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FILED PURSUANT TO RULE 424(b)(4) IN CONNECTION WITH
REGISTRATION NUMBERS 333-6073 AND 333-6079
PROSPECTUS DATED SEPTEMBER 30, 1996
SUBJECT TO COMPLETION
8,976,922 SHARES
WINSTAR COMMUNICATIONS, INC.
COMMON STOCK
--------------------
This Prospectus relates to the issuance by the Company of up to 7,133,000
shares of Common Stock to the holders of the Company's 14% convertible senior
subordinated discount notes due 2005 (the "Convertible Notes") upon conversion
thereof. The Convertible Notes are convertible, at the option of the holder,
into that number of shares of Common Stock equal to the accreted value
("Accreted Value") of the Convertible Notes being converted (on the date of
conversion) divided by $20.625, subject to adjustment in certain events (the
"Conversion Ratio"). Accordingly, the number of shares of Common Stock issuable
upon conversion of the Convertible Notes will increase as the Accreted Value of
the Convertible Notes increases. On October 23, 1996, the date on which the
Convertible Notes are first convertible, the aggregate Accreted Value of the
Convertible Notes will be approximately $85.88 million, which would be
convertible into an aggregate of approximately 4,164,000 shares of Common Stock.
Immediately prior to maturity in October 2005, assuming no Convertible Notes
have yet been converted, the aggregate Accreted Value of the Convertible Notes
would be approximately $147.1 million, which would be convertible into an
aggregate of approximately 7,133,000 shares of Common Stock. If at any time
after October 23, 1996 the market price of the Common Stock exceeds certain
prices set forth herein, the Convertible Notes will automatically be converted
into the number of shares of Common Stock derived by application of the
Conversion Ratio.
This Prospectus also relates to the sale by certain financial institutions,
institutional investors and other persons ("Selling Stockholders") of up to
1,843,922 shares of Common Stock previously issued by the Company in private
placements or issuable upon conversion of certain other convertible promissory
notes and upon exercise of options and warrants, which convertible promissory
notes, options and warrants were sold in private placements. The Common Stock
may be offered from time to time by the Selling Stockholders through ordinary
brokerage transactions in the over-the-counter market, over the Nasdaq National
Market, in negotiated transactions or otherwise, at market prices prevailing at
the time of sale or at negotiated prices. See "Selling Stockholders and Plan of
Distribution."
The Common Stock is traded on the Nasdaq National Market under the symbol
"WCII." The last reported sale price of the Common Stock on the Nasdaq National
Market on September 30, 1996 was $16.625 per share.
The Company will not receive any cash proceeds from the issuance of Common
Stock upon conversion of the Conversion Shares, but will immediately retire,
without the payment of additional consideration, the debt attributable to the
Convertible Notes converted. The Company will not derive any proceeds from the
sale of Common Stock by the Selling Stockholders. All costs, expenses and fees
in connection with the registration of the shares of Common Stock offered by
this Prospectus will be borne by the Company. Such expenses are estimated at
approximately $700,000.
<PAGE>
--------------
SEE "RISK FACTORS" BEGINNING ON PAGE 15 OF THIS
PROSPECTUS FOR INFORMATION THAT SHOULD BE
CONSIDERED BY PROSPECTIVE INVESTORS.
--------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
--------------
The date of this Prospectus is September 30, 1996
<PAGE>
No person is authorized in connection with the offering made hereby to give
any information or to make any representation not contained in this Prospectus
and, if given or made, such information or representation must not be relied
upon as having been authorized by the Company or any Underwriter. This
Prospectus does not constitute an offer to sell or a solicitation of an offer to
buy any security other than the Common Stock offered hereby, nor does it
constitute an offer to sell or a solicitation of an offer to buy any securities
offered hereby, to any person in any jurisdiction in which it is unlawful to
make any such offer or solicitation to such person. Neither the delivery of
this Prospectus nor any sale made hereunder shall under any circumstance imply
that the information contained herein is correct as of any date subsequent to
the date hereof.
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TABLE OF CONTENTS
Page
----
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE. . . . . . . . . . . . . . 3
PROSPECTUS SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
PRICE RANGE OF COMMON STOCK. . . . . . . . . . . . . . . . . . . . . . . . 30
DIVIDEND POLICY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
CAPITALIZATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
SELECTED FINANCIAL DATA. . . . . . . . . . . . . . . . . . . . . . . . . . 32
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS. . . . . . . . . . . . . . 34
BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
PRINCIPAL STOCKHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . 72
SELLING STOCKHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
DESCRIPTION OF CERTAIN INDEBTEDNESS. . . . . . . . . . . . . . . . . . . . 77
DESCRIPTION OF CAPITAL STOCK . . . . . . . . . . . . . . . . . . . . . . . 80
SHARES ELIGIBLE FOR FUTURE SALE. . . . . . . . . . . . . . . . . . . . . . 81
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS. . . . . . . . . . 82
LEGAL MATTERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87
EXPERTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87
AVAILABLE INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . . 88
WIRELESS FIBER-SM- IS A SERVICE MARK OF WINSTAR COMMUNICATIONS, INC.
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INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents or information have been filed by the Company with
the Securities and Exchange Commission (the "Commission") pursuant to the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and are
incorporated herein by reference:
(1) Transition Report on Form 10-KSB for the ten months ended December 31,
1995;
(2) Quarterly Report on Form 10-Q for the quarters ended March 31, 1996
and June 30, 1996;
(3) Proxy Statement dated May 3, 1996; and
(4) The description of the Company's Common Stock contained in the
Company's registration statement on Form 8-A under the Exchange Act
(File No. 1-10726).
All documents subsequently filed by the Company with the Commission
pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date
of this Prospectus and prior to the termination of the offering covered by this
Prospectus shall be deemed incorporated by reference into this Prospectus and to
be a part hereof from the date of filing of such documents. Any statement
contained in a document incorporated by reference herein shall be deemed to be
modified or superseded for purposes of this Prospectus to the extent that a
statement contained herein modifies or supersedes such statement. Any statement
so modified or superseded shall not be deemed, except as so modified or
superseded, to constitute a part of this Prospectus.
The Company hereby undertakes to provide without charge to each person to
whom a copy of this Prospectus has been delivered, upon the written or oral
request of such person to WinStar Communications, Inc., 230 Park Avenue, New
York, New York 10169 (telephone 212-687-7577), Attention: Investor Relations
(extension 153), a copy of any and all of the documents referred to above (other
than exhibits to such documents) which have been incorporated by reference in
this Prospectus.
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PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE MORE
DETAILED INFORMATION AND FINANCIAL STATEMENTS, INCLUDING NOTES THERETO,
APPEARING ELSEWHERE IN THIS PROSPECTUS. REFERENCES HEREIN TO THE "COMPANY" OR
"WINSTAR" REFER TO WINSTAR COMMUNICATIONS, INC. AND, WHERE APPROPRIATE, ITS
SUBSIDIARIES. CERTAIN OF THE INFORMATION CONTAINED IN THIS SUMMARY AND
ELSEWHERE IN THIS PROSPECTUS, INCLUDING UNDER "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND INFORMATION WITH
RESPECT TO THE COMPANY'S CAP AND CLEC (AS DEFINED BELOW) BUSINESSES AND RELATED
STRATEGY AND FINANCING, ARE FORWARD-LOOKING STATEMENTS. FOR A DISCUSSION OF
IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THE
FORWARD-LOOKING STATEMENTS, SEE "RISK FACTORS" AND "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS." EFFECTIVE JANUARY 1,
1996, THE COMPANY CHANGED ITS FISCAL YEAR END FROM THE LAST DAY IN FEBRUARY TO
DECEMBER 31.
THE COMPANY
The Company delivers telecommunications services in the United States as a
competitive access provider ("CAP"), competitive local exchange carrier
("CLEC"), and long distance and private network services provider. The Company
utilizes its Wireless Fiber-SM- services as a key component of its transmission
capabilities. Wireless Fiber services deliver high quality transmission via
digital, wireless capacity in the 38.6 to 40 gigahertz portion of the radio
spectrum ("38 GHz"), where the Company is the holder of the largest aggregate
amount of bandwidth in the United States pursuant to licenses ("Wireless
Licenses") granted by the Federal Communications Commission ("FCC"). The
Wireless Licenses enable the Company to provide Wireless Fiber services in the
31 most populated Metropolitan Statistical Areas ("MSAs") in the United States,
including Atlanta, Boston, Chicago, Los Angeles, New York and San Francisco,
among others, and 41 of the 45 most populated MSAs. The MSAs covered by the
Wireless Licenses include more than 100 cities with populations exceeding
100,000 and encompass an aggregate population of almost 110 million. The
Company recently has entered into three agreements pursuant to which it has
agreed to acquire a significant number of additional 38 GHz licenses as
described below under "-- Pending Acquisition of Milliwave" and "-- Other Recent
Developments -- Pending Acquisition of Locate" and "-- Pending Acquisition of
Pinnacle." By exploiting its Wireless Fiber capabilities, the Company seeks to
become a value-added, economical provider of local telecommunications services
and an attractive alternative to the local exchange carriers ("LECs"), such as
the regional Bell operating companies ("RBOCs"), in substantially all of the
metropolitan areas covered by the Wireless Licenses.
The Company believes that its Wireless Fiber services provide it with
certain critical competitive advantages in the evolving telecommunications
market. Wireless Fiber services are engineered to provide 99.999%
reliability, with a 10(-13) bit error rate (unfaded), performance equivalent
to that provided by fiber optic-based networks and exceeding that generally
provided by copper-based networks. Wireless Fiber services provide a high
capacity, cost-effective solution for voice and broadband applications,
providing data transfer rates equivalent to fiber-optic products and
significantly exceeding those provided by the fastest dial-up modems and
integrated services digital network ("ISDN") lines. The above-ground,
installation-to-meet-demand nature of the Company's Wireless Fiber services
enables the Company to provide services to a customer more quickly and less
expensively than telecommunications providers that rely on the installation
of fiber optic- or copper-based lines for connection to customer locations.
As a CAP, the Company provides local access services that utilize the
Company's Wireless Fiber services on a point-to-point basis, primarily to
other telecommunications providers and large institutional end users. Since
late 1994, the Company has focused on the development and initial marketing
of its Wireless Fiber-based local access services. After an initial
market-education phase, in which the Company demonstrated the efficacy and
reliability of its Wireless Fiber services, principally though the use of
field demonstrations and the installation of trial-basis Wireless
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Fiber links, the Company began receiving initial orders for Wireless Fiber
service. Since October 1995, the number of customers utilizing the Company's
Wireless Fiber-based services has increased significantly and include such
companies as American Communications Services, Inc., Ameritech Cellular,
Cellular One, Geotek Communications Inc., IntelCom Group (U.S.A.), Inc.,
("IntelCom"), Reed Elsevier PLC, Siemens Stromberg-Carlson, Teleport
Communications Group, Inc. ("Teleport") and Western Wireless Corporation. In
addition, the Company has entered into master service agreements with Electric
Lightwave, Inc. (a subsidiary of Citizens Utilities ("Electric Lightwave")),
MCImetro Access Transmission Services, Inc. ("MCImetro," a subsidiary of MCI
Communications Corp. ("MCI")), ICG Telecom Group ("ICG," a subsidiary of
IntelCom) and Century Telephone Enterprises, Inc. ("Century Telephone"), under
which such companies are expected to utilize Wireless Fiber services as a
component of their own telecommunications networks. The Company is in the
process of negotiating additional master service agreements with other
telecommunications providers. Although the Company believes it has made
substantial progress in the initial rollout of its CAP business, the Company
currently is generating only nominal revenues from such business.
In addition to continuing the expansion of its CAP business, the Company is
implementing its CLEC business on an accelerated basis to exploit opportunities
emerging as a result of the Telecommunications Act of 1996 (the
"Telecommunications Act"), which was enacted in February 1996. The
Telecommunications Act provides for the removal of legal barriers to entering
the local exchange market on a nationwide basis and will permit CLECs, such as
the Company, to offer a full range of local exchange services, including local
dial tone, custom calling features and toll services within Local Access
Transport Areas ("LATAs"), to both business and residential customers. The
Company recently initiated its CLEC business, offering local exchange services
to end users on a retail basis. An integral part of the Company's CLEC business
strategy is the creation of a Wireless Fiber-based infrastructure on a city-by-
city basis that will allow the Company to provide a broad range of local
exchange services within cities covered by the Wireless Licenses. This
infrastructure will utilize the Company's Wireless Fiber capabilities, together
with switches that will be acquired or leased by the Company and facilities
leased or purchased from other carriers, to originate and terminate local
traffic. The Company believes that its Wireless Fiber capabilities will provide
it with a critical economic advantage over many other service providers because
of the high costs such other service providers encounter in connecting end users
to fiber optic backbone. In building its infrastructure, the Company is
following a building-centric network plan, pursuant to which the Company is
identifying strategically-located buildings in areas covered by its Wireless
Licenses that can serve as hubs for its network in each city. These hub sites
will be connected via Wireless Fiber links to end user customers and fiber optic
facilities leased or purchased from other carriers. The Company believes that
establishing a limited number of hub buildings (generally less than a dozen) in
each metropolitan area where it has Wireless Licenses will enable it to address
the vast majority of all commercial buildings targeted by the Company in that
area. The buildings the Company is initially targeting each have more than
100,000 square feet of space and, in many instances, are not served by other
CAPs or CLECs. The Company estimates that there are more than 8,000 buildings
in this target group, populated by approximately 9.7 million people using more
than 2.1 million phone lines, and that these buildings represent an aggregate
local exchange service market exceeding $3.3 billion per annum. These estimates
do not include multi-dwelling residential buildings, universities, hospitals or
buildings occupied by a single tenant, and account only for voice lines and not
data lines.
STRATEGY
By exploiting its Wireless Fiber capabilities, the Company seeks to become
a leading provider of integrated telecommunications services in the United
States. Key elements of the Company's strategy include:
ACCELERATING ROLLOUT OF CLEC SERVICES AND LEVERAGING OF WIRELESS FIBER
CAPABILITIES. The Company has commenced offering local exchange services on a
limited, resale basis in New York City and
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it is anticipated that the Company will begin offering such services in a number
of additional cities during the next nine months. As the Company commences its
CLEC business in each city, in order to gain initial market penetration in that
city, it intends to initially resell the local exchange services of other
service providers, such as other CLECs and the incumbent LECs, until it has
established the Wireless Fiber and switch-based infrastructure required to
provide its own local exchange services in that city. The Company currently
intends to install approximately 17 main switches and 24 remote nodes during the
next three years and plans to install its first main switch in New York City in
October 1996. In July 1996, the Company entered into a three-year agreement
with Lucent Technologies Inc. ("Lucent") allowing the Company to purchase the
switching systems and related equipment and software it will need to build its
CLEC infrastructure. Under the agreement, switches will be provided to the
Company at discounted prices so long as the Company purchases certain minimum
numbers of switches during each year of the agreement. The Company is hiring
sales and marketing personnel to commence marketing efforts that primarily will
target businesses located in those buildings in which the Company's Wireless
Fiber services can be utilized for rapid, cost-effective, high-capacity linkage
to fiber-based networks. By utilizing its Wireless Fiber services to originate
and terminate customer traffic without connecting to end users through the
extension of fiber-optic lines or using the facilities of the LECs, the Company
believes that it will be able to provide many types of bundled local exchange,
long distance, Internet access, enhanced communications and information services
to its target customers at lower cost than many of its competitors, with equal
or better quality.
CONTINUING TO MARKET CAP SERVICES TO OTHER TELECOMMUNICATIONS PROVIDERS.
The Company is continuing to target other telecommunications service providers
in marketing its Wireless Fiber-based local access services. The Company
believes that its Wireless Fiber services present an attractive, economical
vehicle for other telecommunications service providers to extend their own
networks and service territories, especially as they seek to rapidly penetrate
new markets opening up to them as a result of the Telecommunications Act. By
having its Wireless Fiber services packaged with the service offerings of other
telecommunications providers or utilized as a seamless component of such
providers' own telecommunications networks, the Company also hopes to leverage
the marketing and distribution capabilities of such providers. The Company
currently offers its Wireless Fiber services to long distance carriers; other
CAPs and CLECs; providers of personal communications services ("PCS") and
cellular and specialized mobile radio services (collectively "CMRS providers");
LECs and end users. The Company also markets its Wireless Fiber services to
telecommunications service providers as viable, cost-efficient alternate routes
for their telecommunications traffic in situations where primary routes are
incapacitated and/or network reliability concerns require alternate
telecommunications paths.
PROVIDING WIRELESS INTERNET ACCESS AND PRIVATE NETWORK SERVICES. The
Company is marketing its Wireless Fiber services to take advantage of the
characteristics that make it an attractive solution for entities seeking cost-
effective, high capacity Internet access and private voice and data network
services. The total amount of bandwidth of each 38 GHz channel is 100 MHz,
which supports high broadband capability. One Wireless Fiber DS-3 link
provides transfer rates which are over 1,500 times the rate of the fastest dial-
up modem currently in use and over 350 times the rate of the fastest ISDN line
currently in use. In addition to accommodating standard voice and data
requirements, Wireless Fiber services can allow end users to receive real time,
full motion video and 3-D graphics and to utilize highly interactive
applications on the Internet and other networks. The Company offers its
Wireless Fiber services to businesses, government agencies and institutions with
multiple locations that seek to establish their own independent local
telecommunications systems for dedicated private line voice and data networks,
including LAN and WAN applications. The Company also recently established its
first major relationship with an Internet service provider (as described below
under "-- Recent Developments -- Agreement with Digex") and is actively pursuing
relationships with additional Internet service providers.
6
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EXPLOITING FIRST TO MARKET AND LEADING SPECTRUM HOLDER ADVANTAGES. The
Company currently enjoys a "first-to-market" advantage as one of the few holders
of 38 GHz licenses with an established operating and management infrastructure
and the capital necessary to rapidly exploit and roll out its 38 GHz services on
a commercial basis. The Company believes that its competitive advantage is
further strengthened by its position as the holder of the largest aggregate
amount of 38 GHz bandwidth capacity in the United States and by the broad
geographic scope allocated under its Wireless Licenses. The Company holds 43
Wireless Licenses, 30 of which provide for 400 MHz of bandwidth capacity per
licensed area and 13 of which provide for 100 MHz of bandwidth capacity per
licensed area, and which allow the Company to address an aggregate of more than
400 million channel pops (i.e, the aggregate population in the areas covered by
the Wireless Licenses multiplied by the aggregate number of 100 MHz channels
allocated under those licenses). Based on existing and proposed FCC
regulations, the Company believes that it will be difficult, in the near term,
for other entities seeking to provide wireless local telecommunications services
similar to those of the Company to obtain the aggregate bandwidth capacity and
widespread geographic coverage afforded to the Company under its Wireless
Licenses.
EXPANDING AND IMPROVING THE COMPANY'S LONG DISTANCE OPERATIONS. The
Company is seeking to expand and improve its long distance operations by (i)
bundling its resale of long distance services with its local telecommunications
services, (ii) broadening its business customer base and increasing customer
retention rates, (iii) improving operating efficiencies by reducing costs
associated with the provision of its long distance services, (iv)
differentiating its long distance services, most notably, in the near term,
through the use of less complicated billing systems, (v) using intelligent
network platforms for the provision of enhanced telecommunications services, and
(vi) acquiring and integrating customer bases from other telecommunications
providers. The Company also anticipates that it will be able to leverage upon
the billing systems and intelligent network platforms developed in connection
with its long distance services to enhance the marketability of its local
telecommunications services.
ACQUIRING CONTENT TO COMPLEMENT TELECOMMUNICATIONS SERVICE OFFERINGS. The
Company believes that, over time, participants in the telecommunications market
increasingly will seek to offer "content" -- from information programming,
sports, weather, business and stock market information to music, films and
literature -- to differentiate their services and attract traffic onto their
transmission networks and that the ability to deliver entertainment and
information content to consumers will play an increasingly important role in
consumers' choice of a telecommunications provider. Accordingly, as a
complement to its telecommunications service offerings, the Company produces and
distributes information and entertainment content, focusing on niche programming
such as documentaries, foreign films and multimedia sports programming. The
Company believes that, in the future, it will be able to bundle proprietary
content that it controls with various telecommunications services it offers to
provide higher-margin products and services.
PENDING ACQUISITION OF MILLIWAVE
In June 1996, the Company entered into an agreement to acquire (the
"Milliwave Acquisition") all of the outstanding partnership interests in
Milliwave Limited Partnership ("Milliwave"), a holder of 38 GHz licenses (the
"Milliwave Licenses") that allow for the provision of services in more than 80
major markets, encompassing an aggregate population of greater than 160 million.
The purchase price for the Milliwave Merger will be $40 million in cash and 3.4
million shares of Common Stock (which had an aggregate market value of $85
million based on a $25 per share market price at the time the Milliwave Merger
Agreement was executed). The number of shares to be issued in connection with
the Milliwave Merger is subject to upward or downward adjustment depending on
the average market price of the Common Stock for the ten trading days prior to
the consummation of the transaction (i.e., upward adjustment if the average
price is below $22.06 per share and downward adjustment if the average price is
above $27.94 per share); provided that the Company may determine not to
consummate the transaction if the adjustment results in the Company being
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required to issue in excess of 4.5 million shares. All of the consideration is
to be paid at the time the Milliwave Merger is consummated; however, the Company
has placed $5 million of the cash consideration in an escrow account pending
consummation of the Milliwave Merger. The Milliwave Acquisition is subject to
certain regulatory approvals, but is expected to be consummated in the second
quarter of 1997. Milliwave has generated insignificant revenue to date. The
agreements provide for the Company to assist in the development and management
of the Milliwave Licenses during the interim period prior to the consummation of
the Milliwave Acquisition. Upon consummation of the Milliwave Acquisition,
Dennis Patrick, Chief Executive Officer of Milliwave and former Chairman of the
FCC, is expected to join the Company's Board of Directors.
The Company expects that the Milliwave Acquisition will expand its
geographic coverage, provide additional capacity in existing markets, provide
economies of scale and permit the Company to achieve greater network efficiency.
The following chart sets forth the change in the Company's Wireless License
asset base after giving effect to the consummation of the Milliwave Acquisition:
WinStar
WinStar Milliwave Pro Forma
------- --------- ---------
Population Coverage (millions). . . . . . . . 109 160 170(1)
Channel Pops (millions) . . . . . . . . . . . 413 160 573
Licensed Areas with Multiple Channels . . . . 30 0 39(2)
- ----------------
(1) Pro forma population coverage is not additive because of overlapping
licensed areas.
(2) Milliwave has only one channel in each of its licensed areas; however,
when combined with WinStar, the overlapping single channel licensed
areas increase WinStar's pro forma multiple channel coverage by nine
licensed areas, bringing the aggregate population covered by multiple
channels to over 100 million.
OTHER RECENT DEVELOPMENTS
In furtherance of its strategy, the Company recently has accomplished the
following:
COMMENCEMENT OF ROLLOUT OF CLEC SERVICES. In April 1996, the Company
commenced providing local exchange services to customers in New York City. The
Company also commenced a program designed to obtain, by the end of 1999,
authorization to operate as a CLEC in substantially all of the states where the
Company has Wireless Licenses. The Company currently is authorized to operate
as a CLEC in California, Colorado, Connecticut, Florida, Georgia, Illinois,
Massachusetts, Michigan, New York, Pennsylvania, Tennessee, Texas, Washington
and Wisconsin and is seeking or intends to seek such authorization in a number
of additional states. It also is in the process of negotiating interconnection
agreements with various local exchange service providers, including incumbent
LECs, under which the Company will obtain services on an unbundled basis. The
Company has entered into a number of interconnection agreements for states that
encompass various cities covered by the Wireless Licenses. These agreements are
with carriers such as Ameritech Corp. ("Ameritech") for Illinois, Pacific Bell
("PacBell"), GTE Telecommunications ("GTE") for California, NYNEX for New York
and Massachusetts, and Bell South for Florida, Georgia and Tennessee, among
others.
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PREQUALIFICATION OF WIRELESS FIBER LINK SITES. In connection with the
development of its Wireless Fiber capacity for both its CAP and CLEC businesses,
the Company has been following a plan pursuant to which it seeks to negotiate,
prior to receipt of actual service orders, roof rights ("Roof Rights") for the
installation of Wireless Fiber links on buildings specifically identified by
existing and potential customers in the metropolitan areas covered by the
Wireless Licenses, including buildings that can provide interconnection access
to long distance carriers' points of presence ("POPs"), switch locations and
local access nodes.
ESTABLISHMENT OF NEW RELATIONSHIPS WITH OTHER SERVICE PROVIDERS AND
CUSTOMERS. In addition to an existing master service agreement with Electric
Lightwave, the Company recently has entered into master service agreements with
each of MCImetro, ICG and Century Telephone. The master service agreements
contemplate that the carriers will utilize Wireless Fiber services as a
component of their own networks and set forth the general terms of the
relationship between the Company and each carrier, including the initial term of
the relationship, basic pricing schedules and service and installation
parameters. The Company also recently began to provide Wireless Fiber services
to the City of New York as a back-up disaster recovery system for certain of its
facilities, providing it with redundancy in the event that the city's land-based
telecommunications service fails for any reason.
AGREEMENT WITH DIGEX. In June 1996, the Company entered into a six-year
agreement ("Digex Agreement") with Digex, Inc. ("Digex"), a provider of Internet
access services that primarily serves commercial, governmental and institutional
end users as well as Internet access resellers. Pursuant to the Digex
Agreement, the Company has the right of first refusal to provide all of Digex's
local access and/or customer interconnection requirements through the use of the
Company's Wireless Fiber services or the resale of other facilities, as
appropriate. The Company also will purchase from Digex, during the next six
years, a minimum of $5 million of Internet access services with the right to
purchase additional amounts, in each case on a discounted basis. The Company
intends to resell these Internet access services under the Company's own brand
name, including through the bundling of such services with the Company's other
telecommunications services.
ACQUISITION OF LOCATE. The Company recently consummated the acquisition
(the "Locate Acquisition") of the assets of Local Area Telecommunications, Inc.
("Locate") comprising Locate's business as a CAP providing microwave-based local
access services to corporations and long distance and other common carriers (the
"Locate Business"), for a purchase price of $17.5 million. Among Locate's key
assets are two 38 GHz licenses, each providing 100 MHz of bandwidth, for the New
York City metropolitan area, including Long Island and Northern New Jersey. In
addition, Locate, together with its existing customers, has access to the roofs
of numerous buildings, including the World Trade Center and other key sites in
New York City, which the Company anticipates using in its CAP and CLEC
operations. As part of the Locate Acquisition, the Company also acquired from
Locate certain licenses for the provision of point-to-point services in other
portions of the radio spectrum, including, among others, 10, 12, 16 and 18 GHz.
PENDING ACQUISITION OF PINNACLE. In June 1996, the Company entered into an
agreement to acquire the outstanding equity interests of Pinnacle Nine
Communications, LLC, which is the holder of three 38 GHz licenses providing for
100 MHz of bandwidth in each of Baltimore, Dallas and Philadelphia. The
acquisition of the equity interests is subject to obtaining applicable
regulatory approvals and is expected to be consummated once the required
regulatory approvals have been received.
ACQUISITION OF CONTENT AND INFORMATION PROVIDERS. In April 1996, the
Company acquired an 80% equity interest in Fox/Lorber Associates, Inc.
("Fox/Lorber"), an independent distributor of films, entertainment series and
documentaries in the television and home video markets. Also, since April 1996,
the Company has acquired an 80% equity interest in The Winning Line, Inc.
("TWL"), which operates the SportsFan Radio Network ("SportsFan"). SportsFan is
a multimedia sports programming and production company which
9
<PAGE>
provides live sports programming to more than 200 sports and talk format radio
stations across the United States, up to 24 hours a day, including to stations
in 90 of the top 100 United States markets. SportsFan owns and operates The
Pete Rose Show, among others, and also has interests in television and on-line
distribution channels. In June 1996, the Company entered into an agreement with
Source Media Inc. ("Source Media"), a provider of interactive technology and
programming. Pursuant to this agreement, the Company has the exclusive right,
in the 38 GHz spectrum, to use Source Media's technology and programming in
connection with entertainment and information services the Company may offer.
OTHER BUSINESS
Prior to the Company's entry into the telecommunications industry, it
marketed and distributed consumer products, including personal care and bath and
beauty products, through a subsidiary acquired in 1992. The Company continues
to sell such products, primarily to large retailers, mass merchandisers,
discount stores, department stores, national and regional drug store chains and
other regional chains.
CORPORATE INFORMATION
The Company was incorporated under the laws of the State of Delaware in
September 1990. Its principal offices are located at 230 Park Avenue, New York,
New York 10169 and its phone number is (212) 687-7577.
FINANCING PLAN
In October 1995, to finance the initial rollout of its CAP business, the
Company raised net proceeds of $214.5 million from a private placement ("1995
Debt Placement") of units, each unit consisting of two 14% Senior Discount Notes
due 2005 ("Senior Notes") and one Convertible Note. The passage of the
Telecommunications Act has resulted in opportunities that have caused the
Company to accelerate the development and expansion of its telecommunications
businesses. To capitalize on these opportunities, the Company has undertaken an
expanded capital expenditure program and intends to make significant capital
expenditures during the remainder of 1996 and 1997. Management anticipates,
based on current plans and assumptions relating to its operations, that the
Company's existing financial resources (including proceeds raised in the 1995
Debt Placement) and equipment financing arrangements which the Company intends
to seek, will be sufficient to fund the Company's growth and operations for
approximately 16 to 20 months from the date of this Prospectus. After such
time, the Company will be required to obtain additional sources of significant
capital. In the event the Company's plans or assumptions change or prove to be
inaccurate, or if the Company consummates any acquisitions of businesses or
assets (including additional 38 GHz licenses, by auction or otherwise), the
Company may be required to seek additional sources of capital sooner than
currently anticipated. See "Use of Proceeds" and "Risk Factors -- Significant
Capital Requirements" and "-- Risks Related to CLEC Strategy; Anticipated
Initial Negative Operating Margins in CLEC Business."
THE OFFERING
Common Stock offered by the
Company. . . . . . . . . . . . . 7,133,000 shares
Common Stock offered by Selling
Stockholders . . . . . . . . . . 1,843,922 shares
Proceeds The Company will not derive any cash
proceeds from the issuance of Common
Stock upon conversion of the
10
<PAGE>
Convertible Notes, but will immediately
retire, without the payment of any
additional consideration, the debt
attributable to the Convertible Notes
converted. The Company will not derive
any cash proceeds from the sale of
Common Stock by the Selling
Stockholders.
Conversion Ratio . . . . . . . . . The Convertible Notes are convertible,
at the option of the holder, into that
number of shares of Common Stock of the
Company equal to the Accreted Value of
the Convertible Notes being converted
(on the date of conversion) divided by
$20.625, subject to adjustment in
certain events (the "Conversion Ratio").
Accordingly, the number of shares of
Common Stock issuable upon conversion of
the Convertible Notes will increase as
the Accreted Value of the Convertible
Notes increases. On October 23, 1996,
the date on which the Convertible Notes
are first convertible, the aggregate
Accreted Value of the Convertible Notes
will be approximately $85.88 million,
which would be convertible into an
aggregate of approximately 4,164,000
shares of Common Stock. Immediately
prior to maturity in October 2005,
assuming no Convertible Notes have yet
been converted, the aggregate Accreted
Value of the Convertible Notes would be
approximately $147.1 million, which
would be convertible into an aggregate
of approximately 7,133,000 shares of
Common Stock.
11
<PAGE>
Mandatory Conversion . . . . . . . If the closing sale price of the Common
Stock on the Nasdaq National Market
during any period described below has
exceeded the price for such period
referred to below for at least 30
consecutive trading days ("Market
Criteria," with the 30-day period being
referred to as the "Market Criteria
Period"), all of the Convertible Notes
will be automatically converted into
that number of shares of Common Stock
derived by application of the Conversion
Ratio at the close of business on the
last day of the Market Criteria Period:
Number of
Shares Issuable
if Closing
Price Met as
12 Months Closing of Last Day
Beginning Sale Price of Period
--------- ---------- ---------
October 15, 1996 $39.13 4,150,725
October 15, 1997 $40.75 4,752,224
October 15, 1998 $42.38 5,440,802
October 15, 1999 $44.00 6,229,155
Common Stock Nasdaq National
Market Symbol. . . . . . . . . . WCII
12
<PAGE>
SUMMARY FINANCIAL DATA
The summary financial data presented below, as of and for the two years
ended February 28, 1994 and 1995 and for the ten months ended December 31, 1995,
have been derived from the Company's audited financial statements and the
summary financial data presented below as of and for the six months ended June
30, 1995 and 1996 and the ten months ended December 31, 1994 have been derived
from unaudited consolidated financial statements of the Company included
elsewhere in this Prospectus. In the opinion of management, the unaudited
financial statements have been prepared on the same basis as the audited
financial statements and include all adjustments, which consist only of normal
recurring adjustments, necessary for a fair presentation of the financial
position and the results of operations for these periods. This data should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the pro forma and historical
consolidated financial statements, including the notes thereto, appearing
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
TEN MONTHS ENDED
DECEMBER 31, SIX MONTHS ENDED JUNE 30,
-------------------------------- ------------------------------
ACTUAL ACTUAL
-------------- PRO ------------
YEAR ENDED FORMA
FEBRUARY 28, AS PRO PRO FORMA
------------ PRO FORMA ADJUSTED FORMA AS
1994 1995 1994 1995 1995(1)(2) 1995(3) 1995 1996(4) 1996(1) ADJUSTED(3)
---- ---- ---- ---- ---------- ------ ---- ------ ------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA: (IN THOUSANDS, EXCEPT PER SHARE DATA)
Net sales:
Telecommunications(5) . . . $ 8,505 $14,909 $13,420 $13,136 $19,266 $19,266 $4,553 $20,573 $23,102 $23,102
Information services. . . . -- 474 193 2,648 10,308 10,308 2,052 3,423 6,171 6,171
Merchandising . . . . . . . 7,120 10,182 8,405 13,987 13,987 13,987 5,835 6,688 6,688 6,688
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total net sales. . . . . . 15,625 25,565 22,018 29,771 43,561 43,561 12,440 30,684 35,961 35,961
Operating income (loss):
Telecommunications. . . . . (744) (3,423) (2,067) (6,945) (10,599) (10,599) (2,140) (9,027) (10,569) (10,569)
Information Services. . . . -- (117) (115) 238 (1,154) (1,154) 284 (365) (880) (880)
Merchandising . . . . . . . 223 307 329 756 756 756 115 (163) (163) (163)
General corporate . . . . . (1,547) (2,378) (1,609) (3,861) (3,861) (3,861) (1,979) (6,249) (6,249) (6,249)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total operating loss . . . (2,068) (5,611) (3,462) (9,812) (14,858) (14,858) (3,720) (15,804) (17,856) (17,861)
Interest expense . . . . . . 744 637 505 7,630 30,966 21,624 430 18,015 18,862 13,252
Interest income. . . . . . . (109) (385) (297) (2,890) (2,902) (2,902) (294) (5,658) (4,634) (4,634)
Other expenses, net. . . . . 5,687 1,367 948 1,305 988 988 1,253 654 860 860
Net loss . . . . . . . . . . (8,195) (7,230) (4,618) (15,857) (43,910) (34,569) (5,109) (28,815) (32,949) (27,338)
Net loss per common share. . (1.06) (0.42) (0.28) (0.70) (1.64) (1.14) (.25) (1.05) (1.07) (.79)
Weighted average common
shares outstanding. . . . . 7,719 17,122 16,609 22,770 26,812 30,449 20,184 27,468 30,910 34,643
OTHER FINANCIAL DATA:
Capital expenditures . . . . 307 1,816 1,465 8,652 12,310 12,310 1,023 10,405 10,469 10,469
EBITDA(6). . . . . . . . . . (1,845) (5,179) (3,116) (8,952) (11,554) (11,554) (3,401) (13,145) (13,922) (13,922)
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30, 1996
--------------------------------------------
(IN THOUSANDS)
PRO FORMA
ACTUAL PRO FORMA(7) AS ADJUSTED(8)
------ ------------ --------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short term investments. . . . . . $191,061 $155,846 $155,846
Property and equipment, net. . . . . . . . . . . . . . . . . 25,788 34,808 34,808
Total assets . . . . . . . . . . . . . . . . . . . . . . . . 289,345 392,782 388,292
Current portion of long-term debt and capital lease
obligations . . . . . . . . . . . . . . . . . . . . . . . . 10,287 27,842 27,842
Long-term debt and capital lease obligations,
less current portion and discount . . . . . . . . . . . . . 256,110 256,344 173,986
Stockholders' equity (deficit) . . . . . . . . . . . . . . . (790) 84,210 162,078
</TABLE>
(FOOTNOTES ON NEXT PAGE)
13
<PAGE>
- --------------
(1) Gives effect to the acquisitions of Milliwave, Locate, Fox/Lorbers
TWL, and Avant-Garde Telecommunications, Inc., the original holder of
many of the Wireless Licenses ("Avant-Garde"), and financings thereof,
a financing (the "Everest Financing") provided to the Company by
Everest Capital Limited and certain of its affiliates (as described
under "Description of Certain Indebtedness") and the issuance of the
Senior and Convertible Notes as if they occurred as of the beginning
of the respective periods. See notes 2, 8, 17, 18 and 28 to the
Consolidated Financial Statements. Excludes the Pinnacle Acquisition
because of its immaterial effect on the pro forma amounts. Milliwave,
Locate, Pinnacle and Avant-Garde have not generated material revenues
to date. Assumes the issuance of 3.4 million shares of Common Stock
in connection with the Milliwave Acquisition.
(2) On a pro forma basis giving effect to the acquisitions and financings
described in footnote (1) above (collectively, the "Transactions"),
pro forma sales, operating loss, interest expense, net loss and
negative EBITDA for the twelve months ended December 31, 1995 amounted
to $49.4 million, $16.1 million, $37.3 million, $51.5 million and
$12.2 million, respectively.
(3) Adjusted to reflect the acquisitions and financings described in
footnote (1) and the issuance of the Common Stock in this Offering and
the resulting retirement of debt, as if they occurred at the beginning
of the respective periods.
(4) In the first six months of 1996, the Company settled a dispute with
another carrier regarding the unauthorized switching of the Company's
customers to the other carrier. The Company recognized revenue of
approximately $1.5 million and cost of sales of approximately $850,000
in connection with this settlement, the majority of which related to
minutes of use during that period.
(5) The Company has generated nominal revenues from its Wireless Fiber
services.
(6) EBITDA consists of loss before interest, income taxes, depreciation
and amortization and other income and expense. EBITDA is provided
because it is a measure commonly used in the telecommunications
industry. It is presented to enhance an understanding of the
Company's operating results and is not intended to represent cash flow
or results of operations in accordance with generally accepted
accounting principles for the periods indicated. See the Company's
consolidated financial statements contained elsewhere in this
Prospectus.
(7) Gives effect to the acquisitions of Milliwave and Locate as if they
occurred on June 30, 1996. Excludes the Pinnacle Acquisition because
of its immaterial effect on the pro forma amounts.
(8) Adjusted to reflected the acquisitions of Milliwave and Locate and the
issuance of Common Stock upon conversion of the Convertible Notes and
the resulting retirement of debt, as if they occurred on June 30,
1996.
14
<PAGE>
RISK FACTORS
AN INVESTMENT IN THE COMMON STOCK INVOLVES A SIGNIFICANT DEGREE OF RISK.
IN DETERMINING WHETHER TO MAKE AN INVESTMENT IN THE COMMON STOCK, PROSPECTIVE
INVESTORS SHOULD CONSIDER CAREFULLY ALL OF THE INFORMATION SET FORTH IN THIS
PROSPECTUS AND, IN PARTICULAR, THE FOLLOWING RISK FACTORS.
HISTORICAL AND ANTICIPATED FUTURE NET AND OPERATING LOSSES AND NEGATIVE EBITDA
The Company has incurred significant operating and net losses attributable
in substantial part to the development of its telecommunications businesses.
The Company historically has had net losses and negative EBITDA, including a net
loss and negative EBITDA of approximately $15.9 million and $9.0 million,
respectively, for the ten months ended December 31, 1995, and $28.8 million and
$13.1 million, respectively, for the six months ended June 30, 1996. The
Company has been offering local access services as a CAP only since December
1994, and local exchange services as a CLEC only since April 1996, and has made
and is making significant expenditures in the development of its wireless local
telecommunications services operations, including expenditures associated with
establishing an operating infrastructure and introducing and marketing its
telecommunications services. The Company expects to continue to incur
significant and increasing operating and net losses and to generate increasingly
negative EBITDA while it develops and expands its telecommunications businesses
and until such time that it establishes a sufficient revenue-generating customer
base. As a result of expected lower telecommunications revenues and increased
expenses, principally relating to an increase in the number of employees, in
connection with the rollout of CLEC services, there will be substantial
increases in the Company's net loss, operating loss and negative EBITDA in the
third quarter of 1996 as compared to prior quarters and for 1996 and 1997 as
compared to prior years. There can be no assurance that the Company will
achieve or sustain positive EBITDA or profitability or at any time have
sufficient financial resources to make principal and interest payments on its
outstanding debt. In addition, if the Company does not achieve and sustain
positive EBITDA and profitability, the value of the Common Stock may be
adversely affected. See "-- Competition -- Long Distance Market," "Selected
Financial Data" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
RISKS RELATED TO CLEC STRATEGY; ANTICIPATED INITIAL NEGATIVE OPERATING MARGINS
IN CLEC BUSINESS
The Company is pursuing an aggressive strategy to enter the local exchange
services market as a CLEC in the metropolitan areas in which it has Wireless
Licenses and to develop and obtain the facilities necessary to provide its own
local exchange services. The Company has virtually no experience providing
local exchange services and there can be no assurance that the Company's CLEC
strategy will be successful. In addition, local exchange service providers have
never utilized 38 GHz wireless-based systems as a significant segment of their
local exchange services facilities and there can be no assurance that the
Company will be successful in implementing its Wireless Fiber-based system. The
Company's CLEC strategy is subject to risks relating to: the receipt of
necessary regulatory approvals; the negotiation of resale agreements with LECs
and other CLECs; the negotiation of interconnection agreements with RBOCs and
other incumbent LECs; the ability of third-party equipment providers and
installation and maintenance contractors to meet the Company's accelerated
switch and remote node rollout schedule; the recruitment of additional personnel
in a timely manner, so as to be able to attract and service new customers but
not incur excessive personnel costs in advance of the rollout; the Company's
ability to attract and retain new customers and to deliver high quality
services; the potential adverse reaction to the Company's services by the
Company's carrier customers, who may view the Company as a competitor; and the
Company's ability to manage the simultaneous implementation of its plan in
multiple markets. The Company currently does not have any local exchange
services facilities in place, but plans to install its first main switch in New
York in October 1996. The Company commenced marketing of its local exchange
services in April 1996 and currently offers such services only in New York City
and only on a resale basis. The Company currently is generating revenues from
its CLEC operations that are insignificant. The Company does not expect
significant revenues from its
15
<PAGE>
CLEC business during 1996. As a new participant in the CLEC business, without
an existing infrastructure or recognized brand name, the Company may need to
offer lower prices than its competitors to attract customers.
Although the Company's initial implementation of its CLEC strategy often
will entail the resale of the facilities and services of other service
providers, which itself is dependent on the negotiation and availability of
satisfactory resale arrangements, the principal component of the Company's CLEC
strategy will require significant capital investment related to the purchase and
installation of numerous main switches and remote nodes and the interconnection
of these facilities to customers' buildings and other local networks, including
through the installation of Wireless Fiber links and build out of other facility
infrastructure, in advance of generating material revenues.
As the Company rolls out its CLEC operations, it anticipates experiencing
negative operating margins while it develops its facilities. After initial
rollout of its CLEC services in a particular city, the Company expects operating
margins for such operations to improve only when and if (i) sales efforts result
in sufficiently increased volumes of traffic originated and terminated over the
Company's Wireless Fiber facilities instead of LEC or other CLEC facilities and
(ii) higher margin-enhanced services are provided to and accepted by customers.
While the Company believes that the unbundling and resale of LEC services and
the implementation of local telephone number portability, which are mandated by
the Telecommunications Act, will reduce the Company's costs of providing local
exchange services and facilitate the marketing of such services, there can be no
assurance that the Company's CLEC operations will become profitable due to,
among other factors, lack of customer demand, competition from other CLECs and
pricing pressure from the LECs and other CLECs. The Company's failure to
implement its CLEC strategy successfully would have an adverse effect on the
value of the Common Stock. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Business -- Strategy for
Telecommunications Business Growth" and "-- Telecommunications Services -- CLEC
Services."
NEGATIVE OPERATING MARGINS IN THE INITIAL PROVISION OF WIRELESS FIBER-BASED CAP
SERVICES
The Company has experienced negative operating margins in connection with
the development and initial provision of its Wireless Fiber-based CAP services
and expects to continue to experience negative operating margins until it
develops a revenue-generating customer base sufficient to fund operating
expenses attributable to the provision of such services. In order to
demonstrate the efficacy of Wireless Fiber, the Company often provides
complementary service on a trial basis for a limited period. The Company
expects to improve operating margins in the provision of its CAP services over
time by (i) obtaining appropriate sites for its operations, (ii) acquiring and
retaining an adequate customer base, (iii) placing telecommunications traffic of
new customers and additional telecommunications traffic of existing customers
across Wireless Fiber links, (iv) inducing providers of telecommunications
services to utilize and market the Company's Wireless Fiber services as part of
their own networks, systems and services, thereby reducing the Company's related
marketing costs and (v) taking advantage of recent procompetitive regulatory
initiatives and changes that permit the Company to provide additional local
telecommunications services, thereby facilitating the marketability of higher-
margin enhanced and premium services utilizing the Company's Wireless Fiber
capabilities. If the Company fails to accomplish any of the foregoing,
particularly acquiring and retaining an adequate customer base, it will not be
able to improve the operating margins of its CAP business. There can be no
assurance that the Company will be able to achieve or sustain positive operating
margins. Failure to achieve positive operating margins would have an adverse
effect on the value of the Common Stock. For a discussion of factors that
affect results described in the forward-looking statements contained in this
paragraph, see "-- Competition," "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Business -- Competition in the
Telecommunications Industry" and "-- Telecommunications Services -- CAP Services
- -- Marketing."
16
<PAGE>
RISKS ASSOCIATED WITH RAPID EXPANSION AND ACQUISITIONS
The Company intends to pursue a strategy of aggressive and rapid growth,
including the accelerated rollout of its CLEC services, acquisitions of
businesses and assets, continued aggressive marketing of its CAP services and
the hiring of additional management, technical and marketing personnel, all of
which will result in significantly higher operating expenses. 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 monitor
operations, control costs, maintain effective quality controls and significantly
expand the Company's internal management, technical and accounting systems. 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
Company's business, financial condition and results of operations and the value
of the Common Stock. As part of its strategy, the Company may acquire
complementary assets or businesses and may use a portion of the proceeds from
the Offerings for such acquisitions. The pursuit of acquisition opportunities
will place significant demands on the time and attention of the Company's senior
management and will involve considerable financial and other costs with respect
to identifying and investigating acquisition candidates, negotiating acquisition
agreements and integrating the acquired businesses with the Company's existing
operations. Employees and customers of acquired businesses may sever their
relationship with such businesses during or after the acquisition. There can be
no assurance that the Company will be able to successfully consummate any
acquisitions or integrate any business or assets which it may acquire into its
operations. See "Use of Proceeds" and "Business -- Strategy for
Telecommunications Business Growth."
SUBSTANTIAL INDEBTEDNESS; ABILITY TO SERVICE INDEBTEDNESS
The Company has significant indebtedness and interest expense as a result
of the 1995 Debt Placement. At June 30, 1996, on a pro forma basis giving
effect to the Transactions, the Company would have had, on a consolidated basis,
approximately $284.3 million of indebtedness, including capitalized lease
obligations. The accretion of original issue discount on the Senior and
Convertible Notes will significantly increase the Company's liabilities (except
to the extent that the Convertible Notes are converted to Common Stock). At
June 30, 1996, on a pro forma as adjusted basis giving effect to the issuance of
the Common Stock upon conversion of the Convertible Notes and the resulting
retirement of the Convertible Notes (assuming conversion of all such Notes), the
Company would have had, on a consolidated basis, approximately $202.0 million of
indebtedness. The indentures related to the Senior and Convertible Notes
("Indentures") limit, but do not prohibit the incurrence of additional
indebtedness by the Company and subsidiaries. Additionally, the Indentures do
not limit the amount of indebtedness that may be incurred by the Company's new
media and consumer products subsidiaries.
The level of the Company's indebtedness could have important consequences,
including the following: (i) the ability of the Company to obtain any necessary
financing in the future for working capital, capital expenditures, debt service
requirements or other purposes may be limited; (ii) a substantial portion of the
Company's cash flow from operations, if any, must be dedicated to the payment of
principal and interest on its indebtedness and other obligations and will not be
available for use in the Company's business; (iii) the Company's level of
indebtedness could limit its flexibility in planning for, or reacting to changes
in, its business; (iv) the Company is more highly leveraged than many of its
competitors, which may place it at a competitive disadvantage; and (v) the
Company's high degree of indebtedness could make it more vulnerable in the event
of a downturn in its business or if operating cash flow does not significantly
increase.
The Company had net losses and negative EBITDA during the ten months ended
December 31, 1995 (and prior fiscal years) and the first six months of 1996 and
management anticipates that such net losses and negative EBITDA will continue
(and increase) in the foreseeable future. For the same periods, on a pro forma
basis after giving effect to the Transactions, the Company's earnings before
fixed charges would have been
17
<PAGE>
insufficient to cover fixed charges by approximately $43.9 million and $32.8
million, respectively. In addition, for the same periods on the same pro forma
basis, the Company's EBITDA minus capital expenditures and interest expense
would have been negative $54.8 million and negative $43.3 million, respectively.
As the Company expands its operations, it expects to continue to experience
increasing net and operating losses and negative EBITDA. There can be no
assurance that the Company will be able to attain profitability or positive
EBITDA or that the Company will be able to meet its debt service obligations.
If the Company's cash flow is inadequate to meet its obligations or fund its
operations, the Company could face substantial liquidity problems. If the
Company is unable to generate sufficient cash flow or otherwise obtain funds
necessary to make required payments or, if the Company otherwise fails to comply
with the material terms of its indebtedness, it would be in default thereunder,
which would permit the holders of such indebtedness to accelerate the maturity
of such indebtedness and could cause defaults under other indebtedness of the
Company, including the Notes. Such defaults would adversely affect the market
price of the Common Stock. The ability of the Company to meet its obligations
will be dependent upon the future performance of the Company, which will be
affected by prevailing economic conditions and to financial, business and other
factors, including factors beyond the control of the Company. See "Description
of Certain Indebtedness."
COMPETITION
The Company is subject to intense competition in each of the areas in which
it operates. Many of the Company's competitors have longer-standing
relationships with customers and suppliers in their respective industries,
greater name recognition and significantly greater financial, technical and
marketing resources than the Company.
LOCAL TELECOMMUNICATIONS MARKET. The local telecommunications market is
intensely competitive and currently is dominated by the RBOCs and LECs. The
Company has been marketing local access services as a CAP only since December
1994 and local exchange services as a CLEC only since April 1996, and the
Company has not obtained a significant market share in any of the areas where it
offers such services, nor does it expect to do so given the size of the local
telecommunications services market, the intense competition and the diversity of
customer requirements. In each area covered by the Wireless Licenses, the
services offered by the Company compete with those offered by the LECs, such as
the RBOCs, which currently dominate the provision of local services in their
markets. The LECs have long-standing relationships with their customers, have
the ability to subsidize competitive services with revenues from a variety of
other services and benefit from existing state and federal regulations that
currently favor the LECs over the Company in certain respects. While
legislative and regulatory changes have provided increased business
opportunities for competitive telecommunications providers such as the Company,
these same decisions have given the LECs increased flexibility in their pricing
of services. This may allow the LECs to offer special discounts to the
Company's (and other CLECs') customers and potential customers. Further, as
competition increases in the local telecommunications market, the Company
anticipates that general pricing competition and pressures will increase
significantly. As LECs lower their rates, other telecommunications providers
will be forced by market conditions to charge less for their services in order
to compete, which could have an adverse effect on the Company and on the value
of the Common Stock.
In addition to competition from the LECs, the Company also faces
competition from a growing number of new market entrants, such as other CAPs and
CLECs, competitors offering wireless telecommunications services, including
leading telecommunications companies, such as AT&T Wireless, and other entities
that hold or have applied for 38 GHz licenses or which may acquire such licenses
or other wireless licenses from others or the FCC. There is at least one other
CAP and/or CLEC in each metropolitan area covered by the Company's Wireless
Licenses, including, in many such areas, companies such as American
Communications Services, Inc. ("ACSI"), IntelCom, ICG, Brooks Fiber Properties
("Brooks Fiber"), MCImetro, MFS Communications Company, Inc. ("MFS"), Teleport
and Time Warner, Inc. ("Time Warner"). Many of these entities (and the LECs)
already have existing infrastructure which allows them to provide local
telecommunications services with lower marginal costs than the Company can
currently attain and which could
18
<PAGE>
allow them to exert significant pricing pressure in the markets where the
Company provides or seeks to provide telecommunications services. In addition,
many CAPs and CLECs have acquired or plan to acquire switches in order to offer
a broad range of local telecommunications services.
The Company currently faces or anticipates facing competition from other
entities which offer, or are licensed to offer, 38 GHz services, such as
Advanced Radio Telecom Corp. ("ART") and BizTel Communications, Inc. ("BizTel"),
and could face competition in certain aspects of its existing and proposed
businesses from competitors providing wireless services in other portions of the
radio spectrum, such as CAI Wireless Systems, Inc. ("CAI"), a provider of
wireless Internet access services, CellularVision USA, Inc. ("CellularVision"),
a provider of wireless television services which, in the future, also may
provide wireless Internet access and other local telecommunications services,
and Associated Communications LLC ("Associated"), a provider of wireless CAP and
other services. In many instances, these service providers hold 38 GHz licenses
or licenses for other frequencies in geographic areas which encompass or overlap
the Company's market areas. Additionally, some of these entities enjoy the
substantial backing of, or include among their stockholders, major
telecommunications entities, such as Ameritech with respect to ART, Teleport
with respect to BizTel, and NYNEX and Bell Atlantic with respect to CAI. Due to
the relative ease and speed of deployment of 38 GHz and some other wireless-
based technologies, the Company could face intense price competition from these
and other wireless-based service providers. Furthermore, a notice of proposed
rulemaking ("NPRM") issued by the FCC contemplates an auction of additional
channels in the 38 GHz spectrum band, which have not been previously available
for commercial use, and the FCC recently has stated its intention to auction
licenses in other portions of the spectrum, including 28 GHz, which may provide
licensees with capabilities similar to and, in some instances, possibly
superior, to those of the Company. The grant of additional licenses by the FCC
in the 38 GHz band, or other portions of the spectrum with similar
characteristics, as well as the development of new technologies, could result in
increased competition. The Company believes that, assuming the adoption of the
NPRM as currently proposed, entities having greater resources than the Company
could acquire licenses to provide 38 GHz services.
The Company also may face competition in the provision of local
telecommunications services from cable companies, electric utilities, LECs
operating outside their current local service areas and long distance carriers.
The great majority of these entities provide transmission services primarily
over fiber optic-, copper-based and/or microwave networks, which, unlike the
Company's Wireless Fiber services, enjoy proven market acceptance for the
transmission of telecommunications traffic. Moreover, the consolidation of
telecommunications companies and the formation of strategic alliances within the
telecommunications industry, which are expected to accelerate as a result of the
passage of the Telecommunications Act, could give rise to significant new or
stronger competitors. There can be no assurance that the Company will be able
to compete effectively in any of its markets.
The Company's Internet services also are likely to face significant
competition, including, among others, from cable television operators deploying
cable modems, which provide high speed data capability over existing coaxial
cable television networks. Although cable modems currently are not widely
available and do not provide for two-way data transfer rates that are as rapid
as those which can be provided by Wireless Fiber services, the Company believes
that the cable industry may support the deployment of cable modems to
residential cable customers through methods such as price subsidies.
Notwithstanding the cable industry's interest in rapid deployment of cable
modems, the Company believes that in order to provide broadband capacity to a
significant number of users, cable operators will be required to spend
significant time and capital in order to upgrade their existing networks to a
more advanced hybrid fiber coaxial network architecture. However, there can be
no assurance that cable modems will not emerge as a source of competition to the
Company's Internet business. Further, Internet service providers using existing
technologies such as ISDN and, in the future, such technologies as asymmetrical
digital subscriber loop ("ADSL") and high speed digital subscriber loop ("HDSL")
will likely provide additional sources of competition to the Company's Internet
access services. Additionally, the Company believes that many other
telecommunication service providers already
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are promoting their Internet services. See "Business -- Competition in the
Telecommunications Industry -- Local Telecommunications Market" and "--
Government Regulation of Telecommunications Operations."
LONG DISTANCE MARKET. The long distance market has relatively insignificant
barriers to entry, numerous entities competing for the same customers and a high
(and increasing) average churn rate (especially among residential customers,
which the Company historically has emphasized in its long distance reselling
business, and customers acquired in mergers and acquisitions, which are part of
the Company's business strategy), as customers frequently change long distance
providers in response to the offering of lower rates or promotional incentives
by competitors. The Company recently has terminated several "contest" and other
marketing programs conducted by marketing agents, which were responsible for
generating a substantial majority of the Company's telecommunications revenues
during the 12 months ended March 31, 1996. These programs had been extremely
successful in generating new long distance business primarily from consumers and
were instrumental in allowing the Company to rapidly expand its customer base.
As a result of certain consumer and regulatory complaints arising from these
programs, on May 10, 1996, the Company adopted a policy of mandatory independent
verification of all written letters of authorization ("LOAs") arising from these
programs and, effective as of June 10, 1996, no longer accepts LOAs submitted
from these programs. Although the Company is considering several alternative
marketing programs, it does not expect that such alternative programs will,
individually or in the aggregate, be as successful as the contest programs in
the short term in attracting and retaining customers. Based on internal
financial reports, the Company's telecommunications net sales for April, May and
June 1996 were approximately $4.4 million, $3.5 million and $3.0 million,
respectively. This trend is the result of customer attrition that has exceeded
the rate at which new long distance customers have been added to the Company's
customer base since the termination of these marketing programs. The Company
expects to continue to experience low or negative rates of growth in its long
distance business in the near term and expects a reduction in long distance
revenues in the third quarter of 1996. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Revenues."
The Company competes with major carriers such as AT&T Corp. ("AT&T"), MCI
and Sprint, as well as other national and regional long distance carriers and
resellers, many of whom own substantially all of their own facilities and are
able to provide services at costs lower than the Company's current costs since
the Company generally leases its access facilities. The Company believes that
the RBOCs as well as other CLECs also will become significant competitors in the
long distance telecommunications industry. The Company believes that the
principal competitive factors affecting its market share are sales and marketing
programs, pricing, customer service, accurate billing, clear pricing policies
and, to a lesser extent, variety of services. The ability of the Company to
compete effectively will depend upon its ability to maintain high quality,
market-driven services at prices generally perceived to be equal to or below
those charged by its competitors. In 1995, the FCC announced a decision
pursuant to which AT&T no longer will be regulated as a dominant long distance
carrier. This decision is expected to increase AT&T's flexibility in competing
in the long distance telecommunications services market and, in particular, will
eliminate the longer advance tariff notice requirements previously applicable
only to AT&T. To maintain its competitive posture, the Company believes that it
must be in a position to reduce its prices in order to meet reductions in rates,
if any, by others. Any such reductions could adversely affect the Company. In
addition, LECs have been obtaining additional pricing and regulatory
flexibility. This may enable LECs to grant volume discounts to larger long
distance companies, which also could put the Company's long distance business at
a disadvantage in competing with larger providers. See "Business -- Competition
in the Telecommunications Industry -- Long Distance Market."
NEW MEDIA BUSINESS. The industry in which the Company's new media
subsidiary competes consists of a very large number of entities producing,
owning or controlling news, sports, entertainment, educational and informational
content and services, including telecommunications companies, television
broadcast companies, sports franchises, film and television studios, record
companies, newspaper and magazine publishing companies, universities and on-line
computer services. Competition is intense for timely and highly
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marketable or usable information and entertainment content. Almost all of the
entities with which the Company's new media subsidiary competes have
significantly greater presence in the various media markets and greater
resources than the Company, including existing content libraries, financial
resources, personnel and existing distribution channels. There can be no
assurance that the Company will be able to compete successfully in the emerging
new media industry. See "Business -- New Media Business."
CONSUMER PRODUCTS BUSINESS. The consumer products industry is subject to
changes in styles and consumer tastes. An unanticipated change in consumer
preferences inconsistent with the Company's merchandise lines could have a
serious and adverse effect upon its operations. The Company's product lines are
subject to intense competition with numerous manufacturers and distributors of
hair, beauty and bath products. Mass merchandisers, drug store chains, and
other mass volume retailers typically utilize freestanding pegboard fixtures or
pegboard wall fixtures, as well as in-line shelving and end-cap displays, to
display their products. Competition for shelf and wall space for product
placement is intense, as many companies seek to have their products
strategically placed within the store. Competition also exists with respect to
product name recognition and pricing, since retailers and consumers often choose
products on the basis of name brand, cost and value. Many of the Company's
competitors have greater product and name recognition than it does, as well as
much larger and more sophisticated sales forces, product development, marketing
and advertising programs and facilities. The Company generally competes by
attempting to offer retail customers quality, service and products at reasonable
prices. See "Business -- Consumer Products -- Competition."
LIMITED OPERATING HISTORY IN TELECOMMUNICATIONS INDUSTRY
The Company shifted its business focus in 1992 from marketing consumer
products to providing telecommunications services in order to capitalize on
emerging opportunities in the evolving telecommunications industry. The Company
began reselling long distance telecommunications services in 1993. The Company
began marketing its local access services as a CAP in December 1994 and offering
local exchange services as a CLEC in April 1996 and currently offers such CLEC
services only in New York City and only on a resale basis. To date, the
Company's CAP and CLEC operations have generated only nominal revenues.
Although a number of persons comprising the Company's senior management team
have extensive experience in the telecommunications industry, the Company has a
limited operating history in the telecommunications industry. The Company's
prospects, therefore, must be considered in light of the risks, expenses,
delays, problems and difficulties frequently encountered in the establishment of
a new business in an evolving industry characterized by intense competition.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
SIGNIFICANT CAPITAL REQUIREMENTS
The expansion of the Company's telecommunications operations and the
continued funding of operating expenses will require substantial capital
investment. Additionally, as part of its strategy, the Company may seek to
acquire complementary assets or businesses (including additional spectrum
licenses, by auction or otherwise), which also could require substantial capital
investment. The Company's decision to accelerate the development of its CLEC
operations in response to the Telecommunications Act has substantially increased
the Company's capital expenditure requirements. Management anticipates, based
on current plans and assumptions relating to its operations, that existing
financial resources (including proceeds raised in the 1995 Debt Placement) and
equipment financing arrangements which the Company intends to seek, will be
sufficient to fund the Company's growth and operations for approximately 16 to
20 months from the date of this Prospectus. Management believes that the
Company's capital needs at the end of such period will continue to be
significant and the Company will continue to seek additional sources of capital.
Further, in the event the Company's plans or assumptions change or prove to be
inaccurate, or if the Company consummates any acquisitions of businesses or
assets (including additional spectrum licenses, by auction or otherwise), the
Company may be required to seek additional sources of capital sooner than
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currently anticipated. Sources of additional capital may include public and
private equity and debt financings, sales of nonstrategic assets and other
financing arrangements. There can be no assurance that the Company will be able
to obtain additional financing, or, if such financing is available, that the
Company will be able to obtain it on acceptable terms. Failure to obtain
additional financing, if needed, could result in the delay or abandonment of
some or all of the Company's development and expansion plans, which would have a
material adverse effect on the Company's business and could adversely affect the
Company's ability to service its existing debt and the value of the Common
Stock. For a discussion of other factors that could affect the forward-looking
statements contained in this paragraph, see the other risk factors and "Use of
Proceeds," "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Company Overview" and "-- Liquidity and Capital
Resources."
GOVERNMENT REGULATION
The Company's telecommunications services are subject to varying degrees of
federal, state and local regulation. Generally, the FCC exercises jurisdiction
over all telecommunications services providers to the extent such services
involve the provision of jurisdictionally interstate or international
telecommunications, including the resale of long distance services, the
provision of local access services necessary to connect callers to long distance
carriers, and the use of electromagnetic spectrum (i.e., wireless services).
With the passage of the Telecommunications Act, the FCC's jurisdiction has been
extended to include certain interconnection and related issues that
traditionally have been considered subject primarily to state regulation. The
state regulatory commissions retain nonexclusive jurisdiction over the provision
of telecommunications services to the extent such services involve the provision
of jurisdictionally intrastate telecommunications. Municipalities also may
regulate limited aspects of the Company's business by, for example, imposing
zoning requirements or right-of-way permit procedures, certain taxes or
franchise fees.
The Telecommunications Act is intended to remove the formal barriers
between the long distance and local telecommunications services markets,
allowing service providers from each market (as well as providers of cable
television and other services) to compete in all communications markets. The
Telecommunications Act will permit the RBOCs eventually to compete in the
provision of interLATA long distance services. Additionally, the FCC must
promulgate new regulations over the next several years to address mandates
contained in the Telecommunications Act, which will change the regulatory
environment significantly. The Telecommunications Act generally requires LECs
to provide competitors with interconnection and nondiscriminatory access to the
LEC network on more favorable terms than have been available in the past.
However, such interconnection and the terms thereof are subject to negotiations
with each LEC, which may involve considerable delays, and may not necessarily be
obtained on terms and conditions that are acceptable to the Company. In such
instances, although the Company may petition the proper regulatory agency to
arbitrate disputed issues, there can be no assurance that the Company will be
able to obtain acceptable interconnection agreements. In addition, the
Telecommunications Act requires the promulgation of regulations to implement
universal service reform, to revise the existing subsidy system which is
intended to provide support for the provision of ubiquitous telephone service,
and to effect access charge reform to more closely align the access charges
required to be paid by the long distance carriers to the LECs to the actual cost
of providing service.
The Company is unable to predict what effect the Telecommunications Act
will have on the telecommunications industry in general and on the Company in
particular. No assurance can be given that any regulation will broaden the
opportunities available to the Company or will not have a material adverse
effect on the Company and its operations. Further, there can be no assurance
that the Company will be able to comply with additional applicable laws,
regulations and licensing requirements or have sufficient resources to take
advantage of the opportunities which may arise from this dynamic regulatory
environment.
As required by the Telecommunications Act, in August 1996 the FCC adopted
new rules implementing the Telecommunications Act (the "Interconnection Order").
These rules constitute a pro-competitive,
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deregulatory national policy framework designed to remove or minimize the
regulatory, economic and operational impediments to full competition for local
services, including switched local exchange service. Although setting minimum,
uniform, national rules, the Interconnection Order also relies heavily on states
to apply these rules and to exercise their own discretion in implementing a pro-
competitive regime in their local telephone markets. Among other things, the
Interconnection Order establishes rules requiring incumbent LECs to interconnect
with new entrants such as the Company at specified network points; requires
incumbent LECs to provide carriers nondiscriminatory access to network elements
on an unbundled basis at any technically feasible point at rates that are just,
reasonable and nondiscriminatory; establishes rules requiring incumbent LECs to
allow interconnection via physical and virtual collocation; requires the states
to set prices for interconnection, unbundled elements, and termination of local
calls that are nondiscriminatory and cost-based (using a forward looking
methodology which excludes embedded costs but allows a reasonable cost-of-
capital profit); requires incumbent LECs to offer for resale any
telecommunication service that the carrier provides at retail to end users at
prices to be established by the states but which generally are at retail prices
minus reasonably avoided costs; and which requires LECs and utilities to provide
new entrants with nondiscriminatory access to poles, ducts, conduit and rights
of way owned or controlled by LECs or utilities. Exemptions to some of these
rules are available to LECs which qualify as rural LECs under the
Telecommunications Act. The Interconnection Order also requires that intraLATA
presubscription (pursuant to which LECs must allow customers to choose different
carriers for intraLATA toll service without having to dial extra digits) be
implemented no later than February 1999; that LECs provide new entrants with
nondiscriminatory access to directory assistance services, directory listings,
telephone numbers, and operator services; and that LECs comply with certain
network disclosure rules designed to ensure that interoperability of multiple
local switched networks. There can be no assurance how the Interconnection
Order will be implemented or enforced or as to what affect they will have on
competition within the telecommunications industry generally or on the
competitive position of the Company specifically. A number of LECs, including
the National Association of Regulatory Utility Consumers and others, have filed
in Federal court seeking to appeal aspects of the Interconnection Order and to
stay some or all of the rules adopted therein.
Although the Company believes that it is in substantial compliance with all
material laws, rules and regulations governing its operations and has obtained,
or is in the process of obtaining, all licenses and approvals necessary and
appropriate to conduct its operations, changes in existing laws and regulations,
including those relating to the provision of wireless local telecommunications
services via 38 GHz and/or the future granting of 38 GHz licenses, or any
failure or significant delay in obtaining necessary regulatory approvals, could
have a material adverse effect on the Company. On November 13, 1995, the FCC
released an order freezing the acceptance for filing of new applications for 38
GHz frequency licenses. On December 15, 1995, the FCC announced the issuance of
an NPRM, pursuant to which it proposed to amend its current rules relating to 38
GHz, including, among other items, the imposition of minimum construction and
usage requirements and an auction procedure for issuance of licenses in the 37-
40 GHz band where mutually exclusive applications have been filed. In addition,
the FCC ordered that those applications that are subject to mutual exclusivity
with other applicants or that were placed on public notice by the FCC after
September 13, 1995 would be held in abeyance and not processed by the FCC
pending the outcome of the proceeding initiated by the NPRM. Final rules with
respect to the changes proposed by the NPRM have not been adopted and the
changes proposed by the NPRM have been, and are expected to continue to be, the
subject of numerous comments by members of the telecommunications industry, the
satellite industry, various government agencies and others. Consequently, there
can be no assurance that the NPRM will result in the issuance of rules
consistent with the rules initially proposed in the NPRM, or that any rules will
be adopted. Until final rules are adopted, the rules currently in existence
remain in effect with respect to outstanding licenses.
Additionally, providers of long distance services, including the major
interexchange carriers, as well as resellers, such as the Company, are coming
under intensified scrutiny for marketing activities by them or their agents that
result in alleged unauthorized switching of customers from one long distance
provider to another. The FCC and a number of state authorities are seeking to
introduce more stringent regulations to
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curtail the intentional or erroneous switching of customers, which could include
the imposition of fines, penalties and possible operating restrictions on
entities which engage in unauthorized switching activities. In addition, the
Telecommunications Act requires the FCC to prescribe regulations imposing
procedures for verifying the switching of customers and additional remedies on
behalf of carriers for unauthorized switching of their customers. The effect,
if any, of the adoption of any such proposed regulations on the long distance
industry and the manner of doing business therein, cannot be anticipated.
Statutes and regulations which are or may become applicable to the Company as it
expands could require the Company to alter methods of operations, at costs which
could be substantial, or otherwise limit the types of services offered by the
Company.
The Company plans to operate as a CLEC in numerous states and to offer a
full range of local exchange services. However, the Company must obtain the
approval of state regulatory authorities prior to offering CLEC services in each
state. The Company currently is authorized to operate as a CLEC in California,
Colorado, Connecticut, Florida, Georgia, Illinois, Massachusetts, Michigan, New
York, Pennsylvania, Tennessee, Texas, Washington and Wisconsin, and is seeking
or intends to seek authorization in numerous other states. However, there can
be no assurance that the Company will obtain or retain such state authorization.
Further, as a CLEC, the Company will be subject to additional state regulatory
and service parameters, including those relating to quality of service.
The FCC has announced that it will examine, and possibly modify, existing
universal service and access charge policies. In doing so, it will likely
consider reducing substantially the access charges that interexchange carriers
pay to LECs for access to the public switched network. CAPs, such as the
Company, provide local access (i.e., the transmission of a long distance call
from the caller's location to the long distance carrier's POP, and from the
terminating POP to the recipient of the call) at rates that are discounted from
the rates charged by LECs. If the FCC were to mandate reductions in LECs' local
access charges, CAPs might be forced to substantially reduce the rates they
charge long distance providers, resulting in lower gross margins (which, in the
case of the Company, are currently negative). This could have a material
adverse effect on the Company and its prospects, as well as the value of the
Common Stock. See "Business -- Telecommunications Industry Overview," "--
Government Regulation of Telecommunications Operations" and "-- Competition in
the Telecommunications Industry."
FINITE INITIAL TERM OF WIRELESS LICENSES; POTENTIAL LICENSE RENEWAL COSTS;
FLUCTUATIONS IN THE VALUE OF WIRELESS LICENSES; BUILDOUT REQUIREMENTS FOR
MILLIWAVE AND OTHER NEW LICENSES; TRANSFER OF CONTROL
The FCC's current policy is to align the expiration dates of all 38 GHz
licenses such that all such licenses mature concurrently and then to renew all
such licenses for ten years. The initial term of all currently outstanding 38
GHz licenses, including the Company's licenses, expires in February 2001. While
the Company believes that all of its Wireless Licenses will be renewed based
upon FCC custom and practice establishing a presumption in favor of licensees
that have complied with their regulatory obligations during the initial license
period, there can be no assurance that any Wireless License will be renewed upon
expiration of its initial term.
In the NPRM, the FCC proposed auctioning licenses for currently unallocated
38 GHz channels. Given the current political climate with respect to balancing
the federal budget, there is a risk that the FCC will require significant
payments upon renewal of the Company's Wireless Licenses. The FCC's failure to
renew, or imposition of significant charges for renewal of, one or more Wireless
Licenses could have a material adverse effect on the Company and could adversely
affect the value of the Common Stock.
The Wireless Licenses are a significant asset of the Company, the value of
which will depend significantly upon the success of the Company's wireless
telecommunications operations and the future direction of the wireless
telecommunications segment of the telecommunications industry. The value of
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licenses to provide wireless services also may be affected by fluctuations in
the level of supply and demand for such licenses. Any assignment of a license
or transfer of control by an entity holding a license is subject to certain
limitations relating to the identity and status of the transferee and prior FCC
approval (and in some instances state regulatory approval as it relates to the
provision of telecommunications services in that state), thereby possibly
diminishing the value of the Wireless Licenses. A holder of a 38 GHz license is
required to satisfy the FCC's rules and regulations relating to construction
within 18 months from the license's date of grant in order to prevent revocation
of the license. The Company currently is providing construction and support
services to Milliwave in connection with its buildout of the Milliwave Licenses
under the terms of a services agreement between the Company and Milliwave.
The Company has entered into acquisition and related agreements with each
of Milliwave, Locate and Pinnacle. The transfer of licenses issued by the FCC,
including 38 GHz licenses (as well as a change of control of entities holding
licenses), is subject to the prior consent of the FCC, which consent generally
turns on a number of factors including the identity, background and
qualifications of the transferee and the satisfaction of certain other
regulatory requirements. In addition, the existence of proposed channel
limitations in the NPRM, which in at least one licensed area may result in the
Company exceeding the proposed maximum number of licenses for that area, may
result in the FCC denying consent for one or more license transfers. In light of
the foregoing, the newness of this service, and the uncertainty of final
regulations to be issued in connection with the NPRM, there can be no assurance
that the FCC will approve all or any of the proposed acquisitions or, if
approved, that the FCC will not impose limitations on the ultimate number of
licenses held in any particular licensed area. See "Business --
Telecommunications Services -- Wireless Fiber -- Wireless Licenses" and "--
Government Regulation of Telecommunications Operations."
CHANGES IN TECHNOLOGY, SERVICES AND INDUSTRY STANDARDS
The telecommunications industry has been characterized by rapid
technological change, changing end-user requirements, frequent new service
introductions and evolving industry standards. The Company believes that its
future success will depend on its ability to anticipate or adapt to such changes
and to offer, on a timely basis, services that meet these evolving industry
standards. The extent to which competitors using existing or currently
undeployed methods of delivery of local telecommunications services will compete
with the Company's Wireless Fiber services cannot be anticipated. There can be
no assurance that existing, proposed or as yet undeveloped technologies will not
become dominant in the future and render 38 GHz-based (and other spectrum-based)
systems less profitable or less viable. For example, there are several existing
technologies that may be able to allow the transmission of high bandwidth
traffic over existing copper lines. There can be no assurance that the Company
will have sufficient resources to make the investments necessary to acquire new
technologies or to introduce new services that could compete with future
technologies or that equipment held by the Company in inventory will not be
rendered obsolete, any of which would have an adverse effect on the value of the
Common Stock. See "Business -- Telecommunications Industry Overview."
CERTAIN FINANCIAL AND OPERATING RESTRICTIONS
The indebtedness of the Company and the indentures ("Indentures") relating
to the Convertible Notes and Senior Notes impose significant operating and
financial restrictions on the Company, affecting, and in certain cases limiting,
among other things, the ability of the Company to incur additional indebtedness
or create liens on its assets, pay dividends, sell assets, engage in mergers or
acquisitions or make investments. Failure to comply with any such restrictions
could limit the availability of borrowings or result in a default under the
terms of any such indebtedness, and there can be no assurance that the Company
will be able to comply with such restrictions. Moreover, these restrictions
could limit the Company's ability to engage in certain business transactions
which the Company may desire to consummate. The Company's inability to
consummate any such transaction could have an adverse effect on the Company's
operations and the value of the Common Stock. See "Description of Certain
Indebtedness."
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DEPENDENCE ON THIRD PARTIES FOR SERVICE AND MARKETING; POSSIBLE SERVICE
INTERRUPTIONS AND EQUIPMENT FAILURES
The Company's long distance resale business is dependent on utilizing the
facilities of major long distance carriers to carry its customers' long distance
telephone calls and, in many instances, especially during initial market
penetrations, the Company's CLEC business will be dependent on the facilities of
the LECs and other local exchange service providers to carry its customers'
local telephone calls. The Company has agreements with long distance carriers
that provide it with access to such carriers' networks and has entered or is
entering into interconnect agreements with various LECs, and other CLECs, to
access their local exchange facilities. Although the Company believes that it
currently has sufficient access to long distance networks and will be able to
obtain sufficient access to local exchange facilities, any increase in the rates
or access fees charged by the owners of such facilities or their unwillingness
to provide access to such facilities to the Company, as well as potential
reticence of the LECs to honor appropriate provisioning and service intervals
with respect to interconnection arrangements, could materially adversely affect
the Company's operations. Failure to obtain continuing access to such networks
and facilities also would have a material adverse effect on the Company, and
could require the Company to significantly curtail or cease its operations.
Further, the Company's CLEC operations will rely to some extent upon network
elements which the LECs must provide pursuant to the Telecommunications Act and
the Interconnection Order. These facilities often use copper wire for "last
mile" access to end users. To the extent that the Company relies upon LEC
facilities that use copper wire, the Company may not be able to offer potential
customers the benefits of Wireless Fiber with respect to high transmission
capacity. In addition, the Company's operations require that the networks
leased by it, and any facilities which may be developed by the Company, operate
on a continuous basis. It is not unusual for networks and switching facilities
to experience periodic service interruptions and equipment failures. It is
therefore possible that the networks and facilities utilized by the Company may
from time to time experience service interruptions or equipment failures
resulting in material delays which would adversely affect consumer confidence as
well as the Company's business operations and reputation and the value of the
Common Stock. See "Business -- Telecommunications Services -- Long Distance
Services."
The Company utilizes, in certain cases, third parties for marketing its
Wireless Fiber services and maintaining its operational systems. The Company
has entered into master service agreements with each of Electric Lightwave,
MCImetro and Century Telephone, which allow those companies to utilize and
resell the Company's Wireless Fiber services to their own customers. The
Company also has an agreement with Lucent to provide field service for, and
network monitoring of, the Company's Wireless Fiber facilities and another
agreement with Lucent for the purchase by the Company of telecommunications
switches and related equipment. The failure of any of these third parties to
perform under their respective agreements or the loss of any of these agreements
could have a material adverse effect on the Company's results of operations or
its ability to service its customers. The Company plans to enter into master
service agreements with other telecommunications service providers, and the
failure to do so could have an adverse effect on the Company's development and
results of operations and the value of the Common Stock. See "Business --
Telecommunications Services -- CAP Services -- Marketing."
RELIANCE ON EQUIPMENT SUPPLIERS
The Company currently purchases substantially all of its wireless
telecommunications equipment, including transceivers and network monitoring
equipment, from a single supplier and its switches and related equipment from a
single supplier even though, in each case, there are other manufacturers of such
equipment. Any reduction or interruption in supply from its suppliers could
have a material adverse effect on the Company until sufficient alternative
supply sources are established. The Company does not manufacture, nor does it
have the capability to manufacture, any of its telecommunications equipment.
Although there are other manufacturers who have, or are developing, equipment
that would satisfy the Company's needs, there can be no assurance that the
Company would be able to replace its current primary suppliers on commercially
reasonable terms. In addition, no industry standard or uniform protocol
currently exists for 38 GHz equipment.
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Consequently, a single manufacturer's equipment must be used in establishing
each wireless link. See "Business -- Telecommunications Services -- Wireless
Fiber -- Wireless Fiber Links."
LINE OF SIGHT; DISTANCE LIMITATIONS IMPOSED BY RAINFALL CONDITIONS IN CERTAIN
GEOGRAPHIC AREAS; ROOF RIGHTS
In order to provide quality transmission, Wireless Fiber services require
an unobstructed line of sight between two transceivers comprising a link, with a
maximum distance between any two corresponding transceivers of five miles (or
shorter distances in certain areas; weather conditions may necessitate distances
as short as 1.1 miles between transceivers to maintain desired transmission
quality). The areas in which such shorter distances are required are those
where rainfall intensity and the size of the raindrops adversely impact
transmission quality at longer distances. Other weather conditions, such as
snow, electrical storms and high winds, have not, in the Company's experience,
affected Wireless Fiber services. The establishment of Wireless Fiber services
may require additional transceivers to triangulate around obstacles (such as
buildings). Similarly, to establish Wireless Fiber services covering a distance
in excess of five miles, additional transceivers are required to establish a
chain with links no more than five miles apart. The cost of additional
transceivers where required by weather, physical obstacles or distance may
render Wireless Fiber uneconomical in certain instances. The Company must
obtain Roof Rights (or rights to access other locations where lines of sight are
available) in each building where a transceiver will be placed. The Company
seeks to prequalify and obtain Roof Rights at buildings targeted by potential
customers in its licensed areas in advance of anticipated orders. There can be
no assurance, however, that the Company will be successful in obtaining Roof
Rights necessary to establish its Wireless Fiber services in its potential
markets. The Company's prequalification activities often require the payment of
option fees to the owners of buildings that are being prequalified.
Notwithstanding its prequalification activities, there can be no assurance that
the Company will receive orders for Wireless Fiber services which allow the
Company to utilize Roof Rights it obtains. See "Business -- Telecommunications
Services -- Wireless Fiber -- Wireless Fiber Links."
UNCERTAINTY OF MARKET ACCEPTANCE OF WIRELESS FIBER SERVICES
The Company has been marketing its Wireless Fiber services since December
1994 and such services currently are generating revenues that are insignificant.
The Company has not obtained a significant market share in any of the licensed
areas where it offers Wireless Fiber services. The provision of wireless local
telecommunications services over 38 GHz represents an emerging sector of the
telecommunications industry and the demand for and acceptance of Wireless Fiber
services are subject to a high level of uncertainty. Despite the Company's
initial success in attracting customers, there can be no assurance that
substantial markets will develop for wireless local telecommunications services
delivered over 38 GHz, or that, even if such markets develop, the Company will
be able to succeed in positioning itself as a provider of such services or
provide such services profitably. The Company's success in providing wireless
broadband services is subject to a number of factors beyond the Company's
control. These factors include, without limitation, historical perceptions of
the unreliability and lack of security of previous microwave radio technologies,
changes in general and local economic conditions, availability of equipment,
changes in telecommunications service rates charged by other service providers,
changes in the supply and demand for wireless broadband services, competition
from wireline and wireless operators in the same market area, changes in the
federal and state regulatory schemes affecting the operations of
telecommunications service providers in general and wireless broadband systems
in particular (including the enactment of new statutes and the promulgation of
changes in the interpretation or enforcement of existing or new rules and
regulations). In addition, the extent of the potential demand for wireless
broadband services in the Company's market areas cannot be estimated with
certainty. There can be no assurance that one or more of these factors will not
have an adverse effect on the Company's financial condition and results of
operations and the value of the Common Stock. See "Business --
Telecommunications Services."
27
<PAGE>
RELIANCE ON KEY PERSONNEL
The efforts of a small number of key management and operating personnel
will largely determine the Company's success. The loss of any of such personnel
could adversely affect the Company. The Company's success also depends in part
upon its ability to hire and retain highly skilled and qualified operating,
marketing, financial and technical personnel. The competition for qualified
personnel in the telecommunications industry is intense and, accordingly, there
can be no assurance that the Company will be able to hire or retain necessary
personnel. See "Management."
VOLATILITY OF MARKET PRICE OF COMMON STOCK
Since the Common Stock has been publicly traded, the market price of the
Common Stock has fluctuated over a wide range and may continue to do so in the
future. The market price of the Common Stock could be subject to significant
fluctuations in response to various factors and events, including, among other
things, the depth and liquidity of the trading market of the Common Stock,
variations in the Company's operating results, press reports, including with
respect to regulation and industry trends, and the difference between actual
results and the results expected by investors and analysts. In addition, the
stock market in recent years has experienced broad price and volume fluctuations
that have often been unrelated to the operating performance of companies,
particularly telecommunications companies. These broad market fluctuations also
may adversely affect the market price of the Common Stock. See "Price Range of
Common Stock."
SHARES ELIGIBLE FOR FUTURE SALE
As of September 30, 1996, the Company had 31,275,972 shares of Common Stock
outstanding. Although a significant number of the outstanding shares of Common
Stock are "restricted securities," as that term is defined in Rule 144 under the
Securities Act ("Restricted Shares"), and may not be sold unless such sale is
registered under the Securities Act or is made pursuant to an exemption from
registration under the Securities Act, including the exemption provided by Rule
144, substantially all of such Restricted Shares either have been registered for
resale under the Securities Act or are currently, or will soon become, available
for sale pursuant to Rule 144. In addition, the Company may issue a substantial
number of shares of Common Stock in connection with the Milliwave Acquisition
and the Locate Acquisition, all of which would be subject to registration rights
requiring the Company to register them for resale. Sales or the expectation of
sales of a substantial number of shares of Common Stock in the public market
could adversely affect the prevailing market price of the Common Stock. See
"Shares Eligible for Future Sale."
EFFECT OF OUTSTANDING OPTIONS, WARRANTS AND OTHER CONVERTIBLE SECURITIES
As of September 30, 1996, there were outstanding options and warrants with
respect to an aggregate of 9,401,083 shares of Common Stock at per-share
exercise prices ranging from $1.06 to $31.12. Additionally, the Convertible
Notes and certain other convertible debt are convertible into shares (with no
additional cash payment to the Company). Moreover, substantially all of the
shares underlying such securities have been or will be registered for resale
under the Securities Act. The Company has two existing stock option plans under
which options to purchase up to an additional 1,452,583 shares of Common Stock
may be granted. The exercise of outstanding stock options, warrants and other
convertible securities will dilute the percentage ownership of the Company's
stockholders, and any sales in the public market of shares of Common Stock
issuable upon the exercise of such stock options, warrants and convertible
securities may adversely affect prevailing market prices for the Common Stock.
Further, the Company may be required to issue additional shares (up to 4.5
million shares) in connection with the Milliwave Acquisition and may, at its
election, convert the $17.5 million promissory note to be issued in the Locate
Acquisition into that number of shares of Common Stock equal to (a) the
principal and interest due on such note divided by (b) the average closing price
of the Common Stock for the five days ending on the date the Company gives
notice of its intention to convert such
28
<PAGE>
note. See "Description of Certain Indebtedness," "Description of Capital Stock"
and "Shares Eligible for Future Sale."
ANTI-TAKEOVER PROVISIONS
The Company's corporate charter provides that directors serve staggered
three-year terms and authorizes the issuance of up to 15,000,000 preferred
shares with such designations, rights and preferences as may be determined from
time to time by the Company's Board of Directors. The affirmative vote of the
holders of at least two-thirds of the capital stock of the Company is required
to amend the provisions of the charter relating to the classification of the
Board. The staggered board provision could increase the likelihood that, in the
event of a possible takeover of the Company, incumbent directors would retain
their positions and, consequently, may have the effect of discouraging, delaying
or preventing a change in control or management of the Company. While the
Company has no present intention to issue Preferred Stock, the authorization of
preferred shares empowers the Board of Directors, without further stockholder
approval, to issue preferred shares with dividend, liquidation, conversion,
voting or other rights which could adversely affect the voting power or other
rights of the holders of the Common Stock. In the event of issuance, the
preferred shares could be utilized, under certain circumstances, as a method of
discouraging, delaying or preventing a change of control of the Company.
Additionally, certain of the Company's indebtedness (including the Notes)
contains provisions which would allow holders, at their election, to require
prepayment in the event of a change in control of the Company, which could also
serve to delay or prevent such a change in control from occurring. Moreover,
the Company's By-Laws provide that a stockholder entitled to vote for the
election of directors at a meeting may nominate a person or persons for election
as director only if written notice of such stockholder's intent to make such
nomination is given to the Company's Secretary not later than sixty days in
advance of such meeting, and the Company's stock option plans contain a
provision which accelerates the vesting of outstanding options in the event of
certain changes in control of the Company, both of which could serve to delay or
prevent a change in control from occurring. In addition, the Company is and,
subject to certain conditions, will continue to be, subject to the anti-takeover
provisions of the Delaware General Corporation Law, which could have the effect
of delaying or preventing a change of control of the Company. Furthermore,
transfers of control and/or certain assets of telecommunications entities, such
as the Company, may require the approval of the FCC and/or state regulatory
commissions. With respect to 38 GHz licenses such as the Company's Wireless
Licenses, assignments of such licenses and changes of control involving entities
holding licenses require prior FCC and state regulatory approval and are subject
to restrictions and limitations on the identity and status of the assignee or
successor. See "Description of Capital Stock."
29
<PAGE>
PRICE RANGE OF COMMON STOCK
The Company's Common Stock has been quoted on the Nasdaq National Market
since June 27, 1994, under the symbol "WCII" and prior thereto was quoted on the
Nasdaq SmallCap Market under the symbol "WCII" from April 4, 1991 to June 26,
1994.
The following table sets forth, for the fiscal periods indicated, the high
and low last sale prices of the Common Stock as reported on the Nasdaq National
Market or the Nasdaq SmallCap Market, as the case may be. The quotes represent
"inter-dealer" prices without adjustment or mark-ups, mark-downs or commissions
and may not necessarily represent actual transactions.
COMMON STOCK PRICE
------------------
PERIOD ENDED
------------
HIGH LOW
---- ---
May 31, 1994. . . . . . . . . . . . . . . . . . . . . $6-9/16 $3-3/4
August 31, 1994 . . . . . . . . . . . . . . . . . . . 6-11/16 4
November 30, 1994 . . . . . . . . . . . . . . . . . . 9-11/16 6
February 28, 1995 . . . . . . . . . . . . . . . . . . 9-1/8 5-1/32
May 31, 1995. . . . . . . . . . . . . . . . . . . . . 7-1/32 6
August 31, 1995 . . . . . . . . . . . . . . . . . . . 13-3/8 5
November 30, 1995 . . . . . . . . . . . . . . . . . . 21-13/16 13-1/2
December 31, 1995 (commencing December 1, 1995) . . . 17-3/8 14
March 31, 1996. . . . . . . . . . . . . . . . . . . . 18-1/2 13-3/8
June 30, 1996 . . . . . . . . . . . . . . . . . . . . 32-1/4 16
July 1 through September 3, 1996. . . . . . . . . . . 29 15-3/4
See the cover page of this Prospectus for a recent reported last sale price
of the Common Stock on the Nasdaq National Market. As of September 30, 1996,
there were 326 holders of record of the Common Stock. The Company believes that
there are more than 1,000 beneficial holders of the Common Stock.
DIVIDEND POLICY
The Company has not declared or paid any dividends on the Common Stock and
does not intend to pay dividends on the Common Stock in the foreseeable future.
The Company intends to retain future earnings, if any, to finance the
development and expansion of its business. Certain covenants in the Indentures
currently effectively prohibit the Company from declaring or paying cash
dividends. See "Description of Certain Indebtedness."
30
<PAGE>
CAPITALIZATION
The following table sets forth the cash and capitalization of the Company
as of June 30, 1996: (i) on a historical basis, (ii) on a pro forma basis that
gives effect to the acquisitions of Milliwave and Locate and financing thereof
as if they occurred on June 30, 1996 (assuming that the Company does not elect
to convert the $17.5 million note to the sellers of Locate into Common Stock)
and (iii) on a pro forma as adjusted basis that gives effect to the conversion
of all of the Convertible Notes as if it occurred on June 30, 1996. This table
should be read in conjunction with the Consolidated Financial Statements and
related notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
June 30, 1996
------------------------------
Pro Forma
Actual Pro Forma As Adjusted
------ --------- -----------
(in thousands)
<S> <C> <C> <C>
Cash, cash equivalents and short term investments . . . . . $191,061 $155,846 $155,846
-------- -------- --------
-------- -------- --------
Current portion of long-term debt and capital lease
obligations . . . . . . . . . . . . . . . . . . . . . . . $ 10,287 $ 27,842 $ 27,842
-------- -------- --------
-------- -------- --------
Long-term debt and capital lease obligations:
Senior Notes. . . . . . . . . . . . . . . . . . . . . . . $164,716 $164,716 $164,716
Convertible Notes . . . . . . . . . . . . . . . . . . . . 82,358 82,358 --
Other notes . . . . . . . . . . . . . . . . . . . . . . . 3,586 3,586 3,586
Capital lease obligations, net of current portion . . . . 5,450 5,684 5,684
-------- -------- --------
Total long-term debt and capital lease
obligations. . . . . . . . . . . . . . . . . . . . . 256,110 256,344 173,986
-------- -------- --------
Stockholders' equity:
Preferred stock of the Company, 150,000,000
shares authorized, 689 shares issued and held
in treasury, 0 outstanding. . . . . . . . . . . . . . . 689 689 689
Common Stock, $.01 par value, 75,000,000
shares authorized, 30,694,260 shares issued
and 28,037,497 shares outstanding, 34,094,260
shares issued and 31,437,497 shares
outstanding on a pro forma basis, 38,087,366
shares issued and 35,430,603 shares
outstanding on an as adjusted basis(1). . . . . . . . . 307 341 381
Additional paid-in capital. . . . . . . . . . . . . . . . 111,186 196,152 273,980
Accumulated deficit . . . . . . . . . . . . . . . . . . . (70,126) (70,126) (70,126)
-------- -------- --------
42,056 127,056 204,924
Less: treasury stock . . . . . . . . . . . . . . . . . . (42,734) (42,734) (42,734)
Unrealized loss on long term investments . . . . . . . (112) (112) (112)
-------- -------- --------
Total stockholders' equity. . . . . . . . . . . . . . . . (790) 84,210 162,078
-------- -------- --------
Total capitalization. . . . . . . . . . . . . . . . . . $255,320 $340,554 $336,064
-------- -------- --------
</TABLE>
- ------------------------------
(1) Does not include (i) an aggregate of 1,036,582 shares of Common Stock
issuable upon exercise of options granted or which may be granted
under the 1992 Performance Equity Plan ("1992 Plan"), (ii) an
aggregate of 3,500,000 shares of Common Stock issuable upon exercise
of options granted or which may be granted under the 1995 Performance
Equity Plan ("1995 Plan"), (iii) 6,652,782 shares of Common Stock
issuable upon exercise of other outstanding options and warrants and
(iv) 535,714 shares of Common Stock which may be issued upon
conversion of certain convertible debt other than the Convertible
Notes. See "Description of Certain Indebtedness" and notes 17, 18 and
22 to the Consolidated Financial Statements. The exercise and
conversion prices of certain of the foregoing securities are below the
current market price of the Common Stock as of the date of this
Prospectus. Assumes the issuance of 3,400,000 shares of Common Stock
in connection with the Milliwave Acquisition.
31
<PAGE>
SELECTED FINANCIAL DATA
The summary financial data presented below, as of and for the two years
ended February 28, 1994 and 1995 and for the ten months ended December 31, 1995,
have been derived from the Company's audited financial statements and the
summary financial data presented below as of and for the six months ended June
30, 1995 and 1996 and the ten months ended December 31, 1994 have been derived
from unaudited consolidated financial statements of the Company included
elsewhere in this Prospectus. In the opinion of management, the unaudited
financial statements have been prepared on the same basis as the audited
financial statements and include all adjustments, which consist only of normal
recurring adjustments, necessary for a fair presentation of the financial
position and the results of operations for these periods. This data should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the pro forma and historical
consolidated financial statements, including the notes thereto, appearing
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED TEN MONTHS ENDED SIX MONTHS
FEBRUARY 28 DECEMBER 31, ENDED JUNE 30,
-------------- -------------------- --------------
1994 1995 1994 1995 1995 1996(1)
---- ---- ---- ---- ---- -------
STATEMENT OF OPERATIONS DATA: (IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
NET SALES:
TELECOMMUNICATIONS(2) . . . . . . . . . . . . . . . $ 8,505 $14,909 $13,420 $13,136 $4,553 $20,573
INFORMATION SERVICES. . . . . . . . . . . . . . . . -- 474 193 2,648 2,052 3,423
MERCHANDISING . . . . . . . . . . . . . . . . . . . 7,120 10,182 8,405 13,987 5,835 6,688
-------- -------- -------- ------ ------ ------
TOTAL NET SALES . . . . . . . . . . . . . . . . . 15,625 25,565 22,018 29,771 12,440 30,684
OPERATING INCOME (LOSS):
TELECOMMUNICATIONS. . . . . . . . . . . . . . . . . (744) (3,423) (2,067) (6,945) (2,140) (9,027)
INFORMATION SERVICES. . . . . . . . . . . . . . . . -- (117) (115) 238 284 (365)
MERCHANDISING . . . . . . . . . . . . . . . . . . . 223 307 329 756 115 (163)
GENERAL CORPORATE . . . . . . . . . . . . . . . . . (1,547) (2,378) (1,609) (3,861) (1,979) (6,249)
-------- -------- -------- ------ ------ ------
TOTAL OPERATING LOSS. . . . . . . . . . . . . . . (2,068) (5,611) (3,462) (9,812) (3,720) (15,804)
INTEREST EXPENSE. . . . . . . . . . . . . . . . . . . 744 637 505 7,630 430 18,015
INTEREST INCOME . . . . . . . . . . . . . . . . . . . (109) (385) (297) (2,890) (294) (5,658)
OTHER EXPENSES, NET . . . . . . . . . . . . . . . . . 5,687 1,367 948 1,305 1,253 654
NET LOSS. . . . . . . . . . . . . . . . . . . . . . . (8,195) (7,230) (4,618) (15,857) (5,109) (28,815)
NET LOSS PER COMMON SHARE . . . . . . . . . . . . . . (1.06) (0.42) (0.28) (0.70) (.25) (1.05)
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING. . . . . . 7,719 17,122 16,609 22,770 20,184 27,468
OTHER FINANCIAL DATA:
Capital expenditures. . . . . . . . . . . . . . . . . 307 1,816 1,465 8,652 1,023 10,405
EBITDA(3) . . . . . . . . . . . . . . . . . . . . . . (1,845) (5,179) (3,116) (8,952) (3,401) (13,145)
</TABLE>
<TABLE>
<CAPTION>
AS OF AS OF
AS OF FEBRUARY 28 DECEMBER 31, JUNE 30,
----------------- ------------- --------
1994 1995 1995 1996
---- ---- ---- ----
(IN THOUSANDS) (IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short term investments . . . . . . . . . . . . $ 719 $ 3,156 $211,701 $191,061
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . 1,301 2,663 15,898 25,788
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,610 29,509 285,363 289,345
Current portion of long-term debt and capital lease obligations . . . . . 2,851 332 9,643 10,287
Long-term debt and capital lease obligations, less current portion
and discount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,084 5,165 240,455 256,110
Stockholders' equity. . . . . . . . . . . . . . . . . . . . . . . . . . . 4,719 18,280 21,752 (790)
</TABLE>
(FOOTNOTES ON NEXT PAGE)
32
<PAGE>
- --------------
(1) In the first six months of 1996, the Company settled a dispute with
another carrier regarding the unauthorized switching of the Company's
customers to the other carrier. The Company recognized revenue of
approximately $1.5 million and cost of sales of approximately $850,000
in connection with this settlement, the majority of which related to
minutes of use during that period.
(2) The Company has generated nominal revenues from its Wireless Fiber
services.
(3) EBITDA consists of loss before interest, income taxes, depreciation
and amortization and other income and expense. EBITDA is provided
because it is a measure commonly used in the telecommunications
industry. It is presented to enhance an understanding of the
Company's operating results and is not intended to represent cash flow
or results of operations in accordance with generally accepted
accounting principles for the periods indicated. See the Company's
consolidated financial statements contained elsewhere in this
Prospectus.
33
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion includes certain forward-looking statements. For
a discussion of important factors, including, but not limited to, continued
development of the Company's businesses, actions of regulatory authorities and
competitors, and other factors that could cause actual results to differ
materially from the forward-looking statements, see "Risk Factors" and the
Company's periodic reports incorporated herein by reference.
COMPANY OVERVIEW
The Company provides local and long distance telecommunication services in
the United States. As a complement to its telecommunications operations, the
Company produces and distributes information and entertainment content. The
Company also maintains a consumer products company with distribution through
national retailers in the United States and Canada.
The Company operates its businesses through its wholly-owned subsidiaries
as follows:
- WinStar Wireless, Inc. ("WinStar Wireless"), through the Company's
operating subsidiaries, provides Wireless Fiber-based dedicated local access
services on a wholesale basis to other carriers in many major metropolitan areas
via the Company's digital wireless capacity in the 38 GHz portion of the radio
spectrum. Wireless Fiber services currently are marketed to long distance
carriers, fiber-based CAPs, CLECs, cellular and specialized mobile radio
services, LECs, cable companies, internet service providers, value added
resellers an systems intergrators and end user customers.
- WinStar Telecommunications, Inc. ("WinStar Telecom"), through the
Company's operating subsidiaries, is rolling out its local exchange services as
a value-added, economical alternative to the LECs, particularly through the
exploitation of the Company's Wireless Fiber capabilities, in substantially all
of the 41 licensed areas covered by the Company's 38 GHz licenses. WinStar
Telecom markets its services primarily through a direct sales force to small and
medium-sized businesses.
- WinStar Gateway Network, Inc. ("WinStar Gateway Network") is a long
distance telecommunications services reseller that provides service directly to
residential customers and which supports WinStar Telecom's offering of bundled
local and long distance service to businesses.
- WinStar New Media Company, Inc. ("WinStar New Media") produces and
distributes, domestically and abroad, information and entertainment content,
principally nonfiction and international programming and nationally syndicated
sports radio programming.
- WinStar Global Products, Inc. ("WinStar Global Products"), which was
acquired by the Company prior to its entry into the telecommunications industry,
designs, manufactures, markets and distributes personal care products,
principally bath and hair care products, and sells primarily through large
retailers, including mass merchandisers, discount stores, department stores and
national and regional drug store chains.
Perceiving emerging opportunities in an increasingly procompetitive
telecommunications industry, the Company shifted its focus in 1992 from
marketing consumer products to providing telecommunications services, and
entered the telecommunications business in 1993 with its acquisition of WinStar
Gateway. Substantially all of the Company's revenues have historically been
generated through its long distance telecommunications, information and
entertainment, and consumer products businesses. In 1994, the Company
positioned itself for entrance into the local telecommunications market with the
acquisition of Avant-Garde, the original holder of many of the Wireless
Licenses. Utilizing the Wireless Licenses, the Company
34
<PAGE>
(through WinStar Wireless) entered the local access services market as a CAP in
December 1994 and currently provides Wireless Fiber-based local access services
to a limited number of customers, generating nominal revenues to date. In April
1996, the Company (through WinStar Telecom) entered the local exchange services
market as a CLEC, and currently provides such services only on a resale basis in
New York City.
The passage of the Telecommunications Act of 1996 has resulted in
opportunities that have caused the Company to accelerate the development and
expansion of its telecommunications businesses. The Company's entry into the
local exchange services market, along with the continued development and
expansion of the Company's local access business, will require significantly
larger amounts of capital expenditures for the construction of Wireless Fiber
and switch-based infrastructure on a city-by-city basis, for working capital and
for funding of operating losses during the next several years. In connection
with its CLEC business, the Company is installing its own switches and remote
nodes and utilize its Wireless Fiber capacity, together with facilities leased
or purchased from other carriers, to originate and terminate local traffic. The
faster the Company's rollout of its CLEC business, the greater the near term
operating losses and capital expenditures will be. In addition, the Company is
expanding its Wireless Fiber-based CAP business because its CAP business will
serve a significant portion of the local access needs of the Company's CLEC
business, including for backbone interconnections of hub, main switch and local
nodes sites to be created by the Company in connection with its CLEC operations,
and for the origination and termination of local traffic generated by the
Company's local exchange customers.
REVENUES
The Company anticipates that the revenues generated by the operations of
its telecommunications businesses will represent an increasingly larger
percentage of the Company's consolidated revenue as the Company expands into the
local telecommunications services market. Factors driving the mix of revenues
are as follows:
- CLEC revenues will be driven primarily by the number of local exchange
circuits installed and in service. Customers generally are billed a flat
monthly fee plus a per-minute usage charge or fraction thereof. Revenue growth
depends on the introduction of local exchange services in new cities, the
purchase and installation of switches to service those areas, and the addition
of new customers. Additionally, if bundled services, such as long distance and
Internet access and Internet related services are purchased by the Company's
customers, revenue per circuit will increase. Other anticipated sources of
revenue include resale agreements for CMRS services, advanced data services,
broadband data transmission services and video conferencing. The Company
believes that as its local exchange services business grows, it will become the
most significant component of the Company's revenues. The Company currently is
generating revenues from this business that are insignificant. The Company does
not expect significant revenues from its CLEC business during 1996. Local
exchange services that are offered by the Company on a resale basis can be
provided, and revenues generated thereby, shortly after receipt of customer
orders. Currently, the sales cycle for the resale of local exchange services is
approximately one to three weeks in duration. The Company anticipates that the
sales cycle for local exchange services provided using its Wireless Fiber
capabilities and its own switches will be approximately the same duration as
that experienced in the resale of local exchange services. CLECs, including the
Company, currently set prices at a discount to those charged by LECs. The
Company anticipates ongoing price reductions for provision of local exchange
services, including those provided by the Company, in the future.
- CAP revenues are driven primarily by the number of Wireless Fiber
links in service and the capacity of each link (i.e., T-1s or DS-3s). Customers
generally are billed at a fixed monthly rate per unit of capacity. Since the
Company's local access customers have been, and will likely continue to be,
predominantly telecommunications service providers, the addition or loss of
several major customers would have a material impact on this business. The
Company currently is generating revenues from this business that are
insignificant. The Company does not expect significant revenues from its CAP
business during 1996.
35
<PAGE>
The Company's local access services are sold through a sales cycle that has
averaged 9 to 12 months in duration because of the need to (i) demonstrate the
efficacy and reliability of Wireless Fiber-based services to potential
customers, as such services involve technology that is relatively new to the
United States telecommunications industry and (ii) acquire the Roof Rights to
install the Wireless Fiber links necessary to address the specific requirements
of a customer. The Company believes that this sales cycle will become shorter
going forward as (i) the efficacy and reliability of Wireless Fiber services
become more widely accepted in the industry (thereby shortening or eliminating
the customer education phase of the sales cycle), (ii) the Company's strategy of
prequalifying buildings for Roof Rights results in the acquisition of key
locations that will enable the Company to more rapidly address the specific
requirements of many potential customers and (iii) existing customers broaden
their use of the Company's Wireless Fiber services, especially those which have
entered into master service agreements with the Company. CAPs, including the
Company, currently set prices at a discount to those charged by LECs. The
Company anticipates significant ongoing price reductions for CAP services,
including those provided by the Company, in the future. See "Risk Factors --
Uncertainty of Market Acceptance of Wireless Fiber Services."
- Long distance telecommunications services revenues are driven
principally by the size and type of the customer base, with the largest
percentage of the Company's long distance telecommunications services revenues
currently derived from residential customers. Customers are billed on the basis
of minutes or fractions thereof. New customers are generated through agent
programs, affinity group programs and direct marketing. It is expected that in
the future, larger percentages of the Company's long distance telecommunications
service revenues will be derived from direct sales efforts to smaller- and
medium-sized businesses as well as from customers which are purchasing local
exchange services through the Company's CLEC business. See "Risk Factors --
Competition."
- Information and entertainment content revenues are generated
principally by (i) sales of content, such as documentaries and foreign films, to
traditional content customers, such as cable networks, (ii) sales of content to
new media distribution channels, such as on-line services, (iii) sales of
advertising and (iv) the bundling of content with the Company's
telecommunications services. Revenues also are driven by the size and quality
of the Company's programming library and the release of new programs, which
affects quarter to quarter comparability.
- Consumer products revenues are driven principally by the number of
national retailers in the Company's customer base. The Company obtains shelf
space through such large retailers, and the addition or loss of several large
retailers can have a significant effect on the revenues of the Company's
consumer products business. Product sell-through and new product introductions
also play an important role in the Company's relationships with its customers.
COSTS
Factors relating to costs are as follows:
- Costs associated with the Company's CLEC business will include
significant up-front capital expenditures for the development of the
infrastructure required to provide the Company's own local exchange services,
including expenditures relating to interconnection (i.e., the use of LEC
facilities to terminate calls), purchases of switching equipment, 38 GHz radios
site acquisition fees and expenses (including option fees for the
prequalification of buildings for Roof Rights) and strategic preplacement of a
limited number of radios and related equipment in connection with the Company's
building-centric network plan (i.e., hubbing). In addition, the Company will
have substantial start-up costs related to its CLEC business that will not be
capitalized, including costs of engineering, marketing, administrative and other
personnel, who will be needed in advance of related revenues. When the Company
commences operations in a city, it will initially resell the local exchange
services of LECs or other CLECs. The Company will carry more of its traffic on
its own facilities as it develops and installs the switches, radios and
interconnections required to provide services in
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a particular city. However, the Company always will carry significant amounts of
its traffic over leased facilities at lower margins. The resale of local
exchange services typically will result in greater operating costs than the
provision of services over the Company's own facilities and such costs will
therefore decrease as a percentage of total CLEC operating costs as the Company
begins to provide more services over its own facilities. Additionally, site
acquisition and switch costs will become a lower percentage of cost per minute
of service as more buildings are connected and as the Company increases the
number of customers and lines per building. The Company is following a city-by-
city, building-centric network plan to establish its own local exchange services
facilities. The up-front capital costs of establishing the initial
infrastructure required for the Company to provide its own local exchange
services are substantial and much greater than those relating to the Company's
CAP business.
- Costs associated with the Company's CAP business include site
acquisition (including option fees for the prequalification of buildings for
Roof Rights) and equipment related fees and expenses, including costs incurred
in connection with the acquisition of Roof Rights and the purchase of 38 GHz
radios. In addition, the Company will continue to incur substantial start-up
costs related to its CAP business that will not be capitalized, including costs
of engineering, marketing, administrative and other personnel who will be needed
in advance of related revenues. The Company anticipates that the cost per
Wireless Fiber link will be reduced as increased traffic is generated in
buildings in which the Company already has established service and the Company
qualifies for volume discounts from its principal equipment vendors. The Company
also expects that equipment costs will continue to drop as technological
improvements are made and more vendors begin to offer 38 GHz radios and other
equipment. The initial costs to complete a Wireless Fiber link and initiate
services across that link are much less than those required by the Company's
CLEC business because of the additional costs related to establishing CLEC
services, such as those related to the purchasing of switches and customer-site
equipment.
- Costs associated with the Company's long distance business include
expenses related to resalable minutes purchased from major carriers, and
accordingly fluctuate with revenue. Typically, reductions of such costs are
achieved through negotiated volume rebates and competitive contract pricing.
Generally, the Company is obligated to generate certain minimum monthly usage
with its long distance carriers and may be required to pay an underutilization
fee in addition to its monthly bill equal to a certain percentage of the
difference between such minimum commitments and the traffic actually generated
by the Company. The Company has never paid or been required to pay any under
utilization charges.
- The Company's information services businesses have both production and
distribution costs. Film production costs include those related to producing
original products and licensing third-party products and are capitalized as
incurred and are expensed as productions are completed. Overhead costs in the
production division are also capitalized and allocated to films in progress, and
are subsequently expensed as such films are completed. The distribution
divisions incur royalty costs payable to third-party producers and selling
costs, both of which vary directly with sales of acquired product, as well as
administrative costs, substantially personnel related costs, which are primarily
fixed in nature and which are expensed as incurred.
- Costs associated with the Company's consumer product business
fluctuate with material and labor component pricing. A large percentage of
material components are sourced overseas, and are purchased in United States
dollars. The Company seeks to lower product costs through improved material
sourcing. See "-- Liquidity and Capital Resources."
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995
Net sales for the six months ended June 30, 1996 increased by $18,244,000,
or 147%, to $30,684,000, from $12,440,000 for the six months ended June 30,
1995. This increase was principally
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attributable to increased revenues generated by the Company's telecommunications
businesses, which had revenues of approximately $20,573,000 during the six
months ended June 30, 1996, compared with $4,553,000 for the six months ended
June 30, 1995.
The increase in telecommunications revenue relates primarily to the
Company's residential long distance telephone business, which is currently the
Company's largest source of telecommunications revenue. During the period,
however, the operations of the Company's new local communications businesses
were advanced on many fronts, including the addition of personnel and customers,
broader regulatory authorizations in several states, negotiation of interconnect
agreements with incumbent local exchange carriers, and new relationships with
equipment vendors. All of these accomplishments set the stage for future
revenue growth from this part of the Company's business. Over time, this focus
on the local communications market is expected to result in residential long
distance revenues accounting for lower percentage of the overall
telecommunications revenues of the Company. Furthermore, the Company intends to
expand the marketing of its long distance services to the business market
through WinStar Telecom, as part of its integrated telecommunications services
offering.
During the second quarter, the Company stopped accepting new customer
orders for long distance services from certain independent marketing agents.
These agents were responsible for generating a substantial portion of the
Company's telecommunications revenues during the first six months of 1996,
through certain marketing programs which the Company concluded were not
consistent with its overall strategy. On May 10, 1996, the Company adopted a
policy of mandatory independent verification of all written customer orders as a
result of consumer and regulatory complaints from these programs. The Company
is developing alternative long distance marketing programs designed to attract a
broader base of customers, including the marketing and sales by its new CLEC
sales force of these services to small and medium size commercial customers, and
is continuing its efforts to increase its revenues through acquisitions. While
the Company expects overall revenues to increase in the third and fourth
quarters of 1996, to the extent that such new programs or acquisitions
individually or in the aggregate are not successful in the near term, the
Company is likely to experience a reduction in its residential long distance
revenues during the same period.
The Company also recorded a $1,370,000 increase in its information services
revenues to $3,423,000, from $2,052,000 for the six months ended June 30, 1995,
principally resulting from the Fox/Lorber and TWL acquisitions which occurred
during the second quarter. The two New Media acquisitions are consistent with
the Company's low risk, low expenditure approach to the content business. The
acquisitions cost approximately $2.5 million consisting of cash, stock and
notes, and are expected to contribute approximately $7 million to revenues for
the balance of the year.
Gross profit for the six months ended June 30, 1996 increase by $9,629,000,
or 283%, to $13,036,000, from $3,407,000 for the six months ended June 30, 1995.
Gross profit as a percentage of net sales increased to 42.5% for the six months
ended June 30, 1996, from 27.4% for the six months ended June 30, 1995. This
increase was primarily attributable to improving margins in the Company's
telecommunications business, which have been positively impacted by lower cost
of sales of its long distance business achieved through reduced carrier costs
resulting from renegotiated contracts with its long distance service carriers.
The telecommunications segment gross profit margin increased to 46.7% for the
period, up from 21.4% for the first six months of 1995. The Company expects
that gross profit margins of its long distance business for the third and fourth
quarter of 1996 will be lower due to the Company's shift in long distance
marketing strategy. Margin improvement was also recognized from the information
services segment, where the gross profit margin for the six months ended June
30, 1996 was 36.0% compared with 28.6% for the first six months of 1995.
The Company expects gross profit to continue to increase as the Company's
local communications business expands, however the gross profit margin is
expected to continue to fluctuate during this development phase. For example,
the gross profit margin of the Company's CLEC business will initially be
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lower, until its switches are installed and in operation, at which time margins
are expected to increase. The Company's CAP business is expected to positively
impact margins as revenues increase. Long distance margins are expected to be
lower in the near term, due to the Company's shift in its long distance
marketing strategy. While these decreased long distance margins may have a
greater effect on the overall gross profit margin in the near term, this is
expected to have a lesser effect on overall gross profit margin in time as
revenues from the other business segments accelerate. The Company's information
services and consumer product segments' gross profit margins fluctuate from
quarter to quarter based on seasonality and product mix.
Selling, general and administrative expenses increased by $21,039,000 to
$28,005,000, or 91% of net sales, for the six months ended June 30, 1996 from
$6,966,000, or 56% of net sales, for the comparable period of the prior year.
The telecommunications segment accounted for 71% of such increase. Significant
factors were the increase in sales, marketing, network and software engineering
and related technical and support personnel resulting from the accelerated
rollout of the Company's CLEC operations and growth in personnel at WinStar
Wireless. These expenses will continue to grow as a percentage of net sales in
the near term as the Company continues to emphasize the development of its local
communications business. The effect of the Fox/Lorber and TWL acquisitions
during the second quarter resulted in expense increases in the information
services segment, which generated 6% of the increase for the period. Corporate,
general and administrative expenses accounted for 20% of the total increase,
reflecting the expense of continued expansion of the Company's executive,
finance, information and human resource personnel and systems. For the reasons
noted above, the operating loss for the six months ended June 30, 1996 was
$15,804,000, compared with $3,720,000 for the six months ended June 30, 1995.
Interest expense for the six months ended June 30, 1996 was $18,015,000,
compared with $430,000 for the six months ended June 30, 1995. The increase was
primarily attributable to $16,116,000 in interest accreted on the senior and
convertible notes payable issued in the Company's October 1995 Debt Placement,
which is not payable in cash until after 1999. Interest income for the six
months ended June 30, 1996 increased by $5,364,000, to $5,658,000, from $294,000
for the six months ended June 30, 1995. The increase is attributable to
earnings on the proceeds of the 1995 Debt Placement.
Other expense for the six months ended June 30, 1996 decreased by $786,000,
to $467,000, from $1,253,000 for the six months ended June 30, 1995. During the
six months ended June 30, 1995, the Company recorded an expense of $1,104,000
representing its equity interest in the losses of Avant-Garde. As a result of
the merger of Avant-Garde, the Company began to include all of Avant-Garde's
revenues and expenses in its consolidated statements of operations effective
July 17, 1995, and therefore this expense does not appear in the statement of
operations for the quarter ended June 30, 1996. In addition, the cost of
acquisition of Avant-Garde has been allocated primarily to licenses, and the
amortization of this asset caused an increase in the amortization expense from
$149,000 for the six months ended June 30, 1995, to $467,000 for the six months
ended June 30, 1996.
For the reasons noted above, the net loss for the six months ended June 30,
1996 was $28,815,000, compared with a net loss of $5,109,000 for the comparable
period of 1995.
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TEN MONTHS ENDED DECEMBER 31, 1995 COMPARED TO THE TEN MONTHS ENDED
DECEMBER 31, 1994
Net sales for the ten months ended December 31, 1995 increased by
$7,753,366, or 35.2%, to $29,771,472, from $22,018,106 in the comparable period
of the prior year. This increase was attributable to increased revenues in the
Company's information and entertainment services and consumer products
merchandising subsidiaries. During the ten months ended December 31, 1995,
WinStar Wireless had only nominal revenues. WinStar New Media, which reported
nominal revenues in the prior year, had revenues of approximately $2,648,000 for
the ten months ended December 31, 1995, related primarily to the completion of
certain documentary television products. WinStar Global Products also
experienced an increase in revenue of approximately $5,664,000, primarily due to
the growth in sales volume of its bath and body product lines.
Cost of sales for the ten months ended December 31, 1995 increased by
$4,785,000, or 32%, to $19,546,000, from $14,761,000 for the ten months ended
December 31, 1994. The increase was principally attributable to the growth in
the Company's information services and consumer products businesses.
Gross profit for the ten month ended December 31, 1995 increased by
$2,968,000, or 41%, to $10,225,000, from $7,257,000 for the ten months ended
December 31, 1994. Gross profit as a percentage of sales increased to 34.3% for
the ten months ended December 31, 1995, compared to 33.0% in the comparable
period of the prior year. The increase was principally attributable to an
increase in gross margins at WinStar Global Products resulting from sales price
increases and product cost decreases relating to better material pricing and
factory efficiencies.
Selling, general and administrative expenses increased by $9,292,277 to
$19,266,466, or 64.7% of net sales, for the ten months ended December 31, 1995,
from $9,974,189, or 45.3% of net sales, in the comparable period of the prior
year. The acquisition of Avant-Garde and the consolidation of that entity's
results of operations into the Company's financial statements from July 17, 1995
onward, as well as the growth in the administrative infrastructure at WinStar
Wireless, accounted for approximately 36% of the total increase. In particular,
expenses were incurred to develop operating systems, to market services to
targeted customers and to prepare for future growth in the wireless business.
Corporate general and administrative expenses accounted for approximately 23% of
the total increase because of the hiring of additional personnel and the
expansion of the Company's infrastructure to manage future growth in the
wireless business. Selling and marketing expenses incurred by WinStar Global
Products to service increased revenues accounted for approximately 22% of the
total increase.
For the reasons noted above, the operating loss for the ten months ended
December 31, 1995, was $9,811,629, compared to an operating loss of $3,462,037
in the comparable period of the prior year.
Interest expense increased by $7,125,000 to $7,630,000 for the ten months
ended December 31, 1995, from $505,000 for the ten months ended December 31,
1994, reflecting principally the non-cash accretion of interest to the Senior
and Convertible Notes.
Interest income for the ten months ended December 31, 1995 increased by
$2,593,000, to $2,890,000, compared with $297,000 for the same period during the
prior year. The increase was attributable to earnings on the 1995 Debt
Placement, which raised net proceeds of $214.5 million.
Other expense, net, for the ten months ended December 31, 1995 increased by
$357,000, to $1,306,000, compared with $949,000 for the same period of the prior
year. The cost of the acquisition of Avant-Garde has been allocated primarily
to the 38 GHz licenses held by Avant-Garde at the time of the acquisition, and
the amortization of this asset beginning in June 1995, when such licenses were
placed into service, caused an increase in amortization expense of $258,000.
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For the reasons noted above, the Company reported a net loss of
$15,857,459 for the ten months ended December 31, 1995, compared to a net
loss of $4,618,358 in the comparable period of the prior year.
YEAR ENDED FEBRUARY 28, 1995 COMPARED TO YEAR ENDED FEBRUARY 28, 1994
Net sales for the year ended February 28, 1995, were $25,564,760, up
63.6% from the prior year's sales of $15,625,019. During the year ended
February 28, 1995, WinStar Gateway reported net sales of $14,909,225,
compared to net sales of $8,505,282 in the year ended February 28, 1994, an
increase of 75.3%. Sales growth resulted primarily from growth in the
customer base at WinStar Gateway. WinStar Global Products also experienced
substantial sales growth, from $7,119,737 in the year ended February 28,
1994, to $10,182,143 in the year ended February 28, 1995, an increase of 43%.
This increase was attributable to approximately $3,600,000 in additional
sales from the bath and body product line acquired in the year ended February
28, 1994, as well as growth in the personal care products line. These sales
increases were offset by a reduction of approximately $1,200,000 in sales
from discontinued business lines. WinStar New Media generated $473,392 in
sales in the year ended February 28, 1995, its first year of operation.
Cost of sales for the year ended February 28, 1995 increased by
$6,990,000, or 65%, to $17,703,000, from $10,712,000 for the year ended
February 28, 1994. The increase is principally attributable to the growth in
the Company's long distance telephone and consumer products businesses.
Gross profit for the year ended February 28, 1995 increased by
$2,949,000, or 60%, to $7,862,000, from $4,913,000 for the year ended
February 28, 1994. Gross profit as a percentage of sales was 30.8% in the
year ended February 28, 1995, compared to 31.4% in the prior year. The
slight decrease is attributable to certain one-time charges recorded at
WinStar Gateway relating to contractual payments due to the Company's
telecommunications providers.
Selling, general and administrative expenses increased by $5,800,946 to
$12,688,859, or 49.6% of net sales, for the year ended February 28, 1995,
from $6,887,913, or 44.1% of net sales, for the prior year. The increase was
attributable to increased operating expenses related to the growth of WinStar
Gateway and WinStar Global Products, the build up of the corporate
infrastructure to identify, acquire and manage opportunities for the
Company's continued telecommunications growth, and start-up expenses
associated with WinStar Wireless, offset by a reduction of expenses related
to discontinued business lines. The Company also recorded a restructuring
charge of $607,609 and other non-recurring charges of $481,872 in the year
ended February 28, 1995, related to its WinStar Gateway subsidiary. These
charges include termination costs for previous executive, management, and
staff personnel as well as other charges taken in connection with sales
programs and other initiatives implemented by previous management. For the
reasons noted above, the operating loss for the year ended February 28, 1995,
was $5,611,436, compared to an operating loss of $2,067,521 in the prior year.
Interest expense decreased to $637,000 in the year ended February 28,
1995 from $744,000 in the prior year. This improvement was due to the use of
approximately $2,000,000 in promissory notes by the holders thereof for the
payment of the exercise price of certain warrants.
Other expense, net, for the year ended February 28, 1995 decreased by
$4,321,000, to $1,366,000, from $5,687,000 for the year ended February 28,
1994. In the year ended February 28, 1994, the Company recorded a non-cash
expense of $5,316,667 related to certain stock options issued in connection
with the Company's initial public offering in 1991, and an expense of
$292,376 related to discontinued business lines. The Company also recorded
an extraordinary gain of $194,154 resulting from the settlement of debt at a
discount. These situations did not recur in the year ended February 28,
1995. This decrease in other expense was offset in part by the Company's
proportionate share of expenses incurred by Avant-Garde, aggregating $1.1
million.
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For the reasons noted above, the Company reported a net loss of
$7,230,195 for the year ended February 28, 1995, compared to a net loss of
$8,195,468 for the year ended February 28, 1994.
LIQUIDITY AND CAPITAL RESOURCES
The Company has incurred significant operating and net losses due in
large part to the development of its telecommunications services business,
and anticipates that such losses will increase as the Company accelerates its
growth strategy. Historically, the Company has funded its operating losses
and capital expenditures through public and private offerings of debt and
equity securities and from credit facilities. Cash used to fund negative
EBITDA during the six months ended June 30, 1996 and the ten months ended
December 31, 1995 was $13.1 million and $9.0 million, respectively. In
October 1995, the Company raised net proceeds of approximately $214.5 million
from the placement of debt securities (the "1995 Debt Placement") to fund the
expansion of its CAP business. Interest expense on such debt does not require
payments of cash for the first five years. At June 30, 1996 and December 31,
1995, working capital was $193 million and $215 million, respectively,
including cash, cash equivalents and short term investments of $191 million
and $212 million, respectively.
The passage of the Telecommunications Act has resulted in opportunities
that have caused the Company to accelerate the development and expansion of
its telecommunications businesses. To capitalize on these opportunities,
the Company has undertaken a plan to expand and accelerate its capital
expenditure program. Capital expenditures for the six months ended June 30,
1996, and the ten months ended December 31, 1995 were $10.4 million and $8.7
million, respectively, and, prior to the enactment of the Telecommunications
Act, the Company's planned capital expenditures for 1996 and 1997 were
estimated at $36 million and $52 million, respectively. As a result of the
acceleration of the development and expansion of the Company's
telecommunications businesses, the Company now plans to significantly
increase its capital expenditures.
A significant portion of the Company's increased capital requirements
will result from the rollout of the Company's CLEC business on a nationwide
basis. The Company has begun to build a direct sales force, has opened sales
offices in New York City, and is in the process of expanding into other
metropolitan areas. Additionally, the Company is in the process of ordering
switching and other network equipment to be placed in key markets.
Accordingly, the Company expects that its working capital, capital
expenditure needs and selling, general and administrative expenses will
continue to increase as this expansion takes place, which will accelerate the
Company's need for additional capital.
The Company has two working capital facilities and an equipment lease
financing facility with a total of $14.4 million outstanding thereunder as of
June 30, 1996. One working capital facility, which was to expire in
September 1996, was assigned to a new lender who has extended a similar
facility through September 1999. The Company is currently negotiating and
expects to complete an extension of the other working capital facility.
As of June 30, 1996, the Company also has commitments during the next
year (i) to purchase $23.5 million of telecommunications capital equipment,
(ii) to pay an aggregate of approximately $41 million upon consummation of
the Milliwave and other acquisitions, and (iii) to pay $17.5 million in short
term notes or Common Stock upon consummation of the Locate acquisition.
The proceeds of the Company's 1995 Debt Placement will be used
principally to fund the capital expenditures and operating losses resulting
from the accelerated development and expansion of the Company's
telecommunications businesses. Management anticipates, based on current plans
and assumptions relating to its operations, that the net proceeds from the
1995 Debt Placement, together with its current financial resources and
equipment financing arrangements which the Company intends to seek, will be
sufficient to fund the Company's growth and operations for approximately 16
to 20 months from the date
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of this Prospectus. Management believes that the Company's capital needs at
the end of such period will continue to be significant and the Company will
continue to seek additional sources of capital. The Company anticipates that
it will be able to raise sufficient capital to implement its accelerated
plan. Further, in the event the Company's plans or assumptions change or
prove to be inaccurate, or if the Company successfully consummates any
acquisitions of businesses or assets (including additional 38 GHz licenses,
by auction or otherwise), the Company may be required to seek additional
sources of capital sooner than currently anticipated. Sources of additional
capital may include public and private equity and debt financings, sales of
nonstrategic assets and other financing arrangements. There can be no
assurance that the Company will be able to obtain financing, or, if such
financing is available, that the Company will be able to obtain it on
acceptable terms. Failure to obtain additional financing, if needed, could
result in the delay or abandonment of some or all of the Company's
development and expansion plan, which would have a material adverse effect on
the Company's business and could adversely affect the Company's ability to
service its debt and the value of its Common Stock.
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BUSINESS
GENERAL
The Company delivers telecommunications services in the United States as
a CAP, CLEC, and long distance and private network services provider. The
Company utilizes its Wireless Fiber services as a key component of its
transmission capabilities. As a complement to its telecommunications
operations, the Company produces and distributes information and
entertainment content.
Wireless Fiber services deliver high quality transmission via digital,
wireless capacity in the 38 GHz portion of the radio spectrum, where the
Company is the holder of the largest aggregate amount of 38 GHz bandwidth in
the United States pursuant to Wireless Licenses granted by the FCC. The
Wireless Licenses enable the Company to provide Wireless Fiber services in
the 31 most populated MSAs in the United States, including Atlanta, Boston,
Chicago, Los Angeles, New York and San Francisco, among others, and 41 of the
45 most populated MSAs. The MSAs covered by the Wireless Licenses include
more than 100 cities with populations exceeding 100,000, and encompass an
aggregate population of almost 110 million. By exploiting its Wireless Fiber
capabilities, the Company seeks to become a value-added, economical provider
of local telecommunications services and an attractive alternative to the
LECs, such as the RBOCs, in substantially all of the metropolitan areas
covered by the Wireless Licenses.
The Company believes that its Wireless Fiber services provide it with
certain critical competitive advantages in the evolving telecommunications
market. The Company's Wireless Fiber services are engineered to provide
99.999% reliability, with a 10(13) bit error rate (unfaded), performance
equivalent to that provided by fiber optic-based networks and exceeding that
generally provided by copper-based networks. The Company's Wireless Fiber
services provide a high capacity, cost-effective solution for voice and
broadband applications, providing data transfer rates equivalent to
fiber-optic products and significantly exceeding those provided by the
fastest dial-up modems and ISDN lines. The above-ground,
installation-to-meet-demand nature of the Company's Wireless Fiber services
enables the Company to provide services to a customer more quickly and less
expensively than telecommunications providers that rely on the installation
of fiber optic- or copper-based lines for connection to customer locations.
TELECOMMUNICATIONS INDUSTRY OVERVIEW
The telecommunications industry is being reshaped by the deregulation of
telecommunications markets, growing demand for high speed, high capacity
digital telecommunications services and rapid advances in wireless
technologies, including 38 GHz-based technology. The long distance market
has been opened to competition for more than a decade and current
deregulation is now allowing new competitors to enter into the local
telecommunications markets to compete with the incumbent LECs in all aspects
of local telecommunications services. The accelerating growth of LANs, WANs,
Internet services and video teleconferencing, and the ongoing revolution in
microprocessor power, are significantly increasing the volume of broadband
telecommunications traffic. The convergence of these factors is creating
significant opportunities for competitive telecommunications service
providers such as the Company.
GENERAL
The present structure of the telecommunications marketplace was shaped
principally by the court-directed divestiture ("Divestiture") of the Bell
System in 1984. In connection with the Divestiture, the United States was
divided into 194 local regions known as LATAs and the Bell System was
separated into a long distance carrier, AT&T, to provide long distance
services between LATAs, and seven RBOCs, including, for example, Bell
Atlantic and NYNEX, to provide local telecommunications services. Long
distance services involve the carriage of telecommunications traffic between
LATAs. Local telecommunications services involve the provision of switched
local traffic (local exchange services) and short-haul (or intraLATA) toll
service and
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the provision of local network access to long distance carriers by the LECs,
including the RBOCs, and independent long distance carriers and resellers,
thereby allowing long distance traffic to reach end users in a different LATA
(local access).
While the Divestiture facilitated competition in the long distance
segment of the telecommunications market, each LEC initially continued to
enjoy a monopoly in the provision of local telecommunications services in its
respective geographic service area. Beginning in the mid-1980s, however,
certain entities began constructing their own local networks and providing
local access and dedicated services designed to allow users to bypass a
portion of a particular LEC's local network. CAPs were the first alternative
providers of these types of services and the first competitors in the local
telecommunications services market. The demand for alternative local
telecommunications services providers in the past has been driven in large
part by the significant charges levied by the LECs on the long distance
carriers for access to such LECs' local networks (access charges), which have
represented approximately 45% of such carriers' long distance revenues. The
CAPs' local networks typically consist of fiber optic-based facilities
connecting long distance carriers' POPs within a metropolitan area,
connecting end users (primarily large businesses and government agencies)
with long distance carriers' POPs and connecting different locations of a
particular customer. CAPs take advantage of the digital technology employed
by fiber optics and the substantial capacity and economies of scale inherent
in their networks to offer customers service that is generally less expensive
and of higher quality than that obtained from the LECs.
The Telecommunications Act opens the local exchange services market to
competition on a nationwide basis. The Telecommunications Act provides for
the removal of legal barriers to competition in the local exchange market and
will permit CLECs, such as the Company, to offer a full range of local
exchange services, including local dial tone, custom calling features and
intraLATA toll services, to both business and residential customers. It
requires LECs to allow alternate carriers, such as the Company, to
interconnect with their networks and establishes additional procompetitive
obligations upon the incumbent LECs. These obligations include allowing
unbundled access to the incumbent LECs' networks, resale of local exchange
services, number portability, dialing parity, access to rights-of-way and
mutual compensation for the termination of switched local traffic. In
addition, the legislation codifies the LECs' equal access and
nondiscrimination obligations and preempts inconsistent state regulation.
The Telecommunications Act also contains certain provisions that ultimately
will eliminate the restrictions that currently prohibit the RBOCs from
providing interLATA services.
The full extent of the effects of the Telecommunications Act and the
Interconnection Order on the Company and other telecommunications companies
is as of yet unknown, particularly because it contains many provisions that
require enabling regulations, many of which have not yet been promulgated or
which are not yet final or are still subject to reconsideration or appeal or
both. However, the Company believes that both competition and opportunity in
the telecommunications industry will be increased by the Telecommunications
Act, as telecommunications providers seek to enter quickly into newly-opened
markets. The Company believes that such opportunity is amplified by (i)
growing consumer interest, especially among business users, in alternatives
to their existing carriers for more capacity in the form of broader bandwidth
channels to customer premises, better pricing terms and route diversity, (ii)
long distance carriers' desire to connect their long distance networks to
local origination and termination points at rates lower than available from
the incumbent LECs', (iii) a monopoly position and pricing structure in the
local exchange services market which historically has provided little
economic incentive for the incumbent LECs to upgrade their existing networks
or to provide specialized services, (iv) technological advances in data and
video services and products requiring greater transmission capacity and
reliability and (v) ongoing regulatory initiatives to allow other providers
of local telecommunications services to interconnect their networks with
those owned by the incumbent LECs.
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38 GHz TECHNOLOGY
An aggregate of fourteen 100 MHz channels in 38 GHz currently are
allocated by the FCC in each 38 GHz licensed area with certain additional 100
MHz channels available for future licensing. Although FCC rules specify that
38 GHz be used for point-to-point transmissions, it has not mandated any
particular commercial services for such frequency. Prior to 1993, the 38 GHz
portion of the radio spectrum remained largely unassigned for commercial use
in the United States due to, among other factors, the lack of available
technology to efficiently utilize 38 GHz for commercial purposes. In the
early 1990s, however, technology became available which allowed for the
provision of non-switched wireless telecommunications links between two fixed
points for the carriage of telecommunications traffic. 38 GHz technology was
first employed in Europe on a commercial basis by PCS providers for the
interconnection of their cell sites.
By early 1994, technological advances combined with growing use in
Europe led to increasing awareness of and interest in the potential uses of
38 GHz in the United States. After Avant-Garde (which was acquired by the
Company in July 1995 and which was the original recipient of many of the
Company's Wireless Licenses) received its initial 30 multiple-channel 38 GHz
licenses in September 1993 (each license providing for four channels for an
aggregate of 400 MHz of bandwidth capacity), other entities, including
several large telecommunications companies such as Pacific Telesis, Inc., GTE
and MCI, sought similar multiple-channel 38 GHz licenses for the provision of
wireless local telecommunications services. However, in September 1994, the
FCC began to follow new procedures with respect to the granting of 38 GHz
licenses, including limiting bandwidth capacity to a single 100 MHz channel
per licensee in a particular licensed geographic area and, in November 1995,
established a freeze on the issuance of new licenses in this spectrum pending
the outcome of a rulemaking proceeding. See "-- Government Regulation of
Telecommunications Operations."
Point-to-point wireless local telecommunications services can be offered
in many portions of the radio spectrum. However, 38 GHz has several
characteristics that make it particularly well suited for the provision of
such services, including:
- EFFICIENT CHANNEL REUSE ALLOWING FOR DENSE AND CONTROLLED NETWORK
DESIGNS. Certain characteristics of 38 GHz, including the small amount of
dispersion (i.e., scattering) of the radio beam as compared to the more
dispersed radio beams produced in lower frequencies, allow for the reuse of
bandwidth capacity in a licensed area. The ability to reuse capacity allows
the 38 GHz license holder to densely deploy its 38 GHz services in a given
geographic area, providing services to multiple customers over the same 38
GHz channel and conserving bandwidth capacity, thereby enhancing the types of
services that can be provided and increasing the number of customers to which
such services can be provided. Due to the limited dispersion characteristics
of 38 GHz, numerous T-1 circuits and/or DS-3 circuits can be placed in close
proximity without interfering with each other. The Company believes that the
use of multiple 100 MHz channels allows, and in many instances is required,
for dense reuse where multiple DS-3 paths are being deployed in a given area.
The Company currently utilizes one 100 MHz channel to provide either four T-1
circuits, eight T-1 circuits or one DS-3 circuit depending on the specific
radio equipment utilized and its configuration. The specific equipment and
capacity deployed are determined by the capacity needed on each link.
38 GHz licenses have been granted by the FCC on a geographic basis and
cover areas originally defined by the applicant, allowing the license holder
to install and operate as many transmission links as can be engineered in the
entire licensed area without obtaining further approval from the FCC. This
is a significant difference from most other comparable portions of the radio
spectrum (i.e., those that are used for other commercial point-to-point
applications), which are typically licensed on a link-by-link basis following
frequency coordination. Frequency coordination is often time consuming and
problematic at frequencies lower than 38 GHz because such frequencies are
widely used and signals at such frequencies are more dispersed. The
exclusive right to use a particular channel or channels within a broad
geographic area gives the licensee much greater control and flexibility over
its network design. A 38 GHz licensee can save costs, ensure
interference-
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free operations and increase quality and reliability by designing efficient
38 GHz networks in advance of their deployment.
- HIGHER DATA TRANSFER RATES. The total amount of bandwidth for each
38 GHz channel is 100 MHz, which exceeds the bandwidth of any other present
terrestrial wireless channel allotment and supports full broadband
capability. For example, one 38 GHz DS-3 channel at 45 Mbps today can
transfer data at a rate which is over 1,500 times the rate of the fastest
dial-up modem currently in use (28.8 Kbps) and over 350 times the rate of the
fastest ISDN line currently in use (128 Kbps). Data transfer rates of a 38
GHz DS-3 channel even exceed the data transfer rates of cable modems (30
Mbps). The broadband capacity of 38 GHz transmission provides improved speed
and quality in transmissions, as compared to transmissions that are carried
over a "last mile" consisting of copper wire. In addition to accommodating
standard voice and data requirements, 45 Mbps data transmission rates allow
end users to receive full motion video and 3-D graphics and to utilize highly
interactive applications on the Internet and other networks.
- RAPID DEPLOYMENT. 38 GHz technology generally can be deployed
considerably more rapidly than wireline (because of permit procedures and
construction time required for wireline buildout) and many other wireless
technologies (because of the need to follow FCC frequency coordination
procedures in connection with the installation of most wireless facilities).
- EASE OF INSTALLATION. The equipment used for point-to-point
applications in 38 GHz (i.e., antennae, transceivers and digital interface
units) is typically smaller, less obtrusive, less expensive and uses less
power than equipment used for similar applications at lower frequencies,
making it often relatively easier to obtain the Roof Rights required to
install transceivers and less costly to initiate 38 GHz-based services.
- ADDITIONAL ADVANTAGES OVER OTHER PORTIONS OF RADIO SPECTRUM. At
frequencies above 38 GHz, point-to-point applications become less practical
because the maximum distance between transceivers continually decreases as
attenuation increases. Additionally, the FCC has specified the use of many
portions of the spectrum for applications other than point-to-point, such as
satellite and wireless cable services, and, accordingly, these portions of
the radio spectrum often are not available for point-to-point applications.
Finally, 38 GHz has characteristics which provide better signal quality and
performance in inclement weather than those offered in the immediately
surrounding portions of the radio spectrum.
STRATEGY FOR TELECOMMUNICATIONS BUSINESS GROWTH
By exploiting its Wireless Fiber capabilities, the Company seeks to
become a leading provider of integrated telecommunications services in the
United States. Key elements of the Company's strategy include:
ACCELERATING ROLLOUT OF CLEC SERVICES AND LEVERAGING OF WIRELESS FIBER
CAPABILITIES. In response to the Telecommunications Act, the Company is
accelerating the rollout of its local exchange CLEC services. The Company has
commenced offering local exchange services on a limited, resale basis in New
York City and it is anticipated that the Company will begin offering such
services in a number of additional cities during the next nine months. As
the Company commences its CLEC business in each city, in order to gain
initial market penetration in that city, it intends to initially resell the
local exchange services of other service providers, such as other CLECs and
the incumbent LECs, until it has established the Wireless Fiber and
switch-based infrastructure required to provide its own local exchange
services in that city. The Company also is in the process of negotiating
interconnection agreements with various local exchange service providers,
including incumbent LECs, under which the Company will obtain network
elements and/or services on an unbundled basis. The Company has entered into
a number of interconnection agreements for states that encompass various
cities covered by the Wireless Licenses. These agreements are with carriers
such as Ameritech for Illinois, PacBell and GTE for California, NYNEX for New
York and Massachusetts, and Bell South for Florida, Georgia and Tennessee,
among others. The Company is following a city-by-city, building-centric
network plan to establish its own local exchange services facilities which
will utilize the Company's own
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switches and Wireless Fiber services to link end user customers and fiber
optic facilities leased or purchased from service providers. By utilizing its
Wireless Fiber services to originate and terminate customer traffic without
connecting to end users through the extension of more costly fiber-optic
lines or using the facilities of the LECs, the Company believes that it will
be able to provide many types of bundled local exchange, long distance,
Internet services, enhanced communications and information services to its
target customers at lower cost than many of its competitors, with equal or
better quality. See "-- Telecommunications Services -- CLEC Services."
CONTINUING TO MARKET CAP SERVICES TO OTHER TELECOMMUNICATIONS PROVIDERS.
The Company is continuing to target other telecommunications service
providers in marketing its Wireless Fiber-based local access services. The
Company believes that its Wireless Fiber services present an attractive,
economical vehicle for other telecommunications service providers to extend
their own networks and service territories, especially as they seek to
rapidly penetrate new markets opening up to them as a result of the
Telecommunications Act. By having its Wireless Fiber services packaged with
the service offerings of other telecommunications providers or utilized as a
seamless component of such providers' own telecommunications networks, the
Company also hopes to leverage the marketing and distribution capabilities of
such providers. The Company currently offers its Wireless Fiber services to
long distance carriers; other CAPs and CLECs; CMRS providers; and LECs. The
Company also offers its Wireless Fiber services to all types of
telecommunications service providers as viable, cost-efficient alternate
routes for their telecommunications traffic in situations where primary
routes are incapacitated and/or network reliability concerns require
alternate telecommunications paths. See "-- Telecommunications Services -- CAP
Services."
PROVIDING WIRELESS INTERNET ACCESS AND PRIVATE NETWORK SERVICES. The
Company is marketing its Wireless Fiber services to take advantage of the
characteristics that make it an attractive solution for entities seeking
cost-effective, high capacity Internet access and private voice and data
network services. The total amount of bandwidth of each 38 GHz channel is
100 MHz, which supports high broadband capability. One Wireless Fiber DS-3
link provides transfer rates which are over 1,500 times the rate of the
fastest dial-up modem currently in use and over 350 times the rate of the
fastest ISDN line currently in use. In addition to accommodating standard
voice and data requirements, Wireless Fiber services can allow end users to
receive real time, full motion video and 3-D graphics and to utilize highly
interactive applications on the Internet and other networks. In addition to
its CAP and CLEC services, the Company offers its Wireless Fiber services to
businesses, government agencies and institutions with multiple locations that
seek to establish their own independent local telecommunications systems for
dedicated private line voice and data networks, including LAN and WAN
applications. The Company also recently established its first major
relationship with an Internet service provider and is actively pursuing
relationships with additional Internet service providers. See "--
Telecommunications Services -- CAP Services."
EXPLOITING FIRST TO MARKET AND LEADING SPECTRUM HOLDER ADVANTAGES. The
Company currently enjoys a first-to-market advantage as one of the few
holders of 38 GHz licenses with an established operating and management
infrastructure and the capital necessary to rapidly exploit and roll out its
38 GHz services on a commercial basis. The Company believes that its
competitive advantage is further strengthened by its position as the holder
of the largest aggregate amount of 38 GHz bandwidth capacity in the United
States and by the broad geographic scope allocated under its Wireless
Licenses. The Company holds 45 Wireless Licenses, 30 of which provide for 400
MHz of bandwidth capacity per licensed area and 15 of which provide for 100
MHz of bandwidth capacity per licensed area, and which allow the Company to
address an aggregate of more than 400 million channel pops. The Company will
acquire a significant number of additional 38 GHz licenses upon consummation
of the Milliwave, Locate and Pinnacle Acquisitions, which will enable the
Company to address more than 175 million additional channel pops. Based on
existing and proposed FCC regulations, the Company believes that it will be
difficult, in the near term, for other entities seeking to provide wireless
local telecommunications services similar to those of the Company to obtain
the aggregate bandwidth capacity and widespread geographic coverage afforded
to the Company under its Wireless Licenses. The
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Company seeks to acquire other 38 GHz licenses as opportunities arise, which
may include the acquisition of interests in other licensees and participation
in any auction procedure for 38 GHz licenses that the FCC establishes. See
"-- Telecommunications Services -- Wireless Fiber --Wireless Licenses."
EXPANDING AND IMPROVING THE COMPANY'S LONG DISTANCE OPERATIONS. The
Company is seeking to expand and improve its long distance operations by (i)
bundling its resale of long distance services with its local
telecommunications services, (ii) broadening its business customer base and
increasing customer retention rates, (iii) improving operating efficiencies
by reducing costs associated with the provision of its long distance
services, (iv) differentiating its long distance services, most notably, in
the near term, through the use of less complicated billing systems, (v) using
intelligent network platforms for the provision of enhanced
telecommunications services, (vi) enhancing the Company's internal marketing
capabilities, and (vii) acquiring and integrating customer bases from other
telecommunications providers. The Company also anticipates that it will be
able to leverage upon the billing systems and intelligent network platforms
developed in connection with its telecommunications services to enhance the
marketability of such services. See "-- Telecommunications Services -- Long
Distance Services."
ACQUIRING CONTENT TO COMPLEMENT TELECOMMUNICATIONS SERVICE OFFERINGS.
The Company believes that, over time, participants in the telecommunications
market increasingly will seek to offer "content" -- from information
programming, sports, weather, business and stock market information to music,
films and literature -- to differentiate their services and attract traffic
onto their transmission networks and that the ability to deliver
entertainment and information content to consumers will play an increasingly
important role in consumers' choice of a telecommunications provider.
Accordingly, as a complement to its telecommunications service offerings, the
Company produces and distributes information and entertainment content,
focusing on niche programming such as documentaries, foreign films and
multimedia sports programming. The Company believes that, in the future, it
will be able to bundle proprietary content that it controls with various
telecommunications services it offers to provide higher-margin products and
services. See "--New Media Business."
TELECOMMUNICATIONS SERVICES
Since late 1994, the Company has focused primarily on the development
and initial marketing of its Wireless Fiber-based local access services.
After an initial market-education phase, in which the Company demonstrated
the efficacy and reliability of its Wireless Fiber services, principally
though the use of field demonstrations and the installation of trial-basis
Wireless Fiber links, the Company began receiving initial orders for Wireless
Fiber services. In addition to continuing the expansion of its CAP business,
the Company is implementing its CLEC business on an accelerated basis. The
Company seeks to develop its CLEC business into a value-added, economical
alternative to the LECs, particularly through the exploitation of the
Company's Wireless Fiber capabilities.
WIRELESS FIBER
The Company utilizes its Wireless Fiber capacity in connection with its
CAP business. The Company also will employ its Wireless Fiber capacity as an
integral component of its planned CLEC facilities for the origination and
termination of local traffic and hubbing of switch and local node sites and
other facilities constructed or accessed by the Company.
WIRELESS FIBER LINKS.
Each Wireless Fiber link currently provides up to eight T-1s of capacity
(equivalent to 192 voice lines) or one DS-3 of capacity (equivalent to 672
voice lines). The Company believes that with future developments in 38 GHz
technology there will be substantial increases in the capacity of each
Wireless Fiber link. The Company's Wireless Fiber links meet or exceed
general telephone industry standards, provide transmission
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quality equivalent to that produced by fiber optic-based facilities, and
address the growing demand for high speed, high capacity, digital
telecommunications services for voice, data and video applications, including
traditional local access, Internet access and network interconnection
services. Accordingly, the Company believes that its Wireless Fiber capacity
meets or exceeds the majority of potential customers' requirements in the
Company's present and future target markets.
Each Wireless Fiber path consists of transmission links, which are
paired digital millimeter wave radio transceivers placed at a distance of up
to five miles from one another within a direct, unobstructed line of sight.
The transceivers currently used by the Company to create its Wireless Fiber
paths are primarily the Tel-Link 38 Radio Systems supplied by P-Com, Inc.
("P-Com") pursuant to a four-year nonexclusive supply agreement ("Tel-Link
Agreement") executed in November 1994, which may be terminated by the Company
upon 90 days' notice to P-Com (subject to certain liquidated damages
provisions if certain purchase minimums are not met). The transceivers are
installed where lines of sight can be established between transceivers, such
as on rooftops or towers or in windows. The Tel-Link Agreement includes
provisions whereby the Company pays a higher price per link at the beginning
of the contract period, with the excess recoverable by the Company in the
form of significantly discounted links once certain volume levels have been
achieved. The contract also stipulates certain minimum annual volume levels
which must be met in order to maintain the agreed upon pricing structure.
The Company has entered into an amendment to the Tel-Link Agreement with
P-Com, pursuant to which the requirements for volume discount pricing were
revised. The Company has not yet qualified for significant volume discounts.
The amendment also added another year to such term, reduced the purchase
commitment provisions upon termination, and revised the type of Tel-Links to
be provided by P-Com such that a greater proportion of higher capacity
transceivers (including DS-3 capable transceivers), will be delivered under
the agreement. As of June 30, 1996, the Company's noncancellable purchase
commitment under the Tel-Link Agreement was approximately $12.5 million.
The Company's Wireless Fiber services are reliable and cost-efficient.
Significant features of the Company's Wireless Fiber services include: (i) 38
GHz digital millimeter wave transmissions having narrow beam width, reducing
the potential of channel interference; (ii) 100 MHz bandwidth in each
channel, allowing for high subdivision of voice and data traffic; (iii) a
range of up to five miles between transmission links; (iv) performance
engineered to provide 99.999% reliability, as tested; (v) transmission
accuracy engineered to provide bit error rates of 10(13) (unfaded); (vi)
24-hour network monitoring by the Company's and Lucent's System Operations
Control Centers ("SOCCs"); (vii) optional safeguards from link outages by
installation of hot standbys that remain powered up and switch "on line" if
the primary link fails; (viii) optional forward error correction ensuring the
integrity of transmitted data over Wireless Fiber paths; and (ix) relatively
low cost (installed) for each pair of transceivers comprising a transmission
link.
In August 1995, the Company entered into a three-year service contract
with Lucent, pursuant to which Lucent has agreed to provide site survey,
installation, maintenance and network management services for the Company's
Wireless Fiber services 24-hours a day, 365 days a year, as required. The
Company also is in the process of expanding its own installation, maintenance
and network management capabilities, which expansion includes the development
of management and operating systems and the hiring of qualified personnel.
Transmission links in the Company's Wireless Fiber paths are connected
via dial-up modems to both the Company-maintained SOCC in Virginia and
Lucent's SOCC in Maryland. The SOCCs provide the Company with points of
contact for network monitoring, troubleshooting and dispatching repair
personnel in each MSA. The SOCCs provide a wide range of network
surveillance functions for each Wireless Fiber path, providing the Company
with the ability to remotely receive data regarding the diagnostics, status
and performance of its transmission links.
In order to provide quality transmission, Wireless Fiber services
require an unobstructed line of sight between two transceivers comprising a
link, with a maximum distance between any two corresponding
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transceivers of up to five miles (or shorter distances in certain areas; as
weather conditions may necessitate distances as short as 1.1 miles between
transceivers to maintain desired transmission quality). The areas in which
such shorter distances are required are those where rainfall intensity and
the size of the raindrops adversely impact transmission quality at longer
distances. Other weather conditions, such as snow, electrical storms and high
winds, have not, in the Company's experience, affected Wireless Fiber
services. The establishment of Wireless Fiber may require additional
transceivers to triangulate around obstacles (such as buildings). Similarly,
to establish Wireless Fiber services covering a distance in excess of five
miles, additional transceivers are required to establish a chain whose links
are no more than five miles apart at any given point. The cost of additional
transceivers where required by weather, physical obstacles or distance may
render the provision of Wireless Fiber services uneconomical in certain
instances.
The Company must obtain Roof Rights (or rights to access other similar
locations where unobstructed lines of sight are available) on each building
where a transceiver will be placed. The Company's prequalification
activities often require the payment of option fees for the buildings that
are being prequalified. In connection with the development of its Wireless
Fiber capacity for both its CAP and CLEC businesses, the Company has been
following a plan pursuant to which it seeks to negotiate, prior to receipt of
actual service orders, Roof Rights for the installation of Wireless Fiber
links on buildings specifically identified by existing and potential
customers in the metropolitan areas covered by the Wireless Licenses,
including buildings that can provide interconnection access to long distance
carriers' points of presence, switch locations and local access nodes. In
addition, upon consummation of the Locate Acquisition, it is anticipated that
the Company will gain roof access to a number of buildings, including the
World Trade Center and other key sites in New York City, which the Company
anticipates using in its CAP and CLEC operations.
WIRELESS LICENSES.
The Wireless Licenses allow the Company to provide Wireless Fiber
services in the 31 most populated MSAs in the United States and 41 of the 45
most populated MSAs, which include more than 100 cities with populations
exceeding 100,000 and encompasses an aggregate population of almost 110
million people. The Company has the largest aggregate amount of 38 GHz
bandwidth capacity in the United States, holding 45 Wireless Licenses, 30 of
which provide for 400 MHz of bandwidth capacity per licensed area ("400 MHz
Wireless Licenses"). The 400 MHz Wireless Licenses allow for the provision
of wireless local telecommunications services over four of the fourteen 38
GHz channels allocated in each of the following metropolitan areas: Atlanta,
Baltimore, Boston, Buffalo, Chicago, Cincinnati, Cleveland, Dallas, Denver,
Detroit, Houston, Kansas City, Los Angeles, Miami, Milwaukee,
Minneapolis/St.Paul, New York (Long Island), New York City, New York West
(Newark and Northern New Jersey), Oakland, Philadelphia, Phoenix, Pittsburgh,
San Diego, San Francisco, Seattle, Spokane, St. Louis, Tacoma, Tampa Bay and
Washington, D.C. The Company's remaining 15 Wireless Licenses, providing for
100 MHz of bandwidth capacity per licensed area ("100 MHz Wireless
Licenses"), were issued under FCC procedures adopted in September 1994 which
have limited recent grants of 38 GHz licenses to 100 MHz of bandwidth
capacity per licensee in a particular licensed area. The 100 MHz Wireless
Licenses allow for the provision of wireless local telecommunications
services over two additional channels in the New York City metropolitan area
and over one of the fourteen 38 GHz channels in each of the following
metropolitan areas: Austin-San Marcos, Boise, Charlotte, Indianapolis,
Jacksonville, Memphis, New Orleans, Norfolk, Oklahoma City, Omaha, Portland
(Oregon), San Antonio and Stamford.
Upon consummation of the Milliwave Acquisition, the Company will obtain
88 additional 38 GHz licenses, each providing for 100 MHz of bandwidth. The
Milliwave Licenses allow for the provision of service in more than 80 major
markets, encompassing an aggregate population of greater than 160 million.
The cities covered by the Milliwave Licenses include many already serviceable
by the Company under its existing Wireless Licenses, such as Boston, Chicago,
Dallas, Los Angeles and New York, among others, which will increase the
Company's aggregate bandwidth capacity in each such city. The Milliwave
Licenses also cover many cities which currently are not serviceable by the
Company under its existing Wireless Licenses,
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including, among others, Honolulu, Nashville, Orlando, Raleigh/Durham and
Rochester (New York). The Company also has entered into a (i) services
agreement with Milliwave pursuant to which it has agreed to provide services
to Milliwave in connection with the buildout by Milliwave of its licensed
areas in consideration for payment of monthly site access and management
fees, as well as installation fees, and (ii) a two-year transmission path
lease agreement with Milliwave permitting the Company to use up to 488 radio
links in Milliwave's licensed areas. Additionally, upon consummation of the
Pinnacle Acquisition, the Company will acquire three additional 38 GHz
licenses, each providing 100 MHz of bandwidth in the Baltimore, Dallas and
Philadelphia areas.
The 400 MHz Wireless Licenses were granted in September 1993. Under
each 400 MHz Wireless License, Avant-Garde, the original licensee, was
required to construct a Wireless Fiber link in each geographic area covered
by a Wireless License by March 15, 1995 in order to prevent possible
revocation of the license. On or before March 15, 1995, Avant-Garde was
operational in each of the areas covered by the 400 MHz Licenses and it filed
a certificate of completion (FCC Form 494A) for each 400 MHz Wireless License
with the FCC on March 15, 1995. The majority of the 100 MHz Wireless
Licenses have been granted since June 1995. Under each 100 MHz Wireless
License, WinStar Wireless is required to construct a Wireless Fiber link in
each geographic area covered by a Wireless License within 18 months from its
date of grant in order to prevent possible revocation of the license. Such
construction has occurred for all of the Wireless Licenses.
The FCC's current policy is to align the expiration dates of all
outstanding 38 GHz licenses such that all such licenses mature concurrently
and then to renew all such licenses for a matching period. The initial term
of all currently outstanding 38 GHz licenses, including the Wireless
Licenses, expires in February 2001. While the Company believes that all of
its Wireless Licenses will be renewed based upon FCC custom and practice
establishing a presumption in favor of licensees that have complied with
their regulatory obligations during the initial license period, there can be
no assurance that any Wireless License will be renewed upon expiration of its
initial term. See "Risk Factors -- Finite Initial Term of Wireless Licenses;
Potential License Renewal Costs; Fluctuations in the Value of Wireless
Licenses; Buildout Requirements for Milliwave and Other New Licenses;
Transfer of Control."
CAP SERVICES
The Company markets and provides wireless local access CAP services.
Utilizing its Wireless Licenses, the Company offers numerous wireless
telecommunications services to support a wide range of local access and
dedicated service needs with a high degree of reliability. The technology
and service applications in this field are evolving rapidly, and the Company
believes that its Wireless Fiber service offerings will expand over time to
include a broad range of voice, data and video applications. The Company
currently offers Wireless Fiber services for the following applications,
among others
LLOCAL BY-PASS FOR LONG DISTANCE CARRIERS. Long distance carriers can
utilize the Company's Wireless Fiber services to connect certain call
termination or origination points in a particular licensed area to such
carriers' POPs in the licensed area (see diagram on next page) at more
economical rates than those generally charged by LECs and to connect two or
more of their respective POPs in a single licensed area. Long distance
carriers using Wireless Fiber services may benefit from both the lower cost
afforded by such services and the wide-band capacity compared to LEC
facilities, which, in many instances, are based in part on copper
infrastructure and are, therefore, narrow-band. By utilizing the Company's
Wireless Fiber services, long distance carriers can avoid the capacity
barrier inherent in copper wire connections that typically has prevented them
from providing their customers with end-to-end, full digital service
available under a fiber optic- or wireless-based system. Wireless Fiber
services also may be utilized to provide such carriers with viable,
cost-efficient paths to serve as physically diverse routes (redundant and
back-up capacity) for traffic in situations where primary routes are
incapacitated and/or network reliability concerns demand alternate
telecommunications paths.
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LOCAL BYPASS FOR THE LONG DISTANCE INDUSTRY
[DIAGRAM]
WIRELESS COMPLEMENT TO CAP AND LEC NETWORKS. Currently, CAPs typically
compete with LECs by utilizing their own fiber optic cable rings and lease
the other facilities necessary to complete their networks from the LECs. Due
to the large capital investment required to construct such networks, CAPs
generally build their networks in limited, densely populated areas and offer
services primarily to large customers such as long distance carriers, medium-
to large-size businesses, government agencies and institutions. CAPs can
utilize Wireless Fiber services to bypass facilities typically leased by them
from the LECs (see diagram on next page). CAPs also can utilize the
Company's Wireless Fiber services to facilitate the build out and enhance the
reliability of their own local telecommunications networks and expand their
marketing opportunities. The Company believes that the relative ease and low
cost of installation of Wireless Fiber services in comparison to fiber
optic-based facilities can provide CAPs with the ability to expand their
networks to reach some customers in areas where demand levels are
insufficient to justify the cost and time involved in constructing fiber
optic capacity. CAPs, as well as LECs, also can utilize the Company's
Wireless Fiber services to extend their own networks to provide services to
areas within a licensed area to which it is not cost-efficient to run fiber
optic cable or to which such cable simply has not yet been run. CAPs and LECs
also may utilize the Company's Wireless Fiber services to provide redundant
and back-up capacity to their own existing networks.
WIRELESS COMPLEMENT TO FIBER NETWORK
[DIAGRAM]
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BACKBONE INTERCONNECTION AND REDUNDANCY FOR CMRS SERVICE PROVIDERS.
Wireless Fiber services can be utilized by providers of mobile
telecommunications services, such as PCS, cellular and specialized mobile
radio carriers, for interconnecting traffic (backbone network traffic)
between and among cell sites, repeaters, MTSOs and the wired local networks
(see diagram on next page). The Company also anticipates that entities that
acquired licenses in the PCS auctions, or which will acquire licenses in
subsequent PCS auctions conducted by the FCC, also will find Wireless Fiber
services attractive to carry their backbone network traffic. By utilizing
Wireless Fiber services for their backbone network needs, CMRS carriers can
maintain greater control over their systems by monitoring traffic carried
over the Wireless Fiber services component of their systems, reduce costs of
construction of their networks, increase the flexibility of their services
and reduce the lead time involved in the provision of services in their
respective licensed areas. Wireless Fiber services also can be used by CMRS
carriers to provide redundant and back-up capacity for the fiber optic and/or
copper wire portions of their backbone networks.
CELLULAR/PCS SITE INTERCONNECT
[DIAGRAM]
DEDICATED PRIVATE NETWORK SERVICES. The Company also markets its
Wireless Fiber services to businesses, government agencies and institutions
with multiple locations within the Company's licensed areas and which
generate heavy telecommunications traffic between such locations. These
entities can utilize Wireless Fiber services to establish their own
independent telecommunications systems for dedicated private network services
(see diagram below). Wireless Fiber services present entities with (i) a
method for providing telecommunications connections between their buildings
on a cost-effective basis, (ii) a viable alternative to the LECs' networks
that frequently use low-capacity copper wire for "last mile" delivery,
generally allowing for faster, more reliable data transmissions, (iii)
greater control over their local telecommunications traffic and costs and
(iv) greater security because of the private line nature of the Company's
Wireless Fiber services.
END USER PRIVATE NETWORK
[DIAGRAM]
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NETWORK AND INTERNET ACCESS. The ability to access and distribute
information quickly has become critical to business and government end users.
Data traffic is becoming an increasing portion of overall telecommunications
traffic because of the proliferation of LANs, WANs, Internet services and
video teleconferencing. The Company's Wireless Fiber capacity enables it to
provide high-speed data transmission services to end users.
WAN SERVICES. The Company recently introduced dedicated WAN services.
The Company's high-speed data telecommunications services permit businesses
to transport data between buildings and between personal computers or
workstations. These dedicated services allow personal computers and
workstations on one LAN to communicate with personal computers and
workstations on another LAN at the same speed at which these LANs operate.
The Company's WAN services are offered at a variety of capacities to allow
customers to choose the level which meets their needs.
INTERNET SERVICES. The expanding demand for Internet access and the
growing importance of audio, video and graphic Internet applications to both
businesses and consumers also has created a growing market opportunity for
the Company. The Company can offer Internet service providers timely,
reliable and affordable access at high speed data rates. The Company can
provide wireless broadband links between customers and their Internet service
providers and between Internet service providers' POPs and the Internet
backbone. In addition to accommodating standard voice and data requirements,
45 Mbps data transmission rates can allow end users to receive real time,
full motion video and 3-D graphics and to utilize highly interactive
applications on the Internet and other networks. The Company is actively
pursuing relationships with Internet service providers. In June 1996, the
Company entered into an agreement with Digex, a provider of Internet access
services that primarily serves other Internet access providers, as well as
commercial, governmental and institutional end users. Pursuant to the Digex
Agreement, the Company has the right of first refusal to provide all of
Digex's local access and/or customer interconnection requirements through the
use of the Company's Wireless Fiber services or the resale of other
facilities, as appropriate.
POTENTIAL INTERACTIVE VIDEO APPLICATIONS. The inherent qualities of 38
GHz also may offer substantial opportunities for broadband interactive video
applications appropriate for highly customized commercial demands. While the
specific service offerings utilizing 38 GHz for video applications are still
in development, the ability to commercially utilize certain aspects of this
technology appears to be possible. The narrow-beam characteristics of 38 GHz,
allowing for frequency reuse within a small area, coupled with its broadband
capacity and multichannel capabilities may offer a significant market
opportunity in the future as the appropriate technologies emerge, although
there can be no assurance of the consumer acceptance or commercial viability
of such video services. In June 1996, the Company entered into an agreement
with Source Media, a provider of interactive technology and programming.
Pursuant to this agreement, the Company has the exclusive right, in the 38
GHz spectrum, to use Source Media's technology and programming in connection
with entertainment and information services the Company may offer.
MARKETING. The Company began marketing its Wireless Fiber services in
December 1994. Wireless Fiber services currently are marketed by the Company
primarily to long distance carriers, CAPs, CMRS service providers and LECs,
as well as businesses, government agencies and institutions. The Company has
entered into master service agreements with each of Electric Lightwave,
MCImetro, ICG and Century Telephone. The master service agreements
contemplate that the carriers will utilize the Company's Wireless Fiber
services as a component of their own networks and set forth the general terms
of the relationship between the Company and each carrier, including the
initial term of the relationship, basic pricing schedules and service and
installation parameters. The Company also recently began to provide Wireless
Fiber services to the City of New York as a back-up disaster recovery system
for certain of its facilities, providing the city with redundancy in the
event that its land-based telecommunications service fails for any reason.
The Company currently markets or intends to market its CAP services (i)
by performing field demonstrations and testing of Wireless Fiber
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services, (ii) by providing potential customers with Wireless Fiber services
at reduced rates, in order to educate such customers about the efficacy and
reliability of such services, (iii) by appearing at trade shows and
advertising in trade publications, (iv) through national sales agents and
direct sales and (v) directly to existing and potential customers of the
Company's long distance services.
CLEC SERVICES
An integral part of the Company's CLEC business strategy is the creation
of a Wireless Fiber-based infrastructure on a city-by-city basis that will
allow the Company to provide a broad range of communications services within
cities covered by the Wireless Licenses. This infrastructure will utilize
the Company's Wireless Fiber capabilities, together with switches that will
be acquired by the Company and facilities leased or purchased from other
carriers, to originate and terminate local traffic. The Company believes
that its Wireless Fiber capabilities will provide it with a critical economic
advantage over many other service providers because of the high costs such
service providers encounter in connecting fiber-optic lines to end users. In
building its infrastructure, the Company is following a building-centric
network plan, pursuant to which the Company is identifying
strategically-located buildings in areas covered by its Wireless Licenses
that can serve as hubs for its network in each city. These hub sites will be
interconnected via Wireless Fiber links to fiber optic facilities leased or
purchased from other carriers as well as to end users. The Company believes
that the establishment of a limited number of hub buildings (generally less
than a dozen) in each metropolitan area where it has Wireless Licenses will
allow it to address the vast majority of all commercial buildings targeted by
the Company in that area.
The Company intends to install approximately 17 main switches and 24
remote nodes during the next three years and plans to install its first main
switch in New York City in October 1996. The Company intends to have at
least five additional major metropolitan areas serviced by its own switches
or remote nodes by the first quarter of 1997. In July 1996, the Company
entered into a three-year agreement with Lucent providing for the purchase
from Lucent of the switching systems and related equipment and software the
Company will need to build its CLEC infrastructure. Switches will be
provided to the Company at discounted prices so long as the Company purchases
certain switches during each year of the agreement.
The Company has commenced a program designed to obtain, by the end of
1999, authorization to operate as a CLEC in virtually every state where the
Company has Wireless Licenses, which will allow the Company to file tariffs
and provide local exchange services in such states once authorization is
granted. The Company currently is authorized to operate as a CLEC in
California, Connecticut, Florida, Georgia, Illinois, Massachusetts, Michigan,
New York, Pennsylvania, Tennessee, Texas, Washington and Wisconsin, is in the
process of seeking authorization to operate as a CLEC in several additional
states, and intends to seek such authorization in a number of additional
states. It also is in the process of negotiating interconnection agreements
with various local exchange service providers, including incumbent LECs,
under which the Company will obtain network elements and/or services on an
unbundled basis. The Company has entered into a number of interconnection
agreements for states that encompass various cities covered by the Wireless
Licenses. These agreements are with carriers such as Ameritech Corp.
("Ameritech") for Illinois, Pacific Bell ("PacBell") and GTE
Telecommunications ("GTE") for California, and NYNEX for New York and
Massachusetts, and Bell South for Florida, Georgia and Tennessee, among
others.
Implementation of the Company's CLEC strategy requires significant
up-front capital expenditures to obtain necessary Roof Rights for hub
buildings, to purchase 38 GHz radios and install Wireless Fiber links on hub
buildings and to purchase and install main switches and remote nodes in up to
41 cities through 1999. See "Risk Factors -- Risks Related to CLEC Strategy;
Anticipated Initial Negative Operating Margins in CLEC Business" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations --Liquidity and Capital Resources."
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MARKETING. The Company plans to offer a broad range of communications
and information services including local, long distance, enhanced, frame
relay, mobile, Internet and targeted information services.
The Company has commenced offering local exchange services on a limited,
resale basis in New York City to various customers and it is anticipated that
the Company will begin offering such services in a number of additional
cities during the next nine months. As the Company commences its CLEC
business in each city, in order to gain initial market penetration in that
city, it initially intends to resell the local exchange services of other
service providers, such as CLECs and the incumbent LECs, until such time that
it has established the Wireless Fiber and switch-based infrastructure
required to provide its own local exchange services in that city. Over the
next three years, the Company intends to commence marketing its local
exchange services in substantially all markets covered by its Wireless
Licenses.
The Company is targeting small and medium-sized businesses, especially
those in buildings in which the Company's Wireless Fiber capacity can be
utilized, for economic competitive advantage, to originate and/or terminate
customers local telecommunications traffic. The buildings the Company is
initially targeting each have more than 100,000 square feet of space, and, in
many instances, are not currently served by other CAPs or CLECs. The Company
estimates that there are more than 8,000 buildings in this target group,
populated by approximately 9.7 million people using more than 2.1 million
phone lines, and that these buildings represent an aggregate local exchange
service market of greater than $3.3 billion per annum. These estimates do not
include multi-dwelling residential buildings, universities, hospitals or
buildings occupied by a single tenant, and account only for voice lines and
not data lines.
The Company also intends to market its services to residences in
multiple dwelling units, such as apartment buildings. The Company intends to
enter into the residential segment of the local exchange services market
primarily by entering into partnerships and agency arrangements with shared
tenant services providers and possibly partnerships or alliances with other
telecommunications services providers.
In connection with the plan to build its CLEC networks on a city-by-city
basis, the Company is hiring numerous engineering, installation, maintenance,
customer service, and marketing and sales personnel in order to create a
direct sales force organization which will provide a high level of service to
the business and multi-dwelling residential markets. A sales force has been
deployed in New York and the Company is in the process of developing sales
forces in several additional cities during the next nine months and currently
plans to have a sales force in all metropolitan areas covered by the Wireless
Licenses by the end of 1999. The Company also is developing joint marketing,
reselling and agency relationships. For example, pursuant to the Digex
Agreement, the Company will purchase from Digex, during the next six years, a
minimum of $5 million of Internet services with the right to purchase
additional amounts, in each case on a discounted basis. The Company will
resell these Internet services under the Company's own brand name, including
through the bundling of such services with the Company's other
telecommunications services.
The Company seeks to make its CLEC business an attractive choice for
potential customers by (i) offering a broad range of telecommunications
services that specifically address its target customers' needs, while
providing levels of customer satisfaction that exceed those provided by
larger competitors and (ii) exploiting the Company's Wireless Fiber service
whenever feasible for economical origination and termination of customer
traffic, thereby allowing for attractive pricing of services.
LONG DISTANCE SERVICES
The Company resells long distance services through its wholly-owned
subsidiary, WinStar Gateway, which has its own agreements with major long
distance carriers (AT&T, MCI, WorldCom, Inc. and U.S. Long Distance, Inc.),
which allow it to utilize their networks. WinStar Gateway's services are
tariffed at the FCC; also, WinStar Gateway has obtained authority to provide
intrastate services in the large majority of states. The Company's current
customer base encompasses primarily residential customers and small- and
medium-
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sized businesses. The Company has been able to sell Wireless Fiber services
to a limited number of its long distance customers and expects to be able to
sell its Wireless Fiber services to a greater percentage of such customers in
the future. In addition to providing basic long distance services, the
Company provides toll-free services, international call-back, prepaid phone
cards and certain enhanced services.
The Company's agreements with certain major long distance carriers are
for between one- and four-year terms and provide the Company with access to
long distance carriers' networks at rates which are typically discounted,
varying with monthly traffic generated by the Company through each carrier.
Generally, the Company is obligated to generate certain minimum monthly usage
through each network and, if such traffic is less than the minimum monthly
usage commitment, may be required to pay an underutilization fee in addition
to its monthly bill equal to a certain percentage of the difference between
such minimum commitments and the traffic actually generated by the Company.
The Company has never paid or been required to pay any underutilization
charges. During 1995, the Company established a reserve for possible
underutilization charges.
MARKETING. The Company, like many long distance carriers, historically
has experienced high customer turnover rates, primarily because a large
portion of its customer base consists of residential customers who, as a
group, are generally less loyal to telecommunications providers than larger
customers, such as businesses. The Company believes customer turnover rates
have recently increased (and will continue to increase) in the long distance
industry generally, as well as for the Company. In order to reduce customer
turnover rates, the Company is increasing its direct sales force and has
decided to expand its marketing focus, which had been primarily on
residential customers, to emphasize small- to medium-sized businesses through
the introduction of products and services readily marketable to business
customers, including prepaid phone card services and a broad array of
toll-free services, including services which allow toll-free calls to be
originated nationwide. The Company also offers business customers several
flexible billing services such as master account billing (which enables
customers to aggregate billing for several locations for management and
accounting purposes and to qualify for volume discounts), project accounting
codes (which reflect accounting codes of the customer on the billing
statement) and computerized call detail reports (which provide call detail to
customers on computer disks or tape for direct input into the customer's
computer for accounting or rebilling). The Company recently has increased its
customer service staff and will be seeking to reduce the turnover rate of its
residential customers through improved customer service and more diverse
service offerings.
WinStar Gateway markets long distance telecommunications services
primarily through independent sales representatives and resellers, through
affinity group programs and to a lesser extent, through direct marketing to
resellers and commercial accounts. Independent sales representatives
typically enter into agreements with the Company providing for payments of
commissions on business generated. The use of independent sales
representatives entails the risk that the activities of such representatives
may result in unauthorized switching of long distance carriers. See "--
Government Regulation of Telecommunications Operations." The Company has
implemented a supervisory program with its agents to reduce this risk. The
Company also markets its services to end users through print advertising and
direct mail advertising in selected markets and in connection with its CLEC
service offerings.
COMPETITION IN THE TELECOMMUNICATIONS INDUSTRY
LOCAL TELECOMMUNICATIONS MARKET
The local telecommunications market is intensely competitive and
currently is dominated by the RBOCs and LECs. The Company has been marketing
local access services as a CAP only since December 1994 and local exchange
services as a CLEC only since April 1996, and the Company has not obtained a
significant market share in any of the areas where it offers such services,
nor does it expect to do so given the size of the local telecommunications
services market, the intense competition and the diversity of customer
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requirements. In each area covered by the Wireless Licenses, the services
offered by the Company compete with those offered by the LECs, such as the
RBOCs, which currently dominate the provision of local services in their
markets. The LECs have long-standing relationships with their customers, have
the potential to subsidize competitive services with revenues from a variety
of business services and benefit from existing state and federal regulations
that currently favor the LECs over the Company in certain respects. While
legislative and regulatory changes have provided increased business
opportunities for competitive telecommunications providers such as the
Company, these same decisions have given the LECs increased flexibility in
their pricing of services. This may allow the LECs to offer special
discounts to the Company's (and other CLECs') customers and potential
customers. Further, as competition increases in the local telecommunications
market, general pricing competition and pressures will increase
significantly. As LECs lower their rates, other telecommunications providers
will be forced by market conditions to charge less for their services in
order to compete.
In addition to competition from the LECs, the Company also faces
competition from a growing number of new market entrants, such as other CAPs
and CLECs, competitors offering wireless telecommunications services,
including leading telecommunications companies, such as AT&T Wireless, and
other entities that hold or have applied for 38 GHz licenses or which may
acquire such licenses or other wireless licenses from others or the FCC.
There is at least one other CAP and/or CLEC in each metropolitan area covered
by the Company's Wireless Licenses, including, in many such areas, companies
such as IntelCom, ICG, MCImetro, MFS, Teleport and Time Warner. Many of
these entities (and the LECs) already have existing infrastructure which
allows them to provide local telecommunications services at potentially lower
marginal costs than the Company currently can attain and which could allow
them to exert significant pricing pressure in the markets where the Company
provides or seeks to provide telecommunications services. In addition, many
CAPs and CLECs have acquired or plan to acquire switches so that they can
offer a broad range of local telecommunications services.
The Company currently faces competition from other entities which offer,
or are licensed to offer, 38 GHz services, such as ART and BizTel, and could
face competition in certain aspects of its existing and proposed businesses
from competitors providing wireless services in other portions of the radio
spectrum, such as CAI, a provider of wireless Internet access services,
CellularVision, a provider of wireless television services which, in the
future, also may provide wireless Internet access and other local
telecommunications services and Associated, a provider of wireless CAP and
other services. In many instances, these service providers hold 38 GHz
licenses or licenses for other frequencies (such as 18 and 28 GHz) in
geographic areas which encompass or overlap the Company's market areas.
Additionally, some of these entities enjoy the substantial backing of, or
include among their stockholders, major telecommunications entities, such as
Ameritech with respect to ART, Teleport with respect to BizTel, and NYNEX and
Bell Atlantic with respect to CAI. Due to the relative ease and speed of
deployment of 38 GHz and some other wireless-based technologies, the Company
could face intense price competition from these and other wireless-based
service providers. Furthermore, the NPRM issued by the FCC contemplates an
auction of the lower 16 channels in the 38 GHz spectrum band, which have not
been previously available for commercial use. The grant of additional
licenses by the FCC in the 38 GHz band, or other portions of the spectrum
with similar characteristics, as well as the development of new technologies,
could result in increased competition. The Company believes that, assuming
the adoption of the NPRM as currently proposed, additional entities having
greater resources than the Company could acquire licenses to provide 38 GHz
services.
The Company also may face competition from cable companies, electric
utilities, LECs operating outside their current local service areas and long
distance carriers in the provision of local telecommunications services. The
great majority of these entities provide transmission services primarily over
fiber optic-, copper-based and/or microwave networks, which, unlike the
Company's Wireless Fiber services, enjoy proven market acceptance for the
carriage of telecommunications traffic. Moreover, the consolidation of
telecommunications companies and the formation of strategic alliances within
the telecommunications industry, which are expected to accelerate as a result
of the passage of the Telecommunications Act, could give rise to significant
new or
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stronger competitors to the Company. There can be no assurance that the
Company will be able to compete effectively in any of its markets.
The Company's Internet services also are likely to face significant
competition from other Internet service providers as well as from cable
television operators deploying cable modems, which provide high speed data
capability over installed coaxial cable television networks. Although cable
modems currently are not widely available and do not provide for data
transfer rates that are as rapid as those which can be provided by Wireless
Fiber services, the Company believes that the cable industry may support the
deployment of cable modems to residential cable customers through methods
such as price subsidies. Notwithstanding the cable industry's interest in
rapid deployment of cable modems, the Company believes that in order to
provide broadband capacity to a significant number of business and government
users, cable operators will be required to spend significant time and capital
in order to upgrade their existing networks to a more advanced hybrid fiber
coaxial network architecture. However, there can be no assurance that cable
modems will not emerge as a source of competition to the Company's Internet
business. Further, Internet services based on existing technologies such as
ISDN and, in the future, on such technologies as ADSL and HDSL will likely
provide additional sources of competition to the Company's Internet access
services. Additionally, the Company believes that many LECs and CLECs
already are promoting other Internet access services.
LONG DISTANCE MARKET
The long distance market has relatively insignificant barriers to entry,
numerous entities competing for the same customers and a high (and
increasing) average churn rate (especially among residential customers, which
the Company historically has emphasized in its long distance reselling
business, and customers acquired from other service providers, which
acquisitions are part of the Company's ongoing long distance business
strategy), as customers frequently change long distance providers in response
to the offering of lower rates or promotional incentives by competitors. The
Company competes with major carriers such as AT&T, MCI and Sprint, as well as
other national and regional long distance carriers and resellers, many of
whom own substantially all of their own facilities and are able to provide
services at costs lower than the Company's current costs since the Company
generally leases its access facilities. The Company believes that the RBOCs
also will become significant competitors in the long distance
telecommunications industry for certain types of services and that Internet
service providers also will compete in this market. The Company believes that
the principal competitive factors affecting its market share are pricing,
customer service, accurate billing, clear pricing policies and, to a lesser
extent, variety of services. The ability of the Company to compete
effectively will depend upon its ability to maintain high quality,
market-driven services at prices generally perceived to be equal to or below
those charged by its competitors. In 1995, the FCC announced a decision
pursuant to which AT&T no longer will be regulated as a dominant long
distance carrier. This decision is expected to increase AT&T's flexibility
in competing in the long distance telecommunications services market and, in
particular, will eliminate the longer advance tariff notice requirements
previously applicable only to AT&T. To maintain its competitive posture, the
Company believes that it must be in a position to reduce its prices in order
to meet reductions in rates, if any, by others. Any such reductions could
adversely affect the Company. In addition, LECs have been obtaining
additional pricing flexibility. This may enable LECs to grant volume
discounts to larger long distance companies, which also would put the
Company's long distance business at a disadvantage in competing with larger
providers.
GOVERNMENT REGULATION OF TELECOMMUNICATIONS OPERATIONS
The Company's telecommunications services are subject to varying degrees
of federal, state and local regulation. Generally, the FCC exercises
jurisdiction over all telecommunications services providers to the extent
such services involve the provision of jurisdictionally interstate or
international telecommunications, including the resale of long distance
services, the provision of local access services necessary to connect callers
to long distance carriers, and the use of electromagnetic spectrum (i.e.,
wireless services). With the passage of the Telecommunications Act, the
FCC's jurisdiction has been extended to include certain
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interconnection and related issues that traditionally have been considered
subject primarily to state regulation. The state regulatory commissions
retain nonexclusive jurisdiction over the provision of telecommunications
services to the extent such services involve the provision of
jurisdictionally intrastate telecommunications. Municipalities also may
regulate limited aspects of the Company's business by, for example, imposing
zoning requirements or permit right-of-way procedures, and certain taxes or
franchise fees.
The Telecommunications Act is intended to remove the formal barriers
between the long distance and local telecommunications services markets,
allowing service providers from each market (as well as providers of cable
television and other services) to compete in all communications markets. The
Telecommunications Act will permit the RBOCs to compete in the provision of
interLATA long distance services. Additionally, the FCC must promulgate new
regulations over the next several years to address mandates contained in the
Telecommunications Act, which may change the regulatory environment
significantly. The Telecommunications Act generally requires LECs to provide
competitors with interconnection and nondiscriminatory access to the LEC
network on more favorable terms than have been available in the past.
However, such interconnection and the terms thereof are subject to
negotiations with each LEC, which may involve considerable delays, and may
not necessarily be obtained on terms and conditions that are acceptable to
the Company. In such instances, although the Company may petition the proper
regulatory agency to arbitrate disputed issues, there can be no assurance
that the Company will be able to obtain acceptable interconnection agreements.
The Company is unable to predict what effect the Telecommunications Act
will have on the telecommunications industry in general and on the Company in
particular. No assurance can be given that any regulation will broaden the
opportunities available to the Company or will not have a material adverse
effect on the Company and its operations. Further, there can be no assurance
that the Company will be able to comply with additional applicable laws,
regulations and licensing requirements or have sufficient resources to take
advantage of the opportunities which may arise from this dynamic regulatory
environment.
As required by the Telecommunications Act, in August 1996 the FCC
adopted the Interconnection Order. These rules constitute a pro-competitive,
deregulatory national policy framework designed to remove or minimize the
regulatory, economic and operational impediments to full competition for
local services, including switched local exchange service. Although setting
minimum, uniform, national rules, the Interconnection Order also relies
heavily on states to apply these rules and to exercise their own discretion
in implementing a pro-competitive regime in their local telephone markets.
Among other things, the Interconnection Order establishes rules requiring
incumbent LECs to interconnect with new entrants such as the Company at
specified network points; requires incumbent LECs to provide carriers
nondiscriminatory access to network elements on an unbundled basis at any
technically feasible point at rates that are just, reasonable and
nondiscriminatory; establishes rules requiring incumbent LECs to allow
interconnection via physical and virtual collocation; requires the states to
set prices for interconnection, unbundled elements, and termination of local
calls that are nondiscriminatory and cost-based (using a forward looking
methodology which excludes embedded costs but allows a reasonable
cost-of-capital profit); requires incumbent LECs to offer for resale any
telecommunication service that the carrier provides at retail to end users at
prices to be established by the states but which generally are at retail
prices minus reasonably avoided costs; and which requires LECs and utilities
to provide new entrants with nondiscriminatory access to poles, ducts,
conduit and rights' of way owned or controlled by LECs or utilities.
Exemptions to some of these rules are available to LECs which qualify as
rural LECs under the Telecommunications Act. The Interconnection Order also
requires that intraLATA presubscription (pursuant to which LECs must allow
customers to choose different carriers for intraLATA toll service without
having to dial extra digits) be implemented no later than February 1999; that
LECs provide new entrants with nondiscriminatory access to directory
assistance services, directory listings, telephone numbers, and operator
services; and that LECs comply with certain network disclosure rules designed
to ensure that interoperability of multiple local switched networks. There
can be no assurance how the Interconnection Order will be implemented or
enforced or as to what affect they will have on competition within the
telecommunications industry generally or on the competitive position of the
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Company specifically. A number of LECs, including the National Association
of Regulatory Utility Consumers and others, have filed in Federal court
seeking to appeal aspects of the Interconnection Order and to stay some or
all of the rules adopted therein.
The allocation of jurisdiction between federal and state regulators over
dedicated circuits that carry both interstate and intrastate traffic
(including private line and special access services) poses jurisdictional
questions. Although the FCC does not generally rule on the jurisdictional
nature of a carrier's traffic, under current FCC practice, non-switched
telecommunications services are considered jurisdictionally interstate
(subject to FCC jurisdiction) unless more than 90% of the traffic is
intrastate in nature. Currently, the Company's dedicated service offerings
are primarily jurisdictionally interstate in nature. The Company believes
that these services include virtually all service between a long distance
carrier's POP and a POP of that long distance carrier or another long
distance carrier, and between an end user and a long distance carrier's POP.
Under the FCC's streamlined regulation of non-dominant carriers, the
Company must file tariffs with the FCC for jurisdictionally interstate
services on an ongoing basis, although the Telecommunications Act provides
the FCC with the statutory authority to forbear from filing tariffs and the
FCC is considering whether to do so. The Company currently is not subject to
price-cap or rate-of-return regulation and it may install and operate
non-radio facilities for the transmission of interstate communications
without prior FCC authorization.
In addition, the Company has filed tariffs with the FCC as required with
respect to its provision of interstate service and recently has filed for
certification (or similar authority for purposes of providing intrastate
service) in a number of the states where it is licensed by the FCC. The
Company has received certification or other appropriate regulatory authority
to provide intrastate non-switched service in 23 states and has applied for
authority in nine additional states.
Some of the Company's services may be classified as intrastate and
therefore currently subject primarily to state regulation. In all states
where the Company is offering CAP or CLEC service, the Company (through its
state-specific operating subsidiaries) is certified or otherwise operating
with appropriate state authorization. The Company, through WinStar Gateway,
provides intrastate long distance service pursuant to certification,
registration or (where appropriate) on a deregulated basis in more than 40
states and is currently seeking intrastate authority in the remaining
continental states. The Company expects that as its business and product
lines expand and as more procompetitive regulation of the local
telecommunications industry is implemented, it will offer additional
intrastate service. The Company is seeking to expand the scope of its
intrastate service in various jurisdictions, a process which depends upon
regulatory action and, in some cases, legislative action in the individual
states. Interstate and intrastate regulatory requirements are changing
rapidly and will continue to change.
Although the Company believes that it is in substantial compliance with
all material laws, rules and regulations governing its operations and has
obtained, or is in the process of obtaining, all licenses and approvals
necessary and appropriate to conduct its operations, changes in existing laws
and regulations, including those relating to the provision of wireless local
telecommunications services via 38 GHz and/or the future granting of 38 GHz
licenses, or any failure or significant delay in obtaining necessary
regulatory approvals, could have a material adverse effect on the Company. On
November 13, 1995, the FCC released an order freezing the acceptance for
filing of new applications for 38 GHz frequency licenses. On December 15,
1995, the FCC announced the issuance of an NPRM, pursuant to which it
proposed to amend its current rules relating to 38 GHz, including, among
other items, the imposition of minimum construction and usage requirements
and an auction procedure for issuance of licenses in the 37-40 GHz band where
mutually exclusive applications have been filed. In addition, the FCC ordered
that those applications that are subject to mutual exclusivity with other
applicants or that were placed on public notice by the FCC after September
13, 1995 would be held in abeyance and not processed by the FCC pending the
outcome of the proceeding initiated by the NPRM. Final rules with respect to
the changes proposed by the NPRM have not been adopted
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and the changes proposed by the NPRM have been, and are expected to continue
to be, the subject of numerous comments by members of the telecommunications
industry, the satellite industry, various government agencies and others.
Consequently, there can be no assurance that the NPRM will result in the
issuance of rules consistent with the rules initially proposed in the NPRM,
or that any rules will be adopted. Until final rules are adopted, the rules
currently in existence remain in effect with respect to outstanding licenses.
Pursuant to an international treaty to which the United States is a
signatory, the 38.6-40.0 GHz band is allocated on a co-primary basis to the
Fixed Satellite Services ("FSS") and the 37.5-40.5 GHz band is allocated on a
co-primary basis to the Mobile Satellite Services ("MSS"). The FCC has not
proposed rules to implement the treaty provisions, although comments and a
petition for rule making recently have been filed with the FCC by Motorola
Satellite Communications Inc. ("Motorola") requesting that such rules be
considered and, in particular, power flux density limits. On May 21, 1996,
the FCC placed on public notice for comment the petition to allocate the
37.5-38.6 GHz bands to the FSS and to establish Technical Rules for the
37.5-38.6 GHz band. In addition, Motorola requested the FCC to adopt the
power flux density limitations of the ITU Radio Regulations for the 37.5 to
40.5 GHz band in order to allow FSS systems and terrestrial microwave
operators to co-exist on a co-primary basis. There can be no assurance that
any proposed or final rules will not have a material adverse effect on the
Company.
As part of the rulemaking proceedings required under the
Telecommunications Act, the FCC will consider reform of the existing access
charge mechanisms, including possibly substantial reductions in the rates
charged by LECs to long distance service providers for local "access" (i.e.,
the transmission of a long distance call from the caller's location to the
long distance provider's POP and from the terminating POP to the recipient of
the call). CAPs, such as the Company, provide local access at rates that are
discounted from the rates charged by LECs. If the FCC were to mandate
reductions in LECs' local access charges, CAPs might be forced to
substantially reduce the rates they charge long distance providers, resulting
in lower gross margins (which, in the case of the Company, are currently
negative).
Additionally, providers of long distance services, including the major
interexchange carriers as well as resellers, such as the Company, are coming
under intensified regulatory scrutiny for marketing activities by them or
their agents that result in alleged unauthorized switching of customers from
one long distance service provider to another. The FCC and a number of state
authorities are seeking to introduce more stringent regulations or take other
actions to curtail the intentional or erroneous switching of customers, which
could include, among other things, the imposition of fines, penalties and
possible operating restrictions on entities which engage or have engaged in
unauthorized switching activities. In addition, the Telecommunications Act
requires the FCC to prescribe regulations imposing procedures for verifying
the switching of customers and additional remedies on behalf of carriers for
unauthorized switching of their customers. The effect, if any, of the
adoption of any such proposed regulations or other actions on the long
distance industry and the manner of doing business therein, cannot be
anticipated. Statutes and regulations which are or may become applicable to
the Company as it expands could require the Company to alter methods of
operations, at costs which could be substantial, or otherwise limit the types
of services offered by the Company.
NEW MEDIA BUSINESS
The Company formed WinStar New Media based on its belief that the
ability to deliver entertainment and information content to consumers will
play an increasingly important role in consumers' choice of a
telecommunications provider. The Company actively seeks opportunities to
acquire the rights or means to market and distribute information and
entertainment content and services that are marketable to traditional markets
and which also can enhance the marketability of the Company's
telecommunications services. The Company believes that in the future, it will
be able to bundle content that it controls with various telecommunications
services its offers to provide higher-margin products and services.
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In December 1994, the Company consummated the acquisition of Non Fiction
Films, Inc. ("NFF"), a producer of documentary programming. NFF's productions
to date include ten hours of programming for the Arts and Entertainment
Network's award winning Biography-Registered Trademark- series and "Divine
MagicTM: The World of the Supernatural," a ten-part series that traces
ancient beliefs, miracles and mysticism from their early beginnings.
In April 1996, NFF acquired an 80% equity interest in Fox/Lorber, an
independent distributor of films, entertainment series and documentaries.
Fox/Lorber distributes its content to television and home video markets
domestically and abroad. Its home video division emphasizes the distribution
of foreign and art films and has a home video library of over 100 titles. Its
television division emphasizes the distribution of educational and
entertainment program series, sports-related programs and documentaries to
broadcast and cable stations abroad and in the United States and Canada.
Under the terms of an agreement between NFF and the holder of the remaining
20% equity interest in Fox/Lorber, NFF has the right to require such holder
to sell, and such holder has the right to require NFF to purchase, the
remaining 20% equity interest based upon certain criteria.
Since April 1996, WinStar New Media acquired an 80% equity interest in
TWL. WinStar New Media has the right to require the stockholders of TWL who
own the remaining 20% equity interest in TWL to sell, and such stockholders
have the right to require WinStar New Media to purchase, the remaining 20%
equity interest based upon certain criteria. TWL operates SportsFan, a
multimedia sports programming and production company that provides live
sports programming to more than 200 sports and talk format radio stations
across the United States, up to 24 hours a day, including to stations in 90
of the top 100 United States markets. SportsFan owns and operates The Pete
Rose Show, among others, and also has developing interests in television and
on-line distribution channels.
In June 1996, WinStar New Media entered into an agreement with Source
Media, a provider of interactive technology and programming. Pursuant to
this agreement, WinStar New Media has the exclusive right, in the 38 GHz
spectrum, to use Source Media's technology and programming in connection with
entertainment and information services the Company may offer.
In September 1996, WinStar New Media acquired an 80% equity interest in
Millennium Marketing, Inc. (which does business as S&A Associates ("S&A").
WinStar New Media has the right to require the stockholders of S&A who own
the remaining 20% equity interest in S&A to sell, and such stockholders have
the right to require WinStar New Media to purchase, the remaining 20% equity
interest based upon certain criteria. S&A is a full service agency to media
sellers, with a focus on the provision of advertising sales representation
and/or related consulting services for content-driven interactive media
properties.
The industry in which the Company's new media subsidiary competes
consists of a very large number of entities producing, owning or controlling
news, sports, entertainment, educational and informational content and
services, including telecommunications companies, television broadcast
companies, sports franchises, film and television studios, record companies,
newspaper and magazine publishing companies, universities and on-line
computer services. Competition is intense for timely and highly marketable or
usable information and entertainment content. Almost all of the entities with
which the Company's new media subsidiary competes have significantly greater
presence in the various media markets and greater resources than the Company,
including existing content libraries, financial resources, personnel and
existing distribution channels. There can be no assurance that the Company
will be able to successfully compete in the emerging new media industry.
CONSUMER PRODUCTS
The Company's consumer products business is operated through its
subsidiary, WinStar Global Products. WinStar Global Products designs, markets
and distributes personal care products, including hair
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brushes and certain hair accessories, and bath products, including gels,
lotions, bath oils and home fragrance products including potpourri and
candles.
MARKETING AND DISTRIBUTION
WinStar Global Products' customers are primarily large retailers,
including mass merchandisers, discount stores, department stores, national
and regional drug store chains and other regional chains. WinStar Global
Products' customers sell through more than 20,000 individual retail outlets.
Its current customer list includes the following national and regional chain
stores: Walmart, Revco Drug Stores, CVS, Mervyn's, Target, Ames, Marshalls,
Eckerd Drug, Family Dollar Stores, Sally Beauty Supply, Fay Drug, Arbor Drug
and American Drug Stores.
A significant portion of WinStar Global Products' sales is made by its
in-house sales force. The remainder of WinStar Global Products' sales
typically are made by independent sales representatives who receive a
commission from WinStar Global Products on all orders generated by them.
Independent sales representatives generally carry the product lines of
several noncompeting manufacturers and distributors, many of whom are much
larger than WinStar Global Products.
SOURCING
WinStar Global Products currently utilizes a combination of domestic and
foreign suppliers and contract manufacturers and internal assembling for its
consumer product lines. WinStar Global Products generally purchases its hair
brushes and combs from foreign manufacturers, and packages these products in
its Fairfield, New Jersey facility. WinStar Global Products purchases
components for its bath and body product line from both foreign and domestic
sources, and assembles and packages products in its Fairfield, New Jersey
facility. WinStar Global Products does not have any binding agreements with
any of its manufacturers or suppliers. Therefore, any of such entities can
terminate their relationship with WinStar Global Products at any time.
WinStar Global Products does not believe that the termination of any such
relationship or relationships would have a material adverse impact on its
operations since management believes it would have alternative sources for
its products and components at comparable prices. There can be no assurance
of this, however, or that, in the event that WinStar Global Products were to
experience difficulties with its present manufacturers, suppliers and
subassemblers, it would not experience a temporary delay in obtaining the
products or components it needs elsewhere.
COMPETITION
The consumer products industry is subject to changes in styles and
consumer tastes. An unanticipated change in consumer preferences inconsistent
with WinStar Global Products' merchandise lines could have a serious and
adverse effect upon its operations. WinStar Global Products' product lines
are subject to intense competition with numerous manufacturers and
distributors of hair, beauty and bath products. Mass merchandisers, drug
store chains, and other mass volume retailers typically utilize freestanding
pegboard fixtures or pegboard wall fixtures, as well as in-line shelving and
end-cap displays, to display their products. Competition for shelf and wall
space for product placement is intense, as many companies seek to have their
products strategically placed within the store. Competition also exists with
respect to product name recognition and pricing, since retailers and
consumers often choose products on the basis of name brand, cost and value.
Many of WinStar Global Products' competitors have greater product and name
recognition than it does, as well as much larger and more sophisticated sales
forces, product development, marketing and advertising programs and
facilities. WinStar Global Products generally competes by attempting to offer
quality, service and products to its customers at reasonable prices.
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EMPLOYEES
As of September 30, 1996 the Company had approximately 650 employees.
The Company is not a party to any collective bargaining agreements and never
has experienced a strike or work stoppage. The Company considers its
relations with its employees to be good.
PROPERTIES
The Company's corporate headquarters are located at 230 Park Avenue,
Suite 3126, New York, New York 10169. These headquarters are situated in
approximately 11,500 square feet of space which the Company subleases for an
average rent of approximately $304,000 per annum under a sublease which
expires in April 2000. The Company has executed a lease for additional space
of approximately 6,000 square feet at 230 Park Avenue for a rent of $188,176
per annum, which lease becomes effective June 1, 1996 and expires in April
2000. The Company maintains leases on other properties used in the operations
of its subsidiaries. The Company believes that its insurance coverage on its
properties is adequate and that the Company, and each of its subsidiaries, as
the case may be, is in compliance with the related leases.
LEGAL PROCEEDINGS
WinStar Gateway receives inquiries from state authorities with respect
to consumer complaints concerning the provision of telecommunications
services, including allegations of unauthorized switching of long distance
carriers and misleading marketing. The Company believes such inquiries
are common in the long distance industry and addresses such inquiries in the
ordinary course of business. WinStar Gateway recently has experienced an
increased level of consumer and regulatory complaints, a substantial majority
of which arose from the activities of a limited number of independent
marketing agents. On May 10, 1996, WinStar Gateway adopted a policy of
mandatory independent verification for 100% of customer orders received from
these agents' programs, and effective June 10, 1996, no longer accepts
customer orders from these programs. WinStar Gateway has initiated
discussions with the FCC and a number of state regulatory authorities with
respect to the resolution of any issues arising from the terminated programs.
The Company does not believe that resolution of these issues will have a
material adverse effect on the Company, its financial condition or its
results of operations.
In April 1996, an action was commenced against WinStar Gateway in the
Circuit Court of Jefferson County, Alabama, arising from long distance
marketing programs previously conducted in that state. The plaintiffs, James
Schaffer and Linda Kelly, on behalf of themselves and other Alabama
residents similarly situated, allege that their long distance service was
switched to WinStar Gateway and away from their previous providers without
their consent and through misleading and deceptive marketing practices. The
plaintiffs seek monetary relief, the exact amount of which cannot be
determined. WinStar Gateway has removed the action to federal court in
Alabama and also has moved to have the complaint dismissed. The court has
issued an order denying WinStar Gateway's motion, but, in recognition of the
importance of the issue, has offered to certify the issue for interlocutory
appeal to the appropriate court of appeals, and WinStar Gateway intends to
pursue an interlocutory appeal. In the event the action is not disposed of
by motion, the Company intends to resolve the action as expeditiously and
economically as possible, which may include the diligent defense of the
action or settlement. The Company believes that it has meritorious defenses
to the allegations raised in the action. In the event WinStar Gateway is not
successful in the defense of the action, or if WinStar Gateway elects to
settle the action, the Company believes that any judgment against WinStar
Gateway, or settlement entered into by it, will not have a material adverse
effect on the Company, its financial condition or its results of operations.
In June 1996 the Company, as plaintiff, commenced an action for
declaratory judgment against Nelson Thibodeaux, a former officer of WinStar
Gateway, in the Federal District Court for the Southern District of New York
seeking a declaration that the Company has no obligation to Mr. Thibodeaux
under stock
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option agreements granted to him during his employment with WinStar Gateway.
Further, because the Company believes that any and all claims that may be
advanced by Mr. Thibodeaux with regard to his stock option agreements would
be frivolous, the Company has notified Mr. Thibodeaux and his counsel of its
intention to seek sanctions and such other remedies as may be available
against Mr. Thibodeaux and his counsel in the event that Mr. Thibodeaux and
his counsel seek to assert any defense to the Company's action.
Additionally, the Company seeks monetary damages arising from an alleged
breach by Mr. Thibodeaux of the non-competition and related provisions
contained in his employment agreement with the Company. Mr. Thibodeaux
answered the Company's complaint in August 1996, denying all of the Company's
assertions. The Company intends to diligently proceed with this action.
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MANAGEMENT
The following table sets forth certain information with respect to the
executive officers and directors of the Company.
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
William J. Rouhana, Jr.(1)(2)(3)(4).......... 44 Chairman of the Board of Directors and
Chief Executive Officer
Nathan Kantor(5)............................. 54 President, Chief Operating Officer and Director
Steven G. Chrust(6).......................... 47 Vice Chairman of the Board of Directors
Fredric E. von Stange(6)..................... 41 Executive Vice President, Chief Financial
Officer and Director
Bert Wasserman(2)(5)......................... 62 Director
William J. vanden Heuvel(1)(3)(4)............ 65 Director
William Harvey(3)(6)......................... 53 Director
Steven B. Magyar(1)(2)(3)(4)................. 46 Director
Timothy R. Graham............................ 46 Executive Vice President and Secretary
</TABLE>
- -------------------
(1) Term expires at annual meeting of stockholders in 1997
(2) Member of Audit Committee
(3) Member of Compensation Committee
(4) Member of Nominating Committee
(5) Term expires at annual meeting of stockholders in 1999
(6) Term expires at annual meeting of stockholders in 1998
Mr. Rouhana has been a director of the Company since its inception, its
Chairman of the Board since February 1991, and its Chief Executive Officer
since May 1994. Mr. Rouhana was President and Chief Executive Officer of
WinStar Companies, Inc. ("WinStar Companies") from 1983 until November 1995.
Through WinStar Companies, he served, from August 1987 to February 1989, as
Vice Chairman of the Board and Chief Operating Officer of Management Company
Entertainment Group, Inc., a diversified distributor of entertainment
products and, thereafter, as its Vice Chairman of the Board until May 1990.
Since August 1992, Mr. Rouhana has been a director of TII Industries, Inc.
("TII Industries"), a telecommunications equipment manufacturing company.
From May 1991 through September 1994, he was director of Lancit Media
Productions, Ltd., a creator of children's television programming. Mr.
Rouhana was in private legal practice from 1977 to 1984, specializing in the
financing of entities involved in the development of entertainment products
and information services. Mr. Rouhana is Vice Chairman of the Board of
Governors of the United Nations Association and is a member of certain other
associations, including Business Executives for National Security. He is a
Phi Beta Kappa graduate of Colby College, a Thomas J. Watson Fellow
(1972-1973) and a graduate of Georgetown University School of Law. Mr.
Rouhana is the brother-in-law of Fredric E. von Stange.
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Mr. Kantor has been a director of the Company since October 1994 and
President and Chief Operating Officer of the Company since September 1995.
Since its formation in November 1990, Mr. Kantor had been the President of
ITC Group, Inc. ("ITC"), a company which specializes in the development of
emerging competitive telecommunications companies. Mr. Kantor, through ITC,
coordinated all of the Company's telecommunications operations from June 1994
to September 1995 when he became President and Chief Operating Officer of the
Company, at which time services provided by ITC to the Company ceased. Mr.
Kantor also is currently the Chairman of the Board and Chief Executive
Officer of Image Telecommunications Corp. ("Image Telecom"), a company
involved in the development of information and video servers. From January
1985 to December 1990, he was President of MCI Telecommunications Corporation
(Northeast Division). Mr. Kantor was a founder of MCI International, Inc.,
and served as its President and Chief Operating Officer from its founding in
July 1982 to December 1984. Mr. Kantor is a graduate of Florida State
University and the United States Military Academy at West Point.
Mr. Chrust has been a director of the Company since January 1994 and has
been employed by the Company as its Vice Chairman of the Board since January
1995, in which capacity he is responsible for strategic planning, financing
and corporate development. He has been the President of SGC Advisory
Services, Inc. ("SGC"), a discretionary money-management services firm
specializing in the telecommunications and technology sector, since he
founded it in October 1992. From August 1987 to September 1992, Mr. Chrust
was a director of AMNEX, Inc., an operator services long distance company,
and served as its Chairman of the Board, Chief Executive Officer and
President between October 1990 and October 1992. From August 1985 through
December 1989, Mr. Chrust was the Executive Vice President of Executone
Information Systems, Inc., a telecommunications equipment company. Mr. Chrust
was Director of Technology Research and a stockholder of Sanford C. Bernstein
& Co., Inc., a Wall Street investment firm, where he was ranked in the top
tier of telecommunications analysts for more than ten years and as the
first-ranked analyst in that sector for five consecutive years. He was
associated with Sanford C. Bernstein & Co., Inc., from 1970 through 1985.
From November 1993 until February 1996, Mr. Chrust was a director of American
Communications Services, Inc., a fiber optic-based competitive access
provider. Mr. Chrust is a graduate of Baruch College.
Mr. von Stange has been a director of the Company since its inception,
its Executive Vice President since January 1993, and its Chief Financial
Officer since March 1994. Mr. von Stange was Executive Vice President of
WinStar Companies, a merchant bank and a principal stockholder of the Company
from 1983 until November 1995. From December 1988 to October 1989, Mr. von
Stange was Chairman of the Board of Yankee Bargain Stores, Inc. ("Yankee"),
and resumed that position from July 1991 to December 1991. Mr. von Stange was
a director of Yankee from December 1988 until December 1991. Mr. von Stange
is a graduate of The Wharton School, University of Pennsylvania. He is the
brother-in-law of William J. Rouhana, Jr.
Mr. Wasserman has been a director of the Company since June 1995. Mr.
Wasserman was Executive Vice President and Chief Financial Officer of Time
Warner from January 1990 to December 1994 and was also a director of Time
Warner from January 1990 to March 1993. Mr. Wasserman was a member of the
Office of the President and was also a director of Warner Communications,
Inc. ("Warner Communications"), from 1981 to 1990, when that company merged
with Time Warner, and had served Warner Communications in various capacities
beginning in 1966. Mr. Wasserman serves as a member of various boards,
including: several investment companies in the Dreyfus Family of Funds;
Lillian Vernon Corp., a catalog seller of home products; Mountasia
Entertainment International, Inc., an operator of family recreation centers;
The New German Fund, a New York Stock Exchange listed mutual fund operated by
Deutsche Bank AG; and IDT Corp., a provider of telecommunications services,
including Internet access and long distance services. Mr. Wasserman also
served as a director on the Chemical Bank National Advisory Board until
Chemical Bank merged with Chase Manhattan Bank in March 1996. He is a
graduate of Baruch College and Brooklyn Law School.
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Mr. vanden Heuvel has been a director of the Company since June 1995.
Since 1984, Ambassador vanden Heuvel has served as Senior Advisor to Allen &
Co., an investment banking firm, as well as counsel to the law firm Stroock &
Stroock & Lavan. He served as a director of Time Warner from 1981 to 1993 and
currently is a director of Zemex Corp., a New York Stock Exchange listed
company engaged in the mining and exploitation of industrial minerals.
Ambassador vanden Heuvel also has been a member of the IRC Group, a
Washington D.C. based consulting group comprised of former United States
ambassadors, since 1981. He has been Chairman of the Board of Governors of
the United Nations Association since 1993. From 1979 to 1981, Ambassador
vanden Heuvel served as United States Deputy Permanent Representative to the
United Nations. From 1977 to 1979, he served as United States Ambassador to
the European Office of the United Nations and various other international
organizations. He was Special Assistant to United States Attorney General
Robert F. Kennedy from 1961 to 1964. Ambassador vanden Heuvel is a graduate
of Deep Springs College, Cornell University and Cornell Law School.
Mr. Harvey has been a director of the Company since June 1994. In 1972
and 1991, respectively, Mr. Harvey founded New Electronic Media Science, Inc.
("NEMS"), and Next Century Media, Inc. ("Next Century"), marketing, media and
research consulting companies specializing in the marketing, entertainment
and interactive media industries. Mr. Harvey has served as Chief Executive
Officer and President of both NEMS and Next Century since their respective
inceptions. Through NEMS and Next Century, Mr. Harvey has worked with major
television and cable networks, several RBOCs, major film studios, IBM, AT&T,
advertising agencies, videotex companies and advertisers on the integration
of advertising into various new media. Mr. Harvey invented the marketing tool
known as the Area Dominant Influence ("ADI") for Arbitron and co-founded
International Ratings Services, Inc., the first company to provide United
States movie studios, including Warner Brothers, Columbia and CBS
International, with ratings for their television programs broadcast in
foreign countries. Since 1979, Mr. Harvey has also been the publisher of "The
Marketing Pulse," a monthly advertising and media trade newsletter.
Mr. Magyar has been a director of the Company since June 1993. Since May
1994, Mr. Magyar has been operating a private business he owns which
specializes in financial services for high net worth individuals and business
owners. From 1989 to May 1994, Mr. Magyar was a regional vice president of
CIGNA and during the preceding fifteen years held various sales and sales
management positions with CIGNA. Mr. Magyar has served on CIGNA's strategic
business development committee and has been a guest lecturer at New York
University. Mr. Magyar also is a Certified Life Underwriter and Chartered
Financial Consultant with the American College of Insurance. Mr. Magyar is a
member of the General Agents and Managers Association, the National
Association of Underwriters and the American Society of CLU and ChFC. Mr.
Magyar is a graduate of Colby College.
Mr. Graham has served as Executive Vice President of the Company since
October 1994. From October 1990 through September 1994, Mr. Graham was
engaged in the private practice of law and served in various capacities with
National Capital Management Corporation, a company engaged through its
subsidiaries in various businesses, such as the ownership of real estate
rental properties, industrial manufacturing and insurance matters, including
as Corporate Secretary and as President of its primary real estate and
insurance subsidiaries. During that period, Mr. Graham also acted in various
capacities for WinStar Services, Inc. ("WinStar Services"), a wholly-owned
subsidiary of WinStar Companies. Prior to 1990, Mr. Graham was a partner in
the law firm of Nixon, Hargrave, Devans & Doyle, specializing in corporate
finance, regulatory and business law. Mr. Graham was a Securities Law Editor
of Barrister Magazine, an American Bar Association publication, from 1985 to
1986 and has authored a number of publications, including "Public Offerings
in the United States by Foreign Companies" and "Financing of Foreign
Companies through United States Securities Markets." Mr. Graham is a director
of TII Industries and National Capital Management Corporation. Mr. Graham
also is a member of the Board of Advisors of the Instructional Television
Station of the Archdiocese of New York. Mr. Graham is a graduate of Fordham
Law School and the Georgetown University School of Foreign Service.
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The Board of Directors of the Company is divided into three classes,
each of which generally serves for a term of three years, with only one class
of directors being elected in each year. The term of office of the first
class of directors (Class I), currently consisting of Steven G. Chrust,
Fredric E. von Stange and William Harvey, will expire in 1998, the term of
office of the second class of directors (Class II), currently consisting of
Bert W. Wasserman and Nathan Kantor, will expire in 1999, and the term of
office of the third class of directors (Class III), currently consisting of
William J. Rouhana, Jr., William J. vanden Heuvel and Steven B. Magyar, will
expire in 1997. In each case, each director will hold office until the next
annual meeting of stockholders at which his class of directors is to be
elected, or until his successor is duly qualified and appointed. As of
August 5, 1996, the Company's by-laws have been amended to provide that,
through August 5, 1999, at each annual meeting of stockholders in which
directors are elected, persons will be elected so that a majority of the
members of the Board will be independent directors.
The responsibilities of the Audit Committee, which currently is composed
of William J. Rouhana, Jr., Bert Wasserman and Steven B. Magyar, include, in
addition to such other duties as the Board may specify, (i) recommending to
the Board the appointment of independent accountants; (ii) reviewing the
timing, scope and results of the independent accountant's audit examination
and the related fees; (iii) reviewing periodic comments and recommendations
by the Company's independent accountants and the Company's response thereto;
(iv) reviewing the scope and adequacy of internal accounting controls and
internal auditing activities; and (v) making recommendations to the Board
with respect to significant changes in accounting policies and procedures.
As of August 5, 1996, the Company's by-laws have been amended to provide
that, through August 5, 1999, a majority of the members of this Committee
must be independent directors.
The responsibilities of the Compensation Committee, which currently is
composed of William J. Rouhana, Jr., Steven B. Magyar, William Harvey and
William J. vanden Heuvel, include, in addition to such other duties as the
Board may specify, (i) reviewing and recommending to the Board the salaries,
compensation and benefits of the executive officers and key employees of the
Company, (ii) reviewing any related party transactions on an ongoing basis
for potential conflicts of interest and (iii) administering the Company's
stock option plans. As of August 5, 1996, the by-laws of the Company have
been amended to provide that, through August 5, 1999, a majority of the
members of this Committee must be independent directors and that, absent
approval of a majority of the independent members of the Compensation
Committee, the Company will not enter into any material transaction with any
director or affiliate of any director of the Company.
The responsibilities of the Nominating Committee, which currently is
composed of William J. Rouhana, Jr., William J. vanden Heuvel and Steven B.
Magyar, include, in addition to such other duties as the Board may specify,
considering and recommending to the Board nominees for directors.
DIRECTOR COMPENSATION
The Company pays each outside director $500 for attendance at each
meeting of a committee of which such director is a member and $1,000 for
attendance at each meeting of the Board of Directors. On January 13th of each
year, persons who are directors at such date are granted options to purchase
10,000 shares of Common Stock at a per-share exercise price equal to the last
sale price of a share of Common Stock on the last trading day prior to such
grant.
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PRINCIPAL STOCKHOLDERS
The table and accompanying footnotes set forth certain information as of
September 30, 1996 with respect to the stock ownership of (i) those persons
or groups who beneficially own more than 5% of the Company's Common Stock,
(ii) each director of the Company, (iii) the Company's Chief Executive
Officer and each of the Company's next four most highly compensated executive
officers and (iv) all directors and executive officers of the Company as a
group (based upon information furnished by such persons). Shares of Common
Stock issuable upon exercise of options which currently are exercisable or
exercisable within 60 days of the date of this Prospectus are considered
outstanding for the purpose of calculating the percentage of Common Stock
owned by such person, but not for the purpose of calculating the percentage
of Common Stock owned by any other person. Unless otherwise indicated, the
address for the persons listed below is c/o WinStar Communications, Inc., 230
Park Avenue, Suite 3126, New York, New York 10169.
<TABLE>
<CAPTION>
Percent Beneficially Owned
--------------------------
Number of Shares Before After
Name and Address of Beneficial Owner Beneficially Owned Offering Offering(1)
- ------------------------------------ ------------------ -------- -----------
<S> <C> <C> <C>
William J. Rouhana, Jr. ................... 2,123,002(2) 6.7% 5.9%
Nathan Kantor.............................. 752,568(3) 2.4 2.1
Steven G. Chrust........................... 412,333(4) 1.3 1.2
Fredric E. von Stange...................... 805,833(5) 2.6 2.3
Steven B. Magyar........................... 50,706(6) * *
Two Pine Point
Lloyd Harbor, New York 11742
William J. vanden Heuvel................... 57,500(7) * *
812 Park Avenue
New York, New York 10021
Bert Wasserman............................. 60,000(8) * *
126 East 56th Street
New York, New York 10022
William Harvey............................. 20,000(9) * *
c/o Next Century Media, Inc.
11 North Chestnut Street
New Paltz, New York 12561
Timothy R. Graham.......................... 435,852(10) 1.4 1.2
Keystone Investment Management
Company................................... 2,166,800 6.9 6.1
200 Berkeley Street
Boston, Massachusetts 02116
All Directors and Executive Officers as a
Group (9 persons)......................... 4,717,794(11) 14.2 13.3
</TABLE>
- -----------------
* Less than 1%.
(1) Assumes that all Convertible Notes are converted into an aggregate
of 4,163,639 shares on October 23, 1996, the first possible day of
conversion.
(FOOTNOTES CONTINUED ON FOLLOWING PAGE)
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<PAGE>
(2) Includes 408,333 shares of Common Stock issuable upon exercise of
certain options. Does not include 150,000 shares of Common Stock
issuable upon exercise of options which become exercisable in
March 1997 and 116,667 shares of Common Stock issuable upon
exercise of options which become exercisable in two equal annual
installments in July 1997 and 1998. Mr. Rouhana has agreed that, during
the term of Nathan Kantor's employment agreement with the Company, he
would vote all shares of Common Stock he controls in favor of Mr. Kantor
as a director of the Company.
(3) Includes 530,666 shares of Common Stock issuable upon exercise of
certain options. Also includes 6,500 shares of Common Stock owned by
Mr. Kantor's son and 26,000 shares of Common Stock owned by a trust (a
trustee of which is Mr. Kantor's spouse), over all of which Mr. Kantor
disclaims beneficial ownership. Does not include 233,334 shares of
Common Stock issuable upon exercise of other options which become
exercisable in two equal annual installments commencing in September
1997 and 78,000 shares of Common Stock issuable upon exercise of options
which become exercisable in December 1996.
(4) Includes (i) 12,000 shares of Common Stock owned by the pension
plan for SGC Advisory Services, Inc., a telecommunications consulting
firm of which Mr. Chrust is President and owner, and (ii) 358,333 shares
issuable upon exercise of certain options owned by Mr. Chrust or members
of his family. Does not include 480,000 shares issuable upon exercise
of other options which become exercisable in four equal annual
installments commencing in January 1997 and 66,667 shares issuable upon
exercise of other options which become exercisable in two equal annual
installments in July 1997 and 1998.
(5) Includes 200,000 shares of Common Stock issuable upon exercise of
certain options. Does not include 75,000 shares of Common Stock issuable
upon exercise of other options which become exercisable in March 1997.
(6) Includes (i) 1,000 shares of Common Stock owned by Mr. Magyar's
spouse, over which Mr. Magyar disclaims beneficial ownership, (ii) 1,670
shares of Common Stock owned by benefit plans of which Mr. Magyar is the
sole trustee and primary beneficiary, and (iii) 30,000 shares of Common
Stock issuable upon exercise of certain options.
(7) Includes 50,000 shares of Common Stock issuable upon exercise of
certain options. Does not include 20,000 shares of Common Stock
issuable upon exercise of other options which become exercisable in June
1997. Also includes 500 shares owned by Mr. vanden Heuvel's spouse, as
to which he disclaims beneficial ownership.
(8) Includes 50,000 shares of Common Stock issuable upon exercise of
certain options. Does not include 20,000 shares of Common Stock
issuable upon exercise of other options which become exercisable in June
1997.
(9) Represents 20,000 shares of Common Stock issuable upon exercise of
options.
(10) Includes 260,000 shares of Common Stock issuable upon exercise of
certain options. Does not include 50,000 shares of Common Stock
issuable upon exercise of other options which become exercisable in
October 1997.
(11) Includes shares referred to as being included in notes (2) through
(10). Excludes shares referred to in such notes as being excluded.
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<PAGE>
SELLING STOCKHOLDERS
This Prospectus relates to the resale by the Selling Stockholders
listed below of up to an aggregate of 2,216,922 shares of Common Stock.
All of the shares being registered under the Registration Statement of
which this Prospectus forms a part are being so registered pursuant to
certain registration rights granted by the Company to the Selling
Stockholders. Except as footnoted, none of the Selling Stockholders has
had a material relationship with the Company or any of its predecessors
or affiliates within the past three years.
<TABLE>
<CAPTION>
Number of Beneficial
Beneficial Ownership Shares of Ownership of Percentage
of Shares of Common Shares of of Beneficial
Name of Common Stock as of Stock Common Stock Ownership
Selling Stockholder August 30, 1996 to be Sold After Sale After Sale
- ------------------- -------------------- ---------- ------------- -------------
<S> <C> <C> <C> <C>
Everest Capital Limited (1) 535,714 132,174 403,540 1.6%
Morgan Stanley & Co. International(1) 400,000 400,000 -- --
Leo I. George (2) 492,500 247,500 245,000 *
Tracy Jo Hudson Lewis Trust, U.T.A. dated January
25, 1990, as amended(2) 62,500 62,500 -- --
Cindy Lee Hudson Fumei Trust, U.T.A. dated January
25, 1990, as amended(2) 62,500 62,500 -- --
Michelle Dawn Hudson Trust, U.T.A. dated January 25,
1990, as amended(2) 62,500 62,500 -- --
Jerri Dee Hudson Bell Trust, U.T.A. dated January 25,
1990, as amended(2) 62,500 62,500 -- --
The CIT Group (3) 50,000 50,000 -- --
Century Business Credit Corporation (4) 125,048 75,000 50,048 *
James J. Pinto (5) 279,332 236,443 42,889 *
Telcom Partners L.P. (5) 200,000 200,000 -- --
Churchill Associates L.P. (5) 10,555 10,555 -- --
GKN Securities Corp. (6) 159,500 159,500 -- --
ML Investors Services, Inc. (7) 70,000 70,000 -- --
Strategic Growth International, Inc. (8) 33,000 12,750 20,250 --
</TABLE>
________________________
* Less than one percent.
(1) In May 1995, the Company, WinStar Wireless, Everest Capital Fund
L.P. ("Fund"), Everest Capital International Ltd. ("Capital" and, along
with Fund the "Purchasers") and Everest Capital Limited, agent for the
Purchasers ("Agent"), entered into a note and warrant purchase
agreement, pursuant to which WinStar Wireless issued an aggregate
principal amount of $7,500,000 secured promissory notes ("Convertible
Notes"), which are convertible into shares of the Company's Common Stock
and the Company issued warrants to purchase up to 550,000 shares of
Common Stock. The Convertible Notes bear interest at the rate of 7% per
annum and are payable in May 2000. At any time, the unpaid principal
amount of and accrued interest on the Convertible Notes are convertible,
at the option of the Purchasers, into shares of Common Stock at a
conversion price of $7.00 per share (1,071,429 shares of Common Stock).
After December 15, 1996, WinStar Wireless may force conversion if the
last sale price of the Common Stock is above 175% of the then conversion
price (currently $12.25) for 20 consecutive trading days. The warrants
issued to the Purchasers were
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<PAGE>
divided into three classes: EC-A Warrants, EC-B Warrants and EC-C
Warrants. The 300,000 aggregate amount of EC-A Warrants are exercisable
immediately through May 24, 2000 at an exercise price of $12.00 per
share. The 100,000 EC-B Warrants are exercisable immediately through May
24, 2000 at an exercise price of $13.00 per share. The 150,000 EC-C
Warrants were exercised in July 1995 at an exercise price of $.01 per
share. In December 1996, the Agent sold 300,000 EC-A Warrants and
100,000 EC-B Warrants to Morgan Stanley & Co. International, an
affiliate of Morgan Stanley & Co., the placement agent in the sale of
the Senior and Convertible Notes in October 1995. The 1,071,429 shares
of Common Stock issuable upon conversion of the Convertible Notes and
the 550,000 shares of Common Stock issuable or issued upon exercise of
the EC-A, EC-B and EC-C Warrants sold to the Purchasers in the
above-described transactions are being registered for resale by the
Purchaser under the Registration Statement of which this Prospectus
forms a part. As of August 31, 1996, the Purchasers have sold or
transferred 1,489,255 of the aforementioned shares.
(2) In February 1994, the Company, its wholly-owned subsidiary WinStar
Wireless, Avant-Garde and Leo I. George, President and Chief Executive
Officer of Avant-Garde, entered into an agreement, pursuant to which
WinStar Wireless acquired from Mr. George, 360 shares, or 16%, of the
issued and outstanding common stock of Avant-Garde ("Avant-Garde Common
Stock") for a purchase price consisting of (i) $500,000 cash, (ii)
$900,000 in the form of 225,000 shares of the Company's Series D
Convertible Preferred Stock ("Preferred Stock D") having a liquidation
value of $4.00 per share (which Preferred Stock D was subsequently
converted into 225,000 shares of the Company's Common Stock) and (iii)
the promissory note of WinStar Wireless in the principal amount of
$200,000, payable without interest in April 1995. WinStar Wireless also
received two options from Mr. George to purchase an additional 742.5
shares ("First Option") and 697.5 shares ("Second Option") of
Avant-Garde Common Stock, respectively. In April 1994, WinStar Wireless
exercised the First Option to purchase an additional 742.5 shares (33%
of the outstanding shares) of Avant-Garde Common Stock at a purchase
price of $4,444.44 per share (for an aggregate purchase price of $3.3
million payable in cash). As a result of the exercise of the First
Option, WinStar Wireless raised its ownership to a total of 49% of the
outstanding Avant-Garde Common Stock. In connection with the First
Option exercise, WinStar Wireless prepaid in full its outstanding
promissory note to Mr. George in the principal amount of $200,000. In
April 1995, in lieu of exercising the Second Option, WinStar Wireless
entered into a merger agreement with Avant-Garde, Mr. George and The
Larry D. Hudson Trust ("Hudson Trust"), the only other shareholder of
Avant-Garde, pursuant to which Avant-Garde was merged into WinStar
Wireless Fiber Corp., a wholly-owned subsidiary of the Company, in July
1995. In connection with this merger, the Company acquired 697.5 shares
of Avant-Garde from Mr. George and 450 shares of Avant-Garde Common
Stock from The Hudson Trust and, in consideration thereof, issued
775,000 shares and 500,000 shares, respectively, of the Company's Common
Stock to Mr. George and The Hudson Trust. 688,000 of the 775,000 shares
of Common Stock issued to Mr. George (of which 440,500 have already been
sold) and the 500,000 shares of Common Stock (of which 250,000 have
already been sold) issued to The Larry D. Hudson Trust in connection
with the above-described transactions are being registered for resale by
such persons under the Registration Statement of which this Prospectus
forms a part. Of such shares being registered, some may be owned by a
trust established by Mr. George for the benefit of Mr. George and his
family members. 35,000 of the 988,000 shares beneficially owned by Mr.
George are owned by the George Family L.P., of which Mr. George is the
general partner. Mr. George now serves as a Vice President of WinStar
Wireless and of WinStar Wireless Fiber Corp., a wholly-owned subsidiary
of the Company. Pursuant to the terms of the Hudson Trust, the
remaining 250,000 shares of Common Stock originally held by the Hudson
Trust have been reissued in equal amounts of 62,500 shares to four
trusts established under the Hudson Trust for the benefit of Mr.
Hudson's daughters.
(3) The CIT Group, a lending institution, was issued warrants to
purchase 50,000 shares of Common Stock (with a per-share exercise price
of $6.975) in November 1994 in connection with a $5,000,000 financing
provided by such institution to WinStar Gateway, a wholly-owned
subsidiary of the Company.
76
<PAGE>
(4) Century Business Credit Corporation, a lending institution, was
issued (a) 50,000 shares of Common Stock upon exercise of certain
warrants (with a per-share exercise price of $3.625) issued in October
1993 in connection with an $8,000,000 import trade factoring and
financing arrangement provided by such institution to WinStar Global
Products, a wholly-owned subsidiary of the Company, and (b) 25,000
shares of Common Stock upon exercise of certain warrants (with a
per-share exercise price of $5.75 per share) issued in May 1995, in
connection with an extension of such facility.
(5) 310,000, 55,555 and 140,000 shares of Common Stock were issued to
James Pinto, Churchill Associates L.P. and Telcom Partners, L.P.,
respectively, upon exercise of certain options (with a per-share
exercise price of $1.50) granted in September 1993 in connection with
loans aggregating $500,000 provided by such persons to the Company. The
loans were evidenced by promissory notes payable in August 1996 and
accruing interest at the annual rate of 7%. All amounts under these
promissory notes have been fully paid. James Pinto is the general
partner of Telcom Partners, L.P. Mr. Pinto is also one of the principal
officers of Churchill International Inc., the corporate general partner
of Churchill Associates L.P. Mr. Pinto has sold 73,557 shares of his
Common Stock, Churchill Associates L.P. has sold 45,555 of its shares
and Telecom Partners L.P. has sold 40,000 of its shares. Shares issued
to each person are not included in the others' beneficial ownership.
(6) 312,500 shares of Common Stock were issued to GKN Securities Corp.
("GKN") upon exercise of options (12,500 with a per-share exercise price
of $3.25 and 300,000 with a per-share exercise price of $8.25). GKN had
acted as underwriter of the Company's initial public offering of
securities consummated in April 1991. As of August 31, 1996, 153,500 of
such shares have been sold. The number of shares indicated does not
include shares held by GKN in its trading account.
(7) ML was issued options to purchase 55,000 shares of Common Stock
(with a per-share exercise price of $17.125) in September 1995 and
options to purchase 15,000 shares of Common Stock (with a per-share
exercise price of $18.0625) in October 1995 as additional consideration
for providing the Equipment Lease Financing.
(8) Strategic Growth International was issued options to purchase
12,750 shares of Common Stock (with a per-share exercise price of $2.25)
in March 1993 for certain consulting services.
The Common Stock of the Selling Stockholders may be offered and sold
from time to time as market conditions permit in the over-the-counter market,
including the Nasdaq National Market, in negotiated transactions or
otherwise, at prices and terms then prevailing or at prices related to the
then-current market price, or in negotiated transactions. The Common Stock
of the Selling Stockholder may be sold by one or more of the following
methods, without limitation: (i) a block trade in which a broker or dealer
so engaged will attempt to sell the shares as agent but may position and
resell a portion of the block as principal to facilitate the transaction;
(ii) purchases by a broker or dealer as principal and resale by such broker
or dealer for its account pursuant to this Prospectus; (iii) ordinary
brokerage transactions in the shares or related rights and transactions in
which the broker solicits purchases; and (iv) transactions between sellers
and purchasers without a broker/dealer; and (v) underwritten offerings. In
effecting sales, brokers or dealers engaged by the Selling Stockholders may
arrange for other brokers or dealers to participate. Such brokers or dealers
may receive commissions or discounts from Selling Stockholders in amounts to
be negotiated. Such brokers and dealers and any other participating brokers
and dealers may be deemed to be "underwriters" within the meaning of the
Securities Act, in connection with such sales.
77
<PAGE>
DESCRIPTION OF CERTAIN INDEBTEDNESS
In October 1995, the Company raised net proceeds of $214.5 million from
the 1995 Debt Placement. There will not be any accrual of cash interest on
the Senior or Convertible Notes (collectively, the "Notes") prior to October
15, 2000 or payment of cash interest on the Notes prior to April 15, 2001.
From and after October 15, 2000, the Notes will bear interest at the rate of
14% per annum, payable semi-annually in cash commencing April 15, 2001. The
Notes mature on October 15, 2005. At maturity, the Senior Notes will have an
aggregate principal amount of $294.2 million and the Convertible Notes will
have an aggregate principal amount of $147.1 million.
The Convertible Notes are convertible, at the option of the holder, into
Common Stock at any time on or after October 23, 1996 into that number of
shares derived by dividing the principal amount of the Convertible Notes
being converted by the Conversion Price. In addition, if the closing sale
price of the Common Stock on the Nasdaq National Market during the
twelve-month periods from October 15, 1995 through October 15, 1999 has
exceeded the Market Criteria and a registration statement with respect to the
Conversion Shares is effective and available, all of the Convertible Notes
automatically will be converted into shares of Common Stock at the close of
business on the last day of the Market Criteria Period; provided, however,
that if the Market Criteria is satisfied prior to October 15, 1996, the
conversion will not occur until October 23, 1996 and will occur only if the
closing sale price of the Common Stock is at least $37.50 on such date. The
Company is obligated to cause to be declared effective a registration
statement registering the issuance or resale of the shares of Common Stock on
or prior to October 23, 1996. This Prospectus forms a part of such
registration statement. If such registration statement is not declared
effective on or prior to October 23, 1996, the Conversion Price will be
decreased to $20.06.
The Indentures contain certain covenants which, among other things,
restrict the ability of the Company and certain of its subsidiaries to: incur
additional indebtedness; create liens; engage in sale-leaseback transactions;
pay dividends or make distributions in respect of their capital stock; make
investments or make certain other restricted payments; sell assets; issue or
sell stock of such subsidiaries; enter into transactions with stockholders or
affiliates; acquire assets or businesses not constituting "telecommunications
assets" (as defined in such Indentures); or consolidate, merge or sell all or
substantially all of their assets. The covenants contained in the Indentures
are subject to exceptions and the Company's new media and consumer products
subsidiary will not be subject to the covenants contained therein, although
the Company's ability to invest in such subsidiaries is limited.
In September 1995, WinStar Wireless entered into an equipment lease
financing (the "Equipment Lease Financing") with ML Investors Services, Inc.
("ML") pursuant to which ML has agreed to make up to $10.0 million of
equipment financing available to WinStar Wireless until September 1996. As of
the date of this Prospectus, ML has made available only $7.0 million under
the Equipment Lease Financing. The balance of $3.0 million may be drawn by
WinStar Wireless only if ML agrees to make such funds available, which it is
not obligated to do. As of June 30, 1996, WinStar Wireless leased equipment
having a value of approximately $7.0 million under the Equipment Lease
Financing. Pursuant to a master lease agreement between WinStar Wireless and
ML (the "Lease") entered into in connection with the Equipment Lease
Financing. WinStar Wireless may lease transceivers and related network
equipment from ML or its assignee for payments at the rate of 2.2753% per
month of the equipment value (a return of approximately 13% per annum to the
lessor) and are non-cancelable for sixty months. After twelve months, Winstar
Wireless may purchase the equipment at scheduled rates which decline over the
term of the Lease and which provide for a return of approximately 15% per
annum to the lessor. WinStar Wireless' obligations under the Lease are
guaranteed by the Company. As additional consideration for providing the
Equipment Lease Financing, the Company has agreed to issue ML five-year
options to purchase shares of Common Stock at the rate of one share of Common
Stock for each $100 of the Equipment Lease Financing amount made available at
a price equal to the market price on the day prior to the date of grant.
Pursuant to such agreement, the Company has issued to ML options to
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<PAGE>
purchase 55,000 shares of Common Stock at an exercise price of $17.125 per
share and options to purchase 15,000 shares of Common Stock at an exercise
price of $18.0625 per share.
In May 1995, the Company, WinStar Wireless and Everest Capital Fund L.P.
("Fund"), Everest Capital International Ltd. ("Capital" and, along with Fund
the "Purchasers") and Everest Capital Limited, agent for the Purchasers
("Agent"), entered into a note and warrant purchase agreement, pursuant to
which WinStar Wireless issued $7.5 million of notes (the "Everest Notes"),
which are convertible into shares of the Company's Common Stock, and warrants
to purchase up to 550,000 shares of Common Stock. The Everest Notes bear
interest at the rate of 7% per annum, payable in cash on a semi-annual basis,
and are payable in May 2000. The Everest Notes are secured by a lien on all
of the assets of WinStar Wireless and Wireless Fiber Corp. and are guaranteed
by the Company and Wireless Fiber Corp. To secure its guaranty, the Company
pledged all of the outstanding shares of common stock of WinStar Wireless and
Wireless Fiber Corp. Under the Everest Notes, WinStar Wireless may not pay
any dividends to the Company and may not issue any capital stock. The
Purchasers agreed to subordinate their liens to any liens granted by the
Company to secure up to $30.0 million of equipment-related financing prior to
February 29, 1996 and up to an additional $20.0 million of such financing
prior to February 28, 1997. Any liens securing indebtedness above such
amounts, and any liens granted after February 28, 1997, require the consent
of the Purchasers.
At any time, the unpaid principal amount of and accrued interest on the
Everest Notes are convertible, at the option of the Purchasers, into shares
of Common Stock at a conversion price of $7.00 per share. On December 28,
1995, the Purchasers exercised their option to convert $3.75 million of
principal and approximately $25,000 of interest due under the Everest Notes
into 539,255 shares of Common Stock. In addition, the holders of the Everest
Notes have committed that they will convert any remaining outstanding Everest
Notes into Common Stock on or prior to December 15, 1996. After December 15,
1996, WinStar Wireless may force conversion of the Everest Notes if the last
sale price of the Common Stock is above 175% of the then conversion price
(currently $12.25) for 20 consecutive trading days. The warrants issued to
the Purchasers were divided into three classes: EC-A Warrants, EC-B Warrants
and EC-C Warrants. The 300,000 aggregate amount of EC-A Warrants are
exercisable through May 24, 2000 at an exercise price of $12.00 per share.
The 100,000 EC-B Warrants are exercisable through May 24, 2000 at an exercise
price of $13.00 per share. The 150,000 EC-C Warrants were exercised in July
1995 by Everest at an exercise price of $.01 per share.
In November 1994, WinStar Gateway entered into a Loan and Security
Agreement ("CIT Loan Agreement") with The CIT Group/Credit Finance, Inc.
("The CIT Group"), pursuant to which The CIT Group agreed to make a $5.0
million (less $100,000 until WinStar Gateway has maintained three consecutive
calendar months with positive net income from operations) revolving credit
facility (the "CIT Credit Facility") available to WinStar Gateway until
November 1996. Pursuant to the terms of the CIT Loan Agreement, borrowings
are limited to 90% of most eligible accounts receivable, with availability of
certain types of accounts receivable limited to 80% and 50% (less appropriate
reserves as determined by The CIT Group). In addition, WinStar Gateway is
prohibited from paying dividends to the Company. The Company also is party to
a keepwell agreement requiring the Company to make a monthly contribution to
WinStar Gateway in an amount equal to WinStar Gateway's net income (loss),
plus its depreciation and amortization, minus its capital expenditures, if
such amount is less than zero for a particular month. Borrowings bear
interest at a rate of 3.0% in excess of the prime commercial lending rate of
The Chase Manhattan Bank, N.A. ("Chase Manhattan") and are secured by a lien
on all of WinStar Gateway's assets as well as a guarantee from the Company as
to the first $2.2 million in borrowings. The CIT Loan Agreement also provides
for an annual fee of $50,000 as well as certain underutilization fees. As
additional consideration for providing the CIT Credit Facility, the Company
issued to The CIT Group warrants to purchase 50,000 shares of Common Stock
until November 3, 1998 at an exercise price of $6.975 per share, which
warrants have been exercised.
In August 1996, WinStar Global Products entered into an Amended and
Restated Credit and Security Agreement ("Credit Agreement") with IBJ Schroder
Bank & Trust Company (the "Lender"), pursuant to which
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<PAGE>
the Lender agreed to make a $12,000,000 revolving credit facility (the
"Revolving Credit Facility") and a $250,000 Letter of Credit facility
(included within the $12,000,000 facility) available to WinStar Global
Products until August 8, 1999. Pursuant to the terms of the Credit
Agreement, borrowings are limited to an amount equal to the sum of (a) 85% of
eligible accounts receivable plus (b) the lesser of 50% of eligible inventory
or $4,500,000 plus (c) for the period commencing March 1 of each year through
January 31 of the following year, $3,000,000 (the "Overadvance"). Borrowings
bear interest at a rate of 0.75% in excess of the base lending rate of the
Lender and are secured by a lien on all of the assets of WinStar Global
Products as well as a guaranty from the Company of the Overadvance. The
Credit Agreement also provides for certain periodic fees to be paid by
WinStar Global Products and places certain affirmative and negative covenants
upon it, including restrictions upon its ability to pay dividends or make
other payments to the Company. The Revolving Credit Facility amends the
$6,000,000 credit facility from Century Business Credit Corporation
("Century") which was established in 1994 and was assigned (including a
$3,000,000 guaranty by the Company) by Century to the Lender.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
COMMON STOCK
The authorized capital stock of the Company includes 75,000,000 shares
of Common Stock, $.01 par value. The holders of Common Stock are entitled to
one vote for each share held of record on all matters submitted to a vote of
stockholders. Although the Company has no present intention of paying any
dividends, holders of Common Stock are entitled to receive ratably such
dividends as may be declared by the Board of Directors out of funds legally
available therefor. In the event of a liquidation or dissolution of the
Company, holders of Common Stock are entitled to share ratably in all assets
remaining after payment of liabilities and liquidation preference of
preferred shares.
Holders of Common Stock have no preemptive rights and have no rights to
convert their Common Stock into any other securities. There are no redemption
or sinking fund provisions applicable to the Common Stock. All of the
outstanding shares of Common Stock are fully paid and nonassessable.
The Company's Certificate of Incorporation, as amended, provides for a
Board of Directors divided into three classes, each of which will generally
serve for a term of three years, with only one class of directors being
elected in each year; provides that directors may be removed with or without
cause and only by at least a majority of the capital stock of the Company
entitled to vote thereon; and further requires an affirmative vote of the
holders of at least two-thirds of the capital stock of the Company entitled
to vote thereon to alter, amend or repeal the provisions relating to the
classification of, and the removal of members from, the Board of Directors.
Nominations for the Board of Directors may be made by the Company Board or by
any stockholder entitled to vote for the election of directors. A stockholder
entitled to vote for the election of directors at a meeting may nominate a
person or persons for election as director only if written notice of such
stockholder's intent to make such nomination is given to the Company's
Secretary not later than sixty days in advance of such meeting. The Company's
Certificate of Incorporation and By-Laws do not provide for cumulative voting
rights which means that holders of more than one-half of the outstanding
voting rights, voting for the election of directors, can elect all of the
directors to be elected, if they so choose and, in such event, the holders of
the remaining shares will not be able to elect any of the Company's
directors. A special meeting of stockholders of the Company may be called by
the request of the holders of at least 10% of the outstanding capital stock
of the Company entitled to vote generally in all matters.
The registrar and the transfer agent for the Common Stock of the Company
is Continental Stock Transfer & Trust Company, 2 Broadway, New York, New York
10004.
PREFERRED STOCK
The authorized capital stock of the Company includes 15,000,000 shares
of "blank check" preferred stock, which may be issued from time to time in
one or more series upon authorization by the Company's Board of Directors.
There currently are no shares of preferred stock outstanding. The Board of
Directors, without further approval of the stockholders, is authorized to fix
the dividend rights and terms, conversion rights, voting rights, redemption
rights and terms, liquidation preferences, and any other rights, preferences,
privileges and restrictions applicable to each series of preferred stock. The
issuance of preferred stock (and the ability of the Board of Directors to do
so without stockholder approval), while providing flexibility in connection
with possible acquisitions and other corporate purposes could, among other
things, adversely affect the voting power of the holders of Common Stock and,
under certain circumstances, make it more difficult for a third party to gain
control of the Company, discourage bids for the Company's Common Stock at a
premium or otherwise adversely affect the market price of the Common Stock.
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STATUTORY PROVISIONS AFFECTING STOCKHOLDERS
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law. In general, the statute prohibits a publicly held
Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder unless prior
to the date the stockholder became an interested stockholder the board
approved either the business combination or the transaction that resulted in
the stockholder becoming an interested stockholder or unless one of two
exceptions to the prohibitions are satisfied: (i) upon consummation of the
transaction that resulted in such person becoming an interested stockholder,
the interested stockholder owned at least 85% of the Company's voting stock
outstanding at the time the transaction commenced (excluding, for purposes of
determining the number of shares outstanding, shares owned by certain
directors or certain employee stock plans) or (ii) on or after the date the
stockholder became an interested stockholder, the business combination is
approved by the board of directors and authorized by the affirmative vote
(and not by written consent) of at least two-thirds of the outstanding voting
stock, excluding the stock owned by the interested stockholder. A "business
combination" includes a merger, asset sale or other transaction resulting in
a financial benefit to the interested stockholder. An "interested
stockholder" is a person who (other than the corporation and any direct or
indirect majority-owned subsidiary of the corporation), together with
affiliates and associates, owns (or, as an affiliate or associate, within
three years prior, did own) 15% or more of the corporation's outstanding
voting stock. It is possible that these provisions may have the effect of
delaying, deterring or preventing a change in control of the Company.
SHARES ELIGIBLE FOR FUTURE SALE
As of September 30, 1996, there were outstanding options and warrants
with respect to an aggregate of [9,957,464] shares of Common Stock at
per-share exercise prices ranging from $1.06 to $31.12. Additionally, the
Convertible Notes and certain other convertible debt are convertible into
shares (with no additional cash payment to the Company). Although a
significant number of the outstanding shares of Common Stock are "restricted
securities," as that term is defined in Rule 144 under the Securities Act
("Restricted Shares"), and may not be sold unless such sale is registered
under the Securities Act or is made pursuant to an exemption from the
registration under the Securities Act, including the exemption provided by
Rule 144, substantially all of such Restricted Shares have been registered
for resale under the Securities Act or are currently, or will soon become,
available for sale pursuant to Rule 144. In addition, the Company may issue
a substantial number of shares of Common Stock in connection with the
Milliwave Acquisition and the Locate Acquisition, all of which would be
subject to registration rights requiring the Company to register them for
resale. Sales or the expectation of sales of a substantial number of shares
of Common Stock in the public market could adversely affect the prevailing
market price of the Common Stock.
In general, under Rule 144 as currently in effect, if two years have
elapsed since the later of the date of acquisition of Restricted Shares from
the Company or any "affiliate" of the Company, as that term is defined under
the Securities Act, the holder is entitled to sell within any three-month
period a number of shares of Common Stock that does not exceed the greater of
1% of the then-outstanding shares of Common Stock or the average weekly
trading volume of shares of Common Stock on all exchanges and reported
through the automated quotation system of a registered securities association
during the four calendar weeks preceding the date on which notice of the sale
is filed with the Commission. Sales under Rule 144 are also subject to
certain restrictions on the manner of sales, notice requirements and the
availability of current public information about the Company. If three years
have elapsed since the date of acquisition of Restricted Shares from the
Company or from any "affiliate" of the Company, and the holder thereof is
deemed not to have been an affiliate of the Company at any time during the 90
days preceding a sale, such person would be entitled to sell such Common
Stock in the public market under Rule 144(k) without regard to the volume
limitations, manner of sale provisions, public information requirements or
notice requirements.
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The Commission recently has proposed amendments to Rule 144 and Rule
144(k) that would permit resales of restricted securities under Rule 144
after a one-year, rather than a two-year, holding period, subject to
compliance with the other provisions of Rule 144, and would permit unlimited
resales of restricted securities by non-affiliates under Rule 144(k) after a
two-year, rather than a three-year, holding period. Adoption of such
amendments could result in resales of restricted securities sooner than would
be the case under Rule 144 and Rule 144(k) as currently in effect. The
Company is unable to determine when or if such proposed amendments will be
adopted.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following is a general discussion of certain United States federal
income tax consequences to beneficial owners from the conversion of
Convertible Notes into Common Stock and the ownership and disposition of the
Common Stock. This discussion is based on current provisions of the Internal
Revenue Code (the "Code"), applicable final, temporary and proposed Treasury
Regulations ("Treasury Regulations"), judicial authorities, and current
administrative rulings and pronouncements of the Service and upon the facts
concerning the Company and its subsidiaries as of the date hereof. There can
be no assurance that the Service will not take a contrary view, and no ruling
from the Service has been or will be sought by the Company. Legislative,
judicial, or administrative changes or interpretations may be forthcoming
that could alter or modify the statements and conclusions set forth herein.
Any such changes or interpretations may or may not be retroactive and could
affect the tax consequences to holders.
This discussion does not address all aspects of United States federal
income taxation that may be relevant to particular holders of the Convertible
Notes or the Common Stock in light of their personal investment or tax
circumstances, or to certain types of investors (including insurance
companies, financial institutions, broker-dealers or tax-exempt
organizations) subject to special treatment under the United States federal
income tax laws. This discussion does not deal with special tax situations,
such as the holding of the Convertible Notes or Common Stock as part of a
straddle with other investments or situations in which the functional
currency of a holder who is a U.S. Holder (as defined below) is not the
United States dollar. In addition, this discussion deals only with
Convertible Notes and Common Stock held as capital assets within the meaning
of Section 1221 of the Code. This discussion does not deal with foreign,
state and local consequences that may be relevant to non-U.S. Holders in
light of their personal circumstances.
As used in the discussion which follows, the term "U.S. Holder" means a
beneficial owner of Convertible Notes or Common Stock, as applicable, that
for United States federal income tax purposes is (i) a citizen or resident of
the United States, (ii) a corporation, partnership or other entity created or
organized in or under the laws of the United States or of any political
subdivision thereof, or (iii) an estate or trust the income of which is
subject to United States federal income taxation regardless of its source.
The term "Non-U.S. Holder" means a Holder of Convertible Notes or Common
Stock, as applicable, that is, for United States federal income tax purposes,
not a U.S. Holder.
An individual may, subject to certain exceptions, be deemed to be a
resident alien (as opposed to a nonresident alien) by virtue of being present
in the United States for at least 31 days in the calendar year and for an
aggregate of at least 183 days during a three-year period ending in the
current calendar year (counting for such purposes all of the days present in
the current year, one-third of the days present in the immediately preceding
year, and one-sixth of the days present in the second preceding year).
Resident aliens are subject to U.S. federal tax as if they were U.S. citizens.
HOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS AS TO THE PARTICULAR TAX
CONSEQUENCES TO THEM OF CONVERTING THE CONVERTIBLE NOTES INTO COMMON STOCK
AND HOLDING AND DISPOSING OF THE COMMON STOCK, INCLUDING THE APPLICABILITY
AND EFFECT OF ANY STATE, LOCAL OR FOREIGN TAX LAWS.
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TAX CONSEQUENCES TO U.S. HOLDERS
EXERCISE OF CONVERSION RIGHTS
No gain or loss will be recognized for United States federal income tax
purposes by a U.S. Holder of the Convertible Notes upon the conversion
thereof in exchange for Common Stock (except to the extent of cash, if any,
received in lieu of the issuance of fractional shares of Common Stock). A
U.S. Holder's tax basis in the Common Stock will equal the sum of the
adjusted tax basis in the Convertible Notes reduced by the portion of
adjusted tax basis allocated to any fractional Common Stock exchanged for
cash. The adjusted tax basis in the Convertible Notes is the purchase price
of such Convertible Note to the U.S. Holder as increased by any accrued
original issue discount (net of all amortized acquisition premiums) and
market discount previously included in income by the U.S. Holder and
decreased by amortizable bond premiums, if any, deducted over the term of the
Convertible Notes. The holding period of the Common Stock received on the
conversion of the Convertible Notes will include the period during which the
Convertible Notes were held by such U.S. Holder, except that the holding
period of Common Stock allocable to accrued original issue discount may
commence on a later date. If any cash is received in lieu of fractional
shares, the U.S. Holder will recognize gain or loss, and the character and
the amount of such gain or loss will be determined as if the U.S. Holder had
received such fractional shares and then immediately sold them for cash.
ADJUSTMENTS
The Conversion Ratio applicable to the Convertible Notes is subject to
adjustments under certain circumstances. Under Section 305 of the Code and
the Treasury Regulations promulgated thereunder, holders of the Convertible
Notes will be treated as having received a constructive distribution,
resulting in ordinary income to the extent of the Company's current and
accumulated earnings and profits, if, and to the extent that, adjustments in
the Conversion Ratio are coupled with or occur by reason of certain taxable
distributions on stock and increase the proportionate interest of a holder of
a Convertible Note in the earnings and profits of the Company. The Company
believes that it does not presently have earnings and profits for tax
purposes. Accordingly, any such adjustment will not be treated as a taxable
distribution to holders of the Convertible Notes so long as the Company
continues not to have earnings and profits for tax purposes.
DIVIDENDS
The Company does not presently intend to pay dividends on its Common
Stock in the foreseeable future. If the Company should pay a dividend on the
Common Stock, the dividend will be taxable as ordinary income to the extent
of the Company's current and accumulated earnings and profit. If there are no
such earnings and profits, such dividend would be treated first as a return
of capital to the extent of the U.S. Holder's tax basis in the Common Stock,
and then, if the amount of the dividend exceeds such tax basis, as capital
gain to the extent of such excess. As a result, until such time as the
Company has current or accumulated earnings and profits, distributions on
Common Stock will be a nontaxable return of capital and will be applied
against and reduce the adjusted tax basis of any Common Stock (but not below
zero) in the hands of its holder. The Company believes that it does not
presently have accumulated earnings and profits for tax purposes. However,
the Company cannot predict whether it will have earnings and profits for
future taxable years. See "Risk Factors -- Historical and Anticipated Future
Operating Losses and Negative EBITDA."
SALE OF COMMON STOCK
Gain or loss will generally be recognized upon a sale of the Common
Stock received upon conversion of Convertible Notes in an amount equal to the
difference between the amount realized on the transfer and the holder's
adjusted tax basis in the Common Stock. Such gain or loss will be capital
gain or loss, provided
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the Common Stock is held as a capital asset, and will be long-term capital
gain or loss with respect to Common Stock held for more than one year.
BACKUP WITHHOLDING
In general, certain payments to a non-corporate U.S. Holder of dividends
on Common Stock and the gross proceeds of a disposition of the Common Stock
will be subject to United States information reporting requirements. In
general, subject to certain exceptions, such payments will be subject to
United States backup withholding tax at a rate of 31% if the U.S. Holder,
among other things, (i) fails to furnish his social security number or other
taxpayer identification number ("TIN") to the payor responsible for backup
withholding (for example, the U.S. Holder's securities broker), (ii)
furnishes to such payor an incorrect TIN, (iii) fails to provide such payor
with a certified statement, signed under penalties of perjury, that the TIN
provided to the payor is correct and that the U.S. Holder is not subject to
backup withholding or (iv) fails to report properly interest and dividends on
his tax return. A holder who does not provide the Company or the applicable
reporting entity with his or her correct TIN may be subject to penalties
under the Code.
The amount of any backup withholding from a payment to a holder will be
allowed as a credit against such holder's United States federal income tax
liability and may entitle such holder to a refund, provide that the required
information is furnished to the Service.
TAX CONSEQUENCES TO NON-U.S. HOLDERS
EXERCISE OF CONVERSION RIGHTS
No gain or loss will be recognized for United States federal income tax
purposes by non-U.S. Holders of the Convertible Notes upon the conversion
thereof in exchange for full shares of Common Stock. To the extent any cash
is received in lieu of the issuance of fractional shares of Common Stock, the
rules applicable to gain from a sale of Common Stock will apply. See "Gain
on Disposition of Common Stock."
DIVIDENDS
The Company does not anticipate paying cash dividends on its capital
stock in the foreseeable future. See "Dividend Policy." In the event,
however, that dividends are paid on shares of Common Stock, dividends paid to
a Non-U.S. Holder of Common Stock will be subject to withholding of United
States federal income tax at a 30% rate or such lower rate as may be provided
by an income tax treaty between the United States and the country of which
the Non-U.S. Holder is a tax resident, unless (i) the dividends are
effectively connected with the conduct of a trade or business of the Non-U.S.
Holder within the United States and the Non-U.S. Holder provides the payor
with proper documentation or (ii) if a tax treaty applies, the dividends are
attributable to a U.S. permanent establishment maintained by the Non-U.S.
Holder. In order to claim the benefit of an applicable tax treaty rate, a
Non-U.S. Holder may have to file with the Company or its dividend paying
agent an exemption or reduced treaty rate certificate or letter in accordance
with the terms of such treaty. Dividends that are effectively connected with
the conduct of a trade or business within the United States or, if a tax
treaty applies, are attributable to such a United States permanent
establishment, are subject to United States federal income tax on a net
income basis (that is, after allowance for applicable deductions) at
applicable graduated individual or corporate rates. Any such effectively
connected dividends received by a foreign corporation may, under certain
circumstances, be subject to an additional "branch profits tax" at a 30% rate
or such lower rate as may be specified by an applicable income tax treaty.
Under current United States Treasury regulations, dividends paid to an
address outside the United States are presumed to be paid to a resident of
such country for purposes of the withholding discussed above (unless the
payor has knowledge to the contrary) and, under the current interpretation of
United States Treasury regulations, for purpose of determining the
applicability of a tax treaty rate. However, under
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proposed United States Treasury regulations, in the case of dividends paid
after December 31, 1997 (December 31, 1999 in the case of dividends paid to
accounts in existence on or before the date that is 60 days after the
proposed United States Treasury regulations are published as final
regulations), a Non-U.S. Holder generally would be subject to United States
withholding tax at a 31% rate under the backup withholding rules described
below, rather than at a 30% rate or a reduced rate under an income tax
treaty, unless certain certification procedures (or, in the case of payments
made outside the United States with respect to an offshore account, certain
documentary evidence procedures) are complied with, directly or through an
intermediary. Certain certification and disclosure requirements must be
complied with in order to be exempt from withholding under the effectively
connected income exemption.
A Non-U.S. Holder of Common Stock eligible for a reduced rate of United
States withholding tax pursuant to an income tax treaty may obtain a refund
of any excess amounts withheld by filing an appropriate claim for refund with
the Internal Revenue Service (the "IRS"), provided that the required
information is furnished to the IRS.
GAIN ON DISPOSITION OF COMMON STOCK
A Non-U.S.Holder generally will not be subject to United States federal
income tax with respect to gain recognized on a sale or other disposition of
Common Stock unless (i) (a) the gain is effectively connected with a trade or
business conducted by the Non-U.S. Holder within the United States or (b) if
a tax treaty applies, the gain is attributable to a United States permanent
establishment maintained by the Non-U.S. Holder, (ii) in the case of a
Non-U.S. Holder who is an individual and holds the Common Stock as a capital
asset, such holder is present in the United States for 183 or more days in
the taxable year of the sale or other disposition and certain other
conditions are met, (iii) the Non-U.S. Holder is subject to tax pursuant to
certain provisions of the Code applicable to United States expatriates, or
(iv) the Company is or has been a "U.S. real property holding corporation"
for United States federal income tax purposes at any time within the shorter
of the five-year period preceding such disposition or the period such
Non-U.S. Holder held the Common Stock. If the Company were, or to become, a
U.S. real property holding corporation, gains realized upon a disposition of
Common Stock by a Non-U.S. Holder which did not directly or indirectly own
more than 5% of the Common Stock during the shorter of the periods described
above generally would not be subject to United States federal income tax so
long as the Common Stock is "regularly traded" on an established securities
market. The Company believes that it has not been, is not currently, and
does not anticipate becoming, a "U.S. real property holding corporation" for
United States federal income tax purposes.
If an individual Non-U.S. Holder falls under clause (i) above, such
individual generally will be taxed on the net gain derived from a sale under
regular graduated United States federal income tax rates. If an individual
Non-U.S. Holder falls under clause (ii) above, such individual generally will
be subject to a flat 30% tax on the gain derived from a sale, which may be
offset by certain United States capital losses (notwithstanding the fact that
such individual is not considered a resident of the United States). Thus,
individual Non-U.S. Holders who have spent (or expect to spend) 183 days or
more in the United States in the taxable year in which they contemplate a
sale of Common Stock are urged to consult their tax advisors as to the tax
consequences of such sale.
If a Non-U.S. Holder that is a foreign corporation falls under clause
(i) above, it generally will be taxed on its net gain under regular graduated
United States federal income tax rates and, in addition, will be subject to
the branch profits tax equal to 30% of its "effectively connected earnings
and profits" within the meaning of the Code for the taxable year, as adjusted
for certain items, unless it qualifies for a lower rate under an applicable
income tax treaty.
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FEDERAL ESTATE TAX
Common Stock owned or treated as owned by an individual who is neither a
United States citizen nor a United States resident (as defined for United
States federal estate tax purposes) at the time of death will be included in
the individual's gross estate for United States federal estate tax purposes,
unless an applicable estate tax treaty provides otherwise and, therefore, may
be subject to United States federal estate tax.
INFORMATION REPORTING AND BACKUP WITHHOLDING TAX
Under United States Treasury regulations, the Company must report
annually to the IRS and to each Non-U.S. Holder the amount of dividends paid
to such holder and the tax withheld with respect to such dividends. These
information reporting requirements apply even if withholding was not required
because the dividends were effectively connected with a trade or business in
the United States of the Non-U.S. Holder or withholding was reduced or
eliminated by an applicable income tax treaty. Copies of the information
returns reporting such dividends and withholding may also be made available
to the tax authorities in the country in which the Non-U.S. Holder is a
resident under the provisions of an applicable income tax treaty or agreement.
United States backup withholding (which generally is a withholding tax
imposed at the rate of 31% on certain payments to persons that fail to
furnish certain information under the United States information reporting
requirements) generally will not apply to (i) dividends paid to Non-U.S.
Holders that are subject to the 30% withholding discussed above (or that are
not so subject because a tax treaty applies that reduces or eliminates such
30% withholding) or (ii) under current law, dividends paid to a Non-U.S.
Holder at an address outside of the United States. However, under proposed
United States Treasury regulations, in the case of dividends paid after
December 31, 1997 (December 31, 1999 in the case of dividends paid to
accounts in existence on or before the date that is 60 days after the
proposed United States Treasury regulations are published as final
regulations), a Non-U.S. Holder generally would be subject to backup
withholding at a 31% rate, unless certain certification procedures (or, in
the case of payments made outside the United States with respect to an
offshore account, certain documentary evidence procedures) are complied with,
directly or through an intermediary.
Backup withholding and information reporting generally will apply to
dividends paid to addresses inside the United States on shares of Common
Stock to beneficial owners that are not "exempt recipients" and that fail to
provide in the manner required certain identifying information.
In general, backup withholding and information reporting will not apply
to a payment of the gross proceeds of a sale of Common Stock effected at a
foreign office of a broker. If, however, such broker is, for United States
federal income tax purposes, a U.S. person, a controlled foreign corporation
or a foreign person, 50% or more of whose gross income for certain periods is
derived from activities that are effectively connected with the conduct of a
trade or business in the United States, such payments will not be subject to
backup withholding but will be subject to information reporting, unless (i)
such broker has documentary evidence in its records that the beneficial owner
is a Non-U.S. Holder and certain other conditions are met, or (ii) the
beneficial owner otherwise establishes an exemption. Temporary United States
Treasury regulations provide that the Treasury is considering whether backup
withholding should be required in such circumstances. Under proposed United
States Treasury regulations not currently in effect, backup withholding will
not apply to such payments absent actual knowledge that the payee is a United
States person. The IRS recently proposed regulations addressing certain
withholding, certification and information reporting rules (some of which
have been mentioned above) which could affect treatment of the payment of the
proceeds discussed above. Non-U.S. Holders should consult their tax advisors
regarding the application of these rules to their particular situations, the
availability of an exemption therefrom, the procedure for obtaining such an
exemption, if available, and the possible application of the proposed United
States Treasury regulations addressing the withholding and the information
reporting rules.
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Payment by a United States office of a broker of the proceeds of a sale
of Common Stock is subject to both backup withholding and information
reporting unless the beneficial owner certifies under penalties of perjury
that it is a Non-U.S. Holder, or otherwise establishes an exemption. Backup
withholding is not an additional tax. Any amounts withheld under the backup
withholding rules will be allowed as a refund or a credit against such
holder's U.S. federal income tax liability provided the required information
is furnished to the IRS.
THE FOREGOING SUMMARY DOES NOT DISCUSS ALL ASPECTS OF UNITED STATES
FEDERAL INCOME TAXATION THAT MAY BE RELEVANT TO A PARTICULAR HOLDER OF
CONVERTIBLE NOTES OR COMMON STOCK IN LIGHT OF ITS PARTICULAR CIRCUMSTANCES
AND INCOME SITUATION. HOLDERS SHOULD CONSULT THEIR OWN TAX ADVISOR AS TO THE
SPECIFIC TAX CONSEQUENCES TO THEM FROM THE CONVERSION OF THE CONVERTIBLE
NOTES INTO COMMON STOCK AND THE OWNERSHIP AND DISPOSITION OF COMMON STOCK,
INCLUDING THE APPLICATION AND EFFECT OF STATE, LOCAL, FOREIGN AND OTHER TAX
LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN FEDERAL OR OTHER TAX LAWS.
LEGAL MATTERS
The legality of the securities offered hereby and certain tax matters
are being passed upon for the Company by Graubard Mollen & Miller, New York,
New York. Certain partners and employees of Graubard Mollen & Miller own
shares of Common Stock.
EXPERTS
The consolidated financial statements and financial statement schedule
of the Company as of December 31, 1995 and February 28, 1995, and for the ten
months ended December 31, 1995 and for the two years in the period ended
February 28, 1995, the financial statements of Avant-Garde
Telecommunications, Inc. as of February 28, 1995 and for the two years in the
period ended February 28, 1995 and the financial statements of Milliwave
Limited Partnership as of December 31, 1995 and for the period April 25, 1995
(inception) through December 31, 1995 included in this Prospectus, have been
audited by Grant Thornton LLP, independent certified public accountants, to
the extent and for the periods indicated in their reports thereon, and are
included herein in reliance upon the authority of such firm as experts in
giving such reports.
The financial statements of the Microwave Division of Local Area
Telecommunications, Inc. as of December 31, 1995 and 1994, and for each of
the years then ended, appearing in this Prospectus and Registration Statement
have been audited by Ernst & Young LLP, independent auditors, as set forth in
their report thereon (which contains an explanatory paragraph with respect to
the Division's ability to continue as a going concern as discussed in Note 1
to the financial statements) appearing elsewhere herein, and are included in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Exchange
Act, and, in accordance therewith, is required to file reports, proxy
statements and other information with the Commission. Such reports, proxy
statements and other information can be inspected and copied at the Public
Reference Section of the Commission at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the Commission's regional offices at Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and 7
World Trade Center, Suite 1300, New York, New York 10048. Copies of the
reports, proxy statements and other information can be obtained from the
Public Reference Section of the Commission, Washington, D.C. 20549,
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at prescribed rates. In addition, all reports filed by the Company via the
Commission's Electronic Data Gathering and Retrieval System (EDGAR) can be
obtained from the Commission's Internet web site located at www.sec.gov. The
Common Stock of the Company is traded on the Nasdaq National Market (Symbol:
WCII), and such reports, proxy statements and other information concerning
the Company also can be inspected at the offices of the Nasdaq National
Market, 1735 K Street, N.W., Washington, D.C. 20006.
The Company has filed with the Commission two Registration Statements
under the Securities Act on Form S-3 (Nos. 333-6073 and 333-6079,
respectively) with respect to the securities offered by the Company pursuant
to this Prospectus and a Registration Statement on Form S-3 (No. 33-95242)
with respect to the securities offered by the Selling Stockholders pursuant
to this Prospectus. As permitted by the rules and regulations of the
Commission, this Prospectus does not contain all of the information set forth
in the Registration Statements. For further information about the Company
and the securities offered hereby, reference is made to the Registration
Statements and to the financial statements, exhibits and schedules filed
therewith. The statements contained in this Prospectus about the contents of
any contract or other document referred to are not necessarily complete, and
in each instance, reference is made to the copy of such contract or other
document filed as an exhibit to the Registration Statements, each such
statement being qualified in all respects by such reference. Copies of each
such document may be obtained from the Commission at its principal office in
Washington, D.C. upon payment of the charges prescribed by the Commission.
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INDEX TO FINANCIAL STATEMENTS
Page
----
WinStar Communications, Inc. and Subsidiaries
Report of Independent Certified Public Accountants..................... F-2
Consolidated Balance Sheets as of June 30, 1996 (unaudited),
December 31,1995 and February 28, 1995............................... F-3
Consolidated Statements of Operations, Six Months Ended
June 30, 1996 and 1995 (unaudited), Ten Months Ended December 31,
1995 and 1994 (unaudited as to 1994),
and Years Ended February 28, 1995 and 1994........................... F-4
Consolidated Statements of Stockholders' Equity, Ten Months
Ended December 31, 1995, and Years Ended February 28, 1995
and 1994............................................................. F-5
Consolidated Statements of Cash Flows, Six Months Ended
June 30, 1996 and 1995 (unaudited), Ten Months Ended
December 31, 1995, and Years Ended February 28, 1995
and 1994............................................................. F-8
Notes to Consolidated Financial Statements............................. F-9
The Microwave Division of Local Area Telecommunications, Inc.
Report of Independent Auditors..........................................F-33
Balance Sheets as of June 30, 1996 (unaudited),
December 31, 1995 and 1994............................................F-34
Statements of Operations, Six Months Ended June 30, 1996 and
1995 (unaudited) and Years Ended December 31, 1995 and 1994...........F-35
Statements of Divisional (Deficit) Surplus, Six Months Ended
June 30, 1996 (unaudited) and Years Ended December 31, 1995
and 1994............................................................ F-36
Statements of Cash Flows, Six Months Ended June 30, 1996 and 1995
(unaudited) and Years Ended December 31, 1995 and 1994.............. F-37
Notes to Financial Statements......................................... F-38
Avant-Garde Telecommunications, Inc.
Report of Independent Certified Public Accountants.................... F-42
Balance Sheet as of February 28, 1995................................. F-43
Statements of Operations, Period March 1, 1995 to July 17, 1995
(unaudited) and Years Ended February 28, 1995 and 1994.............. F-44
Statements of Cash Flows, Period March 1, 1995 to July 17, 1995
(unaudited) and Years Ended February 28, 1995 and 1994.............. F-45
Notes to Financial Statements......................................... F-46
Milliwave Limited Partnership
Report of Independent Certified Public Accountants.................... F-49
Balance Sheets as of June 30, 1996 (unaudited) and December
31, 1995............................................................ F-50
Statement of Operations, Six Months Ended June 30, 1996............... F-51
Statement of Changes in Partners' Capital, April 25, 1995
(inception) through December 31, 1995 and the Six Months Ended
June 30, 1996 (unaudited)........................................... F-52
Statement of Cash Flows, Six Months Ended June 30, 1996............... F-53
Notes to Financial Statements......................................... F-54
Unaudited Pro Forma Condensed Consolidated Financial Statements
Unaudited Pro Forma Condensed Consolidated Balance Sheet
as of June 30, 1996................................................. F-57
Unaudited Pro Forma Condensed Consolidated Statement of Operations,
Six Months Ended June 30, 1996...................................... F-58
Unaudited Pro Forma Condensed Consolidated Statement of Operations,
Ten Months Ended December 31, 1995.................................. F-59
Notes to Unaudited Pro Forma Condensed Consolidated Financial
Statements.......................................................... F-60
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
WinStar Communications, Inc.
We have audited the accompanying consolidated balance sheets of WinStar
Communications, Inc. and Subsidiaries as of December 31, 1995 and February 28,
1995, and the related consolidated statements of operations, stockholders'
equity, and cash flows for the ten months ended December 31, 1995 and the years
ended February 28, 1995 and 1994. 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 in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatements. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of WinStar
Communications, Inc. and Subsidiaries as of December 31, 1995 and February 28,
1995, and the consolidated results of their operations and their consolidated
cash flows for the ten months ended December 31, 1995 and the years ended
February 28, 1995 and 1994, in conformity with generally accepted accounting
principles.
GRANT THORNTON LLP
New York, New York
March 8, 1996
F-2
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31, February 28,
1996 1995 1995
------------ ------------ -----------
(unaudited)
<S> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents........................... $ 75,600,073 $138,105,824 $ 3,156,354
Short term investments.............................. 115,460,429 73,594,849 --
------------ ------------ -----------
Total cash, cash equivalents and short term
investments..................................... 191,060,502 211,700,673 3,156,354
Investments in marketable equity securities......... 937,500 6,515,250 --
Accounts receivable, net of allowance for
doubtful accounts of $1,091,000, $800,000
and $824,000...................................... 14,905,197 8,683,860 4,035,007
Notes receivable.................................... 214,318 199,635 706,329
Inventories......................................... 10,924,137 7,391,686 4,232,927
Prepaid expenses and other current assets........... 8,888,945 3,568,448 983,380
------------ ------------ -----------
Total current assets.............................. 226,930,599 238,059,552 13,113,997
Property and equipment, net........................... 25,788,184 15,898,005 2,663,068
Notes receivable...................................... 385,106 3,488,948 2,289,002
Investments and advances.............................. 399,729 322,733 7,866,927
Licenses, net......................................... 12,519,169 12,556,281 --
Intangible assets, net................................ 10,061,579 3,033,505 3,213,785
Deferred financing costs.............................. 11,157,759 10,525,301 --
Other assets.......................................... 2,103,036 1,478,530 362,673
------------ ------------ -----------
Total assets...................................... $289,345,161 $285,362,855 $ 29,509,452
============ ============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Loans payable $ 8,758,076 $ 8,287,461 $ --
Accounts payable and accrued expenses............... 23,738,727 13,513,369 5,732,039
Capitalized lease obligations....................... 1,528,811 1,355,255 332,239
------------ ------------ -----------
Total current liabilities......................... 34,025,614 23,156,085 6,064,278
Senior notes payable.................................. 164,715,601 153,971,508 --
Convertible notes payable............................. 82,357,801 76,985,754 --
Other notes payable................................... 3,585,777 3,416,288 4,410,753
Capitalized lease obligations......................... 5,450,617 6,081,299 754,525
------------ ------------ -----------
Total liabilities................................. 290,135,410 263,610,934 11,229,556
Commitments and contingencies
Stockholders' equity
Preferred stock..................................... 688,900 688,900 732,691
Common stock, $.01 par value, authorized
75,000,000 shares, issued 30,694,260,
29,707,792 and 20,146,934 shares;
outstanding 28,037,497, 27,201,029 and
20,146,934 shares................................. 306,943 297,079 201,470
Additional paid-in capital.......................... 111,186,462 103,836,510 42,583,679
Accumulated deficit................................. (70,126,061) (41,311,075) (25,237,944)
------------ ------------ -----------
42,056,244 63,511,414 18,279,896
Less Treasury stock (42,733,993) (39,677,743) --
Deferred compensation............................... -- (1,100,000) --
Unrealized loss on investments in
marketable equity securities...................... (112,500) (981,750) --
------------ ------------ -----------
Total stockholders' equity...................... (790,249) 21,751,921 18,279,896
------------ ------------ -----------
Total liabilities and stockholders' equity...... $289,345,161 $285,362,855 $29,509,452
============ ============ ===========
</TABLE>
See Notes to Consolidated Financial Statements
F-3
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the six months For the ten months For the years ended
ended June 30, ended December 31, February 28,
---------------------------- --------------------------- ----------------------------
(unaudited) (unaudited)
1996 1995 1995 1994 1995 1994
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net sales ...................... $ 30,683,587 $ 12,439,846 $ 29,771,472 $ 22,018,106 $ 25,564,760 $ 15,625,019
Cost of sales .................. 17,647,510 9,032,733 19,546,351 14,761,290 17,702,570 10,712,090
------------ ------------ ------------ ------------ ------------ ------------
Gross profit ................. 13,036,077 3,407,113 10,225,121 7,256,816 7,862,190 4,912,929
Selling, general and
administrative expenses ...... 28,005,469 6,966,060 19,266,466 9,974,189 12,688,859 6,887,913
Restructuring expense .......... -- -- -- 607,609 607,609 --
Depreciation ................... 834,965 161,311 770,284 137,055 177,158 92,537
------------ ------------ ------------ ------------ ------------ ------------
Operating loss ................. (15,804,357) (3,720,258) (9,811,629) (3,462,037) (5,611,436) (2,067,521)
Other (income) expenses
Interest expense ............. 18,014,704 429,928 7,630,079 504,857 637,028 744,371
Interest income .............. (5,657,530) (294,111) (2,889,813) (297,051) (384,572) (109,320)
Amortization of
intangibles ................ 466,568 148,905 439,888 181,972 225,176 239,993
Equity in loss of
Avant-Garde ................ -- 1,103,752 865,676 766,543 1,108,962 --
Loss on discontinuation
of product lines ........... -- -- -- -- -- 292,376
Performance stock
option expense ............. -- -- -- -- -- 5,316,667
Other ........................ -- -- -- -- 32,165 (161,986)
------------ ------------ ------------ ------------ ------------ ------------
Net loss before
extraordinary item and
income taxes ................. (28,628,099) (5,108,732) (15,857,459) (4,618,358) (7,230,195) (8,389,622)
Extraordinary item
Gain from
extinguishment of debt ....... -- -- -- -- -- 194,154
------------ ------------ ------------ ------------ ------------ ------------
Net loss before income
taxes ........................ (28,628,099) (5,108,732) (15,857,459) (4,618,358) (7,230,195) (8,195,468)
Income taxes ................... 186,887 -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Net loss ..................... $(28,814,986) $ (5,108,732) $(15,857,459) $ (4,618,358) $ (7,230,195) $ (8,195,468)
============ ============ ============ ============ ============ ============
Net loss per share
Before extraordinary
item ......................... $ (1.05) $ (0.25) $ (0.70) $ (0.28) $ (0.42) $ (1.09)
Extraordinary item ........... -- -- -- -- -- 0.03
------------ ------------ ------------ ------------ ------------ ------------
Net loss..................... $ (1.05) $ (0.25) $ (0.70) $ (0.28) $ (0.42) $ (1.06)
============ ============ ============ ============ ============ ============
Weighted average
shares outstanding ......... 27,468,186 20,183,505 22,769,770 16,609,305 17,122,318 7,718,988
============ ============ ============ ============ ============ ============
</TABLE>
See Notes to Consolidated Financial Statements
F-4
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE TEN MONTHS ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
Preferred Stock
---------------------------------------
B E Common Stock Additional
----------------- ----------------- ----------------- Paid-in Accumulated
Shares Amount Shares Amount Shares Amount Capital Deficit
------ ------ ------ ------ ------ ------ ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at
February 28, 1995. 732.69 $732,691 0.00 $ -- 20,146,934 $201,470 $42,583,679 $(25,237,944)
Issuances of
common stock for
cash (exercise of
options and
otherwise)........ 3,172,427 31,724 5,552,392
Issuance of
common stock for
the acquisition of
Avant-Garde...... 1,275,000 12,750 5,087,250
Issuance of
Preferred Stock E. 932,040 6,000,008 (360,000)
Warrants and
common stock
equivalents
issued in
connection with
convertible notes. 804,500
Common stock
equivalents issued
in connection with
lease financing... 176,550
Conversion of
preferred stock... (146.16) (146,160) (932,040) (6,000,008) 682,952 6,830 6,139,338
Preferred stock
dividends......... 102.37 102,369 (215,672)
Issuance of
restricted stock
to employee....... 150,000 1,500 1,236,000
Private exchange
transaction....... 3,741,224 37,412 39,640,331
Issuance of
common stock in
connection with the
conversion of
convertible notes
payable........... 539,255 5,393 3,408,928
Amortization of
deferred
compensation
expense...........
Change in market
value of
investments in
marketable equity
securities........
Other.............. (432,458)
Net loss........... (15,857,459)
------ -------- ---- ---------- ---------- -------- ------------ ------------
Balances at
December 31, 1995. 688.90 $688,900 0.00 $ -- 29,707,792 $297,079 $103,836,510 $(41,311,075)
====== ======== ==== ========== ========== ======== ============ ============
<CAPTION>
Unrealized
Treasury Stock Loss on
-------------------------------------------- Investments in
Common Stock Preferred Stock B Marketable Total
Deferred Equity Stockholders'
Shares Amount Shares Amount Compensation Securities Equity
------ ------ ------ ------ ------------ --------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at
February 28, 1995. -- $ -- -- $ -- $ -- $ -- $18,279,896
Issuances of
common stock for
cash (exercise of
options and
otherwise)........ 5,584,116
Issuance of
common stock for
the acquisition of
Avant-Garde...... 5,100,000
Issuance of
Preferred Stock E. 5,640,008
Warrants and
common stock
equivalents
issued in
connection with
convertible notes. 804,500
in connection with
lease financing... 176,550
Conversion of
preferred stock... --
Preferred stock
dividends......... (113,303)
Issuance of
restricted stock
to employee....... (1,237,500) --
Private exchange
transaction....... (2,506,763) (36,348,065) (688.90) (3,329,678) --
Issuance of
common stock in
connection with the
conversion of
convertible notes
payable........... 3,414,321
Amortization of
deferred
compensation
expense........... 137,500 137,500
Change in market
value of
investments in
marketable equity
securities........ (981,750) (981,750)
Other.............. (432,458)
Net loss........... (15,857,459)
---------- ------------ ------- ----------- ----------- --------- -----------
Balances at
December 31, 1995. (2,506,763) $(36,348,065) (688.90) $(3,329,678) $(1,100,000) $(981,750) $21,751,921
========== ============ ======= =========== =========== ========= ===========
</TABLE>
See Notes to Consolidated Financial Statements
F-5
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED FEBRUARY 28, 1995
<TABLE>
<CAPTION>
Preferred Stock
--------------------------------------------------------------------
B C D
--------------------- --------------------- --------------------
Shares Amount Shares Amount Shares Amount
-------- ---------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Balances at February 28, 1994....... 1,203.79 $1,203,791 173.00 $173,000 225,000 $900,000
Exercise of Series A and Series B
Warrants..........................
Exercise of Series D and Series E
Warrants..........................
Conversion of Preferred Stock C..... (173.00) (173,000)
Conversion of Preferred Stock B..... (533.00) (533,000)
Conversion of Preferred Stock D..... (225,000) (900,000)
Issuances of common stock for
cash (exercise of options and
otherwise)........................
Issuance of Preferred B stock
dividend.......................... 61.90 61,900
Issuance of common stock for
the acquisition of NFF, Inc.......
Other...............................
Net loss............................
------ ---------- ------- --------- -------- --------
Balances at February 28, 1995....... 732.69 $ 732,691 -- $ -- -- $ --
====== ========== ======= ========= ======== ========
<CAPTION>
Common Stock Additional Total
------------------------ Paid-in Accumulated Stockholders'
Shares Amount Capital Deficit Equity
--------- -------- ----------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Balances at February 28, 1994............ 9,842,670 $ 98,427 $20,289,677 $(17,945,849) $ 4,719,046
Exercise of Series A and Series B
Warrants............................... 3,291,417 32,914 10,657,038 10,689,952
Exercise of Series D and Series E
Warrants............................... 2,814,142 28,141 2,081,137 2,109,278
Conversion of Preferred Stock C.......... 82,381 824 172,176 --
Conversion of Preferred Stock B.......... 177,665 1,777 531,223 --
Conversion of Preferred Stock D.......... 225,000 2,250 897,750 --
Issuances of common stock for
cash (exercise of options and
otherwise)............................. 3,685,087 36,852 7,767,569 7,804,421
Issuance of Preferred B stock
dividend............................... (61,900) --
Issuance of common stock for
the acquisition of NFF, Inc............ 28,572 285 199,715 200,000
Other.................................... (12,606) (12,606)
Net loss................................. (7,230,195) (7,230,195)
---------- -------- ----------- ------------ ------------
Balances at February 28, 1995............ 20,146,934 $201,470 $42,583,679 $(25,237,944) $ 18,279,896
========== ======== =========== ============ ============
</TABLE>
See Notes to Consolidated Financial Statements
F-6
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED FEBRUARY 28, 1994
<TABLE>
<CAPTION>
Preferred Stock
-------------------------------------------------------------------
B C D
--------------------- --------------------- --------------------
Shares Amount Shares Amount Shares Amount
-------- ---------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Balances at February 28, 1993... 1,135.66 $1,135,662 222.60 $222,600 0 $ --
Issuances of common stock
for cash.......................
Issuance of common stock
for acquisition of WGN, Inc....
Issuance of common stock
for acquisition of Inne
Dispensibles, Inc..............
Issuance of Preferred Stock
D for acquisition of
Avant-Garde.................... 225,000 900,000
Conversion of Preferred
Stock C........................ (50.00) (50,000)
Conversion of Series D
Warrants.......................
Issuance of common stock
for services rendered..........
Issuance of common stock
to retire debt.................
Issuance of Preferred B
stock dividend................. 68.13 68,129
Issuance of Preferred C
stock dividend.................
Purchase and retirement of
treasury stock.................
Performance stock options.......
Net loss........................
Adjustments..................... 0.40 400
-------- ---------- ------ -------- ------- --------
Balances at
February 28, 1994.............. 1,203.79 $1,203,791 173.00 $173,000 225,000 $900,000
======== ========== ====== ======== ======= ========
<CAPTION>
Common Stock Additional Total
----------------------- Paid-in Accumulated Stockholders'
Shares Amount Capital Deficit Equity
--------- -------- ----------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Balances at February 28, 1993... 6,539,475 $65,394 $ 9,986,348 $ (9,662,872) $1,747,132
Issuances of common stock
for cash....................... 1,687,436 16,875 3,197,684 3,214,559
Issuance of common stock
for acquisition of WGN, Inc.... 1,271,351 12,714 1,457,286 1,470,000
Issuance of common stock
for acquisition of Inne
Dispensibles, Inc.............. 39,506 395 99,605 100,000
Issuance of Preferred Stock
D for acquisition of
Avant-Garde.................... 900,000
Conversion of Preferred
Stock C........................ 23,810 238 49,762 --
Conversion of Series D
Warrants....................... 205,000 2,050 135,300 137,350
Issuance of common stock
for services rendered.......... 63,406 634 48,096 48,730
Issuance of common stock
to retire debt................. 50,000 500 56,531 57,031
Issuance of Preferred B
stock dividend................. (68,129) --
Issuance of Preferred C
stock dividend................. 10,789 108 19,272 (19,380) --
Purchase and retirement of
treasury stock................. (48,103) (481) (76,474) (76,955)
Performance stock options....... 5,316,667 5,316,667
Net loss........................ (8,195,468) (8,195,468)
Adjustments..................... (400) --
--------- ------- ----------- ------------ ----------
Balances at
February 28, 1994.............. 9,842,670 $98,427 $20,289,677 $(17,945,849) $4,719,046
========= ======= =========== ============ ==========
</TABLE>
See Notes to Consolidated Financial Statements
F-7
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Ten Months
Six Months ended June 30, Ended
----------------------------------- December 31,
1996 1995 1995
---- ---- --------------
(unaudited)
<S> <C> <C> <C>
Cash flows from operating activities, net of the effects of acquisitions
Net loss ................................................................. $ (28,814,986) $ (5,108,732) $ (15,857,459)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation and amortization .......................................... 2,658,760 319,177 860,103
Amortization of licenses and intangibles ............................... 459,338 149,154 439,888
Provision for doubtful accounts ........................................ 803,590 354,898 887,425
Equity in unconsolidated results of Avant--Garde ....................... -- 1,087,779 865,676
Non cash interest expense .............................................. 16,156,192 -- 6,151,090
Extraordinary gain from extinguishment of debt ......................... -- -- --
Performance stock option expense ....................................... -- -- --
Non cash loss on discontinuation of product lines ...................... -- -- --
Other .................................................................. -- 46,360 177,735
(Increase) decrease in operating assets
Accounts receivable ................................................. (2,710,591) 1,500,572 (5,526,618)
Inventories ......................................................... (2,355,709) (1,438,127) (3,158,759)
Prepaid expenses and other current assets ........................... (6,304,797) 29,124 (2,478,501)
Other assets ........................................................ (574,377) (77,061) (268,650)
(Decrease) increase in accounts payable and accrued expenses ........... 1,760,656 (439,416) 6,306,466
------------- ------------ ------------
Net cash used in operating activities ...................................... (18,921,924) (3,576,272) (11,601,604)
------------- ------------ ------------
Cash flows from investing activities
Investments in and advances to Avant--Garde ............................ -- (6,625,228) (5,703,608)
Acquisitions ........................................................... -- -- --
Increase in short-term investments, net ................................ (41,865,580) (764,089) (73,593,849)
Decrease (increase) in investments in marketable equity securities ..... 6,447,000 -- (7,497,000)
Collections of notes receivable ........................................ 93,774 680,000 1,003,859
Increase in notes receivable ........................................... (748,498) (1,216,255) (1,370,974)
Purchase of property and equipment, net ................................ (10,405,329) (1,022,689) (8,607,794)
Cash proceeds from sale of skiwear brands .............................. -- -- --
License acquisition costs .............................................. (228,283) -- (129,413)
Cash acquired through acquisitions ..................................... 93,067 -- --
Other .................................................................. -- 294,736 (3,251)
------------- ------------ ------------
Net cash provided by (used in) investing activities ........................ (46,613,849) (8,653,525) (95,902,030)
------------- ------------ ------------
Cash flows from financing activities
Proceeds from (repayment of) loans payable ............................. (88,757) (713,058) 3,849,233
Proceeds from notes payable ............................................ -- 7,505,800 221,946,330
Repayment of notes payable ............................................. -- -- --
Payment of dividends ................................................... -- -- (113,303)
Debt financing costs ................................................... (392,646) -- (784,791)
Proceeds from equipment lease financing ................................ -- -- 6,997,600
Proceeds of cash collateral ............................................ -- -- --
Payment of capital lease obligations ................................... (684,259) (136,732) (700,828)
Net proceeds from equity transactions .................................. 4,195,684 8,374,772 11,258,863
------------- ------------ ------------
Net cash provided by financing activities .................................. 3,030,022 15,030,782 242,453,104
------------- ------------ ------------
Net increase (decrease) in cash and cash equivalents ....................... (62,505,751) 2,800,985 134,949,470
Cash and cash equivalents at beginning of period ........................... 138,105,824 5,287,188 3,156,354
------------- ------------ ------------
Cash and cash equivalents at end of period ................................. 75,600,073 8,088,173 138,105,824
Short-term investments at end of period .................................... 115,460,429 771,681 73,594,849
------------- ------------ ------------
Cash, cash equivalents and short-term investments at end of period ......... $191,060,502 $ 8,859,854 $211,700,673
============ ============ ============
<CAPTION>
Year Ended February 28,
------------------------------
1995 1994
---- ----
<S> <C> <C>
Cash flows from operating activities, net of the effects of acquisitions
Net loss ................................................................. $ (7,230,195) $ (8,195,468)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation and amortization .......................................... 432,502 223,088
Amortization of licenses and intangibles ............................... 225,176 239,993
Provision for doubtful accounts ........................................ 893,857 343,694
Equity in unconsolidated results of Avant--Garde ....................... 1,108,962 --
Non cash interest expense .............................................. -- --
Extraordinary gain from extinguishment of debt ......................... -- (194,154)
Performance stock option expense ....................................... -- 5,316,667
Non cash loss on discontinuation of product lines ...................... -- 292,376
Other .................................................................. 78,374 (155,086)
(Increase) decrease in operating assets
Accounts receivable ................................................. (1,409,862) (1,438,263)
Inventories ......................................................... (1,729,395) (337,781)
Prepaid expenses and other current assets ........................... (440,188) (249,496)
Other assets ........................................................ (90,637) (12,049)
(Decrease) increase in accounts payable and accrued expenses ........... 1,635,189 1,531,892
------------- -------------
Net cash used in operating activities ...................................... (6,526,217) (2,634,587)
------------- -------------
Cash flows from investing activities
Investments in and advances to Avant--Garde ............................ (7,128,947) (632,000)
Acquisitions ........................................................... (678,566) 27,679
Increase in short-term investments, net ................................ -- --
Decrease (increase) in investments in marketable equity securities ..... -- --
Collections of notes receivable ........................................ 360,000 600,000
Increase in notes receivable ........................................... (2,234,636) --
Purchase of property and equipment, net ................................ (1,055,167) (227,787)
Cash proceeds from sale of skiwear brands .............................. -- 276,695
License acquisition costs .............................................. -- --
Cash acquired through acquisitions ..................................... -- --
Other .................................................................. (50,140) --
------------- -------------
Net cash provided by (used in) investing activities ........................ (10,787,456) 44,587
------------- -------------
Cash flows from financing activities
Proceeds from (repayment of) loans payable ............................. 1,695,447 (1,772,550)
Proceeds from notes payable ............................................ -- 1,966,498
Repayment of notes payable ............................................. (431,793) (300,625)
Payment of dividends ................................................... -- --
Debt financing costs ................................................... (329,483) --
Proceeds from equipment lease financing ................................ -- --
Proceeds of cash collateral ............................................ -- 100,000
Payment of capital lease obligations ................................... (250,871) (115,249)
Net proceeds from equity transactions .................................. 19,067,386 2,800,739
------------- -------------
Net cash provided by financing activities .................................. 19,750,686 2,678,813
------------- -------------
Net increase (decrease) in cash and cash equivalents ....................... 2,437,013 88,813
Cash and cash equivalents at beginning of period ........................... 719,341 630,528
------------- -------------
Cash and cash equivalents at end of period ................................. 3,156,354 719,341
Short-term investments at end of period .................................... -- --
------------- -------------
Cash, cash equivalents and short-term investments at end of period ......... $ 3,156,354 $ 719,341
============= =============
</TABLE>
F-8
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information with respect to the six months
ended June 30, 1996 and 1995 is unaudited)
Note 1--Summary of Significant Accounting Policies
Consolidation
The consolidated financial statements include the accounts of WinStar
Communications, Inc. ("WCI") and its wholly owned subsidiaries, WinStar
Wireless, Inc. ("WWI"); WinStar Wireless Fiber Corp. ("WWFC"); WinStar Gateway
Network, Inc. (formerly Communications Gateway Network, Inc., "WGN"); WinStar
Global Products, Inc. (formerly Beauty Labs, Inc., "WGP"); WinStar New Media
Company, Inc. ("WNM"); and Non Fiction Films, Inc. ("NFF") (collectively
referred to as the "Company"). All material intercompany transactions and
accounts have been eliminated in consolidation.
Nature of Business
The Company provides local and long distance telecommunications services
in the United States. The Company offers its Wireless FiberSM local
telecommunications services on a point-to-point basis in many major metropolitan
areas via its digital wireless capacity in the 38.6 to 40 gigahertz portion of
the radio spectrum, where it has licenses granted by the Federal Communications
Commission("FCC"). The Company's Wireless FiberSM services deliver high quality
voice and data transmissions which meet or exceed telephone industry standards
and provide transmission quality equivalent to that produced by fiber
optic-based facilities. The Company also offers resale- and facilities-based
long distance services and has authority in several states to provide local
switched telecommunications services. As regulatory and competitive conditions
permit, the Company intends to offer its customers integrated local and long
distance telecommunications services, thereby participating in both the $90
billion local exchange market and the $60 billion long distance market in the
United States. As a complement to its telecommunications operations, the Company
acquires rights to distribute and otherwise control certain information and
entertainment content and services. The Company also markets consumer products
nationwide through a subsidiary acquired prior to the Company's entry into the
telecommunications industry. The Company's telecommunications services are
subject to varying degrees of federal, state and local regulation.
Fiscal Year
The Company changed its fiscal year end from February 28 to December 31,
effective January 1, 1996. Accordingly, these financial statements present a
transition period of the ten months ended December 31, 1995.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. Cash
equivalents consist of money market fund investments, short-term certificates of
deposit, and commercial paper. Exclusive of cash in banks, cash equivalents were
approximately $137,370,000 at December 31, 1995, and approximate fair value.
Short Term Investments
Short term investments are widely diversified and principally consist of
certificates of deposit and money market deposits, U.S. government or government
agency securities, commercial paper rated "A- 1/P-1" or higher, and municipal
securities rated "A" or higher with an original maturity of greater than three
months and less than six months. Short term investments are considered
held-to-maturity and are stated at amortized cost which approximates fair value.
As of December 31, 1995, cash, cash equivalents and short term investments
totaled $211,700,673.
F-9
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 1 - Summary of significant Accounting Policies - (Continued)
Inventories
Inventories in the merchandising division are valued at the lower of
cost or market, principally using the first-in, first-out method.
Film inventories include direct and indirect production costs, which
are amortized to expense in the proportion that revenue recognized during the
year for each film bears to the estimated total revenue to be received from
all sources under the individual film forecast method. Management's estimate
of forecasted revenues exceeds the unamortized costs on an individual program
basis. Such forecasted revenue is subject to revision in future periods if
warranted by changing market conditions.
Property and Equipment
Property and equipment is stated at cost. Depreciation and amortization
are computed using the straight-line method over the estimated useful lives
of the related assets.
Intangible Assets
Intangible assets are being amortized by the straight-line method over
their estimated useful lives.
The Company's policy is to measure goodwill impairment by considering a
number of factors as of each balance sheet date including (i) current
operating results of the applicable business, (ii) projected future operating
results of the applicable business, (iii) the occurrence of any significant
regulatory changes which may have an impact on the continuity of the
business, and (iv) any other material factors that affect the continuity of
the applicable business. The amortization period for goodwill is determined
on a case-by-case basis for each acquisition from which goodwill arises based
on a review of the nature of the business acquired as well as the factors
cited above (Note 14).
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
109"). Pursuant to SFAS 109, deferred income taxes are recognized for
temporary differences between financial statement and income tax bases of
assets and liabilities and loss carryforwards and tax credit carryforwards
for which income tax benefits are expected to be realized in future years. A
valuation allowance is to be established to reduce deferred tax assets if it
is more likely than not that all, or some portion, of such deferred tax
assets will not be realized. The effect on deferred taxes of a change in tax
rates is recognized in income in the period that includes the enactment date.
Revenue Recognition
In the telecommunications division, sales are recorded upon placing of
calls or rendering of other related services. In the merchandising division,
sales are recorded upon shipment of merchandise and are presented in the
accompanying consolidated statement of operations net of merchandise returns.
The Company provides for future estimated returns of merchandise at the time
of sale. Revenues from film productions are recognized when a program is
accepted by the licensee and is available for broadcast.
F-10
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Net Loss Per Common Share
Note 1 - Summary of Significant Accounting Policies - (Continued)
Net loss per common share is calculated by dividing the net loss by the
weighted average number of shares of common stock outstanding. Stock options
and warrants have not been included in the calculation as their inclusion
would be antidilutive.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to
concentration of credit risk consist principally of trade receivables.
Concentration of credit risk with respect to these receivables is generally
diversified due to the large number of entities comprising the Company's
customer base and their dispersion across geographic areas. The Company
routinely addresses the financial strength of its customers and, as a
consequence, believes that its receivable credit risk exposure is limited.
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, short term
investments, accounts and notes receivable, and accounts payable and accrued
expenses approximate fair value, principally because of the short maturity of
these items. Marketable equity securities are stated at quoted market value.
The carrying amounts of the loans payable to financial institutions
issued pursuant to the Company's subsidiaries' asset-based lending agreements
approximate fair value because the interest rates on these investments change
with market interest rates and the carrying amounts of the senior notes
payable, convertible notes payable and capitalized lease obligations
approximate fair value since the obligations were entered into principally in
September and October, 1995.
Use of Estimates in Preparing Financial Statements
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the
financial statements and revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Unaudited Financial Statements
The unaudited consolidated balance sheet as of June 30, 1996 and the
unaudited consolidated statements of operations and statements of cash flows
for the six months ended June 30, 1996 and 1995 are condensed financial
statements in accordance with the rules and regulations of the Securities and
Exchange Commission. Accordingly, they omit certain information included in
complete financial statements and should be read in connection with the
information for the ten months ended December 31, 1995 and the years ended
February 28, 1995 and 1994. In the opinion of the Company, the accompanying
unaudited consolidated financial statements include all adjustments
(consisting only of normal recurring adjustments) necessary to present fairly
the financial position as of June 30, 1996 and results of operations and the
cash flows for the six months ended June 30, 1996 and 1995.
Note 2--Acquisition of Avant-Garde
Avant-Garde Telecommunications, Inc. ("Avant-Garde") was a privately
held company which held 30 millimeter wave radio licenses granted by the FCC
in September 1993. These licenses cover many of the largest metropolitan
areas in the United States, as well as other markets, and allow the licensee
to deliver voice, data and video via the 38 GHz band. Avant-Garde was
required to begin the provision of
F-11
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 2--Acquisition of Avant-Garde -- (Continued)
services authorized under such licenses by March 15, 1995, and on that date,
Avant-Garde filed a certificate of completion for each license with the FCC.
Through July 17, 1995, the Company owned 49% of Avant-Garde, which it
acquired for $4,900,000, and accounted for its investment in Avant-Garde
under the equity method. For the periods from March 1, 1995 to July 17, 1995,
and the year ended February 28, 1995, Avant-Garde had net losses of
approximately $1,778,000 and $2,302,000 respectively.
In April 1995, the Company entered into a merger agreement with the
holders of the remaining 51% of Avant-Garde, subject to FCC approval. In June
1995, the FCC granted Avant-Garde permission to transfer control of its
licenses to the Company. On July 17, 1995, pursuant to the terms of the
merger agreement, the Company exchanged 1,275,000 restricted shares of its
common stock valued at $5,100,000 for the 51% of Avant-Garde that it did not
already own. Avant-Garde was then merged into WinStar Wireless Fiber Corp., a
wholly-owned subsidiary of the Company which is the sole surviving
corporation.
The acquisition of Avant-Garde has been treated as a "purchase" for
purposes of generally accepted accounting principles, with the purchase
allocated based on fair value of the assets acquired and liabilities assumed,
including approximately $12,600,000 allocated to the licenses acquired. The
amount allocated to licenses is being amortized over 40 years in accordance
with industry practice. The accounts of Avant-Garde have been consolidated
into the Company's financial statements as of the date of the acquisition.
Unaudited pro-forma results of operations, which reflect the merger of
Avant-Garde into the Company as if the merger occurred as of the beginning of
each period, are as follows
For the Six Months For the Ten Months For the Twelve
Ended Ended Months Ended
June 30, 1995 December 31, 1995 February 28, 1995
------------- ----------------- -----------------
Net sales .............. $ 12,443,000 $ 29,744,251 $ 25,572,218
Net loss ............... (5,817,000) (16,769,516) (8,422,780)
Net loss per share ..... $ (0.27) $ (0.72) $ (0.46)
Note 3--WGN Acquisition
On March 10, 1993, the Company completed the exercise of an option to
purchase an aggregate of 10,408 (51%) shares of the common stock of WGN for
approximately $1,045,000, paid in cash and through the assumption of notes.
WGN provides long-distance telephone service to businesses and residences.
The option was exercised by the Company in portions, commencing in December
1992. The exercise of the option was financed primarily by a private
placement of units which was also completed on March 10, 1993. The
transaction was treated as a "purchase" for purposes of generally accepted
accounting principles, with the purchase price allocated based on the fair
value of the Company's proportionate ownership of the assets acquired and
liabilities assumed. The excess of the purchase price over the fair value of
the net assets acquired, aggregating approximately $828,000, has been
recorded as goodwill.
F-12
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 3--WGN Acquisition -- (Continued)
The assets purchased and liabilities assumed have been valued as follows
March 10,
1993
Acquisition
-----------
Current assets
Cash .............................................. $ 451,490
Accounts receivable ............................... 148,834
Other current assets .............................. 5,334
----------
Total current assets .............................. 605,658
Property and equipment ............................ 733,675
Intangible assets ................................. 18,386
Other assets ...................................... 4,754
----------
Total assets ...................................... 1,362,473
----------
Current liabilities
Capitalized lease obligations ..................... 97,517
Accounts payable and accrued expenses ............. 310,388
----------
Total current liabilities ......................... 407,905
Capitalized lease obligations ..................... 528,674
Minority interest ................................. 208,688
Total liabilities ................................. 1,145,267
----------
Net assets at acquisition date .................... $ 217,206
==========
Through a stock exchange offer, the Company acquired the remaining 49%
interest in WGN on August 6, 1993, and paid approximately $1,470,000 through
an exchange of 127.135 shares of the Company's common stock for each WGN
share outstanding. The exchange ratio was based on the closing price of the
Company's common stock on July 16, 1993 of $1 5/32, as reported by NASDAQ.
The purchase price was determined as a multiple of revenues. This transaction
impacted the Company's financial statements as follows (1) the elimination of
the minority interest of WGN of $53,602, which was originally $208,688 on
March 10, 1993, and was subsequently reduced by $155,086, the 49% minority
interest in WGN's losses during the period March 10, 1993 through August 6,
1993, (2) the recording of the unallocated purchase price as goodwill
aggregating $1,468,037, (3) the increase in equity of $1,470,000 resulting
from the issuance of 1,271,351 shares of the Company's common stock, and (4)
the increase in accounts payable of $51,639 for fees incurred in connection
with this transaction.
Certain former stockholders of WGN (the "Affiliated Shareholders") were
and are affiliated with WCI. At the formation of WGN in May 1992, the
Affiliated Shareholders individually invested a combined total of
approximately $82,000 in a WGN private placement in which they received a
combination of promissory notes and an approximate 14% equity interest. One
Affiliated Shareholder also received a 5% equity interest in return for
services rendered in connection with the formation of WGN. As a result of the
aforementioned acquisitions and subsequent exchange of notes and stock of WGN
for securities of the Company, the Affiliated Shareholders received shares of
the Company's common stock with an aggregate market value of approximately
$283,000 and approximately $82,000 in notes from the aforementioned March
1993 private placement, all on the same basis as the other WGN shareholders.
F-13
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 3--WGN Acquisition--(Continued)
Unaudited pro forma results of operations, which reflect the combined
operations of the Company and WGN as if the merger occurred as of the
beginning of fiscal 1994, are as follows
For the Year Ended
February 28, 1994
-----------------
Net sales .................................. $ 15,651,885
Net loss before extraordinary item ......... (8,622,407)
Net loss per share before extraordinary item $ (1.04)
Note 4--NFF Acquisition
On July 8, 1994, WinStar NFF Inc. ("WNFF"), a newly incorporated and
wholly-owned subsidiary of WCI, entered into an agreement with Non Fiction
Films, Inc. ("NFF") pursuant to which WNFF purchased 95 shares, or 19%, of
the common stock of NFF for a purchase price of $200,000 in cash. NFF is a
producer of non-fiction programming for cable television and for other media.
Additionally, the principal of NFF granted to WNFF an option to purchase all
of the shares of NFF owned by such principal, thereby making NFF a
wholly-owned subsidiary of WNFF. Effective December 1, 1994, WNFF exercised
its option and purchased the remaining 81% of NFF for 28,572 shares of WCI
common stock valued at $200,000. NFF was merged into WNFF, and the surviving
corporation was renamed Non Fiction Films, Inc. The transaction was treated
as a "purchase" for purposes of generally accepted accounting principles,
with the purchase price allocated based on the fair value of the assets
acquired and liabilities assumed. The total purchase price was $476,000 and
the excess of the purchase price over the fair value of the net assets
acquired, aggregating approximately $495,000 has been recorded as goodwill.
Unaudited pro forma results of operations, which reflect the combined
operations of the Company and NFF as if the merger occurred as of the
beginning of the year ended February 28, 1995 are as follows
For the Year Ended
February 28, 1995
-----------------
Net sales ......................... $ 26,099,553
Net loss .......................... (7,470,205)
Net loss per share ................ $ (0.44)
No pro forma results of operations are shown for the year ended
February 28, 1994, as NFF only commenced operations in March 1994.
Note 5--Preferred Stock E
In April 1995, the Company completed a private placement of 932,040
shares of Series E Convertible Preferred Stock ("Preferred Stock E") at a
price of $6.4375 per share for gross proceeds of $6,000,000. Preferred Stock
E holders were entitled to dividends at the rate of 9% per annum, payable
quarterly beginning on June 30, 1995. During the ten month period ended
December 31, 1995, the entire 932,040 shares of Preferred Stock E were
converted into 634,228 shares of common stock.
F-14
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 6--Restructuring
During the year ended February 28, 1995, the Company's WGN subsidiary
restructured its operations by reducing its clerical and middle management
staff, replacing senior management personnel, and discontinuing certain
unprofitable programs initiated by previous management. In connection with
this restructuring, the Company recorded an expense of approximately $608,000
during the year ended February 28, 1995, including $235,000 in benefits
related to the termination of 19 employees. Of the amount recorded at
February 28, 1995, $349,000 related to future cash outflows, with the balance
representing charges related to amounts paid or to write-off of assets
purchased prior to February 28, 1995. During the ten month period ended
December 31, 1995, the Company incurred approximately $111,000 of the
expected cash outflows, leaving a remaining liability balance of
approximately $238,000 at December 31, 1995.
Note 7--Investments in Marketable Equity Securities
On December 13, 1995, the Company purchased 714,000 shares of a
publicly traded interactive media and telecommunications services company at
$10.50 per share, for a total cash consideration of $7,497,000. At December
31, 1995, the investment has been reflected at the market value of the shares
held by the Company, $6,515,250. In accordance with the treatment of the
investment as an available for sale security under Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities", the $981,750 difference between the market value of the
investment at December 31, 1995, and the original purchase price has been
reflected in unrealized losses on long term investments, a component of
stockholders' equity. At June 30, 1996, a $112,500 difference between the
market value of the investment at June 30, 1996 and the original purchase
price has been reflected in unrealized losses on long term investments, a
component of stockholders' equity. The Company believes that this decrease in
market value is temporary.
Note 8--Notes Receivable
Notes receivable at December 31, 1995 consist of the following
Notes receivable -- TWL(a) ................ $3,008,948
Notes receivable -- Robert Skiwear(b) ..... 540,000
Other ..................................... 139,635
----------
Total ..................................... 3,688,583
Less current portion ...................... 199,635
----------
Long-term notes receivable ................ $3,488,948
==========
- ----------
(a) WNM's stated business purpose is to capitalize upon opportunities in
the media content industry by acquiring distribution and other
rights in and from emerging companies in this field. On April 8,
1994, WNM entered into an agreement with The Winning Line, Inc.
("TWL"), a producer of sports programming. As subsequently amended,
the agreement provides for WNM to make periodic cash advances to
TWL, with such advances being collateralized by a first lien on all
of the assets of TWL as well as by shares of TWL common stock owned
by certain individuals. Advances made to date are payable on demand
and bear interest at a rate of 12% or at a rate 3% in excess of the
prime commercial lending rate (8.25% at December 31, 1995). WNM had
the right, which was exercised in April 1996, to convert up to
$970,000 of advances made, together with all accrued interest
thereon, into 65% of TWL's then issued and outstanding shares of
common stock (Note 28).
F-15
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 8--Notes Receivable --(Continued)
(b) In connection with the sale of its skiwear brands product line in
April 1993 to Robern Skiwear, Inc., the Company has a note
receivable from the buyer. The note bore interest at 8% per annum
payable quarterly, through January 31, 1996. Effective February 1,
1996, the note was modified such that interest now accrues at 9% per
annum and is payable monthly. The $540,000 of outstanding principal
is payable in 22 monthly installments of $19,054, inclusive of
interest, beginning January 31, 1996, through October 31, 1997, with
a final payment of $180,000 to be paid in a lump sum on November 30,
1997. The note is guaranteed by the principals of Robern Skiwear,
Inc. as well as certain other individuals.
Note 9--Discontinuation of Products Lines
As of February 28, 1994, the Company discontinued its remaining apparel
and tennis racquet product lines as a result of lower-than-expected sales and
continuing losses in these lines. Included as a loss on the discontinuation
of product lines for the year ended February 28, 1994, is the writedown of
the net assets of these product lines (primarily intangible assets) as well
as the accrual of certain expenses incurred in the windup of these lines,
amounting to $292,000 in total.
Note 10--Performance Stock Option Expense
In connection with the Company's initial public offering in April 1991,
options to purchase 1,000,000 shares of common stock of the Company at $0.01
per share were granted to the original shareholders of the company (Note 22).
Subsequent to February 28, 1994, the conditions for exercise of these options
were met, and in connection therewith, the Company recorded a non-cash
expense of $5,316,667 at February 28, 1994, representing the difference
between the option price and the market price on the day the options actually
became exercisable.
Note 11--Gain From Extinguishment of Debt
On September 7, 1993, the Company paid the following in full
satisfaction of an obligation of approximately $501,000 (i) $250,000 in cash,
and (ii) 50,000 shares of the Company's common stock valued at $57,031. The
gain of $194,154 on the payment of the indebtedness is classified in the
statement of operations as an extraordinary item. No tax provision has been
recorded as a result of the Company's tax loss carryforwards.
Note 12--Inventories
Components of inventories are as follows
June 30, December 31, February 28,
1996 1995 1995
----------- ----------- ------------
(unaudited)
Finished goods .............. $ 1,564,621 $ 1,432,951 $ 1,190,670
Raw materials ............... 5,596,032 4,017,655 2,092,101
Film inventories ............ 3,763,484 1,941,080 950,156
----------- ----------- -----------
$10,924,137 $ 7,391,686 $ 4,232,927
=========== =========== ===========
F-16
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 13--Property and Equipment
Property and equipment consist of the following
December 31, February 28, Estimated
1995 1995 Useful Life
------------ ------------ -------------
Machinery, equipment and software.. $16,072,511 $2,963,690 5 to 10 years
Furniture and fixtures............. 867,963 239,507 4 to 5 years
Leasehold improvements............. 536,115 185,919 Life of the lease
----------- ----------
17,476,589 3,389,116
Less accumulated depreciation
and amortization.................. (1,578,584) (726,048)
----------- ----------
$15,898,005 $2,663,068
=========== ==========
Note 14--Intangible Assets
Intangible assets consist of the following
December 31, February 28, Estimated
1995 1995 Useful Life
------------ ------------ -------------
Goodwill.......................... $2,953,021 $2,953,021 20 years
Covenants not to compete.......... 668,397 668,397 5 to 10 years
Other............................. 39,460 39,460 3 to 5 years
----------- ----------
3,660,878 3,660,878
Less accumulated amortization..... (627,373) (447,093)
----------- ----------
$ 3,033,505 $3,213,785
=========== ==========
Licenses are amortized over a 40 year period. As of December 31, 1995,
the value of licenses was $12,556,281, net of accumulated amortization of
$256,039.
Note 15--Loans Payable
Loans payable consist of the following
December 31, February 28,
1995 1995
----------- ------------
Loan payable-financial institution(a) ...... $3,153,821 $1,668,743
Loan payable-financial institution(b) ...... 4,338,099 2,742,010
Other(c) ................................... 795,541 --
---------- ----------
$8,287,461 $4,410,753(d)
========== ==========
- ----------
(a) In November 1994, WGN entered into a Loan and Security Agreement
with a financial institution providing for the financing of WGN's
receivables. Borrowings under this agreement are limited to 90% of
most eligible accounts receivable, with availability of certain
types of accounts receivable limited to 80% and 50%, subject to a
maximum credit availability of $5,000,000. Borrowings bear interest
at a rate ranging from 2.5% to 3% in excess of the prime commercial
lending rate and are secured by a lien on all WGN assets as well as
a guarantee from WCI as to the first $2,200,000 in borrowings. The
agreement
F-17
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
also calls for an annual fee of $50,000 as well as certain
underutilization fees. This agreement expires November 3, 1996.
(b) In August 1994, WGP secured an asset based loan from a financial
institution to finance its receivables and inventory. Borrowings
under this loan are limited to 80% of eligible accounts receivable
and 45% of eligible inventory, with a $1,500,000 overadvance
facility, subject to a maximum credit availability of $6,000,000.
Borrowings bear interest at a rate 3.5% in excess of the prime
commercial lending rate and are secured by a lien on all WGP assets
as well as a guarantee from WCI as to the first $3,000,000 in
borrowings. The agreement also provides for annual facility fees.
This agreement expires September 30, 1996.
(c) In April 1995, NFF secured a production loan from an Irish limited
partnership. NFF issued a letter of credit to the creditor in the
amount of $807,000 which may be presented at any time from March
1996 forward. The letter of credit is secured by an equal amount of
investments in U.S. Treasury Bills on deposit with the financial
institution which issued the letter of credit.
(d) Included in long-term other notes payable at February 28, 1995.
Note 16--Capital Lease Obligations
In September 1995, WinStar Wireless entered into a $10,000,000
equipment lease financing facility, of which $7,000,000 has been made
available as of December 31, 1995. As of December 31, 1995, the Company has
utilized substantially all of the amount available under this facility.
Borrowings bear interest at a rate of 13% per annum and are payable over
sixty months. After twelve months, WinStar Wireless has the option to
purchase the equipment at a price that will provide a return of 15% to the
lessor. As additional consideration, the Company has agreed to issue options
to purchase up to 100,000 shares of stock to the lessor, of which options to
purchase 70,000 shares of stock have been issued through December 31, 1995.
The Company leases its transmission equipment utilized by WWI and its
switch equipment utilized by WGN as well as certain computer and other
equipment used by the Company. Such leases have been accounted for as capital
leases in accordance with Statement of Financial Accounting Standards No. 13,
"Accounting for Leases".
F-18
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 16--Capital Lease Obligations --(Continued)
Future minimum lease payments on these capital leases are as follows
Year Ending December 31,
- ------------------------
1996 ............................................. $ 2,364,838
1997 ............................................. 2,420,841
1998 ............................................. 1,963,914
1999 ............................................. 1,910,601
2000 ............................................. 1,324,164
-----------
9,984,358
Less amount representing interest ................ (2,547,805)
-----------
Present value of minimum lease payments .......... $ 7,436,553
===========
The carrying value of assets under capital leases was $8,052,000 at
December 31, 1995 and is included in property and equipment. Amortization of
these assets is included in depreciation expense.
Note 17--Senior and Convertible Notes Payable
In October 1995, the Company completed a $225 million private placement
of debt securities with institutional investors (the "Debt Placement"). The
transaction was structured as a unit offering with two components $150
million of Senior Discount Notes due in 2005 (the "Senior Notes"), and $75
million of Convertible Senior Subordinated Discount Notes due in 2005 (the
"Convertible Notes"), convertible at $20.625, a 10% premium over the closing
price on October 18, 1995, the day of pricing. Both securities accrue
interest at 14% per annum, with no interest payable during the first five
years, and principal payable only at maturity in October 2005. After five
years, both securities require the payment of interest only, in cash, until
maturity. In addition, the Convertible Notes, including accretion thereon,
will be automatically converted during the initial five year period if the
market price of the Company's common stock exceeds certain levels for thirty
consecutive trading days, ranging from $37.50 per share in the first year to
$44.00 per share in the fifth year.
Under the terms of the Debt Placement, the Company was obligated to
consummate an exchange offer with respect to the Senior Notes by April 23,
1996, whereby these notes would be exchanged for new notes (the "New Notes")
which would be identical in every respect to the original Senior Notes except
that the New Notes would be registered under the Securities Act of 1933.
Pursuant to such obligation, the Company filed an offer to exchange the
Senior Notes for the New Notes on January 31, 1996, upon which all Senior
Notes were subsequently converted. The Company is also obligated to cause to
be declared effective a registration statement registering the issuance or
resale of the shares underlying the convertible Notes (the "Conversion
Shares") by October 23, 1996. If the exchange offer or the registration of
the Conversion Shares does not take place prior to the respective deadlines,
the Company will be obligated to pay additional interest on the Senior Notes
and/or lower the conversion price on the Convertible Notes. The Company filed
such registration statement in September 1996. The terms of the Debt
Placement also place certain restrictions on the ability of the Company to
pay dividends, incur additional indebtedness, issue guarantees, sell assets,
or enter into certain other specified transactions.
F-19
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 18--Other Notes Payable
In May 1995, WinStar Wireless completed a private placement of
$7,500,000 of five year secured convertible notes (the "Notes"). The Notes
bear interest at a rate of 7%, payable semiannually, with all principal due
and payable on May 24, 2000. The Notes are guaranteed by the Company and are
collateralized by a first lien on WinStar Wireless' assets and a pledge by
the Company of its shares of WinStar Wireless and WinStar Wireless Fiber
Corp. The noteholders' first lien and rights are subject to subordination to
certain future secured equipment financing for WinStar Wireless. The Notes
are convertible into common stock at a price of $7.00 per share. The
noteholders also received 550,000 warrants and share equivalents, of which
300,000 warrants at an exercise price of $12.00 per share and 100,000
warrants at an exercise price of $13.00 per share were outstanding at
December 31, 1995.
The portion of the proceeds attributable to the warrants and share
equivalents has been valued at $805,000 and has been accounted for as
additional paid-in capital and as a reduction in convertible notes payable.
The resulting debt discount is being amortized to interest expense over the
life of the Notes.
On December 28, 1995, the note holders converted $3,750,000 of the
convertible notes and accrued interest thereon into 539,255 shares of common
stock of the Company. In addition, the note holders have committed that they
will convert all remaining outstanding Notes into common shares of the
Company on or prior to December 15, 1996.
Note 19--Commitments and Contingencies
a. Operating Leases
The Company's manufacturing and warehousing facilities and offices,
along with various equipment and roof access rights, are leased under
operating leases expiring in 1996 through 2006.
Future minimum lease payments on noncancellable operating leases are as
follows
Year ending December 31,
------------------------
1996 ....................................... $1,546,000
1997 ....................................... 1,316,000
1998 ....................................... 1,314,000
1999 ....................................... 1,306,000
2000 ....................................... 884,000
Thereafter ................................. 2,749,000
----------
$9,115,000
==========
Rent expense for the ten month period ended December 31, 1995 and the
years ended February 28, 1995 and 1994 was $1,044,000, $500,000 and $366,000,
respectively.
F-20
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 19--Commitments and Contingencies--(Continued)
b. Employment Contracts
Amounts due under employment contracts are as follows
Year ending December 31,
1996............................. $2,450,000
1997............................. 1,750,000
1998............................. 861,000
1999............................. 525,000
-------
2000............................. 54,000
$5,640,000
==========
c. Litigation
In January 1995, the Company's directors, certain other persons, and
the Company (as a nominal defendant) were named in one or more of four
actions brought by various stockholders of the Company in the Court of
Chancery of the State of Delaware in and for New Castle County. These actions
subsequently were consolidated into a single lawsuit, which has been settled.
The complaint alleged that certain transactions including (i) the payment of
consideration to certain directors and others in connection with the
Company's acquisition of WGN and (ii) the payment of compensation (including
the granting of options and the issuance of warrants) to certain directors
and others involved self dealing, waste of corporate assets or otherwise were
unfair to the Company. Although the Company believed that the allegations
were completely without merit, in order to halt the expense, inconvenience
and distraction of continued litigation, the Company entered into a court
approved settlement agreement pursuant to which the Company agreed to amend
its bylaws to formalize certain corporate governance issues, and to pay legal
fees and expenses of plaintiffs' counsel in the amount of $246,500, a portion
of which is covered by the Company's insurance.
The Company occasionally receives inquiries from state authorities
arising with respect to consumer complaints concerning the provision of
telecommunications services, including allegations of unauthorized switching
of long distance carriers and misleading marketing. The Company believes such
inquiries are common in the long distance industry and addresses such
inquiries in the ordinary course of business. The Company recently has
experienced an increased level of consumer and regulatory complaints, a
substantial majority of which arose from the activities of several
independent marketing companies involving contest programs and the use of
executed written letters of authorization ("LOAs") to switch long distance
carriers. The inquiries primarily arose from allegations of unauthorized or
misleading switching of long distance carriers. In order to eliminate further
complaints from these programs, the Company, on May 10, 1996, adopted a
policy of mandatory independent verification for one hundred percent of LOAs
received from these programs and effective as of June 10, 1996 no longer
accepts LOAs from these programs. The Company has also initiated discussions
with the FCC and a number of state regulatory authorities with respect to the
resolution of any issues arising from the terminated programs. The Company is
also involved in miscellaneous claims, inquiries and litigation arising in
the ordinary course of business. The Company believes that these matters,
taken individually or in the aggregate, would not have a material adverse
impact on the Company's financial position.
In June, 1996, the Company commenced an action for declaratory judgment
against a former officer of WinStar Gateway, who recently notified the
Company of his belief that he was entitled to the issuance of certain shares
of Common Stock (or payment of the cash value thereof) having an aggregate
market value
F-21
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
in excess of $27 million under the terms of stock options granted to him
during his employment with WinStar Gateway from the Company. He has based his
beliefs on standard anti-dilution language contained in his stock option
agreement which was designed and intended to adjust the number of shares
purchasable thereunder in the event of a merger or capital restructuring of
the Company. As the Company has never been subject of a merger or capital
restructuring, the former officer was immediately notified of the Company's
belief that his claim was without merit in law or fact. To expedite
resolution of these issues, the Company currently is seeking declaratory
judgment that it has no obligation to the former officer. Further, because
the Company believes that any and all claims that may be advanced by the
former officer with regard to the foregoing issue would be frivolous, the
Company has notified the former officer and his counsel of its intention to
seek Rule 11 sanctions and such other remedies as may be available against
the former officer and his counsel in the event that the former officer and
his counsel seek to assert any defense to the Company's action for
declaratory judgment or otherwise proceed with respect to the issue.
d. Other
In November 1994, and as subsequently amended in December 1995, the
Company entered into a non-exclusive, four year agreement with P-Com, Inc.
("P-Com"), a manufacturer and distributor of radio links, providing for the
purchase of radio links from P-Com. The contract pricing structure includes
provisions whereby the Company pays additional amounts above the agreed upon
price for links purchased at the beginning of the contract period. These
amounts will be recovered in the form of discounted radio links once certain
volume levels have been reached. An annual minimum volume requirement must be
met in order to maintain the agreed upon pricing structure. The contract is
cancelable by the Company subject to certain conditions, primarily the
acceptance of a minimum number of links and the guarantee of the next 90
days' purchases in accordance with an agreed upon schedule. As of December
31, 1995, the Company's noncancellable purchase commitment was approximately
$15,600,000. These conditions to cancellation become more favorable to the
Company as certain volume levels are reached.
Note 20--Income Taxes
SFAS 109 requires the use of the liability method in accounting for
income taxes. Temporary differences and carryforwards that give rise to
deferred tax assets and liabilities are as follows
December 31, February 28,
1995 1995
------------ ------------
Deferred tax assets
Net operating loss carry forward ........ $ 14,700,000 $ 9,230,000
Allowance for doubtful accounts ......... 1,025,000 440,000
Other ................................... 2,275,000 380,000
------------ ------------
Gross deferred tax assets .................. 18,000,000 10,050,000
Valuation allowance ..................... (18,000,000) (10,050,000)
------------ ------------
Net deferred tax assets .............. $ -- $ --
============ ============
Note 20--Income Taxes--(Continued)
If not utilized, the net operating loss carryforwards will expire in
various amounts through the year 2010. The tax loss carryforwards relating to
WGP are limited by the Separate Return Limitation Year rules and Section 382
of the Internal Revenue Code with respect to the amount utilizable each year.
The Company's remaining net operating loss carryforwards are also subject to
limitation under the Internal Revenue Code. These limitations will reduce the
Company's ability to utilize the net operating loss carryforwards included
above. The amount of the limitation has not been quantified by the Company.
F-22
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
SFAS 109 requires a valuation allowance against deferred tax assets if,
based on the weight of available evidence, it is more likely than not that
some or all of the deferred tax assets may not be realized. The valuation
allowances at February 28, 1995, and December 31, 1995, primarily pertain to
uncertainties with respect to future utilization of net operating loss carry
forwards.
Note 21--Stockholders' Equity
Common Stock
The authorized capital stock of WCI includes 75,000,000 shares of
common stock, $.01 par value. The holders of common stock are entitled to one
vote for each share held of record on all matters submitted to a vote of
stockholders. Although the Company has no present intention of paying any
dividends, holders of common stock are entitled to receive ratably such
dividends as may be declared by the Board of Directors out of funds legally
available therefor. In the event of a liquidation or dissolution of WCI,
holders of common stock are entitled to share ratably in all assets remaining
after payment of liabilities and liquidation preference of preferred shares.
Holders of common stock have no preemptive rights and have no rights to
convert their common stock into any other securities. There are no redemption
or sinking fund provisions applicable to the common stock.
Preferred Stock
The authorized capital stock of the Company includes 15,000,000 shares
of preferred stock, $.01 par value, which may be issued from time to time in
one or more series upon authorization by the Company's Board of Directors.
There are currently no shares of preferred stock outstanding. The Board of
Directors, without further approval of the stockholders, is authorized to fix
the rights and terms, conversion rights, voting rights, redemption rights and
terms, liquidation preferences and any other rights, preferences, privileges
and restrictions applicable to each series of preferred stock. In March 1994,
all 173 outstanding shares of Preferred Stock C were converted into an
aggregate of 82,381 shares of common stock of the Company. In addition, in
accordance with the terms of the Preferred Stock C, the holders of the
Preferred Stock C received 41,191 Series B Warrants upon conversion, all of
which were subsequently exercised during the year ended February 28, 1995. In
December 1994, all 225,000 outstanding shares of Preferred Stock D were
automatically converted into 225,000 shares of common stock as a result of
the market value of the Company's common stock having met certain criteria.
In November 1995, all outstanding shares of Preferred Stock B were acquired
in the Private Exchange transaction (Note 23). As of December 31, 1995, all
classes of preferred stock other than Preferred Stock B have been retired.
Treasury Stock
Included in treasury stock at cost are 2,506,763 shares of common stock
and 689 shares of Preferred Stock B which were acquired in the Private
Exchange transaction (Note 23).
Note 22--Stock Options and Stock Purchase Warrants
Options to purchase 1,000,000 shares of common stock of the Company at
$.01 per share were issued at the time of the Company's initial public
offering in April 1991 to the original shareholders of the Company. The
options were exercisable at any time after April 3, 1993 and prior to April
3, 1996, or April 3, 1998 for one investor, if the market price of the
Company's common stock exceeded $5.00 per share (the "Market Price") as
adjusted, over a period of 40 consecutive business days at any time after
April 3, 1992. Pursuant to certain antidilutive provisions in the option
agreements, the number of shares subject to these options was increased to
1,253,931, and the Market Price was reduced to $3.99 per share. The Market
Price was met and such options became exercisable in April 1994 (Note 10),
and all such options were exercised during
F-23
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
the year ended February 28, 1995. In addition, options to purchase 14,000
shares of common stock at $.01 per share were granted to an employee on June
30, 1991 in lieu of compensation.
In 1990, the Board of Directors adopted a non-qualified common
stock incentive plan, as amended, pursuant to which options to purchase an
aggregate of 150,000 shares of common stock may be granted to key employees
of the Company as selected by the Board of Directors. The exercise price for
shares covered by options granted pursuant to this plan will not be less than
the fair market value of the shares on the date of the grant. In 1992, the
Board of Directors adopted and stockholders approved the 1992 Performance
Equity Plan ("1992 Plan"), which authorizes the granting of awards up to
1,000,000 shares of common stock to the Company's key employees, officers,
directors and consultants. Awards consist of stock options (both
non-qualified and options intended to qualify as "incentive" stock options
under the Internal Revenue Code), restricted stock awards, deferred stock
awards, stock appreciation rights and other stock-based awards. The plan
provides for automatic issuance of 10,000 stock options annually to each
director on January 13, at the fair market value at that date, subject to
availability. In June 1995, the Board of Directors adopted the 1995
Performance Equity Plan ("1995 Plan") which was approved by the stockholders
of the Company at the Annual Meeting of Stockholders in September 1995. The
1995 Plan authorizes the granting of awards of up to 1,500,000 shares of
Common Stock to the Company's key employees, officers, directors and
consultants. The 1995 Plan is similar to the 1992 Plan, except that the 1995
Plan does not allow for annual automatic annual director grants. In addition
to these three plans, the Company has granted options to certain individuals
not under any plan (Note 28).
The Company has granted options to purchase common stock as follows
Number Price Per Share
------ ---------------
Balance, March 1, 1993 .................. 3,064,000 $1.63 - $5.25
Granted ................................. 2,570,067 $1.06 - $6.17
Canceled ................................ (616,500) $1.69 - $3.63
---------
Balance, February 28, 1994 .............. 5,017,567 $1.06 - $6.17
Granted ................................. 2,851,360 $4.22 - $9.50
Exercised ............................... (1,389,547) $1.50 - $4.90
Canceled ................................ (235,050) $1.69 - $9.03
---------
Balance, February 28, 1995 .............. 6,244,330 $1.06 - $9.50
Granted ................................. 3,896,000 $5.50 - $19.75
Exercised ............................... (2,091,572) $1.06 - $6.88
Canceled ................................ (708,133) $2.13 - $8.81
---------
Balance, December 31, 1995 .............. 7,340,625 $1.06 - $19.75
=========
In addition to the above, in May 1992, the Company granted to WinStar
Venture II, Inc. ("WVII"), an affiliate of a Director of the Company, an
option through August 31, 1998 to purchase shares of Series C preferred stock
in the amount of $2,000,000 in return for WVII's guarantee of certain company
debt.
Note 22--Stock Options and Stock Purchase Warrants--(Continued)
At December 31, 1995, options for 2,848,462 shares were exercisable at
exercise prices ranging from $1.06 to $17.13 per share.
Warrants to purchase the Company's common stock were issued as follows
F-24
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
<TABLE>
<CAPTION>
Series A Series B Series C Series D Series E
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Outstanding at February 28,
1993 ........................... 1,277,646 1,897,867 250,000 -- --
Issued in connection with private
placement of debt .............. -- -- -- 2,000,000 --
Other warrants issued ........... 135,804 79,807 -- 200,000 200,000
Warrants exercised .............. -- -- -- (205,000) --
--------- --------- ------- --------- -------
Outstanding at February 28,
1994 ........................... 1,413,450 1,977,674 250,000 1,995,000 200,000
Warrants issued ................. -- 41,191 -- -- 1,000,000
Warrants exercised .............. (1,397,500) (1,975,738) -- (1,995,000) (1,200,000)
Warrants expired ................ (15,950) (43,127) (250,000) -- --
--------- --------- ------- --------- -------
Outstanding at February 28,
1995 ........................... -- -- -- -- --
========= ========= ======= ========= =======
</TABLE>
Each Series A Warrant entitled the registered holder to purchase one share
of WCI's common stock for an exercise price of $3.00 per share and each Series B
Warrant entitled the registered holder to purchase one share of common stock for
an exercise price of $3.75 per share through April 3, 1994. In March and April
1994, approximately 1,337,000 Series A Warrants and approximately 1,921,000
Series B Warrants were exercised prior to their scheduled expiration. Proceeds
to the Company, net of registration costs and fees to WinStar Services, Inc.,
were approximately $10,700,000. All remaining Series A and Series B Warrants,
which were unregistered and did not expire on April 3, 1994, were exercised in
May 1994.
The Series C Warrants expired without having become exercisable upon
issuance of the fiscal 1994 financial statements for the year ended February 28,
1994, because the conditions for the exercise of these warrants were not met.
In connection with a private placement of debt, the Company on March 10,
1993 issued 2,000,000 Series D Warrants. Each Series D Warrant entitled the
holder to purchase one share of common stock for $.67 during the five year
period commencing March 10, 1993 and ending March 9, 1998. In connection with
the same private placement, the Company in March 1994 issued 1,000,000 Series E
Warrants, each of which entitled the holder to purchase one share of common
stock at an exercise price of $2.24 per share. Series E Warrants were
exercisable from April 1, 1994 through March 10, 1999. In addition to the above,
the Company also issued 200,000 Series D Warrants and 200,000 Series E Warrants
to a separate noteholder in return for an extension of that note payable on
terms more favorable to the Company. In April 1994, the holders of the Series D
and Series E Warrants exercised their warrants. The exercise price on the
warrants was paid primarily by the warrant holders assigning their notes which
they had acquired in the private placement, as well as any accrued interest
thereon. The balance due from the warrant holders was satisfied by the return to
the Company of that number of unexercised Series E Warrants which, when valued
by reference to the fair market value of the common stock on that date, would
satisfy such balance due. The net effect of this conversion was that the Company
satisfied $1,996,650 in notes payable and $59,079 in accrued interest thereon,
and issued approximately 2,814,000 shares of common stock for the exercise of
1,995,000 Series D Warrants and 1,200,000 Series E Warrants. The common shares
which were issued upon exercise of all Series D and Series E Warrants were
restricted shares.
Note 23--Related Party Transactions
Management Agreement
The Company and WinStar Services, a wholly-owned subsidiary of WinStar
Companies, a corporation of which two of the Company's directors are principal
officers and stockholders, were parties to a five-year management agreement
which provided, as amended, that WinStar Services would render financial,
advisory and management services in connection with the capital, acquisition and
planning needs of the Company. The Company agreed to pay WinStar Services as
compensation for such services $200,000 per year plus certain
F-25
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
contingent performance fees, in addition to reimbursement of all out-of-pocket
expenses incurred by WinStar Services. In August 1993, the terms of the
management agreement were extended to August 31, 1998, and the Company granted
to WinStar Services options to purchase 500,000 shares of the Company's Common
Stock at the then current market price of $2.13 per share which options were
exercised in connection with the transaction between WinStar Companies, WinStar
Services and WinStar Venture II, Inc. The expiration date for these options as
well as for any options or warrants previously granted to WinStar companies and
its subsidiaries was set at August 31, 1998. During the years ended February 28,
1995 and 1994, an aggregate of $254,560 and $254,095, respectively, was paid to
WinStar Services by the Company as management fees and reimbursement of
expenses. Additionally, the Company paid $481,039 and $78,040 in cash and issued
notes amounting to $481,038 and $78,040 in payment of contingent performance
fees to WinStar Services during the years ended February 28, 1995 and 1994,
respectively. These contingent performance fees related to specific debt and
equity financing and investment transactions in excess of $33.6 million. During
the year ended February 28, 1995, all such notes were satisfied when they were
used to pay for the exercise of warrants and stock options held by WinStar
Services and its affiliates. See Private Exchange Transaction.
The management agreement was terminated prospectively as of February 28,
1995.
Private Exchange Transaction
On November 29, 1995, the Company acquired, in exchange for the issuance
of 3,741,224 shares of its Common Stock ("Private Exchange"), substantially all
of the assets of WinStar Companies, whose assets consisted of (i) all the
outstanding capital stock of WinStar Services and WinStar Venture, two
wholly-owned subsidiaries of WinStar Companies, and (ii) 389,580 shares of the
Company's Common Stock owned by WinStar Companies. The sole assets of WinStar
Services and WinStar Venture were 2,117,183 shares of the Company's Common Stock
and other securities of the Company that were exercisable or convertible into
1,429,633 shares of the Company's Common Stock. Accordingly, the Company issued
3,741,224 shares of Common Stock and, in exchange, acquired 3,936,396 shares of
Common Stock and Common Stock equivalents. All of the Common Stock and certain
of the Common Stock equivalents received in the Private Exchange are included in
Treasury Stock at December 31, 1995. WinStar Companies, WinStar Services and
WinStar Venture had no liabilities at the time of the closing of the Private
Exchange other than a liability previously assumed by the Company or liabilities
for which the Company is being indemnified.
The new shares of the Company's Common Stock issued in the Private
Exchange represented that number of shares which had an aggregate market value
based upon the average of the last sale price of the Company's Common Stock on
the 30 trading days preceding November 15, 1995, the date as of which the
exchange agreement regarding the above-described transaction was executed, equal
to the market value of the Company's Common Stock (i) transferred by WinStar
Companies to the Company, (ii) owned by WinStar Services and WinStar Venture and
(iii) underlying certain other securities of the Company owned by WinStar
Services and WinStar Venture which were convertible into or exercisable for
shares of the Company's Common Stock, less the aggregate exercise price of such
latter securities.
The stockholders of WinStar Companies included several of the Company's
current executive officers and directors. Simultaneously with the Private
Exchange, WinStar Companies was dissolved and the new shares issued in the
Private Exchange were issued directly to the stockholders of WinStar Companies
in proportion to their equity ownership of WinStar Companies.
The Private Exchange was considered and approved by a special committee of
independent and disinterested directors of the Company and an opinion from an
independent investment banking firm that the Private Exchange was fair to the
Company and its stockholders was obtained in connection with the Private
Exchange.
F-26
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
SGC Consulting Agreement
In November 1993, the Company entered into a consulting agreement with
SGC, pursuant to which SGC received a monthly fee of $5,000 and immediately
exercisable five-year options to purchase 50,000 shares of Common Stock for
$2.75 per share. The President and Director of SGC is currently a Director and
employee of the Company. In April 1994, the Company entered into a restated and
amended consulting agreement with SGC. Pursuant to the new agreement, SGC
provided consulting services to the Company and was paid a monthly fee of
$17,500. SGC also received options to purchase 125,000 shares of Common Stock at
a price of $4.50 per share, which vest in two equal annual installments
beginning in April 1994. The Company granted certain registration rights for all
shares, warrants and options issued to SGC or its President. Under this
consulting agreement, SGC was entitled to receive a cash fee equal to 5% of the
consideration paid in connection with certain transactions introduced to the
Company by SGC. Fees and expenses paid to SGC during the ten months ended
December 31, 1995, and the year ended February 28, 1995 were $0 and $119,000,
respectively.
In connection with investments by the Company in Avant-Garde and TWL, a
producer of sportsrelated radio programming, both of which businesses were
introduced to the Company by SGC, SGC was paid fees by Avant-Garde and by TWL.
Additionally, in connection with the Company's acquisition of its equity
interest in Avant-Garde, such Director was paid a fee by the principal of
Avant-Garde equal to 4.0% of the total consideration received by such principal
from the Company in connection with the acquisition. The Company paid no fees to
SGC in connection with such transactions, but the fees received by SGC and such
Director from Avant-Garde and TWL were credited against the monthly fees payable
to SGC by the Company.
The consulting agreement was terminated in January 1995 in connection with
the execution of such Director's employment agreement with the Company.
Agreement with ITC Group, Inc.
In May 1994, the Company, WWI and ITC entered into a two-year agreement
pursuant to which ITC advised the Company on the operations of WWI, WWFC and
WGN. ITC, together with the management and employees of WWI, developed and
implemented a two-year operating plan ("Operating Plan") for the Company's
wireless telecommunications business. Pursuant to the terms of the consulting
agreement, ITC made its consultants available to the Company and its
subsidiaries. The Company paid ITC an annual base consulting fee of $700,000 in
monthly installments for the services of a core management team, as well as
supplemental fees at agreed upon rates for additional consulting services
rendered by ITC as necessary from time to time. ITC also was entitled to receive
a bonus of up to $2.0 million per year at such time that certain pretax income
targets set forth in the Operating Plan were attained. No such bonus was paid
during the year ended February 28, 1995. During the year ended February 28, 1995
and through September 1995, ITC was paid $1,553,249 and $1,046,084,
respectively, in fees and expenses under the terms of the consulting agreement,
providing up to 12 consultants at any given time. In connection with the
consulting agreement, the Company granted options to purchase an aggregate of
500,000 shares of Common Stock for $4.41 per share to certain consultants of
ITC. Of such options, 375,000 are presently exercisable. ITC and the Company
executed a noncompetition agreement, pursuant to which ITC, and its key
employees and consultants, must refrain from providing services to any segment
of a business which provides wireless telecommunications services or otherwise
competes with the Company; provided, however, that ITC may provide services to
entities in connection with the provision of cellular and personal communication
services. In October 1994, ITC's President was elected as a director of the
Company.
Effective September 5, 1995, ITC's President became President and Chief
Operating Officer of the Company and certain core management personnel
previously provided by ITC also became employees, and ITC ceased providing
services to the Company under the consulting agreement. The Company's obligation
to pay any future compensation to ITC under such agreement was terminated.
F-27
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 24--Supplemental Cash Flow Information
Cash paid for interest during the six months ended June 30, 1996, the ten
months ended December 31, 1995, and the years ended February 28, 1995 and 1994
was $1,949,000, $1,270,000, $621,000, and $726,000, respectively.
During the ten month period ended December 31, 1995, the Company completed
the following material non-cash transactions (i) the conversion of $3,750,000 of
convertible notes plus accrued interest thereon; (ii) the conversion of
Preferred Stock E; (iii) the acquisition of approximately $7,500,000 in property
and equipment through various capitalized leases; (iv) the Private Exchange
transaction; (v) the settlement of the Company's placement expenses from the
gross proceeds of the Debt Placement; (vi) the acquisition of Avant-Garde.
During the year ended February 28, 1995, the Company completed the
following material non-cash transactions (i) the conversion of the Series D and
Series E Warrants through the assignment of notes payable and accrued interest
(Note 22); (ii) the satisfaction of approximately $600,000 in notes payable
through the exercise of stock options; (iii) conversions of Preferred Stock B,
C, and D; (iv) the acquisition of approximately $740,000 in property and
equipment through various capitalized leases; and (v) the purchase of Non
Fiction Films, Inc., wherein the purchase price was satisfied in part through
the issuance of 28,572 shares of common stock valued at $200,000.
During the year ended February 28, 1994, the Company completed the
following material non-cash transactions (i) the sale of the net assets of the
skiwear brands product line, net of cash received, for a $1,500,000 note
receivable; (ii) the private placement of $458,717 in notes for non-cash
consideration; (iii) the purchases, in March and August 1993, of WGN, whose net
assets, including cash acquired, have been valued at $1,470,000 for 1,271,351
shares of the Company's common stock (Note 3); (iv) the exercise by an investor
of 200,000 Series D warrants with a total exercise price of $134,000 through the
releasing of $100,000 owed him by the Company, with the balance paid in cash;
(v) the purchase of certain assets of a bath products company, valued at
$100,000 net of cash paid, for 39,506 shares of the Company's common stock; (vi)
the sale of 287,043 shares of common stock for stock subscriptions receivable of
$758,065, which amount was included in other current assets at February 28,
1994, and was realized in March 1994; and (vii) the acquisition of an investment
in AGT valued at $1,691,950 for $232,000 in notes payable, $900,000 in Series D
preferred stock and $27,950 in accounts payable, with the balance paid in cash.
Note 25--Major Customers
No customer individually amounted to more than 10% of net sales for the
ten months ended December 31, 1995 and the years ended February 28, 1995 and
1994.
Note 26--Business Segments
The Company's business segments are telecommunications, information
services, and merchandising. The following table is a summary of these segments
for the ten months ended December 31, 1995 and the years ended February 28, 1995
and 1994. For the year ended February 28, 1994, information related to the
telecommunications business segment relates only to the period from March 10,
1993 (date of acquisition of WGN) to February 28, 1994, and no amounts are shown
for the information services segment, which commenced operations in the year
ended February 28, 1995.
<TABLE>
<CAPTION>
Information TotalBusiness General
Telecommunications Services Merchandising Segments Corporate Consolidated
------------------ -------- ------------- -------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
For the ten months
ended December 31,
1995
Net sales ............ $ 13,136,644 $ 2,648,203 $ 13,986,625 $ 29,771,472 $ -- $ 29,771,472
</TABLE>
F-28
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
<TABLE>
<CAPTION>
Information TotalBusiness General
Telecommunications Services Merchandising Segments Corporate Consolidated
------------------ -------- ------------- -------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
Operating income
(loss) ............. (6,944,690) 238,129 756,135 (5,950,426) (3,861,203) (9,811,629)
Depreciation and
amortization ....... 586,114 3,097 166,929 756,140 103,963 860,103
Amortization of
intangibles ........ 344,228 20,706 74,954 439,888 -- 439,888
Capital expenditures . 7,457,971 14,478 528,985 8,001,434 650,758 8,652,192
Identifiable assets at
December 31, 1995 .. $ 36,998,045 $ 20,194,679 $ 10,458,663 $ 67,651,387 $ 217,711,468 $ 285,362,855
For the year ended
February 28, 1995
Net sales ............ $ 14,909,225 $ 473,392 $ 10,182,143 $ 25,564,760 $ -- $ 25,564,760
Operating income
(loss) ............. (3,422,937) (117,605) 307,097 (3,233,445) (2,377,991) (5,611,436)
Depreciation and
amortization ....... 263,839 744 153,731 418,314 14,188 432,502
Amortization of
intangibles ........ 128,117 6,165 90,894 225,176 -- 225,176
Capital expenditures . 1,328,938 4,486 286,583 1,620,007 196,321 1,816,328
Identifiable assets at
February 28, 1995 .. $ 14,594,048 $ 4,218,579 $ 6,911,270 $ 25,723,897 $ 3,785,555 $ 29,509,452
For the year ended
February 28, 1994
Net sales ............ $ 8,505,282 $ -- $ 7,119,737 $ 15,625,019 $ -- $ 15,625,019
Operating income
(loss) ............. (743,613) -- 222,611 (521,002) (1,546,519) (2,067,521)
Depreciation and
amortization ....... 116,635 -- 102,823 219,458 3,630 223,088
Amortization of
intangibles ........ 74,944 -- 165,049 239,993 -- 239,993
Capital expenditures . 274,940 -- 25,531 300,471 6,591 307,062
Identifiable assets at
February 28, 1994 .. $ 8,013,203 $ -- $ 5,118,512 $ 13,131,715 $ 1,478,220 $ 14,609,935
</TABLE>
F-29
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 27--New Accounting Standards Not Yet Adopted
In 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed of" ("SFAS No. 121"),
which provides guidance on when to assess and how to measure impairment of
long-lived assets, certain intangibles and goodwill related to those assets to
be held and used, and for long-lived assets and certain identifiable intangibles
to be disposed of. The Financial Accounting Standards Board also issued
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"), which gives companies a choice of the method of
accounting used to determine stock-based compensation. Companies may account for
such compensation either by using the intrinsic value-based method provided in
APB Opinion 25, "Accounting for Stock Issued to Employees" ("APB No. 25") or the
fair market value-based method provided in SFAS No. 123. These accounting
standards are effective for financial statements for fiscal years beginning
after December 15, 1995. As of January 1, 1996, the Company adopted SFAS No. 121
and SFAS No. 123. The adoption of SFAS No. 121 had no effect on the Company. The
Company intends to continue to use the intrinsic value-based method provided in
APB No. 25 to determine stock-based compensation, and therefore the sole effect
of the adoption of SFAS No. 123 will be the obligation to comply with the new
disclosure requirements provided thereunder.
Note 28--Subsequent Events To December 31, 1995 (Unaudited)
Agreement To Acquire Milliwave Limited Partnership
In June 1996, a subsidiary of the Company entered into certain agreements
with Milliwave Limited Partnership ("Milliwave") whereby the Company would
acquire Milliwave for a purchase price of $40 million in cash and 3.4 million
shares of the Company's common stock (which had an aggregate market value of $85
million based on a $25 per share market price at the time the agreements were
executed). The number of shares to be issued in connection with the acquisition
is subject to upward or downward adjustment depending on the market price of the
Company's Common Stock at the time the transaction is closed; provided, however,
that the Company may determine not to consummate the transaction if the
adjustment results in the Company being required to issue in excess of 4.5
million shares. The acquisition is subject to certain regulatory approvals, but
is expected to be consummated in the second quarter of calendar year 1997. The
Company also has entered into a (i) services agreement with Milliwave pursuant
to which it has agreed to provide services to Milliwave in connection with the
buildout by Milliwave of its licensed areas in consideration for payment of
monthly site access and management fees, as well as installation fees, and
(ii) a two-year transmission path lease agreement with Milliwave permitting the
Company to use up to 488 radio links in Milliwave's licensed areas.
Agreement To Acquire Pinnacle Nine Communications, LLC
In June 1996, the Company entered into an agreement to acquire the
outstanding membership interests of Pinnacle Nine Communications, LLC which is
the holder of three 38 GHz licenses. The acquisition is subject to certain
regulatory approvals, but is expected to be consummated in the last quarter of
1996.
Agreement To Acquire Local Area Telecommunications, Inc.
In April 1996, a subsidiary of the Company entered into an agreement to
acquire certain assets of Local Area Telecommunications, Inc. ("Locate"),
comprising its business as a competitive access provider of local digital
microwave distribution services and facilities to large corporations and to
interexchange and other common carriers. The purchase price for such assets will
be $17,500,000, which will be paid in the form of a promissory note due six
months after closing and bearing interest at the annual rate of eight percent.
The Company may convert the note, in whole but not part, at its election, into
that number of shares of Common Stock equal to (a) the principal amount and all
accrued and unpaid interest on the note divided by (b) the average of the
closing prices of the Common Stock for the five days ending on the date on which
the
F-30
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Company gives written notice of its decision to convert the note. Locate has no
rights of conversion. The Company has granted certain registration rights to
Locate with respect to such shares of Common Stock in the event that the Company
elects such conversion.
Consummation of the purchase is subject to certain closing conditions
including (i) expiration or termination of the waiting period under
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and
(ii) consent of the Federal Communications Commission and certain state agencies
to the transfer of control of, or the assignment of certain licenses and other
authorizations to conduct business. The purchase is expected to close as soon as
practicable after satisfaction of all closing conditions set forth in the
purchase agreement.
In connection with the purchase, the Company and Locate entered into a
service agreement for a term commencing in April 1996 and terminating upon the
earlier to occur of (i) the closing of the purchase or (ii) termination of the
purchase agreement. Pursuant to the services agreement, the Company performs
certain consulting and related services for Locate. As full compensation for
performance of such services, Locate pays the Company a fee of $125,000 per
month during the term of the agreement, subject to certain adjustments.
Acquisition of 80% Equity Interest in Fox Lorber Associates, Inc.
In April 1996, NFF acquired 80% of the outstanding common stock of
Fox/Lorber Associates, Inc. ("Fox/Lorber"), an independent distributor of films,
entertainment series and documentaries in the television and home video markets.
The purchase price consisted of $150,000 in common stock of the Company and
$300,000 in cash contributed by NFF to the working capital of Fox/Lorber.
NFF also purchased, in a separate, simultaneous transaction, all of the
outstanding shares of Fox/Lorber's preferred stock, together with three
promissory notes in the aggregate principal amount of $136,507 for an aggregate
purchase price of $1,020,000 in the Company's Common Stock.
The 20% minority shareholder has an option subject to certain earnings
levels, to put his interest to the Company and the Company is obligated, under
certain conditions, to provide up to $2,000,000 in working capital to Fox
Lorber.
Acquisition of 65% Equity Interest in The Winning Line, Inc.
In April 1996, WNM converted $970,000 principal amount of loans (plus
accrued interest) outstanding to The Winning Line, Inc. ("TWL"), into a 65%
equity interest in TWL.
TWL operates the SportsFan Radio Network ("SportsFan"). SportsFan is a
multimedia sports programming and production company which provides live sports
programming to more than 200 sports and talk format radio stations across the
United States, up to 24 hours a day, including to affiliate stations in 90 of
the top 100 United States markets.
WNM has the right to require certain principals of TWL who own the
remaining 35% equity interest in TWL to sell, and such principals have the right
to require WNM to purchase the remaining 35% equity interest based upon certain
criteria. At WNM's option, the purchase price in either instance can be paid in
shares of the Company's common stock (Note 8).
Stock Option Plan
On April 26, 1996, the Board of Directors approved an amendment to the
1992 and 1995 Plans, increasing the number of shares of common stock available
for grant to 1,500,000 and 3,500,000, respectively, subject to stockholder
approval.
F-31
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Agreement with Digex, Inc.
In June 1996, the Company entered into a six-year agreement with Digex,
Inc. ("Digex"), a national provider of Internet access services. Pursuant to
this agreement, the Company has the right of first refusal to provide all of
Digex's local access and/or customer interconnection requirements through the
use of the Company's Wireless Fiber or other services. The Company also will
purchase from Digex, during the term of the agreement, a minimum of $5 million
of Internet access services on a discounted basis.
Other
As of June 30, 1996, the Company has commitments during the next year to
purchase 23.5 million of telecommunications capital equipment.
F-32
<PAGE>
Report of Independent Auditors
The Board of Directors and Shareholders
Local Area Telecommunications, Inc.
We have audited the accompanying balance sheets of the Microwave Division
of Local Area Telecommunications, Inc. as of December 31, 1995 and 1994, and the
related statements of operations, divisional (deficit) surplus and cash flows
for the years then ended. 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 in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Microwave Division of
Local Area Telecommunications, Inc. at December 31, 1995 and 1994, and the
results of its operations and its cash flows for the years then ended, in
conformity with generally accepted accounting principles.
As discussed in Note 1 to the financial statements, the Microwave
Division's recurring losses from operations and divisional deficit raise
substantial doubt about its ability to continue as a going concern. The
financial statements do not include any adjustment that might result from the
outcome of this uncertainty. As also discussed in Note 1, on April 1, 1996, the
Company entered into an agreement to sell certain of the assets of the Microwave
Division to WinStar Communications, Inc.
Ernst & Young LLP
MetroPark, New Jersey
April 9, 1996
F-33
<PAGE>
The Microwave Division of
Local Area Telecommunications, Inc.
Balance Sheets
<TABLE>
<CAPTION>
June 30, 1996 December 31,
------------- -----------------------
(Unaudited) 1995 1994
---- ----
<S> <C> <C> <C>
ASSETS
Current assets
Cash ............................... $ 35,419 $ 441,994 $ 1,772,460
Accounts receivable, net of
allowance for doubtful accounts
of $95,000, $90,000 and $73,000
at June 30, 1996 and December 31,
1995 and 1994 .................... 611,828 538,269 526,391
Inventories ........................ 3,402,454 3,353,641 2,895,981
Prepaids and other current assets... 130,974 171,752 619,885
------------ ------------ ------------
Total current assets ................. 4,180,675 4,505,656 5,814,717
Property and equipment, net .......... 8,799,170 10,015,056 11,531,900
Security deposits .................... 85,029 83,308 85,164
------------ ------------ ------------
Total assets ......................... $ 13,064,874 $ 14,604,020 $ 17,431,781
============ ============ ============
LIABILITIES AND DIVISIONAL
(DEFICIT) SURPLUS
Current liabilities
Accounts payable and accrued
expenses ......................... $ 813,722 $ 874,001 $ 1,945,129
Obligations under capital leases ... 54,799 107,816 65,535
Interest payable ................... 2,528,013 1,645,708 641,579
Notes payable ...................... 17,300,000 17,300,000
------------ ------------ ------------
Total current liabilities ............ 20,696,534 19,927,525 2,652,243
Capital lease obligations, less
current portion .................... 233,862 233,862 210,295
Long-term debt ....................... 25,000 25,000 13,050,000
------------ ------------ ------------
Total liabilities .................... 20,955,396 20,186,387 15,912,538
Divisional (deficit) surplus ......... (7,890,522) (5,582,367) 1,519,243
------------ ------------ ------------
Total liabilities and divisional
(deficit) surplus .................. $ 13,064,874 $ 14,604,020 $ 17,431,781
============ ============ ============
</TABLE>
See accompanying notes.
F-34
<PAGE>
The Microwave Division of
Local Area Telecommunications, Inc.
Statements of Operations
<TABLE>
<CAPTION>
Six Months Ended June 30, Year ended December 31,
------------------------- -----------------------
1996 1995 1995 1994
---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C>
Revenues:
Sales of communications services .. $ 1,900,607 2,043,513 $ 4,264,664 $ 4,946,988
Sales of communications systems ... 578,904 1,517,031 2,656,718 1,842,828
Installation charges .............. 49,667 120,479 169,165 88,151
----------- ----------- ----------- -----------
2,529,178 3,681,023 7,090,547 6,877,967
Operating expenses
Network services .................. 1,337,081 1,286,991 2,320,374 2,381,922
Cost of systems sold .............. 391,744 1,093,815 1,714,429 1,302,601
Selling, general and administrative 872,202 1,016,857 2,582,894 2,780,982
Depreciation and amortization ..... 1,280,152 1,345,046 2,784,156 2,608,765
----------- ----------- ----------- -----------
3,881,179 4,742,709 9,401,853 9,074,270
----------- ----------- ----------- -----------
Loss from operations ................ (1,352,001) (1,061,686) (2,311,306) (2,196,303)
Other income (expense)
Interest income ................... 4,784 6,091 11,736 7,370
Interest expense .................. (960,938) (720,788) (1,587,851) (1,012,434)
----------- ----------- ----------- -----------
(956,154) (714,697) (1,576,115) (1,005,064)
----------- ----------- ----------- -----------
Net loss .......................... $(2,308,155) ($1,776,383) $(3,887,421) $(3,201,367)
============ =========== =========== ===========
</TABLE>
See accompanying notes.
F-35
<PAGE>
The Microwave Division of
Local Area Telecommunications, Inc.
Statements of Divisional (Deficit) Surplus
Six months ended June 30, 1996 and
years ended December 31, 1995 and 1994
<TABLE>
<S> <C>
Divisional surplus at December 31, 1993........................... $ 4,692,407
Net loss ....................................................... (3,201,367)
Net activity with Locate ....................................... 28,203
-----------
Divisional surplus at December 31, 1994 .......................... 1,519,243
Net loss ....................................................... (3,887,421)
Net activity with Locate ....................................... (3,214,189)
-----------
Divisional deficit at December 31, 1995 .......................... (5,582,367)
Net loss (unaudited) ........................................... (2,308,155)
-----------
Divisional deficit at June 30, 1996 (unaudited)................... $(7,890,522)
===========
</TABLE>
See accompanying notes.
F-36
<PAGE>
The Microwave Division of
Local Area Telecommunications, Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
Six Months, Year ended
Ended June 30, December 31
----------------------------- -----------------------------
1996 1995 1995 1994
---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C>
Operating activities
Net loss .................. $(2,308,155) $(1,776,383) $(3,887,421) $(3,201,367)
Adjustments to
reconcile net loss to net
cash used in operating
activities
Depreciation and
amortization ........ 1,280,152 1,345,046 2,784,156 2,608,765
Changes in assets and
liabilities
Accounts receivable ... (73,559) (110,217) (11,878) 142,512
Inventory ............. (48,813) (20,839) (457,660) (228,059)
Prepaids and other .... 39,057 20,061 449,989 (291,231)
Accounts payable and
accrued expenses .... (60,279) (18,533) (1,071,128) (223,308)
Interest payable ...... 882,305 225,737 1,004,129 2,918
--------- --------- --------- ---------
Net cash used in operating
activities .............. (289,292) (335,128) (1,189,813) (1,189,770)
--------- --------- --------- ---------
Investing activities
Capital expenditures ...... (64,266) (794,892) (1,164,712) (432,099)
--------- --------- --------- ---------
Net cash used in investing
activities .............. (64,266) (794,892) (1,164,712) (432,099)
--------- --------- --------- ---------
Financing activities
Payments made under
capital lease obligation (53,017) (35,247) (36,752) (20,471)
Proceeds from issuance of
short term debt ....... 1,500,000
Payments made on short term
debt ................. (25,000)
Payments made on long-
term debt ............... (25,000) (7,500,000)
Proceeds from issuance of
long-term debt .......... 4,300,000 10,500,000
Payments to Locate ........ (2,820,449) (6,073,442) (3,109,794)
Payments from Locate ...... 1,147,035 2,859,253 2,952,997
--------- --------- --------- ---------
Net cash provided by (used
in) financing activities (53,017) (233,661) 1,024,059 2,822,732
--------- --------- --------- ---------
Net (decrease) increase in
cash .................... (406,575) (1,363,681) (1,330,666) 1,200,863
Cash at beginning of period 441,994 1,772,460 1,772,460 571,597
--------- --------- --------- ---------
Cash at end of period ..... $ 35,419 $ 408,779 $ 441,994 $1,772,460
========= ========= ========= =========
Non-cash financing
activities
Acquisition of equipment
under capital leases .... $ 102,600 $ 296,300
Issuance of Locate's common
stock to retire debt .... 185,000
</TABLE>
See accompanying notes.
F-37
<PAGE>
The Microwave Division of
Local Area Telecommunications, Inc.
Notes to Financial Statements
December 31, 1995 and 1994
June 30, 1996 and 1995 (Unaudited)
1. Summary of Significant Accounting Policies
Organization and Basis of Presentation
Local Area Telecommunications, Inc. (the Company), a subsidiary of
MobileMedia Corporation (MobileMedia), was incorporated on October 21, 1981. The
Company's Microwave Division (the Division) is engaged in operations pertaining
to the installation, servicing and maintenance of digital microwave radiosystems
for business use within major metropolitan areas. The Division provides voice,
data and image transmission between dispersed locations through point-to-point,
point-to-multipoint and point-topoint short-haul digital microwave radio. The
Division also designs, installs and sells microwave infrastructures used in
cellular communication systems and other networks.
The accompanying financial statements of the Microwave Division of Local
Area Telecommunications, Inc. include all of the microwave operations of Local
Area Telecommunications, Inc., including an allocated share of common expenses
and specifically identifiable assets, liabilities and long-term debt. These
financial statements have been prepared from the accounting records of Local
Area Telecommunications, Inc. and are presented on a going concern basis which
contemplates the realization of assets and the settlement of liabilities and
commitments in the normal course of business. The Division incurred net losses
of $3,769,387 and $3,201,367 for the years ended December 31, 1995 and 1994,
respectively, and as of December 31, 1995 had a divisional deficit of
$5,432,367. The continued operations of the Division are dependent upon the
receipt of additional funding from Mobile Media and/or other sources. There can
be no assurance that such funding will be received.
In October 1994, following a comprehensive review of the operations of the
Company, the Company's Board of Directors developed a plan to sell substantially
all of the assets of the Company by October 1995, retaining an investment banker
to market the assets. At December 31, 1994, in accordance with Accounting
Principles Board Opinion No. 30, "Reporting the Results of Operations--Reporting
the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions", the Company accrued losses
in anticipation of disposal prior to December 31, 1995. At December 31,1995, the
Microwave Division remained unsold and the Company accrued additional losses
expected to be incurred due to the delay in consummating the disposal. The
accrued losses at December 31, 1995 and 1994 have been recorded in the Company's
accounts, and the accompanying financial statements do not reflect any
allocation therefrom.
On April 1, 1996, the Company entered into an agreement (the "Sale
Agreement") to sell the assets of the Microwave Division, excluding cash,
accounts receivable and certain security deposits, to WinStar
Communications,Inc. (WinStar) in exchange for the assumption of certain
liabilities and $17.5 million in the form of notes bearing interest at 8% (the
WinStar Notes). The WinStar Notes are convertible into common stock of WinStar
at the option of WinStar.
Consummation of the sale noted above is subject to regulatory approval.
There can be no assurance, however, that the sale will be consummated or that,
if consummated, it will be consummated on the terms described above.
In connection with the Sale Agreement, the Company entered into a service
agreement ("Services Agreement") for a term commencing in April 1996 and
terminating upon the earlier to occur of (i) the closing of the Sale Agreement,
or (ii) termination of the Sale Agreement. Pursuant to the Services Agreement,
WinStar provides management services for the Company. As full compensation for
WinStar's performance of such services, the Company pays WinStar a fee of
$125,000 per month during the term
F-38
<PAGE>
The Microwave Division of
Local Area Telecommunications, Inc.
Notes to Financial Statements--(Continued)
1. Summary of Significant Accounting Policies--(Continued)
of the agreement, subject to certain adjustments.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Unaudited Interim Financial Statements
The interim financial information as of June 30, 1996 and the six months
ended June 30, 1996 and 1995 contained herein is unaudited but, in the opinion
of management, includes all adjustments of a normal recurring nature which are
necessary for a fair presentation of the financial position, results of
operations, and cash flows for the periods presented. Results of operations for
the periods presented herein are not necessarily indicative of results of
operations for the entire year.
Inventories
Inventories consist of the cost of communications equipment not yet placed
in service plus the net book value of equipment previously in service which the
Company anticipates returning to service within one year. All inventory is
recorded at the lower of average cost or market.
Property and Equipment
Property and equipment additions, as well as the labor costs associated
with the installation thereof, are capitalized at cost. Depreciation is computed
on the straight-line method based upon estimated useful lives ranging from 5 to
10 years.
Revenue Recognition
The Company recognizes revenue for communication services when the
services are provided. Sales of communication systems are recognized upon
delivery and installation.
Impairment of Long-Lived Assets
In March 1995, the FASB issued Statement No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,
which requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. Statement No. 121 also addresses the accounting for long-lived
assets that are expected to be disposed of. The Division adopted Statement No.
121 as of January 1, 1996, which had no effect on the Division's financial
position or results of operations.
Income Taxes
The Division is included in the consolidated federal income tax return of
MobileMedia. No consolidated federal income tax expense or benefit is allocated
to the Division.
F-39
<PAGE>
The Microwave Division of
Local Area Telecommunications, Inc.
Notes to Financial Statements--(Continued)
2. Property and Equipment
The components of property and equipment were as follows
June
30, 1996 December 31
-------- ---------------------
(Unaudited) 1995 1994
---- ----
Equipment placed in service ....... $26,375,597 $26,472,594 $26,641,661
Furniture and fixtures ............ 1,849,777 1,715,051 1,452,478
----------- ----------- -----------
28,225,374 28,187,645 28,094,139
Less accumulated depreciation ..... 19,426,204 18,172,589 16,562,239
----------- ----------- -----------
$ 8,799,170 $10,015,056 $11,531,900
=========== =========== ===========
Included in equipment placed in service is certain equipment obtained
under capital leases. At June 30, 1996, this equipment has a gross book value of
approximately $429,000 and a net book value of approximately $343,000.
3. Notes Payable
Notes payable, all of which are unsecured, consisted of the following
June
30, 1996 December 31
-------- ---------------------
(Unaudited) 1995 1994
---- ----
12% super senior note payable ..... $ 7,300,000 $ 7,300,000 $ 3,000,000
10% senior notes payable, due
March 31, 1996 .................. 7,500,000 7,500,000 7,500,000
10% senior note payable, due
September 15, 1996 .............. 2,500,000 2,500,000 2,500,000
12% Subordinated Note ............. 25,000 25,000 50,000
----------- ----------- -----------
$17,325,000 $17,325,000 $13,050,000
=========== =========== ===========
In December 1994, the Division refinanced $7,500,000 of its $10,000,000
10% note payable, due September 15, 1996 with two $3,750,000 10% senior notes
payable (the Senior Notes), due January 1, 1996. On April 28, 1995, the due
dates of the two $3,750,000 Senior Notes were extended to March 31, 1996.
In December 1994, the Division borrowed $3,000,000 from a MobileMedia
shareholder in exchange for a 12% super senior note payable due January 1, 1996.
During 1995, the Division borrowed $4,300,000 in exchange for six additional 12%
super senior notes (collectively, the "Super Senior Notes").
As of April 9, 1996, neither the Senior Notes nor the Super Senior Notes
(collectively, the "Notes") were repaid. It is anticipated that the Notes will
be exchanged for WinStar Notes acquired by the Company pursuant to the Sale
Agreement (Note 1).
Total interest paid for the six months ended June 30, 1996 and 1995, and
for the years ended December 31, 1995 and 1994 was approximately $79,000,
$517,000, $586,000 and $1,269,000, respectively.
F-40
<PAGE>
The Microwave Division of
Local Area Telecommunications, Inc.
Notes to Financial Statements--(Continued)
4. Related Party Transactions
For the six months ended June 30, 1996 and 1995, and for the years ended
December 31, 1995 and 1994, the Division had sales to MobileMedia of
approximately $18,000, $35,000, $70,000 and $721,000, respectively.
In December 1995, on behalf of the Division, the Company acquired certain
vehicles, totaling approximately $103,000, under capital lease agreements (the
Agreements) with Roos Capital Planners, Inc., a related party. The Agreements
require the Company to make 36 monthly installments of $4,000.
5. Commitments and Contingencies
On behalf of the Division, the Company leases space under cancelable and
noncancellable operating leases which expire at various dates through 2000.
Total rental expense for the six months ended June 30, 1996 and 1995, and for
the years ended December 31, 1995 and 1994 was approximately $805,000, $756,000,
$1,586,000 and $1,811,000, respectively. Additionally, the Company is obligated
under capital leases for certain equipment.
Future minimum payments under capital leases and noncancellable operating
leases with initial terms of one year or more consists of the following as of
December 31, 1995
Capital Operating
Leases Leases
------ ------
1996 ................................................. $ 147,900 $ 630,000
1997 ................................................. 147,900 538,000
1998 ................................................. 122,708 18,000
1999 ................................................. 8,000
2000 ................................................. 3,000
---------- ----------
Total future minimum payments ........................ 418,508 $1,197,000
==========
Less amount representing interest .................... 76,830
----------
Present value of net minimum lease payments (including
current portion of $107,816) ......................... $ 341,678
==========
The Company has employment agreements with certain executives through
December 31, 1996 requiring the payment of $428,645 per year in compensation
with increases of 5% per annum. Additionally, payments of $1,500,000 may be
required in certain circumstances by the Company in the event of the termination
of employment of the executives within six months from the date of sale of the
Company, as defined in the employment agreements. Also, if the earnings before
interest, depreciation, taxes and amortization of MobileMedia increase by more
than 30% and 50%, the Chief Executive Officer is entitled to a payment of
$350,000 for each noted percentage increase. Based on the specified performance
criteria, $350,000 was expensed in each of 1994 and 1995, and is included in the
results of operations of the Division.
F-41
<PAGE>
REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
Board of Directors
Avant-Garde Telecommunications, Inc.
We have audited the accompanying balance sheet of Avant-Garde
Telecommunications, Inc. as of February 28, 1995, and the related statements of
operations, and cash flows for each of the two years in the period ended
February 28, 1995. 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 in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Avant-Garde
Telecommunications, Inc. as of February 28, 1995, and the results of its
operations and its cash flows for each of the two years in the period ended
February 28, 1995, in conformity with generally accepted accounting principles.
GRANT THORNTON LLP
New York, New York
July 28, 1995
F-42
<PAGE>
Avant--Garde Telecommunications, Inc.
Balance Sheet
February 28, 1995
ASSETS
Cash ........................................................ $ 237
Accounts receivable ......................................... --
Other current assets ........................................ 97,140
Total current assets ............................... 97,377
-----------
Property and equipment, net ................................. 3,149,911
Other assets ................................................ 432,683
-----------
Total assets ....................................... $ 3,679,971
===========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Accounts payable and accrued expenses ....................... $ 2,765,578
Due to affiliate ............................................ 3,350,510
-----------
Total liabilities ........................................... 6,116,088
-----------
Stockholders' Deficiency
Preferred stock, $.001 par value; authorized 50,000
shares, no shares issued and outstanding ........... --
Common stock, $.001 par value; authorized 200,000
shares, issued and outstanding 2,250 shares ........ 2
Additional paid-in capital .................................. 20
Accumulated deficit ........................................... (2,436,139)
-----------
Total stockholders' deficiency ..................... (2,436,117)
-----------
Total liabilities and stockholders' deficiency ..... $ 3,679,971
===========
See Notes to Financial Statements
F-43
<PAGE>
Avant--Garde Telecommunications, Inc.
Statements of Operations
<TABLE>
<CAPTION>
For the Period For the Year Ended
March 1 to February 28,
July 17, 1995 -------------------
-------------
(unaudited) 1995 1994
---- ----
<S> <C> <C> <C>
Revenues ............................... $ 17,779 $ 7,458 $ --
----------- ----------- -----------
Expenses
Selling, general and administrative
expenses ........................... 1,704,294 2,277,094 134,797
Depreciation ......................... 59,250 25,872 --
----------- ----------- -----------
Total expenses ......................... 1,763,544 2,302,966 134,797
----------- ----------- -----------
Operating loss ......................... (1,745,765) (2,295,508) (134,797)
Interest expense (income), net ......... -- 6,039 (205)
Amortization of intangibles ............ 31,978 -- --
----------- ----------- -----------
Net loss ............................... (1,777,743) (2,301,547) (134,592)
Accumulated deficit, beginning of period (2,436,139) (134,592) --
----------- ----------- -----------
Accumulated deficit, end of period ..... $(4,213,882) $(2,436,139) $ (134,592)
=========== =========== ===========
</TABLE>
See Notes to Financial Statements
F-44
<PAGE>
Avant--Garde Telecommunications, Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
For the Period For the Year Ended
March 1 to February 28,
July 17, 1995 -------------------
--------------
(unaudited) 1995 1994
---- ----
<S> <C> <C> <C>
Cash flows from operating activities
Net loss ................................ $(1,777,743) $(2,301,547) $ (134,592)
Adjustments to reconcile net loss to cash
used by operating activities
Depreciation ............................ 59,250 25,872 --
Amortization of intangibles ............. 31,978 -- --
(Increase) decrease in operating assets
Accounts receivable ................... (9,660) 22 --
Other current assets .................. 168 (97,140) --
Increase (decrease) in accounts payable
and accrued expenses .................. (913,593) 921,890 43,688
----------- ----------- -----------
Net cash used in operating activities ..... (2,609,600) (1,450,903) (90,904)
----------- ----------- -----------
Cash flows from investing activities
Purchase of property and equipment ...... (2,447,761) (1,375,783) --
Investment in other assets .............. (458,371) (432,683) --
----------- ----------- -----------
Net cash used in investing activities ..... (2,906,132) (1,808,466) --
----------- ----------- -----------
Cash flows from financing activities
Increase in due to affiliate ............ 5,515,815 3,245,510 105,000
----------- ----------- -----------
Net increase (decrease) in cash ........... 83 (13,859) 14,096
Cash at beginning of period ............... 237 14,096 --
----------- ----------- -----------
Cash at end of period ..................... $ 320 $ 237 $ 14,096
=========== =========== ===========
</TABLE>
See Notes to Financial Statements
F-45
<PAGE>
AVANT-GARDE TELECOMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
Note 1--Summary of Significant Accounting Policies
The financial statements include the accounts of Avant-Garde
Telecommunications, Inc. ("Company"), prepared in accordance with generally
accepted accounting principles.
Nature of Business
The Company develops, markets and delivers local telecommunication
services in the United States. The local telecommunications market has become
increasingly open to competition as a result of recent technological
developments and procompetitive regulatory initiatives. The Company, based in
Washington, D.C., holds 30 licenses, each encompassing four 100-MHz millimeter
wave radio channels. These licenses allow the Company to deliver voice, data and
video over 400 MHz of exclusive bandwidth in the 38 GHz band. These licenses
were issued to the Company on September 16, 1993. Under the terms of its
licenses, the Company was required to begin the provision of services authorized
under such licenses by March 15, 1995. On March 15, 1995, the Company filed a
certificate of completion for each license with the Federal Communications
Commission ("FCC").
Property and Equipment
Property and equipment is stated at cost. When assets are placed into
service, depreciation and amortization are computed using the straight-line
method over the estimated useful lives of the related assets, which ranges from
3 to 8 years.
Other Assets
Certain costs, associated directly with meeting FCC license requirements
have been capitalized. These costs will be amortized over a 3 year period
beginning June 1, 1995, when the licenses are deemed to have been placed in
service. The amount capitalized is $417,000 as of February 28, 1995.
Unaudited Financial Statements
In the opinion of the Company, the accompanying unaudited statements of
operations and statements of cash flows for the period of March 1 to July 17,
1995 include all adjustments (consisting only of normal recurring adjustments)
necessary to present fairly the results of operations and the cash flows for the
period of March 1, 1995 to July 17, 1995.
Note 2--Due to Affiliate
In February and April, 1994, WinStar Wireless, Inc. ("Wireless"), a
wholly-owned subsidiary of WinStar Communications, Inc. ("WCII"), purchased a
49% interest in the company from its majority stockholder for $4,900,000 in cash
and stock. Wireless also obtained an option to acquire an additional 31% of the
Company from the majority stockholder. The Company entered into a management
agreement (the "Agreement") with Wireless at that time. Under the terms of the
Agreement, Wireless has managed the operations of the company since February
1994, subject to the direction of the majority shareholder, including the
development of a strategic business plan and financing all of the operations of
the Company, including capital expenditures. The Agreement provided for a
management fee to Wireless equal to 20% of the Company's gross receipts, subject
to a minimum fee of $10,000 per month. All amounts advanced by Wireless to the
Company, as well as accrued management fees payable, are included in Due to
Affiliate in the accompanying balance sheets and are non-interest bearing.
F-46
<PAGE>
AVANT-GARDE TELECOMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Note 2--Due to Affiliate--(Continued)
On April 10, 1995, WCII entered into an agreement with all of the
Company's shareholders pursuant to which WCII agreed to acquire the remaining
51% of the Company in exchange for 1,275,000 restricted shares of WCII's common
stock valued at $5,100,000. This agreement was contingent upon the Company
obtaining consent from the FCC to transfer control of its licenses. On June 26,
1995, such consent was granted by the FCC, and on July 17, 1995, this agreement
was consummated and the transfer took place. Pursuant to the terms of the
agreement, the Company merged into WinStar Wireless Fiber Corporation, a
wholly-owned subsidiary of WCII which is the sole surviving corporation.
Note 3--Property and Equipment
Property and equipment consist of the following
February 28, 1995
-----------------
Communications Network ........ $ 2,532,103
Computer Systems and Equipment 592,901
Furniture, Fixtures & Equipment 48,230
Other ......................... 2,549
-----------
$ 3,175,783
Accumulated Depreciation ...... (25,872)
-----------
$ 3,149,911
===========
Note 4--P-Com Contract
In November 1994, the Company entered into a non-exclusive, three year
agreement with P-Com, Inc. ("P-Com"), a manufacturer and distributor of radio
links, providing for the purchase of radio links from P-Com. The contract
pricing structure includes provisions relating to the volume of purchases under
the agreement. An annual minimum volume requirement must be met in order to
maintain the agreed upon pricing structure. The contract is cancelable by the
Company subject to certain conditions, such as the guarantee of the next 90
days' purchases in accordance with an agreed upon schedule as well as the
payment of certain deferred billings. As of February 28, 1995, the Company's
noncancellable purchase commitment was approximately $7,250,000. These
conditions to cancellation become more favorable to the Company as certain
volume levels are reached.
Certain amounts paid under the contract are prepayments for future
purchases and are included in communications equipment in property and equipment
but are not being depreciated. In future periods, as certain volume levels are
attained, these amounts may be recovered. This prepaid amounts as of February
28, 1995 is $822,500.
F-47
<PAGE>
AVANT-GARDE TELECOMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Note 5--Income Taxes
The Company follows Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes," which requires the use of the asset and liability
method of accounting for income taxes. Under this method, deferred income taxes
are recognized for the tax consequences of temporary differences by applying
enacted statutory rates applicable to future years to differences between the
financial statement carrying amounts and the tax bases of existing assets and
liabilities.
The temporary differences which result in deferred tax assets consist of
net operating loss carryforwards. The tax effect of this temporary difference is
as follows
February 28, 1995
-----------------
Net operating loss carryforwards $ 826,000
Valuation allowance ............ (826,000)
---------
$ --
=========
Due to losses incurred by the Company, a full valuation of the deferred
tax asset has been provided because realization of this future benefit cannot
currently be assured. The Company's net operating loss carryforwards of
approximately $3,534,000 will begin to expire in 2009, if not utilized. The
Company's ability to utilize its net operating losses deductions to offset
future taxable income is limited due to the change in control as defined in
Internal Revenue Code Section 382.
Note 6--Commitments
In May 1995, Wireless completed a private placement of $7,500,000 of five
year secured convertible notes (the "Notes"). These Notes are guaranteed by the
Company, and the security for the Notes includes a pledge by Wireless of its
shares of the Company.
F-48
<PAGE>
REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
The Partners
Milliwave Limited Partnership
We have audited the accompanying balance sheet of Milliwave Limited
Partnership (a Florida limited partnership) as of December 31, 1995 and the
related statement of changes in partners' capital for the period April 25, 1995
(inception) through December 31, 1995. These financial statements are the
responsibility of the management of Milliwave Limited Partnership. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Milliwave Limited
Partnership as of December 31, 1995, in conformity with generally accepted
accounting principles.
GRANT THORNTON LLP
New York, New York
June 27, 1996
F-49
<PAGE>
Milliwave Limited Partnership
BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
----------- ------------
(unaudited)
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash ..................................................... $2,785,800 $ 11,222
Investments .............................................. 2,000,000 --
Other current assets ..................................... 44,929 --
---------- ----------
Total current assets ................................. 4,830,729 11,222
Property and equipment, net .............................. 220,671 --
Licenses ................................................. 415,285 317,581
Other assets ............................................. 97,777 --
---------- ----------
Total assets ......................................... $5,564,462 $ 328,803
========== ==========
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES
Accounts payable and accrued expenses .................... $ 648,373 $ 53,803
---------- ----------
Total current liabilities ........................... 648,373 53,803
PARTNERS' CAPITAL .......................................... 4,916,089 275,000
---------- ----------
Total liabilities and partners' capital ............. $5,564,462 $ 328,803
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-50
<PAGE>
Milliwave Limited Partnership
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1996
(Unaudited)
Revenues $ --
Operating expenses
Consulting and contracted services ........ $ 123,979
Professional fees ......................... 44,143
Depreciation .............................. 291
Travel .................................... 11,617
Salaries .................................. 6,168
Office and sundry ......................... 3,052
---------
---------
Net loss from operations ..................... (189,250)
Interest income ........................... 11,596
---------
Net loss ..................................... $(177,654)
=========
F-51
<PAGE>
Milliwave Limited Partnership
STATEMENT OF CHANGES IN PARTNERS' CAPITAL
April 25, 1995 (inception) through December 31, 1995
and the six months ended June 30, 1996
(unaudited)
Cost of contributed license applications .................... $ 122,654
Cash contributed ............................................ 152,346
-----------
Partners' capital at December 31, 1995 ...................... 275,000
Cash contributed ............................................ 5,000,000
Syndication costs ........................................... (181,257)
Net loss .................................................... (177,654)
-----------
Partners' capital at June 30, 1996 (unaudited) .............. $ 4,916,089
===========
The accompanying notes are an integral part of these statements.
F-52
<PAGE>
Milliwave Limited Partnership
STATEMENT OF CASH FLOWS
For the six months ended June 30, 1996
(unaudited)
Cash flows from operating activities:
Net loss ................................................... $ (177,654)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation ............................................... 291
Increase in other current assets ........................... (44,929)
Increase in other assets ................................... (97,777)
Increase in accounts payable and accrued expense ........... 159,869
-----------
Net cash used in operating activities ........................ (160,200)
-----------
Cash flows from investing activities:
Increase in investments .................................... (2,000,000)
-----------
Net cash used in investing activities ........................ (2,000,000)
-----------
Cash flows from financing activities:
Proceeds from partners' loans .............................. 200,000
Repayment of partners' loans ............................... (200,000)
Capital contributions ...................................... 5,000,000
Syndication costs .......................................... (65,222)
-----------
Net cash provided by financing activities .................... 4,934,778
-----------
Net increase in cash and cash equivalents .................... 2,774,578
Cash and cash equivalents at beginning of period ............. 11,222
-----------
Cash and cash equivalents at end of period ................... $ 2,785,800
===========
The accompanying notes are an integral part of these statements.
F-53
<PAGE>
Milliwave Limited Partnership
NOTES TO FINANCIAL STATEMENTS
December 31, 1995 and June 30, 1996 (unaudited)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General
Milliwave Limited Partnership (a Florida limited partnership, hereinafter
referred to as the "Partnership") was formed on April 25, 1995 to apply for and
obtain licenses from the Federal Communications Commission ("FCC") and to
exploit such licenses for commercial purposes. Through June 30, 1996, the
Partnership had no operations, other than the application for licenses from the
FCC, and the commencement of construction requirements for such licenses.
A summary of the significant accounting policies applied in the
preparation of the accompanying balance sheet follows
1. Property and Equipment
Property and equipment is stated at cost. Depreciation is calculated using
the straight line method over the estimated useful lives of the related assets.
2. Cash and Cash Equivalents
The Partnership considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
3. Income Taxes
No provision for Federal, state or local income taxes has been provided as
the Partnership is not a taxable entity and the partners are individually liable
for the taxes on their shares of the Partnership's income.
4. Use of Estimates
In preparing financial statements in conformity with generally accepted
accounting principles, the Partnership is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and revenues and expenses during the reporting period. Actual results
could differ from those estimates.
5. Unaudited Financial Statements
In the opinion of the Partnership, the accompanying unaudited balance
sheet as of June 30, 1996 and the unaudited statements of operations, changes in
partners' capital, and cash flows for the six months ended June 30, 1996 include
all adjustments (consisting only of normal recurring adjustments) necessary to
present fairly the financial position of the Partnership as of June 30, 1996 and
the results of operations and cash flows for the six months ended June 30, 1996.
NOTE 2--NATURE OF BUSINESS AND LICENSES
The Partnership holds 88 licenses granted by the FCC. These licenses allow
the Partnership to deliver communication services over the 38 GHz band specified
in the licenses. The licenses were issued at various dates through March 15,
1996. Under the terms of the licenses, the Partnership must construct a minimum
of one radio link per licensed service area within eighteen months of the date
of grant or risk revocation of the licenses by the FCC. The Partnership is
required to complete its minimum construction requirement for the licenses
granted at various dates from August 1996 through September 1997. At June 30,
1996 and December 31, 1995, the Partnership has capitalized $415,285 and
$317,581, respectively, of license costs consisting of filing, application and
legal fees relative to the licenses. (Reference is made to Note 7.)
F-54
<PAGE>
Milliwave Limited Partnership
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1995 and June 30, 1996 (unaudited
NOTE 3-INVESTMENTS
Investments consist of an Overseas Private Investment Corporation ("OPIC")
- - U.S. Government guaranteed debt instrument, classified by the Partnership as
an available for sale security under Statement of Financial Accounting Standards
No. 115, "Accounting for Certain Investments in Debt and Equity Securities." The
investment is stated at cost which equals market value and matures in January
2009, with a seven day put option. Interest is payable quarterly and as of June
30, 1996 was 5.3 percent.
NOTE 4-LOANS PAYABLE-PARTNERS
In March 1996 the Partnership issued two $100,000 promissory notes to two
limited partners bearing interest at 5.86% per annum. These notes were to mature
on December 31, 1996 but were repaid out of the proceeds of a sale of limited
partnership interests. (Reference is made to Note 5).
NOTE 5--PARTNERS' CAPITAL
For the period May 1994 through the formation of the Partnership in April
1995, one of the partners incurred $122,654 in license application costs, which
were contributed to the Partnership at cost and included in the capital of the
Partnership.
The balance of the capital contributed during the period ended December
31, 1995 represented cash contributed of $152,346.
On May 30, 1996, the Partnership amended and restated its limited
partnership agreement to provide for Series A and Series B Limited Partners.
Concurrent with the amendment, the Partnership sold $5,000,000 of Series B
Limited Partnership interests. Syndication costs relating to the sale amounted
to $181,257.
NOTE 6--COMMITMENTS AND CONTINGENCIES
Subsequent to December 31, 1995, the Partnership entered into purchase
orders to purchase radio links from P-Com, Inc. amounting to approximately
$570,000. As of June 30, 1996, open purchase orders amounted to $365,000.
On November 13, 1995, the FCC released an order freezing the acceptance
for filing of new applications for 38 GHz frequency licenses. On December 15,
1995, the FCC announced the issuance of an NPRM, pursuant to which it proposed
to amend its current rules relating to 38 GHz including, among other items, the
imposition of minimum construction requirements and an auction procedure for
issuance of licenses in the 37-40 GHz band. In addition, the FCC ordered that
those applications that are subject to mutual exclusivity with other applicants
or that were placed on public notice by the FCC after September 13, 1995 would
be held in abeyance and not processed by the FCC pending the outcome of the
proceeding initiated by the NPRM. Final rules with respect to the changes
proposed by the NPRM have not been adopted and the changes proposed by the NPRM
have been, and are expected to continue to be, the subject of numerous comments
by members of the telecommunications industry and others. Consequently, there
can be no assurance that the NPRM will result in the issuance of rules
consistent with the rules initially proposed in the NPRM. Until final rules are
adopted, the rules currently in existence remain in effect with respect to
outstanding licenses.
F-55
<PAGE>
Milliwave Limited Partnership
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1995 and June 30, 1996 (unaudited)
NOTE 7--WINSTAR COMMUNICATIONS, INC. AGREEMENT
In June 1996, the Partnership entered into an agreement with WinStar
Communications, Inc. ("WinStar") whereby WinStar would acquire the Partnership
for a purchase price of $40 million in cash and 3.4 million shares of WinStar
common stock. At the date of signing the agreement, the market value of the
common stock was approximately $85,000,000. The number of shares issued is
subject to adjustment, depending on WinStar's stock price on the date of closing
of the transaction with a maximum of 4.5 million shares and an ability for
WinStar to issue fewer than 3.4 million shares if the stock price exceeds
certain levels. The acquisition is subject to FCC approval, but is expected to
be consummated in the second quarter of calendar year 1997. The Partnership also
has entered into a (i) services agreement with Winstar pursuant to which Winstar
has agreed to provide services to the Partnership in connection with the
buildout of its licensed areas in consideration for payment of monthly site
access and management fees, as well as installation fees, and (ii) a two-year
transmission path lease agreement with Winstar permitting its use of up to 488
radio links in the Partnerships' licensed areas.
F-56
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma condensed consolidated balance sheet has
been prepared by taking the June 30, 1996 consolidated balance sheets of WinStar
Communications, Inc. and subsidiaries (the "Company") and the balance sheets of
Milliwave Limited Partnership ("Milliwave") and certain assets of the Microwave
Division of Local Area Telecommunications, Inc. ("Locate"), as if they occurred
on June 30, 1996. The following unaudited pro forma "as adjusted" balance sheet
gives effect to these acquisitions as well as to the issuance of Common Stock in
this Offering and the resulting retirement of debt, as if they occurred on June
30, 1996. The unaudited pro forma condensed consolidated balance sheet has been
prepared for information purposes only and does not purport to be indicative of
the financial condition that necessarily would have resulted had these
transactions taken place on June 30, 1996.
The following unaudited pro forma condensed consolidated statements of
operations for the ten month period ended December 31, 1995 and for the six
months ended March 31, 1996 give effect to the Company's acquisition of
Milliwave, certain assets of Locate, 65% of TWL, 80% of Fox/Lorber, and the
remaining 51% of Avant-Garde Telecommunications, Inc. ("AGT"), as well as the
Everest Financing and issuance of the Senior and Convertible Notes, as if they
occurred as of the beginning of the respective periods. The following unaudited
pro forma "as adjusted" statements of operations for the ten month period ended
December 31, 1995 and for the six month period ended June 30, 1996 give effect
to these acquisitions and financings as well as to the issuance of Common Stock
in this Offering and the resulting retirement of debt, as if they occurred as of
the beginning of the respective periods. The revenues and results of operations
included in the following unaudited pro forma condensed consolidated statements
of operations are not indicative of anticipated results of operations for
periods subsequent to the acquisitions, financings and the issuance of Common
Stock in this Offering and the resulting retirement of debt, nor are they
considered necessarily to be indicative of the results of operations for the
periods specified had the acquisitions, financings and the issuance of Common
Stock in this Offering and the resulting retirement of debt actually been
completed at the beginning of each respective period.
These financial statements should be read in conjunction with the notes to
the unaudited pro forma condensed consolidated financial statements, which
follow, the consolidated financial statements of the Company and the financial
statements of Milliwave, Locate and AGT and the related notes thereto, appearing
elsewhere in the Prospectus.
F-57
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF JUNE 30, 1996
<TABLE>
<CAPTION>
Pro Forma Pro Forma
Adjustments Adjustments
Increase/ Pro Forma Increase/
(Decrease) As Adjusted (Decrease)
The Company, Milliwave, Locate, for for for the Pro Forma
Historical Historical Historical Acquisitions Acquisitions Conversion As Adjusted
---------- ---------- ---------- ------------ ------------ ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents .... $ 75,600,073 $2,785,800 $ 35,419 $(40,000,000)(b) $ 38,385,873 $ $ 38,385,873
(35,419)(a)
Short term investments ....... 115,460,429 2,000,000 -- 117,460,429 117,460,429
------------ ---------- ----------- ------------ ------------ ---------- ------------
Cash, cash equivalents
and short term investments 191,060,502 4,785,800 35,419 (40,035,419) 155,846,302 -- 155,846,302
Investments in marketable
equity securities ....... 937,500 -- -- 937,500 937,500
Accounts receivable, net ..... 14,905,197 -- 611,828 (611,828)(a) 14,905,197 14,905,197
Notes receivable ............. 214,318 -- -- 214,318 214,318
Inventories .................. 10,924,137 -- 3,402,454 14,326,591 14,326,591
Prepaid expenses and other
current assets ......... 8,888,945 44,929 130,974 (130,974)(a) 8,933,874 8,933,874
------------ ---------- ----------- ------------ ------------ ---------- ------------
Total current assets ...... 226,930,599 4,830,729 4,180,675 (40,778,221) 195,163,782 -- 195,163,782
Property and equipment, net .. 25,788,184 220,671 8,799,170 34,808,025 34,808,025
Notes receivable ............. 385,106 -- -- 385,106 385,106
Investments and advances ..... 399,729 -- -- 399,729 399,729
Licenses, net ................ 12,519,169 415,285 -- 120,083,911(b) 138,605,402 138,605,402
5,587,037(a)
Intangible assets, net ....... 10,061,579 -- -- 10,061,579 10,061,579
Deferred financing costs ..... 11,157,759 -- -- 11,157,759 4,490,000)(c) 6,667,759
Other assets ................. 2,103,036 97,777 85,029 (85,029)(a) 2,200,813 2,200,813
------------ ---------- ----------- ------------ ------------ ---------- ------------
Total assets .............. $289,345,161 $5,564,462 $13,064,874 $84,807,698 $392,782,195 $4,490,000) $388,292,195
============ ========== =========== ============ ============ ========== ============
</TABLE>
F-58
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF JUNE 30, 1996
<TABLE>
<CAPTION>
Pro Forma Pro Forma
Adjustments Adjustments
Increase/ Pro Forma Increase/
(Decrease) As Adjusted (Decrease)
The Company, Milliwave, Locate, for for for the
Historical Historical Historical Acquisitions Acquisitions Conversion
---------- ---------- ---------- ------------ ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Loan payable .................... $ 8,758,076 $ $17,300,000 $17,500,000(a) $ 26,258,076 $
(17,300,000)(a)
Accounts payable and accrued
expenses ....................... 23,738,727 648,373 3,341,735 (3,341,735)(a) 24,387,100
Capitalized lease obligations ... 1,528,811 -- 54,799 1,583,610
------------ ---------- ----------- ---------- ------------ ------------
Total current liabilities ...... 34,025,614 648,373 20,696,534 (3,141,735) 52,228,786 --
Senior notes payable ............ 164,715,601 -- -- 164,715,601
Convertible notes payable ....... 82,357,801 -- -- 82,357,801 (82,357,801)(c)
Other notes payable ............. 3,585,777 25,000 (25,000)(a) 3,585,777
Capitalized lease obligations ... 5,450,617 -- 233,862 5,684,477
------------ ---------- ----------- ---------- ------------ ------------
Total liabilities .............. 290,135,410 648,373 20,955,396 (3,166,735) 308,572,444 (82,357,801)
------------ ---------- ----------- ---------- ------------ ------------
Commitments and contingencies
Stockholders' equity:
Preferred stock ................ 688,900 -- 688,900
Common stock, $.01 par value; 306,943 -- -- 34,000(b) 340,943 39,931(c)
authorized 75,000,000 shares,
issued 30,694,260 and
outstanding 28,037,497 shares,
pro forma issued 34,094,260 and
outstanding 31,437,097 shares,
and pro forma as adjusted issued
38,087,366 and outstanding
35,430,603 shares
Partners' capital ............... 4,916,089 (4,916,089)(b) -- --
Additional paid-in capital ..... 111,186,462 -- -- 84,966,000(b) 196,152,462 77,827,870(c)
Accumulated deficit ............ (70,126,061 -- (7,890,522) 7,890,522(a) (70,126,061)
------------ ---------- ----------- ---------- ------------ ------------
42,056,244 4,916,089 (7,890,522) 87,974,433 127,056,244 77,867,801
Less: Treasury stock .......... (42,733,993 -- -- (42,733,993)
Deferred compensation ......... -- -- -- -- --
Unrealized loss on investment
in marketable securities ..... (112,500) -- -- (112,500)
------------ ---------- ----------- ---------- ------------ ------------
Total stockholders' equity .... (790,249 4,916,089 (7,890,522) 87,974,433 84,209,751 77,867,801
------------ ---------- ----------- ---------- ------------ ------------
Total liabilities and
stockholders' equity ......... $289,345,161 $5,564,462 $13,064,874 84,807,698 $392,782,195 $ (4,490,000)
============ ========== =========== ========== ============ ============
<CAPTION>
Pro Forma
As Adjusted
-----------
<S> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Loan payable .................... $ 26,258,076
Accounts payable and accrued
expenses ....................... 24,387,100
Capitalized lease obligations ... 1,583,610
-------------
Total current liabilities ...... 52,228,786
Senior notes payable ............ 164,715,601
Convertible notes payable ....... --
Other notes payable ............. 3,585,777
Capitalized lease obligations ... 5,684,479
-------------
Total liabilities .............. 226,214,643
-------------
Commitments and contingencies
Stockholders' equity:
Preferred stock ................ 688,900
Common stock, $.01 par value; 380,874
authorized 75,000,000 shares,
issued 30,694,260 and
outstanding 28,037,497 shares,
pro forma issued 34,094,260 and
outstanding 31,437,097 shares,
and pro forma as adjusted issued
38,087,366 and outstanding
35,430,603 shares
Partners' capital ............... --
Additional paid-in capital ..... 273,980,332
Accumulated deficit ............ (70,126,061)
-------------
204,924,045
Less: Treasury stock .......... (42,733,993)
Deferred compensation .........
Unrealized loss on investment
in marketable securities ..... (112,500)
-------------
Total stockholders' equity .... 162,077,552
-------------
Total liabilities and
stockholders' equity ......... $ 388,292,195
=============
</TABLE>
F-59
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
TWL,
Historical,
The Company, Milliwave LP, Locate, January 1 to
Historical Historical Historical April 7, 1996
------------ ------------ ------------ --------------
<S> <C> <C> <C> <C>
Net sales ......................... $ 30,683,587 $ -- $ 2,529,178 $ 455,777
Cost of sales ..................... 17,647,510 -- 1,728,825 367,607
Gross profit ................... 13,036,077 -- 800,353 88,170
------------ ------------ ------------ ------------
Selling, general and
administrative expenses .......... 28,005,469 188,959 872,202 529,421
Depreciation ...................... 834,965 291 1,280,152 9,008
------------ ------------ ------------ ------------
Operating loss .................... (15,804,357) (189,250) (1,352,001) (450,259)
Other (income) expense
Interest expense ............... 18,014,704 -- 960,938 112,205
Interest income ................ (5,657,530) (11,596) (4,784) 000
Amortization of intangibles .... 466,568 -- -- 1,940
------------ ------------ ------------ ------------
Net loss before income taxes ...... (28,628,099) (177,654) (2,308,155) (564,404)
Income taxes ...................... 186,887 -- -- --
------------ ------------ ------------ ------------
Net loss .......................... $(28,814,986) $ (177,654) $(2,308,155) $ (564,404)
============ ============ ============ ============
Net loss per share ................ $ (1.05)
============
Weighted average shares outstanding $ 27,468,186
============
<CAPTION>
Pro Forma
Fox/Lorber, Pro Forma Adjustments
Historical Adjustments Pro Forma Increase/
January 1 Increase/ As Adjusted (Decrease)
to 6 April (Decrease) for for for the Pro Forma
23, 1996 Acquisitions Acquisitions Conversions As Adjusted
-------- ------------ ------------ ----------- -----------
Net sales ......................... $ 2,292,535 $ $35,961,077 $ $ 35,961,077
Cost of sales ..................... 1,447,169 21,191,111 21,191,111
------------ ------------ ------------ ------------ ------------
Gross profit ................... 845,366 14,769,966 14,769,966
Selling, general and
administrative expenses .......... 903,542 30,499,593 30,499,593
Depreciation ...................... 7,000 2,131,416 2,131,416
------------ ------------ ------------ ------------ ------------
Operating loss .................... (65,176) (17,861,043) (17,861,043)
Other (income) expense
Interest expense ............... 21,044 (246,438)(a) 18,862,453 (5,610,790) 13,251,663
Interest income ................ 000 1,040,000(m) (4,633,910) (4,633,910)
Amortization of intangibles .... 1,500 202,785(b) 672,793 672,793
------------ ------------ ------------ ------------ ------------
Net loss before income taxes ...... (87,720) (996,347) (32,762,379) 5,610,790 (27,151,589)
Income taxes ...................... -- 186,887 186,887
------------ ------------ ------------ ------------ ------------
Net loss .......................... $ (87,720) $ (996,347) $(32,949,266) $ 5,610,790 $(27,338,476)
============ ============ ============ ============ ============
Net loss per share ................ $ (1.07) $ (0.79)
============ ============
41,868(g)
Weighted average shares outstanding $ 3,400,000(n) $30,910,054 $ 3,732,643 $ 34,642,696
============ ============ ============ ============
</TABLE>
F-60
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE TEN MONTH PERIOD ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
AGT,
Historical
The Company, Milliwave, March 1 to Locate, TWL,
Historical Historical July 17, 1995 Historical Historical
---------- ---------- ------------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net sales .................................. $ 29,771,472 $ -- $ 17,779 $ 7,090,547 $ 1,381,319
Cost of sales .............................. 19,546,351 -- -- 4,034,803 957,190
------------ ----------- ------------ ------------ ------------
Gross profit ............................... 10,225,121 -- 17,779 3,055,744 424,129
Selling, general and administrative
expenses .................................. 19,266,466 -- 1,704,294 2,582,894 1,470,831
Depreciation ............................... 770,284 -- 59,250 2,784,156 25,000
------------ ----------- ------------ ------------ ------------
Operating loss ............................. (9,811,629) -- (1,745,765) (2,311,306) (1,071,702)
Other (income) expense
Interest expense ......................... 7,630,079 -- -- 1,587,851 244,454
Interest income .......................... (2,889,813) -- -- (11,736) --
Amortization of intangibles .............. 439,888 -- 31,978 -- 7,045
Other expense ............................ -- -- -- -- --
Equity in loss of AGT .................... 865,676 -- -- -- --
------------ ----------- ------------ ------------ ------------
Net loss ................................... $(15,857,459) $ -- $(1,777,743) $ (3,887,421) $ (1,323,201)
============ =========== ============ ============ ============
Net loss per share ......................... $ (0.70)
============
Weighted average shares outstanding ........ 22,769,770
============
<CAPTION>
Pro Forma
Adjustments Pro Forma
Increase/ Pro Forma As Adjustments
(Decrease) for Adjusted for Increase/
Acquisitions Acquisitions (Decrease)
Fox/Lorber, and Prior and Prior for the Pro Forma
Historical Financings Financings Offerings As Adjusted
---------- ---------- ---------- --------- -----------
<S> <C> <C> <C> <C>
Net sales .............................. $ 7,534,876 $ (2,189,994)(c) $ 43,560,999 $ $ 43,560,999
(45,000)(e)
Cost of sales .......................... 5,679,399 (1,568,699)(c) 28,649,044 28,649,044
------------ ------------ ------------ ------------ ------------
Gross profit ........................... 1,855,477 (666,295) 14,911,955 14,911,955
Selling, general and administrative
expenses .............................. 2,296,448 (70,000)(d) 26,554,832 26,554,832
(651,101)(c)
(45,000)(e)
Depreciation ........................... 27,521 (450,786)(c) 3,215,425 3,215,425
------------ ------------ ------------ ------------ ------------
Operating loss ......................... (468,492) 550,592 (14,858,302) (14,858,302)
Other (income) expense
Interest expense ..................... 79,174 (197,782)(a) 30,965,569 (9,341,108)(k) 21,624,461
(239,413)(c)
21,705,785(i)
155,421(j)
Interest income ...................... -- (2,901,549) (2,901,549)
Amortization of intangibles .......... 5,619 399,357(b) 882,950 882,950
(937)(c)
Other expense ........................ 126,188 (21,031)(c) 105,157 105,157
Equity in loss of AGT ................ -- (865,676)(f) -- --
------------ ------------ ------------ ------------ ------------
$ (9,341,108)
============
Net loss ............................... $ (679,473) $(20,385,132) $(43,910,429) $(34,569,321)
============ ============ ============ ============
Net loss per share ..................... $ (1.64) $ (1.14
============ ============
3,400,000(n)
575,000(h)
Weighted average shares outstanding .... 67,433(g) 26,812,203 3,636,378(l) 30,448,581
============ ============ ============ ============
</TABLE>
F-61
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The adjustments below were prepared based on data currently available and
in some cases are based on estimates or approximations. It is possible that the
actual amounts to be recorded may have an impact on the results of operations
and the balance sheet different from that reflected in the accompanying
unaudited pro forma condensed consolidated financial statements. It is therefore
possible that the entries presented below will not be the amounts actually
recorded at the closing date. Deferred income taxes have not been considered in
the pro forma balance sheet because they are not expected to be material at the
time of the consummation of the acquisitions.
Balance Sheet at March 31, 1996
(a) To record the issuance of $17,500,000 in notes payable in payment for
certain assets of Locate, to eliminate assets and liabilities not acquired or
assumed and division deficiency, and to allocate the excess of the purchase
price over the fair value of the assets acquired to the licenses acquired.
(b) To record the acquisition of Milliwave Limited Partnership as follows
Increase/
(Decrease)
----------
Record cash payment to Milliwave partners ................. $ (40,000,000)
Allocate excess purchase price to licenses ................ 120,083,911
-----------
Total asset adjustments .............................. $ 80,083,911
===========
Eliminate Partners' Capital accounts ...................... $ (4,916,089)
Record the issuance of 3,400,000 shares of the
Company's common stock at an assumed price of
$25.00 per share
Common Stock ......................................... 34,000
Additional Paid in Capital ........................... 84,966,000
-----------
Total equity adjustments ................................ $ 80,083,911
===========
The number of WinStar common shares issued is subject to adjustment, depending
on the Company's stock price on the date of closing of the Transaction.
(c) To record the issuance of 3,993,106 shares of Common Stock in this
Offering based on 82,357,801 accreted value of Convertible Notes at June 30,
1996 and the resulting retirement of debt.
Statements of Operations for the Ten Months Ended December 31, 1995
and For the Six Months Ended June 30, 1996
(a) To eliminate interest expense incurred by Locate on liabilities not
assumed by the Company, offset in part by an adjustment to record interest
expense at 8% per annum on a $17.5 million promissory note to be issued by the
Company in connection with the acquisition of certain assets of Locate.
(b) To record amortization of the excess of the purchase price over the
net book value of the assets acquired in the Locate, TWL and Fox/Lorber
transactions.
F-62
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(c) To adjust the historical results of operations to a ten month period.
The historical results of operations reflected in the December 31, 1995
unaudited pro forma condensed consolidated statement of operations for Locate
and Fox/Lorber are for the twelve months ended December 31, 1995 and September
30, 1995, respectively, and these adjustments are made to restate these
historical results for the ten months ended on those respective dates. Had the
historical results of operations and the pro forma adjustments been restated in
all instances to reflect twelve months of activity, the unaudited pro forma
condensed consolidated statement of operations for the year ended December 31,
1995 would reflect net sales of $49.4 million, an operating loss of $16.1
million, and a net loss of $51.5 million.
(d) To eliminate management fee expense incurred by TWL and payable to the
Company.
(e) To eliminate management fees charged by the Company to AGT pursuant to
a management agreement.
(f) To eliminate the Company's proportionate share of AGT's results for
the period, recorded previously under the equity method.
(g) To record shares issued in accordance with the Fox/Lorber acquisition
agreement as being outstanding for the entire period.
(h) To record shares issued in accordance with the AGT merger agreement as
being outstanding for the entire period.
(i) To record interest expense on $225 million in Senior and Convertible
Notes issued in October 1995, bearing interest at 14% per annum compounding
semiannually, as if the Senior and Convertible Notes were issued at the
beginning of the period.
(j) To record interest expense on the Everest Financing as if it occurred
at the beginning of the period.
(k) To eliminate the interest expense recorded on the Convertible Notes,
which bear interest at 14% per annum compounding semiannually, including
amortization of debt offering costs, as if the Notes had been retired as of the
beginning of the respective periods.
(l) To record the issuance of Common Stock upon the conversion of the
Convertible Notes as if such shares were outstanding for the entire respective
periods.
(m) To eliminate interest income, at an assumed rate of 5.2% per annum, on
$40 million cash, assuming such cash was paid at the beginning of the period in
connection with the Milliwave Limited Partnership acquisition.
(n) To record 3,400,000 shares of the Company's Common Stock issued in
connection with the Milliwave Limited Partnership acquisition at an assumed
price of $25.00 per share.
F-63
