to a loss of customers, which could have a material adverse effect on the Company's business, financial condition and results of operations. In addition, while the Company believes it has insurance comparable to that maintained by other companies in the industry, the Company's central office facility is not fully insured against, and the Anaheim fiber loop is not insured against, earthquake loss. CHANGES IN TECHNOLOGY, SERVICES AND INDUSTRY STANDARDS The telecommunications industry has been characterized by rapid technological advances, changes in end user requirements, frequent new service introductions, evolving industry standards and decreases in the cost of equipment and the pricing of services. The Company expects these changes to continue, and believes that its long-term success will increasingly depend on its ability to offer services that exploit advanced technologies and anticipate or adapt to evolving industry standards. There can be no assurance that the Company's services will not become economically or technically outmoded by technology or services now existing or developed and implemented in the future or that the Company will have sufficient resources to develop or acquire new technologies or to introduce new services capable of competing with future technologies or service offerings. The effect on the Company of technological changes cannot be predicted and could be material and adverse to the Company's business, financial condition and results of operations. SIGNIFICANT CAPITAL REQUIREMENTS The development of the Company's business and deployment of its services and systems will require significant additional capital to fund capital expenditures, working capital, debt service and operating losses. The Company's principal capital expenditure requirements involve the purchase, 28 installation and construction of network operations centers, other network infrastructure and CLE. The Company believes that the proceeds from the Debt Offering (as defined below) and the Additional Equity Investment (as defined below) will be sufficient to fund the Company's aggregate capital expenditures and working capital requirements, including operating losses, associated with its planned network roll-out throughout California. The Company expects that as it expands its networks beyond these areas, its capital requirements will require it to obtain additional financing, which may include commercial bank borrowings, vendor financing or the sale or issuance of equity and debt securities either through one or more offerings or to one or more strategic investors. There can be no assurance that the Company will be successful in raising additional capital in sufficient amounts to fund its strategic objectives, or that such funds, if available, will be available on terms that the Company will consider acceptable. Failure to raise sufficient funds may require the Company to modify, delay or abandon some of its planned future expansion or expenditures, which could have a material adverse effect on the Company's business, financial condition and results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." In addition, the Indenture imposes operating and financial restrictions on the Company and its subsidiaries. These restrictions affect, and in certain cases significantly limit or prohibit, among other things, the ability of the Company and its subsidiaries to incur additional indebtedness, pay dividends or make distributions in respect of the Company's or such subsidiaries' capital stock, make other restricted payments, enter into sale and leaseback transactions, create liens upon assets, enter into transactions with affiliates or related persons, sell assets, or consolidate, merge or sell all or substantially all of their assets. There can be no assurance that such covenants will not adversely affect the Company's ability to finance its future operations or capital needs or to engage in other business activities that may be in the Company's interest. DEPENDENCE ON KEY PERSONNEL The success of the Company depends, in large part, upon the continuing contributions of its key technical, marketing, sales and management personnel. The loss of the services of one or more key people could have a material adverse effect upon the business, financial condition and results of operations of the Company. The Company has employment agreements with a limited number of its officers or employees, and does not maintain any key man life insurance. The Company's future success also is dependent upon its continuing ability to attract and retain additional highly qualified personnel. The Company currently is seeking to hire a number of additional senior management personnel. Competition for such personnel is intense, and the Company's inability to attract and retain additional key employees could have a material adverse effect on the Company's business, financial condition and results of operations. There can be no assurance that the Company's existing personnel will continue to be employed by the Company or that the Company will be able to attract and retain qualified personnel in the future. GOVERNMENT REGULATION The Company is subject to regulation by the FCC and by state public service and public utility commissions as a provider of telecommunications services. Changes in existing policies or regulations in the state and localities served by the Company or by the FCC could materially and adversely affect the Company's business, financial condition and results of operations, particularly if those regulatory or policy changes make it more difficult to obtain unbundled network elements from ILECs or other telecommunications services at competitive prices or otherwise increase the cost and regulatory burdens of providing services. There can be no assurance that regulatory authorities in the areas served by the Company or the FCC will refrain from taking actions having an adverse effect on the business or financial condition or results of operations of the Company. The Telecommunications Act has significantly altered regulation of the telecommunications industry by preempting state and local laws to the extent that they 29 prevent competition and by imposing a variety of new duties on LECs and ILECs in order to promote competition in local exchange and access services. Although the Company believes that the Telecommunications Act and other trends in federal and state legislation and regulation that favor increased competition are to the Company's 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 have a material adverse effect on the Company's business, financial condition and results of operations or its ability to make principal and interest payments on its indebtedness. See "--Regulation." POTENTIAL LIABILITY FOR INFORMATION DISSEMINATED THROUGH NETWORK The law relating to the liability of on-line service providers, private network operators and ISPs for information carried on or disseminated through the facilities of their networks is currently unsettled. Several lawsuits seeking a judgment of such liability are pending. While such claims have not been asserted against the Company, there can be no assurance that such claims will not be asserted 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 the Company, ISPs or Web server hosts of potential liability for materials carried on or disseminated through their systems could require the Company to implement measures to reduce its exposure to such liability, which may require the expenditure of substantial resources or the discontinuation of certain product or service offerings. Further, the costs incurred in defending against any such claims and potential adverse outcomes of such claims could have a material adverse effect on the Company's financial condition and results of operations. The Company believes that it is currently unclear whether the Telecommunications Act prohibits or imposes liability for any services provided by the Company should the content of information transmitted be subject to the statute. CONTROL BY PRINCIPAL STOCKHOLDERS; POTENTIAL CONFLICTS OF INTEREST As of November 30, 1998, Spectra 1, LLC, a Colorado limited liability company controlled by Donald L. Sturm ("Spectra 1"), Colorado Spectra 2, LLC, a Colorado limited liability company controlled by Donald L. Sturm ("Spectra 2"), and Colorado Spectra 3, LLC, a Colorado limited liability company controlled by Donald L. Sturm ("Spectra 3," and together with Spectra 1 and Spectra 2, the "Sturm Entities") beneficially owned approximately 37.0% of the Company's outstanding common stock, including 49.3% of the Company's outstanding Series A Common Stock, which possesses super-voting rights. By virtue of the super-voting rights of the Series A Common Stock, the Sturm Entities control approximately 46.6% of the voting power of the Company's outstanding common stock. As of November 30, 1998, Enron beneficially owned approximately 31.7% of the Company's outstanding common stock, including 49.3% of the Company's Series A Common Stock. By virtue of the super-voting rights of the Series A Common Stock, Enron controls approximately 45.4% of the outstanding voting power of the Company's common stock. In addition, the Sturm Entities are entitled to appoint three directors and Enron is entitled to appoint two directors of the Company's seven-person Board of Directors pursuant to a Securityholders Agreement (the "Securityholders Agreement") among the Sturm Entities, Enron and the Company, and Donald L. Sturm is the Company's Chairman of the Board. As a result of their respective ownership interests and Board designees, the Sturm Entities and Enron control the Company. The Sturm Entities and Enron have the ability to control the election of at least a majority of the directors of the Company and any other major decisions involving the Company or its assets. The ownership and voting 30 interests possessed by the Sturm Entities and Enron make it impossible for a third party to acquire control of the Company without the consent of the Sturm Entities and Enron. In addition to their investments in the Company, the Sturm Entities and Enron have investments, and may in the future make investments, in other telecommunications companies and ventures, including competitors of the Company. As a result, conflicts may arise in the negotiation and enforcement of arrangements entered into by the Company and entities in which the Sturm Entities or Enron have an interest. In addition, the Company, the Sturm Entities and Enron have agreed that the Sturm Entities and Enron are under no obligation to bring to the Company any investment or business opportunities of which they become aware, even if such opportunities are within the scope and objectives of the Company. See "Certain Relationships and Related Transactions." YEAR 2000 ISSUES The Company is continuing to determine whether its systems and its vendors' systems will require updating to continue to function properly beyond 1999. As the Company adds new features to its network it will continue to evaluate the functionality of such features beyond 1999. The Company believes that its Year 2000 problems will be less significant than competing telecommunications providers with a longer history. In other words, the Company's limited history of operations means that some of its systems are already Year 2000 compliant and are not subject to remediation. Notwithstanding this fact, the Company has made Year 2000 compliance a priority and has established a Year 2000 Project Team and a Year 2000 Executive Committee to assess and evaluate its potential Year 2000 problems. In January 1999 additional dedicated full time resources will be procured and assigned to the Year 2000 compliance project in order to complete the evaluation process and accelerate the Company's remediation efforts. Even though the Company has not yet instituted a comprehensive testing and implementation program, management believes that such a program will be implemented prior to the end of March 1999 and completed by the end of June 1999. The Company believes that its Year 2000 program will cost less than an aggregate of $1,000,000 (inclusive of internal labor, external consulting and software and hardware related costs) and will be completed in a timely manner. However, the Company's Year 2000 readiness program is an ongoing process and the estimate of costs and completion dates described above are subject to change. Although the Company does not expect to incur significant expenditures to upgrade its network to address Year 2000 problems, there can be no assurance that the Company will be able to identify all Year 2000 problems in its systems in advance of their occurrence or that the Company will be able to successfully remedy any problems. In addition, to the extent that the Company's suppliers, including the ILECs, IXCs and other service providers and carriers over whose networks the Company provides certain of its services, or customers fail to address Year 2000 issues in a timely and effective manner, the Company's ability to provide uninterrupted, reliable service to customers serviced through such networks may be adversely affected. Moreover, the profitability and stability of the Company's customers may be adversely affected by Year 2000 problems not related to their relationships with the Company. The expenses associated with the Company's efforts to remedy any Year 2000 problems, the expenses or liabilities to which the Company may become subject as a result of such problems or the impact of Year 2000 problems on the ability of existing or future customers to do business with the Company could have a material adverse effect on the Company's business, prospects, operating results and financial condition. RISKS REGARDING FORWARD LOOKING STATEMENTS The statements contained herein that are not historical facts are forward-looking statements, which can be identified by the use of forward-looking terminology such as "believes," "expects," "may," "will," "should" or "anticipates" or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy that involve risks and uncertainties. The Company wishes to caution the reader that these forward-looking statements, such as those relating to the Company's plans to build networks in new areas, its anticipation of revenues from designated markets and statements regarding the development of the Company's business, the markets for the Company's services and products, the Company's anticipated capital expenditures, regulatory reform and other statements contained herein regarding matters that are not historical facts, are only predictions. No assurance can be given that the expected future results will be achieved; actual events or results may differ materially as a result of risks facing the Company or other external events or due to decisions made by the Company in the future. The risks facing the Company include, but are not limited to, those relating to the Company's ability to successfully market its services to current and new customers, access markets, install cable and facilities, including switching electronics, and obtain rights-of-way, building access rights and any required governmental authorizations and permits, all in a timely manner, at reasonable costs and on satisfactory terms and conditions, as well as regulatory, 31 legislative and judicial developments that could cause actual results to differ materially from the future results indicated, expressed or implied, in such forward-looking statements. ITEM 2. PROPERTIES The Company's headquarters are located in a suburb of Denver, Colorado and consist of approximately 7,100 square feet under a lease that expires on November 30, 1999. The Company has an option to renew the lease for an additional one year term and a right of first refusal with respect to two suites located in the same building which would give the Company access to an additional 28,575 square feet. In addition, the Company maintains administrative and sales offices consisting of approximately 35,000 square feet in San Diego, California, which the Company occupies under a lease that expires on August 31, 2002. The Company has a central office switch in Anaheim, California that occupies approximately 8,900 square feet of space under a lease expiring on October 31, 2001. In addition, pursuant to its agreement with the lessor of the Anaheim central office, the Company has a right of first refusal to purchase the central office during the term of the lease and any extensions thereof. The Company also leases offices and space in a number of other locations for sales offices and network equipment installations. ITEM 3. LEGAL PROCEEDINGS On October 16, 1998, FirstWorld filed a declaratory relief action in San Diego Superior Court, asking the Court to find that FirstWorld is not obligated to offer stock to Dina Partners L.P. ("Dina") with respect to the December 1997 equity investment by Enron and Spectra 3. Dina had previously indicated in conversations with FirstWorld officers and counsel and in writing that it believed FirstWorld had breached that certain Amended and Restated Investor Rights Agreement to which FirstWorld and Dina were parties by refusing to allow Dina to purchase additional stock in FirstWorld. On December 3, 1998, in answer to FirstWorld's complaint, Dina filed a general denial with the court. Although the ultimate resolution of this dispute is subject to the uncertainties inherent in litigation, the Company does not believe that the resolution of the declaratory relief action will have a material adverse effect on the Company's results of operations, liquidity or financial position. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On September 28, 1998, the Company obtained the written consent of a majority of its stockholders to the terms of the Employment Agreement between the Company and Mr. Ohringer, by which Mr. Ohringer joined the Company as its new Chief Executive Officer and President. See "Directors and Executive Officers of the Registrant--Retention of New Chief Executive Officer and President." 32 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Not Applicable. ITEM 6. SELECTED FINANCIAL DATA The following selected consolidated financial data has been derived from the Company's audited financial statements. Consolidated balance sheets at September 30, 1998 and 1997 and the related consolidated statements of operations and of cash flows for the three years in the period ended September 30, 1998 and notes thereto appear elsewhere herein. The data should be read in conjunction with the annual financial statements, related notes and other financial information appearing elsewhere herein.
YEAR ENDED SEPTEMBER 30, ----------------------------------------------- 1994 1995 1996 1997 1998 ----- ----- ------- -------- -------- (DOLLARS IN THOUSANDS) STATEMENT OF OPERATIONS DATA: Service revenue $ 85 $ 57 $ 279 $ 75 $ 1,078 Other revenue - 40 75 96 12 Costs and expenses: Network development and operations - 188 1,708 3,170 6,501 Selling, general and administrative 429 740 2,409 4,725 10,641 Depreciation and amortization 21 39 75 501 2,424 ----- ----- ------- -------- -------- Loss from operations (365) (870) (3,838) (8,225) (18,476) Other income (expense): Interest expense (53) (38) (27) (1,372) (16,898) Interest income - - 9 149 6,749 ----- ----- ------- -------- -------- Loss before extraordinary item (418) (908) (3,856) (9,448) (28,625) Extraordinary item-extinguishment of debt - - - (105) (4,731) ----- ----- ------- -------- -------- Net loss $(418) $(908) $(3,856) $ (9,553) $(33,356) ----- ----- ------- -------- -------- ----- ----- ------- -------- -------- OTHER DATA: EBITDA(1) $(344) $(831) $(3,763) $ (7,829) $(20,783) Net cash used in operating activities 416 781 2,168 7,446 10,133 Net cash used in investing activities 18 45 923 12,647 191,659 Net cash provided by financing activities 425 827 3,156 20,557 273,295 Capital expenditures 6 25 908 12,637 26,068 Deficiency of earnings to cover fixed charges(2) 418 908 3,856 9,500 29,075 SEPTEMBER 30, 1997 SEPTEMBER 30, 1998 ------------------ ------------------ (DOLLARS IN THOUSANDS) BALANCE SHEET DATA: Cash and cash equivalents $ 536 $ 72,039 Working capital (deficit) (3,319) 232,565 Total assets 25,321 294,105 Long-term debt 18,964 255,840 Total stockholders' equity 2,265 29,373
- ------------------ (1) EBITDA represents earnings before interest, income taxes, depreciation and amortization. EBITDA is not a measurement of financial performance under generally accepted accounting principles, is not intended to represent cash flow from operations, and should not be considered as an alternative to net loss as an indicator of the Company's operating performance or to cash flows as a measure of liquidity. The Company believes that EBITDA is widely used by analysts, investors and other interested parties in the telecommunications industry. The Company's computation of EBITDA may not be comparable to similarly titled measures for other companies. (2) For purposes of calculating the ratio of earnings to fixed charges, earnings is defined as net loss plus fixed charges (other than capitalized interest). Fixed charges consist of interest and amortization of debt discount and debt issuance costs, whether expensed or capitalized, and that portion of rental expense deemed to represent interest (estimated to be one-third of such expense). For the periods presented, earnings were insufficient to cover fixed charges by the amounts disclosed. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with "Selected Financial Data" and the Consolidated Financial Statements of the Company, including the notes related thereto, and other financial data appearing elsewhere in this Form 10-K. Certain statements set forth below constitute "forward-looking statements." Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Given these uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed under the captions "Business" and "Business--Risk Factors." OVERVIEW The Company is a facilities-based ICP. The key to the Company's business plan is a data-centric focus, with service offerings strategically bundled to address the increasingly complex data and voice communications needs of small and medium businesses. The Company uses a combination of both owned and managed facilities, with a digital network and related provisioning, billing and customer care applications. With targeted marketing and a consultative sales approach, the Company provides its customers with advanced, integrated data and voice communications solutions. Services offered include data connectivity, high speed Internet access, LAN/WAN connectivity, web hosting, e-commerce and system integration services, as well as switch-based local and long distance telephone services. The Company is implementing advanced digital networks and related support systems that combine advanced hardware and software from leading vendors with its own proprietary systems. With a combination of both owned and managed network facilities, the Company provides its customers with an integrated approach to enhanced data and voice network services. The Company has designed its core processes to streamline provisioning, billing, network management and customer service, and has incorporated operational support systems that implement such processes into its network offerings. Among other things, these systems provide single-point-of-contact customer service and facilitate electronic exchanges of information with other network providers where possible. The Company is designing its systems to be compatible with voice over packet technologies such as voice over IP as such technologies are refined in the industry. To date, the Company has experienced significant operating and net losses and negative cash flow from operations and expects that operating and net losses and negative operating cash flow will continue for at least the next several years and will increase significantly as the Company implements its growth strategy of expanding into other cities. See "Risk Factors-- 33 Limited History of Operations; Negative Cash Flow and Operating Losses," "--Substantial Leverage; Ability to Service Indebtedness" and "--Significant Capital Requirements." The Company expects to achieve positive operating margins over time by increasing the number of customers and increasing the products and services it can provide its customers. The Company expects that operating and net losses and negative operating cash flow will increase significantly as the Company implements its growth strategy of expanding its operations. See "--Liquidity and Capital Resources." REVENUE The Company currently offers a broad array of telecommunications services, including data connectivity, high speed Internet access, LAN/WAN connectivity, web hosting, e-commerce and system integration services, as well as switch-based local and long distance telephone services. The Company intends to generate near-term revenue by replacing basic services currently provided by ILECs, IXCs and CLECs, including local, long distance and other voice services, dedicated access lines and commercial Internet access, as well as from advanced network services provided to select customers. The Company believes that it is positioned to generate additional revenue by providing advanced network services to a broader market as the demand for such services grows. The Company currently prices services, such as local and long distance services, which are directly comparable to its competitors' offerings, below prevailing market rates to build market share. The Company believes that its initial networks in Orange County and Los Angeles County will allow it to provide services to a market that includes approximately one million commercial access lines. The Company employs a market segmentation strategy, which involves tailoring service offerings, sales and marketing techniques and network deployment to meet the different needs of prime commercial, basic commercial and wholesale customers. For prime commercial customers (businesses with sophisticated communications needs), the Company utilizes a consultative selling approach that involves a systematic assessment of each customer's telephony, Internet, data communications and video applications needs. For basic commercial customers (businesses with primarily voice and Internet needs), the Company uses direct mail, telemarketing and advertising and offers standardized product bundles consisting of local and long distance telephony and high speed Internet access. The Company also offers use of its network elements and central office functionality on a wholesale basis to other LECs, including CLECs, IXCs, ISPs and other communications providers. COSTS AND EXPENSES NETWORK DEVELOPMENT AND OPERATIONS. As the Company continues to operate and maintain its existing network and deploy additional networks, it will incur network development and operations expenses related to network central office operations and customer service, including salaries of the employees, real estate leases for central offices, access offices, co-location and other sites, costs to interconnect and terminate traffic with other network providers and network design, planning and internal project management costs. The Company has leveraged its substantial internal expertise with respect to engineering, network creation and business processes to design and construct a network architecture that it believes will result in enhanced product offerings and enable the Company to improve scalability, reduce operating costs and improve network profitability. SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative expenses are expected to consist primarily of product marketing, sales staff and sales support expenses, 34 general management and administrative overhead expenses and office leases. Management has developed the Company's business processes with respect to customer service, billing, provisioning and network management systems based on extensive industry and engineering expertise within the Company. The Company has developed operational support systems, incorporated systems from existing external sources and retained third parties to produce systems meeting the Company's specifications to create systems that implement the Company's business processes. As with its network architecture described above, the Company believes that its systems exhibit a high degree of scalability to support network growth, flexibility to support product or technical innovation, increased reliability and reduced operational cost. The Company uses different sales channels to target customers within the three market segments identified by the Company. The Company uses direct sales efforts in a consultative selling approach with prime commercial customers, direct sales efforts for wholesale customers and more economical methods such as direct mail and telemarketing to target basic commercial customers. The Company is in the process of significantly expanding its sales and marketing staff. CAPITAL EXPENDITURES. The Company employs a demand-driven approach to network deployment. This approach is intended to minimize capital expenditure and maximize flexibility to serve the higher margin data market as demand for high speed data communication services grows. The Company connects customers to its networks through direct fiber connections, DSL or unbundled network elements licensed from the ILEC, depending on the most cost-effective connection that will support the bundle of services provided to the customer. Results of Operations YEAR ENDED SEPTEMBER 30, 1998 COMPARED WITH THE YEAR ENDED SEPTEMBER 30, 1997 Service revenue increased from $75,000 for the fiscal year ended September 30, 1997 to $1,078,000 for the fiscal year ended September 30, 1998, an increase of $1,003,000 or 1,337%. The increase reflects the Company's first full year of network operations. Prior to the commencement of operations of the Company's Orange County network, the Company's service revenue consisted principally of reimbursable engineering, design and construction costs associated with the design of fiber optic communications networks on a contract basis for the cities of Lakeland, Florida and Santa Clara, California. Other revenue represents royalties from the license of the Company's patent for fiber optic connectors. Royalty revenue decreased from $96,000 for the fiscal year ended September 30, 1997 to $12,000 for the fiscal year ended September 30, 1998, a decrease of $84,000 or approximately 88%. Going forward, the Company expects that revenue from sales of telephony and data products and services in Orange County and in other areas targeted for network deployment will account for substantially all of the Company's total revenue. The Company does not expect that royalty revenue from the patent license will constitute a significant portion of total revenue in the future as the Company expands its initial network rollout. Network development and operations expenses increased from $3,170,000 for the fiscal year ended September 30, 1997 to $6,501,000 for the fiscal year ended September 30, 1998, an increase of 35 $3,331,000 or approximately 105%. This increase is principally comprised of an increase of $1,740,000 in personnel costs associated with the operations and network deployment groups and increased operating costs relating to the Company's Orange County operations, $932,000 of which relates to an increase in insurance, supplies, license agreements and executory costs associated with the Anaheim agreements. Selling, general and administrative expenses increased from $4,725,000 for the fiscal year ended September 30, 1997 to $10,641,000 for the fiscal year ended September 30, 1998, an increase of $5,916,000 or approximately 125%. During fiscal 1998, the Company entered into separate management consulting agreements with each of Corporate Managers, LLC, an affiliate of Spectra 3, and Enron, pursuant to which the Company incurred and paid consulting fees totaling $840,000 during fiscal 1998. See "Certain Relationships and Related Transactions--Equity Investment--Management Services Agreements." Other significant factors contributing to the overall increase in selling, general and administrative expenses included an increase of approximately $1,683,000 in personnel costs associated with marketing, sales and administrative functions, an increase of approximately $1,044,000 relating to liability insurance, consulting, legal, acccounting and travel expenditures, an increase of approximately $925,000 relating to marketing and public relations expenditures and an increase of approximately $600,000 in employee recruitment and relocation costs. Depreciation and amortization expenses increased from $501,000 for the fiscal year ended September 30, 1997 to $2,424,000 for the fiscal year ended September 30, 1998, an increase of $1,923,000 or approximately 384%. This increase primarily relates to depreciation expense associated with equipment purchased for the Anaheim central office as well as the built and leased elements of the Company's fiber optic network and office and other equipment associated with the Company's general operations. Interest expense increased from $1,372,000 for the fiscal year ended September 30, 1997 to $16,898,000 for the fiscal year ended September 30, 1998, an increase of $15,526,000 or approximately 1,131%. $14,758,000 of the increase relates to interest expense associated with the Senior Notes (as defined below), inclusive of the amortization of related debt discount and deferred financing costs. The remainder of the increase relates to interest expense associated with a revolving credit facility which was terminated in April 1998 (the "Credit Facility"), inclusive of the amortization of related debt discount and deferred financing costs, and to interest expense associated with other short-term borrowings and capital leases. Interest expense incurred during fiscal 1998 and fiscal 1997 was offset by approximately $450,000 and $52,000, respectively, of capitalized interest. Interest income increased from $149,000 for the fiscal year ended September 30, 1997 to $6,749,000 for the fiscal year ended September 30, 1998, an increase of $6,600,000 or approximately 4,430%. The increase is attributable to the availability of additional funds from the sale of the Senior Notes, which funds have been invested in marketable securities and cash equivalents. Marketable securities consist of commercial paper with original maturities of beyond three months but less than six months. The Company has classified its marketable securities as "held to maturity," as management has the intent and ability to hold these securities to maturity. 36 YEAR ENDED SEPTEMBER 30, 1997 COMPARED WITH YEAR ENDED SEPTEMBER 30, 1996 Service revenue decreased from $279,000 in the fiscal year ended September 30, 1996 to $75,000 in the fiscal year ended September 30, 1997, a decrease of $204,000. This decrease reflects the Company's transition from performing engineering and consulting contracts to developing its own telecommunications network. Prior to the commencement of operations of the Company's Orange County network, the Company's service revenue consisted principally of reimbursable engineering, design and construction costs associated with the design of fiber optic communications networks on a contract basis for the cities of Lakeland, Florida and Santa Clara, California. These engineering contracts were substantially complete in 1996, with only $55,000 of engineering and consulting revenue recognized in 1997, and the Company stopped bidding on new engineering contracts in order to focus on design and construction of its Orange County network. The Company's first customer for its Orange County network was brought on line in August 1997, and the Company recognized service revenue from its network operations of $20,000 in the fiscal year ended September 30, 1997. Other revenue represents royalties from the license of the Company's patent for fiber optic connectors. Royalty revenue increased from $75,000 in the fiscal year ended September 30, 1996 to $96,000 in the fiscal year ended September 30, 1997. Going forward, the Company expects that revenue from sales of telephony and data products and services in Orange County and in other areas targeted for network construction will account for substantially all of the Company's total revenue. The Company does not expect that royalty revenue from the patent license will constitute a significant portion of total revenue in the future as the Company expands its Orange County network. Network development and operations expenses increased from $1,708,000 in the fiscal year ended September 30, 1996 to $3,170,000 in the fiscal year ended September 30, 1997, an increase of $1,462,000 or 86%. This increase was principally comprised of increased personnel costs in the operations and engineering groups, increased operating costs for the Company's Anaheim central office and costs for equipment needed to finish a 1996 engineering project. Selling, general and administrative expenses increased from $2,409,000 in the fiscal year ended September 30, 1996 to $4,725,000 in the fiscal year ended September 30, 1997, an increase of $2,316,000 or 96%. This increase was principally due to increased personnel costs of sales and marketing and administrative personnel and an increase in administration expense related to rent, insurance and telephone. Depreciation and amortization expenses increased from $75,000 in the fiscal year ended September 30, 1996 to $501,000 in the fiscal year ended September 30, 1997, an increase of $426,000. This increase consists principally of depreciation related to the Anaheim central office and built and leased elements of the fiber optic network in Anaheim and depreciation related to office and other equipment associated with the Company's general operations. Interest expense increased from $27,000 in the fiscal year ended September 30, 1996 to $1,372,000 in the fiscal year ended September 30, 1997. $997,000 of the increase relates to interest expense associated with the Company's arrangements with the City of Anaheim. See "Business--Agreements with the City of Anaheim and The Irvine Company." The other principal reasons for the increase are interest expense under the Credit Facility and other short-term loans and interest expense associated with the Company's capitalized leases. 37 Interest income increased from $9,000 in the fiscal year ended September 30, to $149,000 in the fiscal year ended September 30, 1997. The increase of $140,000 is a result of an increase in funds available for short-term investment as a result of funds raised from sales of preferred stock in January 1997. LIQUIDITY AND CAPITAL RESOURCES The telecommunications service business is a capital intensive business. The Company's existing operations have required and will continue to require substantial capital investment for the installation of fiber, electronics and related equipment in order to provide switched services in the Company's networks and the funding of operating losses during the start-up phase of each market. In addition, the Company's strategic plan calls for expansion into additional market areas. Such expansion will require significant additional capital for the design, development and construction of new networks and the funding of operating losses during the start-up phase of each market. The Company used $10,133,000 in cash for operating activities for the fiscal year ended September 30, 1998, compared to $7,446,000 for the fiscal year ended September 30, 1997. The increase was primarily due to an increase in the Company's activities 38 associated with the development and initiation of switched local services in the City of Anaheim. The Company invested an additional $26,068,000 of cash in property and equipment for the fiscal year ended September 30, 1998, compared to $12,637,000 for the fiscal year ended September 30, 1997. The Company has funded substantially all of these expenditures through the private sale of equity securities, capital leases, and short and long-term debt financing. From its inception through September 30, 1998, the Company raised approximately $67 million from the private sale of stock. On December 30, 1997, the Company consummated a private placement of equity securities to Spectra 3 and Enron. Aggregate proceeds from this offering, exclusive of the conversion of the bridge notes, totaled approximately $26,136,000, net of offering commissions and certain other advisory fees, and were received on January 6, 1998. See "Certain Relationships and Related Transactions." The Company used $16.9 million of the net proceeds to repay amounts outstanding under the Credit Facility and other short-term debt. On April 13, 1998, the Company completed an offering of debt securities (the "Debt Offering") pursuant to Rule 144A under the Securities Act of 1933, as amended (the "Securities Act"). In the Debt Offering, the Company sold 470,000 units consisting of 13% Senior Discount Notes due 2008 (the "Senior Notes") and warrants to purchase an aggregate of 3,713,094 shares of the Company's Series B Common Stock. On April 13, 1998, the Company also completed a $20 million private placement to Spectra 3 and Enron (the "Additional Equity Investment"), pursuant to the exercise of an existing option held by Spectra 3 and Enron. The aggregate net proceeds of the Debt Offering and the Additional Equity Investment were $260.7 million. The Company terminated the Credit Facility concurrently with the closing of the Debt Offering and paid the $1,000,000 termination fee pursuant to the terms thereof. On October 8, 1998, the Company commenced an offer to exchange (the "Exchange Offer") the Senior Notes for a new issue of 13% Senior Discount Notes due 2008, which were registered with the Securities and Exchange Commission pursuant to a Registration Statement on Form S-4 (the "Exchange Notes"). The Exchange Offer expired on November 9, 1998. Under the terms of the Exchange Offer, the Company accepted for exchange all $470,000,000 in aggregate principal amount at maturity of Senior Notes and caused the cancellation of the Senior Notes and the issuance of the Exchange Notes. On November 24, 1998, FirstWorld purchased all of the outstanding capital stock of Optec from ECI. Optec is a systems integrator with operations in Oregon and Washington and has approximately 90 employees in engineering, sales and operations. The Company also purchased from ECI an indefeasible right of use to fiber optic cable in a MAN serving Portland with routes connecting Beaverton and Hillsboro, Oregon. In addition, the Company obtained rights to OC-3 level capacity on a WAN being developed by ECI that will connect up to 15 cities nationwide. The Company paid an aggregate of $18,000,000 in cash for the Optec capital stock, the indefeasible rights of use and the WAN rights. The Company also repaid at closing approximately $4,000,000 of Optec's indebtedness to ECI. FirstWorld used available cash to fund the acquisition. The substantial capital investment required to initiate the Company's services and the funding of the Company's initial operations has resulted in negative cash flow since the Company's inception. This negative cash flow is the result of the requirement to construct the Company's central office in Anaheim and the construction of fiber-to-the-curb clusters in anticipation of connecting revenue generating customers. The Company expects to continue to experience negative cash flow for the foreseeable future due to expansion activities associated with the development of the Company's markets. There can be no assurance that the Company will attain break-even cash flow in subsequent periods. Until sufficient cash 39 flow is generated, the Company will be required to utilize its current and future capital resources to meet its cash flow requirements and may be required to issue additional debt and/or equity securities. The Company expects that its available cash will be sufficient to fund its capital plan and operations through the expansion of its planned networks throughout California, which are expected to be substantially complete by the end of 1999. As the Company pursues 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 determine 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 a bank credit facility. IMPACT OF THE YEAR 2000 The Company is continuing to determine whether its systems and its vendors' systems will require updating to continue to function properly beyond 1999. As the Company adds new features to its network it will continue to evaluate the functionality of such features beyond 1999. The Company believes that its Year 2000 problems will be less significant than competing telecommunications providers with a longer history. In other words, the Company's limited history of operations means that some of its systems are already Year 2000 compliant and are not subject to remediation. Notwithstanding this fact, the Company has made Year 2000 compliance a priority and has established a Year 2000 Project Team and a Year 2000 Executive Committee to assess and evaluate its potential Year 2000 problems. In January 1999 additional dedicated full time resources will be procured and assigned to the Year 2000 compliance project in order to complete the evaluation process and accelerate the Company's remediation efforts. Even though the Company has not yet instituted a comprehensive testing and implementation program, management believes that such a program will be implemented prior to the end of March 1999 and completed by the end of June 1999. The Company believes that its Year 2000 program will cost less than an aggregate of $1,000,000 (inclusive of internal labor, external consulting and software and hardware related costs) and will be completed in a timely manner. However, the Company's Year 2000 readiness program is an ongoing process and the estimate of costs and completion dates described above are subject to change. Although the Company does not expect to incur significant expenditures to upgrade its network to address Year 2000 problems, there can be no assurance that the Company will be able to identify all Year 2000 problems in its systems in advance of their occurrence or that the Company will be able to successfully remedy any problems. In addition, to the extent that the Company's suppliers, including the ILECs, IXCs and other service providers and carriers over whose networks the Company provides certain of its services, or customers fail to address Year 2000 issues in a timely and effective manner, the Company's ability to provide uninterrupted, reliable service to customers serviced through such networks may be adversely affected. Moreover, the profitability and stability of the Company's customers may be adversely affected by Year 2000 problems not related to their relationships with the Company. The expenses associated with the Company's efforts to remedy any Year 2000 problems, the expenses or liabilities to which the Company may become subject as a result of such problems or the impact of Year 2000 problems on the ability of existing or future customers to do business with the Company could have a material adverse effect on the Company's business, prospects, operating results and financial condition. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Company's audited consolidated financial statements at September 30, 1998 and 1997, and for each of the three years in the period ended September 30, 1998, are included in this report on Form 10-K as set forth on page F-1. 40 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Effective November 1996, the Company engaged Price Waterhouse LLP as the Company's independent accountants and dismissed Coopers & Lybrand L.L.P. as its independent accountants. The decision to change independent accountants was approved by the Company's Board of Directors. The reports of Coopers & Lybrand L.L.P. on the Company's financial statements for the two years ended September 30, 1995, and for the period from September 1, 1993 (inception) through September 30, 1995, did not contain an adverse opinion or disclaimer of opinion and were not qualified or modified as to audit scope or accounting principles. There were no disagreements with Coopers & Lybrand L.L.P. on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedures during the two years ended September 30, 1995, and for the period from September 1, 1993 (inception) through September 30, 1995, and through the date of their dismissal. Coopers & Lybrand L.L.P. has not audited or reported on any financial statements subsequent to September 30, 1995. Prior to November 1996, the Company had not consulted with Price Waterhouse LLP on items which involved the Company's accounting principles or the form of audit opinion to be issued on the Company's financial statements. 41 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The directors and executive officers of the Company and their ages as of December 15, 1998 are as follows: NAME AGE POSITION Donald L. Sturm. . . . . . . 66 Chairman of the Board(1)(3) Sheldon S. Ohringer. . . . . 41 President, Chief Executive Officer and Director(2)(3) David Gandini. . . . . . . . 40 Executive Vice President Marion K. Jenkins. . . . . . 45 Senior Vice President, Information Technology and Chief Information Officer Douglas L. Kramer. . . . . . 44 Senior Vice President and Chief Technical Officer John Lewis . . . . . . . . . 60 Senior Vice President, Network and Operations Eric Hyde. . . . . . . . . . 41 Senior Vice President, Sales and Product Marketing Scott M. Chase . . . . . . . 30 Senior Vice President, Corporate and Government Affairs Dennis Mulroy. . . . . . . . 43 Vice President, Finance and Administration and Secretary C. Kevin Garland . . . . . . 30 Director(3)(4) Rodney Malcolm . . . . . . . 34 Director James O. Spitzenberger . . . 54 Director(5) John C. Stiska . . . . . . . 56 Director Melanie Sturm. . . . . . . . 37 Director(4) - --------------- (1) Mr. Sturm resigned as President and Chief Executive Officer of the Company at the close of business on September 30, 1998 in order to allow Mr. Ohringer to assume such positions. (2) Effective October 1, 1998, Mr. Ohringer became the Company's President and Chief Executive Officer and also became a Director of the Company. See "--Retention of New Chief Executive Officer and President." (3) Member of Chairman's Committee (4) Member of Compensation Committee (5) Member of Audit Committee DONALD L. STURM joined the Company as Chairman of the Board and President of the Company in January 1998 and served as Chief Executive Officer of FirstWorld from March 1998 through September 1998. Since December 1991, Mr. Sturm has been a private equity investor, with interests in the telecommunications, banking and healthcare industries, among others. Mr. Sturm currently serves as chairman of the board of nine banks that he owns in the Rocky Mountain area and the midwest. Mr. Sturm was a member of the group that bought Continental Airlines ("Continental") 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. ("PKS"), a construction, coal mining and telecommunications company that has made significant investments in other industries. In 1984, Mr. Sturm led PKS's $3.5 billion acquisition of The Continental Group Inc. (the "Group") and became the Group's chairman and chief executive officer, positions he held until PKS sold the Group in 1991. 42 While Vice Chairman of PKS, Mr. Sturm participated in decisions to invest in MFS Communications which was taken public in 1993 and sold to WorldCom in 1996 for approximately $14.4 billion. Mr. Sturm owns significant ownership interests in WorldCom and Level 3 Communications, Inc. SHELDON S. OHRINGER joined FirstWorld as its Chief Executive Officer and President on October 1, 1998. Prior to this time, Mr. Ohringer served in various capacities for ICG from November 1994 to September 1998, most recently as Executive Vice President-Telecom of ICG and President of ICG Telecom Group, Inc. Before working for ICG, Mr. Ohringer was Senior Vice President of Sales and Business Development for US Long Distance from May 1991 until October 1994. From May 1984 until August 1990, Mr. Ohringer held key management and executive positions with Telecom* USA, a major long distance carrier which was acquired by MCI in 1990. DAVID GANDINI joined FirstWorld in November 1998 as an Executive Vice President. Mr. Gandini is a 16-year telecommunications industry veteran with extensive experience building and growing young companies. Prior to joining the Company, Mr. Gandini served in various capacities at ICG Communications from February 1997 to November 1998, most recently as Senior Vice President of Wholesale Services, ICG Telecom, Inc. Mr. Gandini also served as President of ICG's long distance and IP telephony. While at ICG, he directed the build of a 166-node network, representing the largest voice/data/Internet Protocol (IP) domestic network. Prior to joining ICG, Mr. Gandini was President of Pace Net Services from December 1995 to February 1997. Mr. Gandini was recently ranked among the top 50 most influential people in competitive long distance by Phone+, an industry trade publication. MARION K. JENKINS, Ph.D., joined the Company in November of 1998 as Senior Vice President of Information Technology and Chief Information Officer. Dr. Jenkins has over a decade of executive management experience in competitive telecommunications, overseeing broad operations in information systems, strategic planning, integration, sales and marketing and customer operations. His background includes positions as Vice President of Strategic Client Applications at Qwest Communications from June 1998 to November 1998, Vice President of Sales Operations at LCI International from March 1998 to June 1998, Chief Information Officer at USLD Communications from November 1996 to February 1998 and Vice President of Sales for American Telco Incorporated from January 1986 to July 1996. Prior to that Dr. Jenkins was a Senior Research Engineer at Exxon Production Research Company. DOUGLAS L. KRAMER joined FirstWorld in December 1998 as a Senior Vice President and Chief Technical Officer after serving in various capacities for ICG Communications' Telecom Group for the previous six years, most recently as Vice President of Network Planning. While at ICG, Mr. Kramer directed integrated planning; network, switch, Signaling System 7 ("SS7") and data planning and engineering; switch provisioning; and industry code compliance. In addition, he was responsible for developing and deploying ICG's 3,000 mile fiber based network throughout nine states and was credited with deploying the nation's largest IP network. Prior to working at ICG, Mr. Kramer directed network services for MidAmerican Communications, acquired by WorldCom in 1991. Mr. Kramer also served as a consultant for WilTel, in connection with the design and negotiation of initial SS7 network deployment with the RBOCs. JOHN LEWIS joined the Company in June of 1996 and has served as Senior Vice President, Network and Operations of the Company since April 1997. Prior to joining the Company, Mr. Lewis amassed significant experience in the telecommunications industry, primarily in the areas of network design, maintenance and administration. From July 1991 to September 1995, Mr. Lewis served as Executive Director of the INFOTEL project at Pacific Bell, which focused on designing Pacific Bell's future telephone operations model. Prior to joining Pacific Bell, Mr. Lewis served as General Manager of Technical Operations & Maintenance Support at AT&T Network Systems from 1984 to 1988, as General 43 Manager of Switching at Pacific Telephone from 1981 to 1983 and as Division Manager of Performance at New York Telephone from 1975 to 1980. ERIC HYDE joined the Company as Senior Vice President, Sales & Product Marketing in June 1998. Mr. Hyde has 15 years experience in product marketing, strategic planning and sales. From March 1997 to June 1998, Mr. Hyde served as Director of Customer Marketing in the Business Communications Systems Division at Lucent Technologies where he was responsible for the implementation of marketing programs for call center, telephony, video and messaging applications. From January 1994 to March 1997, Mr. Hyde served in various capacities at Ameritech, including Senior Director of Product Marketing and Integrated Solutions where he was responsible for launching wireless transport, data and voice CPE products to key accounts. From January 1983 to December 1993, Mr. Hyde held various positions with General Motors Corporation, including Director of Strategic Marketing of the North American Export Sales Division. SCOTT M. CHASE joined the Company in October 1998 as Senior Vice President, Corporate and Government Affairs. Prior to joining the Company, Mr. Chase worked in various capacities for ICG from March 1997 to September 1998, most recently as Vice President, Corporate Communications and Government Affairs. After graduating from the University of Colorado in 1990 and until he joined ICG in March 1997, Mr. Chase 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. In addition 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 Roy Romer, Governor of Colorado. DENNIS MULROY joined the Company as Vice President, Finance and Administration in January 1997 and has served as Secretary since January 1998. From November 1993 to December 1996, Mr. Mulroy held the position of Chief Financial Officer and Vice President of Administration for River Medical Inc., a medical device company. From April 1983 to October 1993, Mr. Mulroy served as Vice President of Finance and Administration for Spectragraphics Corporation, an international computer technology company. Mr. Mulroy is a Certified Public Accountant and previously worked in that capacity for Ernst & Young. C. KEVIN GARLAND joined the Company as a director in January 1998. Mr. Garland has worked for Enron since January 1995. He currently serves as Vice President of Equity Investments for Enron and is responsible for overseeing minority and control investments. 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. From 1992 to April 1993, Mr. Garland worked as an analyst with Stephens Inc., an investment banking firm in Little Rock, Arkansas. RODNEY MALCOLM joined the Company as a director in January 1998. Mr. Malcolm has worked for Enron in Houston, Texas since September 1994 and currently serves as a Vice President with responsibilities for public power and finance. Prior to joining Enron, Mr. Malcom was a project finance banking officer at the Bank of Tokyo. JAMES O. SPITZENBERGER joined the Company as a director in January 1998. Since July 1996, Mr. Spitzenberger has been a private equity investor. Prior to July 1996, Mr. Spitzenberger was a Vice President of PKS, which he joined in February 1981. While at PKS, Mr. Spitzenberger served as Director of Taxation. Prior to joining PKS, Mr. Spitzenberger was a tax manager with Arthur Andersen & Co. JOHN C. STISKA joined the Company as a director in September 1997. Mr. Stiska currently is Chairman of Commercial Bridge Capital, LLC, a newly formed company which will provide "bridge" 44 financing to businesses requiring funds on a short-term basis. Mr. Stiska serves on the board of directors of several companies, including Laser Power Corporation, a publicly traded company. 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 joining QUALCOMM, he was President and then Chairman and Chief Executive Officer of Triton Group Ltd. from 1990 to 1996. Previously, Mr. Stiska practiced law for 20 years, specializing in corporate law, mergers and acquisitions and securities law. In July 1998, Mr. Stiska joined the law firm of Latham & Watkins in an of-counsel capacity. MELANIE STURM joined the Company as a director in January 1998. Ms. Sturm is a private equity investor and currently serves on the board of directors of MD Network, a private healthcare concern. 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 is Donald L. Sturm's daughter. Donald L. Sturm, James O. Spitzenberger and Melanie Sturm were appointed to the Board of Directors as the three directors the Sturm Entities are entitled to appoint pursuant to the Securityholders Agreement. Likewise, C. Kevin Garland and Rodney Malcolm were appointed to the Board of Directors as the two directors Enron is entitled to appoint pursuant to the Securityholders Agreement. Retention of New Chief Executive Officer and President The Company entered into an employment agreement on September 28, 1998 with Sheldon S. Ohringer (the "Employment Agreement"), pursuant to which Mr. Ohringer agreed to join FirstWorld as its President and Chief Executive Officer on October 1, 1998 (the "Commencement Date"). The Employment Agreement has a three year term ending on the close of business on September 30, 2001, unless terminated earlier by either party. The Employment Agreement also provides that Mr. Ohringer will be nominated to serve as a director of the Company during the term of the agreement. The Employment Agreement provides for an initial annual base salary of $200,000 and an annual cash bonus not to exceed 50% of Mr. Ohringer's base salary. In addition, to compensate Mr. Ohringer for certain benefits that he would have received from his previous employer, FirstWorld has agreed to pay Mr. Ohringer a cash payment of $4,000,000 (the "Equalization Payment") in three separate installments. The first installment of the Equalization Payment in the amount of $2,000,000 was paid on the Commencement Date, the second installment of the Equalization Payment in the amount of $1,000,000 is due and payable on October 1, 1999 and the final installment of the Equalization Payment in the amount of $1,000,000 is due and payable on October 1, 2000. Mr. Ohringer must be employed by the Company on the date an installment becomes due to be eligible to receive the installment payment unless the Company terminates Mr. Ohringer's employment other than for cause or Mr. Ohringer terminates his own employment for good reason (as defined in the Employment Agreement) prior to the installment date. In addition, Mr. Ohringer may elect to receive all or any portion of the second and third installment payments in the form of FirstWorld Series B Common Stock. If Mr. Ohringer elects to receive any of the second or third installment payments in Series B Common Stock, such stock will be valued at $5.00 and $7.50 per share, respectively. In addition, under the Employment Agreement, Mr. Ohringer also will be eligible for the following performance based bonuses: IPO BONUS. If the Company consummates a Qualified Initial Public Offering (as defined below) with a price of at least $10.00 per share (subject to adjustment upon a subdivision or combination or other 45 adjustment in the number of outstanding shares of the Company made without the receipt of consideration to the Company after the Commencement Date) within the first 18 months after the Commencement Date, the Company will pay Mr. Ohringer a $1,000,000 cash bonus (the "IPO Bonus"). For purposes of the Employment Agreement, the term "Qualified Initial Public Offering" shall mean the Company's first underwritten initial public offering of common equity securities under the Securities Act, after the date of the Employment Agreement, with gross proceeds to the Company of at least $20,000,000, that results in such common equity securities being listed for trading on a national securities exchange or being authorized for trading on the Nasdaq National Market at such time. DEFERRED CASH BONUS. In addition to the IPO Bonus, Mr. Ohringer also would be entitled to receive the following additional compensation: (i) If the Company consummates a Qualified Initial Public Offering with a price of at least $10.00 per share (subject to adjustment upon a subdivision or combination or other adjustment in the number of outstanding shares of the Company made without the receipt of consideration to the Company after the Commencement Date) within the first 12 months after the Commencement Date, the Company will pay Mr. Ohringer a $4,207,500 cash bonus on September 30, 2001; (ii) If the Company consummates a Qualified Initial Public Offering with a price of at least $12.50 per share (subject to adjustment upon a subdivision or combination or other adjustment in the number of outstanding shares of the Company made without the receipt of consideration to the Company after the Commencement Date) within the first 24 months after the Commencement Date, the Company will pay Mr. Ohringer a $8,415,000 cash bonus on September 30, 2001; provided that if Mr. Ohringer earns the payment described in this paragraph (ii) he will not be entitled to receive the payment described in paragraph (i) above; and (iii) If the Company has a market capitalization of at least $1.2 billion (as adjusted as described below) for a period of 20 consecutive trading days during a three-year period beginning on the Commencement Date, the Company will pay Mr. Ohringer a cash payment equal to $16,830,000 minus any amounts he receives pursuant to paragraph (i) or (ii) above on September 30, 2001. Market capitalization of $1.2 billion assumes 60,000,000 fully diluted shares of Series B Common Stock and a market price of $20.00 per share, subject to adjustment. If the number of fully diluted shares of Series B Common Stock is greater than or less than 60,000,000 shares of Series B Common Stock, the target market capitalization will be proportionately adjusted; provided that the $20.00 per share market price would not be so adjusted, except to the extent required to appropriately reflect any subdivision (by any stock split, stock dividend, recapitalization or otherwise), combination (by reverse stock split or otherwise) or other adjustment in the number of outstanding shares of the Company made without the receipt of consideration to the Company after the Commencement Date. The foregoing payments described in paragraph (i), (ii) and (iii) above are referred to herein individually or collectively, as the "Deferred Cash Bonus." Notwithstanding the foregoing, upon a change of control (as defined in the Employment Agreement) or the termination of Mr. Ohringer's employment upon his death, by the Company without cause or voluntarily by Mr. Ohringer for good reason, 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 (as defined in the Employment Agreement). In no event will the termination of Mr. Ohringer's employment (including, without limitation, termination by the Company for cause or disability (as defined in the Employment Agreement) or Mr. Ohringer's voluntary termination of his 46 employment without good reason) affect Mr. Ohringer's right to receive the Deferred Cash Bonus earned prior to such termination. Mr. Ohringer also has been granted an option to purchase 2,805,000 shares of Series B Common Stock (representing an approximate 5% equity interest in the Company on a fully diluted basis) 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 one-third of the shares covered by the option on the Commencement Date, (ii) with respect to one-third of the shares covered by the option on the first anniversary of the Commencement Date and (iii) with respect to the remaining one-third of the shares covered by the option on the second anniversary of the Commencement Date. Notwithstanding the foregoing, all of the shares subject to the option shall immediately vest (i) immediately prior to a change of control, (ii) if the Company has a market capitalization of at least $1.2 billion for a period of 20 consecutive trading days during a three-year period starting on the Commencement Date or (iii) if Mr. Ohringer is terminated by the Company without cause or Mr. Ohringer voluntarily terminates his employment with the Company 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. 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) in the Company with respect to certain future equity issuances. This right of first refusal terminates on the earlier to occur of (i) January 31, 2004, (ii) the day immediately prior to the closing of a Qualified Initial Public Offering or (iii) the date of termination. Mr. Ohringer may also participate in the employee benefit plans generally available to FirstWorld's senior executives according to the plans' terms and conditions. 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. Mr. Ohringer is subject to a one year covenant not to compete if his employment is terminated by the Company for cause or for disability or if Mr. Ohringer voluntarily terminates his employment without good reason. COMMITTEES OF THE BOARD OF DIRECTORS CHAIRMAN'S COMMITTEE. The Board of Directors has established the Chairman's Committee consisting 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. The Board of Directors has established a Compensation Committee consisting of Mr. Garland and Ms. Sturm. The Compensation Committee determines compensation for the Company's senior executive officers and administers the 1995 Stock Option Plan (as defined) and the 1997 Stock Option Plan (as defined). AUDIT COMMITTEE. The Board of Directors has established an Audit Committee with Mr. Spitzenberger as its sole member. The Audit Committee makes recommendations concerning the engagement of independent public accountants, reviews with the independent public accountants the plans and results of the audit engagement, approves professional services provided by the independent public 47 accountants, reviews the independence of the independent public accountants, considers the range of audit and non-audit fees and reviews the adequacy of the Company's internal accounting controls. COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT The Company was not subject to Section 16(a) of the Exchange Act during the fiscal year ended September 30, 1998. The Company became subject to Section 16(a) of the Exchange Act on October 8, 1998, when the Company filed a Registration Statement on Form 8-A, with respect to its Series B Common Stock. ITEM 11. EXECUTIVE COMPENSATION DIRECTOR COMPENSATION Directors of the Company who are also employees of the Company receive no directors' fees. One of the Company's non-employee directors, John C. Stiska, receives a retainer of $1,000 per month. All non-employee directors are reimbursed for their reasonable out-of-pocket travel expenditures. Directors of the Company are also eligible to receive grants of stock options under the Company's 1997 Stock Option Plan. Corporate Managers, LLC, a Colorado limited liability company and an affiliate of the Sturm Entities (all of which are controlled by Donald L. Sturm and in which James O. Spitzenberger and Melanie Sturm own membership interests), receives an annual management fee of $500,000 plus out of pocket expenses. C. Kevin Garland and Rodney Malcolm are officers of Enron, which receives an annual management fee of $500,000 plus out of pocket expenses. Corporate Managers, LLC and Enron receive such management fees pursuant to three-year Management Consulting Services Agreements. See "Certain Relationships and Related Transactions." EXECUTIVE COMPENSATION The following table sets forth certain information concerning the cash and non-cash compensation during the periods indicated earned by or awarded to the Chief Executive Officer and to the four other most highly compensated executive officers of the Company whose combined salary and bonus exceeded $100,000 during the fiscal year ended September 30, 1998 (the "Named Executive Officers"). 48 SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG-TERM COMPENSATION AWARDS --------------------------------- -------------------------------------------- SECURITIES RESTRICTED UNDERLYING ALL OTHER SALARY BONUS OTHER ANNUAL STOCK AWARDS OPTIONS COMPENSATION NAME AND PRINCIPAL POSITION ($) ($) COMPENSATION ($) (#) ($) - --------------------------- ------ ----- ------------ ------------ ---------- ------------- Donald L. Sturm(1) ............................... 0(2) -- -- -- -- -- Former Chief Executive Officer Renney Senn ...................................... 26,667 -- -- -- 16,417 72,442(3) Former Chief Executive Officer Robert E. Randall(4) ............................. 176,667 -- -- -- 116,417 -- Former Executive Vice President, and former acting Chief Financial Officer John Lewis ....................................... 139,167 2,000 -- -- 56,417 -- Senior Vice President, Network and Operations Andrew B. Taubman(5) ............................. 139,167 -- -- -- 46,417 -- Former Senior Vice President, Corporate Finance and Development G. Bradford Saunders(6) .......................... 139,167 -- -- -- 16,417 -- Former Senior Vice President, Project Development
(1) Mr. Sturm served as the Company's Chief Executive Officer from March 1998 through September 30, 1998. Effective with the close of business on September 30, 1998, Mr. Sturm resigned his position as Chief Executive Officer of the Company in order to allow Mr. Ohringer to assume such position. (2) The Company pays annual management fees to Corporate Managers LLC, an affiliate of Mr. Sturm, pursuant to the Management Consulting Services Agreement between the Company and Corporate Managers, LLC, as amended. See "Certain Relationships and Related Transactions--Equity Investment--Management Services Agreements." (3) Mr. Senn resigned from the Company in January 1998 and in connection with such resignation received $12,231 less applicable federal and state taxes for accrued vacation days. In addition, pursuant to an employee severance program adopted in connection with the Equity Investment (as defined below), the Company paid severance payments to Mr. Senn in an aggregate amount of $60,211. See "Certain Relationships and Related Transactions--Equity Investment--Employee Severance Program" (4) Mr. Randall resigned in December 1998. 49 (5) Mr. Taubman resigned in December 1998. (6) Mr. Saunders resigned in October 1998. OPTION GRANTS DURING FISCAL 1998 The following table sets forth information with respect to grants of stock options to each of the Named Executive Officers during the fiscal year ended September 30, 1998.
POTENTIAL REALIZED VALUE AT NUMBER OF % OF TOTAL ASSUMED ANNUAL RATE SECURITIES OPTIONS GRANTED OF STOCK PRICE UNDERLYING OPTIONS TO EMPLOYEES IN EXERCISE OR APPRECIATION FOR OPTION GRANTED FISCAL YEAR BASE PRICE TERM(1) NAME (#) (%) ($/SH) EXPIRATION DATE 5% 10% - ---- ------------------ --------------- ------------ --------------- --- --- Donald L. Sturm................... -- -- -- -- -- -- Renney Senn(2).................... 16,417 1.16 3.00 4/6/98 0 0 Robert E. Randall(3).............. 16,417 1.16 3.00 3/31/99 2,463 4,925 100,000 7.04 4.50 3/31/99 22,500 45,000 John Lewis........................ 6,000 .42 3.00 10/2/07 11,320 28,687 10,417 .73 3.00 12/16/07 19,654 49,806 40,000 2.82 4.50 6/2/08 113,201 286,874 Andrew B. Taubman(4).............. 16,417 1.16 3.00 3/11/99 2,463 4,925 30,000 2.11 4.50 3/11/99 6,750 13,500 G. Bradford Saunders(5)........... 16,417 1.16 3.00 1/2/99 2,463 4,925
- --------------- (1) The 5% and 10% assumed annual rate of compounded stock price appreciation are mandated by rules of the Securities and Exchange Commission. There can be no assurance that the actual stock price appreciation over the ten year option term will be at the assumed 5% or 10% levels or at any other defined level. (2) Mr. Senn exercised the options to purchase 16,417 shares of Series B Common Stock on April 6, 1998. (3) Mr. Randall resigned from the Company in December 1998. Pursuant to the provisions of the SpectraNet International 1997 Stock Plan, Mr. Randall has until March 31, 1999 to exercise the vested portion of the options described above. (4) Mr. Taubman resigned from the Company in December 1998. Pursuant to the provisions of the SpectraNet International 1997 Stock Plan, Mr. Taubman has until March 11, 1999 to exercise the vested portion of the options described above. (5) Mr. Saunders resigned from the Company in October 1998. Pursuant to the provisions of the SpectraNet International 1997 Stock Plan, Mr. Saunders has until January 2, 1999 to exercise the vested portion of the options described above. OPTION EXERCISES AND FISCAL YEAR-END VALUES The following table sets forth the information with respect to the Named Executive Officers concerning the exercise of options during fiscal year 1998 and unexercised options held as of September 30, 1998. 50 OPTIONS EXERCISED DURING FISCAL 1998
NUMBER OF SECURITIES VALUE OF UNEXERCISED IN-THE- SHARES ACQUIRED ON VALUE UNDERLYING UNEXERCISED MONEY OPTIONS EXERCISE REALIZED OPTIONS AT FY-END (#) AT FY-END ($)(1) NAME (#) ($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE - ---- ------------------ -------- ------------------------- ---------------------------- Donald L. Sturm......... -- -- -- -- Renney Senn............. 16,417 0 0/0 0/0 Robert E. Randall....... -- -- 16,417/100,000 49,251/150,000 John Lewis.............. -- -- 43,617/62,800 190,251/168,000 Andrew B. Taubman....... -- -- 36,417/60,000 159,251/210,000 G. Bradford Saunders.... -- -- 91,417/50,000 469,251/280,000
- --------------- (1) Calculated by determining the difference between the fair market value of the securities underlying the options at September 30, 1998 ($6.00 per share as determined by the Board of Directors) and the exercise price of the options. EXECUTIVE EMPLOYMENT AGREEMENTS The Company has employment agreements with Messrs. Sheldon S. Ohringer, David Gandini, Marion K. Jenkins, Douglas L. Kramer and Scott M. Chase. For a description of the Company's Employment Agreement with Sheldon S. Ohringer see "Directors and Executive Officers of the Registrant--Retention of New Chief Executive Officer and President." The Company's employment agreement with David Gandini provides for a term of three years from November 30, 1998 through November 29, 2001. Mr. Gandini receives a base salary of $185,000 and is eligible to receive an annual bonus of up to 40% of his base salary pursuant to the Company's Annual Bonus Plan. In addition, to compensate Mr. Gandini for certain benefits that he would have received from his previous employer, FirstWorld has agreed to pay Mr. Gandini a cash payment of $500,000 (the "Equalization Payment") in three separate installments. The first installment in the amount of $100,000 is due and payable on January 1, 1999, the second installment in the amount of $200,000 is due and payable on January 1, 2000, and the third installment in the amount of $200,000 is due and payable on January 1, 2001. Mr. Gandini must be employed by the Company on the date an installment becomes due to be eligible to receive the installment payment unless the Company terminates Mr. Gandini's employment other than for cause or Mr. Gandini terminates his own employment for good reason (as defined in the Employment Agreement) prior to the installment date. Pursuant to the terms of the employment agreement, the Company granted Mr. Gandini an option to purchase 500,000 shares of Series B Common Stock. The shares subject to the option vest in four equal increments of 125,000 shares on the first, second, third and fourth anniversaries of Mr. Gandini's start date with the Company. The shares in the first such increment have an exercise price of $6.00 per share, shares in the second such increment have an exercise price of $6.50 per share, shares in the third such increment have an exercise price of $7.00 per share and shares in the fourth such increment have an exercise price of $7.50 per share. If the Company terminates Mr. Gandini's employment during his first three years of employment without "cause" or Mr. Gandini terminates his employment with the Company for "good reason" (as each such term is defined in the employment agreement), the Company must make a severance payment to Mr. 51 Gandini equal to the base salary he would have received had he remained employed with the Company for the remainder of his employment term. The Company's employment agreement with Marion K. Jenkins provides for a term that commenced on November 9, 1998 and ends on October 31, 2000. Mr. Jenkins receives a base salary of $160,000 per year and is eligible to receive a bonus of up to 50% of his base salary under the Company's Annual Bonus Plan. Pursuant to the terms of the employment agreement, the Company granted Mr. Jenkins an option to purchase 250,000 shares of Series B Common Stock. The shares subject to the option vest in four equal increments of 62,500 shares on the first, second, third and fourth anniversaries of Mr. Jenkins' start date with the Company. The shares in the first such increment have an exercise price of $6.00 per share, shares in the second such increment have an exercise price of $6.50 per share, shares in the third such increment have an exercise price of $7.00 per share and shares in the fourth such increment have an exercise price of $7.50 per share. If the Company terminates Mr. Jenkins' employment prior to October 31, 2000 without "cause" or Mr. Jenkins terminates his employment with the Company for "good reason" (as each such term is defined in the employment agreement), the Company must make a severance payment to Mr. Jenkins equal to the base salary he would have received had he remained employed with the Company for the remainder of his employment term. The Company's employment agreement with Douglas L. Kramer provides for a term that commenced on December 7, 1998 and ends on December 13, 2000. Mr. Kramer receives a base salary of $135,000 per year and is eligible to receive a bonus of up to 35% of his base salary under the Company's Annual Bonus Plan. In addition, to compensate Mr. Kramer for certain benefits that he would have received from his previous employer, FirstWorld has agreed to pay Mr. Kramer a cash payment of $30,000 payable in January 1999. Pursuant to the terms of the employment agreement, the Company granted Mr. Kramer an option to purchase 100,000 shares of Series B Common Stock. The shares subject to the option vest in four equal increments of 25,000 shares on the first, second, third and fourth anniversaries of Mr. Kramer's start date with the Company. The shares in the first such increment have an exercise price of $6.00 per share, shares in the second such increment have an exercise price of $6.50 per share, shares in the third such increment have an exercise price of $7.00 per share and shares in the fourth such increment have an exercise price of $7.50 per share. If the Company terminates Mr. Kramer's employment prior to October 31, 2000 without "cause" or Mr. Kramer terminates his employment with the Company for "good reason" (as each such term is defined in the employment agreement), the Company must make a severance payment to Mr. Kramer equal to the base salary he would have received had he remained employed with the Company for the remainder of his employment term. The Company's employment agreement with Scott M. Chase provides for a term of two years from October 1, 1998 through September 30, 2000. Mr. Chase receives a base salary of $125,000 per year and is eligible to receive a bonus as determined by the Compensation Committee of the Board of Directors. In addition, to compensate Mr. Chase for certain benefits that he would have received from his previous employer, FirstWorld paid Mr. Chase a cash payment of $20,000 in October 1998. Mr. Chase was granted an option to purchase 100,000 shares of Series B Common Stock at an exercise price of $4.50 per share. The vesting schedule and other terms and conditions of the option are as set forth in the applicable option plan of the Company. If the Company terminates Mr. Chase's employment prior to September 30, 2000 without "cause" or Mr. Chase terminates his employment with the Company for "good reason" (as each such term is defined in the employment agreement), the Company must make a severance payment to Mr. Chase equal to the amount of base salary he would have received had he remained an employee of the Company through September 30, 2000 less any base salary paid to Mr. Chase prior to the termination of his employment for the 12 month period ending on the last day of the month preceding the month Mr. Chase's employment with the Company is terminated (or, if Mr. Chase is terminated without cause or he terminates his 52 employment for good reason prior to October 1, 1999, the entire period of his employment). STOCK OPTION PLANS AND STOCK PURCHASE PLANS STOCK OPTION PLANS The Company has two stock option plans currently in place: the 1995 Stock Option Plan and the 1997 Stock Option Plan. 1995 STOCK OPTION PLAN. Under the SpectraNet International 1995 Incentive Stock Option Plan (the "1995 Stock Option Plan") the Company is authorized to issue incentive stock options ("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 of Directors or a committee thereof comprised of at least three directors has the authority, subject to certain limitations, to select the employees of the Company 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. 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 such options expire six months and one year, respectively, after the optionee's employment with the Company is terminated. As of November 30, 1998, options to purchase an aggregate of 533,700 shares of Series B Common Stock at prices ranging from $.15 to $.50 were outstanding under the 1995 Stock Option Plan. 1997 STOCK OPTION PLAN. Under the SpectraNet International 1997 Stock Plan (the "1997 Stock Option 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 ISOs and nonqualified stock options ("NQSOs") 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 thereof (the "Administrator") 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 to the Company. However, if the optionee's service to the Company ends because of death or disability, unless otherwise indicated in the Stock Option Agreement, such optionee has 12 months to exercise the vested portion of his or her options. As of November 30, 1998, options to purchase an aggregate of 1,385,603 shares of Series B Common Stock at exercise prices ranging from $3.00 to $4.50 were outstanding under the 1997 Stock Option Plan. STOCK PURCHASE PLAN In September 1998, the Company adopted the 1998 Stock Purchase Plan of FirstWorld Communications (the "Stock Purchase Plan"). Under the Stock Purchase Plan, the Company may grant rights to purchase (each, a "Stock Purchase Right") an aggregate of 500,000 shares of Series B Common Stock to employees or directors of the Company. The Stock Purchase Plan allows for up to 50% of the purchase price of any stock purchased thereunder to be paid in the form of a promissory note. If the 53 offeree elects to pay a portion of the purchase price with a promissory note, such offeree must also pledge the shares acquired with the proceeds of the promissory note to secure the promissory note. The Board or a duly appointed committee thereof has the authority under the Stock Purchase Plan to determine, among other things, the number of shares of stock that each offeree shall be entitled to purchase, the price to be paid and the period during which such offer must be accepted. In September 1998, the Company offered Stock Purchase 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. Subject to applicable laws, the Stock Purchase Plan is subject to approval of the stockholders within 12 months of its adoption. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information regarding the beneficial ownership of the Company's voting securities as of October 1, 1998, by (i) each of the Company's named executive officers and directors; (ii) the Company's executive officers and directors as a group; and (iii) stockholders known by the Company to beneficially own more than 5% of any class of the Company's voting securities. For purposes of this Form 10-K, beneficial ownership of securities is defined in accordance with the rules of the Securities and Exchange Commission and means generally the power to vote or exercise investment discretion with respect to securities, regardless of any economic interests therein. Except as otherwise indicated, the Company believes that the beneficial owners of the securities listed below have sole investment and voting power with respect to such shares, subject to community property laws where applicable. Unless otherwise indicated, the business address for each of the individuals or entities listed below is c/o FirstWorld Communications, Inc., 7100 E. Belleview Avenue, Suite 210, Greenwood Village, Colorado 80111. 54
NUMBER OF NUMBER OF SERIES B SERIES A COMMON COMMON SHARES SHARES BENEFICIALLY BENEFICIALLY NAME OWNED(1)(2) OWNED(1)(2) PERCENT OF CLASS(1) - ---- ------------------ --------------- ----------------------- Donald L. Sturm(3) .......................... 5,000,000 15,452,849 55.57% of Common Stock 51.13% of Voting Stock Enron Capital & Trade Resources Corp.(4) .... 5,000,000 11,666,666 48.43% of Common Stock 49.09% of Voting Stock Kevin Garland(5) ............................ 0 0 *% of Common Stock *% of Voting Stock Rodney Malcolm(6) ........................... 0 0 *% of Common Stock *% of Voting Stock Robert E. Randall(7) ........................ 0 489,748 1.87% of Common Stock *% of Voting Stock James O. Spitzenberger(8) ................... 0 0 *% of Common Stock *% of Voting Stock John C. Stiska(9) ........................... 0 30,000 *% of Common Stock *% of Voting Stock Melanie Sturm(10) ........................... 0 0 *% of Common Stock *% of Voting Stock John Lewis(11) .............................. 0 56,969 *% of Common Stock *% of Voting Stock G. Bradford Saunders(12) .................... 0 136,417 *% of Common Stock *% of Voting Stock Renney Senn(13) ............................. 0 882,274 3.38% of Common Stock *% of Voting Stock Sheldon S. Ohringer(14) ..................... 0 935,000 3.45% of Common Stock *% of Voting Stock Andrew B. Taubman(15) ....................... 0 69,938 *% of Common Stock *% of Voting Stock All directors and executive officers as a 5,000,000 17,237,338 58.42% of Common Stock group (14 persons)(16) ...................... 52.01% of Voting Stock
- -------------------- * Less than one percent beneficially owned (1) In accordance with Rule 13d-3 under the Securities and Exchange Act of 1934, as amended (the "Exchange Act"), 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. A person is also deemed to be a beneficial owner o any securities of which that person has the right to acquire beneficial ownership within 60 days. 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 October 1, 1998 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. (2) This table is based upon information supplied by directors, executive officers and principal stockholders. Unless otherwise indicated in the footnotes to this table, each of the stockholders named in this table has sole voting and investment power with respect to the shares shown as beneficially owned. 55 (3) Shares listed include: (a) 5,000,000 shares of Series A Common Stock held of record by Spectra 3; (b) 1,392,757 shares of Series B Common Stock held of record by Spectra 1; (c) 3,333,333 shares of Series B Common Stock held of record by Spectra 3; and (d) 10,726,759 shares of Series B Common Stock subject to currently exercisable warrants held of record by Spectra 1, Spectra 2 and Spectra 3. Beneficial ownership of the foregoing shares is attributable to Mr. Sturm because he is the managing member of Spectra 1, Spectra 2 and Spectra 3 and is therefore deemed to exercise voting power and investment authority with respect to the shares. (4) Shares listed include: (a) 5,000,000 shares of Series A Common Stock held of record by Enron; (b) 3,333,333 shares of Series B Common Stock held of record by Enron; and (c) 8,333,333 shares of Series B Common Stock subject to currently exercisable warrants held of record by Enron. (5) Excludes the securities owned by Enron described in Footnote (4) above. Mr. Garland is an officer of Enron, but disclaims beneficial ownership of the shares owned by Enron. (6) Excludes the securities owned by Enron described in Footnote (4) above. Mr. Malcolm is an officer of Enron, but disclaims beneficial ownership of the shares owned by Enron. (7) Shares listed include: (a) 149,999 shares of Series B Common Stock held of record by Randall Lamb Associates Profit Sharing Plan and 33,332 shares of Series B Common Stock subject to currently exercisable warrants held by Randall Lamb Associates Profit Sharing Plan; beneficial ownership of such shares is attributable to Mr. Randall because he has the power to direct the voting and investment of such shares; (b) 5,000 shares of Series B Common Stock held of record by Robert E. and Dianne Randall as custodians for Natalie Marie Ray under the California Uniform Transfers to Minors Act ("CUTMA") and 5,000 shares of Series B Common Stock held of record by Robert E. and Dianne M. Randall as custodians for Alexandra Dianne Ray under CUTMA; beneficial ownership of such shares is attributable to Mr. Randall because he is a custodian of the minor children and is therefore deemed to exercise voting power and investment authority with respect to the shares; (c) 280,000 shares of Series B Common Stock held of record by Robert E. and Dianne M. Randall as trustees of the Robert E. and Dianne M. Randall Family Trust, dated 2/3/97; beneficial ownership of such shares is attributable to Mr. Randall because he is a trustee of the Robert E. and Dianne M. Randall Family Trust and is therefore deemed to exercise voting power and investment authority with respect to the shares; and (d) 16,417 shares of Series B Common Stock subject to currently exercisable options held by Mr. Randall at an exercise price of $3.00. (8) Excludes shares of Series A Common Stock and Series B Common Stock beneficially owned by the Sturm Entities. Mr. Spitzenberger 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. (9) Shares listed include 15,000 shares of Series B Common Stock subject to currently exercisable options held by Mr. Stiska at an exercise price of $3.00, 5,000 shares of Series B Common Stock subject to options held by Mr. Stiska at an exercise price of $3.00 exercisable within 60 days of October 1, 1998 and 10,000 shares of Series B Common Stock held jointly by Mr. Stiska and his wife. (10) Excludes shares of Series A Common Stock and Series B Common Stock beneficially owned by the Sturm Entities. Ms. Sturm owns 17.0%, 17.0% and 20.0% of the membership interests in Spectra 1, Spectra 2 and Spectra 3, respectively, through a revocable trust of which she is a co-trustee. Ms. Sturm disclaims beneficial ownership of such shares. 56 (11) Shares listed include: (a) 10,000 shares of Series B Common Stock held of record by John W. and Dorothy M. Lewis Family Trust; beneficial ownership of such shares is attributable to Mr. Lewis because he is a trustee of the John W. and Dorothy M. Lewis Family Trust and is therefore deemed to exercise voting power and investment authority with respect to the shares; (b) 567 shares of Series B Common Stock subject to currently exercisable warrants held by Mr. Lewis at an exercise price of $3.53; (c) 22,017 shares of Series B Common Stock subject to currently exercisable options held by Mr. Lewis at an exercise price of $3.00; and (d) 21,600 shares of Series B Common Stock subject to currently exercisable options held by Mr. Lewis at an exercise price of $.25. (12) Shares listed include 20,000 shares of Series B Common Stock held of record by United Brice Group Ltd., a California corporation. Mr. Saunders is an officer of such corporation and has voting power and investment authority with respect to the shares. Accordingly, he may be deemed to beneficially own the shares held by such corporation. Shares listed also include 16,417 shares of Series B Common Stock subject to currently exercisable options held by Mr. Saunders at an exercise price of $3.00; 45,000 shares of Series B Common Stock subject to currently exercisable options held by Mr. Saunders at an exercise price of $.50; 30,000 shares of Series B Common Stock subject to currently exercisable options held by Mr. Saunders at an exercise price of $.25; and 10,000 shares of Series B Common Stock subject to options held by Mr. Saunders at an exercise price of $.25 exercisable within 60 days of October 1, 1998. (13) Shares listed include 865,856 shares of Series B Common Stock held of record jointly by Mr. Senn and his wife. (14) Shares listed include 935,000 shares of Series B Common Stock subject to currently exercisable options held by Mr. Ohringer at an exercise price of $6.00. (15) Shares listed include: (a) 5,666 shares of Series B Common Stock subject to currently exercisable warrants held by Mr. Taubman at an exercise price of $3.53; (b) 20,000 shares of Series B Common Stock subject to currently exercisable options held by Mr. Taubman at an exercise price of $.50; and (c) 16,417 shares of Series B Common Stock subject to currently exercisable options held by Mr. Taubman at an exercise price of $3.00. (16) Excludes shares held by Enron Capital & Trade Resources Corp. and Renney Senn. See notes 3, 5-12, 14 and 15. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS EQUITY INVESTMENT GENERAL. On December 30, 1997, the Company completed a private placement of equity securities to Spectra 3 and Enron (the "Equity Investment"). The Company issued 5,000,000 shares of newly created Series A Common Stock to each of Spectra 3 and Enron at an issue price of $3.00 per share pursuant to a Common Stock Purchase Agreement dated as of December 30, 1997 (the "Stock Purchase Agreement") by and among the Company, Enron, Spectra 3 and the holders of $405,500 in principal amount of the Company's convertible subordinated promissory notes. In addition, the Company issued an aggregate of 135,164 shares of Series A Common Stock to the holders of the convertible subordinated promissory notes upon the automatic conversion of the convertible subordinated promissory notes pursuant to the terms thereof at a conversion price of $3.00 per share. The Company 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 and warrants to purchase an aggregate of 135,164 shares of Series B Common Stock to the holders of the convertible subordinated promissory notes (collectively, the "Recent Equity Warrants"). Spectra 3, an entity controlled by Donald L. Sturm, was formed for the purpose of participating in the Equity Investment. Spectra 3 is an affiliate of Colorado Spectra 1, LLC ("Spectra 1") and Colorado Spectra 2, LLC ("Spectra 2"), entities that owned equity securities of the Company prior to the Equity Investment. See "Principal Stockholders." Spectra 1, Spectra 2 and Spectra 3 are referred to 57 herein as the "Sturm Entities" and Spectra 3, Enron and the holders of the convertible subordinated promissory notes are referred to herein as the "Purchasers." The Stock Purchase Agreement also granted Spectra 3 and Enron, for a period of 45 days following the closing of the Equity Investment, the right to invest an additional $20,000,000 in the aggregate on the same terms and conditions 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. This option was later extended by action of a special committee of the Company's Board of Directors. Spectra 3 and Enron fully exercised their option to make an additional $20,000,000 investment concurrently with the closing of the Debt Offering. Substantially concurrently with the Equity Investment, the Company (i) converted the three existing classes of preferred stock into Series B Common Stock in accordance with the automatic conversion provision of its existing charter in order to simplify the Company's capital structure and eliminate the rights, preferences and privileges of the preferred stock; (ii) amended its Articles of Incorporation to substantially increase the Company's authorized capital to allow for the Equity Investment and to provide flexibility for future financings; and (iii) amended its Articles of Incorporation to designate two series of Common Stock, with the investors in the Equity Investment to receive Series A Common Stock and all existing Common Stock (including Common Stock issued upon conversion of the existing preferred stock) designated as Series B Common Stock. The Series A Common Stock and Series B Common Stock are identical in all material respects, except that the Series A Common Stock possess ten votes per share on all matters subject to a vote of stockholders while the Series B Common Stock possess one vote per share. The Recent Equity Warrants are exercisable by the holder thereof in whole or in part at an exercise price of $3.00 per share at any time following issuance through the first to occur of (i) the seventh anniversary of the date of issuance, (ii) the merger of the Company following which the Company's stockholders own less than 50% of the surviving entity, and (iii) the sale of all or substantially all of the Company's assets. The exercise price and number of shares subject to the Recent Equity Warrants are subject to customary anti-dilution adjustments in the event of a stock split, subdivision, combination of shares, reorganization or reclassification or in the event that dividends are paid on the Company's common stock in other securities or assets. INVESTOR RIGHTS AGREEMENT. In connection with the closing of the Equity Investment, the Company entered into an Amended and Restated Investor Rights Agreement which entitles the Purchasers and certain other prior investors to certain demand and piggyback 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 the Company with respect to future equity issuances. Mr. Ohringer (pursuant to the terms of his Employment Agreement), the Sturm Entities and Enron are the only entities having a right of first refusal or other preemptive right on future equity financing transactions. See "Directors and Executive Offices of the Registrant--Retention of New Chief Executive Officer and President." In connection with the Additional Equity Investment, the Company further amended and restated the Amended and Restated Investor Rights Agreement in order to (i) allow for, and coordinate with, the registration rights granted to the Initial Purchasers pursuant to that certain Warrant Registration Rights Agreement dated as of April 13, 1998 by and between the Company and the Initial Purchasers and (ii) to make certain other revisions to the previous iteration of the Amended and Restated Investor Rights Agreement. 58 AMENDMENT TO STURM WARRANT. In connection with the Company's Series C preferred stock financing, the Company and Spectra 1 and Spectra 2 entered into a Warrant Purchase/Right to Maintain Agreement pursuant to which the Company issued and sold to Spectra 2 a warrant (the "Sturm Warrant") that was initially exercisable for 800,000 shares of Common Stock at an aggregate exercise price of $3,800,000. The Sturm Warrant contained a complex anti-dilution provision pursuant to which the number of shares purchasable could be increased significantly based upon the weighted average issuance price of equity securities issued by the Company prior to the earliest of (i) April 1, 1999, (ii) the death of Donald L. Sturm and (iii) a public offering of securities by the Company (the "Adjustment Date"). Based upon those existing provisions, upon the closing of the Equity Investment, the Sturm Warrant would have been exercisable for approximately 2,250,000 shares of Common Stock at an aggregate exercise price of $3,800,000, and assuming exercise of the right of Spectra 3 and Enron to increase their investment by $20 million as described above would have been exercisable for approximately 2,800,000 shares of Common Stock at an aggregate exercise price of $3,800,000. The Sturm Warrant would also have continued to adjust upon future equity issuances through the Adjustment Date. In connection with the Equity Investment, in order to eliminate the uncertainty regarding the number of shares purchasable under the Sturm Warrant, the Company and Spectra 1 and Spectra 2 set the number of shares purchasable under the Sturm Warrant at 2,110,140 shares of Series B Common Stock with an exercise price of $1.80 per share (aggregate exercise price of approximately $3,800,000). The Sturm Warrant, as amended, is subject to customary adjustment on stock splits, stock dividends, subdivisions or combinations, but would not otherwise be subject to adjustment. In addition, Spectra 1 and Spectra 2 waived their maintenance rights provided under the Warrant Purchase/Right to Maintain Agreement. The Sturm Entities, however, continue to have a right of first refusal under the Amended and Restated Investor Rights Agreement as described above. BOARD OF DIRECTORS. Upon the closing of the Equity Investment, the Company's Board of Directors was reconstituted with seven directors as follows: three designees of the Sturm Entities -Donald L. Sturm, Melanie Sturm and James O. Spitzenberger; two designees of Enron - C. Kevin Garland and Rodney Malcolm; one management representative - Robert E. Randall; and John C. Stiska, an existing director, as an independent member of the Board. Renney Senn and Robert Cerasoli resigned from the Board at this time. In addition, pursuant to the Stock Purchase Agreement within six months following the closing of the Equity Investment, the Board would be further reconstituted to consist of seven directors, three of whom would be designated by the Sturm Entities, two of whom would be designated by Enron, one of whom would be designated by the holders of Series B Common Stock and one of whom would be an independent director. The right of the Series B stockholders to elect a director is set forth in the Company's Certificate of Incorporation. WAIVER OF BUSINESS OPPORTUNITIES. In an effort to alleviate possible conflicts of interest among Enron, the Sturm Entities and the Company (and each of their respective affiliates) with respect to their existing and prospective businesses, the Company revised its purpose clause in Article II of its Certificate of Incorporation to provide that the Company generally may not engage in oil, natural gas, electricity, water and other energy-related business, in lieu of the general purpose clause that previously had been applicable. In addition to the restriction on business, the Company, 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, have agreements with and otherwise participate in, telecommunications businesses, and may develop, finance, acquire, enter into agreements with or otherwise participate in, such businesses in the future, including businesses that are or may become competitive with the business of the Company. In this regard, 59 Enron advised the Company and the Sturm Entities that (a) FirstPoint Communications, Inc. and its affiliates ("FirstPoint"), which are Enron affiliates, are engaged in the business of providing telecommunications services, and have or may from time to time develop, finance, acquire, or acquire interests in, telecommunications and related service and product companies that compete with the Company (including, without limitation, those that compete in the Company's markets in California) and (b) FirstPoint was at the time of the investment by Enron in the Company pursuing a financing, acquisition or investment opportunity in a competitor or potential competitor of the Company. The Business Opportunity Agreement generally provides, except to the extent expressly agreed by the parties and set forth therein, that (i) neither Enron, the Sturm Entities nor any of their respective affiliates would have any obligation to pursue any business opportunity jointly with the Company or to offer any business opportunity to the Company, and any Enron or Sturm Entity representative on the Board of Directors of the Company would have no obligation to offer any business opportunity to the Company; (ii) Enron, the Sturm Entities and their respective affiliates would be free to pursue business opportunities jointly with parties other than the Company, including opportunities that had telecommunications applications; and (iii) Enron, the Sturm Entities and their respective affiliates would be free to compete with the Company and would have no obligation to the Company to refrain from engaging in any business. GRANT OF EXCLUSIVE RIGHTS TO ENRON. The Business Opportunity Agreement also provides that the Company would, during an "Exclusivity Period" (as defined below), grant Enron and its affiliates the exclusive right to pursue jointly with the Company any business opportunity that includes both telecommunications and utility applications (i.e., the marketing of one or more of natural gas, electricity or water and the provision of related services, including provision of the commodity, provision of transmission, transportation or distribution, provision of financial and risk management services and products, and provision of customer care functions (e.g., meter, billing and collection functions) (the "Joint Application Opportunity")). The Exclusivity Period began on the closing of the Equity Investment and continues until the earlier of (x) the third anniversary of the date of closing of the Equity Investment or (y) the date upon which Enron and any of its affiliates hold less than 5% of the capital stock or warrants of the Company (determined on a fully-diluted basis as if all warrants or rights to acquire capital stock were exercised, and determined without reference to any voting rights). During the Exclusivity Period, the Company is obligated to provide Enron notice of any Joint Application Opportunity that the Company desires to pursue anywhere in the United States. If Enron notifies the Company that it desires to participate in the Joint Application Opportunity, then the Company cannot pursue the Joint Application Opportunity without the participation of Enron. If Enron elects not to participate in the Joint Application Opportunity, then the Company is free to pursue independently the telecommunications portion of such Joint Application Opportunity without the participation of Enron, but 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 the Company. SECURITYHOLDERS AGREEMENT. The Sturm Entities and Enron entered into a Securityholders Agreement, to which the Company is also a party, in connection with the closing of the Equity Investment. The Securityholders Agreement contains agreements among the Sturm Entities and Enron with respect to the designation, election, removal and replacement of the members of the Board of Directors of the Company other than those elected by the holders of the Company's Series B Common Stock. The Securityholders Agreement also contains agreements among the Sturm Entities and Enron (i) providing for rights of first offer with respect to certain proposed transfers of Common Stock or warrants of the 60 Company by any of the Sturm Entities or Enron, (ii) providing for rights to purchase the Common Stock and warrants held by a party to the Securityholders Agreement (other than the Company) that experiences a change of control or other triggering event and (iii) providing for rights to participate in certain proposed dispositions of Common Stock or warrants by any of the Sturm Entities or Enron. EMPLOYEE SEVERANCE PROGRAM. In connection with the Equity Investment, the Company established an employee severance program applicable to any person who was a full time employee of the Company as of December 1, 1997. The program provided that if any eligible employee was terminated by the Company without "cause" (as defined) before June 30, 1998, such employee would receive severance pay in an amount equal to (i) six months base salary for employees with the title of director, vice-president or higher, and (ii) two weeks base salary plus one week base salary for each full year of employment with the Company (with a minimum of four weeks base salary) for all other eligible employees. The Company would also pay the base share toward a terminated employee's COBRA benefits, until the employee accepts other employment for a period of up to nine months following termination. With respect to such employees with the title of director, vice-president or higher, the severance payments are subject to a payment schedule and are conditioned upon execution of a non-competition agreement. Prior to the expiration of the employee severance program on June 30, 1998, one employee received payments thereunder totaling approximately $60,000. TRANSACTION FEES AND EXPENSES. The Company paid the Sturm Entities and Enron a transaction fee equal to six percent of the gross amount invested by them in the Equity Investment (based upon the $30 million invested, $900,000 for the Sturm Entities and $900,000 for Enron). Spectra 3 and Enron also received the six percent transaction fee on the $20 million invested in the Additional Equity Investment ($600,000 for the Sturm Entities and $600,000 for Enron). In addition, the Company 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. The Company executed Management Consulting Services Agreements with Corporate Managers, LLC, a Colorado limited liability company and an affiliate of the Sturm Entities, and Enron pursuant to which they will provide management services to the Company for three years following the closing of the Equity Investment for an annual management fee. Both Management 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, LLC 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 the Company than originally anticipated. On October 1, 1998, the Company further amended the Management Consulting Services Agreement to reduce the compensation payable to Corporate Mangers, LLC thereunder to $500,000 per year. This reduction was intended to reflect the reduced role Mr. Sturm is expected to take effective with the retention of Mr. Ohringer as the Company's new Chief Executive Officer and President. Corporate Managers, LLC and Enron each has the right in its discretion to terminate its Management Consulting Services Agreement with the Company. LEGAL MATTERS John C. Stiska, one of the Company's directors, accepted an of-counsel position with Latham & Watkins in July 1998. Latham & Watkins provides legal services to the Company. 61 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
PAGE NUMBER ------ (a) DOCUMENTS FILED AS PART OF THE REPORT: Report of Independent Accountants. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-2 Consolidated Balance Sheets at September 30, 1998 and 1997 . . . . . . . . . . . . . . . . . . . . . . . . F-3 Consolidated Statements of Operations for each of the three years in the period ended September 30, 1998 . F-4 Consolidated Statements of Stockholders' Equity (Deficit) for each of the three years in the period ended September 30, 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-5 Consolidated Statements of Cash Flows for each of the three years in the period ended September 30, 1998 . F-6 Notes to Consolidated Financial Statements.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-7 FINANCIAL STATEMENT SCHEDULE: Schedule II - Valuation and Qualifying Accounts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-27
Financial statement schedules other than those listed above have been omitted because they are either not required, not applicable or the information is otherwise included herein. 62 (c) Exhibits
EXHIBIT NO. DESCRIPTION ------- ------------ 3.1 Form of Certificate of Incorporation, as amended. (2) 3.2 Form of Bylaws, as amended. (2) 4.1 Indenture dated as of April 13, 1998 between the Registrant and The Bank of New York. (1) 4.2 Form of 13% Senior Discount Notes due 2008 and schedule of 13% Senior Discount Notes due 2008. (1) 4.3 Registration Rights Agreement dated as of April 13, 1998 among the Registrant and the Initial Purchasers. (1) 10.1 Form of Indemnification Agreement entered into by the Registrant and each of its executive officers and directors and schedule listing all executive officers and directors who have executed an Indemnification Agreement. (2) 10.2 1995 Stock Option Plan and related form of option agreement. (1) 10.3 1997 Stock Option Plan and related form of option agreement. (1) 10.4 Warrant Agreement dated as of April 13, 1998 among the Registrant and the Initial Purchasers and related form of warrant attached thereto. (1) 10.5 Warrant Registration Rights Agreement dated as of April 13, 1998 among the Registrant and the Initial Purchasers. (1) 10.6 Common Stock Purchase Agreement dated as of December 30, 1997 among the Registrant, Colorado Spectra 3, LLC, Enron Capital & Trade Resources Corp. and the holders of $405,000 in principal amount of the Company's convertible subordinated promissory notes. (1) 10.7 First Amendment to Common Stock Purchase Agreement dated as of February 9, 1998 among the Registrant, Colorado Spectra 3, LLC and Enron Capital & Trade Resources Corp. (1) 10.8 Amended and Restated Investor Rights Agreement dated as of April 13, 1998 among the Registrant and the Investors set forth therein. (1) 10.9 Securityholders Agreement dated as of December 30, 1997 among the Registrant, Enron Capital & Trade Resources Corp., Colorado Spectra 1, LLC, Colorado Spectra 2, LLC and Colorado Spectra 3, LLC. (1) 10.10 Business Opportunity Agreement dated as of December 30, 1997 among the Registrant, Enron Capital & Trade Resources Corp., Colorado Spectra 1, LLC, Colorado Spectra 2, LLC and Colorado Spectra 3, LLC. (1) 10.11 Management Consulting Services Agreement dated as of December 30, 1997, as amended by that First Amendment to Management Consulting Services Agreement dated as of March 17, 1998, between the Registrant and Corporate Managers, LLC. (1) 10.12 Management Consulting Services Agreement dated as of December 30, 1997 between the Registrant and Enron Trade & Capital Resources Corp. (1) 10.13 Form of Warrant to Purchase Series B Common Stock and schedule listing all holders of such warrants entitled to purchase a number of shares of Series B Common Stock equal to or greater than 1% of the Company's common stock outstanding as of May 31, 1998. (1) 10.14 Warrant to Purchase 2,110,140 shares of Series B Common Stock issued to Colorado Spectra 2, LLC on December 30, 1997 (1) 10.15 Agreement for Use of Operating Property dated as of February 25, 1997 between FirstWorld Anaheim and the City of Anaheim. (1) 10.16 Universal Telecommunications System Participation Agreement dated as of February 25, 1997
63
EXHIBIT NO. DESCRIPTION ------- ------------ among the Registrant, FirstWorld Anaheim and the City of Anaheim. (1) 10.17 Development Fee Agreement dated as of February 25, 1997 between the Registrant and the City of Anaheim. (1) *10.18 Agreement for Lease of Telecommunications Conduit dated as of March 5, 1998 between FirstWorld Orange Coast and The Irvine Company. (3) *10.19 Telecommunications System License Agreement dated as of March 5, 1998 between FirstWorld Orange Coast and The Irvine Company. (3) 10.20 Office Lease for Genesee Executive Plaza dated as of September 4, 1996 between Talcott Realty I Limited Partnership and the Registrant. (1) 10.21 Standard Industrial/Commercial Single-Tenant Lease-Gross dated as of August 26, 1996 between Scope Development and FirstWorld Anaheim. (1) 10.22 SpectraNet International Founders' Sale Agreement. (2) 10.23 System Acquisition Agreement. (2) 10.24 Employment Agreement between the Registrant and Sheldon S. Ohringer. (3) 10.25 Stock Option Agreement between the Registrant and Sheldon S. Ohringer. 10.26 Employment Agreement between the Registrant and Scott Chase. 10.27 Employment Agreement between the Registrant and Marion K. Jenkins. 10.28 Employment Agreement between the Registrant and David Gandini. 10.29 Employment Agreement between the Registrant and Doug Kramer. 10.30 Lease between the Registrant and The Prudential Insurance Company of America. 10.31 First Amendment to Lease (Genesee Executive Plaza) dated as of July 31, 1998 between Arden Realty Limited Partnership (successor in interest to Talcott Realty I Limited Partnership) and the Registrant. 10.32 Second Amendment to Management Consulting Services Agreement, dated as of October 1, 1998, by and between the Registrant and Corporate Managers, LLC. 10.33 First Amendment to Amended and Restated Investor Rights Agreement, dated as of September 28, 1998, among the Registrant, Enron Capital & Trade Resources Corp., Colorado Spectra 1, LLC, Colorado Spectra 2, LCC and Colorado Spectra 3, LLC. 12.1 Computation of Ratio of Earnings to Fixed Charges. 16.1 Letter Regarding Change in Certifying Accountant. (2) 21.1 Subsidiaries of the Registrant. (2) 23.1 Consent of PricewaterhouseCoopers LLP. 24.1 Power of Attorney (included on signature page hereof). 27.1 Financial Data Schedule.
- ---------------- * Portions of this exhibit have been omitted pursuant to an order granting confidential treatment filed with the Securities and Exchange Commission (1) Incorporated herein by reference to the Registrant's Registration Statement on Form S-4 (No. 333-57829) filed with the Securities and Exchange Commission on June 26, 1998. (2) Incorporated herein by reference to Amendment No. 1 to the Registrant's Registration Statement on Form S-4 (No. 333-57829) filed with the Securities and Exchange Commission on August 24, 1998. (3) Incorporated herein by reference to Amendment No. 2 to the Registrant's Registration Statement on Form S-4 (No. 333-57829) filed with the Securities and Exchange Commission on October 8, 1998. 64 (b) REPORTS ON FORM 8-K There were no reports on Form 8-K filed by the Company during the fourth quarter of the fiscal year ended September 30, 1998. (c) EXHIBITS The exhibits required by this Item are listed under Item 14(a)(3). (d) FINANCIAL STATEMENT SCHEDULES The consolidated financial statement schedules required by this Item are listed under Item 14(a)(2). 65 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: December 22, 1998 FIRSTWORLD COMMUNICATIONS, INC. By: /s/ SHELDON S. OHRINGER ----------------------- Name: Sheldon S. Ohringer Title: President, Chief Executive Officer, acting Chief Financial Officer and Director POWER OF ATTORNEY Know all persons by these presents, that each person whose signature appears below constitutes and appoints Sheldon S. Ohringer, as his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this report, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming that said attorney-in-fact and agent, or his substitute, may lawfully do or cause to be done by virtue thereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Name Title Date /s/ SHELDON S. OHRINGER President, Chief Executive December 22, 1998 - ----------------------- Officer, acting Chief Financial Sheldon S. Ohringer Officer and Director (Principal Executive Officer and Principal Financial Officer) /s/ DENNIS M. MULROY Vice President, Finance and December 22, 1998 - -------------------- Administration (Principal Dennis M. Mulroy Accounting Officer) /s/ DONALD L. STURM Chairman of the Board of December 22, 1998 - ------------------- Directors Donald L. Sturm /s/ C. KEVIN GARLAND Director December 22, 1998 - -------------------- C. Kevin Garland /s/ RODNEY MALCOLM Director December 22, 1998 - ------------------ Rodney Malcolm /s/ JAMES O. SPITZENBERGER Director December 22, 1998 - -------------------------- James O. Spitzenberger /s/ MELANIE STURM Director December 22, 1998 - ----------------- Melanie Sturm /s/ JOHN C. STISKA Director December 22, 1998 - ------------------ John C. Stiska
66 ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE --------- FINANCIAL STATEMENTS: Report of Independent Accountants. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-2 Consolidated Balance Sheets at September 30, 1998 and 1997 . . . . . . . . . . . . . . . . . . . . . . . . F-3 Consolidated Statements of Operations for each of the three years in the period ended September 30, 1998 . F-4 Consolidated Statements of Stockholders' Equity (Deficit) for each of the three years in the period ended September 30, 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-5 Consolidated Statements of Cash Flows for each of the three years in the period ended September 30, 1998 . F-6 Notes to Consolidated Financial Statements.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-7 FINANCIAL STATEMENT SCHEDULE: Schedule II - Valuation and Qualifying Accounts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-27
F-1 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of FirstWorld Communications, Inc. (formerly SpectraNet International) In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of FirstWorld Communications, Inc. (formerly SpectraNet International) and its subsidiaries at September 30, 1997 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PRICEWATERHOUSECOOPERS LLP San Diego, California December 11, 1998 F-2 FIRSTWORLD COMMUNICATIONS, INC. (formerly SpectraNet International) CONSOLIDATED BALANCE SHEETS - --------------------------------------------------------------------------------
SEPTEMBER 30, 1998 1997 ----------------- ------------------ ASSETS Current assets: Cash and cash equivalents $72,039,498 $536,275 Restricted cash - 50,000 Marketable securities 165,591,010 - Interest receivable 3,016,623 - Accounts receivable, net of allowance for doubtful accounts of $9,765 and $0 493,393 72,567 Prepaid expenses 305,834 100,442 Other current assets 10,453 14,709 ----------------- ------------------ Total current assets 241,456,811 773,993 Property and equipment, net 44,020,418 20,331,353 Deferred financing costs, net of accumulated amortization of $429,818 and $60,872 8,217,102 4,067,932 Other assets 411,026 147,812 ----------------- ------------------ $ 294,105,357 $ 25,321,090 ----------------- ------------------ ----------------- ------------------ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 6,611,380 $2,483,793 Accrued interest 546,416 569,816 Accrued employee costs 221,785 205,012 Other accrued expenses 694,398 113,266 Short-term borrowings, net of discount - 401,262 Current portion of long-term debt 30,070 8,446 Current portion of capital lease obligations 787,874 311,166 ----------------- ------------------ Total current liabilities 8,891,923 4,092,761 Long-term debt, net of discount 249,725,538 11,756,283 Convertible bridge notes - 405,500 Capital lease obligations 6,114,509 6,801,926 ----------------- ------------------ Total liabilities 264,731,970 23,056,470 ----------------- ------------------ Commitments (Notes 7, 8 and 14) - - Stockholders' equity: Preferred stock, no par value, 5,160,335 shares authorized at September 30, 1997: Series C, convertible, voting, 2,600,000 shares issued and outstanding - 12,279,362 Series B, convertible, voting, 2,016,638 shares issued and outstanding - 3,670,060 Series A, convertible, non-voting, 118,667 shares issued and outstanding - 395,162 Preferred stock, $.0001 par value, 10,000,000 shares authorized at September 30, 1998; no shares designated, issued or outstanding - - Common stock, voting, no par value, 15,000,000 shares authorized at September 30, 1997; 3,262,900 shares issued and outstanding - (226,984) Common stock, voting, $.0001 par value, 100,000,000 shares authorized at September 30, 1998: Series A, 10,135,164 shares designated; 10,135,164 shares issued and outstanding 1,014 - Series B, 89,864,836 shares designated; 15,929,708 shares issued and outstanding 1,591 - Additional paid-in capital 45,617,220 - Warrants 31,963,295 1,000,960 Stockholder receivables (96,500) (96,500) Accumulated deficit (48,113,233) (14,757,440) ----------------- ------------------ Total stockholders' equity 29,373,387 2,264,620 ----------------- ------------------ $ 294,105,357 $ 25,321,090 ----------------- ------------------ ----------------- ------------------
See accompanying notes to consolidated financial statements F-3 FIRSTWORLD COMMUNICATIONS, INC. (formerly SpectraNet International) CONSOLIDATED STATEMENTS OF OPERATIONS - --------------------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30, -------------------------------------------------------- 1998 1997 1996 Service revenue $1,078,288 $ 75,118 $279,483 Other revenue 12,373 95,715 75,000 ---------------- ---------------- ---------------- 1,090,661 170,833 354,483 ---------------- ---------------- ---------------- Costs and expenses: Network development and operations 6,501,105 3,169,854 1,708,416 Selling, general and administrative expenses 10,641,312 4,724,649 2,409,442 Depreciation and amortization 2,424,466 501,354 75,258 ---------------- ---------------- ---------------- 19,566,883 8,395,857 4,193,116 ---------------- ---------------- ---------------- Loss from operations (18,476,222) (8,225,024) (3,838,633) Other income (expense): Interest expense (16,898,271) (1,372,377) (26,517) Interest income 6,749,367 149,243 8,958 ---------------- ---------------- ---------------- Loss before extraordinary item (28,625,126) (9,448,158) (3,856,192) Extraordinary item - extinguishment of debt (Notes 4 and 5) (4,730,667) (104,680) - ---------------- ---------------- ---------------- Net loss $(33,355,793) $ (9,552,838) $ (3,856,192) ---------------- ---------------- ---------------- ---------------- ---------------- ----------------
See accompanying notes to consolidated financial statements F-4 FIRSTWORLD COMMUNICATIONS, INC. (formerly SpectraNet International) CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) - -------------------------------------------------------------------------------
SERIES A SERIES B COMMON STOCK COMMON STOCK ADDITIONAL ------------------------------ ------------------------------- PAID-IN SHARES AMOUNT SHARES AMOUNT CAPITAL ------------- -------------- ------------- -------------- --------------- BALANCE AT OCTOBER 1, 1995 - $ - - $ - $ - Issuance of Series B preferred stock Issuance of Series B preferred stock for settlement of notes payable and for consulting services Repurchase of Series A preferred stock Issuance of Series B preferred stock for property and equipment Issuance of common stock for notes receivable Exercise of options to purchase common stock for shareholder notes receivable Net loss for 1996 ------------- -------------- ------------- -------------- --------------- BALANCE AT SEPTEMBER 30, 1996 - - - - - Cancellation of shareholder notes receivable for common stock repurchase Repayment of shareholder notes receivable Issuance of Series C preferred stock with warrants to purchase 520,000 shares of common stock, net of issuance costs of $704,638 Issuance of common stock warrants as finders fees Issuance of common stock warrant for cash Exercise of options and warrants to purchase common stock Issuance of common stock warrants with debt Net loss for 1997 ------------- -------------- ------------- -------------- --------------- BALANCE AT SEPTEMBER 30, 1997 - - - - - Exercise of options to purchase common stock - October 1997 to December 1997 - - - - - Issuance of Series A common stock with warrants to purchase 10,135,164 shares of Series B common stock, net of offering costs of $3,863,691 10,135,164 16,913,809 - - - Conversion of Series C preferred stock, Series B preferred stock, Series A preferred stock and common stock to Series B common stock as follows: Series C preferred stock; conversion ratio of 1.39:1, including anti-dilutive adjustments - - 3,621,120 12,279,362 - Series B preferred stock and common stock; conversion ratio of 1:1 - - 5,545,638 3,486,426 - Series A preferred stock; conversion ratio of 1:10 - - 11,867 395,162 - Issuance of Series B common stock with warrants to purchase 6,666,666 shares of Series B common stock, net of offering costs of $1,800,000 - - 6,666,666 12,466,665 - Issuance of warrants to purchase 3,713,094 shares of Series B common stock in connection with the issuance of 13% Senior Discount Notes - - - - - Exercise of options to purchase Series B common stock - - 67,917 55,901 - Establishment of $.0001 par value for Series A and B common stock in connection with Delaware reincorporation - (16,912,795) - (28,681,925) 45,594,720 Exercise of options to purchase Series B common 16,500 - 22,500 stock - post Delaware reincorporation Net loss for 1998 - - - - - ------------- -------------- ------------- -------------- --------------- BALANCE AT SEPTEMBER 30, 1998 10,135,164 $ 1,014 15,929,708 $ 1,591 $ 45,617,220 ------------- -------------- ------------- -------------- --------------- ------------- -------------- ------------- -------------- --------------- SERIES C CONVERTIBLE PREFERRED STOCK ------------------------------ SHARES AMOUNT ------------- -------------- BALANCE AT OCTOBER 1, 1995 - - Issuance of Series B preferred stock Issuance of Series B preferred stock for settlement of notes payable and for consulting services Repurchase of Series A preferred stock Issuance of Series B preferred stock for property and equipment Issuance of common stock for notes receivable Exercise of options to purchase common stock for shareholder notes receivable Net loss for 1996 ------------- -------------- BALANCE AT SEPTEMBER 30, 1996 - - Cancellation of shareholder notes receivable for common stock repurchase Repayment of shareholder notes receivable Issuance of Series C preferred stock with warrants to purchase 520,000 shares of common stock, net of issuance costs of $704,638 2,600,000 12,279,362 Issuance of common stock warrants as finders fees Issuance of common stock warrant for cash Exercise of options and warrants to purchase common stock Issuance of common stock warrants with debt Net loss for 1997 ------------- -------------- BALANCE AT SEPTEMBER 30, 1997 2,600,000 12,279,362 Exercise of options to purchase common stock - October 1997 to December 1997 - - Issuance of Series A common stock with warrants to purchase 10,135,164 shares of Series B common stock, net of offering costs of $3,863,691 - - Conversion of Series C preferred stock, Series B preferred stock, Series A preferred stock and common stock to Series B common stock as follows: Series C preferred stock; conversion ratio of 1.39:1, including anti-dilutive adjustments (2,600,000) (12,279,362) Series B preferred stock and common stock; conversion ratio of 1:1 - - Series A preferred stock; conversion ratio of 1:10 - - Issuance of Series B common stock with warrants to purchase 6,666,666 shares Series B common stock, net of offering costs of $1,800,000 - - Issuance of warrants to purchase 3,713,094 shares of Series B common stock in connection with the issuance of 13% Senior Discount Notes - - Exercise of options to purchase Series B common stock - - Establishment of $.0001 par value for Series A and B common stock in connection with Delaware reincorporation - - Exercise of options to purchase Series B common stock - post Delaware reincorporation Net loss for 1998 - - ------------- -------------- BALANCE AT SEPTEMBER 30, 1998 - $ - ------------- -------------- ------------- -------------- SERIES B CONVERTIBLE PREFERRED STOCK ------------------------------ SHARES AMOUNT ------------- -------------- BALANCE AT OCTOBER 1, 1995 837,667 $1,256,502 Issuance of Series B preferred stock 1,142,304 2,355,226 Issuance of Series B preferred stock for settlement of notes payable and for consulting services 33,334 50,000 Repurchase of Series A preferred stock Issuance of Series B preferred stock for property and equipment 3,333 8,332 Issuance of common stock for notes receivable Exercise of options to purchase common stock for shareholder notes receivable Net loss for 1996 ------------- -------------- BALANCE AT SEPTEMBER 30, 1996 2,016,638 3,670,060 Cancellation of shareholder notes receivable for common stock repurchase Repayment of shareholder notes receivable Issuance of Series C preferred stock with warrants to purchase 520,000 shares of common stock, net of issuance costs of $704,638 Issuance of common stock warrants as finders fees Issuance of common stock warrant for cash Exercise of options and warrants to purchase common stock Issuance of common stock warrants with debt Net loss for 1997 ------------- -------------- BALANCE AT SEPTEMBER 30, 1997 2,016,638 3,670,060 Exercise of options to purchase common stock - October 1997 to December 1997 - - Issuance of Series A common stock with warrants to purchase 10,135,164 shares of Series B common stock, net of offering costs of $3,863,691 - - Conversion of Series C preferred stock, Series B preferred stock, Series A preferred stock and common stock to Series B common stock as follows: Series C preferred stock; conversion ratio of 1.39:1, including anti-dilutive adjustments - - Series B preferred stock and common stock; conversion ratio of 1:1 (2,016,638) (3,670,060) Series A preferred stock; conversion ratio of 1:10 - - Issuance of Series B common stock with warrants to purchase 6,666,666 shares Series B common stock, net of offering costs of $1,800,000 - - Issuance of warrants to purchase 3,713,094 shares of Series B common stock in connection with the issuance of 13% Senior Discount Notes - - Exercise of options to purchase Series B common stock - - Establishment of $.0001 par value for Series A and B common stock in connection with Delaware reincorporation - - Exercise of options to purchase Series B common stock - post Delaware reincorporation Net loss for 1998 - - ------------- -------------- BALANCE AT SEPTEMBER 30, 1998 - $ - ------------- -------------- ------------- -------------- SERIES A CONVERTIBLE PREFERRED STOCK COMMON STOCK ------------------------- --------------------------- SHARES AMOUNT SHARES AMOUNT ----------- ------------ ------------ ------------- BALANCE AT OCTOBER 1, 1995 127,601 $ 424,912 2,520,000 $ (402,101) Issuance of Series B preferred stock Issuance of Series B preferred stock for settlement of notes payable and for consulting services Repurchase of Series A preferred stock Issuance of Series B preferred stock for property and equipment Issuance of common stock for notes receivable 396,000 99,000 Exercise of options to purchase common stock for shareholder notes receivable 330,000 74,167 Net loss for 1996 ----------- ------------ ------------ ------------- BALANCE AT SEPTEMBER 30, 1996 118,667 395,162 3,246,000 (228,934) Cancellation of shareholder notes receivable for common stock repurchase (90,000) (22,500) Repayment of shareholder notes receivable Issuance of Series C preferred stock with warrants to purchase 520,000 shares of common stock, net of issuance costs of $704,638 Issuance of common stock warrants as finders fees Issuance of common stock warrant for cash Exercise of options and warrants to purchase common stock 106,900 24,450 Issuance of common stock warrants with debt Net loss for 1997 ----------- ------------ ------------ ------------- BALANCE AT SEPTEMBER 30, 1997 118,667 395,162 3,262,900 (226,984) Exercise of options to purchase common stock - October 1997 to December 1997 - - 266,100 43,350 Issuance of Series A common stock with warrants to purchase 10,135,164 shares of Series B common stock, net of offering costs of $3,863,691 - - - - Conversion of Series C preferred stock, Series B preferred stock, Series A preferred stock and common stock to Series B common stock as follows: Series C preferred stock; conversion ratio of 1.39:1, including anti-dilutive adjustments - - - - Series B preferred stock and common stock; conversion ratio of 1:1 - - (3,529,000) 183,634 Series A preferred stock; conversion ratio of 1:10 (118,667) (395,162) - - Issuance of Series B common stock with warrants to purchase 6,666,666 shares Series B common stock, net of offering costs of $1,800,000 - - - - Issuance of warrants to purchase 3,713,094 shares of Series B common stock in connection with the issuance of 13% Senior Discount Notes - - - - Exercise of options to purchase Series B common stock - - - - Establishment of $.0001 par value for Series A and B common stock in connection with Delaware reincorporation - - - - Exercise of options to purchase Series B common stock - post Delaware reincorporation Net loss for 1998 - - - - ----------- ------------ ------------ ------------- BALANCE AT SEPTEMBER 30, 1998 - $ - - $ - ----------- ------------ ------------ ------------- ----------- ------------ ------------ ------------- Shareholder Warrants Receivables -------------- ------------ BALANCE AT OCTOBER 1, 1995 $ - $ - Issuance of Series B preferred stock Issuance of Series B preferred stock for settlement of notes payable and for consulting services Repurchase of Series A preferred stock Issuance of Series B preferred stock for property and equipment Issuance of common stock for notes receivable (99,000) Exercise of options to purchase common stock for shareholder notes receivable (74,167) Net loss for 1996 -------------- ------------ BALANCE AT SEPTEMBER 30, 1996 - (173,167) Cancellation of shareholder notes receivable for common stock repurchase 22,500 Repayment of shareholder notes receivable 54,167 Issuance of Series C preferred stock with warrants to purchase 520,000 shares of common stock, net of issuance costs of $704,638 16,000 Issuance of common stock warrants as finders fees 37,200 Issuance of common stock warrant for cash 200,000 Exercise of options and warrants to purchase common stock Issuance of common stock warrants with debt 747,760 Net loss for 1997 -------------- ------------ BALANCE AT SEPTEMBER 30, 1997 1,000,960 (96,500) Exercise of options to purchase common stock - October 1997 to December 1997 - - Issuance of Series A common stock with warrants to purchase 10,135,164 shares of Series B common stock, net of offering costs of $3,863,691 9,628,000 - Conversion of Series C preferred stock, Series B preferred stock, Series A preferred stock and common stock to Series B common stock as follows: Series C preferred stock; conversion ratio of - - 1.39:1, including anti-dilutive adjustments Series B preferred stock and common stock; conversion ratio of 1:1 - - Series A preferred stock; conversion ratio of 1:10 - - Issuance of Series B common stock with warrants to purchase 6,666,666 shares Series B common stock, net of offering costs of $1,800,000 6,333,335 - Issuance of warrants to purchase 3,713,094 shares of Series B common stock in connection with the issuance of 13% Senior Discount Notes 15,001,000 - Exercise of options to purchase Series B common stock - - Establishment of $.0001 par value for Series A and B common stock in connection with Delaware reincorporation - - Exercise of options to purchase Series B common stock - post Delaware reincorporation Net loss for 1998 - - -------------- ------------ BALANCE AT SEPTEMBER 30, 1998 $31,963,295 $ (96,500) -------------- ------------ -------------- ------------ Total Stockholders' Accumulated Equity Deficit (Deficit) ----------------- -------------- BALANCE AT OCTOBER 1, 1995 $ (1,348,410) $ (69,097) Issuance of Series B preferred stock 2,355,226 Issuance of Series B preferred stock for settlement of notes payable and for consulting services 50,000 Repurchase of Series A preferred stock (29,750) Issuance of Series B preferred stock for property and equipment 8,332 Issuance of common stock for notes receivable - Exercise of options to purchase common stock for shareholder notes receivable - Net loss for 1996 (3,856,192) (3,856,192) ----------------- -------------- BALANCE AT SEPTEMBER 30, 1996 (5,204,602) (1,541,481) Cancellation of shareholder notes receivable for common stock repurchase - Repayment of shareholder notes receivable 54,167 Issuance of Series C preferred stock with warrants to purchase 520,000 shares of common stock, net of issuance costs of $704,638 12,295,362 Issuance of common stock warrants as finders fees 37,200 Issuance of common stock warrant for cash 200,000 Exercise of options and warrants to purchase common stock 24,450 Issuance of common stock warrants with debt 747,760 Net loss for 1997 (9,552,838) (9,552,838) ----------------- -------------- BALANCE AT SEPTEMBER 30, 1997 (14,757,440) 2,264,620 Exercise of options to purchase common stock - October 1997 to December 1997 - 43,350 Issuance of Series A common stock with warrants to purchase 10,135,164 shares of Series B common stock, net of offering costs of $3,863,691 Conversion of Series C preferred stock, Series B preferred stock, Series A preferred stock and common stock to Series B common stock as follows: Series C preferred stock; conversion ratio of 1.39:1, including anti-dilutive adjustments - - Series B preferred stock and common stock; conversion ratio of 1:1 - - Series A preferred stock; conversion ratio of 1:10 Issuance of Series B common stock with warrants to purchase 6,666,666 shares Series B common stock, net of offering costs of $1,800,000 - 18,800,000 Issuance of warrants to purchase 3,713,094 shares of Series B common stock in connection with the issuance of 13% Senior Discount Notes - 15,001,000 Exercise of options to purchase Series B common stock - 55,901 Establishment of $.0001 par value for Series A and B common stock in connection with Delaware reincorporation - - Exercise of options to purchase Series B common 22,500 stock - post Delaware reincorporation Net loss for 1998 (33,355,793) (33,355,793) ----------------- -------------- BALANCE AT SEPTEMBER 30, 1998 $ (48,113,233) $ 29,373,387 ----------------- -------------- ----------------- --------------
See accompanying notes to consolidated financial statements F-5 FIRSTWORLD COMMUNICATIONS, INC. (formerly SpectraNet International) CONSOLIDATED STATEMENTS OF CASH FLOWS - --------------------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30, ----------------------------------------------------- 1998 1997 1996 CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (33,355,793) $(9,552,838) $ (3,856,192) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 2,424,466 501,354 75,258 Amortization of deferred financing costs 1,203,452 60,872 - Amortization of debt discount 14,571,093 58,242 - Non-cash interest expense 293,264 37,782 - Extraordinary loss on extinguishment of debt 3,730,667 104,680 - Changes in assets and liabilities: Restricted cash related to operating activities 50,000 (50,000) - Accounts receivable (420,826) 29,954 (101,771) Interest receivable (3,016,623) - - Other assets (314,350) (98,219) (116,117) Accounts payable and accrued expenses 4,702,092 1,462,457 1,830,947 ----------------- ----------------- -------------- Net cash used in operating activities (10,132,558) (7,445,716) (2,167,875) ----------------- ----------------- -------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment (26,068,310) (12,636,918) (908,120) Purchases of held-to-maturity marketable securities (236,701,191) - - Maturities of held-to-maturity marketable securities 71,110,181 - - Procurement of patents - (9,827) (15,317) ----------------- ----------------- -------------- Net cash used in investing activities (191,659,320) (12,646,745) (923,437) ----------------- ----------------- -------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of Senior Discount Notes and related warrants 250,205,000 - - Proceeds from issuance of Series A common stock and related warrants, net of offering costs 26,136,309 - - Proceeds from issuance of Series B common stock and related warrants, net of offering costs 18,800,000 - - Proceeds from stock option and warrant exercises 121,751 24,450 - Proceeds from issuance of Series B preferred stock - - 2,355,226 Proceeds from issuance of Series C preferred stock and related common stock warrants, net of offering costs - 4,528,862 - Proceeds from issuance of commons stock warrants - 200,000 - Proceeds from collection of stockholder receivables - 54,167 - Principal payments on capital leases (255,930) (114,197) (34,371) Proceeds from issuance of convertible bridge notes - 7,347,000 835,000 Proceeds from draws under revolving credit facility and related warrants 3,796,262 12,172,592 - Proceeds from short-term borrowings and related warrants - 1,000,000 - Principal payments on short-term borrowings (550,000) (500,000) - Proceeds from other long-term debt - - 27,510 Principal payments on other long-term debt (11,471) (26,643) (26,934) Principal payments on revolving credit facility (16,299,900) - Payment of deferred financing costs (8,646,920) (4,129,017) - ----------------- ----------------- -------------- Net cash provided by financing activities 273,295,101 20,557,214 3,156,431 ----------------- ----------------- -------------- Net increase in cash and cash equivalents 71,503,223 464,753 65,119 Cash and cash equivalents at beginning of period 536,275 71,522 6,403 ----------------- ----------------- -------------- Cash and cash equivalents at end of period $ 72,039,498 $ 536,275 $ 71,522 ----------------- ----------------- -------------- ----------------- ----------------- --------------
See accompanying notes to consolidated financial statements F-6
YEAR ENDED SEPTEMBER 30, ----------------------------------------------------- 1998 1997 1996 SUPPLEMENTAL CASH FLOWS INFORMATION: Cash paid during the period for interest $ 1,292,511 $ 440,178 $ 14,142 NON-CASH TRANSACTIONS: Property and equipment purchased under capitalized leases 45,221 7,097,437 105,808 Issuance of Series B preferred stock for settlement of note payable, for consulting services received, and for procurement of property and equipment - - 58,332 Issuance of common stock for stockholder receivables - - 173,167 Issuance of note payable to repurchase Series A preferred stock - - 29,750 Conversion of convertible bridge notes into Series C preferred stock and related warrants - 7,776,500 - Conversion of convertible bridge notes into Series A common stock and related warrants 405,000 - - Issuance of common stock warrants as finders fees - 10,000 - Non-cash deferred financing costs - 27,200 - Issuance of note payable to vendor for up-front service 150,000 - - fees Issuance of note payable for consulting services received - 50,000 - Cancellation of stockholder receivable for stock - 22,500 - repurchase
See accompanying notes to consolidated financial statements F-7 FIRSTWORLD COMMUNICATIONS, INC. (formerly SpectraNet International) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ----------------------------------------------------------------------------- NOTE 1 - THE COMPANY FirstWorld Communications, Inc. (the Company) commenced operations on September 1, 1993 under the name SpectraNet International. On January 29, 1998, the Company changed its name to FirstWorld Communications, Inc. Effective June 26, 1998, the Company changed its state of incorporation from California to Delaware (Note 9). Prior to fiscal 1998, the Company was considered a development stage enterprise, as defined in Statement of Financial Accounting Standards No. 7. The Company is a facilities-based integrated communications provider. The Company has a data-centric focus, with service offerings bundled to address the data and voice communications needs of emerging businesses. The Company's service offerings include data connectivity, high speed Internet access, local and wide area network (LAN/WAN) connectivity, web hosting, video communications and system integration services, as well as switch-based local and long distance telephone services. NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The consolidated financial statements include the accounts of FirstWorld Communications, Inc. and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the financial statement date, as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. CASH EQUIVALENTS The Company considers all highly liquid investments with original maturities of three months or less at the time of purchase to be cash equivalents. The Company invests primarily in high-grade short-term investments which consist of money market instruments and commercial paper. MARKETABLE SECURITIES Marketable securities consist principally of commercial paper with original maturities of beyond three months but less than six months. The Company has classified its marketable securities as held to maturity as management has the intent and ability to hold those securities to maturity. Such securities are recorded at cost, which approximates fair value. RESTRICTED CASH Restricted cash in support of outstanding letters of credit totaled $50,000 at September 30, 1997. No restricted cash exists at September 30, 1998. F-8 FIRSTWORLD COMMUNICATIONS, INC. (formerly SpectraNet International) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ----------------------------------------------------------------------------- REVENUE RECOGNITION The Company recognizes service revenue on local competitive access services in the month such services are provided. Billings to customers for services in advance of providing such services are deferred and recognized as revenue when earned. Other revenues consist primarily of royalties earned under a certain patent licensing agreement and are recorded when earned and when payment is reasonably assured. During fiscal 1998, approximately 25% of the Company's service revenue was derived from a single telecommunications customer. During fiscal 1997, approximately 73% of the Company's service revenue was derived under non-recurring service contracts with two governmental entities. CONCENTRATION OF CREDIT RISK The Company's financial instruments that are exposed to concentrations of credit risk consist principally of cash equivalents, marketable securities and accounts receivable. The Company places its short-term cash investments with high credit-quality financial institutions while commercial paper investments are placed with high credit-caliber corporate issuers. The Company limits the amount of credit exposure in any one institution or type of investment instrument. Credit risk with respect to accounts receivable is minimized because of the diversification of the Company's commercial telecommunications customer base. Credit is extended to commercial customers based on an evaluation of the customer's financial condition and generally collateral is not required. The Company maintains reserves for potential credit losses from such customers. As of September 30, 1998 and 1997, approximately 25% and 70% of accounts receivable, respectively, was due from a single customer. PROPERTY AND EQUIPMENT Property and equipment is recorded at cost and is depreciated using the straight-line method over the estimated useful lives of the assets. Costs capitalized in connection with the development of communication networks include expenses associated with network engineering, design and construction. Depreciation of communications networks and related infrastructure commences when the applicable network becomes commercially operational. The estimated useful lives of the Company's principal classes of assets are as follows: Network infrastructure 20 years Telecommunications 5 - 7 years Building and improvements 30 years Furniture, office equipment and other 3 - 7 years Leasehold improvements Shorter of estimated useful life or lease term
CAPITALIZATION OF INTEREST Interest costs incurred during the period of time that internally constructed assets are being made ready for their intended use are capitalized as part of acquiring such assets to the extent that these interest costs relate to financing obtained in order to prepare such assets for use. During fiscal 1998 and 1997, the Company capitalized approximately $450,000 and $52,000, respectively, in interest costs associated with the development of the Company's telecommunications networks. F-9 FIRSTWORLD COMMUNICATIONS, INC. (formerly SpectraNet International) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ----------------------------------------------------------------------------- DEFERRED FINANCING COSTS Deferred financing costs include commitment fees and other costs related to certain debt financing transactions and are being amortized over the term of the related debt using the interest method. DEBT DISCOUNT Discounts recorded in connection with the issuance of debt financing are deferred and amortized over the term of the related debt using the interest method. FAIR VALUE OF FINANCIAL INSTRUMENTS With the exception of the Company's Senior Discount Notes, management believes that the carrying amounts shown for the Company's financial instruments reasonably approximate their fair values. The fair value of the Company's Senior Discount Notes, determined based on quoted high-yield market bid prices, approximates $141,000,000 at September 30, 1998. The carrying amount of such Senior Discount Notes at September 30, 1998 is $249,596,346. LONG-LIVED ASSETS The Company assesses potential impairments to its long-lived assets when there is evidence that events or changes in circumstances have made recovery of the asset's carrying value unlikely. Potential impairment associated with network infrastructure costs is measured on the basis of specific network projects. An impairment loss would be recognized when the sum of the expected future net cash flows is less than the carrying amount of the asset. No such impairment losses have been identified by the Company during the fiscal years presented. STOCK-BASED COMPENSATION ACCOUNTING The Company measures compensation expense for its stock-based employee compensation plans using the intrinsic value method and provides pro forma disclosures of net loss as if the minimum value method had been applied in measuring compensation expense. Compensation charges for non-employee stock-based compensation is measured using fair value-based methods. INCOME TAXES Current income tax expense is the amount of income taxes expected to be payable for the current year. A deferred tax asset or liability is computed for both the expected future impact of differences between the financial statement and tax bases of assets and liabilities and for the expected future tax benefit to be derived from tax loss and tax credit carryforwards. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be "more likely than not" realized in future tax returns. Tax rate changes are reflected in the statement of operations in the period such changes are enacted. F-10 FIRSTWORLD COMMUNICATIONS, INC. (formerly SpectraNet International) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ----------------------------------------------------------------------------- NOTE 3 - PROPERTY AND EQUIPMENT Property and equipment consists of the following:
SEPTEMBER 30, 1998 1997 Network infrastructure $19,758,122 $12,636,955 Telecommunications equipment 8,971,835 5,048,156 Building and improvements 1,328,237 1,328,237 Furniture, office equipment and other 4,447,438 976,341 Leasehold improvements 633,175 507,573 Construction in process 11,881,300 427,986 ----------- ----------- 47,020,107 20,925,248 Accumulated depreciation (2,999,689) (593,895) ----------- ----------- $44,020,418 $20,331,353 ----------- ----------- ----------- -----------
The following is a summary of property and equipment acquired under capital leases, included in the above:
SEPTEMBER 30, 1998 1997 Network infrastructure $ 6,000,000 $ 6,000,000 Telecommunications equipment 218,747 218,747 Building and improvements 557,612 557,612 Furniture, office equipment and other 519,761 474,540 ----------- ----------- 7,296,120 7,250,899 Accumulated depreciation (613,035) (191,847) ----------- ----------- $ 6,683,085 $ 7,059,052 ----------- ----------- ----------- -----------
NOTE 4 - SHORT-TERM BORROWINGS On August 29, 1997, the Company obtained a $1,000,000, 18% per annum, short-term bridge loan with an institutional lender which was due on October 15, 1997. On September 17, 1997, the Company repaid $500,000 of the outstanding principal balance associated with this loan, plus accrued interest thereon, and extended the maturity date of the remaining principal balance of $500,000 to March 16, 1998 through the consummation of a new loan agreement with the lender. Simultaneous to the execution of the new loan agreement on September 17, 1997, which was considered to be a substantial modification of the original loan agreement which it superseded, the Company recognized an extraordinary charge on debt extinguishment totaling $104,680. The extraordinary charge consisted of the write-off of unamortized debt discount and deferred financing costs associated with the original bridge loan. The remaining $500,000 bridge loan balance was repaid during January 1998. On September 2, 1997, the Company issued a $50,000, 10% per annum, unsecured promissory note to a financial adviser of the Company as payment for services performed in connection with the attainment of debt financing. The note was repaid on October 2, 1997. F-11 FIRSTWORLD COMMUNICATIONS, INC. (formerly SpectraNet International) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ----------------------------------------------------------------------------- NOTE 5 - LONG-TERM DEBT Long-term debt consists of the following:
SEPTEMBER 30, 1998 1997 13% senior Discount Notes, net of unamortized discount totaling $220,403,654 at September 30, 1998 $249,596,346 $ - 14% Revolving Credit Facility, net of unamortized discount totaling $463,513 at September 30, 1997 - 11,746,861 14% unsecured term note with a vendor; monthly installments of principal and interest payable through December 2000 150,000 - Other 9,262 17,868 ------------ ----------- 249,755,608 11,764,729 Less current portion (30,070) (8,446) ------------ ----------- $249,725,538 $11,756,283 ------------ ----------- ------------ -----------
Aggregate principal maturities of long-term debt are as follows: FISCAL YEAR 1999 $ 30,070 2000 88,514 2001 40,678 2002 - 2003 - Thereafter 470,000,000 ------------- 470,159,262 Less unamortized discount on the 13% Senior Discount Notes (220,403,654) ------------- $ 249,755,608 ------------- -------------
SENIOR DISCOUNT NOTES On April 13, 1998, the Company completed an offering of debt securities pursuant to Rule 144A under the Securities Act of 1933, as amended (the Act), for gross proceeds of $250,205,000 (the High Yield Debt Offering). In the High Yield Debt Offering, the Company sold 470,000 units consisting of 13% Senior Discount Notes due 2008 (the Notes) and warrants to purchase an aggregate of 3,713,094 shares of the Company's Series B common stock (Note 10). The Company allocated $235,204,000 of the proceeds to the Notes and $15,001,000 to the warrants, representing their estimated fair value at the date of issuance as determined via an independent valuation. F-12 FIRSTWORLD COMMUNICATIONS, INC. (formerly SpectraNet International) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------- The Notes will accrete in value through April 15, 2003 at a rate of 13% per annum, compounded semi-annually, at which time $470,000,000 in aggregate principal amount at maturity will be outstanding. Cash interest will neither accrue nor be payable prior to April 15, 2003. Thereafter, cash interest on the Notes will accrue and will be payable semiannually in arrears on each April 15 and October 15, commencing October 15, 2003, at a rate of 13% per annum. The Company is not required to make mandatory redemption or sinking fund payments with respect to the Notes prior to maturity. The Notes are redeemable at the option of the Company, in whole or in part, at any time on or after April 15, 2003, at a premium declining to par on April 15, 2006, plus accrued and unpaid interest through the date of redemption. In the event of a change in control, as defined in the indenture governing the Notes, the holders of the Notes will have the right to require the Company to purchase their Notes in an amount equal to 101% of the aggregate principal amount at maturity or accreted value thereof, as applicable, plus accrued and unpaid interest to the date of purchase. The indenture pursuant to which the Notes are issued contains certain covenants which, among other things, limit the ability of the Company and its subsidiaries to incur additional indebtedness, issue stock in subsidiaries, pay dividends or make other distributions, engage in sale and leaseback transactions, create certain liens, enter into certain transactions with affiliates, sell assets of the Company and its subsidiaries, and enter into certain mergers and consolidations. The Company is in compliance with such covenants at September 30, 1998. REVOLVING CREDIT FACILITY On September 16, 1997, the Company entered into a five-year $23,000,000 revolving credit facility (the Credit Facility) with a syndicate of lenders (the Lenders) to provide financing for the construction of telecommunication networks and for general working capital purposes. The Company terminated this facility April 13, 1998, concurrent with the closing of the High Yield Debt Offering, and paid the Lenders a $1,000,000 termination fee pursuant to the terms thereof. The Company has recorded an extraordinary loss of $4,730,667 associated with such debt extinguishment, which loss is inclusive of the aforementioned termination fee and the write-off of unamortized debt discount and deferred financing costs associated with the Credit Facility. NOTE 6 - CONVERTIBLE BRIDGE NOTES Convertible bridge notes outstanding at September 30, 1997 consist of $405,500 in principal funding received through the issuance of 8% subordinated, convertible bridge notes pursuant to a private placement in fiscal 1997. On December 30, 1997, such convertible bridge notes were converted into shares of the Company's Series A common stock and related warrants at the conversion rate of $3.00 per share (Note 9). NOTE 7 - COMMITMENTS LEASE COMMITMENTS The Company leases its office space, certain network access facilities and fiber transport, and automobiles under noncancelable operating lease arrangements which expire on varying dates through fiscal 2008. Rent expense under noncancelable operating leases totaled $549,400, $361,156, and $108,429, during each of fiscal 1998, 1997 and 1996, respectively. The Company has procured certain of its property and equipment, including its Anaheim network central office switching facility, through capital leases which expire through fiscal 2001. Additionally, the Company has accounted for certain agreements with the City of Anaheim, as more fully described below and which extend through fiscal 2027, as both capital leases and executory contracts in the accompanying financial statements. F-13 FIRSTWORLD COMMUNICATIONS, INC. (formerly SpectraNet International) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------- Future minimum payments under capital leases (inclusive of the minimum payments allocated from the agreements with the City of Anaheim) and noncancelable operating leases are as follows:
FISCAL YEAR CAPITAL OPERATING LEASES LEASES 1999 $1,539,459 $1,206,955 2000 1,396,141 1,190,403 2001 1,289,953 1,205,561 2002 1,277,226 1,112,133 2003 1,277,226 223,713 Thereafter 30,014,822 462,916 ---------------- ---------------- Total minimum lease payments 36,794,827 $5,401,681 ---------------- ---------------- ---------------- Amount representing interest (29,892,444) ---------------- Present value of minimum lease payments $6,902,383 ---------------- ----------------
COMMITMENTS RELATING TO AGREEMENTS WITH THE CITY OF ANAHEIM During February 1997, the Company and its wholly-owned subsidiary FirstWorld Anaheim (FWA) entered into a 30-year Universal Telecommunications System Participation Agreement (as amended, the UTS Agreement) with the City of Anaheim, California (the City), under which FWA has agreed to design, construct and operate a fiber-optic telecommunications network in cooperation with the City. The UTS Agreement requires FWA to pay to the City (i) an annual payment in lieu of a franchise fee based on a percentage of FWA's "adjusted gross revenues," as defined, related to the Anaheim network, subject to a minimum annual payment of $1,000,000 for periods after June 30, 1999 through the term of the agreement, (ii) a percentage of FWA's "net revenues," as defined, derived from the Anaheim network, (iii) certain of the City's annual operating costs associated with the UTS Agreement, not to exceed $175,000 per year prior to the commencement of the third phase of the Anaheim network (as discussed below), and not to exceed $350,000 per year thereafter, subject to inflationary adjustments, and (iv) $20,000 per year to support the City's presence on the Internet, subject to inflationary adjustments. The UTS Agreement also requires the Company to deposit an amount equal to up to 15% of "net revenues" derived from the Anaheim network, as defined, to fund and maintain a $6,000,000 reserve account for debt service and capital improvements. As of September 30, 1998, no amounts have been deposited into such reserve account as "net revenues" have not yet been generated from the Anaheim network. Pursuant to the UTS Agreement, the City has been granted an irrevocable option to purchase all of the issued and outstanding stock of FWA at anytime after July 1, 2012 for its then current appraised fair value, the determination of which is to be derived by qualified independent appraisers selected by both the Company and the City, as more specifically defined within the UTS Agreement. Any sale or issuance of FWA stock can only be made if such sale or issuance is expressly made subject to the City's purchase option. Moreover, any sale of the Anaheim network or other sale of substantially all of FWA's assets can only be made if the City is equitably compensated for the loss of its future income stream under the UTS Agreement or the buyer expressly assumes the obligations of FWA under the UTS Agreement. Simultaneous to the execution of the UTS Agreement, FWA entered into a 30-year Agreement for Use of Operating Property (the Operating Property Agreement) with the City under which FWA has been granted the exclusive right to lease 60 of 96 fiber strands contained in an approximate 50 mile loop of fiber optic cable owned by the City, F-14 FIRSTWORLD COMMUNICATIONS, INC. (formerly SpectraNet International) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------- together with related facilities and rights. Under the terms of the Operating Property Agreement, the Company is obligated to make quarterly payments to the City in the amount of $113,862. In addition, the Company is obligated to pay all costs associated with operating and maintaining the leased property, including maintenance expenses, taxes, insurance premiums and pole usage fees. FWA has the right to assign its rights under the Operating Property Agreement, but will not be released from liability unless the City expressly consents. FWA also has the right to encumber its interest in the leased property. Although the Company considers the Operating Property Agreement to be a capital lease and the UTS Agreement to be an executory contract, certain of the minimum payments prescribed by the UTS Agreement have been accounted for as additional minimum capital lease payments. The Operating Property Agreement and the UTS Agreement were bid, negotiated and consummated simultaneously with each other. In addition, both agreements have identical 30-year terms and include certain cross-default provisions. Moreover, the Operating Property Agreement contains payment terms which are below the fair value of the benefits conferred by such agreement; whereas, the UTS Agreement contains payment terms which are above the fair value of the benefits conferred by such agreement. Accordingly, the Company has allocated the collective payments prescribed by the agreements between the two contracts based upon the estimated fair value of the benefits the Company receives under each of the two agreements. Future minimum payments prescribed by the UTS Agreement and not allocated to the capital lease total $239,555, $373,220, $373,220, $373,220, $373,220 and $8,770,670 during each of fiscal 1999, 2000, 2001, 2002, 2003 and thereafter, respectively. Pursuant to the UTS Agreement, FWA is required to meet certain future performance requirements for the completion of network design and the commencement of network construction related to certain phases of the city-wide network. The first phase, which extended service to identified municipal facilities, was substantially completed in October 1997. The second phase requires service to be extended in the ordinary course of business (i.e., within six months following execution of a customer service agreement) to commercial, industrial and governmental customers within certain defined service areas. The Company was required to complete 44% of the first and second phases by April 1, 1998 and is further required to complete 90% of the first and second phases by December 31, 1998, plus a 180-day cure period in each case. The Company has constructed and installed the necessary infrastructure to satisfy the 44% completion requirement and expects that the completion of infrastructure currently under construction and approved for construction will satisfy the 90% completion requirement in a timely manner. In the event that FWA does not meet the specified performance deadlines related to completion of the first and second phases of the Anaheim network due to financial or other reasons, the City may elect to either terminate the Operating Property Agreement or to immediately exercise its option to purchase all of the issued and outstanding stock of FWA under the same option terms, as defined within the UTS Agreement, which otherwise do not become effective until after July 1, 2012. Any termination of the Operating Property Agreement would have a material adverse effect on the Company's business, financial condition and results of operations. Under the UTS Agreement, the third phase of the Anaheim network, which allows service to be extended in the ordinary course of business to all customers within the city, including residential customers, will be commenced only after the economic feasibility of the third phase is validated by an independent consultant's report and financing is arranged. FWA has agreed to cause a feasibility study with respect to the third phase to be completed no later than January 1, 2000, and thereafter to provide annual updates to the study if necessary. If the Company determines not to proceed with the development of the third phase of the Anaheim network, or if for any reason the principal financing for the third phase is not funded or construction of the third phase is not commenced by December 31, 2002, then the City may pursue development of the third phase on its own. The UTS Agreement also requires FWA to commence construction of a demonstration center in the City's downtown area by November 30, 1998, and to complete such demonstration center by June 30, 1999. However, as a result of a change in the proposed scope of the project, FWA now contemplates leasing additional office space in the downtown area of Anaheim and housing a demonstration center in the leased facilities. The Company expects the demonstration center to be operational prior to March 31, 1999. Although the Company believes that it is in compliance with its obligations with respect to the demonstration center, the City has asserted its belief that the Company is not satisfying such obligations. The parties are currently in the process of attempting to resolve these issues. The Company does not believe that the ultimate resolution will have a material adverse effect on the Company's results of operations, liquidity or financial position. Pursuant to a Development Fee Arrangement dated simultaneous to the aforementioned City agreements, for a period of five years, commencing with the earlier to occur of the closing of the financing for or the commencement of construction of the first Additional Network (as defined below), the Company must pay to the City a lump sum development fee for each Additional Network which the Company develops ($300,000 for each Additional Network financed in the first year; $200,000 for each Additional Network financed in the second year; and $100,000 for each Additional Network financed in the third, fourth and fifth years, which amounts must be paid within thirty days F-15 FIRSTWORLD COMMUNICATIONS, INC. (formerly SpectraNet International) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------- following the closing of the principal financing for an Additional Network or the commencement of construction of such Additional Network, whichever occurs first). "Additional Network" means (a) any expansion of the Anaheim network into one or more adjacent or nearby cities where FWA enters into a revenue sharing agreement with any such city, and (b) any separate communications system developed by any other subsidiary of the Company that holds a Certificate of Public Convenience and Necessity issued by the Public Utilities Commission and enters into a revenue sharing agreement with one or more public entities. COMMITMENTS RELATING TO AGREEMENTS WITH THE IRVINE COMPANY On March 5, 1998, FirstWorld Orange Coast (FWOC), a wholly-owned subsidiary of the Company, and The Irvine Company entered into two agreements regarding FWOC's development of a network to serve certain areas that have been or are planned to be developed by The Irvine Company (the Irvine Network). The Company has guaranteed the payment obligations of FWOC under each of such agreements. Pursuant to an Agreement for Lease of Telecommunications Conduit dated as of March 5, 1998 (the Conduit Lease), FWOC leases from The Irvine Company space within two underground telecommunications tubes (the Conduit), and, in connection therewith, has received the non-exclusive right to use undivided space within the pull boxes serving such Conduit (collectively, the Leased Premises). The Conduit Lease applies to (i) an existing Conduit system within certain already-developed areas in the Irvine Spectrum and (ii) Conduit to be constructed in the future in the as yet undeveloped areas of the Irvine Spectrum. The Irvine Company may also install Conduit in other areas it may develop in the cities of Irvine, Newport Beach and Tustin, and in unincorporated areas of Orange County, and such areas may in the future be incorporated into the Conduit Lease upon the mutual agreement of the parties (Additional Areas). The term of the Conduit Lease runs through December 31, 2027. The Conduit Lease obligates FWOC to install fiber optic cable (Cable) in the Conduit pursuant to a phasing plan. A phase is completed when sufficient Cable has been installed to enable FWOC to connect and provide service (for that portion of the Irvine Network) to property abutting the Conduit. Upon termination of the agreement, the Cable will be owned by The Irvine Company. If FWOC fails to complete installation of the required Conduit within 18 months following March 5, 1998, The Irvine Company may, until such installation is completed, terminate the Conduit Lease. The Conduit Lease obligates FWOC to make quarterly rent payments to The Irvine Company based upon its "adjusted gross revenue", as defined, from the Irvine Network. In addition, FWOC is obligated to pay all costs associated with its lease, operation, maintenance, repair and use of the Leased Premises, including maintenance expenses, taxes and insurance premiums. Any assignment of FWOC's rights under the Conduit Lease and any sale of a controlling interest in FWOC require The Irvine Company's prior approval, and The Irvine Company has a right of first refusal in the event of any such proposed sale. Based upon its term, the Conduit Lease is a capital lease. However, as such lease does not prescribe any fixed rental payments and as it is not practicable for the Company to estimate any future probable contingent rental payments associated with such lease, no amount has been capitalized in the accompanying Consolidated Financial Statements. Contingent rental payments associated with this lease are recorded as additional operating expenditures when they become due pursuant to the lease. Concurrently with the execution of the Conduit Lease, FWOC and The Irvine Company executed a Telecommunications System License Agreement (the License Agreement) which provides FWOC, with some exceptions, with the right and obligation to provide telecommunications services to (i) the 106 buildings currently owned by The Irvine Company in the Irvine Spectrum area, (ii) commercial, industrial and retail buildings in the future owned by The Irvine Company in the Irvine Spectrum, and (iii) under certain circumstances in The Irvine Company's discretion, similar buildings located in the Additional Areas and other locations in California. F-16 FIRSTWORLD COMMUNICATIONS, INC. (formerly SpectraNet International) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------- The License Agreement requires FWOC to pay The Irvine Company a license fee each calendar quarter, subject to an annual CPI increase that will not be less than 2% or greater than 6%. The base license fee was initially $62,500 for the buildings owned by Irvine in the Irvine Spectrum area at the time that the License Agreement was consummated. Pursuant to the License Agreement, such fee is increased or decreased over its term based on the rentable square footage of the buildings that are from time to time subject to the License Agreement. As of September 30, 1998, such fee totals $88,000 per calendar quarter. Future minimum payments prescribed by the License Agreement, based upon this current fee and assuming a 2% per annum upward CPI adjustment over its term, total approximately $359,000, $366,000, $374,000, $381,000, $389,000 and $11,747,000 during each of fiscal 1999, 2000, 2001, 2002, 2003 and thereafter, respectively. The License Agreement provides FWOC with the right to install, maintain, operate, replace and remove Cable and associated communications equipment (Equipment) in, as well as access rights to, such buildings, subject to the rights of The Irvine Company's tenants and to reasonable requirements and procedures imposed by The Irvine Company. Except with respect to buildings that are leased to a single tenant, The Irvine Company is required to provide FWOC with a reasonable amount of equipment room space in each building, sufficient to enable FWOC to install Cable and Equipment and deliver services. FWOC's rights to a building are non-exclusive, meaning that The Irvine Company can grant similar licenses to other service providers. Although all the Cable becomes the property of The Irvine Company upon termination of the License Agreement, FWOC has the right to remove and retain ownership of the Equipment, subject to The Irvine Company's election to purchase the Equipment at a price to be negotiated by the parties. Subject to certain qualifications, FWOC will have the obligation to provide telecommunications services to any tenant who wishes to subscribe with FWOC for those services, and FWOC is required to install Cable and Equipment in that tenant's building if FWOC owns or leases Conduit located within 1,000 feet of that building. Under certain circumstances, FWOC may be required to provide completion and performance bonds to The Irvine Company in connection with that work. To the extent that FWOC provides fiber optic service to a building, it is required to achieve and maintain standards of minimum reliability. Subject to force majeure, if there is a system-wide failure to provide such service that exceeds five consecutive days, The Irvine Company has the right to use the network (and if necessary bring in an alternative service provider) and to charge its costs to FWOC. Whenever FWOC is the first competitive access provider to a building, it is required to install a building entrance conduit system (which connects the building to the street access point) (a BECS), with a capacity equal to 200% of the capacity required by FWOC to service the building. The Irvine Company can grant other providers the right to use that BECS, but must pay or cause that provider to pay FWOC 50% of FWOC's cost of installing the BECS, which costs are subject to increase based on a CPI calculation. Where a BECS already exists, The Irvine Company must make any excess capacity therein available to FWOC. OTHER COMMITMENTS The Company is party to a contract with a long distance carrier pursuant to which the Company is committed to minimum service fees. Such minimum fees aggregate $487,500 and $1,437,500 during fiscal 1999 and 2000, respectively. The Company is party to a network services agreement with a provider of voicemail and data services under which future minimum payments aggregate $239,040, $286,560 and $23,880 during fiscal 1999, 2000 and 2001, respectively. Additionally, the Company is party to an agreement with a provider of data processing and billing services under which future minimum payments aggregate $150,000 during each of fiscal 1999, 2000 and 2001. During fiscal 1998, the Company entered into separate management consulting service agreements with its two majority shareholders (or affiliates thereof) whereby such parties will provide general management consulting services to the Company for a period of three years commencing January 1, 1998. Pursuant to such agreements, as F-17 amended, the Company is required to pay to the related parties aggregate consulting fees totaling $500,000 per annum. Related party consulting fees recorded by the Company during fiscal 1998 totaled $840,000. Future minimum consulting fees under these agreements aggregate $1,000,000, $1,000,000 and $250,000 during each of fiscal 1999, 2000 and 2001, respectively. The Company is party to an arrangement with the owner of a retail development located in Orange County, California, whereby it is required to remit to the owner of such development a percentage of "adjusted gross revenues", as defined, derived from serving tenant customers located within such development. NOTE 8 - CEO EMPLOYMENT AGREEMENT On September 28, 1998, the Company entered into an Employment Agreement (the Employment Agreement) pursuant to which the Company retained the services of a new President and Chief Executive Officer (the CEO) effective October 1, 1998 (the Commencement Date). The Employment Agreement has a three-year term ending on the close of business on September 30, 2001, unless terminated earlier by either party, and provides an initial annual base salary of $200,000 per annum. Additionally, the Employment Agreement granted the CEO an Equalization Payment (as defined within the Employment Agreement) in the amount of $4,000,000, payable in three separate installments. The first $2,000,000 installment became due and was paid on October 1, 1998, the employment Commencement Date, while the second and third $1,000,000 installments are due and payable on October 1, 1999 and October 1, 2000, respectively. The CEO must be employed by the Company on the date that the second and third installments become due to be eligible to receive such payments unless the Company terminates the CEO's employment other than for cause or the CEO terminates his own employment for good reason (as defined in the Employment Agreement) prior to the installment date. In addition, the CEO may elect to receive all or any portion of the second and third installment payments in the form of the Company's Series B common stock. If the CEO elects to receive any of the second or third installment payments in Series B common stock, such stock shall be valued at $5.00 and $7.50 per share, respectively. The Employment Agreement stipulates that the CEO will also be eligible for the following performance-based bonuses: (i) if the Company consummates a Qualified Initial Public Offering (as defined in the Employment Agreement) with a price of at least $10.00 per share (subject to adjustment as set forth in the Employment Agreement) within the first 18 months after the Commencement Date, the Company will pay the CEO a $1,000,000 cash bonus; (ii) if the Company consummates a Qualified Initial Public Offering with a price of at least $10.00 per share (subject to adjustment as set forth in the Employment Agreement) within the first 12 months after the Commencement Date, the Company will be obligated to pay the CEO a $4,207,500 cash bonus on September 30, 2001 (unless otherwise accelerated as described in the Employment Agreement); (iii) if the Company consummates a Qualified Initial Public Offering with a price of at least $12.50 per share (subject to adjustment as set forth in the Employment Agreement) within the first 24 months after the Commencement Date, the Company will be obligated to pay the CEO a $8,415,000 cash bonus on September 30, 2001 (unless otherwise accelerated as described in the Employment Agreement); provided that if the CEO earns the payment described in this clause (iii) he will not be entitled to receive the payment described in clause (ii) above; and (iv) if the Company has a market capitalization of at least $1.2 billion (as adjusted as described in the Employment Agreement) for a period of 20 consecutive trading days during a three-year period beginning on the Commencement Date, the Company will be obligated to pay the CEO a cash payment equal to $16,830,000 minus any amounts he receives pursuant to clause (ii) or (iii) above on September 30, 2001 (unless otherwise accelerated as described in the Employment Agreement). The Employment Agreement also granted the CEO on October 1, 1998 an option to purchase 2,805,000 shares of Series B common stock at an exercise price of $6.00 per share (subject to anti-dilution protections set forth in the Employment Agreement). The option vests (i) with respect to 1/3 of the shares covered by the option on the Commencement Date, (ii) with respect to 1/3 of the shares covered by the option on the first anniversary of the Commencement Date and (iii) with respect to the remaining 1/3 of the shares covered by the option on the second anniversary of the Commencement Date (unless otherwise accelerated in accordance with the terms of the Employment Agreement). F-18 FIRSTWORLD COMMUNICATIONS, INC. (formerly SpectraNet International) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------- NOTE 9 - STOCKHOLDERS' EQUITY EQUITY RECAPITALIZATION On December 30, 1997, the Company (i) converted its three existing classes of preferred stock into common stock in accordance with the automatic conversion provision of its then existing charter in order to simplify the Company's capital structure and to eliminate the rights, preferences and privileges of the preferred stock; (ii) amended its Articles of Incorporation to substantially increase the Company's authorized capital; and (iii) amended its Articles of Incorporation to designate two series of common stock, with the investors in the below-referenced private placement occurring on December 30, 1997 receiving Series A common stock and all then existing shares of common stock (including common stock issued upon conversion of the then existing preferred stock) being designated as Series B common stock. The Series A common stock and Series B common stock are identical in all material respects, except that the holders of Series A common stock possess ten votes per share on all matters subject to a vote of shareholders while the holders of Series B common stock possess one vote per share. Pursuant to the amended Articles of Incorporation, the Company may also issue Preferred stock from time to time in one or more series. As of September 30, 1998, no such preferred stock has been issued. PRIVATE PLACEMENTS On April 13, 1998, the Company consummated a private placement of equity securities with Spectra 3 and Enron (the Additional Equity Investment) pursuant to the exercise of an existing option held by Spectra 3 and Enron. Pursuant to the Additional Equity Investment, the Company sold to each of Spectra 3 and Enron 3,333,333 shares of Series B common stock, resulting in aggregate offering proceeds totaling $18,800,000, net of offering commissions. In connection with this private placement, the Company also issued to Spectra 3 and Enron warrants to purchase an additional 3,333,333 shares of Series B common stock (Note 10). On December 30, 1997, the Company consummated a private placement of equity securities with Colorado Spectra 3, LLC (Spectra 3) and Enron Capital & Trade Resources Corp. (Enron). In connection with this placement, the Company issued 5,000,000 shares of newly created Series A common stock to each of Spectra 3 and Enron at an issue price of $3.00 per share pursuant to a common stock purchase agreement by and among the Company, Enron, Spectra 3 and the holders (the Noteholders) of $405,500 in principal amount of the Company's convertible subordinated bridge notes (Note 6). The Company also issued an aggregate of 135,164 shares of Series A common stock to the Noteholders upon the automatic conversion of the bridge notes pursuant to the terms thereof at a conversion price of $3.00 per share. Aggregate proceeds from this offering, exclusive of the conversion of the bridge notes, totaled $26,136,309, net of offering commissions and certain other advisory fees paid in connection with the consummation of this equity placement. In connection with this private placement, the Company also issued i) to each of Spectra 3 and Enron warrants to purchase 5,000,000 shares of newly created Series B common stock, and ii) to the Noteholders warrants to purchase an aggregate of 135,164 shares of such Series B common stock (Note 10). On January 31, 1997, in connection with a private placement offering, the Company issued 2,600,000 shares of Series C preferred stock, consisting of 1,044,700 shares issued for cash proceeds totaling $4,518,862, net of placement agent commissions and related fees, and 1,555,300 shares issued through the retirement of convertible bridge notes at $5.00 per share. In connection with this offering, the holders of Series C shares also received warrants for the purchase of 520,000 shares of common stock (Note 10). During fiscal 1996, in connection with various private placement offerings, the Company issued 1,142,304 shares of Series B preferred stock for proceeds totaling $2,355,226. F-19 FIRSTWORLD COMMUNICATIONS, INC. (formerly SpectraNet International) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------- DELAWARE REINCORPORATION Effective June 26, 1998, the Company changed its state of incorporation from California to Delaware. In connection therewith, a par value equal to $.0001 per share was assigned to each series of common and preferred stock. As a result, the Consolidated Statement of Stockholders' Equity for fiscal 1998 reflects a reclassification to additional paid-in capital for the amounts in excess of par value. NOTE 10 - WARRANTS During fiscal 1998, 1997 and 1996, the Company's non-employee warrant activity was as follows: In connection with the High Yield Debt Offering which was consummated on April 13, 1998, the Company issued to the initial purchasers of the Notes warrants to purchase 3,713,094 shares of Series B common stock at an exercise price of $0.01 per share. Such warrants are exercisable at any time on or after the earlier to occur of May 1, 1999, an initial public offering of the Company's common stock or in the event of a change in control, as defined in the warrant agreement, and expire on April 15, 2008. Such warrants contain customary adjustments to protect against dilution, as well as certain additional anti-dilutive adjustments as defined in the warrant agreement. As of September 30, 1998, all of these warrants remain outstanding. In connection with the December 1997 private placement of Series A common stock, the Company issued warrants for the purchase of 10,135,164 shares of Series B common stock to the investors therein. Such warrants were issued with an exercise price of $3.00 per share, contain customary adjustments to protect against dilution, and may be exercised at any time prior to the first to occur of (i) December 30, 2004; (ii) the merger of the Company with or into another entity in which the shareholders of the Company immediately prior to the merger own less than 50% of the voting securities of the surviving entity immediately following the merger; and (iii) the sale by the Company of all or substantially all of its assets. As of September 30, 1998, all of these warrants remain outstanding. In connection with the private placement of Series A common stock referred to above, the Company also issued to certain financial advisors warrants to purchase 17,500 and 30,000 shares of Series B common stock at exercise prices of $6.00 and $5.00, respectively, all of which have terms of five years and contain customary adjustments to protect against dilution. As of September 30, 1998, all of these warrants remain outstanding. During fiscal 1997, in connection with the attainment of a revolving credit facility, the Company issued to the lender warrants to purchase 800,000 shares of common stock. Such warrants were issued with an exercise price of $6.00 per share, a term of five years, and contain customary adjustments to protect against dilution, as well as certain additional anti-dilutive adjustments as defined in the warrant agreement. As a result of the capital transaction and the equity recapitalization which occurred on December 30, 1997, these warrants are currently exercisable into 800,000 shares of Series B common stock at an exercise price of $3.00 per share. As of September 30, 1998, all of these warrants remain outstanding. In connection with the consummation of the credit facility described above, the Company also issued to certain financial advisors warrants to purchase 83,400 shares of common stock, which warrants have an exercise price of $6.00 and a term of five years. As a result of the equity recapitalization which occurred on December 30, 1997, these warrants are currently exercisable into shares of Series B common stock. As of September 30, 1998, all of these warrants remain outstanding. During fiscal 1997, in connection with the attainment of short-term bridge financing, the Company issued to the lender warrants to purchase 300,000 shares of common stock. Such warrants were issued with an exercise price of $6.00 per share, a term of seven years, and contain customary adjustments to protect against dilution, as well as certain additional anti-dilutive adjustments as defined in the warrant agreements. As a result of the capital transaction and the equity recapitalization which occurred on December 30, 1997 and the capital transaction occurring on April 13, 1998, such warrants are currently exercisable into 470,092 shares of Series B common stock F-20 FIRSTWORLD COMMUNICATIONS, INC. (formerly SpectraNet International) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------- at an exercise price of $3.83 per share. As of September 30, 1998, all of these warrants remain outstanding. During fiscal 1997, in connection with the issuance of convertible bridge notes, warrants for the purchase of 33,789 shares of common stock were issued to the note holders. Such warrants, which expire in July 2002, have an exercise price of $6.00 per share and contain customary adjustments to protect against dilution. As a result of the equity recapitalization which occurred on December 30, 1997, these warrants are currently exercisable into shares of Series B common stock. As of September 30, 1998, all of these warrants remain outstanding. During fiscal 1997, the Company issued to certain legal service providers warrants to purchase 19,000 and 5,000 shares of common stock at exercise prices of $.50 and $5.00, respectively. Such warrants have terms of five years and contain customary adjustments to protect against dilution. As a result of the equity recapitalization which occurred on December 30, 1997, these warrants are currently exercisable into shares of Series B common stock. As of September 30, 1998, all of these warrants remain outstanding. During fiscal 1997, the Company issued a warrant for the purchase of 800,000 shares of common stock to a single investor for cash proceeds totaling $200,000, which warrant has a term of five years. As issued, the original warrant agreement contained a complex anti-dilution provision pursuant to which the number of underlying common shares and exercise price per common share would have been adjusted based upon the occurrence of certain future events, as defined in the warrant agreement. On December 30, 1997, the warrant agreement was amended whereby the number of shares purchasable under the warrant was set at 2,110,140 shares of Series B common stock with an exercise price of $1.80 per share. This warrant, as amended, remains subject to certain customary adjustments to protect against dilution. As of September 30, 1998, no shares have been issued pursuant to this warrant. In connection with a fiscal 1997 private placement of Series C preferred stock, the Company issued warrants for the purchase of 520,000 shares of common stock to the investors. Such warrants were issued with an exercise price of $5.00 per share, a term of five years, and contain customary adjustments to protect against dilution, as well as certain additional anti-dilutive adjustments as defined in the warrant agreements. As a result of the capital transactions which occurred on December 30, 1997 and April 13, 1998, such warrants are currently exercisable into 736,564 shares of Series B common stock at an exercise price of $3.53 per share. As of September 30, 1998, all of these warrants remain outstanding. In connection with the private placement of Series C preferred stock referred to above, the Company also issued to certain financial advisors warrants to purchase 218,118 and 15,000 shares of common stock at exercise prices of $5.00 and $.50, respectively, all of which have terms of five years and contain customary adjustments to protect against dilution. During fiscal 1997, 5,000 of the $.50 warrants were exercised for proceeds totaling $2,500. As a result of the equity recapitalization which occurred on December 30, 1997, the remaining outstanding warrants are currently exercisable into shares of Series B common stock. As of September 30, 1998, all of the remaining warrants remain outstanding. As a result of the equity recapitalization which occurred on December 30, 1997, outstanding warrants to purchase 139,494 shares of Series B preferred stock, as previously issued in fiscal 1994, are currently exercisable into shares of Series B common stock. Such warrants expire in April 1999 and contain customary adjustments to protect against dilution. As of September 30, 1998, all of these warrants remain outstanding. The fair value of the above-referenced warrants was determined at their time of grant via application of the Black-Scholes option pricing model or, with respect to those warrants issued in connection with the High Yield Debt Offering, based on an independent valuation. F-21 FIRSTWORLD COMMUNICATIONS, INC. (formerly SpectraNet International) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------ The following table summarizes information about warrants outstanding at September 30, 1998:
OUTSTANDING EXERCISABLE --------------------------------------------------------- --------------------------------- NUMBER WEIGHTED- NUMBER OUTSTANDING AVERAGE WEIGHTED- EXERCISABLE WEIGHTED- RANGE OF AS OF REMAINING AVERAGE AS OF AVERAGE EXERCISE SEPTEMBER 30, CONTRACTUAL EXERCISE SEPTEMBER 30, EXERCISE PRICES 1998 LIFE (YEARS) PRICE 1998 PRICE $.01 3,713,094 9.6 $.01 - - $.50 29,000 4.3 $.50 29,000 $.50 $1.50-1.80 2,249,634 3.1 $1.78 2,249,634 $1.78 $3.00-3.83 12,141,820 5.9 $3.06 12,141,820 $3.26 $5.00-6.00 387,807 4.2 $5.35 387,807 $4.50 ----------------- ---------------- 18,521,355 14,808,261 ----------------- ---------------- ----------------- ----------------
NOTE 11 - STOCK OPTIONS AND PURCHASE RIGHTS The Company has a 1995 Incentive Stock Option Plan (the 1995 Plan) and a 1997 Stock Plan (the 1997 Plan) (collectively, the Plans) under which stock options or stock purchase rights to acquire an aggregate of 1,500,000 shares and 1,500,000 shares, respectively, of Series B common stock may be granted to employees and directors of the Company, as well as to non-employee consultants of the Company under the 1997 Plan. Both plans provide for the granting of incentive stock options (within the meaning of Section 422A of the Internal Revenue Code) while the 1997 Plan also provides for the granting of non-statutory stock options. Additionally, stock purchase rights may also be granted under the 1997 Plan. The terms of stock options granted under the Plans are determined by the Board of Directors. Stock options may be granted for periods of up to ten years at a price per share not less than the fair market value of the Company's Series B common stock at the date of grant for incentive stock options and not less than 85% of the fair market value of the Company's Series B common stock at the date of grant for non-statutory stock options. In the case of incentive and non-statutory stock options granted under Plans to employees, directors or consultants who, at the time of grant of such options, own stock representing more than 10% of the voting power of all classes of stock of the Company, the exercise price shall be no less than 110% of the fair market value of the Company's Series B common stock at the date of grant. Additionally, the term of incentive stock option grants under the Plans is limited to five years if the grantee owns in excess of 10% of the voting power of all classes of stock of the Company at the time of grant. Options granted under the Plans generally vest to the option holder ratably over a period of four to five years beginning on the grant date. The terms of stock purchase rights granted under the 1997 Plan are determined by the Board of Directors. Such purchase rights may be issued either alone, in addition to, or in tandem with other awards granted under the 1997 Plan and/or cash awards made outside of the 1997 Plan. The Company has a 1998 Stock Purchase Plan (the 1998 Plan) pursuant to which it may grant to key employees and directors stock purchase rights to acquire an aggregate of 500,000 shares of Series B common stock. The terms of stock purchase rights granted under the 1998 Plan are determined by the Board of Directors. Under the 1998 Plan, up to 50% of the aggregate purchase price for shares subject to stock purchase rights may be paid by the offeree in the form of a promissory note to the Company. The Company measures compensation expense for its stock-based employee compensation plans using the intrinsic value method and provides pro forma disclosures of net loss as if the minimum value method had been applied in measuring compensation expense. Had compensation cost for the Company's stock-based compensation plans been determined based on the minimum value method at the grant dates for awards under this plan consistent with the method prescribed by Statement of Financial Accounting Standards No. 123, the Company's net loss would have been increased to the pro forma amounts indicated below: F-22 FIRSTWORLD COMMUNICATIONS, INC. (formerly SpectraNet International) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30, 1998 1997 1996 NET LOSS: As reported $33,355,793 $9,552,838 $3,856,192 Pro forma $33,434,078 $9,564,128 $3,859,992
The minimum value of each option and stock purchase right grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants during fiscal 1998, 1997 and 1996: dividend yield of 0.0% for all periods; volatility of 0.0% for all periods; risk-free interest rates of 5.88%, 6.07% and 5.79%; and an expected life of 5.0 years for all periods, except with respect to stock purchase rights granted during fiscal 1998, which rights have a term of .17 years. The weighted average fair value of options and stock purchase rights granted during fiscal 1998, 1997 and 1996 was approximately $.57, $.09 and $.06, respectively. Stock option and stock purchase right transactions during the three fiscal years ended September 30, 1998, all of which relate to employee transactions, are summarized as follows:
WEIGHTED WEIGHTED AVERAGE STOCK AVERAGE EXERCISE PURCHASE EXERCISE OPTIONS PRICE RIGHTS PRICE Outstanding at September 30, 1995 763,333 $ .15 - - Granted 788,667 $ .25 - - Exercised (330,000) $ .22 - - Canceled (432,000) $ .21 - - --------------- ---------------- Outstanding at September 30, 1996 790,000 $ .18 - - Granted 489,400 $ .82 - - Exercised (101,900) $ .22 - - Canceled (138,700) $ .48 - - --------------- ---------------- Outstanding at September 30, 1997 1,038,800 $ .44 - - Granted 1,420,766 $3.71 300,000 $4.50 Exercised (350,517) $ .35 - - Canceled (75,854) $2.44 - - --------------- ---------------- Outstanding at September 30, 1998 2,033,195 $2.66 300,000 $4.50 --------------- ---------------- --------------- ----------------
F-23 FIRSTWORLD COMMUNICATIONS, INC. (formerly SpectraNet International) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------ The following table summarizes information about stock options and stock purchase rights outstanding at September 30, 1998:
OUTSTANDING EXERCISABLE --------------------------------------------------------- --------------------------------- NUMBER WEIGHTED- NUMBER OUTSTANDING AVERAGE WEIGHTED- EXERCISABLE WEIGHTED- RANGE OF AS OF REMAINING AVERAGE AS OF AVERAGE EXERCISE SEPTEMBER 30, CONTRACTUAL EXERCISE SEPTEMBER 30, EXERCISE PRICES 1998 LIFE (YEARS) PRICE 1998 PRICE STOCK OPTIONS $ .15 -.25 301,000 7.2 $ .22 253,600 $ .22 $ .50 341,400 8.2 $ .50 153,840 $ .50 $ 3.00 721,960 9.2 $3.00 453,753 $3.00 $ 4.50 668,835 9.8 $4.50 181,196 $4.50 ----------------- ---------------- 2,033,195 1,042,389 ----------------- ---------------- ----------------- ---------------- STOCK PURCHASE RIGHTS $ 4.50 300,000 .13 $4.50 300,000 $4.50 ----------------- ---------------- ----------------- ----------------
The Company's Board of Directors approved a repricing of stock options in December 1997, pursuant to which the exercise price of certain stock options designated at $3.20 per share was reduced to $3.00 per share. NOTE 12 - INCOME TAXES Deferred tax assets (liabilities) are comprised of the following:
SEPTEMBER 30, 1998 1997 Net operating loss carryforwards $ 11,523,433 $ 4,733,931 High yield debt interest deductible when paid 4,945,868 - Accrued employee costs 70,009 39,834 Depreciation and amortization (1,537,964) (78,845) ---------------- ---------------- 15,001,346 4,694,920 Valuation allowance (15,001,346) (4,694,920) ---------------- ---------------- Deferred tax assets (liabilities), net $ - $ - ---------------- ---------------- ---------------- ----------------
As of September 30, 1998, the Company has federal and state net operating loss carryforwards of approximately $37,436,000 and $23,997,000 respectively, which amounts expire beginning in fiscal 2009 and fiscal 2000, respectively. As a result of the private equity placement which occurred on December 30, 1997 (Note 9), which resulted in a change of ownership as defined by Section 382 of the Internal Revenue Code, the Company's utilization of net operating loss carryforwards generated through December 30, 1997 will be subject to an annual limitation of approximately $878,000 for both federal and state tax purposes, the effect of which has been reflected in the summary of deferred tax assets above. Additionally, if the Company is able to recognize certain built-in gains F-24 FIRSTWORLD COMMUNICATIONS, INC. (formerly SpectraNet International) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------ in the future, the annual utilization rate of the net operating losses would be increased. If the Company were to recognize certain built-in losses, they will be subject to the annual utilization limitation when recognized. Based upon the Company's lack of prior earnings history and other available evidence, management has recorded a full valuation allowance for the benefit of deferred tax assets. A reconciliation of the income tax benefit computed using the U.S. federal statutory rate (34%) and the Company's effective tax rate follows:
YEAR ENDED SEPTEMBER 30, 1998 1997 1996 Computed expected federal tax benefit $ (11,340,970) $ (3,247,965) $ (1,311,105) Non-deductible high yield debt interest 684,111 - - State income taxes, net of federal benefit (1,069,310) 161,439 (356,087) Change in valuation allowance 10,306,426 2,426,858 1,689,863 Section 382 net operating loss limitations 1,457,713 557,451 - Other (37,970) 102,217 (22,671) --------------- ---------------- ---------------- $ - $ - $ - --------------- ---------------- ---------------- --------------- ---------------- ----------------
NOTE 13 - LEGAL PROCEEDINGS On October 16, 1998, the Company filed a declaratory relief action in San Diego Superior Court, asking the Court to find that the Company is not obligated to offer stock to Dina Partners L.P. (Dina) with respect to the December 30, 1997 equity investment by Spectra 3 and Enron (Note 9). Dina had previously indicated in conversations with FirstWorld officers and counsel and in writing that it believed the Company had breached a certain Amended and Restated Investor Rights Agreement to which the Company and Dina were parties by refusing to allow Dina to purchase additional stock in the Company. On December 3, 1998, in answer to the Company's complaint, Dina filed a general denial with the court. Although the ultimate resolution of this dispute is subject to the uncertainties inherent in litigation, the Company does not believe that the resolution of the declaratory relief action will have a material adverse effect on the Company's results of operations, liquidity or financial position. NOTE 14 - SUBSEQUENT EVENTS On October 8, 1998, the Company commenced an offer to exchange (the Exchange Offer) its outstanding 13% Senior Discount Notes due 2008 (the Original Notes) for a new issue of 13% Senior Discount Notes due 2008, which were registered with the Securities and Exchange Commission pursuant to a Registration Statement on Form S-4 (the Exchange Notes). The Exchange Offer expired on November 9, 1998. Under the terms of the Exchange Offer, the Company accepted for exchange all $470,000,000 in aggregate principal amount at maturity of Original Notes and caused the cancellation of the Original Notes and the issuance of the Exchange Notes. On October 16, 1998, the Board of Directors of the Company elected to change the Company's fiscal year end from September 30 to December 31, commencing with the short fiscal year ending on December 31, 1998. The Company intends to file a transition report on Form 10-Q with the Securities and Exchange Commission for the period from October 1, 1998 through December 31, 1998. On November 1, 1998, the Company adopted a 401(k) retirement plan (the Plan) pursuant to which eligible employees may elect to defer up to 20% of their compensation into the Plan up to a maximum of $10,000 per annum. The Plan also stipulates that the Company may provide discretionary matching contributions to the F-25 FIRSTWORLD COMMUNICATIONS, INC. (formerly SpectraNet International) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------ participants of the Plan, which matching contributions would be allocated to the participants on December 31 of each Plan year and would vest to the participants at the rate of 25% per annum. All administrative expenses of the Plan will be borne by the Company. On November 24, 1998, pursuant to a Stock Purchase Agreement between the Company and Enron Communications, Inc. (ECI), the Company purchased for cash all of the outstanding capital stock of Optec, Inc. (Optec) from ECI. ECI is the parent company of Enron Capital & Trade Resources Corp., a principal stockholder of the Company. Optec is a telecommunications systems integrator with operations in Oregon and Washington. Simultaneous to such transaction, the Company also purchased from ECI an indefeasible right of use to fiber optic cable in a metropolitan area network serving Portland with routes connecting Beaverton and Hillsboro, Oregon. In addition, the Company obtained rights to OC-3 level capacity on a wide area network being developed by ECI that will connect up to 15 cities nationwide. The Company paid an aggregate of $18,000,000 for the Optec capital stock, the indefeasible rights of use and the wide area network rights. The Company also repaid at closing approximately $4,000,000 of Optec's indebtedness to ECI. The Company has deposited $1,000,000 of the total purchase price into an escrow account to be held for a three year period for the purpose of satisfying any claim made by the Company for breach of any representations, warranties or covenants made by ECI in the agreement relating to the Company's purchase of the Optec capital stock. During the period October 1998 to December 1998, the Company entered into certain employment agreements with key executive officials. Future minimum salaries prescribed by such agreements, inclusive of equalization payments (as defined in such agreements), total $688,000, $805,000, $421,000 and $31,000 during each of fiscal 1999, 2000, 2001 and 2002, respectively. Pursuant to such agreements, the Company has also granted or committed to grant to the executives a total of 950,000 options to purchase Series B common stock at exercise prices that range from $4.50 to $7.50 per share. F-26 FIRSTWORLD COMMUNICATIONS, INC. (FORMERLY SPECTRANET INTERNATIONAL) SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Balance at Balance at beginning of end of period Additions Deductions period ------------- ------------ ---------- ---------- DEFERRED TAX ASSET VALUATION ALLOWANCE: Year ended September 30, 1996 .. 578,199 1,689,863 -- 2,268,062 Year ended September 30, 1997 .. 2,268,062 2,426,858 -- 4,694,920 Year ended September 30, 1998 .. 4,694,920 10,306,426 -- 15,001,346 ALLOWANCE FOR DOUBTFUL ACCOUNTS: Year ended September 30, 1996 .. -- -- -- -- Year ended September 30, 1997 .. -- -- -- -- Year ended September 30, 1998 .. -- 9,765 -- 9,765
F-27 EX-10.25 2 EXHIBIT 10.25 Exhibit 10.25 FIRSTWORLD COMMUNICATIONS, INC. STOCK OPTION AGREEMENT Capitalized terms used herein but not otherwise defined herein, shall have the meanings assigned to such terms in that certain Employment Agreement, dated as of October 1, 1998, by and between the Company (as defined below) and Sheldon S. Ohringer (the "EMPLOYMENT AGREEMENT"). 1. NOTICE OF STOCK OPTION GRANT (a) NOTICE: Sheldon S. Ohringer c/o FirstWorld Communications 9333 Genesee Avenue, Suite 200 San Diego, CA 92121 The undersigned optionee ("OPTIONEE") has been granted an option to purchase (the "STOCK OPTION") Series B Common Stock, par value $.0001 per share (the "COMMON STOCK"), of FirstWorld Communications, Inc. (the "COMPANY"), subject to the terms and conditions of this Stock Option Agreement, as follows. Date of Grant: 10/1/98 Vesting Commencement Date: 10/1/98 Exercise Price per Share: $6.00 (as adjusted pursuant to Section 2(c) below) Total Number of Shares Granted: 2,805,000 (as adjusted pursuant to Section 2(c) below) Total Exercise Price: $16,830,000 (as adjusted pursuant to Section 2(c) below) Type of Option: Nonstatutory Stock Option Term/Expiration Date: 9/30/05 (b) VESTING SCHEDULE: This Stock Option shall be exercisable, in whole or in part, according to the following vesting schedule: (i) with respect to one-third (1/3) of the Shares purchasable thereunder, on the Commencement Date (as defined in the Employment Agreement); (ii) with respect to one-third (1/3) of the Shares purchasable thereunder, on the first anniversary of the Commencement Date; and (iii) with respect to the remaining one-third (1/3) of the Shares purchasable thereunder, on the second anniversary of the Commencement Date; PROVIDED, HOWEVER, that immediately prior to the effectiveness of a Change of Control (as defined below) of the Company, all of the Shares subject to the Stock Option shall immediately vest; and FURTHER PROVIDED, HOWEVER, if the Company has a market capitalization of at least $1.2 billion (as adjusted as described below) for a period of twenty (20) consecutive trading days at any time during a three year period beginning on October 1, 1998 and ending on September 30, 2001, then all of the Shares subject to the Stock Option shall immediately vest. For the purposes hereof, a "Change in Control" of the Company means the occurrence of one of the following events: (1) the sale, lease, transfer, conveyance or other disposition, in one or a series of related transactions, of all or substantially all of the assets of the Company and its subsidiaries, taken as a whole, to any person (as such term is defined in Section 3(a)(9) of the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT")) or group (as such term is defined in Section 13(d)(3) of the Exchange Act and Section 14(d)(2) of the Exchange Act); (2) the adoption of a plan relating to the liquidation or dissolution of the Company; or (3) any person (as defined above) or group (as defined above) other than the Permitted Holders (as defined below) is or becomes the Beneficial Owner (as defined below), directly or indirectly, of 50% or more of the total voting stock or total common equity of the Company, including by way of merger, consolidation or otherwise. For the purposes hereof, the term "Permitted Holders" means (a) Donald L. Sturm, Colorado Spectra 1, LLC, a Colorado limited liability company ("SPECTRA 1"), Colorado Spectra 2, LLC, a Colorado limited liability company ("SPECTRA 2"), Colorado Spectra 3, LLC, a Colorado limited liability company ("SPECTRA 3"), Enron Capital & Trade Resources Corp., a Delaware corporation ("ENRON"), and any other person which any of the foregoing entities directly or indirectly controls, or is under common control with, or is controlled by (other than the Company and its subsidiaries) and (b) any child, stepchild, spouse, sibling, son-in-law, daughter-in-law, brother-in-law or sister-in-law (including adoptive relationships) of Donald L. Sturm (or any entity all of the beneficial ownership interests of which are owned by such a relative) to whom membership interests in Spectra 1, Spectra 2 or Spectra 3 are distributed to upon the death of Donald L. Sturm. The term "Beneficial Owner" means a beneficial owner as defined in Rules 13d-3 and 13d-5 under the Exchange Act (or any successor rules), including (but not limited to) the provisions of such rules that a person shall be deemed to have beneficial ownership of all securities that such person has a right to acquire within 60 days; PROVIDED that a person will not be deemed a beneficial owner of, or to own beneficially, any securities if such beneficial ownership (1) arises solely as a result of a revocable proxy delivered in response to a proxy or consent 2 solicitation made pursuant to, and in accordance with, the Exchange Act and (2) is not also then reportable on Schedule 13D or Schedule 13G (or any successor schedule) under the Exchange Act. The term "controls," as used with respect to any person, means the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such person, whether through the ownership of voting securities or voting interests or otherwise. For the purposes hereof, market capitalization of $1.2 billion assumes 60,000,000 fully diluted shares of Common Stock (regardless of whether 60,000,000 shares of Common Stock are actually trading as of any period of determination) and a market price of $20.00 per share (subject to adjustment as described in the following sentence). If the number of fully diluted shares of Common Stock is greater than or less than 60,000,000 shares of Common Stock, the target market capitalization shall be proportionately adjusted; PROVIDED THAT the $20.00 per share market price would not be so adjusted, except to the extent required to appropriately reflect any subdivision (by any stock split, stock dividend, recapitalization or otherwise), combination (by reverse stock split or otherwise) or other adjustment in the number of outstanding shares of the Company as determined on a fully diluted basis made without the receipt of consideration to the Company after October 1, 1998. (c) TERMINATION PERIOD: Optionee acknowledges that he (or his estate) will have ninety (90) days from the Date of Termination (as defined in the Employment Agreement) to exercise all Shares of Common Stock vested under the Stock Option as of the Date of Termination. In no event may Optionee exercise this Option after the "Term/Expiration Date" set forth in Section 1(a) above. 2. AGREEMENT (a) GRANT OF OPTION. The Board of Directors of the Company (the "BOARD") hereby grants to the Optionee the Stock Option to purchase the number of Shares set forth in the Notice of Grant, at the exercise price per share set forth in the Notice of Grant (the "EXERCISE PRICE"), and subject to the terms and conditions hereof. This Stock Option is not intended to qualify as an Incentive Stock Option as defined in Section 422 of the Code; therefore, this Stock Option shall be treated as a Nonstatutory Stock Option ("NSO"). (b) EXERCISE OF OPTION. (1) RIGHT TO EXERCISE. This Stock Option is exercisable during its term in accordance with the vesting schedule set out in the Notice of Grant and the applicable provisions of this Stock Option Agreement. (2) METHOD OF EXERCISE. This Stock Option is exercisable by delivery of an exercise notice, in the form attached as EXHIBIT A (the "EXERCISE NOTICE"), which shall state the election to exercise the Stock Option, the number of Shares with respect to which the Stock Option is being exercised, and such other representations and agreements as may be required by the Company. The Exercise 3 Notice shall be accompanied by payment of the aggregate Exercise Price as to all Shares being exercised thereby. This Stock Option shall be deemed to be exercised upon receipt by the Company of such fully executed Exercise Notice accompanied by the aggregate Exercise Price. No Shares shall be issued pursuant to the exercise of a Stock Option unless such issuance and such exercise complies with applicable laws. Assuming such compliance, for income tax purposes the Shares shall be considered transferred to the Optionee on the date on which the Stock Option is exercised with respect to such Shares. (c) ADJUSTMENT TO EXERCISE PRICE AND NUMBER OF SHARES. In order to prevent dilution of the rights granted to Optionee under the Stock Option, the number of shares of Common Stock subject to the Stock Option and the Exercise Price of such Common Stock shall be subject to adjustment from time to time as provided in this Section 2(c). (1) SUBDIVISION OR COMBINATION OF STOCK. (A) If at any time or from time to time after the Commencement Date the Company shall subdivide (by stock split, stock dividend or otherwise) its outstanding shares of common stock, the Exercise Price in effect immediately prior to such subdivision shall, concurrently with the effectiveness of such subdivision, be proportionately decreased. In the event the outstanding shares of common stock shall be combined or consolidated, by reclassification or otherwise, into a lesser number of shares of common stock, the Exercise Price then in effect shall, concurrently with the effectiveness of such combination or consolidation, be proportionately increased. (B) Upon each adjustment of the Exercise Price as provided in Section 2(c)(1)(A), Optionee thereafter shall be entitled to purchase, at the Exercise Price resulting from such adjustment, the number of shares of Common Stock (calculated to the nearest whole share) obtained by multiplying the Exercise 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 Exercise Price resulting from such adjustment. (2) OTHER DISTRIBUTIONS. (A) In case the Company shall after the Commencement Date distribute to the holders of its common stock evidences of its indebtedness or assets (excluding regular cash dividends or distributions and dividends or distributions referred to in Section 2(c)(1) above) in connection with a split-up, spin-off or otherwise, then in each such case the Exercise Price in effect thereafter shall be determined by multiplying the Exercise Price in 4 effect immediately prior thereto by a fraction, the numerator of which shall be the total number of shares of common stock outstanding multiplied by the Fair Market Value (as defined in Section 2(c)(5) below) per share of common stock prior to such distribution, less the fair market value (as determined by the Board) of said assets or evidences of indebtedness so distributed, and the denominator of which shall be the total number of shares of common stock outstanding multiplied by the Fair Market Value per share of common stock prior to the distribution. Such adjustment shall be made successively whenever such a record date is fixed. Such adjustment shall be made whenever any such distribution is made and shall become effective immediately after the record date for the determination of stockholders entitled to receive such distribution. (B) Upon each adjustment of the Exercise Price as provided in Section 2(c)(2)(A), Optionee thereafter shall be entitled to purchase, at the Exercise Price resulting from such adjustment, the number of shares of Common Stock (calculated to the nearest whole share) obtained by multiplying the Exercise 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 Exercise Price resulting from such adjustment. (3) No adjustment in the Exercise Price and/or the number of shares subject to the Stock Option shall be made if such adjustment would result in a change in (i) the Exercise Price of less than one cent ($0.01) per share or (ii) the number of shares represented by the Stock Option of less than one share (the "ADJUSTMENT THRESHOLD AMOUNT"). Any adjustment not made because the Adjustment Threshold Amount is not satisfied shall be carried forward and made, together with any subsequent adjustments, at the earlier of such time as (a) the aggregate amount of all such adjustments is at least equal to the Adjustment Threshold Amount or (b) the shares of Common Stock subject to the Stock Option are acquired. (4) Upon the occurrence of each adjustment or readjustment of the Exercise Price pursuant to this Section 2(c), the Company promptly shall compute such adjustment or readjustment in accordance with the terms hereof and prepare and furnish to Optionee a certificate setting forth such adjustment or readjustment, showing in detail the facts upon which such adjustment or readjustment is based. (5) "Fair Market Value" of a share of common stock as of a given date shall be: (i) the average closing sale price of a share of common stock on the principal exchange on which the common stock is then trading, if any, over the last ten trading days prior to such date, or, if shares were not traded during such period, over the next preceding ten trading day period during which a sale occurred; (ii) if the common stock is not traded on an exchange but is quoted on Nasdaq or a successor quotation system, (1) the average closing sale price over the last ten trading days (if the common stock is then quoted on the Nasdaq National Market or the Nasdaq SmallCap 5 Market) or (2) the mean between the closing representative bid and asked prices (in all other cases) for a share of the common stock over the last ten trading days prior to such date, or, if shares were not traded during such period, then over the next preceding ten trading day period during which a sale occurred, as reported by Nasdaq or such successor quotation system; (iii) if the common stock is not publicly traded on an exchange and not quoted on Nasdaq or a successor quotation system, the mean between the closing bid and asked prices for a share of common stock over the last ten trading days prior to such date, or, if shares were not traded during such period, then over the next preceding ten trading day period during which a sale occurred, as determined in good faith by the Board; or (iv) if the common stock is not publicly traded, the fair market value of a share of common stock established by the Board acting in good faith. (6) Prior to the consummation of any recapitalization, reorganization, reclassification, consolidation, merger or other transaction which is effected in such a way that holders of common stock are entitled to receive (either directly or upon subsequent liquidation) stock, securities or assets with respect to or in exchange for such securities (each an "ORGANIC CHANGE"), the Company shall make appropriate provision to ensure that Optionee shall have the right to acquire and receive upon Optionee's acquisition of the shares of Common Stock subject to the Stock Option subsequent to such consummation, in lieu of or in addition to (as the case may be) the shares of Common Stock subject to the Stock Option, such shares of stock, securities or assets as Optionee would be entitled to receive if the shares of Common Stock subject to the Stock Option had been acquired immediately prior to such Organic Change. In any such case, the Company shall make appropriate provision with respect to Optionee's rights and interests to insure that the provisions of this Section 2(c) shall thereafter be applicable to the Stock Option. The Company shall not effect any such Organic Change unless, prior to the consummation thereof, the successor entity (if other than the Company) resulting from such Organic Change (including a purchaser of all or substantially all of the Company's assets) assumes by written instrument the obligation to deliver to Optionee such shares of stock, securities or assets as, in accordance with the foregoing provisions, Optionee may be entitled to acquire upon acquisition of the shares of Common Stock subject to the Stock Option. (d) LOCK-UP PERIOD. Optionee hereby agrees that, if so requested by the Company or any representative of the underwriters (the "MANAGING UNDERWRITER") in connection with any registration of the offering of any securities of the Company under the Securities Act, Optionee shall not sell or otherwise transfer any Shares or other securities of the Company during the 180-day period (or such other period as may be requested in writing by the Managing Underwriter and agreed to in writing by the Company) (the "MARKET STANDOFF PERIOD") following the effective date of the registration statement of the Company filed under the Securities Act. Such restriction shall apply only to the first registration statement of the Company to become effective under the Securities Act that includes securities to be sold on behalf of the Company to the public in an underwritten public offering under the Securities Act. The Company may impose stop-transfer instructions with respect to securities subject to the foregoing restrictions until the end of such Market Standoff Period. 6 (e) METHOD OF PAYMENT. Payment of the aggregate Exercise Price shall be by any of the following, or a combination thereof, at the election of the Optionee: (1) cash or check; (2) consideration received by the Company under a formal cashless exercise program adopted by the Company; or (3) surrender of other Shares which, (i) in the case of Shares acquired upon exercise of an option, have been owned by the Optionee for more than six (6) months on the date of surrender and (ii) have a Fair Market Value (as defined in Section 2(c)(5) above) on the date of surrender equal to the aggregate Exercise Price of the Shares being exercised thereby. (f) RESTRICTIONS ON EXERCISE. (1) This Stock Option may not be exercised if the issuance of such Shares upon such exercise or the method of payment of consideration for such Shares would constitute a violation of any Applicable Law (as defined below). For the purposes hereof, "Applicable Laws" means the requirements relating to the administration of stock option plans under U.S. state corporate laws, U.S. federal and state securities laws, the Internal Revenue Code of 1986, as amended, and any stock exchange or quotation system on which the Common Stock is listed or quoted. (2) Upon any exercise of the Stock Option, Optionee agrees that he will hold at least 40% of the shares acquired pursuant to such Stock Option exercise for at least one year from the date of such Stock Option exercise; PROVIDED, HOWEVER, that the foregoing requirement will not apply from and after (i) a Change in Control (as defined above) of the Company or (ii) a merger, consolidation or other transaction in which the Company is not the surviving entity and in which all of the Company's stockholders receive cash or other consideration for their shares as a result of such merger, consolidation or other transaction. In addition, in connection with a merger, consolidation or other transaction in which the Company is not the surviving entity and in which all of the Company's stockholders receive stock for their shares as a result of such merger, consolidation or other transaction, the period during which Optionee held the restricted shares of the Company will be added to the time Optionee holds the shares acquired in connection with such merger, consolidation or other transaction for purposes of determining the one year holding period for the restricted shares. In connection with all Stock Option exercises, certificates representing an aggregate of 40% of the shares acquired pursuant to such exercise shall be endorsed conspicuously as follows: 7 "BY THE TERMS OF AN EMPLOYMENT AGREEMENT, CERTAIN RESTRICTIONS HAVE BEEN PLACED ON THE TRANSFER OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE. THE CORPORATION WILL FURNISH A COPY OF SUCH AGREEMENT TO THE HOLDER OF THIS CERTIFICATE WITHOUT CHARGE UPON REQUEST TO THE CORPORATION AT ITS PRINCIPAL PLACE OF BUSINESS OR REGISTERED OFFICE." In addition, the Company will be entitled to issue "stop- transfer" orders to its transfer agent (the "TRANSFER AGENT") with respect to the Common Stock that bears the endorsement set forth above. At the conclusion of each applicable one-year period, the Company will cause the Transfer Agent to remove the above legend from the shares bearing such legend and which were restricted from transfer during the prior one-year period pursuant to this Section 2(f)(2). (g) NON-TRANSFERABILITY OF OPTION. This Stock Option may not be transferred in any manner otherwise than by will or by the laws of descent or distribution and may be exercised during the lifetime of Optionee only by Optionee. The terms of this Stock Option Agreement shall be binding upon the executors, administrators, heirs, successors and assigns of the Optionee. (h) TERM OF OPTION. This Stock Option may be exercised only within the term set out in the Notice of Grant, and may be exercised during such term only in accordance with the terms of this Stock Option. (i) TAX CONSEQUENCES. Set forth below is a brief summary as of the date of this Stock Option of some of the federal tax consequences of exercise of this Stock Option and disposition of the Shares. THIS SUMMARY IS NECESSARILY INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE. THE OPTIONEE SHOULD CONSULT A TAX ADVISER BEFORE EXERCISING THIS STOCK OPTION OR DISPOSING OF THE SHARES. (1) EXERCISE OF NONSTATUTORY STOCK OPTION. There may be a regular federal income tax liability upon the exercise of a Nonstatutory Stock Option. The Optionee will be treated as having received compensation income (taxable at ordinary income tax rates) equal to the excess, if any, of the Fair Market Value of the Shares on the date of exercise over the Exercise Price. If Optionee is an employee or a former employee, the Company will be required to withhold from Optionee's compensation or collect from Optionee and pay to the applicable taxing authorities an amount in cash equal to a percentage of this compensation income at the time of exercise, and may refuse to honor the exercise and refuse to deliver Shares if such withholding amounts are not delivered at the time of exercise. (2) DISPOSITION OF SHARES. In the case of an NSO, if Shares are held for at least one year, any gain realized on disposition of the Shares will be treated as long-term capital gain for federal income tax purposes. 8 (j) ENTIRE AGREEMENT; GOVERNING LAW. The Employment Agreement and this Stock Option Agreement constitute the entire agreement of the parties with respect to the subject matter hereof and supersede in their entirety all prior undertakings and agreements of the Company and Optionee with respect to the subject matter hereof, and may not be modified adversely to the Optionee's interest except by means of a writing signed by the Company and Optionee. This agreement is governed by the internal substantive laws, but not the choice of law rules, of California. (k) NO GUARANTEE OF CONTINUED EMPLOYMENT. OPTIONEE ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO THE VESTING SCHEDULE HEREOF IS NOT EARNED THROUGH THE ACT OF BEING HIRED, BEING GRANTED THIS STOCK OPTION OR ACQUIRING SHARES HEREUNDER. OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT THIS AGREEMENT, THE TRANSACTIONS CONTEMPLATED HEREUNDER AND THE VESTING SCHEDULE SET FORTH HEREIN DO NOT CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUED ENGAGEMENT AS AN EMPLOYEE OF THE COMPANY. Optionee has reviewed this Stock Option in its entirety, has had an opportunity to obtain the advice of counsel prior to executing this Stock Option Agreement and fully understands all provisions of the Stock Option. Optionee hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Board upon any questions arising under this Stock Option. Optionee further agrees to notify the Company upon any change in the residence address indicated below. OPTIONEE: FIRSTWORLD COMMUNICATIONS, INC., a Delaware corporation /s/ Sheldon S. Ohringer /s/ David Gandini - ---------------------------------- ----------------------------------- SHELDON S. OHRINGER Name: David Gandini Title: Executive Vice President - ---------------------------------- - ---------------------------------- - ---------------------------------- Residence Address Date: October 1, 1998 9 EXHIBIT A EXERCISE NOTICE FirstWorld Communications 9333 Genesee Avenue, Suite 200 San Diego, California 92121 Attention: Chief Financial Officer 1) EXERCISE OF OPTION. Effective as of today, ____________ ___, _____, the undersigned ("OPTIONEE") hereby elects to exercise Optionee's option to purchase (the "OPTION") ___________ shares of the Series B Common Stock, par value $.0001 per share (the "SHARES"), of FirstWorld Communications, Inc., a Delaware corporation (the "COMPANY"), under and pursuant to the Stock Option Agreement dated October 1, 1998 (the "OPTION AGREEMENT"). 2) DELIVERY OF PAYMENT. Optionee herewith delivers to the Company the full purchase price of the Shares, as set forth in the Option Agreement. 3) REPRESENTATIONS OF OPTIONEE. Optionee acknowledges that Optionee has received, read and understood the Option Agreement and agrees to abide by and be bound by its terms and conditions. 4) RIGHTS AS STOCKHOLDER. Until the issuance of the Shares (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company), no right to vote or receive dividends or any other rights as a stockholder shall exist with respect to the Shares acquired hereby, notwithstanding the exercise of the Option. The Shares shall be issued to the Optionee as soon as practicable after the Option is exercised. 5) COMPANY'S RIGHT OF FIRST REFUSAL. Before any Shares held by Optionee or any transferee (either being sometimes referred to herein as the "HOLDER") may be sold or otherwise transferred (including transfer by gift or operation of law), the Company or its assignee(s) shall have a right of first refusal to purchase the Shares on the terms and conditions set forth in this Section (the "RIGHT OF FIRST REFUSAL"). a) NOTICE OF PROPOSED TRANSFER. The Holder of the Shares shall deliver to the Company a written notice (the "NOTICE") stating: (i) the Holder's bona fide intention to sell or otherwise transfer such Shares; (ii) the name of each proposed purchaser or other transferee ("PROPOSED TRANSFEREE"); (iii) the number of Shares to be transferred to each Proposed Transferee; and (iv) the bona fide cash price or other consideration for which the Holder proposes to transfer the Shares (the "OFFERED PRICE"), and the Holder shall offer the Shares at the Offered Price to the Company or its assignee(s). A-1 b) EXERCISE OF RIGHT OF FIRST REFUSAL. At any time within thirty (30) days after receipt of the Notice, the Company and/or its assignee(s) may, by giving written notice to the Holder, elect to purchase all, but not less than all, of the Shares proposed to be transferred to any one or more of the Proposed Transferees, at the purchase price determined in accordance with subsection (c) below. c) PURCHASE PRICE. The purchase price ("PURCHASE PRICE") for the Shares purchased by the Company or its assignee(s) under this Section shall be the Offered Price. If the Offered Price includes consideration other than cash, the cash equivalent value of the non-cash consideration shall be determined by the Board of Directors of the Company (the "BOARD") in good faith. d) PAYMENT. Payment of the Purchase Price shall be made, at the option of the Company or its assignee(s), in cash (by check), by cancellation of all or a portion of any outstanding indebtedness of the Holder to the Company (or, in the case of repurchase by an assignee, to the assignee), or by any combination thereof within 30 days after receipt of the Notice or in the manner and at the times set forth in the Notice. e) HOLDER'S RIGHT TO TRANSFER. If all of the Shares proposed in the Notice to be transferred to a given Proposed Transferee are not purchased by the Company and/or its assignee(s) as provided in this Section, then the Holder may sell or otherwise transfer such Shares to that Proposed Transferee at the Offered Price or at a higher price, PROVIDED that such sale or other transfer is consummated within 60 days after the date of the Notice, that any such sale or other transfer is effected in accordance with any applicable securities laws and that the Proposed Transferee agrees in writing that the provisions of this Section shall continue to apply to the Shares in the hands of such Proposed Transferee. If the Shares described in the Notice are not transferred to the Proposed Transferee within such period, a new Notice shall be given to the Company, and the Company and/or its assignees shall again be offered the Right of First Refusal before any Shares held by the Holder may be sold or otherwise transferred. f) EXCEPTION FOR CERTAIN FAMILY TRANSFERS. Anything to the contrary contained in this Section notwithstanding, the transfer of any or all of the Shares during the Optionee's lifetime or on the Optionee's death by will or intestacy to the Optionee's immediate family or a trust for the benefit of the Optionee's immediate family shall be exempt from the provisions of this Section. "Immediate Family" as used herein shall mean spouse, lineal descendant or antecedent, father, mother, brother or sister. In such case, the transferee or other recipient shall receive and hold the Shares so transferred subject to the provisions of this Section, and there shall be no further transfer of such Shares except in accordance with the terms of this Section. A-2 g) TERMINATION OF RIGHT OF FIRST REFUSAL. The Company's Right of First Refusal shall terminate immediately as to all Shares upon the occurrence of the first to occur of the following events: i) The acquisition of the Company by another entity by means of the merger or consolidation of the Company with or into another corporation in which the stockholders of the Company own less than 50% of the voting securities of the surviving entity; ii) The sale of all or substantially all of the assets of the Company; or iii) The date of the first sale of Common Stock of the Company to the general public pursuant to a registration statement filed with and declared effective by the Securities and Exchange Commission under the Securities Act of 1933, as amended. 6) TAX CONSULTATION. Optionee understands that Optionee may suffer adverse tax consequences as a result of Optionee's purchase or disposition of the Shares. Optionee represents that Optionee has consulted with any tax consultants Optionee deems advisable in connection with the purchase or disposition of the Shares and that Optionee is not relying on the Company for any tax advice. 7) RESTRICTIVE LEGENDS AND STOP-TRANSFER ORDERS. a) LEGENDS. Optionee understands and agrees that the Company shall cause the legends set forth below or legends substantially equivalent thereto, to be placed upon any certificate(s) evidencing ownership of the Shares together with any other legends that may be required by the Company or by state or federal securities laws: THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN RESTRICTIONS ON TRANSFER AND A RIGHT OF FIRST REFUSAL HELD BY THE ISSUER OR ITS ASSIGNEE(S) AS SET FORTH IN THE EXERCISE NOTICE BETWEEN THE ISSUER AND THE ORIGINAL HOLDER OF THESE SHARES, A COPY OF WHICH MAY BE OBTAINED AT THE PRINCIPAL OFFICE OF THE ISSUER. SUCH TRANSFER RESTRICTIONS AND RIGHT OF FIRST REFUSAL ARE BINDING ON TRANSFEREES OF THESE SHARES. b) REFUSAL TO TRANSFER. The Company shall not be required (i) to transfer on its books any Shares that have been sold or otherwise transferred in violation of any of the provisions of this Agreement or (ii) to treat as owner of such Shares or to accord the right to vote or pay dividends to any purchaser or other transferee to whom such Shares shall have been so transferred. A-3 8) SUCCESSORS AND ASSIGNS. The Company may assign any of its rights under this Agreement to single or multiple assignees, and this Agreement shall inure to the benefit of the successors and assigns of the Company. Subject to the restrictions on transfer herein set forth, this Agreement shall be binding upon Optionee and his or her heirs, executors, administrators, successors and assigns. 9) INTERPRETATION. Any dispute regarding the interpretation of this Agreement shall be submitted by Optionee or by the Company forthwith to the Board (or a committee thereof) which shall review such dispute at its next regular meeting. The resolution of such a dispute by the Board (or a committee thereof) shall be final and binding on all parties. 10) GOVERNING LAW. This Agreement is governed by the internal substantive laws, but not the choice of law rules, of California. 11) ENTIRE AGREEMENT. The Employment Agreement and the Option Agreement are incorporated herein by reference. This Agreement, the Employment Agreement and the Option Agreement constitute the entire agreement of the parties with respect to the subject matter hereof and supersede in their entirety all prior undertakings and agreements of the Company and Optionee with respect to the subject matter hereof, and may not be modified adversely to the Optionee's interest except by means of a writing signed by the Company and Optionee. Submitted by: Accepted by: OPTIONEE: FIRSTWORLD COMMUNICATIONS, INC. a Delaware corporation SHELDON S. OHRINGER ----------------------------------- - ---------------------------------- Name: Signature ------------------------------ Title: ----------------------------- Address: Address: 9333 Genesee Avenue, Suite 200 - ---------------------------------- San Diego, California 92121 - ---------------------------------- ----------------------------------- Date Received A-4 EX-10.26 3 EXHIBIT 10.26 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (the "AGREEMENT"), dated as of October 1, 1998, is by and between FirstWorld Communications, Inc., a Delaware corporation (the "COMPANY") and Scott M. Chase ("EXECUTIVE"). RECITAL The Company desires to employ Executive, effective as of October 1, 1998 (the "COMMENCEMENT DATE"), on the terms and conditions set forth in this Agreement, and Executive desires to be so employed. AGREEMENT IN CONSIDERATION of the premises and the mutual covenants set forth below, the parties hereby agree as follows: 1. EMPLOYMENT. The Company hereby agrees to employ Executive as the Senior Vice President, Corporate Communications and External Affairs of the Company, and Executive hereby accepts such employment, on the terms and conditions hereinafter set forth. 2. TERM. The period of employment of Executive by the Company hereunder (the "EMPLOYMENT PERIOD") shall commence at the Commencement Date and shall continue through September 30, 2000. The Employment Period may be sooner terminated by either party in accordance with Section 5 of this Agreement. 3. POSITION AND DUTIES. During the Employment Period, Executive shall serve as Senior Vice President, Corporate Communications and External Affairs of the Company. Executive shall devote such time, attention and energies to Company affairs as are necessary to fully perform his duties (other than absences due to illness or vacation) for the Company. During the Employment Period, Executive shall not, directly or indirectly, render services to any other organization, entity or person, as an employee, independent contractor, consultant or otherwise, with or without compensation, without the prior written consent of the Board of Directors of the Company (the "BOARD") 4. COMPENSATION AND RELATED MATTERS. (a) EQUALIZATION PAYMENT. To compensate Executive for certain benefits that he may lose or forfeit as a result of his termination of employment with his former employer, ICG Communications, Inc., and commencement of employment with the Company, the Company shall pay Executive in cash a $20,000 payment (the "EQUALIZATION PAYMENT") payable on the Commencement Date or as soon as reasonably practicable thereafter. (b) SALARY. During the Employment Period, the Company shall pay Executive an annual base salary of $125,000 per year ("BASE SALARY"). Executive's Base Salary shall be paid in approximately equal installments in accordance with the Company's customary payroll schedule and practices. Executive's Base Salary shall be subject to annual reviews commencing October 1999 and each year thereafter. If Executive's Base Salary is increased by the Company, such increased Base Salary shall then constitute the Base Salary for all purposes of this Agreement. All compensation paid to Executive shall be subject to withholding and other employment taxes imposed by applicable law. (c) ANNUAL BONUS. The Board's compensation committee (the "COMPENSATION COMMITTEE") shall review Executive's performance at least once annually during each year of the Employment Period and, based on Executive's performance, recommend whether the Company should award Executive a cash bonus ("BONUS") in order to reward Executive for services rendered to the Company and/or as an incentive for continued service to the Company. The amount of Executive's Bonus, if any, shall be determined in the reasonable discretion of the Compensation Committee and shall be dependent upon, among other things, the achievement of certain performance levels by the Company, including, without limitation, (i) the nature, magnitude and quality of the services performed by Executive for the Company, (ii) the condition (financial and other) and results of operations of the Company and (iii) the compensation paid for positions of comparable responsibility and authority within the telecommunications industry. (d) STOCK OPTIONS. Effective as of the Commencement Date, Executive shall be awarded a stock option (the "STOCK OPTION") to purchase 100,000 shares of the Company's Series B Common Stock, par value $.0001 per share (the "Common Stock"). Each share of Common Stock subject to the Stock Option shall have an exercise price of $4.50 per share. The Stock Option will be granted under one of the Company's stock option plans and the terms and conditions of the Stock Option will be determined in accordance with the applicable stock option plan. (e) EXPENSES. The Company shall promptly reimburse Executive for all reasonable business expenses upon the presentation of reasonably itemized statements of such expenses in accordance with the Company's policies and procedures now in force or as such policies and procedures may be modified with respect to all senior executive officers of the Company. (f) WELFARE AND PENSION PLANS. In addition to Executive's Base Salary and any incentive compensation and bonuses awarded to Executive hereunder, he (and his family) shall be entitled to participate, to the extent that he is (and they are) eligible under the terms and conditions thereof, in any pension, retirement, hospitalization, insurance, disability or medical service plan generally available to the executive officers of the Company that may be in effect from time to time during the Employment Period. The Company shall be under no obligation to institute or continue the existence of any such employee benefit plan. 5. TERMINATION. Executive's employment hereunder may be terminated during the Employment Period under the following circumstances: 2 (a) DEATH. Executive's employment hereunder shall terminate upon his death. (b) DISABILITY. If, as a result of Executive's incapacity due to physical or mental illness, Executive shall have been substantially unable to perform his duties hereunder for an entire period of thirty (30) consecutive days, and within thirty (30) days after written Notice of Termination (as defined in Section 6(a)) is given after such thirty (30) day period, Executive shall not have returned to the substantial performance of his duties on a full-time basis, the Company shall have the right to terminate Executive's employment hereunder for "Disability," and such termination in and of itself shall not be, nor shall it be deemed to be, a breach of this Agreement. (c) CAUSE. The Company shall have the right to terminate Executive's employment for Cause (as defined), and such termination in and of itself shall not be, nor shall it be deemed to be, a breach of this Agreement. For purposes of this Agreement, the Company shall have "Cause" to terminate Executive's employment upon Executive's: (i) conviction of, or plea of guilty or nolo contendere to, any crime constituting a felony; (ii) commission of a material act of dishonesty, fraud, misrepresentation or other act of moral turpitude that would, in the Board's reasonable judgment, prevent the effective performance of his duties hereunder; (iii) continued failure to substantially perform his duties hereunder to the reasonable satisfaction of the Board (other than such failure resulting from Executive's incapacity due to physical or mental illness or subsequent to the issuance of a Notice of Termination by Executive for Good Reason (as defined in Section 5(d)) after demand for substantial performance is delivered by the Board in writing that specifically identifies the manner in which the Board believes Executive has not used reasonable best efforts to substantially perform his duties; or (iv) willful misconduct (including, but not limited to, a willful breach of the provisions of Section 8) that is, in the Board's reasonable judgment, injurious to the Company or to any entity in control of, controlled by or under common control with the Company ("AFFILIATE"). For purposes of this Section 5(c), no act, or failure to act, by Executive shall be considered "willful" unless committed in bad faith and without a reasonable belief that the act or omission was in the best interests of the Company or any Affiliates thereof; PROVIDED, HOWEVER, that the requirements outlined in paragraphs (iii) or (iv) above shall be deemed to have occurred if Executive's action or non-action continues for more than ten (10) days after Executive has received written notice of the inappropriate action or non-action. This Section 5(c) shall not prevent Executive from challenging the Board's determination that Cause exists or that Executive has failed to cure any act (or failure to act) that purportedly formed the basis for the Board's determination, under the arbitration procedures set forth in Section 10 below. 3 (d) GOOD REASON. Executive may terminate his employment for "Good Reason" within thirty (30) days after Executive has actual knowledge of the occurrence, without the written consent of Executive, of one of the following events that has not been cured within thirty (30) days after written notice thereof has been given by Executive to the Company (PROVIDED, that with respect to this Section 5(d), the Company shall have the right to challenge Executive's determination that he has the right to terminate his employment for "Good Reason" under the arbitration procedures set forth in Section 10 below): (i) a reduction by the Company in Executive's Base Salary or a failure by the Company to pay any such amounts when due; (ii) any purported termination of Executive's employment for Cause which is not effected pursuant to the procedures of Section 5(c) (and for purposes of this Agreement, no such purported termination shall be effective); (iii) the Company's failure to provide the Stock Option or the Company's material breach of one or more of the stock option agreements pursuant to which the Stock Option was issued to Executive; (iv) the Company's failure to substantially provide any material employee benefits due to be provided to Executive; or (v) the Company's failure to provide in all material respects the indemnification set forth in Section 9 of this Agreement. Executive's continued employment during the thirty (30) day period referred to above in this paragraph (d) shall not constitute Executive's consent to, or a waiver of rights with respect to, any act or failure to act constituting Good Reason hereunder. (e) WITHOUT GOOD REASON. Executive shall have the right to terminate his employment hereunder without Good Reason by providing the Company with a Notice of Termination, and such termination shall not in and of itself be, nor shall it be deemed to be, a breach of this Agreement. 6. TERMINATION PROCEDURE. (a) NOTICE OF TERMINATION. Any termination of Executive's employment by the Company or by Executive during the Employment Period (other than termination pursuant to Section 5(a)) shall be communicated by written Notice of Termination (as defined below) to the other party hereto in accordance with Section 12 below. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Executive's employment under the provision so indicated. 4 (b) DATE OF TERMINATION. "Date of Termination" shall mean (i) if Executive's employment is terminated by his death, the date of his death, (ii) if Executive's employment is terminated pursuant to Section 5(b), thirty (30) days after Notice of Termination (provided that Executive shall not have returned to the substantial performance of his duties on a full-time basis during such thirty (30) day period) and (iii) if Executive's employment is terminated for any other reason, the date on which a Notice of Termination is given or any later date (within thirty (30) days after the giving of such notice) set forth in such Notice of Termination. 7. COMPENSATION UPON TERMINATION OR DURING DISABILITY. In the event Executive is disabled or his employment terminates during the Employment Period, the Company shall provide Executive with the payments and benefits set forth below. Executive acknowledges and agrees that the payments set forth in this Section 7 constitute liquidated damages for termination of his employment during the Employment Period. (a) TERMINATION BY COMPANY WITHOUT CAUSE OR BY EXECUTIVE FOR GOOD REASON. If Executive's employment is terminated by the Company without Cause or by Executive for Good Reason: (i) the Company shall pay to Executive a severance payment equal to the amount of Base Salary Executive would have received under the Agreement if Executive had remained employed throughout the Employment Period less any Base Salary paid to Executive prior to the Date of Termination plus accrued vacation for the 12 month period ending on the last day of the month preceding the month Executive's employment is terminated by the Company without Cause or by Executive for Good Reason, within thirty (30) days following the Date of Termination; (ii) the Company shall reimburse Executive pursuant to Section 4(e) for reasonable expenses incurred, but not paid prior to such termination of employment; and (iii) Executive shall be entitled to any other rights, compensation and/or benefits as may be due to Executive in accordance with the terms and provisions of any agreements, plans or programs of the Company. (b) TERMINATION BY COMPANY FOR CAUSE OR BY EXECUTIVE WITHOUT GOOD REASON. If Executive's employment is terminated by the Company for Cause or by Executive (other than for Good Reason): (i) the Company shall pay Executive his Base Salary and, to the extent required by law or the Company's vacation policy, his accrued vacation pay through the Date of Termination, as soon as practicable following the Date of Termination; (ii) the Company shall reimburse Executive pursuant to Section 4(e) for reasonable expenses incurred, but not paid prior to such termination of employment, unless such termination resulted from a misappropriation of Company funds; and 5 (iii) Executive shall be entitled to any other rights, compensation and/or benefits as may be due to Executive in accordance with the terms and provisions of any agreements, plans or programs of the Company. (c) DISABILITY. During any period that Executive fails to perform his duties hereunder as a result of incapacity due to physical or mental illness, Executive shall continue to receive his full Base Salary set forth in Section 4(b) until his employment is terminated pursuant to Section 5(b). In the event Executive's employment is terminated for Disability pursuant to Section 5(b): (i) the Company shall pay to Executive his Base Salary and accrued vacation pay through the Date of Termination, within 30 days following the Date of Termination; (ii) the Company shall reimburse Executive pursuant to Section 4(e) for reasonable expenses incurred, but not paid prior to such termination of employment; and (iii) Executive shall be entitled to any other rights, compensation and/or benefits as may be due to Executive in accordance with the terms and provisions of any agreements, plans or programs of the Company. (d) DEATH. If Executive's employment is terminated by his death: (i) the Company shall pay in a lump sum to Executive's beneficiary, legal representatives or estate, as the case may be, Executive's Base Salary through the Date of Termination; (ii) the Company shall reimburse Executive's beneficiary, legal representatives, or estate, as the case may be, pursuant to Section 4(e) for reasonable expenses incurred, but not paid prior to such termination of employment; and (iii) Executive's beneficiary, legal representatives or estate, as the case may be, shall be entitled to any other rights, compensation and benefits as may be due to any such persons or estate in accordance with the terms and provisions of any agreements, plans or programs of the Company. 8. CONFIDENTIAL INFORMATION, OWNERSHIP OF DOCUMENTS; NON-COMPETITION. (a) CONFIDENTIAL INFORMATION. Executive shall hold in a fiduciary capacity for the benefit of the Company all Confidential Information (as defined below) relating to the Company and its businesses and investments, which shall have been obtained by Executive during Executive's employment by the Company and which is not generally available public knowledge (other than by acts of Executive in violation of this Agreement). Except as may be required or appropriate in connection with his carrying out his duties under this Agreement, Executive shall not, without the prior written consent of the Company or as may otherwise be required by law or 6 any legal process, or as is necessary in connection with any adversarial proceeding against the Company (in which case Executive shall use his reasonable best efforts in cooperating with the Company in obtaining a protective order against disclosure by a court of competent jurisdiction), communicate or divulge any such Confidential Information relating to the Company to anyone other than the Company and those designated by the Company or on behalf of the Company in the furtherance of its business or to perform duties hereunder. For the purposes hereof, the term "Confidential Information" means, with respect to any person, any information concerning such person or its business, products, financial condition, prospects and affairs that is not generally available to the public. The term Confidential Information shall not include information that: (i) is already known to the recipient and was properly obtained by the recipient prior to the date of this Agreement; (ii) is in the public domain other than through a negligent act or omission or willful misconduct of the recipient; (iii) is acquired in good faith from a third party and, at the time of the acquisition, the recipient had no knowledge or reason to believe that such information was wrongfully obtained or disclosed by the third party; (iv) is independently developed by the recipient from information not defined as "Confidential Information" in this Agreement, as evidenced by the recipient's written records; (v) is disclosed to third parties by the disclosing party without restriction; (vi) is required to be disclosed under applicable law or by a valid subpoena or other court or governmental order, decree, regulation or rule; PROVIDED, HOWEVER, that if disclosure is required under this provision the recipient shall advise the disclosing party of the requirement to disclose the Confidential Information prior to such disclosure and as soon as reasonably practicable after the recipient becomes aware of such required disclosure; and FURTHER PROVIDED THAT upon the request of the disclosing party, the recipient agrees to cooperate in good faith with any reasonable and lawful actions which the disclosing party takes to resist such disclosure, limit the information to be disclosed or limit the extent to which the information so disclosed may be used or made available to third parties, at the cost of the disclosing party. (b) REMOVAL OF DOCUMENTS; RIGHTS TO PRODUCTS. All records, files, drawings, documents, models, equipment, and the like relating to the Company's business, which Executive has control over shall not be removed from the Company's premises by Executive without the Board's written consent, unless such removal is in the furtherance of the Company's business or is in connection with Executive's carrying out his duties under this Agreement and, if so removed by Executive, shall be returned to the Company promptly after termination of Executive's employment hereunder, or otherwise promptly after removal if such removal occurs following termination of employment. Executive shall assign to the Company all rights to trade secrets and other products relating to the Company's business developed by him alone or in conjunction with others at any time while employed by the Company. (c) CONTINUING OPERATION. Except as specifically provided in this Section 8, the termination of Executive's employment or of this Agreement shall have no effect on the continuing operation of this Section 8. 9. INDEMNIFICATION. Upon the Commencement Date, Executive will enter into the Company's standard directors and officers indemnification agreement. 7 10. ARBITRATION. Any controversy between Executive and the Company involving the construction or application of any of the terms, provisions or conditions of this Agreement, including, without limitation, the determination of whether "Cause" or "Good Reason" exists under Section 5(c) or Section 5(d) hereof and claims involving specific performance, shall on the written request of either party served on the other in accordance with Section 12 below be submitted to binding arbitration. EACH PARTY, BY SIGNING THIS AGREEMENT, VOLUNTARILY, KNOWINGLY AND INTELLIGENTLY WAIVES ANY RIGHTS SUCH PARTY MAY OTHERWISE HAVE TO SEEK REMEDIES IN COURT OR OTHER FORUMS, INCLUDING THE RIGHT TO A JURY TRIAL. Arbitration shall comply with and be governed in accordance with the Commercial Arbitration Rules of the American Arbitration Association (the "AAA"). The arbitration will be conducted only in Denver, Colorado, before a single arbitrator selected by the parties or, if they are unable to agree on an arbitrator, before an arbitrator selected by the AAA. The arbitrator shall have full authority to order specific performance and award damages and other relief available under this Agreement or applicable law, but shall have no authority to add to, detract from, change or amend the terms of this Agreement or existing law. All arbitration proceedings, including settlements and awards, shall be confidential. The decision of the arbitrator will be final and binding, and judgment on the award by the arbitrator may be entered in any court of competent jurisdiction. THIS SUBMISSION AND AGREEMENT TO ARBITRATE WILL BE SPECIFICALLY ENFORCEABLE. The arbitrator will have no power to award punitive or exemplary damages, to ignore or vary the terms of this Agreement and any other agreement between Executive and the Company and will be bound to apply controlling law. The prevailing party in any such arbitration shall be entitled to receive the costs of arbitration, including reasonable attorneys' fees and costs, from the losing party. 11. SUCCESSORS; BINDING AGREEMENT. (a) COMPANY'S SUCCESSORS. No rights or obligations of the Company under this Agreement may be assigned or transferred, except that the Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, "Company" shall mean the Company as herein before defined and any successor to its business and/or assets (by merger, purchase or otherwise) which executes and delivers the agreement provided for in this Section 11 or which otherwise becomes bound by all the terms and provisions of this Agreement by operation of law. (b) EXECUTIVE'S SUCCESSORS. No rights or obligations of Executive under this Agreement may be assigned or transferred by Executive other than his rights to payments or benefits hereunder, which may be transferred only by will or the laws of descent and distribution. Upon Executive's death, this Agreement and all rights of Executive hereunder shall inure to the benefit of and be enforceable by Executive's beneficiary or beneficiaries, personal or legal representatives or estate, to the extent any such person succeeds to Executive's interests under 8 this Agreement. Executive shall be entitled to select and change a beneficiary or beneficiaries to receive any benefit or compensation payable hereunder following Executive's death by giving the Company written notice thereof. In the event of Executive's death or a judicial determination of his incompetence, reference in this Agreement to Executive shall be deemed, where appropriate, to refer to his beneficiary(ies), estate or other legal representative(s). If Executive should die following his Date of Termination while any amounts would still be payable to him hereunder if he had continued to live, all such amounts unless otherwise provided herein shall be paid in accordance with the terms of this Agreement to such person or persons so appointed in writing by Executive, or otherwise to his legal representatives or estate. 12. NOTICE. For the purposes of this Agreement, notices, demands and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered either personally or by United States certified or registered mail, return receipt requested, postage prepaid, addressed as follows: If to Executive: Scott M. Chase c/o FirstWorld Communications, Inc. 9333 Genesee Avenue, Suite 200 San Diego, CA 92121 Telecopy: (619) 552-8010 If to the Company: FirstWorld Communications, Inc. 9333 Genesee Avenue, Suite 200 San Diego, CA 92121 Attn: Secretary Telecopy: (619) 552-8010 With a copy to: David A. Hahn, Esq. Latham & Watkins 701 "B" Street, Suite 2100 San Diego, California 92101 Telecopy: (619) 696-7419 or to such other address as any party may have furnished to the others in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. 13. WAIVER. No provisions of this Agreement may be amended, modified, or waived unless such amendment or modification is agreed to in a writing signed by Executive and by a duly authorized officer of the Company, and such waiver is set forth in writing and signed by the 9 party to be charged. No waiver by either party hereto at any time of any breach by the other party hereto of any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time 14. SURVIVAL. Except as otherwise expressly set forth herein, the respective rights and obligations of the parties under this Agreement shall survive Executive's termination of employment and the termination of this Agreement to the extent necessary for the intended preservation of such rights and obligations. 15. CHOICE OF LAW. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Colorado without regard to its conflicts of law principles. 16. VALIDITY. The invalidity or unenforceability of any provision or provisions of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 17. COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. Facsimile signatures will be deemed to be effective originals hereunder. 18. ENTIRE AGREEMENT. This Agreement sets forth the entire agreement of the parties hereto in respect of the subject matter contained herein and supersedes all prior agreements, promises, covenants, arrangements, communications, representations or warranties, whether oral or written, by any officer, employee or representative of any party hereto in respect of such subject matter. Any prior agreement of the parties hereto in respect of the subject matter contained herein is hereby terminated and canceled. 19. WITHHOLDING. All payments hereunder shall be subject to any required withholding of Federal, state and local taxes pursuant to any applicable law or regulation. 20. SECTION HEADINGS. The section headings in this Agreement are for convenience of reference only, and they form no part of this Agreement and shall not affect its interpretation. 10 IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the date first above written. FIRSTWORLD COMMUNICATIONS, INC., a Delaware corporation By: /s/ Sheldon S. Ohringer ----------------------------------------- Name: Sheldon S. Ohringer Title: President and Chief Executive Officer /s/ Scott M. Chase -------------------------------------------- SCOTT M. CHASE 11 EX-10.27 4 EXHIBIT 10.27 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (the "AGREEMENT"), dated as of November 9, 1998, is by and between FirstWorld Communications, Inc., a Delaware corporation (the "COMPANY") and Marion K. Jenkins ("EXECUTIVE"). RECITAL The Company desires to employ Executive, effective as of November 9, 1998 (the "COMMENCEMENT DATE"), on the terms and conditions set forth in this Agreement, and Executive desires to be so employed. AGREEMENT IN CONSIDERATION of the premises and the mutual covenants set forth below, the parties hereby agree as follows: 1. EMPLOYMENT. The Company hereby agrees to employ Executive as Senior Vice President and Chief Information Officer of the Company, and Executive hereby accepts such employment, on the terms and conditions hereinafter set forth. 2. TERM. The period of employment of Executive by the Company hereunder (the "EMPLOYMENT PERIOD") shall commence at the Commencement Date and shall continue through October 31, 2000. The Employment Period may be sooner terminated by either party in accordance with Section 5 of this Agreement. 3. POSITION AND DUTIES. During the Employment Period, Executive shall serve as Senior Vice President and Chief Information Officer of the Company. Executive shall devote such time, attention and energies to Company affairs as are necessary to fully perform his duties (other than absences due to illness or vacation) for the Company. During the Employment Period, Executive shall not, directly or indirectly, render services to any other organization, entity or person, as an employee, independent contractor, consultant or otherwise, with or without compensation, without the prior written consent of the Board of Directors of the Company (the "BOARD") 4. COMPENSATION AND RELATED MATTERS. (a) SALARY. During the Employment Period, the Company shall pay Executive an annual base salary of $160,000 per year ("BASE SALARY"). Executive's Base Salary shall be paid in approximately equal installments in accordance with the Company's customary payroll schedule and practices. Executive's Base Salary shall be subject to annual reviews commencing November 1999 and each year thereafter. If Executive's Base Salary is increased by the Company, such increased Base Salary shall then constitute the Base Salary for all purposes of this Agreement. All compensation paid to Executive shall be subject to withholding and other employment taxes imposed by applicable law. (b) ANNUAL BONUS. The Board's compensation committee (the "COMPENSATION COMMITTEE") shall review Executive's performance at least once annually during each year of the Employment Period and, based on Executive's performance, recommend whether the Company should award Executive a cash bonus ("BONUS") in order to reward Executive for services rendered to the Company and/or as an incentive for continued service to the Company. The amount of Executive's Bonus, if any, shall be determined in the reasonable discretion of the Compensation Committee and shall be dependent upon, among other things, the achievement of certain performance levels by the Company, including, without limitation, (i) the nature, magnitude and quality of the services performed by Executive for the Company, (ii) the condition (financial and other) and results of operations of the Company and (iii) the compensation paid for positions of comparable responsibility and authority within the telecommunications industry. The targeted amount of Executive's Bonus shall be an amount equal to 50% of Base Salary at 100% completion of applicable performance levels, to be set forth in the Company's Annual Bonus Plan. (c) STOCK OPTIONS. Effective as of the Commencement Date, Executive shall be awarded a stock option (the "STOCK OPTION") to purchase 250,000 shares of the Company's Series B Common Stock, par value $.0001 per share (the "Common Stock"). The shares of Common Stock subject to the Stock Option shall vest in increments of 62,500 shares on each of the first, second, third and fourth anniversaries of the Commencement Date, with the shares in the first such increment having an exercise price of $6.00, shares in the second such increment having an exercise price of $6.50, shares in the third such increment having an exercise price of $7.00 and shares in the fourth such increment having an exercise price of $7.50. The Stock Option will be granted under one of the Company's stock option plans and the terms and conditions of the Stock Option will be determined in accordance with the applicable stock option plan. (d) EXPENSES. The Company shall promptly reimburse Executive for all reasonable business expenses upon the presentation of reasonably itemized statements of such expenses in accordance with the Company's policies and procedures now in force or as such policies and procedures may be modified with respect to all senior executive officers of the Company. (e) WELFARE AND PENSION PLANS. In addition to Executive's Base Salary and any incentive compensation and bonuses awarded to Executive hereunder, he (and his family) shall be entitled to participate, to the extent that he is (and they are) eligible under the terms and conditions thereof, in any pension, retirement, hospitalization, insurance, disability or medical service plan generally available to the executive officers of the Company that may be in effect from time to time during the Employment Period. The Company shall be under no obligation to institute or continue the existence of any such employee benefit plan. 5. TERMINATION. Executive's employment hereunder may be terminated during the Employment Period under the following circumstances: (a) DEATH. Executive's employment hereunder shall terminate upon his death. 2 (b) DISABILITY. If, as a result of Executive's incapacity due to physical or mental illness, Executive shall have been substantially unable to perform his duties hereunder for an entire period of sixty (60) consecutive days, and within thirty (30) days after written Notice of Termination (as defined in Section 6(a)) is given after such sixty (60) day period, Executive shall not have returned to the substantial performance of his duties on a full-time basis, the Company shall have the right to terminate Executive's employment hereunder for "Disability," and such termination in and of itself shall not be, nor shall it be deemed to be, a breach of this Agreement. (c) CAUSE. The Company shall have the right to terminate Executive's employment for Cause (as defined), and such termination in and of itself shall not be, nor shall it be deemed to be, a breach of this Agreement. For purposes of this Agreement, the Company shall have "Cause" to terminate Executive's employment upon Executive's: (i) conviction of, or plea of guilty or nolo contendere to, any crime constituting a felony; (ii) commission of a material act of dishonesty, fraud, misrepresentation or other act of moral turpitude that would, in the Board's reasonable judgment, prevent the effective performance of his duties hereunder; (iii) continued failure to substantially perform his duties hereunder to the reasonable satisfaction of the Board (other than such failure resulting from Executive's incapacity due to physical or mental illness or subsequent to the issuance of a Notice of Termination by Executive for Good Reason (as defined in Section 5(d)) after demand for substantial performance is delivered by the Board in writing that specifically identifies the manner in which the Board believes Executive has not used reasonable best efforts to substantially perform his duties; or (iv) willful misconduct (including, but not limited to, a willful breach of the provisions of Section 8) that is, in the Board's reasonable judgment, injurious to the Company or to any entity in control of, controlled by or under common control with the Company ("AFFILIATE"). For purposes of this Section 5(c), no act, or failure to act, by Executive shall be considered "willful" unless committed in bad faith and without a reasonable belief that the act or omission was in the best interests of the Company or any Affiliates thereof; PROVIDED, HOWEVER, that the requirements outlined in paragraphs (iii) or (iv) above shall be deemed to have occurred if Executive's action or non-action continues for more than ten (10) days after Executive has received written notice of the inappropriate action or non-action. This Section 5(c) shall not prevent Executive from challenging the Board's determination that Cause exists or that Executive has failed to cure any act (or failure to act) that purportedly formed the basis for the Board's determination, under the arbitration procedures set forth in Section 10 below. (d) GOOD REASON. Executive may terminate his employment for "Good Reason" within thirty (30) days after Executive has actual knowledge of the occurrence, without 3 the written consent of Executive, of one of the following events that has not been cured within thirty (30) days after written notice thereof has been given by Executive to the Company (PROVIDED, that with respect to this Section 5(d), the Company shall have the right to challenge Executive's determination that he has the right to terminate his employment for "Good Reason" under the arbitration procedures set forth in Section 10 below): (i) a reduction by the Company in Executive's Base Salary or a failure by the Company to pay any such amounts when due; (ii) any purported termination of Executive's employment for Cause which is not effected pursuant to the procedures of Section 5(c) (and for purposes of this Agreement, no such purported termination shall be effective); (iii) the Company's failure to provide the Stock Option or the Company's material breach of one or more of the stock option agreements pursuant to which the Stock Option was issued to Executive; (iv) the Company's failure to substantially provide any material employee benefits due to be provided to Executive; (v) the Company's failure to provide in all material respects the indemnification set forth in the agreement referenced in Section 9 of this Agreement; (vi) the relocation of the Company's corporate headquarters (which are currently located in San Diego but which are being relocated to the Denver metropolitan area) more than 100 miles from the Denver metropolitan area; or (vii) in connection with a Change in Control (as defined below) of the Company, Executive's responsibilities are reduced such that he is no longer serving as Senior Vice President and Chief Information Officer of the Company or in a reasonably similar capacity. For purposes of this Agreement, a "Change in Control" of the Company means the occurrence of one of the following events: (1) the sale, lease, transfer conveyance or other disposition, in one or a series of related transactions, of all or substantially all of the assets of the Company and its subsidiaries, taken as a whole, to any person (as such term is defined in Section 3(a)(9) of the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT")) or group (as such term is defined in Section 13(d)(3) of the Exchange Act and Section 14(d)(2) of the Exchange Act); (2) the adoption of a plan relating to the liquidation or dissolution of the Company; or 4 (3) any person (as defined above) or group (as defined above) other than the Permitted Holders (as defined below) is or becomes the Beneficial Owner (as defined below), directly or indirectly, of 50% or more of the total voting stock or total common equity of the Company, including by way of merger, consolidation or otherwise. Executive's continued employment during the thirty (30) day period referred to above in this paragraph (d) shall not constitute Executive's consent to, or a waiver of rights with respect to, any act or failure to act constituting Good Reason hereunder. (e) WITHOUT GOOD REASON OR CAUSE. Executive shall have the right to terminate his employment hereunder without Good Reason and the Company shall have the right to terminate Executive's employment hereunder without Cause by providing the other with a Notice of Termination, and such termination shall not in and of itself be, nor shall it be deemed to be, a breach of this Agreement. 6. TERMINATION PROCEDURE. (a) NOTICE OF TERMINATION. Any termination of Executive's employment by the Company or by Executive during the Employment Period (other than termination pursuant to Section 5(a)) shall be communicated by written Notice of Termination (as defined below) to the other party hereto in accordance with Section 12 below. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Executive's employment under the provision so indicated. (b) DATE OF TERMINATION. "Date of Termination" shall mean (i) if Executive's employment is terminated by his death, the date of his death, (ii) if Executive's employment is terminated pursuant to Section 5(b), thirty (30) days after Notice of Termination (provided that Executive shall not have returned to the substantial performance of his duties on a full-time basis during such thirty (30) day period) and (iii) if Executive's employment is terminated for any other reason, the date on which a Notice of Termination is given or any later date (within thirty (30) days after the giving of such notice) set forth in such Notice of Termination. 7. COMPENSATION UPON TERMINATION OR DURING DISABILITY. In the event Executive is disabled or his employment terminates during the Employment Period, the Company shall provide Executive with the payments and benefits set forth below. Executive acknowledges and agrees that the payments set forth in this Section 7 constitute liquidated damages for termination of his employment during the Employment Period. (a) TERMINATION BY COMPANY WITHOUT CAUSE OR BY EXECUTIVE FOR GOOD REASON. If Executive's employment is terminated by the Company without Cause or by Executive for Good Reason: 5 (i) the Company shall pay to Executive a severance payment equal to the amount of Base Salary Executive would have received under the Agreement if Executive had remained employed throughout the Employment Period stated in Section 2, plus accrued vacation, within thirty (30) days following the Date of Termination; (ii) the Company shall reimburse Executive pursuant to Section 4(d) for reasonable expenses incurred, but not paid prior to such termination of employment; and (iii) Executive shall be entitled to any other rights, compensation and/or benefits as may be due to Executive in accordance with the terms and provisions of any agreements, plans or programs of the Company. (b) TERMINATION BY COMPANY FOR CAUSE OR BY EXECUTIVE WITHOUT GOOD REASON. If Executive's employment is terminated by the Company for Cause or by Executive (other than for Good Reason): (i) the Company shall pay Executive his Base Salary and, to the extent required by law or the Company's vacation policy, his accrued vacation pay through the Date of Termination, as soon as practicable following the Date of Termination; (ii) the Company shall reimburse Executive pursuant to Section 4(d) for reasonable expenses incurred, but not paid prior to such termination of employment, unless such termination resulted from a misappropriation of Company funds; and (iii) Executive shall be entitled to any other rights, compensation and/or benefits as may be due to Executive in accordance with the terms and provisions of any agreements, plans or programs of the Company. (c) DISABILITY. During any period that Executive fails to perform his duties hereunder as a result of incapacity due to physical or mental illness, Executive shall continue to receive his full Base Salary set forth in Section 4(a) until his employment is terminated pursuant to Section 5(b). In the event Executive's employment is terminated for Disability pursuant to Section 5(b): (i) the Company shall pay to Executive his Base Salary and accrued vacation pay through the Date of Termination, within 30 days following the Date of Termination; (ii) the Company shall reimburse Executive pursuant to Section 4(d) for reasonable expenses incurred, but not paid prior to such termination of employment; and 6 (iii) Executive shall be entitled to any other rights, compensation and/or benefits as may be due to Executive in accordance with the terms and provisions of any agreements, plans or programs of the Company. (d) DEATH. If Executive's employment is terminated by his death: (i) the Company shall pay in a lump sum to Executive's beneficiary, legal representatives or estate, as the case may be, Executive's Base Salary through the Date of Termination; (ii) the Company shall reimburse Executive's beneficiary, legal representatives, or estate, as the case may be, pursuant to Section 4(d) for reasonable expenses incurred, but not paid prior to such termination of employment; and (iii) Executive's beneficiary, legal representatives or estate, as the case may be, shall be entitled to any other rights, compensation and benefits as may be due to any such persons or estate in accordance with the terms and provisions of any agreements, plans or programs of the Company. 8. CONFIDENTIAL INFORMATION, OWNERSHIP OF DOCUMENTS; NON-COMPETITION. (a) CONFIDENTIAL INFORMATION. Executive shall hold in a fiduciary capacity for the benefit of the Company all Confidential Information (as defined below) relating to the Company and its businesses and investments, which shall have been obtained by Executive during Executive's employment by the Company and which is not generally available public knowledge (other than by acts of Executive in violation of this Agreement). Except as may be required or appropriate in connection with his carrying out his duties under this Agreement, Executive shall not, without the prior written consent of the Company or as may otherwise be required by law or any legal process, or as is necessary in connection with any adversarial proceeding against the Company (in which case Executive shall use his reasonable best efforts in cooperating with the Company in obtaining a protective order against disclosure by a court of competent jurisdiction), communicate or divulge any such Confidential Information relating to the Company to anyone other than the Company and those designated by the Company or on behalf of the Company in the furtherance of its business or to perform duties hereunder. For the purposes hereof, the term "Confidential Information" means, with respect to any person, any information concerning such person or its business, products, financial condition, prospects and affairs that is not generally available to the public. The term Confidential Information shall not include information that: (i) is already known to the recipient and was properly obtained by the recipient prior to the date of this Agreement; (ii) is in the public domain other than through a negligent act or omission or willful misconduct of the recipient; (iii) is acquired in good faith from a third party and, at the time of the acquisition, the recipient had no knowledge or reason to believe that such information was wrongfully obtained or disclosed by the third party; (iv) is independently developed by the recipient from information not defined as "Confidential Information" in this Agreement, as evidenced by the recipient's written records; (v) is disclosed to 7 third parties by the disclosing party without restriction; (vi) is required to be disclosed under applicable law or by a valid subpoena or other court or governmental order, decree, regulation or rule; PROVIDED, HOWEVER, that if disclosure is required under this provision the recipient shall advise the disclosing party of the requirement to disclose the Confidential Information prior to such disclosure and as soon as reasonably practicable after the recipient becomes aware of such required disclosure; and FURTHER PROVIDED THAT upon the request of the disclosing party, the recipient agrees to cooperate in good faith with any reasonable and lawful actions which the disclosing party takes to resist such disclosure, limit the information to be disclosed or limit the extent to which the information so disclosed may be used or made available to third parties, at the cost of the disclosing party. (b) REMOVAL OF DOCUMENTS; RIGHTS TO PRODUCTS. All records, files, drawings, documents, models, equipment, and the like relating to the Company's business, which Executive has control over shall not be removed from the Company's premises by Executive without the Board's written consent, unless such removal is in the furtherance of the Company's business or is in connection with Executive's carrying out his duties under this Agreement and, if so removed by Executive, shall be returned to the Company promptly after termination of Executive's employment hereunder, or otherwise promptly after removal if such removal occurs following termination of employment. Executive shall assign to the Company all rights to trade secrets and other products relating to the Company's business developed by him alone or in conjunction with others at any time while employed by the Company. (c) CONTINUING OPERATION. Except as specifically provided in this Section 8, the termination of Executive's employment or of this Agreement shall have no effect on the continuing operation of this Section 8. 9. INDEMNIFICATION. Upon the Commencement Date, Executive will enter into the Company's standard directors and officers indemnification agreement. 10. ARBITRATION. Any controversy between Executive and the Company involving the construction or application of any of the terms, provisions or conditions of this Agreement, including, without limitation, the determination of whether "Cause" or "Good Reason" exists under Section 5(c) or Section 5(d) hereof and claims involving specific performance, shall on the written request of either party served on the other in accordance with Section 12 below be submitted to binding arbitration. EACH PARTY, BY SIGNING THIS AGREEMENT, VOLUNTARILY, KNOWINGLY AND INTELLIGENTLY WAIVES ANY RIGHTS SUCH PARTY MAY OTHERWISE HAVE TO SEEK REMEDIES IN COURT OR OTHER FORUMS, INCLUDING THE RIGHT TO A JURY TRIAL. Arbitration shall comply with and be governed in accordance with the Commercial Arbitration Rules of the American Arbitration Association (the "AAA"). The arbitration will be conducted only in Denver, Colorado, before a single arbitrator selected by the parties or, if they are unable to agree on an arbitrator, before an arbitrator selected by the AAA. The arbitrator shall have full authority to order specific performance and award damages and other relief available under this Agreement or applicable law, but shall have no authority to add to, detract from, change or amend the terms of this Agreement or existing law. All arbitration proceedings, including settlements and awards, shall be 8 confidential. The decision of the arbitrator will be final and binding, and judgment on the award by the arbitrator may be entered in any court of competent jurisdiction. THIS SUBMISSION AND AGREEMENT TO ARBITRATE WILL BE SPECIFICALLY ENFORCEABLE. The arbitrator will have no power to award punitive or exemplary damages, to ignore or vary the terms of this Agreement and any other agreement between Executive and the Company and will be bound to apply controlling law. The prevailing party in any such arbitration shall be entitled to receive the costs of arbitration, including reasonable attorneys' fees and costs, from the losing party. 11. SUCCESSORS; BINDING AGREEMENT. (a) COMPANY'S SUCCESSORS. No rights or obligations of the Company under this Agreement may be assigned or transferred, except that the Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, "Company" shall mean the Company as herein before defined and any successor to its business and/or assets (by merger, purchase or otherwise) which executes and delivers the agreement provided for in this Section 11 or which otherwise becomes bound by all the terms and provisions of this Agreement by operation of law. (b) EXECUTIVE'S SUCCESSORS. No rights or obligations of Executive under this Agreement may be assigned or transferred by Executive other than his rights to payments or benefits hereunder, which may be transferred only by will or the laws of descent and distribution. Upon Executive's death, this Agreement and all rights of Executive hereunder shall inure to the benefit of and be enforceable by Executive's beneficiary or beneficiaries, personal or legal representatives or estate, to the extent any such person succeeds to Executive's interests under this Agreement. Executive shall be entitled to select and change a beneficiary or beneficiaries to receive any benefit or compensation payable hereunder following Executive's death by giving the Company written notice thereof. In the event of Executive's death or a judicial determination of his incompetence, reference in this Agreement to Executive shall be deemed, where appropriate, to refer to his beneficiary(ies), estate or other legal representative(s). If Executive should die following his Date of Termination while any amounts would still be payable to him hereunder if he had continued to live, all such amounts unless otherwise provided herein shall be paid in accordance with the terms of this Agreement to such person or persons so appointed in writing by Executive, or otherwise to his legal representatives or estate. 12. NOTICE. For the purposes of this Agreement, notices, demands and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered either personally or by United States certified or registered mail, return receipt requested, postage prepaid, addressed as follows: 9 If to Executive: Marion K. Jenkins 5454 E. Nichols Place Littleton, CO 80122 Telecopy: (303) 770-5443 If to the Company: FirstWorld Communications, Inc. 9333 Genesee Avenue, Suite 200 San Diego, CA 92121 Attn: Secretary Telecopy: (619) 552-8010 With a copy to: David A. Hahn, Esq. Latham & Watkins 701 "B" Street, Suite 2100 San Diego, California 92101 Telecopy: (619) 696-7419 or to such other address as any party may have furnished to the others in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. 13. WAIVER. No provisions of this Agreement may be amended, modified, or waived unless such amendment or modification is agreed to in a writing signed by Executive and by a duly authorized officer of the Company, and such waiver is set forth in writing and signed by the party to be charged. No waiver by either party hereto at any time of any breach by the other party hereto of any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time 14. SURVIVAL. Except as otherwise expressly set forth herein, the respective rights and obligations of the parties under this Agreement shall survive Executive's termination of employment and the termination of this Agreement to the extent necessary for the intended preservation of such rights and obligations. 15. CHOICE OF LAW. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Colorado without regard to its conflicts of law principles. 10 16. VALIDITY. The invalidity or unenforceability of any provision or provisions of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 17. COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. Facsimile signatures will be deemed to be effective originals hereunder. 18. ENTIRE AGREEMENT. This Agreement sets forth the entire agreement of the parties hereto in respect of the subject matter contained herein and supersedes all prior agreements, promises, covenants, arrangements, communications, representations or warranties, whether oral or written, by any officer, employee or representative of any party hereto in respect of such subject matter. Any prior agreement of the parties hereto in respect of the subject matter contained herein is hereby terminated and canceled. 19. WITHHOLDING. All payments hereunder shall be subject to any required withholding of Federal, state and local taxes pursuant to any applicable law or regulation. 20. SECTION HEADINGS. The section headings in this Agreement are for convenience of reference only, and they form no part of this Agreement and shall not affect its interpretation. [REMAINDER OF THIS PAGE LEFT BLANK INTENTIONALLY] 11 IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the date first above written. FIRSTWORLD COMMUNICATIONS, INC., a Delaware corporation By: /s/ Sheldon S. Ohringer ------------------------------------------- Name: Sheldon S. Ohringer Title: President and Chief Executive Officer /s/ Marion K. Jenkins ---------------------------------------------- MARION K. JENKINS 12 EX-10.28 5 EXHIBIT 10.28 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (the "Agreement"), dated as of November 30, 1998, is by and between FirstWorld Communications, Inc., a Delaware corporation (the "COMPANY") and David Gandini ("EXECUTIVE"). RECITAL The Company desires to employ Executive, effective as of November 30, 1998 (the "COMMENCEMENT DATE"), on the terms and conditions set forth in this Agreement, and Executive desires to be so employed. AGREEMENT IN CONSIDERATION of the premises and the mutual covenants set forth below, the parties hereby agree as follows: 1. EMPLOYMENT. The Company hereby agrees to employ Executive as the Executive Vice President of Sales of the Company, and Executive hereby accepts such employment, on the terms and conditions hereinafter set forth. 2. TERM. The period of employment of Executive by the Company hereunder (the "EMPLOYMENT PERIOD") shall commence at the Commencement Date and shall continue through November 30, 2001. The Employment Period may be sooner terminated by either party in accordance with Section 5 of this Agreement. 3. POSITION AND DUTIES. During the Employment Period, Executive shall serve as Executive Vice President of Sales of the Company. Executive shall devote such time, attention and energies to Company affairs as are necessary to fully perform his duties (other than absences due to illness or vacation) for the Company. During the Employment Period, Executive shall not, directly or indirectly, render services to any other organization, entity or person, as an employee, independent contractor, consultant or otherwise, with or without compensation, without the prior written consent of the Board of Directors of the Company (the "Board"), unless such services are unrelated to any telecommunications or internet business and do not interfere with his duties to the Company. 4. COMPENSATION AND RELATED MATTERS. (a) EQUALIZATION PAYMENT. To compensate Executive for certain benefits that he may lose or forfeit as a result of his termination of employment with his former employer, ICG Communications, Inc., and commencement of employment with the Company, the Company shall pay Executive in cash a $500,000 payment (the "EQUALIZATION PAYMENT") payable in three installments. The first installment in the amount of $100,000 is due and payable on January 1, 1999, the second installment in the amount of $200,000 is due and payable on January 1, 2000, and the third installment in the amount of $200,000 is due and payable on January 1, 2001; PROVIDED, HOWEVER, that Executive shall have no right to receive any installment of the Equalization Payment if he is not employed by the Company (or one of its Affiliates (as defined in Section 5(c)(iv) below)), whether or not employed as the Executive Vice President of Sales, on the dates such payments become due and payable as a result of Executive's (i) death, (ii) Disability (as defined below) , (iii) termination for Cause (as defined below) or (iv) voluntary termination of employment without Good Reason (as defined below). (b) SALARY. During the Employment Period, the Company shall pay Executive an annual base salary of $185,000 per year ("BASE SALARY"). Executive's Base Salary shall be paid in approximately equal installments in accordance with the Company's customary payroll schedule and practices. Executive's Base Salary shall be subject to annual reviews commencing December 1999 and each year thereafter. If Executive's Base Salary is increased by the Company, such increased Base Salary shall then constitute the Base Salary for all purposes of this Agreement. All compensation paid to Executive shall be subject to withholding and other employment taxes imposed by applicable law. (c) ANNUAL BONUS. The Board's compensation committee (the "COMPENSATION COMMITTEE") shall review Executive's performance at least once annually during each year of the Employment Period and, based on Executive's performance, recommend whether the Company should award Executive a cash bonus ("BONUS") in order to reward Executive for services rendered to the Company and/or as an incentive for continued service to the Company. The amount of Executive's Bonus, if any, shall be determined in the reasonable discretion of the Compensation Committee and shall be dependent upon, among other things, the achievement of certain performance levels by the Company, including, without limitation, (i) the nature, magnitude and quality of the services performed by Executive for the Company, (ii) the condition (financial and other) and results of operations of the Company and (iii) the compensation paid for positions of comparable responsibility and authority within the telecommunications industry. The targeted amount of Executive's Bonus shall be an amount equal to 40% of Base Salary at 100% completion of applicable performance levels, to be set forth in the Company's Annual Bonus Plan. (d) STOCK OPTIONS. Effective as of the Commencement Date, Executive shall be awarded a stock option (the "STOCK OPTION") to purchase 500,000 shares of the Company's Series B Common Stock, par value $.0001 per share (the "Common Stock"). The shares of Common Stock subject to the Stock Option shall vest in increments of 125,000 shares on each of the first, second, third and fourth anniversaries of the Commencement Date, with the shares in the first such increment having an exercise price of $6.00, shares in the second such increment having an exercise price of $6.50, shares in the third such increment having an exercise price of $7.00 and shares in the fourth such increment having an exercise price of $7.50. The Stock Option will be granted under one of the Company's stock option plans and the terms and conditions of the Stock Option will be determined in accordance with the applicable stock option plan. Notwithstanding any such terms, however, all shares subject to the Stock Option shall become immediately vested and exercisable in the event of the sale of all or substantially all of the Company's assets or a merger or consolidation in which the Company is not the surviving entity or the Company's shareholders prior to the transaction own less than 50% of the voting power of the Company's outstanding securities immediately following the transaction. 2 (e) EXPENSES. The Company shall promptly reimburse Executive for all reasonable business expenses upon the presentation of reasonably itemized statements of such expenses in accordance with the Company's policies and procedures now in force or as such policies and procedures may be modified with respect to all senior executive officers of the Company. (f) WELFARE AND PENSION PLANS. In addition to Executive's Base Salary and any incentive compensation and bonuses awarded to Executive hereunder, he (and his family) shall be entitled to participate, to the extent that he is (and they are) eligible under the terms and conditions thereof, in any pension, retirement, hospitalization, insurance, disability or medical service plan generally available to the executive officers of the Company that may be in effect from time to time during the Employment Period. The Company shall be under no obligation to institute or continue the existence of any such employee benefit plan. 5. TERMINATION. Executive's employment hereunder may be terminated during the Employment Period under the following circumstances: (a) DEATH. Executive's employment hereunder shall terminate upon his death. (b) DISABILITY. If, as a result of Executive's incapacity due to physical or mental illness, Executive shall have been substantially unable to perform his duties hereunder for an entire period of thirty (30) consecutive days, and within thirty (30) days after written Notice of Termination (as defined in Section 6(a)) is given after such thirty (30) day period, Executive shall not have returned to the substantial performance of his duties on a full-time basis, the Company shall have the right to terminate Executive's employment hereunder for "Disability," and such termination in and of itself shall not be, nor shall it be deemed to be, a breach of this Agreement. (c) CAUSE. The Company shall have the right to terminate Executive's employment for Cause (as defined), and such termination in and of itself shall not be, nor shall it be deemed to be, a breach of this Agreement. For purposes of this Agreement, the Company shall have "Cause" to terminate Executive's employment upon Executive's: (i) conviction of, or plea of guilty or nolo contendere to, any crime constituting a felony; (ii) commission of a material act of dishonesty, fraud, misrepresentation or other act of moral turpitude that would, in the Board's reasonable judgment, prevent the effective performance of his duties hereunder; (iii) continued failure to substantially perform his duties hereunder to the reasonable satisfaction of the Board (other than such failure resulting from Executive's incapacity due to physical or mental illness or subsequent to the issuance of a Notice of Termination by Executive for Good Reason (as defined in Section 5(d)) after demand for substantial performance is delivered by the Board in writing that specifically identifies the 3 manner in which the Board believes Executive has not used reasonable best efforts to substantially perform his duties; or (iv) willful misconduct (including, but not limited to, a willful breach of the provisions of Section 8) that is, in the Board's reasonable judgment, injurious to the Company or to any entity in control of, controlled by or under common control with the Company ("Affiliate"). For purposes of this Section 5(c), no act, or failure to act, by Executive shall be considered "WILLFUL" unless committed in bad faith and without a reasonable belief that the act or omission was in the best interests of the Company or any Affiliates thereof; PROVIDED, HOWEVER, that the requirements outlined in paragraphs (iii) or (iv) above shall be deemed to have occurred if Executive's action or non-action continues for more than ten (10) days after Executive has received written notice of the inappropriate action or non-action. This Section 5(c) shall not prevent Executive from challenging the Board's determination that Cause exists or that Executive has failed to cure any act (or failure to act) that purportedly formed the basis for the Board's determination, under the arbitration procedures set forth in Section 10 below. (d) GOOD REASON. Executive may terminate his employment for "Good Reason" within thirty (30) days after Executive has actual knowledge of the occurrence, without the written consent of Executive, of one of the following events that has not been cured within thirty (30) days after written notice thereof has been given by Executive to the Company (PROVIDED, that with respect to this Section 5(d), the Company shall have the right to challenge Executive's determination that he has the right to terminate his employment for "Good Reason" under the arbitration procedures set forth in Section 10 below): (i) a reduction by the Company in Executive's Base Salary or a failure by the Company to pay any such amounts when due; (ii) any purported termination of Executive's employment for Cause which is not effected pursuant to the procedures of Section 5(c) (and for purposes of this Agreement, no such purported termination shall be effective); (iii) the Company's failure to provide the Stock Option or the Company's material breach of one or more of the stock option agreements pursuant to which the Stock Option was issued to Executive; (iv) the Company's failure to substantially provide any material employee benefits due to be provided to Executive; or (v) the Company's failure to provide in all material respects the indemnification set forth in the agreement referenced in Section 9 of this Agreement. 4 Executive's continued employment during the thirty (30) day period referred to above in this paragraph (d) shall not constitute Executive's consent to, or a waiver of rights with respect to, any act or failure to act constituting Good Reason hereunder. (e) WITHOUT GOOD REASON OR CAUSE. Executive shall have the right to terminate his employment hereunder without Good Reason and the Company shall have the right to terminate Executive's employment hereunder without Cause by providing the other with a Notice of Termination, and such termination shall not in and of itself be, nor shall it be deemed to be, a breach of this Agreement. 6. TERMINATION PROCEDURE. (a) NOTICE OF TERMINATION. Any termination of Executive's employment by the Company or by Executive during the Employment Period (other than termination pursuant to Section 5(a)) shall be communicated by written Notice of Termination (as defined below) to the other party hereto in accordance with Section 12 below. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Executive's employment under the provision so indicated. (b) DATE OF TERMINATION. "Date of Termination" shall mean (i) if Executive's employment is terminated by his death, the date of his death, (ii) if Executive's employment is terminated pursuant to Section 5(b), thirty (30) days after Notice of Termination (provided that Executive shall not have returned to the substantial performance of his duties on a full-time basis during such thirty (30) day period) and (iii) if Executive's employment is terminated for any other reason, the date on which a Notice of Termination is given or any later date (within thirty (30) days after the giving of such notice) set forth in such Notice of Termination. 7. COMPENSATION UPON TERMINATION OR DURING DISABILITY. In the event Executive is disabled or his employment terminates during the Employment Period, the Company shall provide Executive with the payments and benefits set forth below. Executive acknowledges and agrees that the payments set forth in this Section 7 constitute liquidated damages for termination of his employment during the Employment Period. (a) TERMINATION BY COMPANY WITHOUT CAUSE OR BY EXECUTIVE FOR GOOD REASON. If Executive's employment is terminated by the Company without Cause or by Executive for Good Reason: (i) the Company shall pay to Executive a severance payment equal to the amount of Base Salary Executive would have received under the Agreement if Executive had remained employed throughout the Employment Period stated in Section 2, plus accrued vacation, within thirty (30) days following the Date of Termination; 5 (ii) the Company shall reimburse Executive pursuant to Section 4(e) for reasonable expenses incurred, but not paid prior to such termination of employment; and (iii) Executive shall be entitled to any other rights, compensation, stock options (as described herein) and/or benefits as may be due to Executive in accordance with the terms and provisions of any agreements, plans or programs of the Company. (b) TERMINATION BY COMPANY FOR CAUSE OR BY EXECUTIVE WITHOUT GOOD REASON. If Executive's employment is terminated by the Company for Cause or by Executive (other than for Good Reason): (i) the Company shall pay Executive his Base Salary and, to the extent required by law or the Company's vacation policy, his accrued vacation pay through the Date of Termination, as soon as practicable following the Date of Termination; (ii) the Company shall reimburse Executive pursuant to Section 4(e) for reasonable expenses incurred, but not paid prior to such termination of employment, unless such termination resulted from a misappropriation of Company funds; and (iii) Executive shall be entitled to any other rights, compensation and/or benefits as may be due to Executive in accordance with the terms and provisions of any agreements, plans or programs of the Company. (c) DISABILITY. During any period that Executive fails to perform his duties hereunder as a result of incapacity due to physical or mental illness, Executive shall continue to receive his full Base Salary set forth in Section 4(b) until his employment is terminated pursuant to Section 5(b). In the event Executive's employment is terminated for Disability pursuant to Section 5(b): (i) the Company shall pay to Executive his Base Salary and accrued vacation pay through the Date of Termination, within 30 days following the Date of Termination; (ii) the Company shall reimburse Executive pursuant to Section 4(e) for reasonable expenses incurred, but not paid prior to such termination of employment; and (iii) Executive shall be entitled to any other rights, compensation and/or benefits as may be due to Executive in accordance with the terms and provisions of any agreements, plans or programs of the Company. (d) DEATH. If Executive's employment is terminated by his death: (i) the Company shall pay in a lump sum to Executive's beneficiary, legal representatives or estate, as the case may be, Executive's Base Salary through the Date of Termination; 6 (ii) the Company shall reimburse Executive's beneficiary, legal representatives, or estate, as the case may be, pursuant to Section 4(e) for reasonable expenses incurred, but not paid prior to such termination of employment; and (iii) Executive's beneficiary, legal representatives or estate, as the case may be, shall be entitled to any other rights, compensation and benefits as may be due to any such persons or estate in accordance with the terms and provisions of any agreements, plans or programs of the Company. 8. CONFIDENTIAL INFORMATION, OWNERSHIP OF DOCUMENTS; NON-COMPETITION. (a) CONFIDENTIAL INFORMATION. Executive shall hold in a fiduciary capacity for the benefit of the Company all Confidential Information (as defined below) relating to the Company and its businesses and investments, which shall have been obtained by Executive during Executive's employment by the Company and which is not generally available public knowledge (other than by acts of Executive in violation of this Agreement). Except as may be required or appropriate in connection with his carrying out his duties under this Agreement, Executive shall not, without the prior written consent of the Company or as may otherwise be required by law or any legal process, or as is necessary in connection with any adversarial proceeding against the Company (in which case Executive shall use his reasonable best efforts in cooperating with the Company in obtaining a protective order against disclosure by a court of competent jurisdiction), communicate or divulge any such Confidential Information relating to the Company to anyone other than the Company and those designated by the Company or on behalf of the Company in the furtherance of its business or to perform duties hereunder. For the purposes hereof, the term "Confidential Information" means, with respect to any person, any information concerning such person or its business, products, financial condition, prospects and affairs that is not generally available to the public. The term Confidential Information shall not include information that: (i) is already known to the recipient and was properly obtained by the recipient prior to the date of this Agreement; (ii) is in the public domain other than through a negligent act or omission or willful misconduct of the recipient; (iii) is acquired in good faith from a third party and, at the time of the acquisition, the recipient had no knowledge or reason to believe that such information was wrongfully obtained or disclosed by the third party; (iv) is independently developed by the recipient from information not defined as "Confidential Information" in this Agreement, as evidenced by the recipient's written records; (v) is disclosed to third parties by the disclosing party without restriction; (vi) is required to be disclosed under applicable law or by a valid subpoena or other court or governmental order, decree, regulation or rule; PROVIDED, HOWEVER, that if disclosure is required under this provision the recipient shall advise the disclosing party of the requirement to disclose the Confidential Information prior to such disclosure and as soon as reasonably practicable after the recipient becomes aware of such required disclosure; and FURTHER PROVIDED THAT upon the request of the disclosing party, the recipient agrees to cooperate in good faith with any reasonable and lawful actions which the disclosing party takes to resist such disclosure, limit the 7 information to be disclosed or limit the extent to which the information so disclosed may be used or made available to third parties, at the cost of the disclosing party. (b) REMOVAL OF DOCUMENTS; RIGHTS TO PRODUCTS. All records, files, drawings, documents, models, equipment, and the like relating to the Company's business, which Executive has control over shall not be removed from the Company's premises by Executive without the Board's written consent, unless such removal is in the furtherance of the Company's business or is in connection with Executive's carrying out his duties under this Agreement and, if so removed by Executive, shall be returned to the Company promptly after termination of Executive's employment hereunder, or otherwise promptly after removal if such removal occurs following termination of employment. Executive shall assign to the Company all rights to trade secrets and other products relating to the Company's business developed by him alone or in conjunction with others at any time while employed by the Company. (c) CONTINUING OPERATION. Except as specifically provided in this Section 8, the termination of Executive's employment or of this Agreement shall have no effect on the continuing operation of this Section 8. 9. INDEMNIFICATION. (a) Upon the Commencement Date, Executive will enter into the Company's standard directors and officers indemnification agreement. (b) Upon the Commencement Date, Company will ensure that Executive is added as an insured on its directors and officers liability insurance policy. In the event that Executive's employment relationship with Company is severed, for any reason, the Company will provide that Executive shall continue to be an insured under the Company's directors and officers liability insurance policy for as long as the Company retains such coverage, and if the Company discontinues such coverage, Executive and/or his heirs or personal or legal representative shall be given the opportunity to purchase continuation coverage in accordance with the terms of the applicable policy. 10. ARBITRATION. Any controversy between Executive and the Company involving the construction or application of any of the terms, provisions or conditions of this Agreement, including, without limitation, the determination of whether "Cause" or "Good Reason" exists under Section 5(c) or Section 5(d) hereof and claims involving specific performance, shall on the written request of either party served on the other in accordance with Section 12 below be submitted to binding arbitration. EACH PARTY, BY SIGNING THIS AGREEMENT, VOLUNTARILY, KNOWINGLY AND INTELLIGENTLY WAIVES ANY RIGHTS SUCH PARTY MAY OTHERWISE HAVE TO SEEK REMEDIES IN COURT OR OTHER FORUMS, INCLUDING THE RIGHT TO A JURY TRIAL. Arbitration shall comply with and be governed in accordance with the Commercial Arbitration Rules of the American Arbitration Association (the "AAA"). The arbitration will be conducted only in Denver, Colorado, before a single arbitrator selected by the parties or, if they are unable to agree on an arbitrator, before an arbitrator selected by the AAA. The arbitrator shall have full authority to order specific performance and award damages and other relief available under this Agreement or applicable 8 law, but shall have no authority to add to, detract from, change or amend the terms of this Agreement or existing law. All arbitration proceedings, including settlements and awards, shall be confidential. The decision of the arbitrator will be final and binding, and judgment on the award by the arbitrator may be entered in any court of competent jurisdiction. THIS SUBMISSION AND AGREEMENT TO ARBITRATE WILL BE SPECIFICALLY ENFORCEABLE. The arbitrator will have no power to award punitive or exemplary damages, to ignore or vary the terms of this Agreement and any other agreement between Executive and the Company and will be bound to apply controlling law. The prevailing party in any such arbitration shall be entitled to receive the costs of arbitration, including reasonable attorneys' fees and costs, from the losing party. 11. SUCCESSORS; BINDING AGREEMENT. (a) COMPANY'S SUCCESSORS. No rights or obligations of the Company under this Agreement may be assigned or transferred, except that the Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, "Company" shall mean the Company as herein before defined and any successor to its business and/or assets (by merger, purchase or otherwise) which executes and delivers the agreement provided for in this Section 11 or which otherwise becomes bound by all the terms and provisions of this Agreement by operation of law. (b) EXECUTIVE'S SUCCESSORS. No rights or obligations of Executive under this Agreement may be assigned or transferred by Executive other than his rights to payments or benefits hereunder, which may be transferred only by will or the laws of descent and distribution. Upon Executive's death, this Agreement and all rights of Executive hereunder shall inure to the benefit of and be enforceable by Executive's beneficiary or beneficiaries, personal or legal representatives or estate, to the extent any such person succeeds to Executive's interests under this Agreement. Executive shall be entitled to select and change a beneficiary or beneficiaries to receive any benefit or compensation payable hereunder following Executive's death by giving the Company written notice thereof. In the event of Executive's death or a judicial determination of his incompetence, reference in this Agreement to Executive shall be deemed, where appropriate, to refer to his beneficiary(ies), estate or other legal representative(s). If Executive should die following his Date of Termination while any amounts would still be payable to him hereunder if he had continued to live, all such amounts unless otherwise provided herein shall be paid in accordance with the terms of this Agreement to such person or persons so appointed in writing by Executive, or otherwise to his legal representatives or estate. 12. NOTICE. For the purposes of this Agreement, notices, demands and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered either personally or by United States certified or registered mail, return receipt requested, postage prepaid, addressed as follows: 9 If to Executive: David Gandini 3351 Meadow Creek Place Highland Ranch, CO 80126 If to the Company: FirstWorld Communications, Inc. 9333 Genesee Avenue, Suite 200 San Diego, CA 92121 Attn: Secretary Telecopy: (619) 552-8010 With a copy to: David A. Hahn, Esq. Latham & Watkins 701 "B" Street, Suite 2100 San Diego, California 92101 Telecopy: (619) 696-7419 or to such other address as any party may have furnished to the others in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. 13. WAIVER. No provisions of this Agreement may be amended, modified, or waived unless such amendment or modification is agreed to in a writing signed by Executive and by a duly authorized officer of the Company, and such waiver is set forth in writing and signed by the party to be charged. No waiver by either party hereto at any time of any breach by the other party hereto of any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time 14. SURVIVAL. Except as otherwise expressly set forth herein, the respective rights and obligations of the parties under this Agreement shall survive Executive's termination of employment and the termination of this Agreement to the extent necessary for the intended preservation of such rights and obligations. 15. CHOICE OF LAW. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Colorado without regard to its conflicts of law principles. 16. VALIDITY. The invalidity or unenforceability of any provision or provisions of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 10 17. COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. Facsimile signatures will be deemed to be effective originals hereunder. 18. ENTIRE AGREEMENT. This Agreement sets forth the entire agreement of the parties hereto in respect of the subject matter contained herein and supersedes all prior agreements, promises, covenants, arrangements, communications, representations or warranties, whether oral or written, by any officer, employee or representative of any party hereto in respect of such subject matter. Any prior agreement of the parties hereto in respect of the subject matter contained herein is hereby terminated and canceled. 19. WITHHOLDING. All payments hereunder shall be subject to any required withholding of Federal, state and local taxes pursuant to any applicable law or regulation. 20. SECTION HEADINGS. The section headings in this Agreement are for convenience of reference only, and they form no part of this Agreement and shall not affect its interpretation. [REMAINDER OF THIS PAGE LEFT BLANK INTENTIONALLY] 11 IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the date first above written. FIRSTWORLD COMMUNICATIONS, INC., a Delaware corporation By: /s/ Sheldon S. Ohringer ------------------------------------------- Name: Sheldon S. Ohringer Title: President and Chief Executive Officer /s/ David Gandini ---------------------------------------------- DAVID GANDINI 12 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (the "Agreement"), dated as of November 30, 1998, is by and between FirstWorld Communications, Inc., a Delaware corporation (the "COMPANY") and David Gandini ("EXECUTIVE"). RECITAL The Company desires to employ Executive, effective as of November 30, 1998 (the "COMMENCEMENT DATE"), on the terms and conditions set forth in this Agreement, and Executive desires to be so employed. AGREEMENT IN CONSIDERATION of the premises and the mutual covenants set forth below, the parties hereby agree as follows: 1. EMPLOYMENT. The Company hereby agrees to employ Executive as the Executive Vice President of Sales of the Company, and Executive hereby accepts such employment, on the terms and conditions hereinafter set forth. 2. TERM. The period of employment of Executive by the Company hereunder (the "EMPLOYMENT PERIOD") shall commence at the Commencement Date and shall continue through November 30, 2001. The Employment Period may be sooner terminated by either party in accordance with Section 5 of this Agreement. 3. POSITION AND DUTIES. During the Employment Period, Executive shall serve as Executive Vice President of Sales of the Company. Executive shall devote such time, attention and energies to Company affairs as are necessary to fully perform his duties (other than absences due to illness or vacation) for the Company. During the Employment Period, Executive shall not, directly or indirectly, render services to any other organization, entity or person, as an employee, independent contractor, consultant or otherwise, with or without compensation, without the prior written consent of the Board of Directors of the Company (the "Board"), unless such services are unrelated to any telecommunications or internet business and do not interfere with his duties to the Company. 4. COMPENSATION AND RELATED MATTERS. (a) EQUALIZATION PAYMENT. To compensate Executive for certain benefits that he may lose or forfeit as a result of his termination of employment with his former employer, ICG Communications, Inc., and commencement of employment with the Company, the Company shall pay Executive in cash a $500,000 payment (the "EQUALIZATION PAYMENT") payable in three installments. The first installment in the amount of $100,000 is due and payable on January 1, 1999, the second installment in the amount of $200,000 is due and payable on January 1, 2000, and the third installment in the amount of $200,000 is due and payable on January 1, 2001; PROVIDED, HOWEVER, that Executive shall have no right to receive any installment of the Equalization Payment if he is not employed by the Company (or one of its Affiliates (as defined in Section 5(c)(iv) below)), whether or not employed as the Executive Vice President of Sales, on the dates such payments become due and payable as a result of Executive's (i) death, (ii) Disability (as defined below) , (iii) termination for Cause (as defined below) or (iv) voluntary termination of employment without Good Reason (as defined below). (b) SALARY. During the Employment Period, the Company shall pay Executive an annual base salary of $185,000 per year ("BASE SALARY"). Executive's Base Salary shall be paid in approximately equal installments in accordance with the Company's customary payroll schedule and practices. Executive's Base Salary shall be subject to annual reviews commencing December 1999 and each year thereafter. If Executive's Base Salary is increased by the Company, such increased Base Salary shall then constitute the Base Salary for all purposes of this Agreement. All compensation paid to Executive shall be subject to withholding and other employment taxes imposed by applicable law. (c) ANNUAL BONUS. The Board's compensation committee (the "COMPENSATION COMMITTEE") shall review Executive's performance at least once annually during each year of the Employment Period and, based on Executive's performance, recommend whether the Company should award Executive a cash bonus ("BONUS") in order to reward Executive for services rendered to the Company and/or as an incentive for continued service to the Company. The amount of Executive's Bonus, if any, shall be determined in the reasonable discretion of the Compensation Committee and shall be dependent upon, among other things, the achievement of certain performance levels by the Company, including, without limitation, (i) the nature, magnitude and quality of the services performed by Executive for the Company, (ii) the condition (financial and other) and results of operations of the Company and (iii) the compensation paid for positions of comparable responsibility and authority within the telecommunications industry. The targeted amount of Executive's Bonus shall be an amount equal to 40% of Base Salary at 100% completion of applicable performance levels, to be set forth in the Company's Annual Bonus Plan. (d) STOCK OPTIONS. Effective as of the Commencement Date, Executive shall be awarded a stock option (the "STOCK OPTION") to purchase 500,000 shares of the Company's Series B Common Stock, par value $.0001 per share (the "Common Stock"). The shares of Common Stock subject to the Stock Option shall vest in increments of 125,000 shares on each of the first, second, third and fourth anniversaries of the Commencement Date, with the shares in the first such increment having an exercise price of $6.00, shares in the second such increment having an exercise price of $6.50, shares in the third such increment having an exercise price of $7.00 and shares in the fourth such increment having an exercise price of $7.50. The Stock Option will be granted under one of the Company's stock option plans and the terms and conditions of the Stock Option will be determined in accordance with the applicable stock option plan. Notwithstanding any such terms, however, all shares subject to the Stock Option shall become immediately vested and exercisable in the event of the sale of all or substantially all of the Company's assets or a merger or consolidation in which the Company is not the surviving entity or the Company's shareholders prior to the transaction own less than 50% of the voting power of the Company's outstanding securities immediately following the transaction. 2 (e) EXPENSES. The Company shall promptly reimburse Executive for all reasonable business expenses upon the presentation of reasonably itemized statements of such expenses in accordance with the Company's policies and procedures now in force or as such policies and procedures may be modified with respect to all senior executive officers of the Company. (f) WELFARE AND PENSION PLANS. In addition to Executive's Base Salary and any incentive compensation and bonuses awarded to Executive hereunder, he (and his family) shall be entitled to participate, to the extent that he is (and they are) eligible under the terms and conditions thereof, in any pension, retirement, hospitalization, insurance, disability or medical service plan generally available to the executive officers of the Company that may be in effect from time to time during the Employment Period. The Company shall be under no obligation to institute or continue the existence of any such employee benefit plan. 5. TERMINATION. Executive's employment hereunder may be terminated during the Employment Period under the following circumstances: (a) DEATH. Executive's employment hereunder shall terminate upon his death. (b) DISABILITY. If, as a result of Executive's incapacity due to physical or mental illness, Executive shall have been substantially unable to perform his duties hereunder for an entire period of thirty (30) consecutive days, and within thirty (30) days after written Notice of Termination (as defined in Section 6(a)) is given after such thirty (30) day period, Executive shall not have returned to the substantial performance of his duties on a full-time basis, the Company shall have the right to terminate Executive's employment hereunder for "Disability," and such termination in and of itself shall not be, nor shall it be deemed to be, a breach of this Agreement. (c) CAUSE. The Company shall have the right to terminate Executive's employment for Cause (as defined), and such termination in and of itself shall not be, nor shall it be deemed to be, a breach of this Agreement. For purposes of this Agreement, the Company shall have "Cause" to terminate Executive's employment upon Executive's: (i) conviction of, or plea of guilty or nolo contendere to, any crime constituting a felony; (ii) commission of a material act of dishonesty, fraud, misrepresentation or other act of moral turpitude that would, in the Board's reasonable judgment, prevent the effective performance of his duties hereunder; (iii) continued failure to substantially perform his duties hereunder to the reasonable satisfaction of the Board (other than such failure resulting from Executive's incapacity due to physical or mental illness or subsequent to the issuance of a Notice of Termination by Executive for Good Reason (as defined in Section 5(d)) after demand for substantial performance is delivered by the Board in writing that specifically identifies the 3 manner in which the Board believes Executive has not used reasonable best efforts to substantially perform his duties; or (iv) willful misconduct (including, but not limited to, a willful breach of the provisions of Section 8) that is, in the Board's reasonable judgment, injurious to the Company or to any entity in control of, controlled by or under common control with the Company ("Affiliate"). For purposes of this Section 5(c), no act, or failure to act, by Executive shall be considered "WILLFUL" unless committed in bad faith and without a reasonable belief that the act or omission was in the best interests of the Company or any Affiliates thereof; PROVIDED, HOWEVER, that the requirements outlined in paragraphs (iii) or (iv) above shall be deemed to have occurred if Executive's action or non-action continues for more than ten (10) days after Executive has received written notice of the inappropriate action or non-action. This Section 5(c) shall not prevent Executive from challenging the Board's determination that Cause exists or that Executive has failed to cure any act (or failure to act) that purportedly formed the basis for the Board's determination, under the arbitration procedures set forth in Section 10 below. (d) GOOD REASON. Executive may terminate his employment for "Good Reason" within thirty (30) days after Executive has actual knowledge of the occurrence, without the written consent of Executive, of one of the following events that has not been cured within thirty (30) days after written notice thereof has been given by Executive to the Company (PROVIDED, that with respect to this Section 5(d), the Company shall have the right to challenge Executive's determination that he has the right to terminate his employment for "Good Reason" under the arbitration procedures set forth in Section 10 below): (i) a reduction by the Company in Executive's Base Salary or a failure by the Company to pay any such amounts when due; (ii) any purported termination of Executive's employment for Cause which is not effected pursuant to the procedures of Section 5(c) (and for purposes of this Agreement, no such purported termination shall be effective); (iii) the Company's failure to provide the Stock Option or the Company's material breach of one or more of the stock option agreements pursuant to which the Stock Option was issued to Executive; (iv) the Company's failure to substantially provide any material employee benefits due to be provided to Executive; or (v) the Company's failure to provide in all material respects the indemnification set forth in the agreement referenced in Section 9 of this Agreement. 4 Executive's continued employment during the thirty (30) day period referred to above in this paragraph (d) shall not constitute Executive's consent to, or a waiver of rights with respect to, any act or failure to act constituting Good Reason hereunder. (e) WITHOUT GOOD REASON OR CAUSE. Executive shall have the right to terminate his employment hereunder without Good Reason and the Company shall have the right to terminate Executive's employment hereunder without Cause by providing the other with a Notice of Termination, and such termination shall not in and of itself be, nor shall it be deemed to be, a breach of this Agreement. 6. TERMINATION PROCEDURE. (a) NOTICE OF TERMINATION. Any termination of Executive's employment by the Company or by Executive during the Employment Period (other than termination pursuant to Section 5(a)) shall be communicated by written Notice of Termination (as defined below) to the other party hereto in accordance with Section 12 below. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Executive's employment under the provision so indicated. (b) DATE OF TERMINATION. "Date of Termination" shall mean (i) if Executive's employment is terminated by his death, the date of his death, (ii) if Executive's employment is terminated pursuant to Section 5(b), thirty (30) days after Notice of Termination (provided that Executive shall not have returned to the substantial performance of his duties on a full-time basis during such thirty (30) day period) and (iii) if Executive's employment is terminated for any other reason, the date on which a Notice of Termination is given or any later date (within thirty (30) days after the giving of such notice) set forth in such Notice of Termination. 7. COMPENSATION UPON TERMINATION OR DURING DISABILITY. In the event Executive is disabled or his employment terminates during the Employment Period, the Company shall provide Executive with the payments and benefits set forth below. Executive acknowledges and agrees that the payments set forth in this Section 7 constitute liquidated damages for termination of his employment during the Employment Period. (a) TERMINATION BY COMPANY WITHOUT CAUSE OR BY EXECUTIVE FOR GOOD REASON. If Executive's employment is terminated by the Company without Cause or by Executive for Good Reason: (i) the Company shall pay to Executive a severance payment equal to the amount of Base Salary Executive would have received under the Agreement if Executive had remained employed throughout the Employment Period stated in Section 2, plus accrued vacation, within thirty (30) days following the Date of Termination; 5 (ii) the Company shall reimburse Executive pursuant to Section 4(e) for reasonable expenses incurred, but not paid prior to such termination of employment; and (iii) Executive shall be entitled to any other rights, compensation, stock options (as described herein) and/or benefits as may be due to Executive in accordance with the terms and provisions of any agreements, plans or programs of the Company. (b) TERMINATION BY COMPANY FOR CAUSE OR BY EXECUTIVE WITHOUT GOOD REASON. If Executive's employment is terminated by the Company for Cause or by Executive (other than for Good Reason): (i) the Company shall pay Executive his Base Salary and, to the extent required by law or the Company's vacation policy, his accrued vacation pay through the Date of Termination, as soon as practicable following the Date of Termination; (ii) the Company shall reimburse Executive pursuant to Section 4(e) for reasonable expenses incurred, but not paid prior to such termination of employment, unless such termination resulted from a misappropriation of Company funds; and (iii) Executive shall be entitled to any other rights, compensation and/or benefits as may be due to Executive in accordance with the terms and provisions of any agreements, plans or programs of the Company. (c) DISABILITY. During any period that Executive fails to perform his duties hereunder as a result of incapacity due to physical or mental illness, Executive shall continue to receive his full Base Salary set forth in Section 4(b) until his employment is terminated pursuant to Section 5(b). In the event Executive's employment is terminated for Disability pursuant to Section 5(b): (i) the Company shall pay to Executive his Base Salary and accrued vacation pay through the Date of Termination, within 30 days following the Date of Termination; (ii) the Company shall reimburse Executive pursuant to Section 4(e) for reasonable expenses incurred, but not paid prior to such termination of employment; and (iii) Executive shall be entitled to any other rights, compensation and/or benefits as may be due to Executive in accordance with the terms and provisions of any agreements, plans or programs of the Company. (d) DEATH. If Executive's employment is terminated by his death: (i) the Company shall pay in a lump sum to Executive's beneficiary, legal representatives or estate, as the case may be, Executive's Base Salary through the Date of Termination; 6 (ii) the Company shall reimburse Executive's beneficiary, legal representatives, or estate, as the case may be, pursuant to Section 4(e) for reasonable expenses incurred, but not paid prior to such termination of employment; and (iii) Executive's beneficiary, legal representatives or estate, as the case may be, shall be entitled to any other rights, compensation and benefits as may be due to any such persons or estate in accordance with the terms and provisions of any agreements, plans or programs of the Company. 8. CONFIDENTIAL INFORMATION, OWNERSHIP OF DOCUMENTS; NON-COMPETITION. (a) CONFIDENTIAL INFORMATION. Executive shall hold in a fiduciary capacity for the benefit of the Company all Confidential Information (as defined below) relating to the Company and its businesses and investments, which shall have been obtained by Executive during Executive's employment by the Company and which is not generally available public knowledge (other than by acts of Executive in violation of this Agreement). Except as may be required or appropriate in connection with his carrying out his duties under this Agreement, Executive shall not, without the prior written consent of the Company or as may otherwise be required by law or any legal process, or as is necessary in connection with any adversarial proceeding against the Company (in which case Executive shall use his reasonable best efforts in cooperating with the Company in obtaining a protective order against disclosure by a court of competent jurisdiction), communicate or divulge any such Confidential Information relating to the Company to anyone other than the Company and those designated by the Company or on behalf of the Company in the furtherance of its business or to perform duties hereunder. For the purposes hereof, the term "Confidential Information" means, with respect to any person, any information concerning such person or its business, products, financial condition, prospects and affairs that is not generally available to the public. The term Confidential Information shall not include information that: (i) is already known to the recipient and was properly obtained by the recipient prior to the date of this Agreement; (ii) is in the public domain other than through a negligent act or omission or willful misconduct of the recipient; (iii) is acquired in good faith from a third party and, at the time of the acquisition, the recipient had no knowledge or reason to believe that such information was wrongfully obtained or disclosed by the third party; (iv) is independently developed by the recipient from information not defined as "Confidential Information" in this Agreement, as evidenced by the recipient's written records; (v) is disclosed to third parties by the disclosing party without restriction; (vi) is required to be disclosed under applicable law or by a valid subpoena or other court or governmental order, decree, regulation or rule; PROVIDED, HOWEVER, that if disclosure is required under this provision the recipient shall advise the disclosing party of the requirement to disclose the Confidential Information prior to such disclosure and as soon as reasonably practicable after the recipient becomes aware of such required disclosure; and FURTHER PROVIDED THAT upon the request of the disclosing party, the recipient agrees to cooperate in good faith with any reasonable and lawful actions which the disclosing party takes to resist such disclosure, limit the 7 information to be disclosed or limit the extent to which the information so disclosed may be used or made available to third parties, at the cost of the disclosing party. (b) REMOVAL OF DOCUMENTS; RIGHTS TO PRODUCTS. All records, files, drawings, documents, models, equipment, and the like relating to the Company's business, which Executive has control over shall not be removed from the Company's premises by Executive without the Board's written consent, unless such removal is in the furtherance of the Company's business or is in connection with Executive's carrying out his duties under this Agreement and, if so removed by Executive, shall be returned to the Company promptly after termination of Executive's employment hereunder, or otherwise promptly after removal if such removal occurs following termination of employment. Executive shall assign to the Company all rights to trade secrets and other products relating to the Company's business developed by him alone or in conjunction with others at any time while employed by the Company. (c) CONTINUING OPERATION. Except as specifically provided in this Section 8, the termination of Executive's employment or of this Agreement shall have no effect on the continuing operation of this Section 8. 9. INDEMNIFICATION. (a) Upon the Commencement Date, Executive will enter into the Company's standard directors and officers indemnification agreement. (b) Upon the Commencement Date, Company will ensure that Executive is added as an insured on its directors and officers liability insurance policy. In the event that Executive's employment relationship with Company is severed, for any reason, the Company will provide that Executive shall continue to be an insured under the Company's directors and officers liability insurance policy for as long as the Company retains such coverage, and if the Company discontinues such coverage, Executive and/or his heirs or personal or legal representative shall be given the opportunity to purchase continuation coverage in accordance with the terms of the applicable policy. 10. ARBITRATION. Any controversy between Executive and the Company involving the construction or application of any of the terms, provisions or conditions of this Agreement, including, without limitation, the determination of whether "Cause" or "Good Reason" exists under Section 5(c) or Section 5(d) hereof and claims involving specific performance, shall on the written request of either party served on the other in accordance with Section 12 below be submitted to binding arbitration. EACH PARTY, BY SIGNING THIS AGREEMENT, VOLUNTARILY, KNOWINGLY AND INTELLIGENTLY WAIVES ANY RIGHTS SUCH PARTY MAY OTHERWISE HAVE TO SEEK REMEDIES IN COURT OR OTHER FORUMS, INCLUDING THE RIGHT TO A JURY TRIAL. Arbitration shall comply with and be governed in accordance with the Commercial Arbitration Rules of the American Arbitration Association (the "AAA"). The arbitration will be conducted only in Denver, Colorado, before a single arbitrator selected by the parties or, if they are unable to agree on an arbitrator, before an arbitrator selected by the AAA. The arbitrator shall have full authority to order specific performance and award damages and other relief available under this Agreement or applicable 8 law, but shall have no authority to add to, detract from, change or amend the terms of this Agreement or existing law. All arbitration proceedings, including settlements and awards, shall be confidential. The decision of the arbitrator will be final and binding, and judgment on the award by the arbitrator may be entered in any court of competent jurisdiction. THIS SUBMISSION AND AGREEMENT TO ARBITRATE WILL BE SPECIFICALLY ENFORCEABLE. The arbitrator will have no power to award punitive or exemplary damages, to ignore or vary the terms of this Agreement and any other agreement between Executive and the Company and will be bound to apply controlling law. The prevailing party in any such arbitration shall be entitled to receive the costs of arbitration, including reasonable attorneys' fees and costs, from the losing party. 11. SUCCESSORS; BINDING AGREEMENT. (a) COMPANY'S SUCCESSORS. No rights or obligations of the Company under this Agreement may be assigned or transferred, except that the Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, "Company" shall mean the Company as herein before defined and any successor to its business and/or assets (by merger, purchase or otherwise) which executes and delivers the agreement provided for in this Section 11 or which otherwise becomes bound by all the terms and provisions of this Agreement by operation of law. (b) EXECUTIVE'S SUCCESSORS. No rights or obligations of Executive under this Agreement may be assigned or transferred by Executive other than his rights to payments or benefits hereunder, which may be transferred only by will or the laws of descent and distribution. Upon Executive's death, this Agreement and all rights of Executive hereunder shall inure to the benefit of and be enforceable by Executive's beneficiary or beneficiaries, personal or legal representatives or estate, to the extent any such person succeeds to Executive's interests under this Agreement. Executive shall be entitled to select and change a beneficiary or beneficiaries to receive any benefit or compensation payable hereunder following Executive's death by giving the Company written notice thereof. In the event of Executive's death or a judicial determination of his incompetence, reference in this Agreement to Executive shall be deemed, where appropriate, to refer to his beneficiary(ies), estate or other legal representative(s). If Executive should die following his Date of Termination while any amounts would still be payable to him hereunder if he had continued to live, all such amounts unless otherwise provided herein shall be paid in accordance with the terms of this Agreement to such person or persons so appointed in writing by Executive, or otherwise to his legal representatives or estate. 12. NOTICE. For the purposes of this Agreement, notices, demands and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered either personally or by United States certified or registered mail, return receipt requested, postage prepaid, addressed as follows: 9 If to Executive: David Gandini 3351 Meadow Creek Place Highland Ranch, CO 80126 If to the Company: FirstWorld Communications, Inc. 9333 Genesee Avenue, Suite 200 San Diego, CA 92121 Attn: Secretary Telecopy: (619) 552-8010 With a copy to: David A. Hahn, Esq. Latham & Watkins 701 "B" Street, Suite 2100 San Diego, California 92101 Telecopy: (619) 696-7419 or to such other address as any party may have furnished to the others in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. 13. WAIVER. No provisions of this Agreement may be amended, modified, or waived unless such amendment or modification is agreed to in a writing signed by Executive and by a duly authorized officer of the Company, and such waiver is set forth in writing and signed by the party to be charged. No waiver by either party hereto at any time of any breach by the other party hereto of any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time 14. SURVIVAL. Except as otherwise expressly set forth herein, the respective rights and obligations of the parties under this Agreement shall survive Executive's termination of employment and the termination of this Agreement to the extent necessary for the intended preservation of such rights and obligations. 15. CHOICE OF LAW. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Colorado without regard to its conflicts of law principles. 16. VALIDITY. The invalidity or unenforceability of any provision or provisions of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 10 17. COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. Facsimile signatures will be deemed to be effective originals hereunder. 18. ENTIRE AGREEMENT. This Agreement sets forth the entire agreement of the parties hereto in respect of the subject matter contained herein and supersedes all prior agreements, promises, covenants, arrangements, communications, representations or warranties, whether oral or written, by any officer, employee or representative of any party hereto in respect of such subject matter. Any prior agreement of the parties hereto in respect of the subject matter contained herein is hereby terminated and canceled. 19. WITHHOLDING. All payments hereunder shall be subject to any required withholding of Federal, state and local taxes pursuant to any applicable law or regulation. 20. SECTION HEADINGS. The section headings in this Agreement are for convenience of reference only, and they form no part of this Agreement and shall not affect its interpretation. [REMINDER OF THIS PAGE LEFT BLANK INTENTIONALLY] 11 IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the date first above written. FIRSTWORLD COMMUNICATIONS, INC., a Delaware corporation By: ------------------------------------------- Name: Sheldon S. Ohringer Title: President and Chief Executive Officer ---------------------------------------------- DAVID GANDINI 12 EX-10.29 6 EXHIBIT 10.29 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (the "AGREEMENT"), dated as of December 7, 1998, is by and between FirstWorld Communications, Inc., a Delaware corporation (the "COMPANY") and Doug Kramer ("EXECUTIVE"). RECITAL The Company desires to employ Executive, effective as of December 7, 1998 (the "COMMENCEMENT DATE"), on the terms and conditions set forth in this Agreement, and Executive desires to be so employed. AGREEMENT IN CONSIDERATION of the premises and the mutual covenants set forth below, the parties hereby agree as follows: 1. EMPLOYMENT. The Company hereby agrees to employ Executive as a Senior Vice President and Chief Technical Officer of the Company, and Executive hereby accepts such employment, on the terms and conditions hereinafter set forth. 2. TERM. The period of employment of Executive by the Company hereunder (the "EMPLOYMENT PERIOD") shall commence at the Commencement Date and shall continue through December 13, 2000. The Employment Period may be sooner terminated by either party in accordance with Section 5 of this Agreement. 3. POSITION AND DUTIES. During the Employment Period, Executive shall serve as a Senior Vice President and Chief Technical Officer of the Company. Executive shall devote such time, attention and energies to Company affairs as are necessary to fully perform his duties (other than absences due to illness or vacation) for the Company. During the Employment Period, Executive shall not, directly or indirectly, render services to any other organization, entity or person, as an employee, independent contractor, consultant or otherwise, with or without compensation, without the prior written consent of the Board of Directors of the Company (the "BOARD"). 4. COMPENSATION AND RELATED MATTERS. (a) EQUALIZATION PAYMENT. To compensate Executive for certain benefits that he may lose or forfeit as a result of his termination of employment with his former employer, ICG Communications, Inc., and commencement of employment with the Company, the Company shall pay Executive in cash a $30,000 payment (the "EQUALIZATION PAYMENT") payable with Executive's first regularly scheduled paycheck in January, 1999. (b) SALARY. During the Employment Period, the Company shall pay Executive an annual base salary of $135,000 per year ("BASE SALARY"). Executive's Base Salary shall be paid in approximately equal installments in accordance with the Company's customary payroll schedule and practices. Executive's Base Salary shall be subject to annual reviews commencing December 1999 and each year thereafter. If Executive's Base Salary is increased by the Company, such increased Base Salary shall then constitute the Base Salary for all purposes of this Agreement. All compensation paid to Executive shall be subject to withholding and other employment taxes imposed by applicable law. (c) ANNUAL BONUS. The Board's compensation committee (the "COMPENSATION COMMITTEE") shall review Executive's performance at least once annually during each year of the Employment Period and, based on Executive's performance, recommend whether the Company should award Executive a cash bonus ("BONUS") in order to reward Executive for services rendered to the Company and/or as an incentive for continued service to the Company. The amount of Executive's Bonus, if any, shall be determined in the reasonable discretion of the Compensation Committee and shall be dependent upon, among other things, the achievement of certain performance levels by the Company, including, without limitation, (i) the nature, magnitude and quality of the services performed by Executive for the Company, (ii) the condition (financial and other) and results of operations of the Company and (iii) the compensation paid for positions of comparable responsibility and authority within the telecommunications industry. The targeted amount of Executive's Bonus shall be an amount equal to 35% of Base Salary at 100% completion of applicable performance levels, to be set forth in the Company's Annual Bonus Plan. (d) STOCK OPTIONS. Effective as of the Commencement Date, Executive shall be awarded a stock option (the "STOCK OPTION") to purchase 100,000 shares of the Company's Series B Common Stock, par value $.0001 per share (the "COMMON STOCK"). The shares of Common Stock subject to the Stock Option shall vest in increments of 25,000 shares on each of the first, second, third and fourth anniversaries of the Commencement Date, with the shares in the first such increment having an exercise price of $6.00, shares in the second such increment having an exercise price of $6.50, shares in the third such increment having an exercise price of $7.00 and shares in the fourth such increment having an exercise price of $7.50. The Stock Option will be granted under one of the Company's stock option plans and the terms and conditions of the Stock Option will be determined in accordance with the applicable stock option plan. Notwithstanding any such terms, however, all shares subject to the Stock Option shall become immediately vested and exercisable in the event of the sale of all or substantially all of the Company's assets or a merger or consolidation in which the Company is not the surviving entity or the Company's stockholders prior to the transaction own less than 50% of the voting power of the Company's outstanding securities immediately following the transaction. (e) EXPENSES. The Company shall promptly reimburse Executive for all reasonable business expenses upon the presentation of reasonably itemized statements of such expenses in accordance with the Company's policies and procedures now in force or as such policies and procedures may be modified with respect to all senior executive officers of the Company. (f) WELFARE AND PENSION PLANS. In addition to Executive's Base Salary and any incentive compensation and bonuses awarded to Executive hereunder, he (and his family) 2 shall be entitled to participate, to the extent that he is (and they are) eligible under the terms and conditions thereof, in any pension, retirement, hospitalization, insurance, disability or medical service plan generally available to the executive officers of the Company that may be in effect from time to time during the Employment Period. The Company shall be under no obligation to institute or continue the existence of any such employee benefit plan. 5. TERMINATION. Executive's employment hereunder may be terminated during the Employment Period under the following circumstances: (a) DEATH. Executive's employment hereunder shall terminate upon his death. (b) DISABILITY. If, as a result of Executive's incapacity due to physical or mental illness, Executive shall have been substantially unable to perform his duties hereunder for an entire period of thirty (30) consecutive days, and within thirty (30) days after written Notice of Termination (as defined in Section 6(a)) is given after such thirty (30) day period, Executive shall not have returned to the substantial performance of his duties on a full-time basis, the Company shall have the right to terminate Executive's employment hereunder for "Disability," and such termination in and of itself shall not be, nor shall it be deemed to be, a breach of this Agreement. (c) CAUSE. The Company shall have the right to terminate Executive's employment for Cause (as defined), and such termination in and of itself shall not be, nor shall it be deemed to be, a breach of this Agreement. For purposes of this Agreement, the Company shall have "Cause" to terminate Executive's employment upon Executive's: (i) conviction of, or plea of guilty or nolo contendere to, any crime constituting a felony; (ii) commission of a material act of dishonesty, fraud, misrepresentation or other act of moral turpitude that would, in the Board's reasonable judgment, prevent the effective performance of his duties hereunder; (iii) continued failure to substantially perform his duties hereunder to the reasonable satisfaction of the Board (other than such failure resulting from Executive's incapacity due to physical or mental illness or subsequent to the issuance of a Notice of Termination by Executive for Good Reason (as defined in Section 5(d)) after demand for substantial performance is delivered by the Board in writing that specifically identifies the manner in which the Board believes Executive has not used reasonable best efforts to substantially perform his duties; or (iv) willful misconduct (including, but not limited to, a willful breach of the provisions of Section 8) that is, in the Board's reasonable judgment, injurious to the Company or to any entity in control of, controlled by or under common control with the Company ("AFFILIATE"). 3 For purposes of this Section 5(c), no act, or failure to act, by Executive shall be considered "willful" unless committed in bad faith and without a reasonable belief that the act or omission was in the best interests of the Company or any Affiliates thereof; PROVIDED, HOWEVER, that the requirements outlined in paragraphs (iii) or (iv) above shall be deemed to have occurred if Executive's action or non-action continues for more than ten (10) days after Executive has received written notice of the inappropriate action or non-action. This Section 5(c) shall not prevent Executive from challenging the Board's determination that Cause exists or that Executive has failed to cure any act (or failure to act) that purportedly formed the basis for the Board's determination, under the arbitration procedures set forth in Section 10 below. (d) GOOD REASON. Executive may terminate his employment for "Good Reason" within thirty (30) days after Executive has actual knowledge of the occurrence, without the written consent of Executive, of one of the following events that has not been cured within thirty (30) days after written notice thereof has been given by Executive to the Company (PROVIDED, that with respect to this Section 5(d), the Company shall have the right to challenge Executive's determination that he has the right to terminate his employment for "Good Reason" under the arbitration procedures set forth in Section 10 below): (i) a reduction by the Company in Executive's Base Salary or a failure by the Company to pay any such amounts when due; (ii) any purported termination of Executive's employment for Cause which is not effected pursuant to the procedures of Section 5(c) (and for purposes of this Agreement, no such purported termination shall be effective); (iii) the Company's failure to provide the Stock Option or the Company's material breach of one or more of the stock option agreements pursuant to which the Stock Option was issued to Executive; (iv) the Company's failure to substantially provide any material employee benefits due to be provided to Executive; or (v) the Company's failure to provide in all material respects the indemnification set forth in the agreement referenced in Section 9 of this Agreement. Executive's continued employment during the thirty (30) day period referred to above in this paragraph (d) shall not constitute Executive's consent to, or a waiver of rights with respect to, any act or failure to act constituting Good Reason hereunder. (e) WITHOUT GOOD REASON OR CAUSE. Executive shall have the right to terminate his employment hereunder without Good Reason and the Company shall have the right to terminate Executive's employment hereunder without Cause by providing the other with a Notice of Termination, and such termination shall not in and of itself be, nor shall it be deemed to be, a breach of this Agreement. 4 6. TERMINATION PROCEDURE. (a) NOTICE OF TERMINATION. Any termination of Executive's employment by the Company or by Executive during the Employment Period (other than termination pursuant to Section 5(a)) shall be communicated by written Notice of Termination (as defined below) to the other party hereto in accordance with Section 12 below. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Executive's employment under the provision so indicated. (b) DATE OF TERMINATION. "Date of Termination" shall mean (i) if Executive's employment is terminated by his death, the date of his death, (ii) if Executive's employment is terminated pursuant to Section 5(b), thirty (30) days after Notice of Termination (provided that Executive shall not have returned to the substantial performance of his duties on a full-time basis during such thirty (30) day period) and (iii) if Executive's employment is terminated for any other reason, the date on which a Notice of Termination is given or any later date (within thirty (30) days after the giving of such notice) set forth in such Notice of Termination. 7. COMPENSATION UPON TERMINATION OR DURING DISABILITY. In the event Executive is disabled or his employment terminates during the Employment Period, the Company shall provide Executive with the payments and benefits set forth below. Executive acknowledges and agrees that the payments set forth in this Section 7 constitute liquidated damages for termination of his employment during the Employment Period. (a) TERMINATION BY COMPANY WITHOUT CAUSE OR BY EXECUTIVE FOR GOOD REASON. If Executive's employment is terminated by the Company without Cause or by Executive for Good Reason: (i) the Company shall pay to Executive a severance payment equal to the amount of Base Salary Executive would have received under the Agreement if Executive had remained employed throughout the Employment Period stated in Section 2, plus accrued vacation, within thirty (30) days following the Date of Termination; (ii) the Company shall reimburse Executive pursuant to Section 4(e) for reasonable expenses incurred, but not paid prior to such termination of employment; and (iii) Executive shall be entitled to any other rights, compensation, stock options (as described herein) and/or benefits as may be due to Executive in accordance with the terms and provisions of any agreements, plans or programs of the Company. (b) TERMINATION BY COMPANY FOR CAUSE OR BY EXECUTIVE WITHOUT GOOD REASON. If Executive's employment is terminated by the Company for Cause or by Executive (other than for Good Reason): 5 (i) the Company shall pay Executive his Base Salary and, to the extent required by law or the Company's vacation policy, his accrued vacation pay through the Date of Termination, as soon as practicable following the Date of Termination; (ii) the Company shall reimburse Executive pursuant to Section 4(e) for reasonable expenses incurred, but not paid prior to such termination of employment, unless such termination resulted from a misappropriation of Company funds; and (iii) Executive shall be entitled to any other rights, compensation and/or benefits as may be due to Executive in accordance with the terms and provisions of any agreements, plans or programs of the Company. (c) DISABILITY. During any period that Executive fails to perform his duties hereunder as a result of incapacity due to physical or mental illness, Executive shall continue to receive his full Base Salary set forth in Section 4(b) until his employment is terminated pursuant to Section 5(b). In the event Executive's employment is terminated for Disability pursuant to Section 5(b): (i) the Company shall pay to Executive his Base Salary and accrued vacation pay through the Date of Termination, within 30 days following the Date of Termination; (ii) the Company shall reimburse Executive pursuant to Section 4(e) for reasonable expenses incurred, but not paid prior to such termination of employment; and (iii) Executive shall be entitled to any other rights, compensation and/or benefits as may be due to Executive in accordance with the terms and provisions of any agreements, plans or programs of the Company. (d) DEATH. If Executive's employment is terminated by his death: (i) the Company shall pay in a lump sum to Executive's beneficiary, legal representatives or estate, as the case may be, Executive's Base Salary through the Date of Termination; (ii) the Company shall reimburse Executive's beneficiary, legal representatives, or estate, as the case may be, pursuant to Section 4(e) for reasonable expenses incurred, but not paid prior to such termination of employment; and (iii) Executive's beneficiary, legal representatives or estate, as the case may be, shall be entitled to any other rights, compensation and benefits as may be due to any such persons or estate in accordance with the terms and provisions of any agreements, plans or programs of the Company. 6 8. CONFIDENTIAL INFORMATION, OWNERSHIP OF DOCUMENTS; NON-COMPETITION. (a) CONFIDENTIAL INFORMATION. Executive shall hold in a fiduciary capacity for the benefit of the Company all Confidential Information (as defined below) relating to the Company and its businesses and investments, which shall have been obtained by Executive during Executive's employment by the Company and which is not generally available public knowledge (other than by acts of Executive in violation of this Agreement). Except as may be required or appropriate in connection with his carrying out his duties under this Agreement, Executive shall not, without the prior written consent of the Company or as may otherwise be required by law or any legal process, or as is necessary in connection with any adversarial proceeding against the Company (in which case Executive shall use his reasonable best efforts in cooperating with the Company in obtaining a protective order against disclosure by a court of competent jurisdiction), communicate or divulge any such Confidential Information relating to the Company to anyone other than the Company and those designated by the Company or on behalf of the Company in the furtherance of its business or to perform duties hereunder. For the purposes hereof, the term "Confidential Information" means, with respect to any person, any information concerning such person or its business, products, financial condition, prospects and affairs that is not generally available to the public. The term Confidential Information shall not include information that: (i) is already known to the recipient and was properly obtained by the recipient prior to the date of this Agreement; (ii) is in the public domain other than through a negligent act or omission or willful misconduct of the recipient; (iii) is acquired in good faith from a third party and, at the time of the acquisition, the recipient had no knowledge or reason to believe that such information was wrongfully obtained or disclosed by the third party; (iv) is independently developed by the recipient from information not defined as "Confidential Information" in this Agreement, as evidenced by the recipient's written records; (v) is disclosed to third parties by the disclosing party without restriction; (vi) is required to be disclosed under applicable law or by a valid subpoena or other court or governmental order, decree, regulation or rule; PROVIDED, HOWEVER, that if disclosure is required under this provision the recipient shall advise the disclosing party of the requirement to disclose the Confidential Information prior to such disclosure and as soon as reasonably practicable after the recipient becomes aware of such required disclosure; and FURTHER PROVIDED THAT upon the request of the disclosing party, the recipient agrees to cooperate in good faith with any reasonable and lawful actions which the disclosing party takes to resist such disclosure, limit the information to be disclosed or limit the extent to which the information so disclosed may be used or made available to third parties, at the cost of the disclosing party. (b) REMOVAL OF DOCUMENTS; RIGHTS TO PRODUCTS. All records, files, drawings, documents, models, equipment, and the like relating to the Company's business, which Executive has control over shall not be removed from the Company's premises by Executive without the Board's written consent, unless such removal is in the furtherance of the Company's business or is in connection with Executive's carrying out his duties under this Agreement and, if so removed by Executive, shall be returned to the Company promptly after termination of Executive's employment hereunder, or otherwise promptly after removal if such removal occurs following termination of employment. Executive shall assign to the Company all rights to trade secrets and 7 other products relating to the Company's business developed by him alone or in conjunction with others at any time while employed by the Company. (c) CONTINUING OPERATION. Except as specifically provided in this Section 8, the termination of Executive's employment or of this Agreement shall have no effect on the continuing operation of this Section 8. 9. INDEMNIFICATION. (a) Upon the Commencement Date, Executive will enter into the Company's standard directors and officers indemnification agreement. (b) Upon the Commencement Date, the Company will ensure that Executive is added as an insured on its directors and officers liability insurance policy. In the event that Executive's employment relationship with the Company is severed, for any reason, the Company will provide that Executive shall continue to be an insured under the Company's directors and officers liability insurance policy for as long as the Company retains such coverage, and if the Company discontinues such coverage, Executive and/or his heirs or personal or legal representative shall be given the opportunity to purchase continuation coverage in accordance with the terms of the applicable policy. 10. ARBITRATION. Any controversy between Executive and the Company involving the construction or application of any of the terms, provisions or conditions of this Agreement, including, without limitation, the determination of whether "Cause" or "Good Reason" exists under Section 5(c) or Section 5(d) hereof and claims involving specific performance, shall on the written request of either party served on the other in accordance with Section 12 below be submitted to binding arbitration. EACH PARTY, BY SIGNING THIS AGREEMENT, VOLUNTARILY, KNOWINGLY AND INTELLIGENTLY WAIVES ANY RIGHTS SUCH PARTY MAY OTHERWISE HAVE TO SEEK REMEDIES IN COURT OR OTHER FORUMS, INCLUDING THE RIGHT TO A JURY TRIAL. Arbitration shall comply with and be governed in accordance with the Commercial Arbitration Rules of the American Arbitration Association (the "AAA"). The arbitration will be conducted only in Denver, Colorado, before a single arbitrator selected by the parties or, if they are unable to agree on an arbitrator, before an arbitrator selected by the AAA. The arbitrator shall have full authority to order specific performance and award damages and other relief available under this Agreement or applicable law, but shall have no authority to add to, detract from, change or amend the terms of this Agreement or existing law. All arbitration proceedings, including settlements and awards, shall be confidential. The decision of the arbitrator will be final and binding, and judgment on the award by the arbitrator may be entered in any court of competent jurisdiction. THIS SUBMISSION AND AGREEMENT TO ARBITRATE WILL BE SPECIFICALLY ENFORCEABLE. The arbitrator will have no power to award punitive or exemplary damages, to ignore or vary the terms of this Agreement and any other agreement between Executive and the Company and will be bound to apply controlling law. The prevailing party in any such arbitration shall be entitled to receive the costs of arbitration, including reasonable attorneys' fees and costs, from the losing party. 8 11. SUCCESSORS; BINDING AGREEMENT. (a) COMPANY'S SUCCESSORS. No rights or obligations of the Company under this Agreement may be assigned or transferred, except that the Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, "Company" shall mean the Company as herein before defined and any successor to its business and/or assets (by merger, purchase or otherwise) which executes and delivers the agreement provided for in this Section 11 or which otherwise becomes bound by all the terms and provisions of this Agreement by operation of law. (b) EXECUTIVE'S SUCCESSORS. No rights or obligations of Executive under this Agreement may be assigned or transferred by Executive other than his rights to payments or benefits hereunder, which may be transferred only by will or the laws of descent and distribution. Upon Executive's death, this Agreement and all rights of Executive hereunder shall inure to the benefit of and be enforceable by Executive's beneficiary or beneficiaries, personal or legal representatives or estate, to the extent any such person succeeds to Executive's interests under this Agreement. Executive shall be entitled to select and change a beneficiary or beneficiaries to receive any benefit or compensation payable hereunder following Executive's death by giving the Company written notice thereof. In the event of Executive's death or a judicial determination of his incompetence, reference in this Agreement to Executive shall be deemed, where appropriate, to refer to his beneficiary(ies), estate or other legal representative(s). If Executive should die following his Date of Termination while any amounts would still be payable to him hereunder if he had continued to live, all such amounts unless otherwise provided herein shall be paid in accordance with the terms of this Agreement to such person or persons so appointed in writing by Executive, or otherwise to his legal representatives or estate. 12. NOTICE. For the purposes of this Agreement, notices, demands and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered either personally or by United States certified or registered mail, return receipt requested, postage prepaid, addressed as follows: If to Executive: Doug Kramer 11965 Templin Lane Parker, Colorado 80138 9 If to the Company: FirstWorld Communications, Inc. 9333 Genesee Avenue, Suite 200 San Diego, CA 92121 Attn.: Secretary Telecopy: (619) 552-8010 With a copy to: David A. Hahn, Esq. Latham & Watkins 701 "B" Street, Suite 2100 San Diego, California 92101 Telecopy: (619) 696-7419 or to such other address as any party may have furnished to the others in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. 13. WAIVER. No provisions of this Agreement may be amended, modified, or waived unless such amendment or modification is agreed to in a writing signed by Executive and by a duly authorized officer of the Company, and such waiver is set forth in writing and signed by the party to be charged. No waiver by either party hereto at any time of any breach by the other party hereto of any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. 14. SURVIVAL. Except as otherwise expressly set forth herein, the respective rights and obligations of the parties under this Agreement shall survive Executive's termination of employment and the termination of this Agreement to the extent necessary for the intended preservation of such rights and obligations. 15. CHOICE OF LAW. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Colorado without regard to its conflicts of law principles. 16. VALIDITY. The invalidity or unenforceability of any provision or provisions of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 17. COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. Facsimile signatures will be deemed to be effective originals hereunder. 10 18. ENTIRE AGREEMENT. This Agreement sets forth the entire agreement of the parties hereto in respect of the subject matter contained herein and supersedes all prior agreements, promises, covenants, arrangements, communications, representations or warranties, whether oral or written, by any officer, employee or representative of any party hereto in respect of such subject matter. Any prior agreement of the parties hereto in respect of the subject matter contained herein is hereby terminated and canceled. 19. WITHHOLDING. All payments hereunder shall be subject to any required withholding of Federal, state and local taxes pursuant to any applicable law or regulation. 20. SECTION HEADINGS. The section headings in this Agreement are for convenience of reference only, and they form no part of this Agreement and shall not affect its interpretation. [REMAINDER OF THIS PAGE LEFT BLANK INTENTIONALLY] 11 IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the date first above written. FIRSTWORLD COMMUNICATIONS, INC., a Delaware corporation By: /s/ Sheldon S. Ohringer ----------------------------------------- Name: Sheldon S. Ohringer Title: President and Chief Executive Officer /s/ Doug Kramer -------------------------------------------- DOUG KRAMER 12 EX-10.30 7 EXHIBIT 10.30 LEASE THE PRUDENTIAL INSURANCE COMPANY OF AMERICA, A NEW JERSEY CORPORATION (AS LANDLORD) AND FIRSTWORLD COMMUNICATIONS, INC., A DELAWARE CORPORATION (AS TENANT) LEASE THE PRUDENTIAL INSURANCE COMPANY OF AMERICA, a New Jersey Corporation (as Landlord) and FIRSTWORLD COMMUNICATIONS, INC., a Delaware Corporation (as Tenant) 1. PREMISES . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 2. TERM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 3. RENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 4. COMPLETION OR REMODELING OF THE PREMISES . . . . . . . . . . . . .2 5. OPERATING EXPENSES AND TAXES . . . . . . . . . . . . . . . . . . .2 6. SERVICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9 7. QUIET ENJOYMENT . . . . . . . . . . . . . . . . . . . . . . . . 11 8. DEPOSIT . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 9. CHARACTER OF OCCUPANCY . . . . . . . . . . . . . . . . . . . . . 11 10. MAINTENANCE, ALTERATIONS AND REENTRY BY LANDLORD . . . . . . . . 12 11. ALTERATIONS AND REPAIRS BY TENANT . . . . . . . . . . . . . . . 12 12. MECHANICS' LIENS . . . . . . . . . . . . . . . . . . . . . . . . 14 13. SUBLETTING AND ASSIGNMENT . . . . . . . . . . . . . . . . . . . 14 14. DAMAGE TO PROPERTY . . . . . . . . . . . . . . . . . . . . . . . 17 15. INDEMNITY TO LANDLORD . . . . . . . . . . . . . . . . . . . . . 17 16. SURRENDER AND NOTICE . . . . . . . . . . . . . . . . . . . . . . 18 17. INSURANCE, CASUALTY, AND RESTORATION OF PREMISES . . . . . . . . 18 18. CONDEMNATION . . . . . . . . . . . . . . . . . . . . . . . . . . 19 19. DEFAULT BY TENANT . . . . . . . . . . . . . . . . . . . . . . . 20 20. DEFAULT BY LANDLORD . . . . . . . . . . . . . . . . . . . . . . 24
21. SUBORDINATION AND ATTORNMENT . . . . . . . . . . . . . . . . . . 24 22. REMOVAL OF TENANT'S PROPERTY . . . . . . . . . . . . . . . . . . 25 23. HOLDING OVER: TENANCY MONTH-TO-MONTH . . . . . . . . . . . . . . 25 24. PAYMENTS AFTER TERMINATION . . . . . . . . . . . . . . . . . . . 25 25. STATEMENT OF PERFORMANCE . . . . . . . . . . . . . . . . . . . . 26 26. MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . 26 27. AUTHORITIES FOR ACTION AND NOTICE . . . . . . . . . . . . . . . 29 28. RULES AND REGULATIONS . . . . . . . . . . . . . . . . . . . . . 30 29. PARKING . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 30. SUBSTITUTE PREMISES . . . . . . . . . . . . . . . . . . . . . . 30 31. BROKERAGE . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 32. TIME OF ESSENCE . . . . . . . . . . . . . . . . . . . . . . . . 30 33. OPTION TO EXTEND . . . . . . . . . . . . . . . . . . . . . . . . 30 34. SIGNAGE . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 35. RIGHT OF FIRST REFUSAL . . . . . . . . . . . . . . . . . . . . . 31 EXHIBIT A FLOOR PLAN . . . . . . . . . . . . . . . . . . . . . . . . . 34 EXHIBIT B LEGAL DESCRIPTION . . . . . . . . . . . . . . . . . . . . . 35 EXHIBIT C COMMENCEMENT CERTIFICATE . . . . . . . . . . . . . . . . . . 36 EXHIBIT D RULES AND REGULATIONS . . . . . . . . . . . . . . . . . . . 37
-ii- OFFICE BUILDING LEASE THIS LEASE is made this 1st day of December, 1998 by and between THE PRUDENTIAL INSURANCE COMPANY OF AMERICA, a New Jersey corporation ("Landlord") and FIRSTWORLD COMMUNICATIONS, INC., a Delaware corporation ("Tenant"). W I T N E S S E T H: 1. PREMISES. In consideration of the payment of rent and the keeping and performance of the covenants and agreements by Tenant, as hereinafter set forth, Landlord hereby leases and demises unto Tenant the premises located on the second floor of the Building known as Suite 208, comprised of approximately 7,108 rentable square feet (hereinafter referred to as the "Premises"), as depicted on the plat hereto attached as Exhibit A, and being a part of the building known as Paragon Building, located at 7100 East Belleview Avenue, Englewood, Colorado (the "Building"), together with a non-exclusive right, subject to the provisions hereof, to use all appurtenances thereto, including, but not limited to, any plazas, common areas, or other areas on the real property (described more particularly on Exhibit B "Real Property") designated by Landlord for the exclusive or non-exclusive use of the tenants of the Building. The Building, Real Property, plazas, common areas, other areas, and appurtenances are hereinafter collectively sometimes called the "Building Complex." 2. TERM. The term of the Lease shall commence at 12:01 a.m. on the earlier of (i) the 1st day of December, 1998 or (ii) such date as Landlord delivers possession of the Premises to Tenant and shall terminate at 12:00 midnight on the 30th day of November, 1999 (said term is referred to herein as the "Primary Lease Term"). The term of the Lease may be extended pursuant to Paragraph 33 hereof and, if so extended, any references in this Lease to the "Term" shall include the Extension Term. 3. RENT. Tenant shall pay the annual rental (the "Base Rent") for the Primary Lease Term, payable in monthly installments due on the first day of each month during the term hereof, as follows:
TERM MONTHLY ANNUAL ---- RENTAL RENTAL ------ ------ December 1, 1998 - $11,254.33 $135,051.96 November 30, 1999
The Base Rent for the Extension Term shall be as set forth in Paragraph 33 hereof. If the initial or final month of the term of this Lease is less than a calendar month, Base Rent for such partial month shall be prorated at the rate of one-thirtieth of the monthly Base Rent for each day. All rents shall be paid in advance, without notice, set off, abatement, or diminution, at the office of Landlord in Englewood, Colorado, or at such place as Landlord from time to time designates in writing. 4. COMPLETION OR REMODELING OF THE PREMISES. A. Landlord shall have no obligation for the completion or remodeling of the Premises, and Tenant shall accept the Premises in their "as is" condition on the date the Primary Lease Term commences. If Landlord is delayed in delivering the Premises to Tenant due to the failure of a prior occupant to vacate the same, then the obligation for the payment of rent and the commencement of the Primary Lease Term hereof shall be postponed until Landlord delivers the Premises to Tenant whereupon all of the covenants, conditions, and agreements contained herein shall be in full force and effect. The postponement of Tenant's obligation to pay rent and other sums hereunder shall be in full settlement of all claims which Tenant may otherwise have by reason of such delay of delivery. B. If the commencement of the Primary Lease Term is delayed pursuant to subparagraph A above, and such commencement date would otherwise occur on other than the first day of the month, the commencement date of the Primary Lease Term shall be further delayed until the first day of the following month and Tenant shall pay proportionate rent at the same monthly rate set forth herein (also in advance) for such partial month. In the event said commencement date is so delayed, the expiration of the term hereof shall be extended so that the Primary Lease Term will continue for the full period set forth in Paragraph 2 hereof. As soon as the Primary Lease Term commences, Landlord and Tenant shall execute a commencement certificate in the form attached hereto as EXHIBIT C, which may be requested by either party, setting forth the exact date on which the Primary Lease Term commenced and the expiration date of the Primary Lease Term. C. Taking possession of the Premises by Tenant shall be conclusive evidence as against Tenant that the Premises were in the condition agreed upon between Landlord and Tenant and acknowledgment of satisfactory completion of any fix-up or remodeling, as the case may be, which Landlord has agreed in writing to perform. 5. OPERATING EXPENSES AND TAXES. In addition to Base Rent, Tenant shall reimburse Landlord for certain of the Taxes and Operating Expenses of the Building Complex, such reimbursement to be in the manner, at the times, and in the amounts set forth in this Section 5. A. TAXES. If the amount of Taxes billed for any calendar year beginning with the calendar year 2000 and falling partly or wholly within the Term of this Lease shall be in excess of the Taxes for the calendar year 1999 (the "Tax Base Amount"), then the Rent payable by Tenant for such year shall be increased by Tenant's pro rata share ("Pro Rata Share") of such difference, such Pro Rata Share being 4.2 percent and such share calculated on the basis that the rentable area of floor space in the Premises (approximately 7,108 rentable square feet) bears to the total rentable area of floor space in the Building as of the date hereof (approximately 169,757 -2- square feet). If there is a change in the total Building rentable area as a result of an addition to the Building, partial destruction, modification or similar cause, which event causes a reduction or increase on a permanent basis, Landlord shall cause adjustments in the computations as shall be necessary to provide for any such changes. Landlord's system for measurement applied to all tenants shall be used to determine rentable area. In determining the amount of Taxes for any calendar year, the amount of special assessments to be included shall be limited to the amount of the installment (plus any interest payable thereon) of such special assessment which would have been required to have been paid during such calendar year if Landlord had elected to have such special assessment paid over the maximum period of time permitted by law, if such election is available to Landlord. Except as provided in the second sentence of Subsection 5.C.(1) hereof, all reference to Taxes "for" and "billed for" a particular calendar year shall be deemed to refer to Taxes levied, assessed, billed or otherwise imposed for such calendar year, without regard to the dates when any such Taxes are due and payable. As used in this Lease, the term "Taxes" means any and all general and special taxes and impositions of every kind and nature whatsoever levied, assessed, or imposed upon, or with respect to, the Building Complex, any leasehold improvements, fixtures, installations, additions, and equipment whether owed by Landlord or Tenant, or either because of or in connection with the Landlord's ownership, leasing, and operation of the Building and the Property, including, without limitation, real estate taxes, personal property taxes, sewer rents, water rents, general or special assessments, and duties or levies charged or levied upon or assessed against the Building and the Property and personal property, transit taxes, all costs and expenses (including legal fees and court costs) charged for the protest or reduction of property taxes or assessments in connection with the Property and the Building, or any tax or excise on rent or any other tax (however described) on account of rental received for use and occupancy of any or all of the Building, and the Property, whether any such taxes are imposed by the United States, the State of Colorado, the County of Denver, or any local governmental municipality, authority, or agency or any political subdivision of any thereof. Taxes shall not include any net income, capital stock, succession, transfer, franchise, gift, estate, and inheritance taxes; provided, however, if at any time during the Term hereof, a tax or excise on rents or income or other tax, however described (herein called "Rent Tax"), is levied or assessed by the State of Colorado or any political subdivision thereof, on account of the Rent hereunder or the interest of Landlord under this Lease, such Rent Tax shall constitute Taxes; provided, further, in no event shall Tenant be obligated (i) to pay for any calendar year any greater amount by way of such Rent Tax than would have been payable by Tenant had the rentals paid to Landlord under all Building leases (being the rentals upon which such Rent Tax is imposed) had been the sole taxable income of Landlord for the calendar year in question, or (ii) to pay or to reimburse Landlord for any tax of any kind assessed against Landlord on account of any such Rent Tax having been reimbursed to Landlord. B. OPERATING EXPENSES. If, in any calendar year falling partly or wholly within the Term of this Lease, the Operating Expenses paid or accrued by Landlord shall be higher than Landlord's Operating Expenses for the calendar year 1999 (the "Operating Expense Base Amount"), then the Rent payable by Tenant for such calendar year shall be increased by an -3- amount equal to Tenant's Pro Rata Share of such difference calculated on the basis of the percentage set forth in Subsection 5.A. above. As used in this Lease, the term "Operating Expenses" means any and all expenses, costs, and disbursements (other than Taxes) of every kind and nature whatsoever, which are paid or accrued by Landlord in connection with the leasing, management, maintenance, operation, or repair of the Building Complex (including, without limitation): (a) Costs of supplies, including, but not limited to, the cost of relamping all lighting installed as a part of the Building Standard work or located in common areas of the Building Complex. "Building Standard" means the level of tenant finish improvements or the level of Building services, as the context may require, customarily offered from time to time by Landlord to all tenants of the Building; (b) Costs incurred in connection with obtaining and providing energy for the Building Complex, including, but not limited to, costs of propane, butane, natural gas, steam, electricity, solar energy, fuel oils, coal or any other energy sources; (c) Costs of water and sanitary and storm drainage services; (d) Costs of janitorial and security services; (e) Costs of general maintenance and repairs, including costs under climate control and other mechanical maintenance contracts and repairs and replacements of equipment used in connection with such maintenance and repair work; (f) Costs of maintenance and replacement of landscaping; (g) Insurance premiums, including fire and all-risk coverage, together with loss of rent endorsement, the part of any claim required to be paid under the deductible portion of any insurance policies carried by Landlord in connection with the Building Complex (where Landlord is unable to obtain insurance without such deductible from a major insurance carrier at reasonable rates), public liability insurance and any other insurance carried by Landlord on the Building Complex or any component parts thereof (all such insurance shall be in such amounts as may be required by any Mortgagee, as defined in Section 20 hereof, or as Landlord may reasonably determine); (h) Labor costs associated with operation and maintenance of the Building Complex, including wages and other payments, costs to Landlord of workmen's compensation and disability insurance, payroll taxes, welfare fringe benefits, and all legal fees and other costs or expenses incurred in resolving any labor dispute associated with the operation and maintenance of the Building Complex; -4- (i) Professional building management fees including rental for the Manager's office space and costs of supplying the Manager with necessary office equipment and storage space in the Building; (j) Legal, accounting, inspection, and other consultation fees (including, without limitation, fees charged by consultants retained by Landlord for services that are intended to produce a reduction in Operating Expenses, reduce the rate of increase in Operating Expenses or to reasonably improve the operation, maintenance or state of repair of the Building Complex) incurred in the ordinary course of operating the Building Complex; (k) The costs of capital improvements and structural repairs and replacements made in or to the Building Complex in order to conform to any applicable laws, ordinances, rules, regulations or orders of any governmental or quasi-governmental authority having jurisdiction over the Building Complex (herein "Required Capital Improvements") and the costs of any capital improvements and structural repairs and replacements designed primarily to reduce Operating Expenses or to reduce the rate of increase in Operating Expenses (herein "Cost Savings Improvements"). The expenditures for Required Capital Improvements and Cost Savings Improvements shall be reimbursed to Landlord in equal installments over the useful life of such capital improvement or structural repair or replacement (as determined by Landlord) together with interest on the balance of the reimbursed expenditure at the Prime Rate in effect on the date the expenditure was incurred by Landlord, plus three percent (3%); provided, however, that the amount to be reimbursed by Tenant for any Cost Savings Improvement shall be limited in any year to the reduction or estimated savings in Operating Expenses as a result thereof; (l) Costs incurred by Landlord or its agents in engaging experts or other consultants to assist them in making the computations required hereunder; and (m) Rental payments or acquisition costs, allocated over the useful life, for machinery or equipment, including vehicles, necessary to timely and economically perform the cleaning and maintenance functions imposed on Landlord together with the interest on such acquisition costs at the Prime Rate in effect as of the acquisition date on the balance of the unrecovered acquisition costs over the useful life of such machinery or equipment. "OPERATING EXPENSES" shall NOT include: (1) Costs of work, including painting and decorating and tenant change work, which Landlord performs for any tenant or in any tenant's space in the Building other than work of a kind a scope which Landlord would be obligated to furnish to all tenants whose leases contain a rental adjustment provision similar to this one; (2) Costs of repairs or other work occasioned by fire, windstorm or other insured casualty to the extent of insurance proceeds received; -5- (3) Leasing commissions, advertising expenses, and other costs incurred in leasing space in the Building; (4) Costs of repairs or rebuilding necessitated by condemnation; (5) Any interest on borrowed money or debt amortization, except as specifically set forth above; (6) Depreciation on the Building Complex; (7) Any settlement, payment or judgment incurred by Landlord or the Building manager due to their willful misconduct or gross negligence, as established by a court of law, which is not covered by insurance proceeds; or (8) Cost of any damage to the Building Complex caused directly by Landlord's willful misconduct or gross negligence, as established by a court of law, which is not covered by insurance proceeds. Notwithstanding anything contained herein to the contrary, if any lease entered into by Landlord with any tenant in the Building is on a so-called "net" basis, or provides for a separate basis of computation for any Operating Expenses with respect to its leased premises, then, to the extent that Landlord, in its sole judgment, determines that an adjustment should be made in making the computations herein provided for to appropriately allocate the Operating Expenses among the tenants, Landlord shall be permitted to modify the computation of Taxes, Operating Expense Base Amount, rentable area, and/or Operating Expenses for a particular calendar year in order to eliminate or otherwise compensate for any such expenses which are paid for in whole or in part by such tenant. Furthermore, in making any computations contemplated hereby, Landlord shall also be permitted to make such adjustments and modifications to the provisions of this Section 5 as shall be reasonably necessary to achieve the intention of the parties hereto. C. The adjustments provided for in Subsections 5.A. to Taxes shall be made as follows: (1) In the case of calculations made pursuant to Subsection 5.A. above, such calculation shall be made promptly following receipt by Landlord of the bills (meaning in the case of annual general real estate taxes, the statement for same) for Taxes for each calendar year in question. In the event of a subsequent adjustment of Taxes for a previous calendar year by the taxing authority which adjustment has resulted in a corresponding adjustment payment by or to Landlord, the same shall constitute an adjustment to Taxes paid during the calendar year when such adjustment payment is made. If, pursuant to such calculations, the Tenant's Pro Rata Share of Taxes due as adjusted by the taxing authority are more than the Tenant's Pro Rata Share of the Taxes paid by Tenant, Tenant shall pay to Landlord, within fifteen (15) days following the furnishing (the "upward adjustment date") of each such calculation to Tenant, Tenant's Pro Rata Share of such difference. -6- (2) Commencing with the first calendar month next succeeding each upward adjustment date, Tenant shall pay to Landlord on the first day of each calendar month until the next upward adjustment date (which period between adjustment dates is herein called a "Tax Deposit Year") one-twelfth of the amount of Tenant's Pro Rata Share of the excess (the "Tax Excess") of: (i) Taxes most recently billed (as reported in the calculation furnished pursuant to foregoing clause A(1) above over (ii) the Tax Base Amount, and shall also pay with each such first monthly payment for a Tax Deposit Year an amount equal to one-twelfth of Tenant's Pro Rata Share of such Tax Excess multiplied by the number of calendar months between (y) the month preceding the month in which Landlord received the bills for Taxes and (z) the first such monthly payment date. Amounts paid under this Subsection (2) in any Tax Deposit Year shall be credited against any amounts payable by Tenant under the foregoing Subsection (1) on account of Taxes billed to Landlord for the same Tax Deposit Year, and provided there is any surplus remaining after the credit to Tenant and provided Tenant shall not then be in default under any of the provisions of this Lease, Landlord shall, at Landlord's option, either refund the amount of such surplus to Tenant within thirty (30) days following the end of such Tax Deposit Year or apply such surplus amount against any other amounts then due from Tenant to Landlord to the extent such surplus was actually received by Landlord from Tenant. D. The adjustments provided for in Subsections 5.B. to Operating Expenses shall be made as follows: (1) In the case of calculations made pursuant to Subsection 5.B. such calculation shall be made as promptly as practicable following each calendar year in question, and bills therefor shall be furnished to Tenant. Any subsequent adjustment of Operating Expenses for such calendar year which results in a corresponding adjustment payment by or to Landlord, shall constitute an adjustment to Operating Expenses during the calendar year when such adjustment is made. If, pursuant to such calculations, the Operating Expenses so paid exceed the Operating Expense Base Amount, Tenant shall pay Landlord within thirty (30) days of furnishing (the "upward adjustment date") of such calculation to Tenant, Tenant's Pro Rata Share of such difference, calculated on the basis of the percentage determined in Subsection 5.A. (2) As soon as practicable after the close of the calendar year in which the Commencement Date occurs, Landlord shall supply Tenant with written notice of Landlord's estimate of the Operating Expenses that will be incurred or accrued during such calendar year immediately following the calendar year of the Commencement Date (the "Initial Deposit Year") in excess of the Operating Base Cost Amount. On or before the first day of each month during such Initial Deposit Year, Tenant shall pay to Landlord one-twelfth of Tenant's Pro Rata Share of such estimated excess amount. If the monthly deposit amount is not determined in time for Tenant to make the first payment on January 1 of the Initial Deposit Year, then the first monthly payment shall be due on the first day of the month immediately following the date Landlord supplies Tenant with notice of the excess amount and the first monthly payment(s) shall also include a payment equal to one-twelfth of such additional sum multiplied by the number of calendar months which have elapsed during the Initial Deposit Year prior to the date Tenant makes its first payment. If the total of the estimated payments made by Tenant during the Initial -7- Deposit Year are less than Tenant's obligation under this Lease for Operating Expenses for such Initial Deposit Year, then Tenant, within thirty (30) days of the billing therefor, shall pay such deficiency to Landlord. In the event the total of the Tenant's estimated payments for the Initial Deposit Year exceed Tenant's obligation for excess Operating Expenses for such year, then the surplus shall be handled in the manner provided in the last sentence of Subsection 5.D.(3). (3) Commencing with the calendar year following the Initial Deposit Year and during each calendar year of the Term of this Lease, Tenant shall pay to Landlord on the first day of each month of each calendar year (hereinafter sometimes called an "Expense Deposit Year") one-twelfth of the amount, if any, of Tenant's Pro Rata Share of the excess of Operating Expenses paid during the preceding calendar year over the Operating Expense Base Amount. In the event the monthly amount so payable by Tenant during any calendar year is not determined until after January 1 of such calendar year, then until such monthly amount is determined, Tenant shall continue to pay a monthly amount equal to the monthly payments required of Tenant with respect to adjusted (estimated in the case of the Initial Deposit Year) Operating Expenses for the preceding calendar year, and when such current calendar year's monthly amount is so determined, Tenant shall, upon being advised thereof, pay any deficiency between the monthly payments theretofore made during such period and the current monthly payment; provided that in the first calendar year in which Tenant is required to pay additional sums for Operating Expenses under this subsection (3), the first monthly payment shall also include a payment equal to one-twelfth of such additional sum multiplied by the number of calendar months which have elapsed during such calendar year prior to the first monthly payment due date(s) for such additional sum. If the advice shows a surplusage rather than a deficiency between the amount paid and the amount due, and provided Tenant is not then in default under any of the provisions of this Lease, Landlord shall, at Landlord's option, either refund the amount of such surplusage to the Tenant within thirty (30) days following such advice, or apply such amount against any other amounts then due from Tenant to Landlord to the extent actually received by Landlord from Tenant. E. AUDIT AND ADJUSTMENT PROCEDURES. (1) The annual determination and statement of Taxes and Operating Expenses shall be prepared in accordance with generally accepted accounting principles. In the event of any dispute as to any Rent due hereunder, Tenant shall have the right to inspect Landlord's accounting records relative to Taxes and Operating Expenses at the office in which Landlord maintains its records during normal business hours at any time within fifteen (15) days following the furnishing by Landlord to Tenant of such statement. Unless Tenant shall take written exception of any item in any such statement within such fifteen (15) day period, such statement shall be considered as accepted by Tenant. If Tenant makes such timely written exception, a certification as to the proper amount of Rent shall be made by a Certified Public Accountant designated by Landlord (which certification shall be final and conclusive). Tenant agrees to pay the cost of such certification unless it is determined that Landlord's original determination of both Taxes and Operating Expenses was in error by more than three percent (3%) over Tenant's actual obligation. -8- (2) In the event of the termination of this Lease by expiration of the stated Term or for any other cause or reason prior to the determination of an adjustment to Rent permitted by this Lease, Tenant's agreement to pay its Pro Rata Share of increases in Taxes and Operating Expenses up to the time of termination shall survive termination of this Lease, and Tenant shall pay all amounts due to Landlord within fifteen (15) days after being billed therefor. In the event of termination of this Lease by expiration of the stated Term or for any other cause or reason whatsoever, except default by Tenant of any of the terms or provisions of this Lease, prior to the determination of adjustments as hereinabove set forth in Section 5, Landlord's agreement to refund any excess Rent paid by Tenant up to the time of termination shall survive termination of the Lease, and Landlord shall pay the amount due, adjusted by the amounts of any applicable offsets, to Tenant within fifteen (15) days of Landlord's determination of such amount. This covenant shall survive the expiration or termination of this Lease. (3) All calculations to be made under this Section 5 shall be made, furnished, handled, and (where applicable) billed separately. (4) Subject to the rights of Landlord hereunder, any refund to which Tenant may be entitled under the provisions of any of subsections 5.C.(1), 5.C.(2), 5.D.(1), 5.D.(2) and 5.D.(3) may not be used by Tenant to offset any payments of Base Rent or other payments then due or that become due Landlord under this Lease. (5) If the Term of this Lease commences on any day other than the first day of January, or if the Term of this Lease ends on any day other than the last day of December, any payment due to Landlord by reason of an increase in Taxes or Operating Expenses shall be prorated on the basis by which the number of days in such partial year bears to 365. (6) All sums which Tenant is required to pay or discharge pursuant to this Section 5 of this Lease in addition to Base Rent, together with any interest or other sums which may be added for late payment thereof, shall constitute "Rent" hereunder. 6. SERVICES. A. Subject to the provisions of subparagraph D below, Landlord, without charge, except as provided herein, and in accordance with standards from time to time prevailing for the Building, agrees: (1) to furnish running water at those points of supply for general use of tenants of the Building; (2) to furnish to public areas of the Building Complex heated or cooled air (as applicable), electrical current, janitorial services, and maintenance to the extent Landlord deems necessary; (3) to furnish, during Ordinary Business Hours, as hereinafter defined, such heated or cooled air to the Premises as may, in the judgment of Landlord, be reasonably required for the comfortable use and occupancy of the Premises, provided that the recommendations of Landlord's engineer regarding occupancy and use of the Premises are complied with by Tenant and, with respect to cooled air, provided the same is used only for standard office use; (4) to furnish, subject to availability and capacity of building systems, unfiltered treated cooling tower water for use in Tenants' packaged HVAC systems, provided that such systems are equipped -9- with Landlord-approved strainers, pumping systems and controls, and that such systems are connected only after approval of Landlord's engineer; (5) to provide, during Ordinary Business Hours, the general use of passenger elevators for ingress and egress to and from the Premises (at least one such elevator shall be available at all times, except in the case of emergencies or repair); (6) to provide janitorial services for the Premises to the extent of the Building Standard tenant finish work items contained therein (including such window washing of the outside of exterior windows as may, in the judgment of Landlord, be reasonably required), but unless and until the Building Standard changes, such janitorial services shall be provided after Ordinary Business Hours on Monday through Thursday and Sunday only, except for Legal Holidays; and (7) to cause electric current to be supplied to the Premises for all of Tenant's Standard Electrical Usage, as hereinafter defined. "Tenant's Standard Electrical Usage", as used herein, shall mean and refer to weekly electrical consumption in an amount equal to multiplying three and one-half (3.5) watts/square foot by fifty-nine (59) hours and by then multiplying the product thereof by the number of rentable square feet in the Premises. "Ordinary Business Hours" as used herein shall mean and refer to 7:00 a.m. to 6:00 p.m. Monday through Friday and 9:00 a.m. to 12:00 p.m. on Saturdays, Legal Holidays excepted. "Legal Holidays," as used herein, shall mean New Year's Day, Martin Luther King Day, Presidents' Day, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, Christmas Day, and such other national holidays as may be hereafter established by the United States Government. B. "Excess Usage" shall be defined as any usage of electricity (1) during other than Ordinary Business Hours; or (2) in an amount in excess of Tenant's Standard Electrical Usage; or (3) for "Special Equipment"; or (4) for any requirement for standard HVAC services during other than Ordinary Business Hours. "Special Equipment," as used herein, shall mean (a) any equipment consuming more than 0.5 kilowatts at rated capacity, (b) any equipment requiring a voltage other than 120 volts, single phase, or (c) equipment that requires the use of self-contained HVAC units. Tenant shall reimburse Landlord for reasonable costs incurred by Landlord in providing services for Excess Usage, which costs are subject to change from time to time. Such reasonable costs will include Landlord's costs for materials, additional wear and tear on equipment, utilities, and labor (including fringe and overhead costs). Computation of Landlord's cost for providing such services will be made by Landlord's engineer, based on his engineering survey of Tenant's Excess Usage. Tenant shall also reimburse Landlord for all costs of supplementing the Building HVAC System and/or extending or supplementing any electrical service, as Landlord may determine is necessary, as a result of Tenant's Excess Usage. Prior to installation or use by Tenant of any equipment which will result in Excess Usage or operation of the Premises for extended hours on an ongoing basis, Tenant shall notify Landlord of such intended installation or use and obtain Landlord's consent therefor. In addition to the foregoing, Tenant, at Tenant's option, upon such notice or at any time thereafter, may request Landlord, at Tenant's sole cost and expense, to install a check meter and/or flow meter to assist in determining the cost to Landlord of Tenant's Excess Usage. If Tenant desires electric current and/or heated or cooled air to the Premises during periods other than Ordinary Business Hours, Landlord will use reasonable efforts to supply the same, but at the expense of Tenant, at Landlord's standard rate as established by it, from time to time, for such services. Not less than forty-eight (48) hours' prior notice shall be given by Tenant to Landlord of Tenant's desire for such services. It is also -10- understood and agreed that Tenant shall pay the cost of replacing light bulbs and/or tubes and ballast used in all lighting in the Premises other than Building Standard lighting. C. If Tenant requires janitorial services other than those required to be provided to other tenants of the Building Complex generally, Tenant shall separately pay for such services monthly upon billings by Landlord, or Tenant shall, at Landlord's option, separately contract for such services with the same company furnishing janitorial services to Landlord. Notwithstanding the foregoing, Tenant shall have the right, subject to Landlord's prior written consent and such rules, regulations and requirements as Landlord may impose (including but not limited to the requirement that such janitors belong to a trade union), to employ janitors, other than those employed by Landlord, to perform such additional services. D. Tenant agrees that Landlord shall not be liable for failure to supply any such heating, air conditioning, elevator, electrical, janitorial, lighting or other services, or during any period Landlord is required to reduce or curtail such services pursuant to any applicable laws, rules, or regulations, including regulations of any utility now or hereafter in force or effect, it being understood that Landlord may discontinue, reduce, or curtail such services, or any of them (either temporarily or permanently), at such times as it may be necessary by reason of accident, repairs, alterations, improvements, strikes, lockouts, riots, acts of God, application of applicable laws, statutes, or rules and regulations or due to any other happening beyond the control of Landlord. In the event of any interruption, reduction, or discontinuance of Landlord's services (either temporary or permanent), Landlord shall not be liable for damages to person or property as a result thereof nor shall the occurrence of any such event in any way be construed as an eviction of Tenant; or cause or permit an abatement, reduction or setoff of rent; or operate to release Tenant from any of Tenant's obligations hereunder. E. Tenant agrees to notify promptly the Landlord or its representative of any accidents or defects in the Building of which Tenant becomes aware including defects in pipes, electrical wiring, and HVAC equipment. In addition, Tenant shall provide Landlord with prompt notification of any matter or condition which may cause injury or damage to the Building or any person or property therein. 7. QUIET ENJOYMENT. So long as Tenant is not in default under this Lease, Tenant shall be entitled to the quiet enjoyment and peaceful possession of the Premises, subject to the terms and provisions of the Lease. 8. DEPOSIT. Waived. 9. CHARACTER OF OCCUPANCY. Tenant covenants and agrees to occupy the Premises as general offices (the "Permitted Use") and for no other purpose, and to use them in a careful, safe, and proper manner; to pay on demand for any damage to the Premises caused by misuse or abuse thereof by Tenant, Tenant's agents or employees, or of any other person entering upon the Premises under express or implied invitation of Tenant. Tenant, at Tenant's expense, shall comply with all laws, codes, rules, and regulations of the United States, the State of Colorado, and of the County of Arapahoe ("APPLICABLE LAWS"), now in effect, or which may -11- hereafter be in effect, which shall impose any duty upon Landlord or Tenant with respect to the occupation or alteration of the Premises. Tenant shall not commit waste or suffer or permit waste to be committed or permit any nuisance on or in the Premises. Tenant agrees that it will not store, keep, use, sell, dispose of or offer for sale in, upon or from the Premises any article or substance which may be prohibited by any insurance policy in force from time to time covering the Building nor shall Tenant keep, store, produce or dispose of on, in or from the Premises or the Building any substance which may be deemed a hazardous substance or infectious waste under any state, local or federal rule, statute, law, regulation or ordinance as may be promulgated or amended from time to time. 10. MAINTENANCE, ALTERATIONS AND REENTRY BY LANDLORD. A. Unless otherwise expressly provided herein, Landlord shall not be required to make any improvements or repairs of any kind or character to the Premises during the Primary Lease Term, or any extension thereof, except: (i) such repairs to HVAC, mechanical, life safety and electrical systems in the Premises (to the extent such systems are Building Standard) as may be deemed necessary by Landlord for normal maintenance operations of the Building Complex; and (ii) upkeep, maintenance, and repairs to all Common Areas in the Building Complex so long as the need for any such repair is not the result of Tenant's negligence. B. Tenant covenants and agrees to permit Landlord at any time to enter the Premises to examine and inspect the same or, if Landlord so elects, to perform any obligations of Tenant hereunder which Tenant shall fail to perform or to perform such cleaning, maintenance, janitorial services, repairs, additions, or alterations as Landlord may deem necessary or proper for the safety, improvement, or preservation of the Premises or of other portions of the Building Complex or as may be required by governmental authorities through any code, rule, regulation, ordinance, and/or law. Any such reentry shall not constitute an eviction or entitle Tenant to abatement of rent. Furthermore, Landlord shall at all times have the right at Landlord's election to make such alterations or changes in other portions of the Building Complex as Landlord may from time to time deem necessary and desirable as long as such alterations and changes do not unreasonably interfere with Tenant's use and occupancy of the Premises. Landlord may use one or more of the street entrances to the Building Complex and such public areas thereof as may be necessary, in Landlord's determination to complete such alterations or changes. 11. ALTERATIONS AND REPAIRS BY TENANT. A. Tenant covenants and agrees not to make any Alterations in or additions to the Premises, including installation of any equipment or machinery therein which requires modification of or additions to any existing electrical outlet or which would increase Tenant's usage of electricity beyond the Tenant's Standard Electrical Usage (all such alterations are referred to herein collectively as "Alterations") without in each such instance first obtaining the written consent of Landlord. Landlord's consent to any Alterations by Tenant or Landlord's approval of the plans, specifications and working drawings for Tenant's Alterations shall create no responsibility or liability on the part of Landlord for their completeness, design sufficiency, or compliance with all laws, rules and regulations of governmental agencies or authorities now in -12- effect or which may hereafter be in effect. Tenant, at its expense, shall pay all engineering and design costs incurred by Landlord attributable to the Alterations and obtain all necessary governmental permits and certificates required for any Alterations to which Landlord has consented and shall cause such alterations to be completed in compliance therewith and with all applicable laws and requirements of public authorities and all applicable requirements of Landlord's insurance carriers. All Alterations which Tenant is permitted to make shall be performed in a good and workmanlike manner, using new materials and equipment at least equal in quality to the original installations in the Premises. All repair and maintenance work required to be performed by Tenant pursuant to the provisions of subparagraph B below and any Alterations permitted by Landlord pursuant to the provisions hereof, including, but not limited to, any installations desired by Tenant for Tenant's telegraphic, telephonic or electrical connections, shall be done at Tenant's expense by Landlord's employees or, with Landlord's consent, by persons requested by Tenant and authorized in writing by Landlord; provided, however if such work is performed by persons who are not employees of Landlord, Tenant shall pay to Landlord, upon receipt of billing therefor, the costs for supervision and control of such persons as Landlord may determine to be necessary. If Landlord authorizes persons requested by Tenant to perform such work, prior to the commencement of any such work, on request, Tenant shall deliver to Landlord certificates issued by insurance companies qualified to do business in the State of Colorado, evidencing that workmen's compensation, public liability insurance, and property damage insurance, all in the amounts, with companies and on forms satisfactory to Landlord, are in force and effect and maintained by all contractors and subcontractors engaged by Tenant to perform such work. All such policies shall name Landlord and any Mortgagee (as defined in Paragraph 20) as an additional insured. Each such certificate shall provide that the same may not be canceled or modified without ten (10) days' prior written notice to Landlord and such Mortgagee. Further, Landlord and such Mortgagee shall have the right to post notices in the Premises in locations which will be visible by parties performing any work on the Premises stating that Landlord is not responsible for the payment for such work and setting forth such other information as Landlord may deem necessary. Alterations, repair, and maintenance work shall be performed in a manner which will not unreasonably interfere with, delay, or impose any additional expense upon Landlord in the maintenance or operation of the Building or upon other tenants' use of their premises. B. Tenant shall keep the Premises in as good order, condition, and repair and in an orderly state, as when they were entered upon, loss by fire or other casualty or ordinary wear excepted. Subject to Landlord's obligation to make repairs in the event of certain casualties, as set forth in Paragraph 18 below, Landlord shall have no obligation for the repair or replacement of any portion of the interior of the Premises which is damaged or wears out during the term hereof regardless of the cause therefor, including but not limited to carpeting, draperies, window coverings, wall coverings, painting or any of Tenant's property or betterments in the Premises. C. All Alterations and permanent fixtures installed in the Premises, including, by way of illustration and not by limitation, all partitions, paneling, carpeting, drapes or other window coverings, and light fixtures (but not including movable office furniture not attached to the Building), shall be deemed a part of the real estate and the property of Landlord and shall -13- remain upon and be surrendered with the Premises as a part thereof without molestation, disturbance, or injury at the end of the Primary Lease Term, or any extension thereof, whether by lapse of time or otherwise, unless Landlord by notice given to Tenant no later than fifteen (15) days prior to the end of the term shall elect to have Tenant remove all or any of the Alterations, and in such event, Tenant shall promptly remove at Tenant's expense the Alterations specified by Landlord and restore the Premises to their condition prior to the making of the same, reasonable wear and tear excepted. 12. MECHANICS' LIENS. Tenant shall pay or cause to be paid all costs for work done by Tenant or caused to be done by Tenant on the Premises (including work performed by Landlord or its contractor at Tenant's request following the commencement of the Primary Lease Term) of a character which will or may result in liens on Landlord's interest therein and Tenant will keep the Premises free and clear of all mechanics' liens, and other liens on account of work done for Tenant or persons claiming under it. Tenant hereby agrees to indemnify, defend, and save Landlord harmless of and from all liability, loss, damage, costs, or expenses, including attorneys' fees, on account of any claims of any nature whatsoever including claims or liens of laborers or materialmen or others for work performed for or materials or supplies furnished to Tenant or persons claiming under Tenant. Should any liens be filed or recorded against the Premises or any action affecting the title thereto be commenced as a result of such work (which term includes the supplying of materials), Tenant shall cause such liens to be removed of record within five (5) days after notice from Landlord. If Tenant desires to contest any claim of lien, Tenant shall furnish to Landlord adequate security of at least one hundred fifty percent (150%) of the amount of the claim, plus estimated costs and interest and, if a final judgment establishing the validity or existence of any lien for any amount is entered, Tenant shall pay and satisfy the same at once. If Tenant shall be in default in paying any charge for which a mechanic's lien or suit to foreclose the lien has been recorded or filed and shall not have given Landlord security as aforesaid, Landlord may (but without being required to do so) pay such lien or claim and any costs, and the amount so paid, together with reasonable attorney's fees incurred in connection therewith, shall be immediately due from Tenant to Landlord. 13. SUBLETTING AND ASSIGNMENT. A. Tenant shall neither sublet any part of the Premises nor assign this Lease or any interest herein without the written consent of Landlord first being obtained, which consent, as to any subletting of less than twenty-five percent (25%) of the Premises, will not be unreasonably withheld provided that: (1) Tenant has complied with the provision of subparagraph D below and Landlord has declined to exercise its rights thereunder; (2) the proposed subtenant or assignee is engaged in a business and the Premises will be used in a manner which is in keeping with the then standards of the Building and does not conflict with any exclusive use rights granted to any other tenant; (3) the proposed subtenant or assignee has a reputation and standing in the business community consistent with the image of tenants in a first-class office building and has reasonable financial worth in light of the responsibilities involved and Tenant shall have provided Landlord with reasonable proof thereof; (4) Tenant is not in default hereunder at the time it makes its request for such consent; (5) the proposed subtenant or assignee is not a governmental or quasi-governmental agency; (6) the proposed subtenant or -14- assignee is not a tenant under, or is not currently negotiating, a lease with Landlord in any Building owned by Landlord in the southeast Denver metropolitan area (including the Building); or (7) the rent under such sublease or assignment is not less than the rent to be paid by Tenant for such space under the Lease and is not less than 85% of the rental rate then being offered by Landlord for similar space in the Building. Notwithstanding anything contained herein to the contrary, Tenant acknowledges that if the use of the Premises by any proposed subtenant or assignee would require compliance by Landlord and the Building with any current or future laws to a greater extent than that required prior to the proposed occupancy by such subtenant or assignee, Landlord, at its sole option, may refuse to grant such consent, unless, as an express condition thereof, Tenant and/or such assignee or subtenant bears the entire cost of such greater compliance. B. If this Lease is assigned, or if the Premises or any part thereof is sublet or occupied by anybody other than Tenant, Landlord may, after default by Tenant, collect the rent from the assignee, subtenant, or occupant and apply the net amount collected to the rent herein reserved, but no such assignment, subletting, occupancy, or collection shall be deemed an acceptance of the assignee, subtenant, or occupant as the Tenant hereof or a release of Tenant from further performance by Tenant of covenants on the part of Tenant herein contained. A sale by Tenant of all or substantially all of its assets or all or substantially all of its stock if Tenant is a publicly traded corporation, a merger of Tenant with another corporation, the transfer of twenty-five percent (25%) or more of the stock in a corporate tenant whose stock is not publicly traded, or transfer of twenty-five percent (25%) or more of the beneficial ownership interests in a partnership tenant shall constitute a prohibited assignment hereunder. Consent by Landlord to any one Assignment or sublease shall not in any way be construed as relieving Tenant from obtaining the Landlord's express written consent to any further Assignment or sublease. Notwithstanding the consent of Landlord to any sublease or Assignment, Tenant shall not be relieved from its primary obligations hereunder to Landlord, including, but not limited to the payment of all Base Rent and Tenant's Pro Rata Share of increases in Operating Expenses. Landlord's consent to any requested sublease or Assignment shall not waive Landlord's right to refuse to consent to any other such request or to terminate this Lease if such request is made, all as provided herein. If Tenant collects any rental or other amounts from a subtenant or assignee in excess of the Base Rent and Tenant's Pro Rata Share of increases in Operating Expenses for any monthly period, Tenant shall pay to Landlord on a monthly basis, as and when Tenant receives the same, all such excess amounts received by Tenant. C. Notwithstanding anything contained in this Paragraph 13 to the contrary, in the event Tenant requests Landlord's consent to sublet twenty-five percent (25%) or more of the Premises or to assign twenty-five percent (25%) or more of its interest in this Lease, Landlord shall have the right to: (1) consent to such sublease or Assignment in its sole discretion; (2) refuse to grant such consent in Landlord's sole discretion; or (3) refuse to grant such consent and terminate this Lease as to the portion of the Premises with respect to which such consent was requested; provided, however, if Landlord refuses to grant such consent and elects to terminate the Lease as to such portion of the Premises, Tenant shall have the right within fifteen (15) days after notice of Landlord's exercise of its right to terminate to withdraw Tenant's request for such consent and remain in possession of the Premises under the terms and conditions hereof. In the -15- event the Lease is terminated as set forth herein, such termination shall be effective as of the date set forth in a written notice from Landlord to Tenant, which date shall in no event be more than thirty (30) days following such notice. D. Tenant hereby agrees that in the event it desires to sublease all or any portion of the Premises or assign this Lease to any party, in whole or in part, (herein "Assignment"), Tenant shall notify Landlord not less than ninety (90) days prior to the date Tenant desires to sublease such portion of the Premises or assign this Lease ("Tenant's Notice"). Tenant's Notice shall set forth the description of the portion of the Premises to be so sublet or assigned and the terms and conditions on which Tenant desires to sublet the Premises or assign this Lease. Landlord shall have sixty (60) days following receipt of Tenant's Notice within which to attempt to sublet the Premises or assign this Lease on Tenant's behalf (or to exercise Landlord's rights pursuant to subparagraph C above if Tenant's Notice discloses that twenty-five percent (25%) or more of the Premises is involved). In the event that the space covered by Tenant's Notice is leased by Landlord, rent and other sums due from the subtenant in accordance with the sublease shall be paid to Tenant for Tenant's account and Landlord shall have no responsibility whatsoever for the observance and performance by such subtenant of its obligations under its sublease with Tenant. Landlord shall be under no obligation to find a prospective subtenant or assignee. If Landlord is unwilling or unable to locate a subtenant or assignee (and, if applicable, declines to exercise its rights pursuant to subparagraph C above), Landlord will notify Tenant not later than sixty (60) days after the date Landlord receives Tenant's Notice and Tenant shall be free to sublet the portion of the Premises in question or assign the applicable portion of its interest in this Lease to any third party on terms substantially identical to those described in Tenant's Notice, subject to Landlord's consent as set forth in subparagraph A above. If Tenant is unable to sublet said portion of the Premises or assign the applicable portion of its interest in this Lease on said terms and conditions within one hundred twenty (120) days following its original notice to Landlord, Tenant agrees to reoffer the Premises to Landlord in accordance with the provisions hereof prior to leasing or assigning the same to any third party. E. All documents utilized by Tenant to evidence any subletting or assignment to which Landlord has consented shall be subject to prior approval by Landlord or its counsel. Tenant shall pay on demand all of Landlord's costs and expenses, including reasonable attorneys' fees, incurred in determining whether or not to consent to any requested sublease or Assignment and in reviewing and approving such documentation. F. Landlord and Tenant understand that notwithstanding certain provisions to the contrary contained herein, a trustee or debtor in possession under the Bankruptcy Code of the United States may have certain rights to assume or assign this Lease. If a trustee in bankruptcy is entitled to assume control over Tenant's rights under this Lease and assigns such rights to any third party, the Base Rent to be paid hereunder by such party shall be increased to the then current Base Rent (if greater than then being paid for the Premises) which Landlord would charge for comparable space in the Building as of the date of such third party's occupancy of the Premises. Landlord and Tenant further understand that in any event Landlord is entitled under the Bankruptcy Code to Adequate Assurance of future performance of the terms and provisions -16- of this Lease. For purposes of any such assumption or assignment, the parties hereto agree that the term "ADEQUATE ASSURANCE" shall include at least the following: i. In order to assure Landlord that the proposed assignee will have the resources with which to pay the rent called for herein, any proposed assignee must have demonstrated to Landlord's satisfaction a net worth (as defined in accordance with generally accepted accounting principles consistently applied) at least as great as the net worth of Tenant on the date this Lease became effective increased by seven percent (7%), compounded annually, for each year from the Lease Commencement Date through the date of the proposed assignment. The financial condition and resources of Tenant were a material inducement to Landlord in entering into this Lease. ii. Any proposed assignee of this Lease must assume and agree to be bound by the terms, provisions, and covenants of this Lease. 14. DAMAGE TO PROPERTY. Tenant shall neither hold nor attempt to hold Landlord liable for any injury or damage, either proximate or remote, occurring through or caused by fire, water, steam, or any repairs, alterations, injury, accident, or any other cause to the Premises, to any furniture, fixtures, Tenant improvements, or other personal property of Tenant kept or stored in the Premises, or in other parts of the Building Complex not herein demised, whether by reason of the negligence or default of the owners or occupants thereof or any other person or otherwise and the keeping or storing of all property of Tenant in the Building Complex and/or Premises shall be at the sole risk of Tenant. Tenant shall obtain and maintain throughout the term of this Lease "all risk" or "multi-peril" insurance on and for the full cost of replacement of all of Tenant's property and betterments in the Premises, including, without limitation all furniture, fixtures, personal property and all tenant finish in excess of Building Standard items. 15. INDEMNITY TO LANDLORD. A. Tenant hereby agrees to indemnify, defend, and save Landlord harmless of and from all liability, loss, damages, costs, or expenses, including attorneys' fees, on account of injuries to the person or property of Landlord or of any other tenant in the Building Complex or to any other person rightfully in said Building Complex for any purpose whatsoever, where the injuries are caused by the negligence, misconduct or breach of this Lease by the Tenant, Tenant's agents, servants, or employees or of any other person entering upon the Premises under express or implied invitation of Tenant or where such injuries are the result of the violation of the provisions of this Lease by any of such persons. This indemnity shall survive termination or earlier expiration of this Lease. B. In addition to the above, Tenant shall obtain and maintain throughout the term of this Lease a commercial general liability policy, including protection against death, personal injury and property damage, issued by an insurance company qualified to do business in the State of Colorado, with a single limit of not less than One Million Dollars ($1,000,000.00). All such policies shall name Landlord as an additional insured. Each such policy shall provide that the same may not be canceled or modified without at least twenty (20) days' prior written -17 notice to Landlord and any Mortgagee (as defined in Paragraph 20). Prior to occupancy of the Premises, and thereafter from time to time, Tenant shall deliver certificates evidencing that such insurance, as required under Paragraph 14 above and this Paragraph 15, is in force and effect. The limits of said insurance shall not, under any circumstances, limit the liability of Tenant hereunder. 16. SURRENDER AND NOTICE. Upon the expiration or other termination of the term of this Lease, Tenant shall promptly quit and surrender to Landlord the Premises broom clean, in good order and condition, ordinary wear and tear and loss by fire or other casualty excepted unless due to the negligence of Tenant, and Tenant shall remove all of its movable furniture and other effects and such Alterations as Landlord shall require Tenant to remove pursuant to Paragraph 11 hereof. In the event Tenant fails to vacate the Premises on a timely basis as required, Tenant shall be responsible to Landlord for all costs incurred by Landlord as a result of such failure, including, but not limited to, any amounts required to be paid to third parties who were to have occupied the Premises. 17. INSURANCE, CASUALTY, AND RESTORATION OF PREMISES. A. Landlord shall maintain casualty insurance on the shell and core of the Building, on the Premises to the extent of the base tenant finish per the then-current standard allowance provided by Landlord to tenants in the Building therein and in the Building Complex, in such amounts, from such companies, and on such terms and conditions, including loss of rental insurance for such period of time as Landlord deems appropriate, from time to time. B. If the Premises or the Building shall be so damaged by fire or other casualty as to render the Premises wholly untenantable and if such damage shall be so great that a competent architect, in good standing, selected by Landlord shall certify in writing to Landlord and Tenant within sixty (60) days of said casualty that the Premises, with the exercise of reasonable diligence, cannot be made fit for occupancy within one hundred eighty (180) working days from the happening thereof, then this Lease shall cease and terminate from the date of the occurrence of such damage and Tenant shall thereupon surrender to Landlord the Premises and all interest therein hereunder and Landlord may reenter and take possession of the Premises and remove Tenant therefrom. Tenant shall pay rent, duly apportioned, up to the time of such termination of this Lease. If, however, the damage shall be such that said architect shall certify within said sixty (60) day period that the Premises can be made tenantable within said one hundred eighty (180) day period, then, except as hereinafter provided, Landlord shall repair the damage so done (to the extent of the base tenant finish per the then-current standard allowance provided by Landlord to tenants in the Building) with all reasonable speed. C. If the Premises shall be slightly damaged by fire or other casualty, but not so as to render the same wholly untenantable or to require a repair period in excess of one hundred eighty (180) days, then, Landlord, after receiving notice in writing of the occurrence of the casualty, except as hereafter provided, shall cause the same to be repaired to the extent of the base tenant finish per the then-current standard allowance provided by Landlord to tenants in the Building with reasonable promptness. If the estimated repair period as established in accordance -18- with the provisions of subparagraph B above exceeds one hundred eighty (180) days, then the provisions of subparagraph B shall control notwithstanding the fact that the Premises are not wholly untenantable. D. In case the Building throughout shall be so injured or damaged, whether by fire or otherwise (though said Premises may not be affected, or if affected, can be repaired within said one hundred eighty (180) days), that, within sixty (60) days after the happening of such injury, Landlord shall decide not to reconstruct or rebuild said Building, then, notwithstanding anything contained herein to the contrary, upon notice in writing to that effect given by Landlord to Tenant within said sixty (60) days, Tenant shall pay the rent, properly apportioned up to such date, this Lease shall terminate from the date of delivery of said written notice, and both parties hereto shall be freed and discharged of all further obligations hereunder. E. Landlord and Tenant hereby waive any and all rights of recovery against the other, their officers, agents, and employees occurring out of the use and occupancy of the Premises for loss or damage to their respective real and/or personal property arising as a result of a casualty or condemnation contemplated by this Paragraph 17. Each of the parties shall, upon obtaining the policies of insurance required by this Lease, notify the insurance carrier that the foregoing waiver is contained in this Lease and shall require such carrier to include an appropriate waiver of subrogation provision in the policies. F. Provided that the casualty is not the fault of Tenant, Tenant's agents, servants, or employees, Tenant's rent shall abate during any such period of repair and restoration, but only to the extent of any recovery by Landlord under its rental insurance related to the Premises in the same proportion that the part of the Premises rendered untenantable bears to the whole. 18. CONDEMNATION. If the entire Premises or substantially all of the Premises or any portion of the Building Complex which shall render the Premises untenantable shall be taken by right of eminent domain or by condemnation or shall be conveyed in lieu of any such taking, then this Lease, at the option of either Landlord or Tenant exercised by either party giving notice to the other of such termination within thirty (30) days after such taking or conveyance, shall forthwith cease and terminate and the rent shall be duly apportioned as of the date of such taking or conveyance. Tenant thereupon shall surrender the Premises and all interest therein under this Lease to Landlord and Landlord may reenter and take possession of the Premises or remove Tenant therefrom. In the event less than all of the Premises shall be taken by such proceeding, Landlord shall promptly repair the Premises as nearly as possible to its condition immediately prior to said taking, unless Landlord elects not to reconstruct or rebuild as described in subparagraph D of Paragraph 17 above. In the event of any such taking or conveyance, Landlord shall receive the entire award or consideration for the portion of the Building so taken. -19- 19. DEFAULT BY TENANT. A. Each one of the following events is herein referred to as an "Event of Default": (1) Any failure by Tenant to pay the rent or any other monetary sums required to be paid hereunder on the date such sums are due shall be deemed a default. Notwithstanding the foregoing, Tenant may cure a default under this provision at any time prior to five (5) business days after written notice of such default is given by Landlord exercising its remedies as to such default under this Lease; provided, however, Tenant shall not be entitled to more than two (2) notices of a delinquency in payment during any calendar year and, if thereafter during such calendar year any rent or other amounts owing hereunder are not paid when due, an Event of Default shall be deemed to have occurred immediately even though no notice thereof is given; (2) Tenant shall vacate or abandon the Premises; (3) This Lease or the estate of Tenant hereunder shall be transferred to or shall pass to or devolve upon any other person or party except in the manner set forth in Paragraph 13; (4) This Lease or the Premises or any part thereof shall be taken upon execution or by other process of law directed against Tenant or shall be taken upon or subject to any attachment at the instance of any creditor of or claimant against Tenant and said attachment shall not be discharged or disposed of within fifteen (15) days after the levy thereof; (5) The filing of any petition or the commencement of any case or proceeding by the Tenant under any provision or chapter of the Federal Bankruptcy Act, the Federal Bankruptcy Code, or any other federal or state law relating to insolvency, bankruptcy, or reorganization or the adjudication that the Tenant is insolvent or bankrupt or the entry of an order for relief under the Federal Bankruptcy Code with respect to Tenant; (6) The filing of any petition or the commencement of any case or proceeding described in subparagraph (5) above against the Tenant, unless such petition and all proceedings initiated thereby are dismissed within sixty (60) days from the date of such filing; the filing of an answer by Tenant admitting the allegations of any such petition; the appointment of or taking possession by a custodian, trustee or receiver for all or any assets of the Tenant, unless such appointment is vacated or dismissed within sixty (60) days from the date of such appointment; (7) The insolvency of the Tenant or the execution by the Tenant of an assignment for the benefit of creditors; the convening by Tenant of a meeting of its creditors, or any class thereof, for purposes of effecting a moratorium upon or extension or composition of its debts; or the failure of the Tenant generally to pay its debts as they mature; -20- (8) The admission in writing by Tenant, or any partner of Tenant if Tenant is a partnership, that he is unable to pay his debts as they mature or he is generally not paying his debts as they mature; (9) Tenant shall fail to take possession of the Premises on the date the Primary Lease Term commences; (10) Tenant shall fail to perform any of the other agreements, terms, covenants, or conditions hereof on Tenant's part to be performed and such non-performance shall continue for a period of thirty (30) days after written notice thereof by Landlord to Tenant or, if such performance cannot be reasonably had within such thirty (30) day period, Tenant shall not in good faith have commenced such performance within such thirty (30) day period and shall not diligently proceed therewith to completion; provided, however, if Tenant fails to perform any of the other agreements, covenants or conditions hereof repeatedly during the term of this Lease, Tenant shall no longer have the opportunity to cure any subsequent failure and an Event of Default shall be deemed to have occurred immediately upon such failure. B. REMEDIES OF LANDLORD. If any one or more Event of Default shall happen, then Landlord shall have the right at Landlord's election, then or at any time thereafter, either: (1) (a) Without demand or notice, to reenter and take possession of the Premises or any part thereof and repossess the same as of Landlord's former estate and expel Tenant and those claiming through or under Tenant and remove the effects of both or either, without being deemed guilty of any manner of trespass and without prejudice to any remedies for arrears of rent or preceding breach of covenants or conditions. Should Landlord elect to reenter, as provided in this subparagraph (1), or should Landlord take possession pursuant to legal proceedings or pursuant to any notice provided for by law, Landlord may, from time to time, without terminating this Lease, relet the Premises or any part thereof, either alone or in conjunction with other portions of the Building of which the Premises are a part, in Landlord's or Tenant's name but for the account of Tenant, for such term or terms (which may be greater or less than the period which would otherwise have constituted the balance of the term of this Lease) and on such conditions and upon such other terms (which may include concessions of free rent and alteration and repair of the Premises) as Landlord in its uncontrolled discretion, may determine and Landlord may collect and receive the rents therefor. Landlord shall in no way be responsible or liable for any failure to relet the Premises, or any part thereof, or for any failure to collect any rent due upon such reletting. No such reentry or taking possession of the Premises by Landlord shall be construed as an election on Landlord's part to terminate this Lease unless a written notice of such intention be given to Tenant. No notice from Landlord hereunder or under a forcible entry and detainer statute or similar law shall constitute an election by Landlord to terminate this Lease unless such notice specifically so states. Landlord reserves the right following any such reentry and/or reletting to exercise its right to terminate this Lease by giving Tenant such written notice, in which event the Lease will terminate as specified in said notice. (b) If Landlord elects to take possession of the Premises as provided in this subparagraph (1) without terminating the Lease, Tenant shall pay to Landlord (i) -21- the rent and other sums as herein provided, which would be payable hereunder if such repossession had not occurred, less (ii) the net proceeds, if any, of any reletting of the Premises after deducting all of Landlord's expenses incurred in connection with such reletting, including, but without limitation, all repossession costs, brokerage commissions, legal expenses, attorneys' fees, expenses of employees, alteration, remodeling, and repair costs and expenses of preparation for such reletting. If, in connection with any reletting, the new lease term extends beyond the existing term or the premises covered thereby include other premises not part of the Premises, a fair apportionment of the rent received from such reletting and the expenses incurred in connection therewith, as provided aforesaid, will be made in determining the net proceeds received from such reletting. In addition, in determining the net proceeds from such reletting, any rent concessions will be apportioned over the term of the new lease. Tenant shall pay such amounts to Landlord monthly on the days on which the rent and all other amounts owing hereunder would have been payable if possession had not been retaken and Landlord shall be entitled to receive the same from Tenant on each such day; or (2) To give Tenant written notice of intention to terminate this Lease on the date of such given notice or on any later date specified therein and, on the date specified in such notice, Tenant's right to possession of the Premises shall cease and the Lease shall thereupon be terminated, except as to Tenant's liability hereunder as hereinafter provided, as if the expiration of the term fixed in such notice were the end of the term herein originally demised. In the event this Lease is terminated pursuant to the provisions of this subparagraph (2), Tenant shall remain liable to Landlord for damages in an amount equal to the rent and other sums which would have been owing by Tenant hereunder for the balance of the term had this Lease not been terminated less the net proceeds, if any, of any reletting of the Premises by Landlord subsequent to such termination, after deducting all Landlord's expenses in connection with such reletting, including, but without limitation, the expenses enumerated above. Landlord shall be entitled to collect such damages from Tenant monthly on the days on which the rent and other amounts would have been payable hereunder if this Lease had not been terminated and Landlord shall be entitled to receive the same from Tenant on each such day. Alternatively, at the option of Landlord, in the event this Lease is terminated, Landlord shall be entitled to recover forthwith against Tenant as damages for loss of the bargain and not as a penalty an amount equal to the worth at the time of termination of the excess, if any, of the amount of rent reserved in this Lease for the balance of the term hereof over the then Reasonable Rental Value of the Premises for the same period plus all amounts incurred by Landlord in order to obtain possession of the Premises and relet the same, including attorneys' fees, reletting expenses, alterations and repair costs, brokerage commissions and all other like amounts. It is agreed that the "Reasonable Rental Value" shall be the amount of rental which Landlord can obtain as rent for the remaining balance of the term. C. CUMULATIVE REMEDIES. Suit or suits for the recovery of the rents and other amounts and damages set forth hereinabove may be brought by Landlord, from time to time, at Landlord's election, and nothing herein shall be deemed to require Landlord to await the date whereon this Lease or the term hereof would have expired had there been no such default by Tenant or no such termination, as the case may be. Each right and remedy provided for in this Lease shall be cumulative and shall be in addition to every other right or remedy provided for in -22- this Lease or now or hereafter existing at law or in equity or by statute or otherwise, including, but not limited to, suits for injunctive relief and specific performance. The exercise or beginning of the exercise by Landlord of any one or more of the rights or remedies provided for in this Lease or now or hereafter existing at law or in equity or by statute or otherwise shall not preclude the simultaneous or later exercise by Landlord of any or all other rights or remedies provided for in this Lease or now or hereafter existing at law or in equity or by statute or otherwise. All such rights and remedies shall be considered cumulative and non-exclusive. All costs incurred by Landlord in connection with collecting any rent or other amount and damages owing by Tenant pursuant to the provisions of this Lease, or to enforce any provision of this Lease, shall also be recoverable by Landlord from Tenant. Further, if an action is brought pursuant to the terms and provisions of the Lease, the prevailing party in such action shall be entitled to recover from the other party any and all reasonable attorneys' fees incurred by such prevailing party in connection with such action. D. NO WAIVER. No failure by Landlord to insist upon the strict performance of any agreement, term, covenant or condition hereof or to exercise any right or remedy consequent upon a breach thereof and no acceptance of full or partial rent during the continuance of any such breach shall constitute a waiver of any such breach or of such agreement, term, covenant, or condition. No agreement, term, covenant, or condition hereof to be performed or complied with by Tenant and no breach thereof shall be waived, altered, or modified, except by written instrument executed by Landlord. No waiver of any breach shall affect or alter this Lease but each and every agreement, term, covenant, and condition hereof shall continue in full force and effect with respect to any other then existing or subsequent breach thereof. Notwithstanding any termination of this Lease, the same shall continue in force and effect as to any provisions which require observance or performance by Landlord or Tenant subsequent to such termination. E. BANKRUPTCY. Nothing contained in this Paragraph 19 shall limit or prejudice the right of Landlord to prove and obtain as liquidated damages in any bankruptcy, insolvency, receivership, reorganization, or dissolution proceeding an amount equal to the maximum allowed by any statute or rule of law governing such a proceeding and in effect at the time when such damages are to be proved, whether or not such amount be greater, equal to, or less than the amounts recoverable, either as damages or rent, referred to in any of the preceding provisions of this Paragraph. Notwithstanding anything contained in this Paragraph to the contrary, any such proceeding or action involving bankruptcy, insolvency, reorganization, arrangement, assignment for the benefit of creditors, or appointment of a receiver or trustee, as set forth above, shall be considered to be an Event of Default only when such proceeding, action, or remedy shall be taken or brought by or against the then holder of the leasehold estate under this Lease. F. LATE PAYMENT CHARGE. Any rents or other amounts owing hereunder which are not paid within five (5) days after the date they are due shall thereafter bear interest at the rate of three percentage points over the Prime Rate then being charged by Wells Fargo Bank, N.A. or its successor, to its most credit-worthy customers on an unsecured basis for short term loans (the "Prime Rate") or the highest rate permitted by applicable usury law, whichever is lower, until paid. Further, in the event any rents or other amounts owing hereunder are not paid within five -23- (5) days after written notice, Landlord and Tenant agree that Landlord will incur additional administrative expenses, the amount of which will be difficult if not impossible to determine. Accordingly, Tenant shall pay to Landlord an additional, one-time late charge for any such late payment in the amount of five percent (5%) of such payment. Any amounts paid by Landlord to cure any defaults of Tenant hereunder, which Landlord shall have the right but not the obligation to do, shall, if not repaid by Tenant within five (5) days of demand by Landlord, thereafter bear interest at the rate of three percentage points over the Prime Rate or the highest rate permitted by applicable usury law, whichever is lower, until paid. G. WAIVER OF JURY TRIAL. TENANT AND LANDLORD HEREBY WAIVE (TO THE EXTENT ALLOWED BY LAW) ANY AND ALL RIGHTS TO A TRIAL BY JURY IN SUIT OR SUITS BROUGHT TO ENFORCE ANY PROVISION OF THIS LEASE OR ARISING OUT OF OR CONCERNING THE PROVISIONS OF THIS LEASE. 20. DEFAULT BY LANDLORD. In the event of any alleged default on the part of Landlord hereunder, Tenant shall give written notice to Landlord in the manner herein set forth and shall afford Landlord a reasonable opportunity to cure any such default. Notice to Landlord of any such alleged default shall be ineffective unless notice is simultaneously delivered to any holder of a Mortgage and/or Trust Deed affecting all or any portion of the Building Complex ("Mortgagees"), as hereafter provided. Tenant agrees to give all Mortgagees, by certified mail, return receipt requested, a copy of any notice of default served upon Landlord, provided that prior to such notice Tenant has been notified, in writing (by way of notice of Assignment of Rents and Leases, or otherwise), of the address of such Mortgagees. Tenant further agrees that if Landlord shall have failed to cure such default within the time provided for in this Lease, then the Mortgagees shall have an additional thirty (30) days within which to cure such default or, if such default cannot be cured within that time, then such additional time as may be necessary, if, within such thirty (30) days, any Mortgagee has commenced and is diligently pursuing the remedies necessary to cure such default (including, but not limited to, commencement of foreclosure proceedings, if necessary to effect such cure), in which event this Lease shall not be terminated while such remedies are being so diligently pursued. In no event will Landlord or any Mortgagee be responsible for any consequential damages incurred by Tenant as a result of any default, including, but not limited to, lost profits or interruption of business as a result of any alleged default by Landlord hereunder. 21. SUBORDINATION AND ATTORNMENT. A. This Lease, at Landlord's option, shall be subordinate to any mortgage or deed of trust (now or hereafter placed upon the Building Complex, or any portion thereof), including any amendment, modification, or restatement of any of such documents, and to any and all advances made under any mortgage or deed of trust and to all renewals, modifications, consolidations, replacements, and extensions thereof. Tenant agrees that with respect to any of the foregoing documents, no documentation, other than this Lease, shall be required to evidence such subordination. -24- B. If any holder of a mortgage or deed of trust shall elect to have this Lease superior to the lien of the holder's mortgage or deed of trust and shall give written notice thereof to Tenant, this Lease shall be deemed prior to such mortgage or deed of trust, whether this Lease is dated prior or subsequent to the date of said mortgage or deed of trust or the date of recording thereof. C. In confirmation of such subordination or superior position, as the case may be, Tenant agrees to execute such documents as may be required by Landlord or its Mortgagee to evidence the subordination of its interest herein to any of the documents described above, or to evidence that this Lease is prior to the lien of any mortgage or deed of trust, as the case may be, and failing to do so within ten (10) days after written demand, Tenant does hereby make, constitute, and irrevocably appoint Landlord as Tenant's attorney-in-fact and in Tenant's name, place and stead, to do so. D. Tenant hereby agrees to attorn to all successor owners of the Building Complex, whether or not such ownership is acquired as a result of a sale, through foreclosure of a deed of trust or mortgage, or otherwise. 22. REMOVAL OF TENANT'S PROPERTY. All movable furniture and personal effects of Tenant not removed from the Premises upon the vacation or abandonment thereof or upon the termination of this Lease for any cause whatsoever shall conclusively be deemed to have been abandoned and may be appropriated, sold, stored, destroyed, or otherwise disposed of by Landlord without notice to Tenant or any other person and without obligation to account therefor and Tenant shall pay Landlord all expenses incurred in connection with the disposition of such property. 23. HOLDING OVER: TENANCY MONTH-TO-MONTH. If, after the expiration of this Lease, Tenant shall remain in possession of the Premises and continue to pay rent, and Landlord shall accept such rent, without any express written agreement as to such holding over, then such holding over shall be deemed and taken to be a holding upon a tenancy from month-to-month, subject to all the terms and conditions hereof on the part of Tenant to be observed and performed and at a monthly rent equivalent to two hundred percent (200%) of the monthly installments paid by Tenant immediately prior to such expiration or the current market rental rate for the Premises, whichever is greater. All such rent shall be payable in advance on the same day of each calendar month. Such month-to-month tenancy may be terminated by either party upon ten (10) days' notice prior to the end of any such monthly period. Nothing contained herein shall be construed as obligating Landlord to accept any rental tendered by Tenant after the expiration of the term hereof or as relieving Tenant of its liability pursuant to Paragraph 16 and any holdover without Landlord's consent shall be deemed a default hereunder entitling Landlord to all of its rights and remedies set forth in Paragraph 19 above, including, without limitation, its right to recover consequential damages resulting from said holdover. 24. PAYMENTS AFTER TERMINATION. No payments of money by Tenant to Landlord after the termination of this Lease, in any manner, or after giving of any notice (other -25- than a demand for payment of money) by Landlord to Tenant shall reinstate, continue, or extend the term of this Lease or affect any notice given to Tenant prior to the payment of such money, it being agreed that after the service of notice or the commencement of a suit or other final judgment granting Landlord possession of the Premises, Landlord may receive and collect any sums of rent due or any other sums of money due under the terms of this Lease or otherwise exercise Landlord's rights and remedies hereunder and the payment of such sums of money, whether as rent or otherwise, shall not waive said notice or in any manner affect any pending suit or judgment theretofore obtained. 25. STATEMENT OF PERFORMANCE. Tenant agrees at any time and from time to time, upon not less than ten (10) days' prior written request by Landlord, to execute, acknowledge, and deliver to Landlord a statement in writing certifying that this Lease is unmodified and in full force and effect (or, if there have been modifications, that the same is in full force and effect as modified and stating the modifications), that there have been no defaults thereunder by Landlord or Tenant (or, if there have been defaults, setting forth the nature thereof), the date to which the rent and other charges have been paid in advance, if any, and such other information as Landlord may request. It is intended that any such statement delivered pursuant to this Paragraph may be relied upon by any prospective purchaser of all or any portion of Landlord's interest herein or a holder of any mortgage or deed of trust encumbering the Building Complex. Tenant's failure to deliver such statement within such time shall be conclusive upon Tenant that: (i) this Lease is in full force and effect, without modification except as may be represented by Landlord; (ii) there are no uncured defaults in Landlord's performance; and (iii) not more than one (1) month's rent has been paid in advance. Further, upon request, Tenant will supply to Landlord a corporate or partnership resolution, as the case may be, certifying that the party signing said statement of Tenant is properly authorized to do so. 26. MISCELLANEOUS. A. The term "Landlord" as used in this Lease, so far as covenants or obligations on the part of Landlord are concerned, shall be limited to mean and include only the owner or owners of the Building Complex at the time in question and, in the event of any transfer or transfers of the title thereto, Landlord herein named (and in the case of any subsequent transfers or conveyances, the then grantor) shall be automatically released, from and after the date of such transfer or conveyance, of all liability as respects the performance of any covenants or obligations on the part of Landlord contained in this Lease thereafter to be performed, provided that any funds in the hands of Landlord or the then grantor at the time of such transfer in which Tenant has an interest shall be turned over to the grantee and any amount then due and payable to Tenant by Landlord or the then grantor under any provisions of this Lease shall be paid to Tenant. B. The termination or mutual cancellation of this Lease shall not work a merger, and such termination or mutual cancellation shall, at the option of Landlord, either terminate all subleases and subtenancies or operate as an assignment to Landlord of any or all such subleases or subtenancies. -26- C. The Tenant agrees that, for the purposes of completing or making repairs or alterations in any portion of the Building, Landlord may use one or more of the street entrances, the halls, passageways, and elevators of the Building. D. This Lease shall be construed as though the covenants herein between Landlord and Tenant are independent and not dependent and Tenant shall not be entitled to any setoff of the rent or other amounts owing hereunder against Landlord if Landlord fails to perform its obligations set forth herein; provided, however, the foregoing shall in no way impair the right of Tenant to commence a separate action against Landlord for any violation by Landlord of the provisions hereof so long as notice is first given to Landlord and any holder of a mortgage or deed of trust covering the Building Complex or any portion thereof and an opportunity granted to Landlord and such holder to correct such violation as provided in Paragraph 20 above. E. If any clause or provision of this Lease is illegal, invalid, or unenforceable under present or future laws effective during the term of this Lease, then and in that event it is the intention of the parties hereto that the remainder of this Lease shall not be affected thereby and it is also the intention of the parties to this Lease that in lieu of each clause or provision of this Lease that is illegal, invalid, or unenforceable there be added as a part of this Lease a clause or provision as similar in terms to such illegal, invalid, or unenforceable clause or provision as may be possible and be legal, valid, and enforceable. F. The caption of each paragraph is added as a matter of convenience only and shall be considered of no effect in the construction of any provision or provisions of this Lease. G. Except as herein specifically set forth, all terms, conditions, and covenants to be observed and performed by the parties hereto shall be applicable to and binding upon their respective heirs, administrators, executors, and assigns. The terms, conditions, and covenants hereof shall also be considered to be covenants running with the land to the fullest extent permitted by law. H. Tenant and the party executing this Lease on behalf of Tenant represent to Landlord that such party is authorized to do so by requisite action of the board of directors or partners, as the case may be, and agree, upon request, to deliver to Landlord a resolution or similar document or opinion of counsel to that effect. I. If there are more than one entity or person which or who are the Tenant under this Lease, the obligations imposed upon Tenant under this Lease shall be joint and several. J. No act or thing done by Landlord or Landlord's agents during the term hereof, including, but not limited to, any agreement to accept surrender of the Premises or to amend or modify this Lease, shall be deemed to be binding on Landlord, unless such act or thing shall be by a partner or officer of Landlord, as the case may be, or a party designated in writing by Landlord as so authorized to act. The delivery of keys to Landlord, or Landlord's agents, -27- employees, or officers shall not operate as a termination of this Lease or a surrender of the Premises. No payment by Tenant or receipt by Landlord of a lesser amount than the monthly rent and all other amounts owing, as herein stipulated, shall be deemed to be other than on account of the earliest stipulated rent or other amounts nor shall any endorsement or statement on any check or any letter accompanying any check or payment as rent be deemed an accord and satisfaction and Landlord may accept such check or payment without prejudice to Landlord's right to recover the balance of such rent or pursue any other remedy available to Landlord. K. Landlord shall have the right at any time to change the name of the Building, to increase the size of the Building Complex by adding additional real property thereto, to construct other buildings or improvements on any portion of the Building Complex or to change the location and/or character of or to make alterations of or additions to the Building Complex. In the event any such additional buildings are constructed or Landlord increases the size of the Building Complex, Landlord and Tenant shall execute an Amendment to Lease which incorporates such modifications, additions, and adjustments to Tenant's Pro Rata Share, if necessary. Tenant shall not use the Building's name for any purpose other than as a part of its business address. Any use of such name in the designation of Tenant's business shall constitute a default under this Lease. L. Tenant covenants and agrees that no diminution of light, air, or view of or from the Building or any other building (whether or not constructed or owned by Landlord) shall entitle Tenant to any reduction of rent or other charges under this Lease, result in any liability of Landlord to Tenant, or in any way affect this Lease or Tenant's obligations hereunder. M. Notwithstanding anything to the contrary contained herein, Landlord's liability under this Lease shall be limited to Landlord's interest in the Building Complex. N. Tenant acknowledges and agrees that it has not relied upon any statements, representations, agreements, or warranties by Landlord, its agents or employees, except such as are expressed herein and that no amendment or modification of this Lease shall be valid or binding unless expressed in writing and executed by the parties hereto in the same manner as the execution of this Lease. O. Tenant agrees to make such modifications and amendments of this Lease as may hereafter be required to conform to any lender's requirements, so long as such modifications or amendments will not increase Tenant's obligations hereunder or materially alter its rights as set forth herein. P. Submission of this instrument for examination or signature by Tenant does not constitute a reservation of or an option for lease, and it is not effective as a lease or otherwise until execution and delivery by both Landlord and Tenant. Q. Tenant represents as follows: -28- (1) Neither Tenant nor any of its affiliates (within the meaning of Part V(c) of Prohibited Transaction Exemption 84-14, 49 Fed.Reg. 9494 (1984), as amended ("PTE 84-14") has, or during the immediately preceding year, has exercised authority to: (a) appoint or terminate the Prudential Insurance Company of America or Prudential Real Estate Investors ("Prudential") as investment manager over assets of any employee benefit plan invested in Landlord; or (b) negotiate the terms of a management agreement with Prudential on behalf of any such plan; (2) Tenant is not a "related party" of Prudential (as defined in Part V(h) of PTE 84-14); (3) Tenant has negotiated and determined the terms of this Lease at arm's length, as such terms would be negotiated and determined by Tenant with unrelated parties; and (4) Tenant is not an "employee benefit plan" as defined in Section 3(3) of the Employees Retirement Income Security Act of 1974, as amended ("ERISA"), a "plan" as defined in Section 4965(e)(1) of the Internal Revenue Code of 1986, as amended (the "Code"), or any entity deemed to hold "plan assets" within the meaning of 29 C.F.R. Section 2510.3-101 of any such employee benefit plan or plans. 27. AUTHORITIES FOR ACTION AND NOTICE. A. Except as herein otherwise provided, Landlord may act in any manner provided for herein by and through Landlord's Building Manager or any other person who shall from time to time be designated in writing. B. All notices, demands, statements or communications required or permitted to be given to Landlord hereunder shall be in writing and shall be deemed duly served when delivered personally to any officer of Landlord (or a partner of Landlord if Landlord is a partnership or to Landlord individually if Landlord is a sole proprietor) or manager of Landlord whose principal office is in the Building, or when deposited in the United States mail, postage prepaid, certified or registered, return receipt requested, addressed to Landlord at Landlord's principal office in the Building or at the most recent address of which Landlord has notified Tenant in writing. All notices, demands, statements or communications required to be given to Tenant hereunder shall be in writing and shall be deemed duly served when delivered personally to any officer of Tenant (or a partner of Tenant if Tenant is a partnership or to Tenant individually if Tenant is a sole proprietor) or manager of Tenant whose office is in the Building, when deposited in the United States mail, postage prepaid, certified or registered, return receipt requested, addressed to Tenant at the Premises, or, prior to Tenant's taking possession of the Premises, to the address known to Landlord as Tenant's principal office address. Either party shall have the right to designate in writing, served as above provided, a different address to -29- which notice is to be mailed. The foregoing shall in no event prohibit notice from being given as provided in Rule 4 of Colorado Rules of Civil Procedure, as the same may be amended from time to time. 28. RULES AND REGULATIONS. It is further agreed that the rules and regulations set forth on EXHIBIT D attached hereto shall be and are hereby made a part of this Lease and Tenant agrees that Tenant's employees and agents or any others permitted by Tenant to occupy or enter the Premises will at all times abide by said rules and regulations. A breach of any of such rules or regulations shall be deemed an Event of Default under this Lease and Landlord shall have all remedies as set forth in Paragraph 19 hereof. 29. PARKING. Tenant shall be provided non-assigned surface parking in the Building parking lots at a ratio of one (1) space per three hundred (300) rentable square feet of office space leased. Based upon leasing 7,108 rentable square feet, this ratio equates to twenty-four (24) spaces, all of which will be provided at no expense to Tenant during the Primary Lease Term. 30. SUBSTITUTE PREMISES. At any time during the Extension Term, Landlord shall have the right upon thirty (30) days' prior written notice to Tenant to substitute other substantially comparable space within the Building, including substantially comparable tenant finish, for the Premises (the "Substitute Premises"). Tenant shall relocate to the Substitute Premises on the date set forth in Landlord's notice (to occur no sooner than thirty (30) days after receipt by Tenant of said notice). Landlord agrees to pay all reasonable expenses incurred by Tenant to move its furniture, fixtures, and equipment to the Substitute Premises. The suite number designation and Exhibit A shall be deemed revised to reflect the description of the Substitute Premises. Except for such revisions, the terms and provisions of the Lease shall be applicable to the Substitute Premises and the Substitute Premises shall be deemed to be the Premises under the Lease. 31. BROKERAGE. Tenant hereby represents and warrants that Tenant has not employed any broker other than Frederick Ross Company in regard to this Lease and that Tenant has no knowledge of any other broker being instrumental in bringing about this Lease transaction except Cushman and Wakefield/Premisys Colorado, Inc., a Delaware corporation ("Cushman and Wakefield") which has acted as Landlord's leasing agent. Tenant shall indemnify Landlord against any expense incurred by Landlord as a result of any claim for brokerage or other commissions made by any other broker, finder, or agent, whether or not meritorious, employed by Tenant or claiming by, through, or under Tenant. Tenant acknowledges that Landlord shall not be liable for any representations by Cushman and Wakefield regarding the Premises, the Building, or this lease transaction. 32. TIME OF ESSENCE. Time is of the essence herein. 33. OPTION TO EXTEND. Provided that this Lease is in full force and effect and no Event of Default, or event which but for the passage of time or the giving of notice, or both, would constitute an Event of Default has occurred and is continuing, Tenant shall have one -30- option to extend the Lease for a period of one (1) year (the "Extension Term") beginning immediately after the Primary Lease Term upon the same terms and conditions provided in this Lease except that (i) Base Rent will be equal to the then-current market rental rate for the Premises as determined by the Landlord; and (ii) the option to extend stated in this Paragraph shall be deleted. Tenant may exercise this option by giving Landlord at least one hundred twenty (120) days written notice prior to the expiration of the Primary Lease Term. 34. SIGNAGE. In the event that, and at such time as, Tenant leases more than 10,000 square feet in the Building, for a term of at least three years, at Tenant's request and sole expense, Landlord will put a Building-standard sign with Tenant's name on it on one or both of the two exterior monument signs located outside the Building. Further, prior to the installation of any sign, Tenant shall pay to Landlord a fee in an amount to be agreed upon between Landlord and Tenant, which fee shall be in addition to the costs of design and installation of any such sign. 35. RIGHT OF FIRST REFUSAL. If, prior to the expiration or sooner termination of the Term of this Lease, (a) Landlord receives an offer to lease the 26,802 rentable square foot premises located on the third floor of the Building and shown on Exhibit A-2 hereto or (b) Landlord receives an offer to lease the 1,773 rentable square foot area adjacent to the Premises which is known as Suite 206 (either space shall be referred to as the "Refusal Space"), which Landlord desires to accept, and provided that Tenant is not in default, Landlord shall give Tenant written notice of such offer, setting forth the rental rate and all other terms and conditions of such offer, and Tenant shall have the exclusive first right and option to lease the Refusal Space by giving written notice to Landlord of its intention to lease the Refusal Space within three (3) business days after such notice, at the same price and on the same terms of any such offer, it being understood that in the event Tenant does not give notice of its intention to exercise said right and option to lease within said three (3) business day period, Landlord shall be free to lease the Refusal Space upon the same terms and conditions given to Tenant, and in the event the Refusal Space is not leased for any reason, Tenant shall have, upon the same conditions and notice, the continuing right and option to lease the same upon the terms of any subsequent offer or offers to lease. The termination of Tenant's right of first refusal for the Refusal Space for nonexercise, is automatic and self-executing, however, Tenant shall upon request, execute and deliver to Landlord a release of such right and option. Notwithstanding the foregoing, the right of first refusal with respect to Suite 206 shall be subordinate and subject to, the rights of any existing tenant of Suite 206, and an offer to lease by such tenant shall not activate a right of first refusal in favor of Tenant. IN WITNESS WHEREOF, the parties hereto have caused this Lease to be executed the day and year first-above written. -31- FIRSTWORLD COMMUNICATIONS, INC., THE PRUDENTIAL INSURANCE a Delaware corporation COMPANY OF AMERICA, a New Jersey corporation By: /s/ Scott Chase By: CUSHMAN AND WAKEFIELD/ -------------------------------- PREMISYS COLORADO, INC., a Its: Senior Vice President, Delaware corporation, as agent for The Corporate & Government Affairs Prudential Insurance Company of America ------------------------------- By: /s/ Stephen M. Schwab ------------------------------- Stephen M. Schwab Its: Director -32- EX-10.31 8 EXHIBIT 10.31 FIRST AMENDMENT TO LEASE (GENESEE EXECUTIVE PLAZA) THIS FIRST AMENDMENT TO LEASE ("FIRST AMENDMENT") is made and entered into as of the 31st day of July, 1998, by and between ARDEN REALTY LIMITED PARTNERSHIP, a Maryland limited partnership ("LANDLORD") and FIRSTWORLD COMMUNICATIONS, INC., a Delaware corporation (formerly known as SPECTRANET INTERNATIONAL, INC.) ("Tenant"). RECITALS: A. Talcott Realty I Limited Partnership, a Connecticut limited partnership ("ORIGINAL LANDLORD") and Tenant entered into that certain Office Lease, dated as of September 4, 1996 (the "Lease"), whereby Original Landlord leased to Tenant and Tenant leased from Original Landlord certain office space located in that certain building located and addressed at 9333/9339 Genesee Avenue, San Diego, California (the "Building"). Landlord is the successor-in-interest to Original Landlord. B. By this First Amendment, Landlord and Tenant desire to expand the Premises, extend the Term and to otherwise modify the Lease as provided herein. C. Unless otherwise defined herein, capitalized terms as used herein shall have the same meanings as given thereto in the Lease. NOW, THEREFORE, in consideration of the foregoing recitals and the mutual covenants contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: AGREEMENT: 1. THE EXISTING PREMISES. Landlord and Tenant hereby agree that pursuant to the Lease, Landlord currently leases to Tenant and Tenant currently leases from Landlord that certain office space in the Building containing 11,627 rentable (10,128 usable) square feet located on the second (2nd) floor of the Building located and addressed at 9333 Genesee Avenue and known as Suite 200 (the "EXISTING PREMISES"), as outlined on Attachment 2 to the Lease. 2. EXPANSION OF THE PREMISES. That certain space located on the first (1st) floor of the building located and addressed at 9333 Genesee Avenue consisting of 8,375 (7,295 usable) rentable square feet and known as Suite 100 and that certain space located on the first (1st) floor of the building located and addressed at 9339 Genesee Avenue consisting of 15,344 rentable (13,366 usable) square feet and known as Suite 100, as outlined on the floor plan attached hereto as Exhibit "A" and made a part hereof, may be referred to herein as the "EXPANSION SPACE." Effective as of September 1, 1998 ("EXPANSION COMMENCEMENT DATE"), Tenant shall lease from Landlord and Landlord shall lease to Tenant the Expansion Space. Accordingly, effective upon the Expansion Commencement Date, the Existing Premises shall be increased to include the Expansion Space. Landlord and Tenant hereby agree that such addition of the Expansion Space to the Existing Premises shall, effective as of the Expansion Commencement Date, increase the number of rentable square feet leased by Tenant in the Building to a total of 35,346 rentable square feet. Effective as of the Expansion Commencement Date, all references to the "Premises" shall mean and refer to the Existing Premises as expanded by the Expansion Space. Notwithstanding anything to the contrary contained herein, Tenant shall have the right to commence business from the Expansion Space during the period prior to the Expansion Commencement Date (the "EARLY OCCUPANCY PERIOD"), provided that (i) Tenant shall give Landlord at least ten (10) days prior notice of any such occupancy of the Expansion Space and (ii) all of the terms and conditions of the Lease, as amended by this First Amendment shall apply, including Tenant's obligations to pay Monthly Base Rent for the portion of the Expansion Space so utilized by Tenant (which rent shall be prorated based upon the number of rentable square feet of such space at Two Dollars ($2.00) per rentable square foot per month). 3. EXTENDED LEASE TERM. The Termination Date shall be extended such that the Lease shall terminate on August 31, 2002 ("NEW TERMINATION DATE"). The period from the Expansion Commencement Date through the New Termination Date specified above, shall be referred to herein as the "Extended Term." 4. MONTHLY BASE RENT. During the Extended Term, Tenant shall pay in accordance with the provisions of this Section 4, Monthly Base Rent for the entire Premises as follows:
MONTH MONTHLY BASE RENT ----- ----------------- 1 $66,041.20 2-12 $66,622.55 13 $68,282.88 14-24 $73,166.22 25-36 $75,727.04 37-48 $78,377.48
5. TENANT'S PROPORTIONATE SHARE AND BASE YEAR FOR THE EXPANSION SPACE. Effective as of the Expansion Commencement Date and continuing throughout the Extended Term (i) Tenant's Proportionate Share of any increase in Operating Expenses for the Expansion Space only shall be fifteen point one eight percent (15.18%) and (ii) the Base Year shall be the calendar year 1998. 6. BASE YEAR FOR THE EXISTING PREMISES. Section II.M. of the Lease is hereby amended to insert a Base Year for the Existing Premises of 1999, which Base Year shall be effective as of October 1, 1999. Notwithstanding the foregoing, Tenant's Proportionate Share of Excess Expenses for the Existing Premises for the period prior to October 1, 1999 shall be calculated based on a 1996 Base Year as indicated in the Lease. 7. TENANT IMPROVEMENTS. Tenant Improvements in the Expansion Space shall be installed and constructed in accordance with the terms of the Tenant Work Letter attached hereto as Exhibit "B" and made a part hereof. The construction of the Tenant Improvements will be governed by the Tenant Work Letter and not the terms of Section 8 of the Lease. 8. PARKING. Effective as of the Expansion Commencement Date and continuing throughout the Extended Term, Section II.T. of the Lease shall be amended to provide that Tenant shall rent from Landlord a total of one hundred twenty-seven (127) parking passes for use in the Building's parking facility of which one hundred nineteen (119) such passes shall be unreserved parking passes and the eight (8) remaining passes shall be reserved parking spaces. The reserved spaces shall be contiguous to Tenant's existing reserved spaces in the Building parking facility, but in no event shall the total number of reserved spaces exceed eight (8) spaces. Tenant's rental and use of such additional parking passes shall be in accordance with, and subject to, all provisions of Section 28 of the Lease; provided, however that the monthly parking rates for such passes shall be amended as stated herein. The parking passes shall be provided to Tenant free of charge from the Expansion Commencement Date through February 29, 2000. Commencing on March 1, 2000, all unreserved parking passes rented by Tenant shall be at the rate of Twenty-five Dollars ($25.00) per unreserved pass per month and the reserved parking spaces shall be at the rate of Fifty Dollars ($50.00) per pass per month. 9. SECURITY DEPOSIT. Tenant has previously deposited with Landlord Eighteen Thousand Twenty-One and 85/100 Dollars ($18,021.85) as a Security Deposit under the Lease. Concurrently with Tenant's execution of this First Amendment, Tenant shall deposit with Landlord an additional Forty-Eight Thousand Six Hundred and 70/100 Dollars ($48,600.70), for a total Security Deposit under the Lease, as amended herein, of Sixty-Six Thousand Six Hundred -2- Twenty-Two and 55/100 Dollars ($66,622.55). Landlord shall continue to hold the Security Deposit as increased herein in accordance with the terms and conditions of Attachment 1, Section 24 of the Lease. 10. SIGNAGE/DIRECTORY. 10.1 LOBBY/SUITE SIGNAGE. Provided Tenant is not in default under the Lease (as amended by this First Amendment), Tenant, at Tenant's sole cost and expense, shall have the right to two (2) lines in the lobby directory of the Building during the Extended Term. In addition, provided Tenant is not in default under the Lease (as amended by this First Amendment), Tenant shall have the right, at Tenant's sole cost and expense (or as a charge to the Improvement Allowance pursuant to the Tenant Work Letter attached hereto as Exhibit "B"), to install Building standard suite signage designated by Landlord ("TENANT'S SIGNAGE"). Tenant's Signage shall be subject to Landlord's approval as to size, design, location, graphics, materials, colors and similar specifications and shall be consistent with the exterior design, materials and appearance of the Building and the Building's signage program and shall be further subject to all applicable local governmental laws, rules, regulations, codes and other governmental approvals and any applicable covenants, conditions and restrictions. Tenant's Signage shall be personal to the Original Tenant (as defined in Section II below) and may not be assigned to any assignee or sublessee, or any other person or entity. Landlord has the right, but not the obligation, to oversee the installation of Tenant's Signage. Upon the expiration of the Extended Term, or other earlier termination of the Lease, as amended by this First Amendment, Tenant shall be responsible for any and all costs associated with the removal of Tenant's Signage, including, but not limited to, the cost to repair and restore the Building to its original condition, normal wear and tear excepted. 10.2 BUILDING TOP SIGNAGE. Subject to this Section 10.2, Tenant shall be entitled to install, at its sole cost and expense, one (1) sign on the exterior of the Building identifying Tenant, at the highest point possible on the building ("SIGNAGE"). The graphics, materials, size, color, design, lettering, lighting (if any), specifications and exact location of the Signage (collectively, the "SIGNAGE SPECIFICATIONS") shall be subject to the prior written approval of Landlord, which approval should not be unreasonably withheld. In addition, the Signage and all Signage Specifications therefore shall be subject to (i) Tenant's receipt of all required governmental permits and approvals, (ii) all applicable governmental laws and ordinances, (iii) any existing sign rights of other tenants of the Building and (iv) all covenants, conditions and restrictions affecting the Building. Tenant hereby acknowledges that, notwithstanding Landlord's approval of the Signage and/or the Signage Specifications therefor, Landlord has made no representations or warranty to Tenant with respect to the probability of obtaining such approvals and permits. In the event Tenant does not receive the necessary permits and approvals for the Signage, Tenant's and Landlord's rights and obligations under the remaining provisions of the Lease, as amended by this First Amendment, shall not be affected. The cost of installation of the Signage, as well as all costs of design and construction of such Signage and all other costs associated with such Signage, including, without limitation, permits, maintenance and repair, shall be the sole responsibility of Tenant. Notwithstanding anything to the contrary contained herein, in the event that at any time during the Extended Term (or any Option Term, if applicable), Tenant fails to occupy at least 35,346 rentable square feet in the building, Tenant's right to the Signage shall thereupon terminate and Tenant shall remove such Signage as provided in this Section 10.2 below. The rights to the Signage shall be personal to the Original Tenant and may not be transferred. Should the Signage require maintenance or repairs as determined in Landlord's reasonable judgment, Landlord shall have the right to provide written notice thereof to Tenant and Tenant shall cause such repairs and/or maintenance to be performed within thirty (30) days after receipt of such notice from Landlord at Tenant's sole cost and expense. Should Tenant fail to perform such maintenance and repairs within the period described in the immediately preceding sentence, Landlord shall have the right to cause such work to be performed and to charge Tenant, as Additional Rent, for the cost of such work. Upon the expiration or earlier termination of the Lease, as amended by this First Amendment and any applicable Option Term (or the termination of Tenant's Signage right as described above), Tenant shall, at Tenant's sole cost and expense, cause the Signage to be removed from the exterior of the Building and shall cause the exterior of the Building to be restored to the condition existing prior to the placement of such Signage. If Tenant fails to remove such Signage and to restore the exterior of the Building as provided in the -3- immediately preceding sentence within thirty (30) days following the expiration or early termination of the Lease, as amended by this First Amendment, then Landlord may perform such work, and all costs and expenses incurred by Landlord in so performing such work shall be reimbursed by Tenant to Landlord within ten (10) days after Tenant's receipt of invoice therefor. The immediately preceding sentence shall survive the expiration or earlier termination of the Lease, as amended by this First Amendment. Any signs, notices, logos, pictures, names or advertisements which are installed and that have not been individually approved by Landlord may be removed without notice by Landlord at the sole expense of Tenant. Except as provided in this Section 10 above, Tenant may not install any signs on the exterior or roof of the Building or the common areas of the Building or the Land. 11. OPTION TO EXTEND. Section II.G. of the Lease is hereby deleted in its entirety and in lieu thereof Landlord hereby grants to the Tenant named herein (the "ORIGINAL TENANT") one (1) option ("OPTION") to extend the Extended Term for a period of four (4) years ("OPTION TERM"), which option shall be exercisable only by written notice delivered by Tenant to Landlord set forth below. The rights contained in this Section 11 shall be personal to the Original Tenant and may only be exercised by the Original Tenant (and not any assignee, sublessee or other transferee of the Original Tenant's interest in the Lease, as amended herein) if the Original Tenant occupies the entire Existing Premises and Expansion Space as of the date of Tenant's Acceptance (as defined in Section 11(b) below). (a) OPTION RENT. The rent payable by Tenant during the Option Term ("OPTION RENT") shall be equal to the "Market Rent" (defined below). "MARKET RENT" shall mean the applicable Monthly Base Rent, including all escalations, operating expenses, additional rent and other charges at which tenants, as of the commencement of the Option Term, are leasing non-sublease, non-encumbered, space comparable in size, location and quality to the Premises in renewal transactions for a term comparable to the Option Term which comparable space is located in office buildings comparable to the Building in the University Towne Center area, taking into consideration the value of the existing improvements in the Premises to Tenant, as compared to the value of the existing improvements in such comparable space, with such value to be based upon the age, quality and layout of the improvements and the extent to which the same could be utilized by Tenant with consideration given to the fact that the improvements existing in the Premises are specifically suitable to Tenant. (b) EXERCISE OF OPTION. The Option shall be exercised by Tenant only in the following manner: (i) Tenant shall not be in default, and shall not have been in default under the Lease, as amended herein, more than once after the expiration of any applicable cure periods, on the delivery date of the Interest Notice and Tenant's Acceptance; (ii) Tenant shall deliver written notice ("INTEREST NOTICE") to Landlord not more than twelve (12) months nor less than nine (9) months prior to the New Termination Date stating that Tenant is interested in exercising the Option; (iii) within fifteen (15) business days of Landlord's receipt of Tenant's written notice, Landlord shall deliver notice ("OPTION RENT NOTICE") to Tenant setting forth the Option Rent; and (iv) if Tenant desires to exercise such Option, Tenant shall provide Landlord written notice within fifteen (15) days after receipt of the Option Rent Notice ("TENANT'S ACCEPTANCE") and upon and concurrent with such exercise, Tenant may, at its option, object to the Option Rent contained in the Option Rent Notice. Tenant's failure to deliver the Interest Notice or Tenant's Acceptance on or before the dates specified above shall be deemed to constitute Tenant's election not to exercise the Option. If Tenant timely and properly exercises its Option, the Extended Term shall be extended for the Option Term upon all of the terms and conditions set forth in the Lease, as amended herein, except that the rent for the Option Term shall be as indicated in the Option Rent Notice unless Tenant, concurrently with Tenant's Acceptance, objects to the Option Rent contained in the Option Rent Notice, in which case the parties shall follow the procedure and the Option Rent shall be determined, as set forth in Section 11(c) below. (c) DETERMINATION OF MARKET RENT. If Tenant timely and appropriately objects to the Market Rent in Tenant's Acceptance, Landlord and Tenant shall attempt to agree upon the Market Rent using their best good-faith efforts. If Landlord and Tenant fail to reach agreement within twenty-one (21) days following Tenant's Acceptance ("OUTSIDE AGREEMENT DATE"), then each party shall make a separate determination of the Market Rent which shall be submitted to each other and to arbitration in accordance with the following items (i) through (vii): -4- (i) Landlord and Tenant shall each appoint, within ten (10) days of the Outside Agreement Date, one arbitrator who shall by profession be a current real estate broker or appraiser of commercial high-rise properties in the immediate vicinity of the Project, and who has been active in such field over the last five (5) years. The determination of the arbitrators shall be limited solely to the issue of choosing either Landlord's or Tenant's submitted Market Rent as the deemed Market Rent, taking into account the requirements of item (b), above. (ii) The two arbitrators so appointed shall within five (5) business days of the date of the appointment of the last appointed arbitrator agree upon and appoint a third arbitrator who shall be qualified under the same criteria set forth hereinabove for qualification of the initial two arbitrators. (iii) The three arbitrators shall within fifteen (15) days of the appointment of the third arbitrator reach a decision as to whether the parties shall use Landlord's or Tenant's submitted Market Rent, and shall notify Landlord and Tenant thereof. (iv) The decision of the majority of the three arbitrators shall be binding upon Landlord and Tenant. (v) If either Landlord or Tenant fails to appoint an arbitrator within ten (10) days after the applicable Outside Agreement Date, the arbitrator appointed by one of them shall reach a decision, notify Landlord and Tenant thereof, and such arbitrator's decision shall be binding upon Landlord and Tenant. (vi) If the two arbitrators fail to agree upon and appoint a third arbitrator, or both parties fail to appoint an arbitrator, then the appointment of the third arbitrator or any arbitrator shall be dismissed and the matter to be decided shall be forthwith submitted to arbitration under the provisions of the American Arbitration Association, but subject to the instruction set forth in this item (c). (vii) The cost of arbitration shall be paid by Landlord and Tenant equally. 12. ASSIGNMENT AND SUBLETTING. Section 16(c) of Attachment I to the Lease is hereby amended to provide that, in the event of an assignment or sublease, Tenant shall pay to Landlord fifty percent (50%) of all sums referred to in Sections 16(c)(1) and 16(c)(2) of the Lease. 13. BROKERS. Each party represents and warrants to the other that no broker, agent or finder negotiated or was instrumental in negotiating or consummating this First Amendment other than CB Richard Ellis, Inc. Each party further agrees to defend, indemnify and hold harmless the other party from and against any claim for commission or finder's fee by any entity who claims or alleges that they were retained or engaged by the first party or at the request of such party in connection with this First Amendment. 14. SIGNING AUTHORITY. Concurrently with Tenant's execution of this First Amendment, Tenant shall provide to Landlord a copy of a resolution of the Board of Directors authorizing the execution of this First Amendment on behalf of Tenant, which copy of resolution shall be duly certified by the secretary or an assistant secretary of the corporation to be a true copy of a resolution duly adopted by the Board of Directors of said corporation and shall be in the form of Exhibit "C" or in some other form reasonably acceptable to Landlord. In the event Tenant fails to comply with the requirements set forth in this Section 14, then each individual executing this First Amendment shall be personally liable for all of Tenant's obligations in the Lease (as amended by this First Amendment). 15. DEFAULT. Tenant hereby represents and warrants to Landlord that, as of the date of this First Amendment, Tenant is in full compliance with all terms, covenants and conditions of the Lease and that there are no breaches or defaults under the Lease by Landlord or Tenant, and that Tenant knows of no events or circumstances which, given the passage of time, would constitute a default under the Lease by either Landlord or Tenant. 16. WAIVER OF JURY TRIAL. EACH PARTY HEREBY WAIVES ANY RIGHT TO TRIAL BY JURY IN ANY ACTION SEEKING SPECIFIC PERFORMANCE OF ANY PROVISION OF THE LEASE (AS AMENDED BY THIS FIRST -5- AMENDMENT), FOR DAMAGES FOR ANY BREACH UNDER THE LEASE (AS AMENDED BY THIS FIRST AMENDMENT), OR OTHERWISE FOR ENFORCEMENT OF ANY RIGHT OR REMEDY UNDER THE LEASE (AS AMENDED BY THIS FIRST AMENDMENT). 17. NO FURTHER MODIFICATION. Except as set forth in this First Amendment, all of the terms and provisions of the Lease shall apply with respect to the Expansion Space and shall remain unmodified and in full force and effect. Effective as of the Expansion Commencement Date, all references to the "Lease" shall refer to the Lease as amended by this First Amendment. IN WITNESS WHEREOF, this First Amendment has been executed as of the day and year first above written. "LANDLORD" ARDEN REALTY LIMITED PARTNERSHIP, a Maryland limited partnership By: ARDEN REALTY, INC., a Maryland corporation Its: Sole General Partner By: /s/ Victor J. Coleman ------------------------------ VICTOR J. COLEMAN Its: President and COO By: /s/ Andrew J. Sobel ------------------------------ ANDREW J. SOBEL Its: Exec. V.P. and Assistant Secretary "TENANT" FIRSTWORLD COMMUNICATIONS, INC. a Delaware corporation By: /s/ Bob Cerasoli ---------------------------------- Print Name: BOB CERASOLI Title: Senior Vice President By: /s/ G. Bradford Saunders ---------------------------------- Print Name: G. BRADFORD SAUNDERS Title: Asst. Sec. -6- EXHIBIT "A" OUTLINE OF EXPANSION SPACE [MAP] EXHIBIT "A" 1 OF 2 EXHIBIT "A" OUTLINE OF EXPANSION SPACE [MAP] EXHIBIT "A" 2 OF 2 EXHIBIT "B" TENANT WORK LETTER This Tenant Work Letter shall set forth the terms and conditions relating to the renovation of the tenant improvements in the Existing Premises and the Expansion Space. This Tenant Work Letter is essentially organized chronologically and addresses the issues of the construction of the Existing Premises and the Expansion Space, in sequence, as such issues will arise. SECTION 1 LANDLORD'S INITIAL CONSTRUCTION IN THE EXPANSION SPACE Landlord has constructed, at its sole cost and expense, the base, shell and core (i) of the Expansion Space, and (ii) of the floor of the Building on which the Expansion Space is located (collectively, the "BASE, SHELL AND CORE"). Tenant has inspected and hereby approves the condition of the Expansion Space and the Existing Premises and the Base, Shell and Core, and agrees that the Expansion Space and the Existing Premises and the Base, Shell and Core shall be delivered to Tenant in their current "as-is" condition. The renovation to the improvements in the Expansion Space and the Existing Premises shall be designed and constructed pursuant to this Tenant Work Letter. SECTION 2 IMPROVEMENTS 2.1 IMPROVEMENT ALLOWANCE, Tenant shall be entitled to a one-time improvement allowance (the "IMPROVEMENT ALLOWANCE") in the amount of $335,761.80 (based on $13.80 per usable square foot of the Expansion Space and $5.00 per usable square foot of the Existing Premises) for the costs relating to the initial design and construction of Tenant's improvements which are permanently affixed to the Expansion Space and Existing Premises (the "IMPROVEMENTS"). In no event shall Landlord be obligated to make disbursements pursuant to this Tenant Work Letter in a total amount which exceeds the Improvement Allowance and in no event shall Tenant be entitled to any credit for any unused portion of the Improvement Allowance not used by Tenant by February 1, 1999. Allocation of the Improvement Allowance between the Expansion Space and the Existing Premises shall be determined in Tenant's reasonable discretion. 2.2 DISBURSEMENT OF THE IMPROVEMENT ALLOWANCE. Except as otherwise set forth in this Tenant Work Letter, the Improvement Allowance shall be disbursed by Landlord (each of which disbursements shall be made pursuant to Landlord's disbursement process provided below) for costs related to the construction of the Improvements and for the following items and costs (collectively, the "IMPROVEMENT ALLOWANCE ITEMS"): (i) payment of the fees of the "Architect" and the "Engineers," as those terms are defined in Section 3.1 of this Tenant Work Letter, and payment of the fees incurred by, and the cost of documents and materials supplied by, Landlord and Landlord's consultants in connection with the preparation and review of the "Construction Drawings," as that term is defined in Section 3.1 of this Tenant Work Letter, (ii) the cost of permits and construction supervision fees; (iii) the cost of any changes in the Base, Shell and Core required by the Construction Drawings; (iv) the cost of any changes to the Construction Drawings or Improvements required by applicable building codes (the "CODE"); and (v) the "Landlord Coordination Fee," as that term is defined in Section 4.3 of this Tenant Work Letter. However, in no event shall more than $3.00 per usable square foot for the Expansion Space and $1.50 per usable square foot for the Existing Premises of the Improvement Allowance be used for the items described in (i) and (ii) above; any additional amount incurred as a result of (i) and (ii) above shall be deemed to constitute an Over-Allowance Amount. During the construction of the Improvements, Landlord shall make monthly disbursements of the Improvement Allowance for Improvement Allowance Items for the benefit of Tenant and shall authorize the release of monies for the benefit of Tenant as follows. EXHIBIT "B" 2.2.1 MONTHLY DISBURSEMENTS. On or before the first day of each calendar month, during the construction of the Improvements (or such other date as Landlord may designate), Tenant shall deliver to Landlord: (i) a request for payment of the "Contractor," as that term is defined in Section 4.1 of this Tenant Work Letter, approved by Tenant, in a form to be provided by Landlord, showing the schedule, by trade, of percentage of completion of the Improvements in the Expansion Space and the Existing Premises, detailing the portion of the work completed and the portion not completed; (ii) invoices from all of "Tenant's Agents," as that term is defined in Section 4.2 of this Tenant Work Letter, for labor rendered and materials delivered to the Expansion Space and the Existing Premises; (iii) executed mechanic's lien releases from all of Tenant's Agents which shall comply with the appropriate provisions, as reasonably determined by Landlord, of California Civil Code Section 3262(d); and (iv) all other information reasonably requested by Landlord. Tenant's request for payment shall be deemed Tenant's acceptance and approval of the work furnished and/or the materials supplied as set forth in Tenant's payment request. Thereafter, Landlord shall deliver a check to Tenant in payment of the lesser of (A) the amounts so requested by Tenant, as set forth in this Section 2.2.1, above, less a ten percent (10%) retention (the aggregate amount of such retentions to be known as the "FINAL RETENTION"), and (B) the balance of any remaining available portion of the Improvement Allowance (not including the Final Retention), provided that Landlord does not dispute any request for payment based on non-compliance of any work with the "Approved Working Drawings," as that term is defined in Section 3.4 below, or due to any substandard work, or for any other reason. Landlord's payment of such amounts shall not be deemed Landlord's approval or acceptance of the work furnished or materials supplied as set forth in Tenant's payment request. 2.2.2. FINAL RETENTION. Subject to the provisions of this Tenant Work Letter, a check for the Final Retention payable to Tenant shall be delivered by Landlord to Tenant following the completion of construction of the Expansion Space and the Existing Premises, provided that (i) Tenant delivers to Landlord properly executed mechanics lien releases in compliance with both California Civil Code Section 3262(d)(2) and either Section 3262(d)(3) or Section 3262(d)(4), (ii) Landlord has determined that no substandard work exists which adversely affects the mechanical, electrical, plumbing, heating, ventilating and air conditioning, life-safety or other systems of the Building, the curtain wall of the Building, the structure or exterior appearance of the Building, or any other tenant's use of such other tenant's leased premises in the Building and (iii) Architect delivers to Landlord a certificate, in a form reasonably acceptable to Landlord, certifying that the construction of the Improvements in the Expansion Space and the Existing Premises has been substantially completed. 2.2.3 OTHER TERMS. Landlord shall only be obligated to make disbursements from the Improvement Allowance to the extent costs are incurred by Tenant for Improvement Allowance Items. All Improvement Allowance Items for which the Improvement Allowance has been made available shall be deemed Landlord's property. 2.3 STANDARD TENANT IMPROVEMENT PACKAGE. Landlord has established specifications (the "SPECIFICATIONS") for the Building-standard components to be used in the construction of the Improvements in the Expansion Space and the Existing Premises (collectively, the "STANDARD IMPROVEMENT PACKAGE"), which SPECIFICATIONS are available upon request. The quality of Improvements shall be equal to or of greater quality than the quality of the Specifications, provided that Landlord may, at Landlord's option, require the Improvements to comply with certain Specifications. SECTION 3 CONSTRUCTION DRAWINGS 3.1 SELECTION OF ARCHITECT/CONSTRUCTION DRAWINGS. Tenant shall retain KMA Architects as its architect/space planner which architect/space planner has been reasonably approved by Landlord (THE "ARCHITECT") to prepare the "Construction Drawings," as that term is defined in this Section 3.1. Tenant shall also retain the engineering consultants designated by Landlord (the "ENGINEERS") to prepare all plans and engineering working drawings relating to the structural, mechanical, electrical, plumbing, HVAC and lifesafety work of the Improvements. The EXHIBIT "B" -2- plans and drawings to be prepared by Architect and the Engineers hereunder shall be known collectively as the "CONSTRUCTION DRAWINGS." All Construction Drawings shall comply with the drawing format and specifications as reasonably determined by Landlord, and shall be subject to Landlord's reasonable approval. Tenant and Architect shall verify, in the field, the dimensions and conditions as shown on the relevant portions of the base building plans, and Tenant and Architect shall be solely responsible for the same, and Landlord shall have no responsibility in connection therewith. Landlord's review of the Construction Drawings as set forth in this Section 3, shall be for its sole purpose and shall not imply Landlord's review of the same, or obligate Landlord to review the same, for quality, design, Code compliance or other like matters. Accordingly, notwithstanding that any Construction Drawings are reviewed by Landlord or its space planner, architect, engineers and consultants, and notwithstanding any advice or assistance which may be rendered to Tenant by Landlord or Landlord's space planner, architect, engineers, and consultants, Landlord shall have no liability whatsoever in connection therewith and shall not be responsible for any omissions or errors contained in the Construction Drawings. 3.2 FINAL SPACE PLAN. Tenant and the Architect shall prepare the final space plan for Improvements in the Expansion Space and the Existing Premises (collectively, the "FINAL SPACE PLAN"), which Final Space Plan shall include a layout and designation of all offices, rooms and other partitioning, their intended use, and equipment to be contained therein, and shall deliver the Final Space Plan to Landlord for Landlord's approval. 3.3 FINAL WORKING DRAWINGS. Architect and the Engineers shall complete the architectural and engineering drawings for the Expansion Space and the Existing Premises, and the final architectural working drawings in a form which is complete to allow subcontractors to bid on the work and to obtain all applicable permits (collectively, "FINAL WORKING DRAWINGS") and shall submit the same to Landlord for Landlord's approval. 3.4 PERMITS. The Final Working Drawings shall be approved by Landlord (the "APPROVED WORKING DRAWINGS") prior to the commencement of the construction of the Improvements. Tenant shall cause the Architect to immediately submit the Approved Working Drawings to the appropriate municipal authorities for all applicable building permits necessary to allow "Contractor," as that term is defined in Section 4.1, below, to commence and fully complete the construction of the Improvements (the "PERMITS"). No changes, modifications or alterations in the Approved Working Drawings may be made without the prior written consent of Landlord, which consent shall not be unreasonably withheld. SECTION 4 CONSTRUCTION OF THE IMPROVEMENTS 4.1 CONTRACTOR. A general contractor shall be retained by the Tenant to construct the Improvements. Such general contractor ("CONTRACTOR") shall be Neilson Dillingham or, in the event Landlord does not approve the qualifications of Neilson Dillingham (which are to be provided to Landlord for review), another general contractor shall be selected by Tenant and approved by Landlord. 4.2 TENANT'S AGENTS. All subcontractors, laborers, materialmen, and suppliers used by the Tenant (such subcontractors, laborers, materialmen, and suppliers, and the Contractor to be known collectively as "TENANT'S AGENTS") must be approved in writing by Landlord, which approval shall not be unreasonably withheld or delayed. If Landlord does not approve any of the Tenant's proposed subcontractors, laborers, materialmen or suppliers, the Tenant shall submit other proposed subcontractors, laborers, materialmen or suppliers for Landlord's written approval. In addition, Landlord reserves the right to require that any and all subcontractors be selected by a competitive bidding process. Notwithstanding the foregoing, the Tenant shall be required to utilize subcontractors designated by Landlord for any mechanical, electrical, plumbing, life-safety, sprinkler, structural and air-balancing work. 4.3 CONSTRUCTION OF IMPROVEMENTS BY CONTRACTOR. The Tenant shall independently retain, in accordance with Section 4.1 above, Contractor to construct the Improvements in EXHIBIT "B" -3- accordance with the Approved Working Drawings. The Tenant shall pay, or the Improvement Allowance shall be charged, a logistical coordination fee (the "LANDLORD COORDINATION FEE") to Landlord in an amount equal to five percent (5%) of the total amount of the construction contract and general conditions between the Tenant and the Contractor. 4.4 INDEMNIFICATION & INSURANCE. 4.4.1 INDEMNITY. Tenant's indemnity of Landlord as set forth in Article 10 of the Lease shall also apply with respect to any and all costs, losses, damages, injuries and liabilities related in any way to any act or omission of Tenant or Tenant's Agents. 4.4.2 REQUIREMENTS OF TENANT'S AGENT. Each of Tenant's Agents shall guarantee to Tenant and for the benefit of Landlord that the portion of the Improvements for which it is responsible shall be free from any defects in workmanship and materials for a period of not less than one (1) year from the date of completion thereof. All such warranties or guarantees as to materials or workmanship of or with respect to the Improvements shall be contained in the contract or subcontract and shall be written such that such guarantees or warranties shall inure to the benefit of both Landlord and Tenant, as their respective interests may appear, and can be directly enforced by either. Tenant covenants to give to Landlord any assignment or other assurances which may be necessary to effect such right of direct enforcement. 4.4.3 INSURANCE REQUIREMENTS. 4.4.3.1 GENERAL COVERAGES. All of Tenant's Agents shall carry worker's compensation insurance covering all of their respective employees, and shall also carry public liability insurance, including property damage, all with limits, in form and with companies as are required to be carried by Tenant as set forth in Section 9 of the Lease. 4.4.3.2 SPECIAL COVERAGES. Tenant shall carry "Builder's All Risk" insurance in an amount approved by Landlord covering the construction of the Improvements, and such other insurance as Landlord may require. Such insurance shall be in amounts and shall include such extended coverage endorsements as may be reasonably required by Landlord. 4.4.3.3 GENERAL TERMS. Certificates for all insurance carried pursuant to this Section 4.4.3.3 shall be delivered to Landlord before the commencement of construction of the Improvements and before the Contractor's equipment is moved onto the site. In the event that the Improvements are damaged by any cause during the course of the construction thereof, Tenant shall immediately repair the same at Tenant's sole cost and expense. Landlord may, in its discretion, require Tenant to obtain a lien and completion bond or some alternate form of security satisfactory to Landlord in an amount sufficient to ensure the lien-free completion of the Improvements and naming Landlord as a co-obligee. SECTION 5 MISCELLANEOUS 5.1 TENANT'S REPRESENTATIVE. The Tenant has designated Linda Armstrong as its sole representative with respect to the matters set forth in this Tenant Work Letter, who, until further notice to Landlord, shall have full authority and responsibility to act on behalf of the Tenant as required in this Tenant Work Letter. 5.2 LANDLORD'S REPRESENTATIVE. Prior to commencement of construction of Improvements, Landlord shall designate a representative with respect to the matters set forth in this Tenant Work Letter, who, until further notice to the Tenant, shall have full authority and responsibility to act on behalf of the Landlord as required in this Tenant Work Letter. 5.3 TIME OF THE-ESSENCE IN THIS TENANT WORK LETTER. Unless otherwise indicated, all references herein to a "number of days" shall mean and refer to calendar days. EXHIBIT "B" -4- 5.4 FINAL DRAWINGS PROVIDED TO LANDLORD. Notwithstanding anything to the contrary contained herein, upon completion of the Improvements pursuant to this Tenant Work Letter, Tenant shall provide Landlord with complete copies of all Construction Drawings, including, but not limited to, the Approved Working Drawings, which drawings shall be in a form approved by Landlord, but which shall be a reproducible form (i.e. C.A.D. discs) for Landlord's records and use. 5.5 COMPLETION OF IMPROVEMENTS DURING THE EXTENDED TERM. Tenant hereby agrees and acknowledges that the Improvements in the Expansion Space and/or the Existing Premises shall be constructed during the Term of the existing Lease and/or the Extended Term hereof and that the performance of such work shall not be deemed a constructive eviction nor shall Tenant be entitled to any abatement of Rent in connection therewith. 5.6 INDEPENDENT HVAC SYSTEM. Landlord and Tenant hereby acknowledge that Tenant may, as part of the Improvements to be performed in accordance with this Tenant Work Letter, install in the that part of the Expansion Space known as Suite 100 of the building located and addressed at 9339 Genesee Avenue ("HVAC SPACE"), an independent heating, ventilation and air conditioning system ("HVAC SYSTEM"), the electricity for which shall be separately metered at Tenant's sole cost and expense and for which Tenant shall make payment directly to the entity providing such electricity. Tenant shall, at Tenant's sole cost and expense, maintain a service and/or maintenance contract for such HVAC System with a contractor reasonably approved by Landlord, which contractor shall perform all maintenance and repairs on the HVAC System. Tenant hereby acknowledges that the HVAC System shall be part of the Improvements constructed in accordance with this Tenant Work Letter and shall be deemed Landlord's property upon the expiration or earlier termination of the Lease, as amended by this First Amendment, in accordance with Section 2.2.3 above. EXHIBIT "B" -5- EXHIBIT "C" CERTIFIED COPY OF BOARD OF DIRECTORS RESOLUTIONS OF FIRSTWORLD COMMUNICATIONS, INC. The undersigned, being the duly elected Corporate Secretary of Firstworld Communications, Inc., a Delaware corporation ("CORPORATION"), hereby certifies that the following is a true, full and correct copy of the resolutions adopted by the Corporation by unanimous written consent in lieu of a special meeting of its Board of Directors, and that said resolutions have not been amended or revoked as of the date hereof. RESOLVED, that the Corporation, is hereby authorized to execute, deliver and fully perform that certain document entitled First Amendment to Lease ("AMENDMENT") by and between the Corporation and Arden Realty Limited Partnership, a Maryland limited partnership, for the lease of space at 9333 and 9339 Genesee Avenue. RESOLVED FURTHER, that the Corporation is hereby authorized and directed to make, execute and deliver any and all, consents, certificates, documents, instruments, amendments, confirmations, guarantees, papers or writings as may be required in connection with or in furtherance of the Amendment (collectively with the Amendment, the "DOCUMENTS") or any transactions described therein, and to do any and all other acts necessary or desirable to effectuate the foregoing resolution. RESOLVED FURTHER, that the following officers acting together: _____________ as ____________ and _______________ as ______________ are authorized to execute and deliver the Documents on behalf of the Corporation, together with any other documents and/or instruments evidencing or ancillary to the Documents, and in such forms and on such terms as such officer(s) shall approve, the execution thereof to be conclusive evidence of such approval and to execute and deliver on behalf of the Corporation all other documents necessary to effectuate said transaction in conformance with these resolutions. Date: , 199 ---------------- -- ------------------------------------------- , Corporate Secretary ----------- EXHIBIT "C" EX-10.33 9 EXHIBIT 10.33 FIRST AMENDMENT TO AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT This First Amendment to Amended and Restated Investor Rights Agreement (the "AMENDMENT") is entered into as of September 28, 1998, by and among FirstWorld Communications, Inc., a Delaware corporation (the "COMPANY"), Colorado Spectra 1, LLC, a Colorado limited liability company ("SPECTRA 1"), Colorado Spectra 2, LLC, a Colorado limited liability company ("SPECTRA 2"), Colorado Spectra 3, LLC, a Colorado limited liability company ("SPECTRA 3") and Enron Capital & Trade Resources Corp., a Delaware corporation ("ENRON"). WHEREAS, the Company, Spectra 1, Spectra 2, Spectra 3, Enron and the other parties set forth on the Exhibits thereto entered into that certain Amended and Restated Investor Rights Agreement, dated as of April 13, 1998 (the "INVESTOR RIGHTS AGREEMENT"); and WHEREAS, the parties hereto acknowledge pursuant to that certain Employment Agreement, dated as of the date hereof, between the Company and Sheldon S. Ohringer, Mr. Ohringer has been granted a right of first refusal to purchase his pro rata share of certain Equity Securities (as defined in the Investor Rights Agreement) on terms substantially similar to those set forth in the Investor Rights Agreement; WHEREAS, pursuant to the terms of Section 5.5(a) of the Investor Rights Agreement, the Investor Rights Agreement may only be amended or modified upon the written consent of the Company, Spectra 3, Enron and the holders of a majority of the Registrable Securities (as defined in the Investor Rights Agreement); and WHEREAS, the parties hereto hold a majority of the Registrable Securities under the Investor Rights Agreement; and WHEREAS, the parties hereto desire to amend the Investor Rights Agreement as set forth below. NOW, THEREFORE, in consideration of the foregoing recitals and the mutual promises hereinafter set forth, the parties hereto agree as follows: 1. Section 4.1 of the Investor Rights Agreement is hereby deleted and replaced in its entirety by the following: "The Sturm Entities and Enron (each an "ELIGIBLE HOLDER") shall have a right of first refusal to purchase its pro rata share of all Equity Securities, as defined below, that the Company may from time to time propose to sell and issue after the date of this Agreement, other than the Equity Securities excluded by Section 4.6 hereof. Each such Eligible Holder's pro rata share is equal to the ratio of (A) the number of Demand Shares which such Holder holds (or could hold upon exercise of the Common Warrants) immediately prior to the issuance of such Equity Securities to (B) the total number of shares of the Company's outstanding Common Stock (including all shares of Common Stock issued or issuable upon conversion or exercise of any outstanding warrants, options or other convertible securities) immediately prior to the issuance of the Equity Securities. The term "Equity Securities" shall mean (i) any Common Stock or Preferred Stock of the Company, (ii) any security convertible, with or without consideration, into any Common Stock or Preferred Stock (including any option to purchase such a convertible security), (iii) any security carrying any warrant or right to subscribe to or purchase any Common Stock or Preferred Stock or (iv) any such warrant or right. The Company, the Sturm Entities and Enron acknowledge that, pursuant to the terms of an Employment Agreement dated as of September 28, 1998 (the "EMPLOYMENT AGREEMENT"), between the Company and Sheldon S. Ohringer, Mr. Ohringer was granted a right of first refusal to purchase his pro rata share of certain Equity Securities on terms substantially similar to those set forth herein. The Company, the Sturm Entities and Enron acknowledge that Mr. Ohringer is an "Eligible Holder" hereunder; however, Mr. Ohringer's right of first refusal will at all times be governed by the terms of the Employment Agreement." 2. Except as modified in this Amendment, the Investor Rights Agreement shall continue in full force and effect in accordance with its terms. 3. The Sturm Entities and Enron hereby acknowledge and agree that (i) the issuance of an option (the "STOCK OPTION") to purchase 2,805,000 shares of Series B Common Stock to Mr. Ohringer under the Employment Agreement and (ii) any subsequent issuance of the shares of Series B Common Stock underlying the Stock Option are "Excluded Securities" under Section 4.6 of the Investor Rights Agreement and, as such, the Sturm Entities and Enron do not have any "right of first refusal" with respect to the securities described in clauses (i) and (ii) of this Paragraph 3. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 2 The foregoing agreement is hereby executed in counterparts as of the date first above written. FIRSTWORLD COMMUNICATIONS, INC., a Delaware corporation By: /s/ Donald L. Sturm ---------------------------------------- Donald L. Sturm, Chief Executive Officer ENRON CAPITAL & TRADE RESOURCES CORP., a Delaware corporation By: /s/ C. Kevin Garland ---------------------------------------- C. Kevin Garland COLORADO SPECTRA 1, LLC, a Colorado limited liability company By: /s/ Donald L. Sturm ---------------------------------------- Donald L. Sturm, Manager COLORADO SPECTRA 2, LLC, a Colorado limited liability company By: /s/ Donald L. Sturm ---------------------------------------- Donald L. Sturm, Manager COLORADO SPECTRA 3, LLC, a Colorado limited liability company By: /s/ Donald L. Sturm ---------------------------------------- Donald L. Sturm, Manager 3 EX-12.1 10 EXHIBIT 12.1 EXHIBIT 12.1 FIRSTWORLD COMMUNICATIONS, INC. (formerly SpectraNet International) Computation of Ratio of Earnings to Fixed Charges (Dollars in Thousands)
YEAR ENDED SEPTEMBER 30, ---------------------------------------------------- 1994 1995 1996 1997 1998 ---- ---- ---- ---- ---- Pre-tax loss from continuing operations (418) (908) (3,856) (9,448) (28,625) Interest capitalized during the period -- -- -- (52) (450) ---- ---- ------ ------ ------- (418) (908) (3,856) (9,500) (29,075) ---- ---- ------ ------ ------- Fixed charges: Interest expense and amortization of debt discount and premium on all indebtedness 53 38 27 1,424 17,348 Interest portion of rentals (33% of rent expense) 16 24 36 120 183 ---- ---- ------ ------ ------- Total fixed charges 69 62 63 1,544 17,531 ---- ---- ------ ------ ------- Loss before income taxes and fixed charges (349) (846) (3,793) (7,956) (11,544) ---- ---- ------ ------ ------- ---- ---- ------ ------ ------- Ratio of earnings to fixed charges n/a n/a n/a n/a n/a ---- ---- ------ ------ ------- ---- ---- ------ ------ ------- Insufficiency of earnings to cover fixed charges 418 908 3,856 9,500 29,075 ---- ---- ------ ------ ------- ---- ---- ------ ------ -------
Page 1 EX-23.1 11 EXHIBIT 23.1 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 333-68195 and No. 333-65861) of FirstWorld Communications, Inc. of our report dated December 11, 1998 appearing on page F-2 of this Form 10-K. PRICEWATERHOUSECOOPERS LLP San Diego, California December 22, 1998 EX-27.1 12 EXHIBIT 27.1
5 YEAR SEP-30-1998 OCT-01-1997 SEP-30-1998 72,039,498 165,591,010 503,158 9,765 0 241,456,811 47,020,107 2,999,689 294,105,357 8,891,923 0 0 0 2,605 29,370,782 294,105,357 0 1,090,661 0 6,501,105 13,065,778 0 16,898,271 (28,625,126) 0 (28,625,126) 0 (4,730,667) 0 (33,355,793) 0 0
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