AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 14, 1996.
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
FORM S-3
REGISTRATION STATEMENT
UNDER THE
SECURITIES ACT OF 1933
-------------------
WINSTAR COMMUNICATIONS, INC.
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<S> <C> <C>
DELAWARE 4812 13-3585278
(State or other jurisdiction of (Primary standard industrial (I.R.S. Employer
incorporation or organization) classification code number) Identification Number)
</TABLE>
230 PARK AVENUE
NEW YORK, NEW YORK 10169
(212) 687-7577
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive office)
-------------------
WILLIAM J. ROUHANA, JR.
CHIEF EXECUTIVE OFFICER AND CHAIRMAN OF THE BOARD
WINSTAR COMMUNICATIONS, INC.
230 PARK AVENUE
NEW YORK, NEW YORK 10169
(212) 687-7577
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
-------------------
COPIES TO:
<TABLE>
<S> <C>
DAVID ALAN MILLER, ESQ. JERRY V. ELLIOTT, ESQ.
GRAUBARD MOLLEN & MILLER SHEARMAN & STERLING
600 THIRD AVENUE 599 LEXINGTON AVENUE
NEW YORK, NEW YORK 10016 NEW YORK, NEW YORK 10022
TELEPHONE: (212) 818-8800 TELEPHONE: (212) 848-4000
FAX: (212) 818-8881 FAX: (212) 848-7179
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement become effective.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. / /
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
CALCULATION OF REGISTRATION FEE
<TABLE><CAPTION>
PROPOSED MAXIMUM
TITLE OF SECURITIES TO BE AMOUNT TO BE AGGREGATE PRICE PER PROPOSED MAXIMUM AGGREGATE AMOUNT OF
REGISTERED REGISTERED NOTE(*) OFFERING PRICE(*) REGISTRATION FEE
<S> <C> <C> <C> <C>
% Senior Notes due 2006........ $100,000,000 100% $100,000,000 $34,482.76
% Senior Subordinated Notes due
2006........................... $100,000,000 100% $100,000,000 $34,482.76
</TABLE>
(*) Estimated solely for the purpose of calculating the registration fee.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PROSPECTUS (Subject to Completion)
Issued June 14, 1996
$200,000,000
WinStar Communications, Inc.
$100,000,000 % SENIOR NOTES DUE 2006
$100,000,000 % SENIOR SUBORDINATED NOTES DUE 2006
-------------------
THE SENIOR NOTES WILL BEAR INTEREST AT A RATE OF % PER ANNUM AND THE SENIOR
SUBORDINATED NOTES WILL BEAR INTEREST AT A RATE OF % PER ANNUM, IN EACH CASE
PAYABLE SEMI-ANNUALLY IN CASH BEGINNING JANUARY , 2002.
THE NOTES WILL BE REDEEMABLE, AT THE OPTION OF THE COMPANY, IN WHOLE AT ANY TIME
OR IN PART FROM TIME TO TIME, ON OR AFTER JULY , 2001, AT THE REDEMPTION
PRICES SET FORTH HEREIN.
THE SENIOR NOTES WILL BE UNSECURED, UNSUBORDINATED OBLIGATIONS OF THE COMPANY,
WILL RANK PARI PASSU IN RIGHT OF PAYMENT WITH ALL EXISTING AND FUTURE UNSECURED,
UNSUBORDINATED OBLIGATIONS OF THE COMPANY AND WILL BE SENIOR IN RIGHT OF PAYMENT
TO ALL EXISTING AND FUTURE SUBORDINATED INDEBTEDNESS OF THE COMPANY. THE SENIOR
SUBORDINATED NOTES WILL BE UNSECURED, SENIOR SUBORDINATED OBLIGATIONS OF THE
COMPANY AND WILL BE JUNIOR IN RIGHT OF PAYMENT TO ALL EXISTING AND FUTURE SENIOR
INDEBTEDNESS OF THE COMPANY. AT MARCH 31, 1996, ON A PRO FORMA AS ADJUSTED BASIS
GIVING EFFECT TO THE TRANSACTIONS (AS DEFINED), THE COMPANY WOULD HAVE HAD
APPROXIMATELY $477.4 MILLION OF INDEBTEDNESS, INCLUDING CAPITALIZED LEASE
OBLIGATIONS, OF WHICH $297.8 MILLION WOULD HAVE BEEN SENIOR INDEBTEDNESS AND NO
INDEBTEDNESS SUBORDINATED TO THE SENIOR SUBORDINATED NOTES. THE COMPANY IS A
HOLDING COMPANY AND THE NOTES WILL BE EFFECTIVELY SUBORDINATED TO ALL
LIABILITIES OF THE COMPANY'S SUBSIDIARIES, INCLUDING TRADE PAYABLES. AT MARCH
31, 1996, ON THE SAME PRO FORMA AS ADJUSTED BASIS, THE COMPANY'S SUBSIDIARIES
WOULD HAVE HAD APPROXIMATELY $56.7 MILLION OF LIABILITIES. THE COMPANY MAY INCUR
SUBSTANTIAL AMOUNTS OF INDEBTEDNESS IN THE FUTURE.
CONCURRENTLY WITH THE DEBT OFFERING, THE COMPANY WILL MAKE A PUBLIC OFFERING OF
4 MILLION SHARES OF ITS COMMON STOCK.
-------------------
SEE "RISK FACTORS" BEGINNINNG 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.
-------------------
SENIOR NOTES DUE 2006 PRICE % AND ACCRUED INTEREST
SENIOR SUBORDINATED NOTES DUE 2006 PRICE % AND ACCRUED INTEREST
-------------------
<TABLE><CAPTION>
PRICE TO UNDERWRITING DISCOUNTS PROCEEDS TO
PUBLIC(1) AND COMMISSIONS(2) COMPANY(1)(3)
-------- ---------------------- -------------
<S> <C> <C> <C>
Per Senior Note................................. % % %
Total......................................... $ $ $
Per Senior Subordinated Note.................... % % %
Total......................................... $ $ $
</TABLE>
- ------------
(1) Plus accrued interest on the Notes from , 1996.
(2) The Company has agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act of 1933. See
"Underwriter."
(3) Before deducting expenses payable by the Company estimated at $425,000.
-------------------
The Notes are offered, subject to prior sale, when, as and if accepted by
the Underwriter and subject to approval of certain legal matters by Shearman &
Sterling, counsel for the Underwriter. It is expected that delivery of the Notes
will be made on or about , 1996, at the office of Morgan Stanley & Co.
Incorporated, New York, N.Y., against payment therefor in immediately available
funds.
-------------------
MORGAN STANLEY & CO.
Incorporated
, 1996
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
[WINSTAR (*) LOGO]
- -------------------------
COMMUNICATIONS, INC.
WINSTAR WIRELESS 38 GHZ FOOTPRINT
[MAP]
[ ] 100 MHz License
[ ] 400 MHz License
[ * Over 100 cities with populations over 100,000 ]
[ * Largest multiple channel holder with 4 channels ]
[ in the top 30 markets ]
[ * Over 400 million channel pops ]
[ * FCC freeze in place while moving to possible
auction ]
WINSTAR PLANNED SWITCH
COVERAGE IN NEXT THREE YEARS
[MAP]
[ * 10 Planned Switch Sites ]
[ * 31 Planned Remote Notes ]
[ ( ) Switch and Remote Node Groupings]
[ Winstar intends to provide ]
[ telecom series to licensed ]
[ cities within these circles, ]
[ including more than 100 cities ]
[ with populations exceeding ]
[ 100,000. ]
<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 THE UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY SECURITY OTHER THAN THE NOTES 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.
-------------------
FOR CALIFORNIA RESIDENTS
WITH RESPECT TO SALES OF THE NOTES BEING OFFERED HEREBY TO CALIFORNIA
RESIDENTS, AS OF THE DATE OF THIS PROSPECTUS, SUCH NOTES MAY BE SOLD ONLY TO:
(1) "ACCREDITED INVESTORS" WITHIN THE MEANING OF REGULATION D UNDER THE
SECURITIES ACT OF 1933, (2) BANKS, SAVINGS AND LOANS ASSOCIATIONS, TRUST
COMPANIES, INSURANCE COMPANIES, INVESTMENT COMPANIES REGISTERED UNDER THE
INVESTMENT COMPANY ACT OF 1940, PENSION AND PROFIT-SHARING TRUSTS, CORPORATIONS
OR OTHER ENTITIES WHICH, TOGETHER WITH THE CORPORATION'S OR OTHER ENTITY'S
AFFILIATES WHICH ARE UNDER COMMON CONTROL, HAVE A NET WORTH ON A CONSOLIDATED
BASIS ACCORDING TO THEIR MOST RECENT REGULARLY PREPARED FINANCIAL STATEMENTS
(WHICH SHALL HAVE BEEN REVIEWED, BUT NOT NECESSARILY AUDITED, BY OUTSIDE
ACCOUNTANTS) OF NOT LESS THAN $14,000,000 AND SUBSIDIARIES OF THE FOREGOING, (3)
ANY PERSON (OTHER THAN A PERSON FORMED FOR THE SOLE PURPOSE OF PURCHASING NOTES
OFFERED HEREBY) WHO PURCHASES AT LEAST $1,000,000 AGGREGATE AMOUNT OF THE NOTES
OFFERED HEREBY OR (4) ANY PERSON WHO (A) HAS AN INCOME OF $65,000 AND A NET
WORTH OF $250,000, OR (B) HAS A NET WORTH OF $500,000 (IN EACH CASE, EXCLUDING
HOME, HOME FURNISHINGS AND PERSONAL AUTOMOBILES). EACH CALIFORNIA RESIDENT
PURCHASING THE NOTES OFFERED HEREBY WILL BE DEEMED TO REPRESENT BY SUCH PURCHASE
THAT IT COMES WITHIN ONE OF THE AFOREMENTIONED CATEGORIES AND THAT IT WILL NOT
SELL OR OTHERWISE TRANSFER SUCH NOTES TO A CALIFORNIA RESIDENT UNLESS THE
TRANSFEREE COMES WITHIN ONE OF THE AFOREMENTIONED CATEGORIES AND THAT IT WILL
ADVISE THE TRANSFEREE OF THIS CONDITION WHICH TRANSFEREE, BY BECOMING SUCH, WILL
BE DEEMED TO BE BOUND BY THE SAME RESTRICTIONS ON RESALE.
-------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE NOTES AT LEVELS
ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING,
IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
The indentures pursuant to which the Senior Notes and the Senior
Subordinated Notes will be issued will require the Company, and the Company
intends, to distribute to the registered holders of the Notes, annual reports
containing audited consolidated financial statements and a report thereon by the
Company's independent public accountants and quarterly reports containing
unaudited condensed consolidated financial data for the first three quarters of
each fiscal year.
3
<PAGE>
TABLE OF CONTENTS
<TABLE><CAPTION>
PAGE PAGE
---- ----
<S> <C> <S> <C>
Incorporation of Certain Documents by Management............................ 66
Reference............................. 4 Principal Stockholders................ 70
Prospectus Summary.................... 5 Description of the Notes.............. 72
Risk Factors.......................... 15 Description of Certain Indebtedness... 102
Use of Proceeds....................... 29 Certain United States Federal Income
Capitalization........................ 31 Tax Considerations.................... 105
Selected Financial Data............... 32 Underwriter........................... 111
Management's Discussion and Analysis Legal Matters......................... 111
of Financial Condition and Results Experts............................... 111
of Operations....................... 34 Available Information................. 112
Business.............................. 42 Index to Consolidated Financial
Statements............................ F-1
</TABLE>
-------------------
Concurrently with this offering of the Notes (the "Debt Offering" or
"Offering"), the Company is making a public offering of its Common Stock (the
"Stock Offering") as described herein under "Prospectus Summary -- The
Company -- Financing Plan." The closings of the Debt Offering and Stock Offering
are conditioned upon each other. The Debt Offering and the Stock Offering are
referred to herein together as the "Offerings."
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 (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 quarter ended March 31, 1996;
and
(3) Proxy Statement dated May 3, 1996.
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.
WIRELESS FIBERSM IS A SERVICE MARK OF WINSTAR COMMUNICATIONS, INC.
4
<PAGE>
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. Unless otherwise indicated, (i) the
information in this Prospectus, other than the historical financial information,
assumes and gives effect to the Debt Offering and the Stock Offering; (ii) the
information in this Prospectus does not give effect to the exercise of the U.S.
Underwriters' over-allotment option in the Stock Offering; and (iii) references
herein to the "Company," "WinStar" or "WCI" 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. Beginning in
the third quarter of 1996, the Company plans to offer Internet access services.
The Company utilizes its Wireless FiberSM 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. 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. 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. 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.
5
<PAGE>
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 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 service. Since October
1995, the number of customers utilizing the Company's Wireless Fiber-based
services has increased significantly and include companies such as Ackley
Communications, Inc., American Communication Services, Inc., Cellular One, Reed
Elsevier PLC, Siemans Stromberg-Carlson 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")) and Century Telephone Enterprises, Inc. ("Century
Telephone"), under which such companies are expected to utilize the Company's
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 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 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
connected via Wireless Fiber links to end user customers and fiber optic
facilities leased or purchased from other carriers. 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 buildings the Company is initially targeting each have more than
100,000 square feet of space and 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. The Company expects to make capital expenditures of $34 million during
the last nine months of 1996 and $212 million during 1997 in connection with the
development of its CLEC business.
6
<PAGE>
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 it is anticipated that the Company
will begin offering such services in at least five 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 such time that 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 10 main
switches and 31 remote nodes during the next three years and plans to install
its first main switch in New York City by October 1996. The Company is hiring
sales and marketing personnel to commence marketing efforts that 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
between such buildings and wired networks. By utilizing its Wireless Fiber
services to originate and terminate customer traffic without connecting to end
users through the extension of 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 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
the marketing of 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");
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.
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 within
an area covered by the Wireless Licenses 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
7
<PAGE>
described below under "--Recent Developments -- Agreement with Digex") and is
actively pursuing relationships with additional Internet service providers.
Exploiting Position as First to Market and Leading Spectrum Holder. 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.
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 hired
David Schmieg, the former president of the Consumer Division of Sprint
Corporation ("Sprint"), to supervise the rollout of the Company's CLEC business,
and 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, Connecticut, Florida, Illinois, Massachusetts, New York,
Tennessee, Texas and Washington; is in the process of seeking authorization to
operate as a CLEC in six additional states; and intends to seek such
8
<PAGE>
authorization in nine additional states during 1996. 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.
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. As of May 31, 1996, the Company has secured Roof Rights on
more than 280 buildings. Further, the Company, in consultation with existing and
potential customers, has identified more than 2,200 additional buildings in the
metropolitan areas covered by the Wireless Licenses for which it is in the
process of seeking Roof Rights.
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 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 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. In April 1996, the Company entered into an agreement
to acquire (the "Locate Acquisition") the assets of Local Area
Telecommunications, Inc. ("Locate") comprising its 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. The Locate Acquisition is subject to certain regulatory approvals, but
is expected to be consummated in the last quarter of 1996. 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 will acquire
from Locate certain link-specific licenses for the provision of point-to-point
services in the 12-, 16- and 18-GHz portion of the radio spectrum.
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, in April 1996,
9
<PAGE>
the Company acquired a 65% 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 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. SportsFan owns and operates The Pete Rose
Show and The Bob Golic 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.
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 ("Old Senior Notes") and one 14% Convertible Senior Subordinated
Discount Note due 2005 ("Old Convertible Notes," and together with the Old
Senior Notes, the "Old Notes").
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. 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 Company's accelerated strategy, the Company now plans capital
expenditures of $50 million and $280 million for 1996 and 1997, respectively.
Concurrently with this Debt Offering, the Company will consummate the Stock
Offering, consisting of a public offering of 4,000,000 shares of Common Stock,
all of which are being sold by the Company. The closings of the Debt Offering
and the Stock Offering are conditioned upon each other. Management anticipates,
based on current plans and assumptions relating to its operations, that the net
proceeds from the Offerings, together with 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 36 to 48 months following
consummation of the Offerings. In the event the Company's plans or assumptions
change or prove to be inaccurate, or if the Company successfully consummates any
acquisitions (including additional 38 GHz licenses, by auction or otherwise), or
if the Company's operating income does not significantly increase, 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."
10
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Securities Offered........................... $100,000,000 % Senior Notes due 2006 (the
"Senior Notes") and $100,000,000 % Senior
Subordinated Notes due 2006 (the "Senior
Subordinated Notes" and, together with the
Senior Notes, the "Notes").
Maturity..................................... July , 2006.
Yield and Interest........................... The Senior Notes will bear interest at a rate
of % per annum and the Senior Subordinated
Notes will bear interest at a rate of %
per annum. There will not be any payment of
interest on the Notes prior to January ,
2002. For a discussion of the federal income
tax treatment of the Notes under the original
issue discount rules, see "Certain United
States Federal Income Tax Consequences."
Until July , 2001, interest on the Notes
will accrue and be compounded semi-annually
but will not be payable in cash. From and
after July , 2001, interest on the sum of
the principal amount of each Note and accrued
but unpaid interest thereon will be payable
semi-annually in cash on July and January
of each year, commencing January , 2002.
See "Description of the Notes--General."
Optional Redemption.......................... On and after July , 2001, the Senior Notes
and the Senior Subordinated Notes will be
redeemable, at the option of the Company, in
whole at any time or in part from time to
time, at the redemption prices set forth
herein. See "Description of the
Notes--Optional Redemption."
Change of Control............................ Upon a Change of Control (as defined below),
the Company is required to make an offer to
purchase the Notes at a purchase price equal
to 101% of their principal amount plus
accrued interest, if any. See "Description of
the Notes--Repurchase of Notes upon a Change
of Control."
Ranking...................................... The Senior Notes will be unsecured,
unsubordinated indebtedness of the Company,
will rank pari passu in right of payment with
all existing and future unsecured,
unsubordinated indebtedness of the Company
and will be senior in right of payment to all
existing and future subordinated indebtedness
of the Company, including the Senior
Subordinated Notes and the Old Convertible
Notes. The Senior Subordinated Notes will be
unsecured, senior subordinated indebtedness
of the Company and will be junior in right of
payment to all existing and future
unsubordinated indebtedness of the Company,
including the Senior Notes and the Old Senior
Notes. At March 31, 1996, on a pro forma as
adjusted basis giving effect to the Transactions
(as defined), the Company would have had
approximately $477.4 million of indebtedness,
including capitalized lease obligations,
$297.8 million of which would have been
senior indebtedness, of which $20.6 million
would have been secured by substantially all
of the assets of the Company and its
subsidiaries, and there would
</TABLE>
11
<PAGE>
<TABLE>
<S> <C>
have been no indebtedness junior to the
Senior Notes, except for the Senior
Subordinated Notes and the Old Convertible
Notes. The Company is a holding company and
the Notes will be effectively subordinated to
all liabilities of the Company's
subsidiaries, including trade payables. At
March 31, 1996, on the same pro forma as
adjusted basis, the Company's subsidiaries
would have had approximately $56.7 million of
liabilities (except intercompany payables to
the Company or any of its subsidiaries). The
Senior Notes will rank pari passu in right of
payment with the Old Senior Notes, and the
Senior Subordinated Notes will rank pari
passu in right of payment with the Old
Convertible Notes. The Company may incur
substantial amounts of additional
indebtedness in the future. See "Risk
Factors--Substantial Indebtedness; Ability to
Service Indebtedness."
Certain Covenants............................ The Indentures under which the Notes will be
issued (the "Indentures") will contain
certain covenants which, among other things,
will restrict the ability of the Company and
its Restricted Subsidiaries (as defined
below) 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 Restricted Subsidiaries; enter
into transactions with stockholders or
affiliates; acquire assets or businesses not
constituting Telecommunications Assets (as
defined below); 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 subsidiaries will
be classified as Unrestricted Subsidiaries
(as defined below) and, therefore, will not
be subject to these covenants, although the
Company's ability to invest in Unrestricted
Subsidiaries will be limited. See
"Description of the Notes--Covenants."
Use of Proceeds.............................. The Company intends to use the net proceeds
of the Offerings (together with funds raised
in the 1995 Debt Placement) for the expansion
of its telecommunications operations in
multiple markets, including the purchase of
switching equipment, customer site equipment
and related software, the acquisition of Roof
Rights, the hiring of sales, marketing,
engineering and customer service personnel,
the development of operating and management
systems, acquisitions (including additional
38 GHz licenses, by auction or otherwise),
other capital expenditures and for working
capital and general corporate purposes,
including the funding of operating losses. As
a complement to its telecommunications
service offerings, the Company also may use a
portion of the proceeds of the Offerings to
acquire rights to, develop and control
certain information and entertainment content
and services. See "Use of Proceeds."
</TABLE>
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 three months ended
March 31, 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 THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
----------------------------------------- --------------------------
YEAR ENDED PRO
FEBRUARY 28, ACTUAL PRO FORMA AS ACTUAL PRO
---------------- ----------------- FORMA ADJUSTED ---------------- FORMA
1994 1995 1994 1995 1995(1)(2) 1995(2)(3) 1995 1996(4) 1996(1)
------ ------- ------- ------- ---------- -------- ------ ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales:
Telecommunications(5).......... $8,505 $14,909 $13,420 $13,136 $ 19,266 $19,266 $2,219 $10,217 $11,433
Information services........... -- 474 193 2,648 10,308 10,308 844 771 2,942
Merchandising.................. 7,120 10,182 8,405 13,987 13,987 13,987 3,095 3,521 3,521
------ ------- ------- ------- ---------- -------- ------ ------- -------
Total net sales.............. 15,625 25,565 22,018 29,771 43,561 43,561 6,158 14,509 17,896
Operating income (loss):
Telecommunications (744) (3,423) (2,067) (6,945) (10,599) (10,599 ) (1,381) (2,917) (3,626)
Information services........... -- (117) (115) 238 (1,154) (1,154 ) 66 (30) (452)
Merchandising.................. 223 307 329 756 756 756 79 100 100
General corporate.............. (1,547) (2,378) (1,609) (3,861) (3,861) (3,861 ) (1,033) (1,771) (1,771)
------ ------- ------- ------- ---------- -------- ------ ------- -------
Total operating loss......... (2,068) (5,611) (3,462) (9,812) (14,858) (14,858 ) (2,269) (4,618) (5,749)
Interest expense................ 744 637 505 7,630 30,645 54,853 184 8,815 8,966
Interest income................. (109) (385) (297) (2,890) (2,581) (2,581 ) (125) (3,057) (2,737)
Other expenses, net............. 5,687 1,367 948 1,305 988 988 599 194 446
Net loss........................ (8,195) (7,230) (4,618) (15,857) (43,910) (68,118 ) (2,927) (10,699) (12,424)
Net loss per common share....... $(1.06) $ (0.42) $ (0.28) $ (0.70) $ (1.88) $ (2.48 ) $(0.15) $ (0.39) $ (0.46)
Weighted average common shares
outstanding..................... 7,719 17,122 16,609 22,770 23,412 27,412 19,935 27,214 27,282
OTHER FINANCIAL DATA:
Capital expenditures............ $ 307 $ 1,816 $ 1,465 $ 8,652 $ 12,310 $12,310 $ 555 $ 2,588 $ 2,671
EBITDA(6)....................... (1,845) (5,179) (3,116) (8,952) (11,554) (11,554 ) (2,138) (3,771) (4,250)
<CAPTION>
PRO
FORMA AS
ADJUSTED
1996(3)
--------
<S> <C>
STATEMENT OF OPERATIONS DATA:
Net sales:
Telecommunications(5).......... $11,433
Information services........... 2,942
Merchandising.................. 3,521
--------
Total net sales.............. 17,896
Operating income (loss):
Telecommunications (3,626 )
Information services........... (452 )
Merchandising.................. 100
General corporate.............. (1,771 )
--------
Total operating loss......... (5,749 )
Interest expense................ 16,039
Interest income................. (2,737 )
Other expenses, net............. 318
Net loss........................ (19,497 )
Net loss per common share....... $ (0.62 )
Weighted average common shares
outstanding..................... 31,282
OTHER FINANCIAL DATA:
Capital expenditures............ $ 2,671
EBITDA(6)....................... (4,250 )
<CAPTION>
AS OF MARCH 31, 1996
------------------------------------------
PRO FORMA
ACTUAL PRO FORMA(7) AS ADJUSTED(8)
-------- ------------ --------------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short term investments................... $203,503 $203,665 $501,337
Property and equipment, net......................................... 18,089 27,861 27,861
Total assets........................................................ 280,473 308,261 613,858
Current portion of long-term debt and capital lease obligations..... 10,314 28,621 28,621
Long-term debt and capital lease obligations, less current portion
and discount........................................................ 248,037 248,441 448,441
Stockholders' equity................................................ 10,952 12,122 116,870
</TABLE>
(footnotes begin on next page)
13
<PAGE>
- ------------
(1) Gives effect to the acquisitions of Locate, Fox/Lorber, TWL and Avant-Garde
Telecommunications, Inc. ("Avant-Garde"), 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 Old 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.
(2) On a pro forma basis giving effect to the acquisitions and financings
described in footnote (1) above, 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. On a pro forma as adjusted basis
giving effect to the acquisitions and financings described in footnote (1)
above, and the issuance of the Notes, interest expense and net loss for the
twelve months ended December 31, 1995 amounted to approximately $66.5
million and $80.7 million, respectively.
(3) Adjusted to reflect the acquisitions and financings referred to in footnote
(1) above and the Stock Offering and Debt Offering (collectively, the
"Transactions") as if they occurred as of the beginning of the respective
periods. Interest expense has been adjusted to include approximately $24.2
million and $7.1 million consisting of (i) interest on the Notes for the ten
months ended December 31, 1995 and the three months ended March 31, 1996,
respectively, at an assumed interest rate of 13.5% on the Senior Notes and
14% on the Senior Subordinated Notes and (ii) amortization of the $7.9
million of debt offering costs and other related fees using an amortization
period of ten years, but not to include interest income earned on additional
available cash. If the interest rate on the Notes changed by 0.5%, interest
expense would change by approximately $0.9 million and $0.3 million for the
ten months ended December 31, 1995 and the three months ended March 31,
1996, respectively.
(4) In the first quarter 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 substantial majority of which related to minutes of use
during that quarter.
(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 (see footnote (3) to "Selected
Financial Data"). 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 Locate, Fox/Lorber and TWL as if they
occurred on March 31, 1996.
(8) Adjusted to reflect the acquisitions referred to in footnote (7) above, and
the Stock Offering (at an assumed offering price of $27.75 per share) and
Debt Offering as if they occurred on March 31, 1996.
14
<PAGE>
RISK FACTORS
An investment in the Notes involves a significant degree of risk. In
determining whether to make an investment in the Notes, 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 $10.7 million and
$3.8 million, respectively, for the three months ended March 31, 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. 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,
including the Notes. See "Selected Financial Data" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
SUBSTANTIAL INDEBTEDNESS; ABILITY TO SERVICE INDEBTEDNESS
At March 31, 1996, on a pro forma as adjusted basis giving effect to the
Transactions, the Company would have had, on a consolidated
basis, approximately $477.4 million of indebtedness, including capitalized lease
obligations. The accrual of interest on the Notes and the accretion of original
issue discount on the Old Notes will significantly increase the Company's
liabilities (except to the extent that the Old Convertible Notes are converted
to Common Stock). Although the net proceeds from the Offerings are expected to
further enhance liquidity and improve the Company's financial flexibility in the
near term, the Company has significant indebtedness and interest expense as a
result of the 1995 Debt Placement, which will be substantially increased as a
result of the Debt Offering. The indentures under which the Old Senior Notes and
the Old Convertible Notes were issued (the "Old Note Indentures") limit, but do
not prohibit, and the Indentures will limit, but will not prohibit, the
incurrence of additional indebtedness by the Company and subsidiaries.
Additionally, the Old Note Indentures do not, and the Indentures will 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 combined debt service requirements of the Old
Notes and the Notes could make it more difficult for the Company to make
payments on the Old Notes and Notes; (ii) 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; (iii) 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; (iv) the Company's
level of indebtedness could limit its flexibility in planning for, or reacting
to changes in, its business; (v) the Company is more highly leveraged than many
of its competitors, which may place it at a competitive disadvantage; and (vi)
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.
15
<PAGE>
The Company had net losses and negative EBITDA during the ten months ended
December 31, 1995 (and prior fiscal years) and the first three 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 as adjusted basis after giving effect to the Transactions, the
Company's earnings before fixed charges would have been insufficient to cover
fixed charges by approximately $68.1 million and $19.4 million, respectively. In
addition, for the same periods on the same pro forma as adjusted basis, the
Company's EBITDA minus capital expenditures and interest expense would have been
negative $78.7 million and negative $23.0 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, including its obligations with
respect to the Notes. 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
delay or preclude payments on the Notes. 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 the Notes" and "Description of Certain Indebtedness."
HOLDING COMPANY STRUCTURE; RANKING OF THE NOTES, SECURED INDEBTEDNESS
The Company is a holding company and its only material assets consist of the
common stock of its operating subsidiaries and the proceeds raised from certain
private placements of equity and debt securities, all of which the Company has
loaned or contributed or intends to loan or contribute to its subsidiaries. The
Company must rely upon dividends and other payments from its subsidiaries to
generate the funds necessary to meet its obligations, including the payment of
principal of and interest on the Notes. The subsidiaries, however, are legally
distinct from the Company and have no obligation, contingent or otherwise, to
pay amounts due pursuant to the indebtedness, including such indebtedness
evidenced by the Notes or to make funds available for such payment. The
Company's subsidiaries have not guaranteed the Notes. The ability of the
Company's subsidiaries to make such payments to the Company is subject to, among
other things, the availability of funds, the terms of such subsidiaries'
indebtedness and applicable state laws. In particular, the Company's
subsidiaries have entered into credit facilities, which are guaranteed in part
by the Company, certain of which prohibit or restrict the payment of dividends
or other funds by those subsidiaries to the Company. Since the Company's new
media and consumer products subsidiaries are not subject to the covenants
contained in the Indentures, they may in the future incur indebtedness that
prohibits or limits payments by such subsidiaries to the Company. In addition,
the Company has entered into an agreement with a lender to WinStar Gateway (as
defined below) that requires the Company to make periodic capital contributions
to WinStar Gateway to fund WinStar Gateway's net losses and capital
expenditures. Claims of creditors of the Company's subsidiaries, including trade
creditors, will generally have priority as to the assets of such subsidiaries
over the claims of the Company and the holders of the Company's indebtedness,
including the Notes. Accordingly, the Notes are and will be effectively
subordinated to all liabilities (including trade payables) of the subsidiaries
of the Company. At March 31, 1996, on a pro forma as adjusted basis giving
effect to the Transactions, the subsidiaries of the Company would have had
approximately $56.7 million of liabilities (excluding intercompany payables to
the Company), including $38.6 million of indebtedness. See "Description of the
Notes."
The Notes will be unsecured indebtedness of the Company. At March 31, 1996,
on a pro forma as adjusted basis giving effect to the Transactions, the Company
would have had an aggregate of approximately $477.4 million of indebtedness,
including capitalized lease obligations, $20.6 million of
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which were secured by liens on substantially all of the Company's assets. In the
event such secured indebtedness goes into default and the holders thereof
foreclose on the collateral, the holders of secured indebtedness will be
entitled to payment out of the proceeds of their collateral prior to any holders
of general unsecured indebtedness, including the Notes, notwithstanding the
existence of any event of default with respect to the Notes. The Old Note
Indentures also permit, and the Indentures will permit, the Company to incur
additional secured indebtedness and to grant additional liens. In the event of
bankruptcy, liquidation or reorganization of the Company, holders of secured
indebtedness will have a claim, prior to the claim of the holders of the Notes,
on the assets of the Company securing such indebtedness. In addition, to the
extent that the value of such collateral is insufficient to satisfy such secured
indebtedness, holders of amounts remaining outstanding on such secured
indebtedness (as well as other unsubordinated creditors of the Company) are
entitled to share pari passu with the Old Senior Notes and Senior Notes with
respect to any other assets of the Company. Assets remaining after satisfaction
of the claims of holders of secured indebtedness may not be sufficient to pay
all or any portion of amounts due on the Notes then outstanding.
In addition, the Senior Subordinated Notes are subordinated to all senior
indebtedness of the Company, including indebtedness under the Senior Notes, the
Old Senior Notes and its guarantees under the Equipment Lease Financing, the
Everest Notes, the Century Credit Facility and the CIT Credit Facility (each as
defined in "Description of Certain Indebtedness"). Therefore, in the event of
bankruptcy, liquidation or reorganization of the Company, the assets of the
Company will be available to pay obligations on the Senior Subordinated Notes
only after all senior indebtedness has been paid in full, and there may not be
sufficient assets remaining to pay amounts due on the Senior Subordinated Notes.
At March 31, 1996, on a pro forma as adjusted basis giving effect to the
Transactions, the amount of outstanding senior indebtedness of the Company would
have been approximately $297.8 million. See "Description of the Notes --
Ranking."
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 implementation of its plan simultaneously in multiple markets. The
Company currently does not have any local exchange services facilities in place,
but plans to install its first main switch by 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. 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
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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 leased local
networks, including through the installation of Wireless Fiber links and build
out of other facility infrastructure, in advance of generating material
revenues. The Company has budgeted $34 million for the last nine months of 1996
and $212 million for 1997 for capital expenditures for the development of its
CLEC business.
Given the opportunities arising from recent procompetitive legislative and
regulatory initiatives, numerous other companies are entering the CLEC business.
The Company believes that successful CLECs will need to establish their
infrastructure and commence operations over a limited period of time.
Accordingly, the Company is subject to the risk that its competitors will
establish their CLEC businesses before the Company and will have substantial
"first to market" advantages.
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. The Company does not expect to generate
significant revenues from its CLEC business during 1996. The Company's failure
to implement its CLEC strategy successfully would have an adverse effect on the
Company's operations. 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 such time
that 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 occasionally has provided
complementary service on a trial basis. The Company expects to improve operating
margins in the provision of its CAP services over time by (i) acquiring
appropriate sites for its operations, (ii) capturing and retaining an adequate
customer base, (iii) placing telecommunications traffic of new customers and
additional telecommunications traffic of existing customers across Wireless
Fiber links previously installed to address such existing customers' initial
requirements, thereby increasing revenues without a significant increase in
related hardware expense and Roof Rights costs, (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 capturing 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 Company's ability to service its debt, including the
Notes. For a
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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."
LIMITED OPERATING HISTORY IN TELECOMMUNICATIONS INDUSTRY
The Company shifted its business focus in 1992 from marketing consumer
products to providing telecommunications services 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 revenues
generated by the Company's CAP and CLEC operations have totaled less than $1
million. 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."
PAYMENTS DUE ON OTHER INDEBTEDNESS PRIOR TO MATURITY OF NOTES; REFINANCING RISK
At March 31, 1996, on a pro forma basis giving effect to the Transactions
other than this Offering, an aggregate of approximately $277.4 million of
indebtedness was outstanding which matures prior to July 2006, which the Company
does not expect to be able to repay from operating cash flow. In addition, the
accretion of original issue discount on the Old Notes from March 31, 1996 until
October 2000 will increase the Company's liabilities by $202.5 million (unless
the Convertible Notes are converted). The Company anticipates incurring
substantial additional indebtedness, which could place additional payment
obligations on the Company prior to such time. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources" and notes 15, 16, 17 and 18 to the Company's Consolidated
Financial Statements. The Company believes that its existing financial resources
and the proceeds from the Offerings will provide sufficient funds necessary for
the Company to expand its business as planned and to fund its operating expenses
for the next 36 to 48 months, at which time the Company anticipates it will
require additional funds to further expand its business. Accordingly, the
Company may have to refinance a substantial amount of indebtedness prior to July
2006. The Company's ability to do so will depend on, among other things, its
financial condition at the time, the restrictions in the instruments governing
its indebtedness and other factors, including market conditions, beyond the
control of the Company. There can be no assurance that the Company will be able
to refinance such indebtedness or obtain such additional funds. If the Company
is unable to effect such refinancings or obtain additional funds, the Company's
ability to make payments on the Notes would be adversely affected. See
"Description of the Notes" and "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
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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 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, 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.
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 Group Inc.
("IntelCom"), MCImetro, MFS Communications Company, Inc. ("MFS"), Teleport
Communications Group Inc. ("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 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 in order to 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 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,
and 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. 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 Corp. ("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 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.
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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
stronger competitors to the Company. For example, Time Warner recently entered
into a nine-state interconnection agreement with Bell South. There can be no
assurance that the Company will be able to compete effectively in any of its
markets.
The Company's Internet access services also are likely to face competition
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 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 access business.
Further, Internet access services based on existing technologies such as ISDN
and, in the future, on 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 LECs and CLECs already are
promoting other Internet access 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 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 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 also
will become significant competitors in the long distance telecommunications
industry. 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 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."
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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 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."
RISKS ASSOCIATED WITH RAPID EXPANSION
The Company intends to pursue a strategy of aggressive and rapid growth,
including the accelerated rollout of its CLEC services, 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. As part of its strategy, the Company may from time to time seek to
acquire complementary assets or businesses and may use a portion of the proceeds
from the Offerings for such acquisitions. There can be no assurance that the
Company will be able to successfully integrate into its operations any business
or assets which it may acquire. See "Use of Proceeds" and "Business -- Strategy
for Telecommunications Business Growth."
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 38
GHz 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 requirements and the Company has
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undertaken the Stock Offering and Debt Offering to address these increased
requirements. Management anticipates, based on current plans and assumptions
relating to its operations, that the net proceeds from the Stock Offering and
Debt Offering, together with 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 36 to 48 months following consummation of the
Offerings. 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 successfully
consummates any acquisitions (including additional 38 GHz licenses, by auction
or otherwise), or if the Company's operating income does not significantly
increase, 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 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 make interest and principal
payments on the Notes. 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. 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). 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 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
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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.
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 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 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,
Connecticut, Florida, Illinois, Massachusetts, New York, Tennessee, Texas and
Washington, 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 control and the adequate provision of customer service. See "Business
- -- Telecommunications Industry Overview," "-- Government Regulation of
Telecommunications Operations" and "-- Competition in the Telecommunications
Industry."
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FINITE INITIAL TERM OF WIRELESS LICENSES; POTENTIAL LICENSE RENEWAL COSTS;
FLUCTUATIONS IN THE VALUE OF WIRELESS LICENSES
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 a matching ten-year 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.
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.
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. Values of
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. 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 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. See "Business --
Telecommunications Industry Overview."
CERTAIN FINANCIAL AND OPERATING RESTRICTIONS
The indebtedness of the Company imposes 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. A default could result in
acceleration of the Notes, in which case holders of the Notes may not be paid in
full. Moreover, these restrictions could limit the Company's ability to engage
in certain business transactions which the
25
<PAGE>
Company may desire to consummate. The Company's inability to consummate any such
transaction could have an adverse effect on the Company's operations. See
"Description of the Notes -- Covenants" and "Description of Certain
Indebtedness."
ORIGINAL ISSUE DISCOUNT; POSSIBLE UNFAVORABLE TAX AND OTHER LEGAL CONSEQUENCES
FOR HOLDERS OF NOTES AND THE COMPANY
Although there will be no periodic payments in cash of interest on the Notes
prior to January , 2002, original issue discount (the difference between
the stated redemption price at maturity and the issue price of the Notes) will
accrue from the issue date of the Notes. Original issue discount will be
included as interest income periodically (including for periods ending prior to
July , 2001) in a United States noteholder's gross income for United
States federal income tax purposes in advance of receipt of the cash payments to
which the income is attributable. See "Certain United States Federal Income Tax
Considerations" for a more detailed discussion of the United States federal
income tax consequences to the holders of a Note regarding the purchase,
ownership and disposition of the Notes.
Further, the Senior Notes and the Senior Subordinated Notes may be subject
to the high yield discount obligation rules, in which case the Company would not
be able to deduct the original issue discount attributable to the Senior Notes
and the Senior Subordinated Notes until paid in cash or property. As explained
in, and subject to, the discussion under "Certain United States Federal Income
Tax Consequences -- Tax Consequences to U.S. Holders -- Applicable High Yield
Discount Rules," the Senior Notes and the Senior Subordinated Notes each will be
subject to these rules if their yield to maturity equals or exceeds a
Treasury-based interest rate in effect for the month of their issuance plus five
percentage points. For mid-term debt instruments issued in June 1996, such
Treasury-based interest rate plus five percentage points is 11.48%, compounded
semi-annually. Moreover, if the yield to maturity of the Senior Notes and the
Senior Subordinated Notes each exceeds a Treasury-based interest rate in effect
for the month of their issuance plus six percentage points, a portion of the
original issue discount attributable to the Senior Notes and the Senior
Subordinated Notes will not be deductible at all. For mid-term debt instruments
issued in June 1996, such Treasury-based interest rate plus six percentage
points is 12.48%, compounded semi-annually. If these high yield discount rules
apply, the Company's after tax cash flow might be less than if such original
issue discount were deductible when accrued.
If a bankruptcy case is commenced by or against the Company under the United
States Bankruptcy Code after the issuance of the Notes, the claim of a holder of
a Note with respect to the principal amount thereof may be limited to an amount
equal to the sum of (i) the initial offering price and (ii) that portion of the
original issue discount that is not deemed to constitute "unmatured interest"
for purposes of the United States Bankruptcy Code. Any original issue discount
that was not amortized as of any such bankruptcy filing would constitute
"unmatured interest."
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
unwillingness of
26
<PAGE>
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, including possibly
requiring the Company to significantly curtail or cease its operations. 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 atypical 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. 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 a
national agreement with Lucent Technologies, Inc. ("Lucent") to provide field
service for and network monitoring of the Company's Wireless Fiber facilities.
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. See
"Business -- Telecommunications Services -- CAP Services -- Marketing."
RELIANCE ON EQUIPMENT SUPPLIER
The Company currently purchases substantially all of its wireless
telecommunications equipment, including transceivers and network monitoring
equipment, from a single supplier even though there are other manufacturers of
such equipment. Any reduction or interruption in supply from this supplier 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 supplier on commercially
reasonable terms. Although several manufacturers currently produce or are
developing equipment that will meet the Company's current and anticipated
requirements, no industry standard or uniform protocol currently exists for 38
GHz equipment. Consequently, a single manufacturer's equipment must be used in
establishing a link. See "Business -- Telecommunications Services -- Wireless
Fiber -- Wireless Fiber Links."
LINE OF SIGHT; POTENTIAL 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 whose
links are no more than five miles apart at any given point. The cost of
additional
27
<PAGE>
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 similar 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. See "Business -- Telecommunications Services."
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."
ABSENCE OF PUBLIC MARKET
Prior to the Offering, there has been no public market for the Notes, and
the Company does not intend to apply for listing of such securities on any
national securities exchange or automated quotation system. Although the
Underwriter currently intends to make a market in the Notes, it is not obligated
to do so, and any such market-making activities may be discontinued at any time
without notice, in its sole discretion. Accordingly, no assurance can be given
as to the liquidity of, or the existence of trading markets for, the Notes. See
"Underwriter." The liquidity of, and trading markets for, the Notes may also be
adversely affected by declines in the market for high yield securities generally
and by the financial performance and prospects of the Company.
28
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company of the Debt Offering are estimated to be
approximately $192.1 million, after deducting estimated underwriting discounts
and commissions and other expenses payable by the Company. The net proceeds to
the Company of the Stock Offering are estimated to be approximately $104.7
million (approximately $120.5 million if the U.S. Underwriters' over-allotment
option is exercised in full) after deducting estimated underwriting discounts
and commissions and other expenses payable by the Company.
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. Prior to the enactment
of the Telecommunications Act, the Company's planned capital expenditures for
1996 and 1997 were $36 million and $52 million, respectively. As a result of the
Company's accelerated strategy, the Company now plans capital expenditures of
$50 million and $280 million for 1996 and 1997, respectively. In addition to
fueling the growth of the Company's businesses, the Company believes that its
existing capital resources, which will be enhanced substantially by the proceeds
of the Offerings, will allow it to negotiate more effectively with equipment
suppliers and attract talented telecommunications personnel, while also
providing assurance to potential customers.
The Company intends to use the net proceeds of the Offerings (together with
funds raised in the 1995 Debt Placement) for the expansion of its
telecommunications operations in multiple markets, including the purchase of
switching equipment, customer site equipment and related software, the
acquisition of Roof Rights, the hiring of sales, marketing, engineering and
customer service personnel, the development of operating and management systems,
acquisitions (including additional 38 GHz licenses, by auction or otherwise),
other capital expenditures, and for working capital and general corporate
purposes, including the funding of operating losses. As a complement to its
telecommunications services, the Company may also use a portion of the proceeds
to acquire rights to, develop and control certain information and entertainment
content and services. A portion of the Company's expansion may occur through
acquisitions (utilizing cash or securities of the Company) as an alternative to
direct investment in the assets required to facilitate the Company's growth
strategy and a portion of the net proceeds of the Offerings may be used in
connection with such acquisitions. The businesses that the Company may acquire
would likely consist of entities that own or control existing telecommunications
facilities or entertainment and information content and services, customers or
licenses to provide telecommunications services. If the Locate Acquisition is
consummated, the Company may use a portion of the proceeds of the Offerings to
pay the $17.5 million promissory note to be issued to the seller (if the Company
does not elect to convert the note into Common Stock). As of the date of this
Prospectus, the Company has no agreement with any person to acquire or effect
any acquisition of a material business or assets, except as relating to the
Locate Acquisition.
Management anticipates, based on current plans and assumptions relating to
its operations, that the net proceeds from the Stock Offering and Debt Offering,
together with 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 36 to 48 months following consummation of the Offerings.
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. See "Risk Factors -- Significant Capital Requirements,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Company Overview" and "-- Liquidity and Capital Resources."
29
<PAGE>
The following table sets forth (in millions) the estimated sources and uses
of funds from the Offerings:
SOURCES OF FUNDS:
Gross proceeds from the Debt Offering............................... $200
Gross proceeds from the Stock Offering.............................. 111
----
Total sources of funds........................................ $311
----
----
USES OF FUNDS:
Expansion of its telecommunications operations in multiple markets,
acquisitions (including additional 38 GHz licenses, by auction or
otherwise), other capital expenditures and for working capital and
general corporate purposes, including the funding of operating
losses, and, in certain instances, for the acquisition of rights
to, development and control of certain information and
entertainment content and services................................ $297
Transaction fees and expenses....................................... 14
----
Total uses of funds........................................... $311
----
----
30
<PAGE>
CAPITALIZATION
The following table sets forth the cash and capitalization of the Company as
of March 31, 1996: (i) on a historical basis, (ii) on a pro forma basis that
gives effect to the acquisitions of Fox/Lorber, TWL and Locate as if they
occurred on March 31, 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 Offerings (assuming no
exercise of the U.S. Underwriters' over-allotment option in the Stock Offering)
as if they occurred on March 31, 1996 (and assuming an offering price of $27.75
per share of Common Stock). This table should be read in conjunction with the
Consolidated Financial Statements and related notes thereto included elsewhere
in this Prospectus.
<TABLE><CAPTION>
MARCH 31, 1996
------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash, cash equivalents and short term investments.......... $203,503 $ 203,665 $ 501,337
-------- --------- -----------
-------- --------- -----------
Current portion of long-term debt and capital lease
obligations................................................ $ 10,314 $ 28,621 $ 28,621
-------- --------- -----------
-------- --------- -----------
Long-term debt and capital lease obligations:
Old Senior Notes......................................... $159,194 $ 159,194 $ 159,194
Senior Notes offered hereby.............................. -- -- 100,000
Senior Subordinated Notes offered hereby................. -- -- 100,000
Old Convertible Notes.................................... 79,597 79,597 79,597
Other Notes.............................................. 3,436 3,603 3,603
Capital lease obligations, net of current portion........ 5,810 6,047 6,047
-------- --------- -----------
Total long-term debt and capital lease obligations..... 248,037 248,441 448,441
-------- --------- -----------
Stockholders' equity:
Preferred stock of the Company, 15,000,000 shares
authorized, 689 shares issued and held in treasury, 0
outstanding................................................ 689 689 689
Common Stock, $.01 par value, 75,000,000 shares
authorized, 29,740,306 shares issued and 27,233,543
shares outstanding, 29,807,739 shares issued and
27,300,976 shares outstanding on a pro forma basis,
33,807,739 shares issued and 31,300,976 shares
outstanding on an as adjusted basis(1)................. 297 298 338
Additional paid-in capital............................... 103,989 105,158 209,866
Accumulated deficit...................................... (52,010) (52,010) (52,010)
-------- --------- -----------
52,965 54,135 158,883
Less: treasury stock..................................... (39,677) (39,677) (39,677)
Deferred compensation............................... (997) (997) (997)
Unrealized loss on long term investments............ (1,339) (1,339) (1,339)
-------- --------- -----------
Total stockholders' equity............................... 10,952 12,122 116,870
-------- --------- -----------
Total capitalization................................... $258,989 $ 260,563 $ 565,311
-------- --------- -----------
-------- --------- -----------
</TABLE>
- ------------
(1) Does not include (i) an aggregate of 1,075,299 shares of Common Stock
issuable upon exercise of options granted or which may be granted under the
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
Plan, (iii) 6,026,250 shares of Common Stock issuable upon exercise of other
outstanding options and warrants and (iv) 4,699,211 shares of Common Stock
which may be issued upon conversion of the Old Convertible Notes (assuming
they are converted on October 23, 1996, the first date on which conversion
may occur) and certain other convertible debt. See "Description of Certain
Indebtedness" and notes 17, 18 and 22 to the Consolidated Financial
Statements. The exercise and conversion prices of the foregoing securities
are all below the current market price of the Common Stock.
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<PAGE>
SELECTED FINANCIAL DATA
The selected 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 consolidated financial statements which
have been audited by Grant Thornton LLP, independent certified public
accountants. The selected financial data presented below as of and for the three
months ended March 31, 1995 and 1996 and the ten months ended December 31, 1994
have been derived from unaudited consolidated financial statements of the
Company. 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 THREE MONTHS ENDED
FEBRUARY 28, DECEMBER 31, MARCH 31,
------------------ ------------------- -------------------
1994 1995 1994 1995 1995 1996(1)
------- ------- ------- -------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales:
Telecommunications(2).................. $ 8,505 $14,909 $13,420 $ 13,136 $ 2,219 $ 10,217
Information services................... -- 474 193 2,648 844 771
Merchandising.......................... 7,120 10,182 8,405 13,987 3,095 3,521
------- ------- ------- -------- ------- --------
Total net sales.................... 15,625 25,565 22,018 29,771 6,158 14,509
Operating income (loss):
Telecommunications..................... (744) (3,423) (2,067) (6,945) (1,381) (2,917)
Information services................... -- (117) (115) 238 66 (30)
Merchandising.......................... 223 307 329 756 79 100
General corporate...................... (1,547) (2,378) (1,609) (3,861) (1,033) (1,771)
------- ------- ------- -------- ------- --------
Total operating loss............... (2,068) (5,611) (3,462) (9,812) (2,269) (4,618)
Interest expense........................ 744 637 505 7,630 184 8,815
Interest income......................... (109) (385) (297) (2,890) (125) (3,057)
Other expenses, net(3).................. 5,687 1,367 948 1,305 599 194
Net loss(4)............................. (8,195) (7,230) (4,618) (15,857) (2,927) (10,699)
Net loss per common share(4)............ $ (1.06) $ (0.42) $ (0.28) $ (0.70) $ (0.15) $ (0.39)
Weighted average common shares
outstanding............................. 7,719 17,122 16,609 22,770 19,935 27,214
OTHER FINANCIAL DATA:
Capital expenditures.................... $ 307 $ 1,816 $ 1,465 $ 8,652 $ 555 $ 2,588
EBITDA(5)(6)............................ (1,845) (5,179) (3,116) (8,952) (2,138) (3,771)
Ratio of earnings to fixed charges(7)... -- -- -- -- -- --
<CAPTION>
AS OF AS OF AS OF
FEBRUARY 28, DECEMBER 31, MARCH 31,
------------------ ------------ ---------
1994 1995 1995 1996
------- ------- ------------ ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short term investments..... $ 719 $ 3,156 $211,701 $ 203,503
Property and equipment, net........................... 1,301 2,663 15,898 18,089
Total assets.......................................... 14,610 29,509 285,363 280,473
Current portion of long-term debt and capital lease
obligations........................................... 2,851 332 9,643 10,314
Long-term debt and capital lease obligations, less
current portion and discount......................... 3,084 5,165 240,455 248,037
Stockholders' equity.................................. 4,719 18,280 21,752 10,952
</TABLE>
(footnotes on following page)
32
<PAGE>
- ------------
(1) In the first quarter 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 substantial majority of which related to minutes of use
during that quarter.
(2) The Company has generated nominal revenues from its Wireless Fiber services.
(3) For the year ended February 28, 1994, principally represents noncash expense
of $5.3 million consisting of the difference between the exercise prices of
certain options granted in connection with the Company's initial public
offering in April 1991 and the market value of the underlying shares of
Common Stock on the date such options became exercisable.
(4) For the year ended February 28, 1994, net loss includes an extraordinary
gain of approximately $0.2 million from the extinguishment of debt ($.03 per
share).
(5) EBITDA consists of loss before interest, income taxes, depreciation and
amortization and other income and expense (see footnote (3) above). 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.
(6) EBITDA was insufficient to cover interest expense for the years ended
February 28, 1994 and 1995, the ten months ended December 31, 1994 and 1995
and the three months ended March 31, 1995 and 1996.
(7) For the years ended February 28, 1994 and 1995, the ten months ended
December 31, 1994 and 1995 and the three months ended March 31, 1995 and
1996, earnings were insufficient to cover fixed charges by $8.5 million,
$7.2 million, $4.6 million, $15.9 million, $2.9 million and $10.6 million,
respectively. On a pro forma basis, giving effect to the acquisitions of
Locate, Fox/Lorber, TWL and Avant-Garde, the Everest Financing and the
issuance of the Old Notes, as if they occurred at the beginning of the
respective periods, earnings were insufficient to cover fixed charges by
$43.9 million and $12.3 million for the ten months ended December 31, 1995
and the three months ended March 31, 1996, respectively, and $68.1 million
and $19.4 million on a pro forma as adjusted basis giving effect to the
Transactions for the ten months ended December 31, 1995 and the three months
ended March 31, 1996, respectively. Fixed charges consist of interest
charges and amortization of debt expense and discount or premium related to
indebtedness, whether expensed or capitalized, and that portion of rental
expense (one-third) that the Company believes to be representative of
interest. For the twelve months ended December 31, 1995 on a pro forma basis
and a pro forma as adjusted basis giving effect to the Transactions,
earnings were insufficient to cover fixed charges by $51.5 million and $80.7
million, respectively.
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<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") is a CAP that provides
Wireless Fiber-based local access services 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, CAPs, CLECs, CMRS service providers and LECs, as well as
businesses, government agencies and institutions.
. WinStar Telecommunications, Inc. ("WinStar Telecom") is a CLEC that
recently commenced providing local exchange services and seeks to become a
value-added, economical alternative to the LECs, particularly through the
exploitation of the Company's Wireless Fiber capabilities, in substantially
all of the metropolitan areas covered by the Company's Wireless Licenses.
WinStar Telecom markets its services primarily to small- and medium-sized
businesses.
. WinStar Gateway Network, Inc. ("WinStar Gateway") is a long distance
telecommunications services reseller that provides service primarily to
residential customers.
. 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 (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.
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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 will seek to install 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 intends to expand 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, 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 own facilities will be approximately the same duration as
that experienced in the resale of local exchange services. The Company
anticipates significant 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 is generating revenues from this business that
currently are insignificant. 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
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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. 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 a per-minute basis or fraction 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.
. Information and entertainment content revenues are, or will be, driven
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.
. 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 and site acquisition fees and expenses (including option fees for
the prequalification of buildings for Roof Rights). 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. Prior to such time that the Company has developed and constructed
the infrastructure required to provide its own local exchange services in a
particular city, the Company may resell the local exchange services of other
telecommunications providers. 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 the Company begins to provide more services over its own
facilities. For example, as the Company increases the use of its Wireless
Fiber capacity and decreases its dependence on the facilities of LECs and
fiber optic-based carriers, resale costs will decrease proportionately.
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
thereby improving operating margins. The Company is following a
city-by-city, building-centric network plan to establish its own local
exchange services facilities. This strategy allows the Company to manage the
growth of operating and capital expenditures consistent with the amount of
available working capital for such plan. The up-front capital costs of
establishing the initial
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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 cost
per Wireless Fiber link is reduced as increased traffic is generated in
buildings in which the Company already has established service. 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 underutilization charges.
. The Company's information services businesses have both production and
distribution costs. Film production costs 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
THREE MONTHS ENDED MARCH 31, 1996 COMPARED TO THREE MONTHS ENDED MARCH 31,
1995
Net sales for the three months ended March 31, 1996 increased by $8,351,000,
or 136%, to $14,509,000, from $6,158,000 for the three months ended March 31,
1995. This increase was principally attributable to increased revenues generated
by the Company's telecommunications businesses, which had revenues of
approximately $10.2 million during the three months ended March 31, 1996,
compared with $2.2 million for the three months ended March 31, 1995. In the
first quarter 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 the settlement, the
substantial majority of which related to minutes of use during that quarter.
Cost of sales for the three months ended March 31, 1996 increased by
$3,975,000, or 86%, to $8,573,000, from $4,599,000 for the first three months
ended March 31, 1995. The increase is
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principally attributable to costs of purchasing additional long distance minutes
from third-party carriers to support increased telecommunications traffic.
Gross profit for the three months ended March 31, 1996 increased by
$4,376,000, or 280%, to $5,936,000, from $1,559,000 for the three months ended
March 31, 1995. Gross profit as a percentage of net sales increased to 40.9% for
the three months ended March 31, 1996, from 25.3% for the three months ended
March 31, 1995. The increase was primarily attributable to improving margins in
the Company's telecommunications businesses, which was positively impacted
during the first quarter by lower cost of sales for its long distance business
achieved through reduced carrier costs and volume rebates resulting from
renegotiated contracts with long distance service carriers.
Selling, general and administrative expenses increased by $6,422,000 to
$10,192,000 or 70.2% of net sales, for the three months ended March 31, 1996,
from $3,770,000, or 61.2% of net sales, for the comparable period of the prior
year. The increase in personnel employed in the telecommunications businesses,
along with selling costs associated with increased revenues in the long distance
telephone business, accounted for approximately 86% of the increase. Corporate
general and administrative expenses accounted for approximately 11% 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 three months ended March 31,
1996 was $4,618,000, compared with $2,269,000 for the three months ended March
31, 1995.
Interest expense for the three months ended March 31, 1996 was $8,815,000,
compared with $184,000 for the three months ended March 31, 1995. The increase
was primarily attributable to $7,834,000 in interest accreted on the Old Notes
but not payable in cash during the current quarter.
Interest income for the three months ended March 31, 1996 increased by
$2,932,000, to $3,057,000, from $125,000 for the three months ended March
31, 1995. The increase is attributable to earnings on the proceeds of the 1995
Debt Placement, which raised net proceeds of $214.5 million.
Other expense generally consists of amortization of intangibles, equity in
income (loss) of unconsolidated subsidiaries and various other items. Other
expense, net, for the three months ended March 31, 1996 decreased by $405,000,
to $195,000, from $599,000 for the three months ended March 31, 1995. During the
three months ended March 31, 1995, the Company recorded an expense of $537,000
representing its equity interest in the losses of Avant-Garde. As a result of
the merger of Avant-Garde into a subsidiary of the Company, the Company began to
include all of Avant-Garde's revenues and expenses in its consolidated statement
of operations effective July 17, 1995, and therefore this expense does not
appear in the statement of operations for the quarter ended March 31, 1996. In
addition, the cost of the acquisition of Avant-Garde has been allocated
primarily to licenses, and the amortization of this asset caused an increase in
amortization expense from $63,000 for the three months ended March 31, 1995 to
$195,000 for the three months ended March 31, 1996.
For the reasons noted above, the net loss for the three months ended March
31, 1996 was $10,699,000, compared with a net loss of $2,927,000 for the first
three months of 1995.
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.
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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 Old
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.
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
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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.
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 three
months ended March 31, 1996, the ten months ended December 31, 1995 and the
fiscal years ended February 28, 1995 and 1994 was $3.7 million, $9.0 million,
$5.2 million and $1.8 million, respectively. The Company raised net proceeds of
approximately $214.5 million from the 1995 Debt Placement to fund the expansion
of its CAP business. Interest expense on that debt does not require payments of
cash for the first five years. At March 31, 1996 and December 31, 1995, working
capital was $209 million and $215 million, respectively, including cash, cash
equivalents and short term investments of $204 million and $212 million,
respectively.
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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 three months ended March 31, 1996, the ten months
ended December 31, 1995 and the fiscal years ended February 28, 1995 and 1994
were $2.6 million, $8.7 million, $1.8 million and $0.3 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
capital expenditures of $50 million and $280 million for 1996 and 1997,
respectively.
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 its first sales
office 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 credit facilities and an equipment lease financing
facility, with a total of $14.6 million outstanding thereunder as of March 31,
1996. Management believes that upon expiration in 1996, these facilities will be
either renewed or replaced. In the event that they are not renewed or replaced,
the Company will repay amounts outstanding with cash on hand.
As of March 31, 1996, the Company had commitments (i) to purchase $15.6
million of 38 GHz radios from P-Com (as defined below), (ii) to purchase $5
million of Internet access services from Digex and (iii) to pay $17.5 million
upon consummation of the Locate Acquisition.
The proceeds of the Offerings 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. In addition to
enabling the growth of the Company's businesses, the Company believes that its
existing capital resources, which will be enhanced substantially by the proceeds
of the Offerings, will allow it to negotiate more effectively with equipment
suppliers and attract talented telecommunications personnel, while also
providing assurance to potential customers. Management anticipates, based on
current plans and assumptions relating to its operations, that the net proceeds
from the Stock Offering and Debt Offering, together with 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 36 to 48 months
following the consummation of the Offerings. 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 (including additional 38 GHz licenses, by auction
or otherwise), or if the Company's operating income does not significantly
increase, 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 plans, which would have a material
adverse effect on the Company's business and could adversely affect the
Company's ability to service its debt.
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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. Beginning in
the third quarter of 1996, the Company plans to offer Internet access services.
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
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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 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 on the Company
and other telecommunications companies is as of yet unknown, particularly
because it contains many provisions that require enabling regulations, the vast
majority of which have not yet been promulgated. 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 the incumbent LECs' local access charges, (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 Telecommunication Services, Inc.
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. 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-1s 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
are being deployed in a given area.
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-free operations and increase quality and
reliability by designing efficient 38 GHz networks in advance of their
deployment.
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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 at least five 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 such time that it has established the Wireless Fiber and
switch-based infrastructure required to provide its own local exchange services
in that city. 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 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 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 access, enhanced communications and information services to its
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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
the marketing of 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. The Company offers its Wireless Fiber services to
businesses, government agencies and institutions with multiple locations within
an area covered by the Wireless Licenses 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 Position as First to Market and Leading Spectrum Holder. 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. 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
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
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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. 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-based 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 to originate and terminate
local traffic and to interconnect hub, switch and local node sites constructed
by the Company.
Wireless Fiber Links. Each Wireless Fiber link currently provides up to four
T-1s of capacity (equivalent to 96 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 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
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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 March 31, 1996, the
Company's noncancellable purchase commitment under the Tel-Link Agreement was
approximately $15.6 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) at least 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 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
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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. As of May 31, 1996, the Company has secured
Roof Rights on more than 280 buildings. Further, the Company, in consultation
with existing and potential customers, has identified more than 2,200 additional
buildings in the metropolitan areas covered by the Wireless Licenses for which
it is in the process of seeking Roof Rights. 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. 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 43 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 13 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 one of the fourteen 38 GHz channels in each of
the following metropolitan areas: Austin-San Marcos, Boise, Charlotte,
Indianapolis, Jacksonville, Memphis, New Orleans, Richmond, Oklahoma City,
Omaha, Portland (Oregon), San Antonio and Stamford. Upon the consummation of the
Locate Acquisition, the Company will acquire two additional 38 GHz licenses,
each providing 100 MHz of bandwidth, for the New York City metropolitan area,
including portions of Long Island and northern New Jersey.
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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 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. This has occurred for all but the most recently granted Wireless
License, which covers an area that includes Boise, Idaho.
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 ten-year 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."
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:
Local 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
[ARTWORK]
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.
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WIRELESS COMPLEMENT TO FIBER NETWORK
[ARTWORK]
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.
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CELLULAR/PCS SITE INTERCONNECT
[ARTWORK]
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
[ARTWORK]
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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.
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.
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
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.
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The Company currently markets its CAP services (i) by performing field
demonstrations and testing of Wireless Fiber 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 WinStar
Gateway's existing long distance customers.
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 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 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 connected via Wireless Fiber links to end user customers and fiber
optic facilities leased or purchased from other carriers. 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 10 main switches and 31 remote nodes during
the next three years and plans to install its first main switch in New York City
by 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.
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, Illinois, Massachusetts, New York, Tennessee, Texas and Washington, is
in the process of seeking authorization to operate as a CLEC in six additional
states, and intends to seek such authorization in nine additional states during
1996. It also is in the process of negotiating interconnection agreements with
various local exchange providers, including incumbent LECs and certain other
local carriers, which will allow the Company to offer local exchange services on
an unbundled basis to its customers.
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" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources."
Marketing. The Company plans to offer a broad range of communications and
information services including local, long distance, enhanced, frame relay,
mobile, Internet access 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 at least five additional cities
during the next nine months. As the Company commences its CLEC
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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 fiber carriers 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 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 occupant, 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 coordination with the plan to build its CLEC networks on a city-by-city
basis, the Company is hiring numerous engineering, installation, maintenance,
customer service personnel, and marketing and sales personnel in order to create
a direct sales force 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 five
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 access services with the right to purchase additional amounts, in each
case on a discounted basis. The Company will 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.
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 tariffs with the FCC and
agreements with major long distance carriers (AT&T, MCI, WorldCom, Inc. and U.S.
Long Distance, Inc.), which allow it to utilize their networks. The Company's
current customer base encompasses primarily residential customers and small- and
medium-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.
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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 expanded 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.
The Company markets its telecommunications services primarily through
independent sales representatives and resellers, 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 such representatives will engage in
unauthorized switching of long distance carriers. See "--Government Regulation
of Telecommunications Operations." The Company also markets its services to end
users through print advertising and direct mail advertising in selected markets.
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 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
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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, 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, and
CellularVision, a provider of wireless television services which, in the future,
also may provide wireless Internet access and other local telecommunications
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 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
stronger competitors to the Company. For example, Time Warner recently entered
into a nine-state interconnection agreement with Bell South. There can be no
assurance that the Company will be able to compete effectively in any of its
markets.
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The Company's Internet access services also are likely to face competition
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 access business.
Further, Internet access 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. 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. 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). 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
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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.
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 certain 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.
The Company, as an operator of millimeter wave radio facilities, also is
subject to ongoing semi-annual reporting requirements to the FCC with respect to
the deployment of its wireless local telecommunications services in its licensed
areas during the license period. 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 22 states and has
applied for authority in nine additional states.
Certain decisions by the FCC (the "Local Network Interconnect Decisions")
restructured the interstate competitive access services market. The FCC ordered
the RBOCs and all but one of the LECs having in excess of $100 million in gross
annual revenue for regulated services to provide expanded
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interconnection and collocation with, or virtual collocation to, their central
offices and serving wire centers to any CAP, long distance carrier or end user
seeking such interconnection for the provision of interstate access services.
Subject to few exceptions, LECs must offer interconnection in their central
offices at cost-based rates. Consequently, the Company can reach most business
customers in its MSAs via LEC facilities, and thereby significantly expand its
customer base.
In conjunction with its decision to require interconnection, the FCC
provided LECs with a degree of increased pricing flexibility for special access
and switched access services. Some forms of pricing flexibility apply on a
geographic-specific basis or on a central office-by-central office basis. The
Company anticipates that this pricing flexibility will result in LECs lowering
their prices in high density zones, the probable arena of competition with the
Company. To the extent that LECs are provided increased flexibility to lower
their rates, the Company's ability to compete for certain services and its
operating results may be adversely affected.
In a concurrent proceeding on transport rate structure and pricing, the FCC
adopted interim pricing rules that restructure local telephone company switched
transport rates in order to facilitate competition for switched services. No
assurance can be given that any benefits expected to be realized by the Company
as a result of the Local Network Interconnect Decisions will in fact be
realized, nor may the timing of any such benefits be predicted.
Some of the Company's services may be classified as intrastate and therefore
subject 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 43 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.
Under current regulatory schemes, entities can compete with LECs in almost
all states for the provision of (i) local access services, (ii) dedicated access
services, (iii) private network services, including WAN services, for businesses
and other entities and (iv) long distance toll services. The remaining local
telecommunications services are either not currently subject to competition or
only recently have been opened to competition in most states. Accordingly, the
widespread provision of basic local exchange services to customers by entities
other than the incumbent LECs generally will require significant regulatory
changes.
Many states already have instituted regulatory changes encouraging increased
competition in various aspects of the local exchange services market, while
other states are considering such changes. A number of state legislatures and
regulatory bodies recently have enacted legislation and regulations to enhance
competition in the local exchange markets. The Company anticipates that this
trend will continue and will provide opportunities for broader entrance into the
local exchange markets for the Company and others. The Company currently is
authorized to operate as a CLEC in California, Connecticut, Florida, Illinois,
Massachusetts, New York, Tennessee, Texas and Washington; is in the process of
seeking authorization to operate as a CLEC in six additional states; and intends
to seek such authorization in nine additional states during 1996. It also is in
the process of negotiating interconnection agreements with various local
exchange service providers, including incumbent LECs, under which the Company
will be able to obtain services on an unbundled basis.
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
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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.
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.
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 several state authorities are
seeking to introduce more stringent regulations to 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.
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.
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
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programming for the Arts and Entertainment Network's award winning Biography(R)
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.
In April 1996, WinStar New Media acquired a 65% equity interest in TWL.
Under the agreement, WinStar New Media has the right to require the stockholders
of TWL who own the remaining 35% equity interest in TWL to sell, and such
stockholders have the right to require WinStar New Media to purchase, the
remaining 35 percent equity interest based upon certain criteria. TWL operates
the 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 stations in 90 of the top 100 United States markets. SportsFan owns and
operates The Pete Rose Show and the Bob Golic Show, among others, and also has
developing interests in television and on-line distribution channels.
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 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
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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.
EMPLOYEES
As of May 31, 1996 the Company had approximately 390 full-time and 130
part-time 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
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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
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. The complaint alleges that certain
transactions including (i) the payment of consideration to certain directors and
others in connection with the Company's acquisition of WinStar Gateway 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 and, in each case,
were in violation of the fiduciary obligations of the directors to the Company.
The Company believes that the allegations set forth in the complaints are based
on misstatements of fact and misunderstandings of relevant facts, and further
believes that there are meritorious defenses to all of the allegations. In order
to halt the expense, inconvenience and distraction of continued litigation
regarding this action, the Company recently entered into a settlement agreement
with the plaintiffs pursuant to which the Company has agreed to amend its bylaws
to formalize certain corporate governance changes and to pay certain legal fees
of plaintiffs' counsel. The final settlement agreement is subject to approval of
the Delaware Chancery Court.
In April 1996, an action was commenced against WinStar Gateway in the
Circuit Court of Jefferson County, Alabama (Civil Action No. CV9602367). 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 practices. The plaintiffs seek monetary
relief, the exact amount of which cannot be determined. WinStar Gateway has
moved to have the action removed to federal court in Alabama and also to have
the complaint dismissed. 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 the Company is not successful in the defense of the
action, or if the Company elects to settle the action, the Company believes that
any judgment against it, or settlement entered into by it, will not have a
material adverse effect on the Company, its financial condition or its results
of operations.
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.
CORPORATE INFORMATION
The Company was incorporated under the laws of the State of Delaware in
September 1990 and its principal offices are located at 230 Park Avenue, New
York, New York 10169. The Company's phone number is (212) 687-7577. The Company
is a holding company and provides its products and services through its
wholly-owned subsidiaries WinStar Wireless (incorporated in Delaware in February
1994), WinStar Wireless Fiber Corp. ("Wireless Fiber Corp.") (incorporated in
Delaware in March 1995), WinStar Telecom (incorporated in Delaware in February
1996), WinStar Gateway (incorporated in Delaware in May 1992), WinStar New Media
(incorporated in Delaware in March 1994), NFF (incorporated in Delaware in July
1994) and WinStar Global Products (incorporated in Delaware in February 1987).
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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
--- ------------------------------------------
<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).............................. 53 President, Chief Operating Officer and
Director
Steven G. Chrust(6)........................... 46 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 1996
(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.
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
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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.
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
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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.
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 at the meeting of stockholders scheduled for June 27,
1996, and the term of office of the third class of directors (Class
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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. David Banker, who was a Class II director, resigned from the Board of
Directors for personal reasons effective April 22, 1996. On April 26, 1996, the
Board of Directors approved a reduction of the size of the Board of Directors
from nine directors to eight 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.
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.
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
June 12, 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
--------------------
BEFORE AFTER
NUMBER OF SHARES STOCK STOCK
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIALLY OWNED OFFERING OFFERING
- ----------------------------------------------------------- ------------------ -------- --------
<S> <C> <C> <C>
William J. Rouhana, Jr..................................... 2,064,669(1) 7.3% 6.4%
Nathan Kantor.............................................. 765,600(2) 2.7 2.4
Steven G. Chrust........................................... 419,000(3) 1.5 1.3
Fredric E. von Stange...................................... 905,833(4) 3.2 2.8
Steven B. Magyar........................................... 50,706(5) * *
Two Pine Point
Lloyd Harbor, New York 11742
William J. vanden Heuvel................................... 60,000(6) * *
812 Park Avenue
New York, New York 10021
Bert W. Wasserman.......................................... 60,000(7) * *
126 East 56th Street
New York, New York 10022
William Harvey............................................. 20,000(8) * *
c/o Next Century Media, Inc.
11 North Chestnut Street
New Paltz, New York 12561
Timothy R. Graham.......................................... 385,852(9) 1.4 1.2
Keystone Investment Management Company..................... 2,166,800 7.9 6.9
200 Berkeley Street
Boston, Massachusetts 02116
All Directors and Executive Officers as a Group (9 4,731,660(10) 16.1 14.2
persons)...................................................
</TABLE>
- ------------
* Less than 1%.
(1) Includes 350,000 shares of Common Stock issuable upon exercise of certain
options. Does not include 150,000 shares of Common Stock issuable upon
exercise of other options which become exercisable in March 1997. 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.
(2) Includes (i) 447,396 shares of Common Stock issuable upon exercise of
certain options. Does not include 350,000 shares of Common Stock issuable
upon exercise of other options which become exercisable in three equal
annual installments commencing in September 1996 and 78,000 shares of
Common Stock issuable upon exercise of options which become exercisable in
December 1996.
(footnotes continued on following page)
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(3) 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) 325,000 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.
(4) 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.
(5) Includes (i) 1,000 shares of Common Stock owned by Mr. Magyar's spouse,
over which Mr. Magyar disclaims beneficial ownership, and (ii) 30,000
shares of Common Stock issuable upon exercise of certain options.
(6) 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.
(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.
(8) Represents 20,000 shares of Common Stock issuable upon exercise of options.
(9) Includes 210,000 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.
(10) Includes shares referred to as being included in notes (1) through (9).
Excludes shares referred to in such notes as being excluded.
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DESCRIPTION OF THE NOTES
The Senior Notes are to be issued under an Indenture, to be dated as of the
Closing Date (the "Senior Notes Indenture"), between WinStar Communications,
Inc. (for the purposes of this Description of Notes, "WCI"), as issuer, and
United States Trust Company of New York, as Trustee (in such capacity, the
"Senior Notes Trustee"). The Senior Subordinated Notes are to be issued under an
Indenture, to be dated as of the Closing Date (the "Senior Subordinated Notes
Indenture" and, together with the Senior Notes Indenture, the "Indentures"),
between WCI, as issuer, and United States Trust Company of New York, as Trustee
(in such capacity, the "Senior Subordinated Notes Trustee," and, together with
the Senior Notes Trustee, the "Trustees"). Any references herein to a "Trustee"
means the Senior Notes Trustee or the Senior Subordinated Notes Trustee, as the
context may require. Copies of the forms of Indentures are filed as exhibits to
the Registration Statement of which this Prospectus is a part. The Indentures
are subject to, and governed by, the Trust Indenture Act of 1939, as amended
(the "Trust Indenture Act"). The following summary of certain provisions of the
Indentures does not purport to be complete and is subject to, and is qualified
in its entirety by reference to, all the provisions of the Indentures, including
the definitions of certain terms therein and those terms made a part thereof by
the Trust Indenture Act. Whenever particular defined terms of the Indentures not
otherwise defined herein are referred to, such defined terms are incorporated
herein by reference.
GENERAL
The Senior Notes will be unsubordinated, unsecured obligations of WCI,
limited to $100 million aggregate principal amount, and will mature on July ,
2006. The Senior Subordinated Notes will be senior subordinated, unsecured
obligations of WCI, limited to $100 million aggregate principal amount, and will
mature on July , 2006. Until July , 2001, interest on the Notes will accrue
and be compounded semi-annually on each Semi-Annual Accrual Date but will not be
payable in cash. From and after July , 2001, interest on the sum of the
principal amount of each Note and accrued but unpaid interest thereon for all
periods prior to the next preceeding Semi-Annual Accrual Date will be payable
semiannually (to Holders of record at the close of business on the or
immediately preceding the Interest Payment Date) on July and January
of each year, commencing January , 2002.
Although for United States federal income tax purposes a significant amount
of original issue discount, taxable as ordinary income, will be recognized by a
Holder of Notes as such discount is amortized from the date of issuance of the
Notes, Holders of Notes will not receive any payments on the Notes until January
, 2002. For a description of certain tax matters related to an investment in
the Notes, see "Certain United States Federal Income Tax Considerations."
Principal of, premium, if any, and interest on the Notes will be payable,
and the Notes may be exchanged or transferred, at the office or agency of WCI in
the Borough of Manhattan, the City of New York (which initially will be the
corporate trust office of the Senior Notes Trustee at 114 West 47th Street, New
York, New York 10036-1532, with respect to the Senior Notes, and the Senior
Subordinated Notes Trustee at the same address, with respect to the Senior
Subordinated Notes); provided that, at the option of WCI, payment of interest
may be made by check mailed to the respective addresses of the Holders of Notes
as each such address appears in the Security Register.
The Notes will be issued only in fully registered form, without coupons, in
denominations of $1,000 of principal amount and integral multiples thereof. See
"--Book-Entry; Delivery and Form." No service charge will be made for any
registration of transfer or exchange of Notes, but WCI may require payment of a
sum sufficient to cover any transfer tax or other similar governmental charge
payable in connection therewith.
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OPTIONAL REDEMPTION
The Notes will be redeemable, at WCI's option, in whole or in part, at any
time or from time to time, on or after July , 2001 and prior to maturity, upon
not less than 30 nor more than 60 days' prior notice mailed by first-class mail
to each Holder's last address as it appears in the Security Register, at the
following Redemption Prices (expressed as a percentage of the sum of principal
amount and accrued and unpaid interest for all periods prior to July , 2001),
plus accrued and unpaid interest, if any, for the period beginning on July
, 2001 to the Redemption Date (subject to the right of Holders of record on
the relevant Regular Record Date that is on or prior to the Redemption Date to
receive interest due on an Interest Payment Date), if redeemed during the
12-month period commencing July , of the years set forth below:
<TABLE><CAPTION>
SENIOR
SENIOR NOTE SUBORDINATED
REDEMPTION NOTE REDEMPTION
YEAR PRICE PRICE
- -------------------------------------------------------- ---------------------- ----------------
<S> <C> <C>
2001.................................................... % %
2002.................................................... % %
2003 and thereafter..................................... 100.000% 100.000%
</TABLE>
In the case of any partial redemption, selection of the Senior Notes or
Senior Subordinated Notes, as the case may be, for redemption will be made by
the relevant Trustee in compliance with the requirements of the principal
national securities exchange, if any, on which such notes are listed or, if such
notes are not listed on a national securities exchange, on a pro rata basis, by
lot or such other method as such Trustee, in its sole discretion, shall deem
fair and appropriate; provided, however, that no Note of $1,000 in principal
amount or less shall be redeemed in part. If any Note is to be redeemed in part
only, the notice of redemption relating to such Note shall state the portion of
the principal amount thereof to be redeemed. A new Senior Note or Senior
Subordinated Note, as the case may be, in principal amount equal to the
unredeemed portion thereof will be issued in the name of the Holder thereof upon
cancellation of the original Senior Note or Senior Subordinated Note, as the
case may be.
RANKING
The Senior Notes will be unsecured, unsubordinated indebtedness of WCI, will
rank pari passu in right of payment with all existing and future unsecured,
unsubordinated indebtedness, and will be senior in right of payment to all
existing and future subordinated indebtedness, of WCI, including the Senior
Subordinated Notes and the Old Convertible Notes. At March 31, 1996, on a pro
forma as adjusted basis giving effect to the Transactions, WCI would have had
(on an unconsolidated basis) approximately $477.4 million of indebtedness,
including capitalized lease obligations, $297.8 million of which would have been
senior indebtedness and $20.6 million of which would have been secured by
substantially all of the assets of WCI and its subsidiaries, and there would
have been no indebtedness junior to the Senior Notes, except for the Senior
Subordinated Notes and the Old Convertible Notes. WCI is a holding company and
the Senior Notes will be effectively subordinated to all liabilities of the
subsidiaries of WCI, including trade payables. On March 31, 1996, on the same
pro as adjusted forma basis, the subsidiaries of WCI would have had
approximately $56.7 million of liabilities (excluding intercompany payables to
WCI or any of its subsidiaries), including $38.6 million of indebtedness. WCI
may incur substantial amounts of additional indebtedness in the future. See
"Risk Factors--Significant Capital Requirements."
The Senior Subordinated Notes will be unsecured, senior subordinated
indebtedness of WCI. The payment of the Senior Subordinated Obligations will, to
the extent set forth in the Senior Subordinated Notes Indenture, be subordinated
in right of payment to the prior payment in full, in cash or cash equivalents,
of all Senior Indebtedness, including, without limitation, WCI's obligations
under the Senior Notes, the Old Senior Notes and its guarantees under the
Equipment Lease Financing, the
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Everest Notes, the Century Credit Facility and the CIT Credit Facility. As of
the Closing Date, there will be no indebtedness of WCI outstanding pari passu
with or junior to the Senior Subordinated Notes, except for the Old Convertible
Notes, which will be pari passu with the Senior Subordinated Notes. See "Risk
Factors Substantial Indebtedness; Ability to Service Indebtedness" and
"--Holding Company Structure; Ranking of the Notes; Secured Indebtedness" and
"Capitalization."
"Senior Subordinated Obligations" is defined to mean any principal of,
premium, if any, or interest on the Senior Subordinated Notes payable pursuant
to the terms of the Senior Subordinated Notes or upon acceleration, to the
extent relating to the purchase of Senior Subordinated Notes or amounts
corresponding to such principal, premium, if any, or interest on the Senior
Subordinated Notes.
To the extent any payment of Senior Indebtedness (whether by or on behalf of
WCI, as proceeds of security or enforcement of any right of setoff or otherwise)
is declared to be fraudulent or preferential, set aside or required to be paid
to any receiver, trustee in bankruptcy, liquidating trustee, agent or other
similar Person under any bankruptcy, insolvency, receivership, fraudulent
conveyance or similar law, then if such payment is recovered by, or paid over
to, such receiver, trustee in bankruptcy, liquidating trustee, agent or other
similar Person, the Senior Indebtedness or part thereof originally intended to
be satisfied shall be deemed to be reinstated and outstanding as if such payment
had not occurred. To the extent the obligation to repay any Senior Indebtedness
is declared to be fraudulent, invalid, or otherwise set aside under any
bankruptcy, insolvency, receivership, fraudulent conveyance or similar law, then
the obligation so declared fraudulent, invalid or otherwise set aside (and all
other amounts that would come due with respect thereto had such obligation not
been so affected) shall be deemed to be reinstated and outstanding as Senior
Indebtedness for all purposes of the Senior Subordinated Notes Indenture as if
such declaration, invalidity or setting aside had not occurred. Upon any payment
or distribution of assets or securities of WCI of any kind or character, whether
in cash, property or securities, upon any dissolution or winding up or total or
partial liquidation or reorganization of WCI, whether voluntary or involuntary
or in bankruptcy, insolvency, receivership or other proceedings, all amounts due
or to become due upon all Senior Indebtedness (including any interest accruing
subsequent to an event of bankruptcy, whether or not such interest is an allowed
claim enforceable against the debtor under the United States Bankruptcy Code)
shall first be paid in full, in cash or cash equivalents, before the Holders of
the Senior Subordinated Notes or the Senior Subordinated Notes Trustee on behalf
of the Holders of the Senior Subordinated Notes shall be entitled to receive any
payment by WCI on account of Senior Subordinated Obligations, or any payment to
acquire any of the Senior Subordinated Notes for cash, property or securities,
or any distribution with respect to the Senior Subordinated Notes of any cash,
property or securities. Before any payment may be made by, or on behalf of, WCI
of any Senior Subordinated Notes upon any such dissolution, winding up,
liquidation or reorganization, any payment or distribution of assets or
securities of WCI of any kind or character, whether in cash, property or
securities, to which the Holders of the Senior Subordinated Notes or the Senior
Subordinated Notes Trustee on behalf of the Holders of the Senior Subordinated
Notes would be entitled, but for the subordination provisions of the Senior
Subordinated Notes Indenture, shall be made by WCI or by any receiver, trustee
in bankruptcy, liquidating trustee, agent or other similar Person making such
payment or distribution or by the Holders of the Senior Subordinated Notes or
the Senior Subordinated Notes Trustee if received by them or it, directly to the
holders of the Senior Indebtedness (pro rata to such holders on the basis of the
respective amounts of Senior Indebtedness held by such holders) or their
representatives or to the Senior Notes Trustee under the Senior Notes Indenture
or to any trustee or trustees under any other indenture pursuant to which any
such Senior Indebtedness may have been issued, as their respective interests
appear, to the extent necessary to pay all such Senior Indebtedness in full, in
cash or cash equivalents after giving effect to any concurrent payment,
distribution or provision therefor to or for the holders of such Senior
Indebtedness.
No direct or indirect payment by or on behalf of WCI of Senior Subordinated
Obligations, whether pursuant to the terms of the Senior Subordinated Notes or
upon acceleration or otherwise, shall be made if, at the time of such payment,
there exists a default in the payment of all or any portion of the
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obligations on any Senior Indebtedness, and such default shall not have been
cured or waived or the benefits of this sentence waived by or on behalf of the
holders of such Senior Indebtedness. In addition, during the continuance of any
other event of default with respect to any Designated Senior Indebtedness
pursuant to which the maturity thereof may be accelerated, upon receipt by the
Senior Subordinated Notes Trustee of written notice from the trustee or other
representative for the holders of such Designated Senior Indebtedness (or the
holders of at least a majority in principal amount of such Designated Senior
Indebtedness then outstanding), no payment of Senior Subordinated Obligations
may be made by or on behalf of WCI upon or in respect of the Senior Subordinated
Notes for a period (a "Payment Blockage Period") commencing on the date of
receipt of such notice and ending 159 days thereafter (unless, in each case,
such Payment Blockage Period shall be terminated by written notice to the Senior
Subordinated Notes Trustee from such trustee of, or other representatives for,
such holders). Not more than one Payment Blockage Period may be commenced with
respect to the Senior Subordinated Notes during any period of 360 consecutive
days. Notwithstanding anything in the Senior Subordinated Notes Indenture to the
contrary, there must be 180 consecutive days in any 360-day period in which no
Payment Blockage Period is in effect. No event of default that existed or was
continuing (it being acknowledged that any subsequent action that would give
rise to an event of default pursuant to any provision under which an event of
default previously existed or was continuing shall constitute a new event of
default for this purpose) on the date of the commencement of any Payment
Blockage Period with respect to the Designated Senior Indebtedness initiating
such Payment Blockage Period shall be, or shall be made, the basis for the
commencement of a second Payment Blockage Period by the representative for, or
the holders of, such Designated Senior Indebtedness, whether or not within a
period of 360 consecutive days, unless such event of default shall have been
cured or waived for a period of not less than 90 consecutive days.
By reason of the subordination provisions described above, in the event of
liquidation or insolvency, creditors of WCI who are not holders of Senior
Indebtedness may recover less, ratably, than holders of Senior Indebtedness and
may recover more, ratably, than Holders of the Senior Subordinated Notes.
"Senior Indebtedness" under the Senior Subordinated Notes Indenture means
the following obligations of WCI, whether outstanding on the date of the Senior
Subordinated Notes Indenture or thereafter Incurred: (i) all Indebtedness and
all other monetary obligations of WCI under the Senior Notes and the Old Senior
Notes, (ii) all other Indebtedness of WCI (other than the Senior Subordinated
Notes and the Old Convertible Notes), including principal and interest on such
Indebtedness, unless such Indebtedness, by its terms or by the terms of any
agreement or instrument pursuant to which such Indebtedness is issued, is pari
passu with, or subordinated in right of payment to, the Senior Subordinated
Notes and (iii) all fees, expenses and indemnities payable in connection with
the Senior Notes and the Old Senior Notes (including any agreement pursuant to
which the Senior Notes were issued and any agreement pursuant to which the Old
Senior Notes were issued); provided that the term "Senior Indebtedness" shall
not include (a) any Indebtedness of WCI that, when Incurred and without respect
to any election under Section 1111(b) of the United States Bankruptcy Code, was
without recourse to WCI, (b) any Indebtedness of WCI to a Subsidiary of WCI or
to a joint venture in which WCI has an interest, (c) any Indebtedness of WCI, to
the extent not permitted by the "Limitation on Indebtedness" covenant or the
"Limitation on Senior Subordinated Indebtedness" covenant described below, (d)
any repurchase, redemption or other obligation in respect of Redeemable Stock,
(e) any Indebtedness to any employee of WCI or any of its Subsidiaries, (f) any
liability for federal, state, local or other taxes owed or owing by WCI or (g)
any trade payables. Senior Indebtedness will also include interest accruing
subsequent to events of bankruptcy of WCI and its Subsidiaries at the rate
provided for in the document governing such Senior Indebtedness, whether or not
such interest is an allowed claim enforceable against the debtor in a bankruptcy
case under federal bankruptcy law.
"Designated Senior Indebtedness" under the Senior Subordinated Notes
Indenture is defined to mean the Senior Notes, the Old Senior Notes and any
Indebtedness constituting Senior Indebtedness that, at the date of
determination, has an aggregate principal amount of at least $25.0 million and
that
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is specifically designated by WCI in the instrument creating or evidencing such
Senior Indebtedness as "Designated Senior Indebtedness."
The Senior Notes Indenture will specifically designate the Senior Notes as
"Designated Senior Indebtedness" for purposes of the Old Convertible Notes
Indenture.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
covenants and other provisions of the Indentures. Reference is made to the
relevant Indenture for the full definition of all terms as well as any other
capitalized term used herein for which no definition is provided.
"Adjusted Consolidated Net Income" means, for any period, the aggregate net
income (or loss) of WCI and its Restricted Subsidiaries for such period
determined in conformity with GAAP; provided that the following items shall be
excluded in computing Adjusted Consolidated Net Income (without duplication):
(i) the net income of any Person (other than net income attributable to a
Restricted Subsidiary) in which any Person (other than WCI or any of its
Restricted Subsidiaries) has a joint interest and the net income of any
Unrestricted Subsidiary, except to the extent of the amount of dividends or
other distributions actually paid to WCI or any of its Restricted Subsidiaries
by such other Person, including, without limitation, an Unrestricted Subsidiary
during such period; (ii) solely for the purposes of calculating the amount of
Restricted Payments that may be made pursuant to clause (C) of the first
paragraph of the "Limitation on Restricted Payments" covenant described below
(and in such case, except to the extent includable pursuant to clause (i)
above), the net income (or loss) of any Person accrued prior to the date it
becomes a Restricted Subsidiary or is merged into or consolidated with WCI or
any of its Restricted Subsidiaries or all or substantially all of the property
and assets of such Person are acquired by WCI or any of its Restricted
Subsidiaries; (iii) the net income of any Restricted Subsidiary to the extent
that the declaration or payment of dividends or similar distributions by such
Restricted Subsidiary of such net income is not at the time permitted by the
operation of the terms of its charter or any agreement, instrument, judgment,
decree, order, statute, rule or governmental regulation applicable to such
Restricted Subsidiary; (iv) any gains or losses (on an after-tax basis)
attributable to Asset Sales; (v) except for purposes of calculating the amount
of Restricted Payments that may be made pursuant to clause (C) of the first
paragraph of the "Limitation on Restricted Payments" covenant described below,
any amount paid as, or accrued for, cash dividends on Preferred Stock of WCI or
any Restricted Subsidiary owned by Persons other than WCI and any of its
Restricted Subsidiaries; and (vi) all extraordinary gains and extraordinary
losses.
"Adjusted Consolidated Net Tangible Assets" means the total amount of assets
of WCI and its Restricted Subsidiaries (less applicable depreciation,
amortization and other valuation reserves), except to the extent resulting from
write-ups of capital assets (excluding write-ups in connection with accounting
for acquisitions in conformity with GAAP), after deducting therefrom (i) all
current liabilities of WCI and its Restricted Subsidiaries (excluding
intercompany items) and (ii) all goodwill, trade names, trademarks, patents,
unamortized debt discount and expense and other like intangibles (other than
licenses issued by the FCC), all as set forth on the quarterly or annual
consolidated balance sheet of WCI and its Restricted Subsidiaries, prepared in
conformity with GAAP and most recently filed with the Commission pursuant to the
"Commission Reports and Reports to Holders" covenant; provided that the value of
any licenses issued by the FCC shall, in the event of an auction for similar
licenses, be equal to the fair market value ascribed thereto in good faith by
the Board of Directors and evidenced by a Board Resolution. As used in the
Indentures, references to financial statements of WCI and its Restricted
Subsidiaries shall be adjusted to exclude Unrestricted Subsidiaries if the
context requires.
"Affiliate" means, as applied to any Person, any other Person directly or
indirectly controlling, controlled by, or under direct or indirect common
control with, such Person. For purposes of this
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definition, "control" (including, with correlative meanings, the terms
"controlling," "controlled by" and "under common control with"), as applied to
any Person, means the possession, directly or indirectly, of the power to direct
or cause the direction of the management and policies of such Person, whether
through the ownership of voting securities, by contract or otherwise.
"Asset Acquisition" means (i) an investment by WCI or any of its Restricted
Subsidiaries in any other Person pursuant to which such Person shall become a
Restricted Subsidiary of WCI or shall be merged into or consolidated with WCI or
any of its Restricted Subsidiaries; or (ii) an acquisition by WCI or any of its
Restricted Subsidiaries of the property and assets of any Person other than WCI
or any of its Restricted Subsidiaries that constitute substantially all of a
division or line of business of such Person.
"Asset Sale" means any sale, transfer or other disposition (including by way
of merger, consolidation or sale- leaseback transactions) in one transaction or
a series of related transactions by WCI or any of its Restricted Subsidiaries to
any Person other than WCI or any of its Restricted Subsidiaries of (i) all or
any of the Capital Stock of any Restricted Subsidiary, (ii) all or substantially
all of the property and assets of an operating unit or business of WCI or any of
its Restricted Subsidiaries or (iii) any other property or assets of WCI or any
of its Restricted Subsidiaries outside the ordinary course of business of WCI or
such Restricted Subsidiary and, in each case, that is not governed by the
provisions of the relevant Indenture applicable to mergers, consolidations and
sales of assets of WCI; provided that the following shall not be included within
the meaning of "Asset Sale": (A) sales or other dispositions of inventory,
receivables and other current assets; (B) sales or other dispositions of
equipment that has become worn out, obsolete or damaged or otherwise unsuitable
for use in connection with the business of WCI or its Restricted Subsidiaries
and (C) a substantially simultaneous exchange of, or a sale or disposition
(other than 85% or more for cash or cash equivalents) by WCI or any of its
Restricted Subsidiaries of, licenses issued by the FCC or applications or bids
therefor; provided that the consideration received by WCI or any such Restricted
Subsidiary in connection with such exchange, sale or disposition shall be equal
to the fair market value of licenses so exchanged, sold or disposed of, as
determined by the Board of Directors.
"Average Life" means, at any date of determination with respect to any debt
security, the quotient obtained by dividing (i) the sum of the products of (a)
the number of years from such date of determination to the dates of each
successive scheduled principal payment of such debt security and (b) the amount
of such principal payment by (ii) the sum of all such principal payments.
"Capital Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated, whether
voting or non-voting) in equity of such Person, whether now outstanding or
issued after the date of the Indenture, including, without limitation, all
Common Stock and Preferred Stock.
"Capitalized Lease" means, as applied to any Person, any lease of any
property (whether real, personal or mixed) of which the discounted present value
of the rental obligations of such Person as lessee, in conformity with GAAP, is
required to be capitalized on the balance sheet of such Person; and "Capitalized
Lease Obligations" means the discounted present value of the rental obligations
under such lease.
"Change of Control" means such time as (i) a "person" or "group" (within the
meaning of Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934,
as amended ("Exchange Act")), other than the Permitted Investor, becomes the
ultimate "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act) of
Voting Stock representing more than 50% of the total voting power of the Voting
Stock of WCI on a fully diluted basis or (ii) individuals who on October 23,
1995 constitute the Board of Directors (together with any new directors whose
election by the Board of Directors or whose nomination for election by WCI's
stockholders was approved by a vote of at least two-thirds of the members of the
Board of Directors then in office who either were members of the Board of
Directors on
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October 23, 1995 or whose election or nomination for election was previously so
approved) cease for any reason to constitute a majority of the members of the
Board of Directors then in office.
"Closing Date" means the date on which the Senior Notes or the Senior
Subordinated Notes, as the case may be, are originally issued under the
applicable Indenture.
"Consolidated EBITDA" means, for any period, the sum of the amounts for such
period of (i) Adjusted Consolidated Net Income, (ii) Consolidated Interest
Expense, to the extent such amount was deducted in calculating Adjusted
Consolidated Net Income, (iii) income taxes, to the extent such amount was
deducted in calculating Adjusted Consolidated Net Income (other than income
taxes (either positive or negative) attributable to extraordinary and
non-recurring gains or losses or sales of assets), (iv) depreciation expense, to
the extent such amount was deducted in calculating Adjusted Consolidated Net
Income, (v) amortization expense, to the extent such amount was deducted in
calculating Adjusted Consolidated Net Income and (vi) all other non-cash items
reducing Adjusted Consolidated Net Income (other than items that will require
cash payments and for which an accrual or reserve is, or is required by GAAP to
be, made), less all non-cash items increasing Adjusted Consolidated Net Income,
all as determined on a consolidated basis for WCI and its Restricted
Subsidiaries in conformity with GAAP; provided that, if any Restricted
Subsidiary is not a Wholly Owned Restricted Subsidiary, Consolidated EBITDA
shall be reduced (to the extent not otherwise reduced in accordance with GAAP)
by an amount equal to (A) the amount of the Adjusted Consolidated Net Income
attributable to such Restricted Subsidiary multiplied by (B) the quotient of (1)
the number of shares of outstanding Common Stock of such Restricted Subsidiary
not owned on the last day of such period by WCI or any of its Restricted
Subsidiaries divided by (2) the total number of shares of outstanding Common
Stock of such Restricted Subsidiary on the last day of such period.
"Consolidated Interest Expense" means, for any period, the aggregate amount
of interest in respect of Indebtedness (including amortization of original issue
discount on any Indebtedness and the interest portion of any deferred payment
obligation, calculated in accordance with the effective interest method of
accounting; all commissions, discounts and other fees and charges owed with
respect to letters of credit and bankers' acceptance financing; the net costs
associated with Interest Rate Agreements; and Indebtedness that is Guaranteed or
secured by WCI or any of its Restricted Subsidiaries) and all but the principal
component of rentals in respect of Capitalized Lease Obligations paid, accrued
or scheduled to be paid or to be accrued by WCI and its Restricted Subsidiaries
during such period; excluding, however, (i) any amount of such interest of any
Restricted Subsidiary if the net income of such Restricted Subsidiary is
excluded in the calculation of Adjusted Consolidated Net Income pursuant to
clause (iii) of the definition thereof (but only in the same proportion as the
net income of such Restricted Subsidiary is excluded from the calculation of
Adjusted Consolidated Net Income pursuant to clause (iii) of the definition
thereof) and (ii) any premiums, fees and expenses (and any amortization thereof)
payable in connection with the offering of the Notes, all as determined on a
consolidated basis (without taking into account Unrestricted Subsidiaries) in
conformity with GAAP.
"Consolidated Net Worth" means, at any date of determination, stockholders'
equity as set forth on the most recently available quarterly or annual
consolidated balance sheet of WCI and its Restricted Subsidiaries (which shall
be as of a date not more than 90 days prior to the date of such computation, and
which shall not take into account Unrestricted Subsidiaries), less any amounts
attributable to Redeemable Stock or any equity security convertible into or
exchangeable for Indebtedness, the cost of treasury stock and the principal
amount of any promissory notes receivable from the sale of the Capital Stock of
WCI or any of its Restricted Subsidiaries, each item to be determined in
conformity with GAAP (excluding the effects of foreign currency exchange
adjustments under Financial Accounting Standards Board Statement of Financial
Accounting Standards No. 52).
"Default" means any event that is, or after notice or passage of time or
both would be, an Event of Default.
"Everest Notes" means the secured notes issued by WinStar Wireless in May of
1995 (originally in the principal amount of $7.5 million) that are convertible
into Common Stock of WCI.
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"fair market value" means the price that would be paid in an arm's-length
transaction between an informed and willing seller under no compulsion to sell
and an informed and willing buyer under no compulsion to buy, as determined in
good faith by the Board of Directors (whose determination shall be conclusive)
and evidenced by a Board Resolution.
"FCC" means the United States Federal Communications Commission and any
state or local telecommunications authority, department, commission or agency
(and any successors thereto).
"GAAP" means generally accepted accounting principles in the United States
of America as in effect as of the date of the Indenture, including, without
limitation, those set forth in the opinions and pronouncements of the Accounting
Principles Board of the American Institute of Certified Public Accountants and
statements and pronouncements of the Financial Accounting Standards Board or in
such other statements by such other entity as approved by a significant segment
of the accounting profession. All ratios and computations contained in the
Indenture shall be computed in conformity with GAAP applied on a consistent
basis, except that calculations made for purposes of determining compliance with
the terms of the covenants and with other provisions of the Indenture shall be
made without giving effect to (i) the amortization of any expenses incurred in
connection with the offering of the Senior Notes, the Senior Subordinated Notes,
the Old Senior Notes or the Old Convertible Notes, and (ii) except as otherwise
provided, the amortization of any amounts required or permitted by Accounting
Principles Board Opinion Nos. 16 and 17.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness or other obligation of any
other Person and, without limiting the generality of the foregoing, any
obligation, direct or indirect, contingent or otherwise, of such Person (i) to
purchase or pay (or advance or supply funds for the purchase or payment of) such
Indebtedness or other obligation of such other Person (whether arising by virtue
of partnership arrangements, or by agreements to keep-well, to purchase assets,
goods, securities or services, to take-or-pay, or to maintain financial
statement conditions or otherwise) or (ii) entered into for purposes of assuring
in any other manner the obligee of such Indebtedness or other obligation of the
payment thereof or to protect such obligee against loss in respect thereof (in
whole or in part); provided that the term "Guarantee" shall not include
endorsements for collection or deposit in the ordinary course of business. The
term "Guarantee" used as a verb has a corresponding meaning.
"Incur" means, with respect to any Indebtedness, to incur, create, issue,
assume, Guarantee or otherwise become liable for or with respect to, or become
responsible for, the payment of, contingently or otherwise, such Indebtedness,
including, with respect to the Company and its Restricted Subsidiaries, an
"incurrence" of Indebtedness by reason of a Person becoming a Restricted
Subsidiary of the Company; provided that neither the accrual of interest nor the
accretion of original issue discount shall be considered an Incurrence of
Indebtedness.
"Indebtedness" means, with respect to any Person at any date of
determination (without duplication), (i) all indebtedness of such Person for
borrowed money, (ii) all obligations of such Person evidenced by bonds,
debentures, notes or other similar instruments (whether negotiable or non-
negotiable), (iii) all obligations of such Person in respect of letters of
credit or other similar instruments (including reimbursement obligations with
respect thereto), (iv) all obligations of such Person to pay the deferred and
unpaid purchase price of property or services, which purchase price is due more
than six months after the date of placing such property in service or taking
delivery and title thereto or the completion of such services, except trade
payables, (v) all obligations of such Person as lessee under Capitalized Leases,
(vi) all Indebtedness of other Persons secured by a Lien on any asset of such
Person, whether or not such Indebtedness is assumed by such Person; provided
that the amount of such Indebtedness shall be the lesser of (A) the fair market
value of such asset at such date of determination and (B) the amount of such
Indebtedness, (vii) all Indebtedness of other Persons Guaranteed by such Person
to the extent such Indebtedness is Guaranteed by such Person and (viii) to the
extent not otherwise included in this definition, obligations under Currency
Agreements and Interest Rate Agreements. The amount of Indebtedness of any
Person at any date shall be the outstanding balance at
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such date of all unconditional obligations as described above and, with respect
to contingent obligations that are included in any of clauses (i) through (viii)
above, the maximum liability upon the occurrence of the contingency giving rise
to the obligation, provided (A) that the amount outstanding at any time of any
Indebtedness issued with original issue discount is the face amount of such
Indebtedness and (B) that Indebtedness shall not include any liability for
federal, state, local or other taxes.
"Indebtedness to EBITDA Ratio" means, as at any date of determination, the
ratio of (i) the aggregate amount of Indebtedness of WCI and its Restricted
Subsidiaries on a consolidated basis ("Consolidated Indebtedness") as at the
date of determination (the "Transaction Date") to (ii) the Consolidated EBITDA
of WCI for the then most recent four full fiscal quarters for which reports have
been filed pursuant to the "Commission Reports and Reports to Holders" covenant
described below (such four full fiscal quarter period being referred to herein
as the "Four Quarter Period"); provided that (x) pro forma effect shall be given
to any Indebtedness Incurred from the beginning of the Four Quarter Period
through the Transaction Date (including any Indebtedness Incurred on the
Transaction Date), to the extent outstanding on the Transaction Date, (y) if
during the period commencing on the first day of such Four Quarter Period
through the Transaction Date (the "Reference Period"), WCI or any of the
Restricted Subsidiaries shall have engaged in any Asset Sale, Consolidated
EBITDA for such period shall be reduced by an amount equal to the EBITDA (if
positive), or increased by an amount equal to the EBITDA (if negative), directly
attributable to the assets which are the subject of such Asset Sale and any
related retirement of Indebtedness as if such Asset Sale and related retirement
of Indebtedness had occurred on the first day of such Reference Period or (z) if
during such Reference Period WCI or any of the Restricted Subsidiaries shall
have made any Asset Acquisition, Consolidated EBITDA of WCI shall be calculated
on a pro forma basis as if such Asset Acquisition and any Incurrence of
Indebtedness to finance such Asset Acquisition had taken place on the first day
of such Reference Period.
"Investment" in any Person means any direct or indirect advance, loan or
other extension of credit (including, without limitation, by way of Guarantee or
similar arrangement; but excluding advances to customers in the ordinary course
of business that are, in conformity with GAAP, recorded as accounts receivable
on the balance sheet of WCI or its Restricted Subsidiaries) or capital
contribution to (by means of any transfer of cash or other property to others or
any payment for property or services for the account or use of others), or any
purchase or acquisition of Capital Stock, bonds, notes, debentures or other
similar instruments issued by, such Person and shall include (i) the designation
of a Restricted Subsidiary as an Unrestricted Subsidiary and (ii) the fair
market value of the Capital Stock held by WCI and the Restricted Subsidiaries of
any Person that has ceased to be a Restricted Subsidiary by reason of any
transaction permitted by clause (iii) of the "Limitation on the Issuance and
Sale of Capital Stock of Restricted Subsidiaries" covenant. For purposes of the
definition of "Unrestricted Subsidiary" and the "Limitation on Restricted
Payments" covenant described below, (i) "Investment" shall include the fair
market value of the assets (net of liabilities) of any Restricted Subsidiary of
WCI at the time that such Restricted Subsidiary of WCI is designated an
Unrestricted Subsidiary and shall exclude the fair market value of the assets
(net of liabilities) of any Unrestricted Subsidiary at the time that such
Unrestricted Subsidiary is designated a Restricted Subsidiary of WCI and (ii)
any property transferred to or from an Unrestricted Subsidiary shall be valued
at its fair market value at the time of such transfer, in each case as
determined by the Board of Directors in good faith.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including, without limitation, any conditional sale or other
title retention agreement or lease in the nature thereof, any sale with recourse
against the seller or any Affiliate of the seller, or any agreement to give any
security interest).
"Net Cash Proceeds" means, (a) with respect to any Asset Sale, the proceeds
of such Asset Sale in the form of cash or cash equivalents, including payments
in respect of deferred payment obligations (to
the extent corresponding to the principal, but not interest, component thereof)
when received in the form of cash or cash equivalents (except to the extent such
obligations are financed or sold with recourse
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to WCI or any Restricted Subsidiary of WCI) and proceeds from the conversion of
other property received when converted to cash or cash equivalents, net of (i)
brokerage commissions and other fees and expenses (including fees and expenses
of counsel and investment bankers) related to such Asset Sale, (ii) provisions
for all taxes (whether or not such taxes will actually be paid or are payable)
as a result of such Asset Sale without regard to the consolidated results of
operations of WCI and its Restricted Subsidiaries, taken as a whole, (iii)
payments made to repay Indebtedness or any other obligation outstanding at the
time of such Asset Sale that either (A) is secured by a Lien on the property or
assets sold or (B) is required to be paid as a result of such sale and (iv)
appropriate amounts to be provided by WCI or any Restricted Subsidiary of WCI as
a reserve against any liabilities associated with such Asset Sale, including,
without limitation, pension and other post-employment benefit liabilities,
liabilities related to environmental matters and liabilities under any
indemnification obligations associated with such Asset Sale, all as determined
in conformity with GAAP and (b) with respect to any issuance or sale of Capital
Stock, the proceeds of such issuance or sale in the form of cash or cash
equivalents, including payments in respect of deferred payment obligations (to
the extent corresponding to the principal, but not interest, component thereof)
when received in the form of cash or cash equivalents (except to the extent such
obligations are financed or sold with recourse to WCI or any Restricted
Subsidiary of WCI) and proceeds from the conversion of other property received
when converted to cash or cash equivalents, net of attorney's fees, accountants'
fees, underwriters' or placement agents' fees, discounts or commissions and
brokerage, consultant and other fees incurred in connection with such issuance
or sale and net of taxes paid or payable by WCI or any of its subsidiaries as a
result thereof.
"Offer to Purchase" means an offer to purchase Senior Notes or Senior
Subordinated Notes by WCI from the Holders that is required by the "Limitation
on Asset Sales" or "Repurchase of Notes upon a Change of Control" covenants of
the Indentures and which is commenced by mailing a notice to the relevant
Trustee and each Holder stating: (i) the covenant pursuant to which the offer is
being made and that all Senior Notes or Senior Subordinated Notes, as the case
may be, validly tendered will be accepted for payment on a pro rata basis; (ii)
the purchase price and the date of purchase (which shall be a Business Day no
earlier than 30 days nor later than 60 days from the date such notice is mailed)
(the "Payment Date"); (iii) that any Senior Note or Senior Subordinated Note, as
the case may be, not tendered will continue to accrue interest pursuant to its
terms; (iv) that, unless WCI defaults in the payment of the purchase price, any
Senior Note or Senior Subordinated Note, as the case may be, accepted for
payment pursuant to the Offer to Purchase shall cease to accrue interest on and
after the Payment Date; (v) that Holders electing to have a Senior Note or
Senior Subordinated Note, as the case may be, purchased pursuant to the Offer to
Purchase will be required to surrender the Senior Note or Senior Subordinated
Note, as the case may be, together with the form entitled "Option of the Holder
to Elect Purchase" on the reverse side thereof completed, to the Paying Agent at
the address specified in the notice prior to the close of business on the
Business Day immediately preceding the Payment Date; (vi) that Holders will be
entitled to withdraw their election if the Paying Agent receives, not later than
the close of business on the third Business Day immediately preceding the
Payment Date, a telegram, facsimile transmission or letter setting forth the
name of such Holder, the principal amount of Senior Notes or Senior Subordinated
Notes, as the case may be, delivered for purchase and a statement that such
Holder is withdrawing his election to have such Senior Notes or Senior
Subordinated Notes, as the case may be, purchased; and (vii) that Holders whose
Senior Notes or Senior Subordinated Notes, as the case may be, are being
purchased only in part will be issued new Senior Notes or Senior Subordinated
Notes, as the case may be, equal in principal amount (and accrued and unpaid
interest) to the unpurchased portion thereof; provided that each Senior Note or
Senior Subordinated Note, as the case may be, purchased and each new Senior Note
or Senior Subordinated Note, as the case may be, issued shall be in a principal
amount of $1,000 or integral multiples thereof. On the Payment Date, WCI shall
(i) accept for payment on a pro rata basis Senior Notes or Senior Subordinated
Notes, as the case may be, or portions thereof tendered pursuant to an Offer to
Purchase; (ii) deposit with the Paying Agent money sufficient to pay the
purchase price of all Senior Notes or Senior Subordinated Notes, as
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the case may be, or portions thereof so accepted; and (iii) deliver, or cause to
be delivered, to the relevant Trustee all Senior Notes or Senior Subordinated
Notes, as the case may be, or portions thereof so accepted together with an
Officers' Certificate specifying the Senior Notes or Senior Subordinated Notes,
as the case may be, or portions thereof accepted for payment by WCI. The Paying
Agent shall promptly mail to the Holders of Senior Notes or Senior Subordinated
Notes, as the case may be, so accepted for payment in an amount equal to the
purchase price, and the Trustee shall promptly authenticate and mail to such
Holders a new Senior Note or Senior Subordinated Note, as the case may be, equal
in principal amount to any unpurchased portion of the Senior Note or Senior
Subordinated Note, as the case may be, surrendered; provided that each Senior
Note or Senior Subordinated Note, as the case may be, purchased and each new
Senior Note or Senior Subordinated Note, as the case may be, issued shall be in
a principal amount of $1,000 or integral multiples thereof. WCI will publicly
announce the results of an Offer to Purchase as soon as practicable after the
Payment Date. The relevant Trustee shall act as the Paying Agent for an Offer to
Purchase. WCI will comply with Rule 14e-1 under the Exchange Act and any other
securities laws and regulations thereunder to the extent such laws and
regulations are applicable, in the event that WCI is required to repurchase
Senior Notes or Senior Subordinated Notes, as the case may be, pursuant to an
Offer to Purchase.
"Old Convertible Notes" means the 14% Convertible Senior Subordinated
Discount Notes due 2005 of WCI.
"Old Senior Notes" means the 14% Senior Discount Notes due 2005 of WCI.
"Permitted Investment" means (i) an Investment in a Restricted Subsidiary or
a Person which will, upon the making of such Investment, become a Restricted
Subsidiary or be merged or consolidated with or into or transfer or convey all
or substantially all its assets to, WCI or a Restricted Subsidiary; (ii)
Temporary Cash Investments; (iii) payroll, travel and similar advances to cover
matters that are expected at the time of such advances ultimately to be treated
as expenses in accordance with GAAP; (iv) loans or advances to employees in a
principal amount not to exceed $1 million at any one time outstanding; (v)
stock, obligations or securities received in satisfaction of judgments; (vi)
Investments, to the extent that the consideration provided by WCI or any of its
Restricted Subsidiaries consists solely of Capital Stock (other than Redeemable
Stock) of WCI; and (vii) notes payable to WCI that are received by WCI as
payment of the purchase price for Capital Stock (other than Redeemable Stock) of
WCI.
"Permitted Investor" means Mr. William J. Rouhana, Jr.
"Permitted Liens" means (i) Liens for taxes, assessments, governmental
charges or claims that are being contested in good faith by appropriate legal
proceedings promptly instituted and diligently conducted and for which a reserve
or other appropriate provision, if any, as shall be required in conformity with
GAAP shall have been made; (ii) statutory or common law Liens of landlords and
carriers, warehousemen, mechanics, suppliers, materialmen, repairmen or other
similar Liens arising in the ordinary course of business and with respect to
amounts not yet delinquent or being contested in good faith by appropriate legal
proceedings promptly instituted and diligently conducted and for which a reserve
or other appropriate provision, if any, as shall be required in conformity with
GAAP shall have been made; (iii) Liens incurred or deposits made in the ordinary
course of business in connection with workers' compensation, unemployment
insurance and other types of social security; (iv) Liens incurred or deposits
made to secure the performance of tenders, bids, leases, statutory or regulatory
obligations, bankers' acceptances, surety and appeal bonds, government
contracts, performance and return-of-money bonds and other obligations of a
similar nature incurred in the ordinary course of business (exclusive of
obligations for the payment of borrowed money) and a bank's unexercised right of
set-off with respect to deposits made in the ordinary course; (v) easements,
rights-of-way, municipal and zoning ordinances and similar charges,
encumbrances, title defects or other irregularities that do not materially
interfere with the ordinary course of business of WCI or any of its Restricted
Subsidiaries; (vi) Liens (including extensions and renewals thereof) upon real
or personal property acquired after the Closing Date; provided that (a) such
Lien is created solely for the purpose of securing Indebtedness
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Incurred, in accordance with the "Limitation on Indebtedness" covenant described
below, (1) to finance the cost (including the cost of improvement or
construction) of the item of property or assets subject thereto and such Lien is
created prior to, at the time of or within six months after the later of the
acquisition, the completion of construction or the commencement of full
operation of such property or (2) to refinance any Indebtedness previously so
secured, (b) the principal amount of the Indebtedness secured by such Lien does
not exceed 100% of such cost and (c) any such Lien shall not extend to or cover
any property or assets other than such item of property or assets and any
improvements on such item; (vii) leases or subleases granted to others that do
not materially interfere with the ordinary course of business of WCI and its
Restricted Subsidiaries, taken as a whole; (viii) Liens encumbering property or
assets under construction arising from progress or partial payments by a
customer of WCI or its Restricted Subsidiaries relating to such property or
assets; (ix) any interest or title of a lessor in the property subject to any
Capitalized Lease or operating lease; (x) Liens arising from filing Uniform
Commercial Code financing statements regarding leases; (xi) Liens on property
of, or on shares of stock or Indebtedness of, any corporation existing at the
time such corporation becomes, or becomes a part of, any Restricted Subsidiary;
provided that such Liens do not extend to or cover any property or assets of WCI
or any Restricted Subsidiary other than the property or assets acquired; (xii)
Liens in favor of WCI or any Restricted Subsidiary; (xiii) Liens arising from
the rendering of a final judgment or order against WCI or any Restricted
Subsidiary of WCI that does not give rise to an Event of Default; (xiv) Liens
securing reimbursement obligations with respect to letters of credit that
encumber documents and other property relating to such letters of credit and the
products and proceeds thereof; (xv) Liens in favor of customs and revenue
authorities arising as a matter of law to secure payment of customs duties in
connection with the importation of goods; (xvi) Liens encumbering customary
initial deposits and margin deposits, and other Liens that are either within the
general parameters customary in the industry and incurred in the ordinary course
of business, in each case, securing Indebtedness under Interest Rate Agreements
and Currency Agreements and forward contracts, options, future contracts,
futures options or similar agreements or arrangements designed to protect WCI or
any of its Restricted Subsidiaries from fluctuations in the price of
commodities; (xvii) Liens arising out of conditional sale, title retention,
consignment or similar arrangements for the sale of goods entered into by WCI or
any of its Restricted Subsidiaries in the ordinary course of business in
accordance with the past practices of WCI and its Restricted Subsidiaries prior
to the Closing Date; and (xviii) Liens on or sales of receivables.
"Redeemable Stock" means any class or series of Capital Stock of any Person
that by its terms or otherwise is (i) required to be redeemed prior to the
Stated Maturity of the Notes, (ii) redeemable at the option of the holder of
such class or series of Capital Stock at any time prior to the Stated Maturity
of the Notes (unless the redemption price is, at WCI's option, without
conditions precedent, payable solely in Common Stock (other than Redeemable
Stock) of WCI) or (iii) convertible into or exchangeable for Capital Stock
referred to in clause (i) or (ii) above or Indebtedness having a scheduled
maturity prior to the Stated Maturity of the Notes; provided that any Capital
Stock that would not constitute Redeemable Stock but for provisions thereof
giving holders thereof the right to require such Person to repurchase or redeem
such Capital Stock upon the occurrence of an "asset sale" or "change of control"
occurring prior to the Stated Maturity of the Notes shall not constitute
Redeemable Stock if the "asset sale" or "change of control" provisions
applicable to such Capital Stock are no more favorable to the holders of such
Capital Stock than the provisions contained in "Limitation on Asset Sales" and
"Repurchase of Notes Upon a Change of Control" covenants described below and
such Capital Stock specifically provides that such Person will not repurchase or
redeem any such stock pursuant to such provision prior to WCI's repurchase of
such Notes as are required to be repurchased pursuant to the "Limitation on
Asset Sales" and "Repurchase of Notes Upon a Change of Control" covenants
described below.
"Restricted Subsidiary" means any Subsidiary of WCI other than an
Unrestricted Subsidiary.
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"Semi-Annual Accrual Date" means each July and January ,
commencing with the first such date to occur after the Closing Date.
"Senior Notes" means the Senior Notes of WCI due July 2006.
"Senior Subordinated Notes" means the Senior Subordinated Notes of WCI due
July 2006.
"Significant Subsidiary" means, at any date of determination, any Restricted
Subsidiary of WCI that, together with its Subsidiaries, (i) for the most recent
fiscal year of WCI, accounted for more than 10% of the consolidated revenues of
WCI and its Restricted Subsidiaries or (ii) as of the end of such fiscal year,
was the owner of more than 10% of the consolidated assets of WCI and its
Restricted Subsidiaries, all as set forth on the most recently available
consolidated financial statements of WCI for such fiscal year.
"Stated Maturity" means, (i) with respect to any debt security, the date
specified in such debt security as the fixed date on which the final installment
of principal of such debt security is due and payable and (ii) with respect to
any scheduled installment of principal of or interest on any debt security, the
date specified in such debt security as the fixed date on which such installment
is due and payable.
"Subsidiary" means, with respect to any Person, any corporation, association
or other business entity of which Voting Stock representing more than 50% of the
voting power of the outstanding Voting Stock is owned, directly or indirectly,
by such Person and one or more other Subsidiaries of such Person.
"Telecommunications Assets" means any (i) entity or business substantially
all the revenues of which are derived from (a) providing transmission of sound,
data or video; (b) the sale or provision of phone cards, "800" services, voice
mail, switching, enhanced telecommunications services, telephone directory or
telephone number information services or telecommunications network
intelligence; or (c) any business ancillary or directly related to the
businesses referred to in clause (a) or (b) above and (ii) any assets used
primarily to effect such transmission or provide the products or services
referred to in clause (a) or (b) above and any directly related or ancillary
assets including, without limitation, licenses and applications, bids and
agreements to acquire licenses, or other authority to provide transmission
services previously granted, or to be granted, by the FCC; provided that
"Telecommunications Assets" shall not include (A) any entity or business that,
during its most recent fiscal year derived, or in its current fiscal year is
expected by the Board of Directors to derive, more than $3 million in revenues
from, or spend more than $3 million on, the production of entertainment or
information product and (B) any asset consisting of any entertainment or
information product.
"Telecommunications Subsidiary" means (i) WinStar Gateway, WinStar Wireless,
Winstar Telecom, Winstar Locate, Inc. and Wireless Fiber Corp., and, in each
case, its successors and (ii) any other Restricted Subsidiary of WCI that holds
more than a de minimis amount of Telecommunications Assets.
"Temporary Cash Investment" means any of the following: (i) direct
obligations of the United States or any agency thereof or obligations fully and
unconditionally guaranteed by the United States or any agency thereof; (ii) time
deposit accounts, certificates of deposit and money market deposits maturing
within 180 days of the date of acquisition thereof issued by a bank or trust
company which is organized under the laws of the United States, any state
thereof or any foreign country recognized by the United States, and which bank
or trust company has capital, surplus and undivided profits aggregating in
excess of $50.0 million (or the foreign currency equivalent thereof) and has
outstanding debt which is rated "A" (or such similar equivalent rating) or
higher by at least one nationally recognized statistical rating organization (as
defined in Rule 436 under the Securities Act) or any money-market fund sponsored
by a registered broker dealer or mutual fund distributor; (iii) repurchase
obligations with a term of not more than 30 days for underlying securities of
the types described in clause (i) above entered into with a bank meeting the
qualifications described in clause (ii) above; (iv) commercial paper, maturing
not more than six months after the date of acquisition, issued by a
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corporation (other than an Affiliate of WCI) organized and in existence under
the laws of the United States, any state thereof or any foreign country
recognized by the United States with a rating at the time as of which any
investment therein is made of "P-1" (or higher) according to Moody's Investors
Service, Inc. or "A-1" (or higher) according to Standard & Poor's Ratings Group;
and (v) securities with maturities of six months or less from the date of
acquisition issued or fully and unconditionally guaranteed by any state,
commonwealth or territory of the United States, or by any political subdivision
or taxing authority thereof, and rated at least "A" by Standard & Poor's Ratings
Group or Moody's Investors Service, Inc.; provided that, notwithstanding the
foregoing, the maturity of any of the foregoing that is applied to provide
security in favor of the Indebtedness referred to in clause (v) of the second
paragraph of the "Limitation on Liens" covenant may occur as late as the
earliest date that such Indebtedness may be redeemed at the option of the
obligor with respect to such Indebtedness; and provided further that WCI shall
cause such Liens referred to in such clause (v) to be incurred no later than the
first anniversary of the Closing Date.
"Transaction Date" means, with respect to the Incurrence of any Indebtedness
by WCI or any of its Restricted Subsidiaries, the date such Indebtedness is to
be Incurred and, with respect to any Restricted Payment, the date such
Restricted Payment is to be made.
"Unrestricted Subsidiary" means (i) any Subsidiary of WCI that at the time
of determination shall be designated an Unrestricted Subsidiary by the Board of
Directors in the manner provided below and (ii) any Subsidiary of an
Unrestricted Subsidiary. The Board of Directors may designate any Restricted
Subsidiary of WCI (including any newly acquired or newly formed Subsidiary of
WCI), other than a Guarantor, to be an Unrestricted Subsidiary unless such
Subsidiary owns any Capital Stock of, or owns or holds any Lien on any property
of, WCI or any Restricted Subsidiary; provided that neither WCI nor its
Restricted Subsidiaries has any Guarantee of any Indebtedness of such Subsidiary
outstanding at the time of such designation and either (A) the Subsidiary to be
so designated has total assets of $1,000 or less or (B) if such Subsidiary has
assets greater than $1,000, that such designation would be permitted under the
"Limitation on Restricted Payments" covenant described below. Notwithstanding
the foregoing, WinStar New Media Company Inc., Non Fiction Films Inc. and
WinStar Global Products, Inc. and their Subsidiaries are Unrestricted
Subsidiaries. The Board of Directors may designate any Unrestricted Subsidiary
to be a Restricted Subsidiary of WCI; provided that immediately after giving
effect to such designation (x) WCI could Incur $1.00 of additional Indebtedness
under the first paragraph of the "Limitation on Indebtedness" covenant described
below and (y) no Default or Event of Default shall have occurred and be
continuing. Any such designation by the Board of Directors shall be evidenced to
the Trustee by promptly filing with the Trustee a copy of the Board Resolution
giving effect to such designation and an Officers' Certificate certifying that
such designation complied with the foregoing provisions. Anything to the
contrary contained in the Indentures notwithstanding, no Telecommunications
Subsidiary may be designated an Unrestricted Subsidiary.
"Voting Stock" means with respect to any Person, Capital Stock of any class
or kind ordinarily having the power to vote for the election of directors,
managers or other voting members of the governing body of such Person.
"Wholly Owned" means, with respect to any Subsidiary of any Person, such
Subsidiary if all of the outstanding Capital Stock in such Subsidiary (other
than any director's qualifying shares or Investments by foreign nationals
mandated by applicable law) is owned by such Person or one or more Wholly Owned
Subsidiaries of such Person.
COVENANTS
Limitation on Indebtedness
(a) Under the terms of each of the Indentures, WCI will not, and will not
permit any of its Restricted Subsidiaries to, Incur any Indebtedness (other than
the Notes and Indebtedness existing on
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the Closing Date); provided that WCI may Incur Indebtedness if, after giving
effect to the Incurrence of such Indebtedness and the receipt and application of
the proceeds therefrom, the Indebtedness to EBITDA Ratio would be greater than
zero and less than 5:1.
Notwithstanding the foregoing, WCI and any Restricted Subsidiary (except as
specified below) may Incur each and all of the following: (i) Indebtedness of
WCI outstanding at any time in an aggregate principal amount not to exceed
$125.0 million, less any amount of Indebtedness permanently repaid as provided
under the "Limitation on Asset Sales" covenant described below; (ii)
Indebtedness (A) to WCI evidenced by an unsubordinated promissory note or (B) to
any of its Restricted Subsidiaries; provided that any event which results in any
such Restricted Subsidiary ceasing to be a Restricted Subsidiary or any
subsequent transfer of such Indebtedness (other than to WCI or another
Restricted Subsidiary) shall be deemed, in each case, to constitute an
Incurrence of such Indebtedness not permitted by this clause (ii); (iii)
Indebtedness issued in exchange for, or the net proceeds of which are used to
refinance or refund, then outstanding Indebtedness, other than Indebtedness
Incurred under clause (i), (ii), (v), (vi) or (vii) of this paragraph, and any
refinancings thereof in an amount not to exceed the amount so refinanced or
refunded (plus premiums, accrued interest, fees and expenses); provided that
Indebtedness the proceeds of which are used to refinance or refund the Senior
Notes or Senior Subordinated Notes, as the case may be, or Indebtedness that is
pari passu with, or subordinated in right of payment to, the Senior Notes or
Senior Subordinated Notes, as the case may be, shall only be permitted under
this clause (iii) if (A) in case the Senior Notes or Senior Subordinated Notes,
as the case may be, are refinanced in part or the Indebtedness to be refinanced
is pari passu with the Senior Notes or Senior Subordinated Notes, as the case
may be, such new Indebtedness, by its terms or by the terms of any agreement or
instrument pursuant to which such new Indebtedness is outstanding, is expressly
made pari passu with, or subordinate in right of payment to, the remaining
Senior Notes or Senior Subordinated Notes, as the case may be, (B) in case the
Indebtedness to be refinanced is subordinated in right of payment to the Senior
Notes or Senior Subordinated Notes, as the case may be, such new Indebtedness,
by its terms or by the terms of any agreement or instrument pursuant to which
such new Indebtedness is outstanding, is expressly made subordinate in right of
payment to the Senior Notes or Senior Subordinated Notes, as the case may be, at
least to the extent that the Indebtedness to be refinanced is subordinated to
the Senior Notes or Senior Subordinated Notes, as the case may be, and (C) such
new Indebtedness, determined as of the date of Incurrence of such new
Indebtedness, does not mature prior to the Stated Maturity of the Indebtedness
to be refinanced or refunded, and the Average Life of such new Indebtedness is
at least equal to the remaining Average Life of the Indebtedness to be
refinanced or refunded; and provided further that in no event may Indebtedness
of WCI be refinanced by means of any Indebtedness of any Restricted Subsidiary
of WCI pursuant to this clause (iii); (iv) Indebtedness (A) in respect of
performance, surety or appeal bonds provided in the ordinary course of business,
(B) under Currency Agreements and Interest Rate Agreements; provided that such
agreements do not increase the Indebtedness of the obligor outstanding at any
time other than as a result of fluctuations in foreign currency exchange rates
or interest rates or by reason of fees, indemnities and compensation payable
thereunder; and (C) arising from agreements providing for indemnification,
adjustment of purchase price or similar obligations, or from Guarantees or
letters of credit, surety bonds or performance bonds securing any obligations of
WCI or any of the Restricted Subsidiaries pursuant to such agreements, in any
case Incurred in connection with the disposition of any business, assets or
Restricted Subsidiary of WCI (other than Guarantees of Indebtedness Incurred by
any Person acquiring all or any portion of such business, assets or Restricted
Subsidiary of WCI for the purpose of financing such acquisition), in a principal
amount not to exceed the gross proceeds actually received by WCI or any
Restricted Subsidiary in connection with such disposition; (v) Indebtedness of
WCI not to exceed, at any one time outstanding, two times the Net Cash Proceeds
received by WCI after October 23, 1995 from the issuance and sale of its Capital
Stock (other than Redeemable Stock and Preferred Stock that provides for the
payment of dividends in cash), less the amount of any investment made pursuant
to clause (ii) of the second paragraph of the "Limitation on Investments in
Non-Telecommunications Assets" covenant; provided that such Indebtedness (x)
does not mature prior
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to the Stated Maturity of the Notes and has an Average Life longer than the
Notes and (y) (A) in the case of the Senior Notes, is subordinated to the Senior
Notes at least to the extent that the Senior Subordinated Notes are subordinated
to Senior Indebtedness and (B) in the case of the Senior Subordinated Notes, is
pari passu with or subordinated to the Senior Subordinated Notes at least to the
extent that the Senior Subordinated Notes are subordinated to Senior
Indebtedness; (vi) Indebtedness of any Restricted Subsidiary Incurred pursuant
to any credit agreement of such Restricted Subsidiary in effect on October 23,
1995 (and refinancings thereof), up to the amount of the commitment under such
credit agreement on October 23, 1995; (vii) Indebtedness to the extent such
Indebtedness is secured by Liens permitted under clause (vi) of the second
paragraph of the "Limitation on Liens" covenant described below; (viii)
Indebtedness of any Restricted Subsidiary not to exceed, at any one time
outstanding, 62.5% of the accounts receivable net of reserves and allowances for
doubtful accounts, determined in accordance with GAAP, of such Restricted
Subsidiary and its Restricted Subsidiaries (without duplication); provided that
such Indebtedness is not Guaranteed by WCI or any of its Restricted
Subsidiaries; and (ix) Indebtedness of WCI, to the extent the proceeds thereof
are immediately used to purchase Notes tendered in an Offer to Purchase made as
a result of a Change of Control.
(b) For purposes of determining any particular amount of Indebtedness under
this "Limitation on Indebtedness" covenant, Guarantees, Liens or obligations
with respect to letters of credit supporting Indebtedness otherwise included in
the determination of such particular amount shall not be included. For purposes
of determining compliance with this "Limitation on Indebtedness" covenant, in
the event that an item of Indebtedness meets the criteria of more than one of
the types of Indebtedness described in the above clauses, WCI, in its sole
discretion, shall classify such item of Indebtedness and only be required to
include the amount and type of such Indebtedness in one of such clauses.
(c) WCI will not, and will not permit any Restricted Subsidiary to, incur
any Guarantee of Indebtedness of any Unrestricted Subsidiary.
Limitation on Senior Subordinated Indebtedness
Under the terms of the Senior Subordinated Notes Indenture, WCI will not
Incur any Indebtedness, other than the Senior Subordinated Notes, that is
expressly made subordinated in right of payment to any Senior Indebtedness
unless such Indebtedness, by its terms and by the terms of any agreement or
instrument pursuant to which such Indebtedness is outstanding is expressly made
pari passu with, or subordinate in right of payment to, the Senior Subordinated
Notes pursuant to provisions substantially similar to those contained in Article
12 of the Senior Subordinated Notes Indenture; provided, however, that the
foregoing limitation shall not apply to distinctions between categories of
Senior Indebtedness that exist by reason of any Liens or Guarantees arising or
created in respect of some but not all Senior Indebtedness. The Senior
Subordinated Notes Indenture provides that the Senior Subordinated Notes are
pari passu with the Old Convertible Notes.
Limitation on Restricted Payments
Under the terms of each of the Indentures, WCI will not, and will not permit
any Restricted Subsidiary to, directly or indirectly, (i) declare or pay any
dividend or make any distribution on its Capital Stock (other than dividends or
distributions payable solely in shares of its or such Restricted Subsidiary's
Capital Stock (other than Redeemable Stock) held by such holders or in options,
warrants or other rights to acquire such shares of Capital Stock) other than
such Capital Stock held by WCI or any of its Restricted Subsidiaries (and other
than pro rata dividends or distributions on Common Stock of Restricted
Subsidiaries), (ii) repurchase, redeem, retire or otherwise acquire for value
any shares of Capital Stock of WCI (including options, warrants or other rights
to acquire such shares of Capital Stock) held by Persons other than any Wholly
Owned Restricted Subsidiaries of WCI, (iii) make any voluntary or optional
principal payment, or voluntary or optional redemption, repurchase, defeasance,
or other acquisition or retirement for value, of Indebtedness of WCI that is
subordinated in right of payment to the Senior Notes or Senior Subordinated
Notes, as the case may be, or (iv) make any Investment, other than a Permitted
Investment, in any Person (such payments or any other actions
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described in clauses (i) through (iv) being collectively "Restricted Payments")
if, at the time of, and after giving effect to, the proposed Restricted Payment:
(A) a Default or Event of Default shall have occurred and be continuing, (B)
except with respect to any Investment (other than an Investment consisting of
the designation of a Restricted Subsidiary as an Unrestricted Subsidiary), WCI
could not Incur at least $1.00 of Indebtedness under the first paragraph of the
"Limitation on Indebtedness" covenant or (C) the aggregate amount expended for
all Restricted Payments (the amount so expended, if other than in cash, to be
determined in good faith by the Board of Directors, whose determination shall be
conclusive and evidenced by a Board Resolution) after the Closing Date shall
exceed the sum of (1) 50% of the aggregate amount of the Adjusted Consolidated
Net Income (or, if the Adjusted Consolidated Net Income is a loss, minus 100% of
such amount) (determined by excluding income resulting from transfers of assets
by WCI or a Restricted Subsidiary to an Unrestricted Subsidiary) accrued on a
cumulative basis during the period (taken as one accounting period) beginning on
the first day of the fiscal quarter immediately following October 23, 1995 and
ending on the last day of the last fiscal quarter preceding the Transaction Date
for which reports have been filed pursuant to the "Commission Reports and
Reports to Holders" covenant plus (2) the aggregate Net Cash Proceeds received
by WCI after October 23, 1995 from the issuance and sale permitted by the
Indentures of its Capital Stock (other than Redeemable Stock) to a Person who is
not a Subsidiary of WCI, or from the issuance to a Person who is not a
Subsidiary of WCI of any options, warrants or other rights to acquire Capital
Stock of WCI (in each case, exclusive of any convertible Indebtedness,
Redeemable Stock or any options, warrants or other rights that are redeemable at
the option of the holder, or are required to be redeemed, prior to the Stated
Maturity of the Notes), less the amount of any investment made pursuant to
clause (ii) of the second paragraph of the "Limitation on Investments in
Non-Telecommunications Assets" covenant plus (3) an amount equal to the net
reduction in Investments (other than reductions in Permitted Investments and
other than reductions in Investments made pursuant to (A) clauses (vi) or (vii)
of the second paragraph of this "Limitation on Restricted Payments" covenant or
(B) the "Limitation on Investments in Non-Telecommunications Assets" covenant)
in any Person resulting from payments of interest on Indebtedness, dividends,
repayments of loans or advances, or other transfers of assets, in each case to
WCI or any Restricted Subsidiary (except to the extent any such payment is
included in the calculation of Adjusted Consolidated Net Income), or from
redesignations of Unrestricted Subsidiaries as Restricted Subsidiaries (valued
in each case as provided in the definition of "Investments"), not to exceed the
amount of Investments previously made by WCI and its Restricted Subsidiaries in
such Person.
The foregoing provision shall not be violated by reason of: (i) the payment
of any dividend within 60 days after the date of declaration thereof if, at said
date of declaration, such payment would comply with the foregoing paragraph;
(ii) the redemption, repurchase, defeasance or other acquisition or retirement
for value of Indebtedness that is subordinated in right of payment to the Senior
Notes or Senior Subordinated Notes, as the case may be, including premium, if
any, and accrued and unpaid interest, with the proceeds of, or in exchange for,
Indebtedness Incurred under clause (iii) of the second paragraph of the
"Limitation on Indebtedness" covenant; (iii) the repurchase, redemption or other
acquisition of Capital Stock of WCI (or options, warrants or other rights to
acquire such Capital Stock) in exchange for, or out of the proceeds of a
substantially concurrent offering of, shares of Capital Stock or options,
warrants or other rights to acquire such Capital Stock (in each case other than
Redeemable Stock) of WCI; (iv) the making of any principal payment or
repurchase, redemption, retirement, defeasance or other acquisition for value of
Indebtedness of WCI (including, in the case of the Senior Notes, the Senior
Subordinated Notes and the Old Convertible Notes) which is subordinated in right
of payment to the Senior Notes or Senior Subordinated Notes, as the case may be,
in exchange for, or out of the proceeds of, a substantially concurrent offering
of, shares of the Capital Stock of WCI (other than Redeemable Stock); (v)
payments or distributions, in the nature of satisfaction of dissenters' rights,
pursuant to or in connection with a consolidation, merger or transfer of assets
that complies with the provisions of the Indenture applicable to mergers,
consolidations and transfers of all or substantially all of the property and
assets of WCI; (vi) Investments, not to exceed $15 million at any one time
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outstanding; (vii) Investments, not to exceed $15 million at any one time
outstanding, in entities, substantially all of the assets of which consist of
Telecommunications Assets; (viii) (A) cash payments in lieu of the issuance of
fractional shares of Common Stock upon conversion (including mandatory
conversion) of the Old Convertible Notes provided for in the Old Convertible
Notes Indenture and (B) with respect to the Senior Notes Indenture, cash
payments on the Senior Subordinated Notes and the Old Convertible Notes required
to be made under the "Limitation on Asset Sales" and "Repurchase of Notes upon a
Change of Control" covenants in the Senior Subordinated Notes Indenture and the
Old Convertible Notes Indenture; (ix) cash payments in lieu of the issuance of
fractional shares of Common Stock of WCI upon conversion of any class of
Preferred Stock of WCI; provided that this exception shall not be available with
respect to more than two such conversions with respect to any such class of
Preferred Stock by any given Affiliate of WCI; and (x) Investments in entities
that own licenses granted by the FCC; provided that (A) such Investments are
made pursuant to a senior promissory note, in an amount equal to such
Investment, that by its terms is payable in full at or before any required
repayment of principal on the Senior Notes or Senior Subordinated Notes, as the
case may be, (B) such promissory note is secured equally and ratably with (or
prior to) any other secured Indebtedness of such entity, (C) such Investment is
made and used for the purpose of effecting, and does not exceed the amount
reasonably required to effect, the minimum build-out with respect to such
licenses that is required by the FCC as a prerequisite to the transfer of a
majority equity interest in such entity to WCI or one of its Restricted
Subsidiaries, as determined in good faith by the Board of Directors and (D) WCI,
at the time such Investment is made, has a contractual right to, and intends
(subject in all cases to compliance with applicable FCC rules and regulations)
to, acquire such majority equity interest; provided that, except in the case of
clauses (i) and (iii), no Default or Event of Default shall have occurred and be
continuing or occur as a consequence of the actions or payments set forth
herein. Any Investments made other than in cash shall be valued, in good faith,
by the Board of Directors. Any Investment made pursuant to clause (vi) or (vii)
of this paragraph shall be deemed to be no longer outstanding (and repaid in
full) if and when the Person in which such Investment is made becomes a
Restricted Subsidiary of WCI.
Each Restricted Payment permitted pursuant to the preceding paragraph (other
than the Restricted Payment referred to in clause (ii) thereof), and the Net
Cash Proceeds from any issuance of Capital Stock referred to in clauses (iii) or
(iv) shall be included in calculating whether the conditions of clause (C) of
the first paragraph of this "Limitation on Restricted Payments" covenant have
been met with respect to any subsequent Restricted Payments. In the event the
proceeds of an issuance of Capital Stock of WCI are used for the redemption,
repurchase or other acquisition of the Senior Notes or Senior Subordinated
Notes, as the case may be, or Indebtedness that is pari passu with the Senior
Notes or Senior Subordinated Notes, as the case may be, then the Net Cash
Proceeds of such issuance shall be included in clause (C) of the first paragraph
of this "Limitation on Restricted Payments" covenant only to the extent such
proceeds are not used for such redemption, repurchase or other acquisition of
Indebtedness.
Limitation on Dividend and Other Payment Restrictions Affecting Restricted
Subsidiaries
Under the terms of each of the Indentures, WCI will not, and will not permit
any Restricted Subsidiary to, create or otherwise cause or suffer to exist or
become effective any consensual encumbrance or restriction of any kind on the
ability of any Restricted Subsidiary to (i) pay dividends or make any other
distributions permitted by applicable law on any Capital Stock of such
Restricted Subsidiary owned by WCI or any other Restricted Subsidiary, (ii) pay
any Indebtedness owed to WCI or any other Restricted Subsidiary that owns,
directly or indirectly, any Capital Stock of such Restricted Subsidiary, (iii)
make loans or advances to WCI or any other Restricted Subsidiary that owns,
directly or indirectly, any Capital Stock of such Restricted Subsidiary or (iv)
transfer any of its property or assets to WCI or any other Restricted Subsidiary
that owns, directly or indirectly, any Capital Stock of such Restricted
Subsidiary.
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The foregoing provisions shall not prohibit any encumbrances or
restrictions: (i) existing on the Closing Date in the Indentures or any other
agreement in effect on the Closing Date, and any extensions, refinancings,
renewals or replacements of such agreements; provided that the encumbrances and
restrictions in any such extensions, refinancings, renewals or replacements are
no less favorable in any material respect to the Holders than those encumbrances
or restrictions that are then in effect and that are being extended, refinanced,
renewed or replaced; (ii) existing under or by reason of applicable law; (iii)
existing with respect to any Person or the property or assets of such Person
acquired by WCI or any Restricted Subsidiary, at the time of such acquisition
and not incurred in contemplation thereof, which encumbrances or restrictions
are not applicable to any Person or the property or assets of any Person other
than such Person or the property or assets of such Person so acquired; (iv) in
the case of clause (iv) of the first paragraph of this "Limitation on Dividend
and Other Payment Restrictions Affecting Restricted Subsidiaries" covenant, (A)
that restrict in a customary manner the subletting, assignment or transfer of
any property or asset that is a lease, license, conveyance or contract or
similar property or asset, (B) existing by virtue of any transfer of, agreement
to transfer, option or right with respect to, or Lien on, any property or assets
of WCI or any Restricted Subsidiary not otherwise prohibited by the Indenture or
(C) arising or agreed to in the ordinary course of business, not relating to any
Indebtedness, and that do not, individually or in the aggregate, detract from
the value of property or assets of WCI or any Restricted Subsidiary in any
manner material to WCI or any Restricted Subsidiary; or (v) with respect to a
Restricted Subsidiary and imposed pursuant to an agreement that has been entered
into for the sale or disposition of all or substantially all of the Capital
Stock of, or property and assets of, such Restricted Subsidiary. Nothing
contained in this "Limitation on Dividend and Other Payment Restrictions
Affecting Restricted Subsidiaries" covenant shall prevent WCI or any Restricted
Subsidiary from (1) creating, incurring, assuming or suffering to exist any
Liens otherwise permitted in the "Limitation on Liens" covenant or (2)
restricting the sale or other disposition of property or assets of WCI or any of
its Restricted Subsidiaries that secure Indebtedness of WCI or any of its
Restricted Subsidiaries.
Limitation on the Issuance and Sale of Capital Stock of Restricted
Subsidiaries
Under the terms of each of the Indentures, WCI will not sell, and will not
permit any Restricted Subsidiary, directly or indirectly, to issue or sell any
shares of Capital Stock of a Restricted Subsidiary (including options, warrants
or other rights to purchase shares of such Capital Stock) except (i) to WCI or a
Wholly Owned Restricted Subsidiary, (ii) issuances or sales to foreign nationals
of shares of Capital Stock of foreign Restricted Subsidiaries, to the extent
required by applicable law, (iii) if, immediately after giving effect to such
issuance or sale, such Restricted Subsidiary would no longer constitute a
Restricted Subsidiary or (iv) issuances or sales of Common Stock of Restricted
Subsidiaries, other than the Telecommunications Subsidiaries, if within six
months of each such issuance or sale, WCI or such Restricted Subsidiary applies
an amount not less than the Net Cash Proceeds thereof (if any) in accordance
with clause (A) or (B) of the first paragraph of the "Limitation on Asset Sales"
covenant described below.
Limitation on Issuances of Guarantees by Restricted Subsidiaries
Under the terms of each of the Indentures, WCI will not permit any
Restricted Subsidiary, directly or indirectly, to Guarantee any Indebtedness of
WCI ("Guaranteed Indebtedness"), unless (i) such Restricted Subsidiary
simultaneously executes and delivers a supplemental indenture to the Indenture
providing for a Guarantee (a "Subsidiary Guarantee") of payment of the Notes by
such Restricted Subsidiary and (ii) such Restricted Subsidiary waives and will
not in any manner whatsoever claim or take the benefit or advantage of, any
rights of reimbursement, indemnity or subrogation or any other rights against
WCI or any other Restricted Subsidiary as a result of any payment by such
Restricted Subsidiary under its Subsidiary Guarantee; provided that this
paragraph shall not be applicable to any Guarantee of any Restricted Subsidiary
that (x) existed at the time such Person became a Restricted Subsidiary and (y)
was not Incurred in connection with, or in contemplation of, such Person
becoming a Restricted Subsidiary. If the Guaranteed Indebtedness is (A) pari
passu with the Senior Notes or
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Senior Subordinated Notes, as the case may be, then the Guarantee of such
Guaranteed Indebtedness shall be pari passu with, or subordinated to, the
Subsidiary Guarantee or (B) subordinated to the Senior Notes or Senior
Subordinated Notes, as the case may be, then the Guarantee of such Guaranteed
Indebtedness shall be subordinated to the Subsidiary Guarantee at least to the
extent that the Guaranteed Indebtedness is subordinated to the Senior Notes or
Senior Subordinated Notes, as the case may be.
Notwithstanding the foregoing, any Subsidiary Guarantee by a Restricted
Subsidiary shall provide by its terms that it shall be automatically and
unconditionally released and discharged upon (i) any sale, exchange or transfer,
to any Person not an Affiliate of WCI of all of WCI's and each Restricted
Subsidiary's Capital Stock in, or all or substantially all the assets of, such
Restricted Subsidiary (which sale, exchange or transfer is not prohibited by the
Indenture) or (ii) the release or discharge of the Guarantee which resulted in
the creation of such Subsidiary Guarantee, except a discharge or release by or
as a result of payment under such Guarantee.
Limitation on Transactions with Shareholders and Affiliates
Under the terms of each of the Indentures, WCI will not, and will not permit
any Restricted Subsidiary to, directly or indirectly, enter into, renew or
extend any transaction (including, without limitation, the purchase, sale, lease
or exchange of property or assets, or the rendering of any service) with any
holder (or any Affiliate of such holder) of 5% or more of any class of Capital
Stock of WCI or with any Affiliate of WCI or any Restricted Subsidiary, except
upon fair and reasonable terms no less favorable to WCI or such Restricted
Subsidiary than could be obtained, at the time of such transaction or, if such
transaction is pursuant to a written agreement, at the time of the execution of
the agreement providing therefor, in a comparable arm's-length transaction with
a Person that is not such a holder or an Affiliate.
The foregoing limitation does not limit, and shall not apply to (i)
transactions (A) approved by a majority of the disinterested members of the
Board of Directors or (B) for which WCI or a Restricted Subsidiary delivers to
the Trustee a written opinion of a nationally recognized investment banking firm
stating that the transaction is fair to WCI or such Restricted Subsidiary from a
financial point of view; (ii) any transaction solely between WCI and any of its
Wholly Owned Restricted Subsidiaries or solely between Wholly Owned Restricted
Subsidiaries; (iii) the payment of reasonable fees to directors of WCI who are
not employees of WCI; (iv) any payments or other transactions pursuant to any
tax-sharing agreement between WCI and any other Person with which WCI files a
consolidated tax return or with which WCI is part of a consolidated group for
tax purposes; or (v) any Restricted Payments not prohibited by the "Limitation
on Restricted Payments" covenant (other than pursuant to clause (iv) of the
definition of "Permitted Investment" or clause (vi) of the second paragraph of
the "Limitation on Restricted Payments" covenant). Notwithstanding the
foregoing, any transaction covered by the first paragraph of this "Limitation on
Transactions with Shareholders and Affiliates" covenant and not covered by
clauses (ii) through (iv) of this paragraph, the aggregate amount of which
exceeds $250,000 in value, must be approved or determined to be fair in the
manner provided for in clause (i)(A) or (B) above.
Limitation on Liens
Under the terms of each of the Indentures, WCI will not, and will not permit
any Restricted Subsidiary to, create, incur, assume or suffer to exist any Lien
on any of its assets or properties of any character, or any shares of Capital
Stock or Indebtedness of any Restricted Subsidiary (collectively, "Protected
Property"), without making effective provision for all of the Senior Notes or
Senior Subordinated Notes, as the case may be, and all other amounts due under
the Indentures to be directly secured equally and ratably with (or, if the
obligation or liability to be secured by such Lien is subordinated in right of
payment to the Senior Notes or Senior Subordinated Notes, as the case may be,
prior to) the obligation or liability secured by such Lien. The security
interest in any Protected Property granted in favor of the Senior Notes under
this paragraph shall be prior to the security interest granted in favor of the
Senior Subordinated Notes under this paragraph.
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The foregoing limitation does not apply to (i) Liens existing on the Closing
Date; (ii) Liens granted after the Closing Date on any assets or Capital Stock
of WCI or its Restricted Subsidiaries created in favor of the Holders; (iii)
Liens with respect to the assets of a Restricted Subsidiary granted by such
Restricted Subsidiary to WCI or a Wholly Owned Restricted Subsidiary to secure
Indebtedness owing to WCI or such other Restricted Subsidiary; (iv) Liens
securing Indebtedness which is Incurred to refinance secured Indebtedness which
is permitted to be Incurred under clause (iii) of the second paragraph of the
"Limitation on Indebtedness" covenant; provided that such Liens do not extend to
or cover any property or assets of WCI or any Restricted Subsidiary other than
the property or assets securing the Indebtedness being refinanced; (v) Liens on
up to $7.5 million (plus up to six months interest on the Everest Notes) of
Temporary Cash Investments at any one time, in favor of the holders of the
Everest Notes, in their capacity as such holders; (vi) purchase money Liens upon
equipment acquired or held by WCI or any of its Restricted Subsidiaries taken or
retained by the seller of such inventory or equipment to secure all or a part of
the purchase price therefor; provided that such Liens do not extend to or cover
any property or assets of WCI or any Restricted Subsidiary other than the
inventory or equipment acquired; or (vii) Permitted Liens.
Limitation on Sale-Leaseback Transactions
Under the terms of the Senior Notes Indenture, WCI will not, and will not
permit any Restricted Subsidiary to, enter into any sale-leaseback transaction
involving any of its assets or properties whether now owned or hereafter
acquired, whereby WCI or a Restricted Subsidiary sells or transfers such assets
or properties and then or thereafter leases such assets or properties or any
part thereof or any other assets or properties which WCI or such Restricted
Subsidiary, as the case may be, intends to use for substantially the same
purpose or purposes as the assets or properties sold or transferred.
The foregoing restriction does not apply to any sale- leaseback transaction
if (i) the lease is for a period, including renewal rights, of not in excess of
three years; (ii) the lease secures or relates to industrial revenue or
pollution control bonds; (iii) the transaction is solely between WCI and any
Wholly Owned Restricted Subsidiary or solely between Wholly Owned Restricted
Subsidiaries; (iv) the assets or properties are sold and leased back within 30
days of the date that the account payable with respect to the acquisition by WCI
or any Restricted Subsidiary of such assets or properties is due and payable; or
(v) WCI or such Restricted Subsidiary, within six months after the sale or
transfer of any assets or properties is completed, applies an amount not less
than the net proceeds received from such sale in accordance with clause (A) or
(B) of the first paragraph of the "Limitation on Asset Sales" covenant described
below.
Limitation on Investments in Non-Telecommunications Assets
Under the terms of each of the Indentures, WCI will not, and will not permit
any Restricted Subsidiary to, (i) make any Investment in any Unrestricted
Subsidiary that is an entity or business, or that owns or has rights with
respect to assets, in each case of the type described in the proviso of the
definition of "Telecommunications Assets" or (ii) acquire or own (directly or
indirectly), other than through an Unrestricted Subsidiary, any entity,
business, asset or right with respect to an asset, in each case described in the
proviso of the definition of "Telecommunications Assets."
Notwithstanding the foregoing, and subject to the "Limitation on Restricted
Payments" covenant, WCI and its Restricted Subsidiaries may make any Investment
in any Unrestricted Subsidiary which owns, intends to acquire or has rights with
respect to assets other than Telecommunications Assets in an amount not to
exceed (i) $15 million plus (ii) an amount not to exceed the Net Cash Proceeds
received by WCI after October 23, 1995 from the issuance and sale, permitted by
the Indentures, of its Capital Stock (other than Redeemable Stock and Preferred
Stock that provides for the payment of dividends in cash) to a Person that is
not a Subsidiary of WCI, less the amount of (A) any Investment made pursuant to
the first paragraph of the "Limitation on Restricted Payments" covenant and (B)
one-half of the amount of any Indebtedness Incurred pursuant to clause (v) of
the second paragraph of the
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"Limitation on Indebtedness" covenant; provided that the use of such proceeds
with respect to assets other than Telecommunications Assets must be included as
a possible use of proceeds in the disclosure provided to the purchasers of such
Capital Stock and such Investment is made within 12 months after such issuance;
and provided further that no Default or Event of Default shall have occurred and
be continuing or occur as a result of the actions set forth herein.
Limitation on Asset Sales
Under the terms of each of the Indentures, WCI will not, and will not permit
any Restricted Subsidiary to, consummate any Asset Sale, unless (i) the
consideration received by WCI or such Restricted Subsidiary is at least equal to
the fair market value of the assets sold or disposed of and (ii) at least 85% of
the consideration received consists of cash or Temporary Cash Investments. In
the event and to the extent that the Net Cash Proceeds received by WCI or its
Restricted Subsidiaries from one or more Asset Sales occurring on or after the
Closing Date in any period of 12 consecutive months exceed 10% of Adjusted
Consolidated Net Tangible Assets (determined as of the date closest to the
commencement of such 12-month period for which a consolidated balance sheet of
WCI and its Subsidiaries has been prepared), then WCI shall or shall cause the
relevant Restricted Subsidiary to (i) within six months after the date Net Cash
Proceeds so received exceed 10% of Adjusted Consolidated Net Tangible Assets (A)
apply an amount equal to such excess Net Cash Proceeds to permanently repay
unsubordinated Indebtedness of WCI, or Indebtedness of any Restricted
Subsidiary, in each case owing to a Person other than WCI or any of its
Restricted Subsidiaries or (B) invest an equal amount, or the amount not so
applied pursuant to clause (A) (or enter into a definitive agreement committing
to so invest within six months after the date of such agreement), in property or
assets of a nature or type or that are used in a business (or in a company
having property and assets of a nature or type, or engaged in a business)
similar or related to the nature or type of the property and assets of, or the
business of, WCI and its Restricted Subsidiaries existing on the date of such
investment (as determined in good faith by the Board of Directors, whose
determination shall be conclusive and evidenced by a Board Resolution) and (ii)
apply (no later than the end of the six-month period referred to in clause (i))
such excess Net Cash Proceeds (to the extent not applied pursuant to clause (i))
as provided in the following paragraph of this "Limitation on Asset Sales"
covenant. The amount of such excess Net Cash Proceeds required to be applied (or
to be committed to be applied) during such six-month period as set forth in
clause (i) of the preceding sentence and not applied as so required by the end
of such period shall constitute "Excess Proceeds."
If, as of the first day of any calendar month, the aggregate amount of
Excess Proceeds not theretofore subject to an Offer to Purchase pursuant to this
"Limitation on Asset Sales" covenant totals at least $10 million, WCI must
commence, not later than the one hundred and fifth Business Day after the first
day of such month, and consummate an Offer to Purchase from the Holders on a pro
rata basis an aggregate principal amount of Notes equal to the Excess Proceeds
on such date, at a purchase price equal to 101% of the principal amount of the
Notes and accrued and unpaid interest for the period prior to July , 2001, on
the Notes, plus, in each case, accrued and unpaid interest from July , 1996
(if any) to the date of purchase; provided, however, that no Offer to Purchase
shall be required to be commenced with respect to the Senior Subordinated Notes
until the Business Day following the payment date with respect to the Offer to
Purchase Senior Notes and need not be commenced if the Excess Proceeds remaining
after application to the Senior Notes purchased in such Offer to Purchase
applicable thereto are less than $2 million; and provided further, however, that
no Senior Subordinated Notes may be purchased under this "Limitation on Asset
Sales" covenant unless WCI shall have purchased all Senior Notes tendered
pursuant to the Offer to Purchase applicable thereto.
REPURCHASE OF NOTES UPON A CHANGE OF CONTROL
WCI must commence, within 30 days of the occurrence of a Change of Control,
and consummate an Offer to Purchase for all the Notes then outstanding, at a
purchase price equal to 101% of the
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principal amount of the Notes and accrued and unpaid interest for the period
prior to July , 2001 on the Notes, plus accrued and unpaid interest from July
, 2001 (if any) to the date of purchase. Prior to the mailing of the notice to
Holders of Notes commencing such Offer to Purchase, but in any event within 30
days following any Change of Control, WCI covenants to (i) repay in full all
indebtedness of WCI that would prohibit the repurchase of the Notes pursuant to
such Offer to Purchase or (ii) obtain any requisite consents under instruments
governing any such indebtedness of WCI to permit the repurchase of the Notes.
WCI shall first comply with the covenant in the preceding sentence before it
shall repurchase Notes pursuant to this "Repurchase of Notes upon a Change of
Control" covenant.
Under the terms of both Indentures, WCI may not repurchase any Senior
Subordinated Notes pursuant to this covenant until it has repurchased all Senior
Notes tendered pursuant to the Offer to Purchase Senior Notes as a result of
such Change of Control. However, if WCI is unable to repay all of its
indebtedness that would prohibit repurchase of the Notes or is unable to obtain
the consents of the holders of indebtedness, if any, of WCI outstanding at the
time of a Change of Control whose consent would be so required to permit the
repurchase of Notes or otherwise fails to purchase any Notes validly tendered,
then WCI will have breached such covenant. This breach will constitute an Event
of Default under the relevant Indenture if it continues for a period of 30
consecutive days after written notice is given to WCI by the relevant Trustee or
the Holders of at least 25% in aggregate principal amount of the Senior Notes or
Senior Subordinated Notes, as the case may be, outstanding. In addition, the
failure by WCI to repurchase Notes at the conclusion of the Offer to Purchase
will constitute an Event of Default without any waiting period or notice
requirements.
There can be no assurance that WCI will have sufficient funds available at
the time of any Change of Control to make any debt payment (including
repurchases of Notes) required by the foregoing covenant (as well as may be
contained in other securities of WCI which might be outstanding at the time).
The above covenant requiring WCI to repurchase the Notes will, unless the
consents referred to above are obtained, require WCI to repay all indebtedness
then outstanding which by its terms would prohibit such Note repurchase, either
prior to or concurrently with such Note repurchase.
COMMISSION REPORTS AND REPORTS TO HOLDERS
Whether or not WCI is required to file reports with the Commission, if any
Notes are outstanding, WCI shall file with the Commission all such reports and
other information as it would be required to file with the Commission by
Sections 13(a) or 15(d) under the Exchange Act. See "Available Information." WCI
shall supply the Trustee and each Holder of Senior Notes or Senior Subordinated
Notes, as the case may be, or shall supply to the relevant Trustee for
forwarding to each such Holder, without cost to such Holder, copies of such
reports or other information.
EVENTS OF DEFAULT
The following events will be defined as "Events of Default" in each of the
Indentures: (i) default in the payment of principal of (or premium, if any, on)
any Senior Note or Senior Subordinated Note, as the case may be, when the same
becomes due and payable at maturity, upon acceleration, redemption or otherwise,
whether or not, in the case of the Senior Subordinated Notes, such payment is
prohibited by the provisions described above under "Ranking"; (ii) default in
the payment of interest on any Senior Note or Senior Subordinated Note, as the
case may be, when the same becomes due and payable, and such default continues
for a period of 30 days, whether or not, in the case of the Senior Subordinated
Notes, such payment is prohibited by the provisions described under "Ranking";
(iii) WCI defaults in the performance of or breaches any other covenant or
agreement of WCI in the Senior Notes Indenture or Senior Subordinated Notes
Indenture, as the case may be, or under the Senior Notes or Senior Subordinated
Notes, as the case may be, and such default or breach continues for a period of
30 consecutive days after written notice by the relevant Trustee or the Holders
of 25% or more in aggregate principal amount of Senior Notes or Senior
Subordinated Notes, as the case may be; (iv) there occurs
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with respect to any issue or issues of Indebtedness of WCI or any Significant
Subsidiary having an outstanding principal amount of $5 million or more in the
aggregate for all such issues of all such Persons, whether such Indebtedness now
exists or shall hereafter be created, (a) an event of default that has caused
the holder thereof to declare such Indebtedness to be due and payable prior to
its Stated Maturity and such Indebtedness has not been discharged in full or
such acceleration has not been rescinded or annulled within 30 days of such
acceleration and/or (b) the failure to make a principal payment at the final
(but not any interim) fixed maturity and such defaulted payment shall not have
been made, waived or extended within 30 days of such payment default; (v) any
final judgment or order (not covered by insurance) for the payment of money in
excess of $5 million in the aggregate for all such final judgments or orders
against all such Persons (treating any deductibles, self-insurance or retention
as not so covered) shall be rendered against WCI or any Significant Subsidiary
and shall not be paid or discharged, and there shall be any period of 60
consecutive days following entry of the final judgment or order that causes the
aggregate amount for all such final judgments or orders outstanding and not paid
or discharged against all such Persons to exceed $5 million during which a stay
of enforcement of such final judgment or order, by reason of a pending appeal or
otherwise, shall not be in effect; (vi) a court having jurisdiction in the
premises enters a decree or order for (a) relief in respect of WCI or any
Significant Subsidiary in an involuntary case under any applicable bankruptcy,
insolvency or other similar law now or hereafter in effect, (b) appointment of a
receiver, liquidator, assignee, custodian, trustee, sequestrator or similar
official of WCI or any Significant Subsidiary or for all or substantially all of
the property and assets of WCI or any Significant Subsidiary or (c) the winding
up or liquidation of the affairs of WCI or any Significant Subsidiary and, in
each case, such decree or order shall remain unstayed and in effect for a period
of 60 consecutive days; or (vii) WCI or any Significant Subsidiary (a) commences
a voluntary case under any applicable bankruptcy, insolvency or other similar
law now or hereafter in effect, or consents to the entry of an order for relief
in an involuntary case under any such law, (b) consents to the appointment of or
taking possession by a receiver, liquidator, assignee, custodian, trustee,
sequestrator or similar official of WCI or any Significant Subsidiary or for all
or substantially all of the property and assets of WCI or any Significant
Subsidiary or (c) effects any general assignment for the benefit of creditors.
If an Event of Default (other than an Event of Default specified in clause
(vi) or (vii) above that occurs with respect to WCI) occurs and is continuing
under the Indenture, the Trustee or the Holders of at least 25% in aggregate
principal amount of the Senior Notes or Senior Subordinated Notes, as the case
may be, then outstanding, by written notice to WCI (and to the relevant Trustee
if such notice is given by the Holders), may, and the relevant Trustee at the
request of such Holders shall, declare the principal of, premium, if any, and
accrued interest, if any, on the Senior Notes or Senior Subordinated Notes, as
the case may be, to be immediately due and payable. Upon a declaration of
acceleration, such principal, premium, if any, and accrued interest, if any,
shall be immediately due and payable. In the event of a declaration of
acceleration because an Event of Default set forth in clause (iv) above has
occurred and is continuing, such declaration of acceleration shall be
automatically rescinded and annulled if the event of default triggering such
Event of Default pursuant to clause (iv) shall be remedied or cured by WCI or
the relevant Significant Subsidiary or waived by the holders of the relevant
Indebtedness within 60 days after the declaration of acceleration with respect
thereto. If an Event of Default specified in clause (vi) or (vii) above occurs
with respect to WCI, the principal of, premium, if any, and accrued interest, if
any, on the Notes then outstanding shall ipso facto become and be immediately
due and payable without any declaration or other act on the part of either
Trustee or any Holder. The Holders of at least a majority in principal amount of
the outstanding Senior Notes or Senior Subordinated Notes, as the case may be,
by written notice to WCI and to the relevant Trustee, may waive all past
defaults and rescind and annul a declaration of acceleration and its
consequences if (A) all existing Events of Default, other than the nonpayment of
the principal of, premium, if any, and interest on the Senior Notes or Senior
Subordinated Notes, as the case may be, that have become due solely by such
declaration of acceleration, have been cured or waived and (B) the rescission
would not
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conflict with any judgment or decree of a court of competent jurisdiction. For
information as to the waiver of defaults, see "--Modification and Waiver."
The Holders of at least a majority in aggregate principal amount of the
outstanding Senior Notes or Senior Subordinated Notes, as the case may be, may
direct the time, method and place of conducting any proceeding for any remedy
available to the relevant Trustee or exercising any trust or power conferred on
the relevant Trustee. However, such Trustee may refuse to follow any direction
that conflicts with law or the relevant Indenture, that may involve such Trustee
in personal liability, or that such Trustee determines in good faith may be
unduly prejudicial to the rights of Holders of Senior Notes or Senior
Subordinated Notes, as the case may be, not joining in the giving of such
direction and may take any other action it deems proper that is not inconsistent
with any such direction received from Holders of Senior Notes or Senior
Subordinated Notes, as the case may be. A Holder may not pursue any remedy with
respect to the relevant Indenture or the Senior Notes or Senior Subordinated
Notes, as the case may be, unless: (i) the Holder gives the relevant Trustee
written notice of a continuing Event of Default; (ii) the Holders of at least
25% in aggregate principal amount of outstanding Senior Notes or Senior
Subordinated Notes, as the case may be, make a written request to the relevant
Trustee to pursue the remedy; (iii) such Holder or Holders offer the relevant
Trustee indemnity satisfactory to such Trustee against any costs, liability or
expense; (iv) such Trustee does not comply with the request within 60 days after
receipt of the request and the offer of indemnity; and (v) during such 60-day
period, the Holders of a majority in aggregate principal amount of the
outstanding Senior Notes or Senior Subordinated Notes, as the case may be, do
not give the relevant Trustee a direction that is inconsistent with the request.
However, such limitations do not apply to the right of any Holder of a Senior
Note or Senior Subordinated Note, as the case may be, to receive payment of the
principal of, premium, if any, or interest on, such note or to bring suit for
the enforcement of any such payment, on or after the due date expressed in the
Senior Notes or Senior Subordinated Notes, as the case may be, which right shall
not be impaired or affected without the consent of the Holder.
The Indentures will require certain officers of WCI to certify, on or before
a date not more than 90 days after the end of each fiscal year, that a review
has been conducted of the activities of WCI and its Restricted Subsidiaries'
performance under the Indenture and that, to the best knowledge of such officer,
WCI has fulfilled all obligations thereunder, or, if there has been a default in
the fulfillment of any such obligation, specifying each such default and the
nature and status thereof. WCI will also be obligated to notify the relevant
Trustee of any default or defaults in the performance of any covenants or
agreements under the Senior Notes Indenture or Senior Subordinated Notes
Indenture, as the case may be.
CONSOLIDATION, MERGER AND SALE OF ASSETS
Under the terms of the Indentures, WCI shall not consolidate with, merge
with or into, or sell, convey, transfer, lease or otherwise dispose of all or
substantially all of its property and assets (as an entirety or substantially an
entirety in one transaction or a series of related transactions) to, any Person
(other than a consolidation or merger with or into a Wholly Owned Restricted
Subsidiary with a positive net worth; provided that, in connection with any such
merger or consolidation, no consideration (other than Common Stock in the
surviving Person, or WCI) shall be issued or distributed to the stockholders of
WCI) or permit any Person to merge with or into WCI unless: (i) WCI shall be the
continuing Person, or the Person (if other than WCI) formed by such
consolidation or into which WCI is merged or that acquired or leased such
property and assets of WCI shall be a corporation organized and validly existing
under the laws of the United States of America or any jurisdiction thereof and
shall expressly assume, by a supplemental indenture, executed and delivered to
the Trustee, all of the obligations of WCI on all of the Senior Notes or Senior
Subordinated Notes, as the case may be, and under the relevant Indenture; (ii)
immediately after giving effect to such transaction, no Default or Event of
Default shall have occurred and be continuing; (iii) immediately after giving
effect to such transaction on a pro forma basis, WCI or any Person becoming the
successor obligor of the Senior Notes
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or Senior Subordinated Notes, as the case may be, shall have a Consolidated Net
Worth equal to or greater than the Consolidated Net Worth of WCI immediately
prior to such transaction; (iv) immediately after giving effect to such
transaction on a pro forma basis WCI, or any Person becoming the successor
obligor of the Senior Notes or Senior Subordinated Notes, as the case may be,
could Incur at least $1.00 of Indebtedness under the first paragraph of the
"Limitation on Indebtedness" covenant; provided that this clause (iv) shall not
apply to the merger of a corporation, the sole material asset of which consists
of Common Stock of WCI (and options, warrants or other rights to purchase or
acquire such Common Stock), into WCI, if (a) the Chief Executive Officer of WCI
delivers to the relevant Trustee a certificate, in the form attached to the
Indentures as Schedule I, to the effect that to his best knowledge there are no
liabilities, contingent or otherwise, of such corporation and (b) the only
consideration received by the stockholders of such corporation in connection
with such merger consists of Common Stock of WCI (and options, warrants or other
rights to purchase or acquire such Common Stock), in the aggregate in an amount
not to exceed the amount thereof held by such corporation immediately prior to
such merger; and (v) WCI delivers to the relevant Trustee an Officers'
Certificate (attaching the arithmetic computations to demonstrate compliance
with clauses (iii) and, if applicable, (iv)) and Opinion of Counsel, in each
case stating that such consolidation, merger or transfer and such supplemental
indenture complies with this provision and that all conditions precedent
provided for herein relating to such transaction have been complied with;
provided, however, that clauses (iii) and (iv) above do not apply if, in the
good faith determination of the Board of Directors of WCI, whose determination
shall be evidenced by a Board Resolution, the principal purpose of such
transaction is to change the state of incorporation of WCI; and provided further
that any such transaction shall not have as one of its purposes the evasion of
the foregoing limitations.
DEFEASANCE
Defeasance and Discharge. The Indentures will provide that WCI will be
deemed to have paid and will be discharged from any and all obligations in
respect of the Senior Notes or Senior Subordinated Notes, as the case may be, on
the 123rd day after the deposit referred to below, and the provisions of such
Indenture will no longer be in effect with respect to the Senior Notes or Senior
Subordinated Notes, as the case may be, (except for, among other matters,
certain obligations to register the transfer or exchange of the Senior Notes or
Senior Subordinated Notes, as the case may be, to replace stolen, lost or
mutilated Senior Notes or Senior Subordinated Notes, as the case may be, to
maintain paying agencies, to hold monies for payment in trust and, in the case
of the Senior Subordinated Notes, the obligation to issue Common Stock upon the
conversion thereof) if, among other things, (A) WCI has deposited with the
Trustee, in trust, money and/or U.S. Government Obligations that through the
payment of interest and principal in respect thereof in accordance with their
terms will provide money in an amount sufficient to pay the principal of,
premium, if any, and accrued interest on the Senior Notes or Senior Subordinated
Notes, as the case may be, on the Stated Maturity of such payments in accordance
with the terms of the relevant Indenture and the Senior Notes or Senior
Subordinated Notes, as the case may be, (B) WCI has delivered to the relevant
Trustee (i) either (x) an Opinion of Counsel to the effect that Holders will not
recognize income, gain or loss for federal income tax purposes as a result of
WCI's exercise of its option under this "Defeasance" provision and will be
subject to federal income tax on the same amount and in the same manner and at
the same times as would have been the case if such deposit, defeasance and
discharge had not occurred, which Opinion of Counsel must be based upon (and
accompanied by a copy of) a ruling of the Internal Revenue Service to the same
effect unless there has been a change in applicable federal income tax law after
the Closing Date such that a ruling is no longer required or (y) a ruling
directed to the Trustee received from the Internal Revenue Service to the same
effect as the aforementioned Opinion of Counsel and (ii) an Opinion of Counsel
to the effect that the creation of the defeasance trust does not violate the
Investment Company Act of 1940 and after the passage of 123 days following the
deposit, the trust fund will not be subject to the effect of Section 547 of the
United States Bankruptcy Code or Section 15 of the New York Debtor and Creditor
Law, (C) immediately after giving effect to such deposit on a pro forma basis,
no Event of
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Default, or event that after the giving of notice or lapse of time or both would
become an Event of Default, shall have occurred and be continuing on the date of
such deposit or during the period ending on the 123rd day after the date of such
deposit, and such deposit shall not result in a breach or violation of, or
constitute a default under, any other agreement or instrument to which WCI or
any of its Subsidiaries is a party or by which WCI or any of its Subsidiaries is
bound, (D) if at such time the Senior Notes or Senior Subordinated Notes, as the
case may be, are listed on a national securities exchange, WCI has delivered to
the Trustee an Opinion of Counsel to the effect that the Notes will not be
delisted as a result of such deposit, defeasance and discharge and (E) in the
case of the Senior Subordinated Notes, WCI is not prohibited from making
payments on the Senior Subordinated Notes by the provisions described above
under "Ranking."
Defeasance of Certain Covenants and Certain Events of Default. The
Indentures further will provide that their provisions will no longer be in
effect with respect to clauses (iii) and (iv) under "Consolidation, Merger and
Sale of Assets" and all the covenants described herein under "Covenants," clause
(c) under "Events of Default" with respect to such covenants and clauses (iii)
and (iv) under "Consolidation, Merger and Sale of Assets," and clauses (d) and
(e) under "Events of Default" shall be deemed not to be Events of Default, and,
with respect to the Senior Subordinated Notes, the provisions described above
under "Ranking" with respect to the assets held by the Senior Subordinated Notes
Trustee referred to below shall not apply, upon, among other things, the deposit
with the relevant Trustee, in trust, of money and/or U.S. Government Obligations
that through the payment of interest and principal in respect thereof in
accordance with their terms will provide money in an amount sufficient to pay
the principal of, premium, if any, and accrued interest on the Senior Notes or
Senior Subordinated Notes, as the case may be, on the Stated Maturity of such
payments in accordance with the terms of the relevant Indenture and the Senior
Notes or Senior Subordinated Notes, as the case may be, the satisfaction of the
provisions described in clauses (B)(ii), (C), (D) and, in the case of the Senior
Subordinated Notes, (E) of the preceding paragraph and the delivery by WCI to
the relevant Trustee of an Opinion of Counsel to the effect that, among other
things, the Holders will not recognize income, gain or loss for federal income
tax purposes as a result of such deposit and defeasance of certain covenants and
Events of Default and will be subject to federal income tax on the same amount
and in the same manner and at the same times as would have been the case if such
deposit and defeasance had not occurred.
Defeasance and Certain Other Events of Default. In the event WCI exercises
its option to omit compliance with certain covenants and provisions of either
Indenture with respect to the Senior Notes or Senior Subordinated Notes, as the
case may be, as described in the immediately preceding paragraph and the Senior
Notes or Senior Subordinated Notes, as the case may be, are declared due and
payable because of the occurrence of an Event of Default that remains
applicable, the amount of money and/or U.S. Government Obligations on deposit
with the relevant Trustee will be sufficient to pay amounts due on the Senior
Notes or Senior Subordinated Notes, as the case may be, at the time of their
Stated Maturity but may not be sufficient to pay amounts due on the Senior Notes
or Senior Subordinated Notes, as the case may be, at the time of the
acceleration resulting from such Event of Default. However, WCI will remain
liable for such payments.
MODIFICATION AND WAIVER
Modifications and amendments of the Indentures may be made by WCI and the
relevant Trustee with the consent of the Holders of not less than a majority in
aggregate principal amount of the outstanding Notes; provided, however, that no
such modification or amendment may, without the consent of each Holder affected
thereby, (i) change the Stated Maturity of the principal of, or any installment
of interest on, any Note, (ii) reduce the principal amount of, or premium, if
any, or interest on, any Note, (iii) change the place or currency of payment of
principal of, or premium, if any, or interest on, any Note, (iv) impair the
right to institute suit for the enforcement of any payment on or after the
Stated Maturity (or, in the case of a redemption, on or after the Redemption
Date) of any
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Note, (v) reduce the above- stated percentage of outstanding Senior Notes or
Senior Subordinated Notes, as the case may be, the consent of whose Holders is
necessary to modify or amend the Indenture, (vi) waive a default in the payment
of principal of, premium, if any, or interest on the Notes or (vii) reduce the
percentage or aggregate principal amount of outstanding Senior Notes or Senior
Subordinated Notes, as the case may be, the consent of whose Holders is
necessary for waiver of compliance with certain provisions of the Indenture or
for waiver of certain defaults.
BOOK-ENTRY; DELIVERY AND FORM
The Notes will be initially represented by a global Senior Note or global
Senior Subordinated Note, as the case may be, issued in fully registered form
without interest coupons (each, a "Global Note") and will be deposited with, or
on behalf of, the Depositary and registered in the name of a nominee of the
Depositary. Transfers between participants in the Depositary will be effected in
the ordinary way in accordance with the Depositary's rules and will be settled
in same-day funds.
The Depositary has advised the Company and the Underwriters that the
Depositary intends to follow the procedures described below:
The Depositary will act as securities depository for the Global Notes.
Each Global Note will be issued as a fully registered security registered in
the name of Cede & Co. (the Depositary's nominee).
The Depositary is a limited-purpose trust company organized under the
New York Banking Law, a "banking organization" within the meaning of the New
York Banking Law, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York Uniform Commercial Code, and
a "clearing agency" registered pursuant to the provisions of Section 17A of
the Exchange Act. The Depositary holds securities that its participants
("Participants") deposit with the Depositary. The Depositary also
facilitates the settlement among Participants of securities transactions,
such as transfers and pledges, in deposited securities through electronic
computerized book-entry changes in Participants' accounts, thereby
eliminating the need for physical movement of securities certificates.
Direct Participants include securities brokers and dealers, banks, trust
companies, clearing corporations, and certain other organizations ("Direct
Participants"). The Depositary is owned by a number of its Direct
Participants and by the New York Stock Exchange, Inc., the American Stock
Exchange, Inc., and the National Association of Securities Dealers, Inc.
Access to the Depositary's system is also available to others such as
securities brokers and dealers, banks, and trust companies that clear
through or maintain a custodial relationship with a Direct Participant,
either directly or indirectly ("Indirect Participants"). The Rules
applicable to the Depositary and its Participants are on file with the
Commission.
Purchases of Notes must be made by or through Direct Participants, which
will receive a credit for the Notes on the Depositary's records. The
ownership interest of each actual purchaser of each Note ("Beneficial
Owner") is in turn recorded on the Direct and Indirect Participant's
records. Transfers of ownership interests in the Notes are to be
accomplished by entries made on the books of Participants acting on behalf
of Beneficial Owners. Beneficial Owners will not receive certificates
representing their ownership interests in the Notes, except in the event
that use of the book-entry system for the Notes is discontinued.
Conveyance of Notes and other communications by the Depositary to Direct
Participants, by Direct Participants to Indirect Participants, and by Direct
Participants and Indirect Participants to Beneficial Owners are governed by
arrangements among them, subject to any statutory or regulatory requirements
as may be in effect from time to time.
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Redemption notices shall be sent to Cede & Co. If less than all of the
Notes are being redeemed, the Depositary's practice is to determine by lot
the amount of the interest of each Direct Participant in such issue to be
redeemed.
Neither the Depositary nor Cede & Co. will consent or vote with respect
to the Notes. Under its usual procedures, the Depositary mails an Omnibus
Proxy to the issuer as soon as possible after the record date. The Omnibus
Proxy assigns Cede & Co.'s consenting or voting rights to those Direct
Participants to whose accounts the Notes are credited on the record date
(identified in a listing attached to the Omnibus Proxy).
Principal, premium (if any), and interest payments on the Notes will be
made to the Depositary. The Depositary's practice is to credit Direct
Participants' accounts on the payable date in accordance with their
respective holdings shown on the Depositary's records unless the Depositary
has reason to believe that it will not receive payment on the payable date.
Payments by Participants to Beneficial Owners will be governed by standing
instructions and customary practices, as is the case with securities held
for the accounts of customers in bearer form or registered in "street name,"
and will be the responsibility of such Participant and not of the
Depositary, the Paying Agent, or the Company, subject to any statutory or
regulatory requirements as may be in effect from time to time. Payment to
the Depositary of principal, premium (if any) and interest are the
responsibility of the Company or the Paying Agent, disbursement of such
payments to Direct Participants shall be the responsibility of the
Depositary, and disbursement of such payments to the Beneficial Owners shall
be the responsibility of Direct and Indirect Participants.
The information in this section concerning the Depositary and the
Depositary's book-entry system has been obtained from sources that the Company
believes to be reliable, but the Company takes no responsibility for the
accuracy thereof.
So long as the Depositary for a Global Note, or its nominee, is the
registered owner of such Global Note, the Depositary or its nominee, as the case
may be, will be considered the sole owner or Holder of the Notes represented by
such Global Note for all purposes under the related Indenture. Except as set
forth below, owners of beneficial interests in such Global Note will not be
entitled to have Notes represented by such Global Note registered in their
names, will not receive or be entitled to receive physical delivery of Notes in
definitive form and will not be considered the owners or Holders thereof under
such Indenture. Accordingly, each person owning a beneficial interest in a
Global Note must rely on the procedures of the Depositary and, if such person is
not a Participant, those of the Participant through which such person owns its
interests, in order to exercise any rights of a Holder under the relevant
Indenture or such Note.
The Indentures provide that the Depositary, as a Holder, may appoint agents
and otherwise authorize Participants to give or take any request, demand,
authorization, direction, notice, consent, waiver or other action which a Holder
is entitled to give or take under the relevant Indenture, including the right to
sue for payment of principal or interest pursuant to Section 316(b) of the Trust
Indenture Act. The Company understands that under existing industry practices,
when the Company requests any action of Holders or when a Beneficial Owner
desires to give or take any action which a Holder is entitled to give or take
under the related Indenture, the Depositary generally will give or take such
action, or authorize the relevant Participants to give or take such action, and
such Participants would authorize Beneficial Owners owning through such
Participants to give or take such action or would otherwise act upon the
instructions of Beneficial Owners owning through them.
The Company understands that the Depositary will assist its Participants and
their customers (Beneficial Owners) in taking any action a Holder is entitled to
take under the relevant Indenture or exercise any rights available to Cede &
Co., as the holder of record of the Notes, including the right to demand
acceleration upon an Event of Default or to institute suit for the enforcement
of payment or
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interest pursuant to Section 316(b) of the Trust Indenture Act. The Depositary
has advised the Company that it will act with respect to such matters upon
written instructions from a Participant to whose account with the Depositary the
relevant beneficial ownership in the Notes is credited. The Company understands
that a Participant will deliver such written instructions to the Depositary upon
itself receiving similar written instructions from either Indirect Participants
or Beneficial Owners, as the case may be. Under Rule 6 of the rules and
procedures filed by the Depositary with the Commission pursuant to Section 17 of
the Exchange Act, Participants are required to indemnify the Depositary against
all liability the Depositary may sustain, without fault on the part of the
Depositary or its nominee, as a result of any action they may take pursuant to
the instructions of the Participant in exercising any such rights.
The laws of some jurisdictions require that certain purchasers of securities
take physical delivery of such securities in definitive form. Such limits and
such laws may impair the ability to transfer beneficial interests in a Global
Note.
Principal, premium, if any, and interest payments on Notes registered in the
name of or held by the Depositary or its nominee will be made to the Depositary
or its nominee, as the case may be, as the registered owner or the Holder of a
Global Note representing such Notes. Neither the Company nor the Trustee will
have any responsibility or liability for any aspect of the records relating to
or payments made on account of beneficial ownership interests in such Global
Note or for maintaining, supervising or reviewing any records relating to such
beneficial ownership interests.
If the Depositary is at any time unwilling, unable or ineligible to continue
as depositary and a successor depositary is not appointed by the Company within
60 days or if an Event of Default under the relevant Indenture has occurred and
is continuing, the Company will issue Notes in definitive registered form,
without coupons, in denominations of $1,000 of principal amount at maturity and
any integral multiple thereof, in exchange for the Global Note representing such
Notes. In addition, the Company may at any time and in its sole discretion
determine not to have any Notes in registered form represented by a Global Note
and, in such event, will issue Notes in definitive registered form in exchange
for the Global Note representing such Notes. In any such instance, an owner of a
beneficial interest in a Global Note will be entitled to physical delivery in
definitive form of Notes represented registered in its name. Upon the exchange
of a Global Note for Notes in definitive form, such Global Note will be
cancelled by the Trustee.
NO PERSONAL LIABILITY OF INCORPORATORS, SHAREHOLDERS, OFFICERS, DIRECTORS, OR
EMPLOYEES
The Indentures provide that no recourse for the payment of the principal of,
premium, if any, or interest on any of the Notes or for any claim based thereon
or otherwise in respect thereof, and no recourse under or upon any obligation,
covenant or agreement of WCI in such Indenture, or in any of the Notes or
because of the creation of any Indebtedness represented thereby, shall be had
against any incorporator, shareholder, officer, director, employee or
controlling person of WCI or of any successor Person thereof. Each Holder, by
accepting the Notes, waives and releases all such liability.
CONCERNING THE TRUSTEE
The Indentures provide that, except during the continuance of a Default, the
Trustee will not be liable, except for the performance of such duties as are
specifically set forth in such Indenture. If an Event of Default has occurred
and is continuing, the Trustee will use the same degree of care and skill in its
exercise as a prudent person would exercise under the circumstances in the
conduct of such person's own affairs.
The Indentures and provisions of the Trust Indenture Act, incorporated by
reference therein contain limitations on the rights of the Trustees, should they
become creditors of WCI, to obtain payment of claims in certain cases or to
realize on certain property received by it in respect of any such claims, as
security or otherwise. The Trustees are permitted to engage in other
transactions; provided, however, that if either Trustee acquires any conflicting
interest, it must eliminate such conflict or resign.
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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 Old
Notes prior to October 15, 2000 or payment of cash interest on the Old Notes
prior to April 15, 2001. From and after October 15, 2000, the Old Notes will
bear interest at the rate of 14% per annum, payable semi-annually in cash
commencing April 15, 2001. The Old Notes mature on October 15, 2005. At
maturity, the Old Senior Notes will have an aggregate principal amount of $294.2
million and the Old Convertible Notes will have an aggregate principal amount of
$147.1 million.
The Old Convertible Notes are convertible, at the option of the holder, into
Common Stock ("Conversion Shares") at any time on or after October 23, 1996. The
number of Conversion Shares issuable by the Company upon conversion is equal to
the accreted value of the Old Convertible Notes being converted (on the date of
conversion) divided by $20.625, subject to adjustment in certain events
("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 certain closing sale prices during
such periods ranging from $37.50 to $44.00 for at least 30 consecutive trading
days ("Market Criteria") and a registration statement with respect to the
Conversion Shares is effective and available, all of the Old Convertible Notes
automatically will be converted into Conversion Shares at the close of business
on the last day of the 30-day 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 Conversion Shares on or prior to October 23, 1996. 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 Old Note Indentures contain certain covenants which are substantially
similar to the covenants contained in the New Note Indentures.
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 March 31, 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 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
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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 Financing"). 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. 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 1994, WinStar Global Products entered into a Loan and Security
Agreement ("Century Loan Agreement") with Century Business Credit Corporation
("Century"), pursuant to which Century agreed to make a $6.0 million revolving
credit facility (the "Century Credit Facility") available, at its sole
discretion, to WinStar Global Products until September 1996. Pursuant to the
terms of the Century Loan Agreement, borrowings are limited to 80% of eligible
accounts receivable and 45% of eligible inventory. In addition, WinStar Global
Products is prohibited from paying dividends to the Company and may not make
capital expenditures in any fiscal year in an amount in excess of $150,000.
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Borrowings bear interest at a rate 3.5% in excess of the prime commercial
lending rate of Chase Manhattan and are secured by a lien on all of WinStar
Global Products' assets as well as a guarantee from the Company as to the first
$3.0 million in borrowings. The Century Loan Agreement also provides for annual
facility fees as well as an overadvance facility of $1.5 million (included in
the $6.0 million of aggregate availability) which bears interest at a rate of
3.5% in excess of the prime commercial lending rate. In May 1995, as additional
consideration for providing the Century Credit Facility, the Company issued to
Century an option to purchase 25,000 shares of Common Stock at an exercise price
of $5.75 per share until May 30, 1998, which options have been exercised.
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CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
In the opinion of Graubard Mollen & Miller, tax counsel to the Company, the
following discussion accurately summarizes the material United States federal
income tax consequences to beneficial owners from the purchase, ownership and
disposition of the Notes. 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 summary and the above referenced opinion do not purport to deal with
all aspects of taxation that may be relevant to particular holders of the Notes
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 Notes 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 Notes held as capital assets within
the meaning of Section 1221 of the Code.
As used in the discussion which follows, the term "U.S. Holder" means a
beneficial owner of Notes 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 Notes,
that is, for United States federal income tax purposes, not a U.S. Holder.
HOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS AS TO THE PARTICULAR TAX
CONSEQUENCES TO THEM OF PURCHASING, HOLDING AND DISPOSING OF THE NOTES,
INCLUDING THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR FOREIGN TAX LAWS.
TAX CONSEQUENCES TO U.S. HOLDERS
ORIGINAL ISSUE DISCOUNT. The Notes are being issued with original issue
discount, as defined in the Code. The amount of original issue discount on a
debt instrument, within the meaning of Section 1273 of the Code, is the excess
(if any) of its "stated redemption price at maturity" over its issue price. The
issue price of the Senior Notes and the Senior Subordinated Notes will be the
respective offering price to the purchasers (not including any sales to a bond
house, broker, or similar person or organization acting in the capacity of an
underwriter, placement agent or wholesaler) at which a substantial amount of
each of the Notes is sold. According to the Treasury Regulations, the issue
price of the Notes does not change even if part of the issue is subsequently
sold at a different price. The "stated redemption price at maturity" of a debt
instrument is the sum of its principal amount plus all other payments required
thereunder, other than payments of "qualified stated interest" (defined
generally as stated interest that is unconditionally payable in cash or in
property (other than the debt instruments of the issuer), at least annually at a
single fixed rate that appropriately takes into account the length of intervals
between payments). Because interest on the Notes is not payable until January
, 2002, the stated interest on the Notes will not be treated as qualified
stated interest, but will, for United States federal income tax purposes, be
added to the stated redemption price at maturity of the Notes. As a result, the
Notes
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will be treated as having been issued with original issue discount equal to the
excess of their stated redemption price at maturity over their issue price.
Each U.S. Holder of a Note (regardless of whether such U.S. Holder is a cash
or an accrual basis taxpayer) will be required to include in such U.S. Holder's
gross income in each year, in advance of the receipt of cash payments on such
Note, that portion of the original issue discount, computed on a constant yield
basis, attributable to each day during such year on which the U.S. Holder held
the Note. In general, under Section 1272 of the Code, the amount of original
issue discount that a holder of a debt instrument with original issue discount
must include in gross income for United States federal income tax purposes will
be the sum of the daily portions of original issue discount with respect to
such debt instrument for each day during the taxable year or portion of a
taxable year in which such holder holds the debt instrument. The daily portion
is determined under a constant yield method by allocating to each day of an
accrual period a pro rata portion of an amount equal to the "adjusted issue
price" of the debt instrument at the beginning of the accrual period multiplied
by the yield to maturity of the debt instrument (stated in a manner
appropriately taking into account the length of the actual period). Accrual
periods with respect to a Note may be of any length selected by the U.S. Holder
and may vary in length over the term of the Note as long as (i) no accrual
period is longer than one year and (ii) each scheduled payment of interest or
principal on the Note occurs on either the final or first day of any
accrual period. The yield to maturity of a debt instrument is the discount rate
that, when applied to all payments due under the debt instrument produces a
present value equal to the issue price of the debt instrument. The "adjusted
issue price" is the issue price of the debt instrument increased by the accrued
original issue discount for all prior accrual periods (and decreased by the
amount of cash payments made in all prior accrual periods, other than qualified
stated interest payments).
By their terms, the Notes can be redeemed by the Company at a declining
premium and thereafter for an amount equal to their principal amount plus
accrued and unpaid interest. Under the Treasury Regulations and for the purposes
of calculating original issue discount, the Company will be deemed to have
called the Notes if the exercise of such right would reduce the yield on the
Note. For purposes of those calculations, the yield on the Notes is determined
by using any date on which the Notes may be redeemed as the maturity date and
the amount payable on such date in accordance with the terms of the Note as the
principal amount payable at maturity. If the Company does not actually redeem
the Notes, then the yield and maturity of the Notes are redetermined (solely for
purposes of computing the accrual of original issue discount) by treating the
Notes as reissued.
U.S. Holders of Notes should be aware that, because of the above original
issue discount rules, a U.S. Holder of a Note will be required for United States
federal income tax purposes to include amounts in ordinary income in advance of
the receipt of the cash attributable to such income.
ACQUISITION PREMIUM. If a U.S. Holder of a Note acquired such Note at a cost
in excess of its "adjusted issue price" (as defined above) but less than its
stated redemption price at maturity, such Note will have an acquisition premium
to the extent of such excess. Under the acquisition premium rules of the Code
and the Treasury Regulations promulgated thereunder, the amount of the original
issue discount which such U.S. Holder must include in its gross income with
respect to such Note for any taxable year will be reduced by the portion of such
acquisition premium properly allocable to such year.
MARKET DISCOUNT. If a U.S. Holder purchases Notes for an amount that is less
than the revised issue price of the Notes at the time of acquisition, the amount
of such difference will be treated as "market discount" for United States
federal income tax purposes, unless such difference is less than a specified de
minimis amount. Under the market discount rules, a holder will be required to
treat any principal payment on, or any gain on the sale, exchange, retirement or
other disposition of, Notes as ordinary income to the extent of the market
discount which has not previously been included in income and is
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treated as having accrued on such Notes at the time of such payment or
disposition. If a holder makes a gift of a Note, accrued market discount, if
any, will be recognized as if such holder had sold such Note for a price equal
to its fair market value. In addition, the holder may be required to defer,
until the maturity of the Notes or the earlier disposition of the Notes in a
taxable transaction, the deduction of a portion of the interest expense on any
indebtedness incurred or continued to purchase or carry such Notes.
Any market discount will be considered to accrue on a straight-line basis
during the period from the date of acquisition to the maturity date of the
Notes, unless a holder elects to accrue market discount on a constant interest
method. A holder of Notes may elect to include market discount in income
currently as it accrues (on either a straight-line basis or constant interest
method), in which case the rules described above regarding the deferral of
interest deductions will not apply. This election to include market discount in
income currently, once made, applies to all market discount obligations acquired
on or after the first day of the first taxable year to which the election
applies and may not be revoked without the consent of the Service.
AMORTIZABLE BOND PREMIUM. Generally, if the tax basis of an obligation held
as a capital asset exceeds the amount payable at maturity of the obligation,
such excess will constitute amortizable bond premium that the holder may elect,
under Section 171 of the Code, to amortize under the constant yield method over
the period from its acquisition date to the obligation's maturity date. A holder
who elects to amortize bond premium must reduce its tax basis in the related
obligation by the amount of the aggregate amortization allowable for amortizable
bond premium. Amortizable bond premium will be treated under the Code as an
offset to interest income on the related debt instrument for United States
federal income tax purposes, subject to the promulgation of Treasury Regulations
altering such treatment.
SALE OR OTHER DISPOSITION. In general, a U.S. Holder of Notes will recognize
gain or loss upon the sale, exchange, redemption, or other taxable disposition
of such Notes measured by the difference between (i) the amount of cash and the
fair market value of property received (except to the extent attributable to
accrued interest on the Notes previously taken into account) and (ii) the U.S.
Holder's adjusted tax basis in the Notes. A U.S. Holder's adjusted tax basis for
determining gain or loss on the sale or other disposition of a Note will
initially equal the cost of the Note to such U.S. Holder and will be increased
by any accrued original issue discount and any market discount includable in
such U.S. Holder's gross income and decreased by the amount of any cash payments
received by such U.S. Holder regardless of whether such payments are denominated
as principal or interest (other than payments of qualified stated interest).
Subject to the market discount rules discussed above, any such gain or loss will
generally be long-term capital gain or loss, provided the Notes have been held
for more than one year.
ELECTIONS. A U.S. Holder of Notes, subject to certain limitations, may elect
to include all interest and discount on the Notes in gross income under the
constant yield method. For this purpose, interest includes stated and unstated,
original issue discount, de minimus original issue discount, de minimis market
discount and market discount, as adjusted by any amortizable bond premium or
acquisition premium. Any such election, if made in respect of a market discount
bond, will constitute an election to include market discount in income currently
on all market discount bonds acquired by such U.S. Holder on or after the first
day of the first taxable year to which the election applies. See "--Market
Discount." U.S. Holders should consult with their tax advisors regarding any tax
elections they intend to make with respect to any Notes.
APPLICABLE HIGH YIELD DISCOUNT RULES. The Notes will constitute "applicable
high yield discount obligations" ("AHYDOs") if the yield to maturity of such
Notes equals or exceeds the sum of the applicable federal rate in effect at the
time of the issuance of the Notes (the "AFR") plus five percentage points. Under
Sections 163(e) and 163(i) of the Code, a corporation that is an issuer of debt
obligations subject to the AHYDO rules may not deduct any portion of original
issue discount on the
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obligations until such portion is actually paid. A debt obligation is generally
subject to the AHYDO rules if (i) its maturity date is more than five years from
the date of issue, (ii) its yield to maturity equals or exceeds the sum of the
AFR plus five percentage points and (iii) it bears "significant original issue
discount." A debt obligation will bear significant original issue discount for
this purpose if, as of the close of any accrual period ending more than five
years after issuance, the total amount of income includable by a holder with
respect to the debt instrument exceeds the sum of (i) the total amount of
"interest" paid under the obligation before the close of such accrual period and
(ii) the product of the issue price of the debt instrument and its yield to
maturity. In addition, if the yield to maturity of the Notes exceeds the sum of
the AFR plus six percentage points, a portion of original issue discount under
the Notes, equal to the product of the total original issue discount under the
Notes times the ratio of (a) the excess of the yield to maturity over the sum of
the AFR plus six percentage points to (b) the yield to maturity, will not be
deductible by the issuer and will be treated for some purposes as dividends to
the holders of the Notes (to the extent that such amounts would have been
treated as dividends to the holders of the Notes if they had been distributions
with respect to the issuer's stock). Amounts treated as dividends will be
nondeductible by the issuer, and may qualify for the dividend received deduction
for corporate U.S. Holders, but will be treated as original issue discount and
not as dividends for withholding tax purposes.
INFORMATION REPORTING AND BACKUP WITHHOLDING
The "backup" withholding and information reporting requirements may apply to
certain payments of principal and interest (including original issue discount)
on a Note and to certain payments of proceeds on the sale or retirement of a
Note. The Company, its agent, a broker, the Trustee or any paying agent, as the
case may be, will be required to withhold tax from any payment that is subject
to backup withholding 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, (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.
Backup withholding is not an additional tax. The amount of any backup
withholding from a payment to a U.S. 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, provided that the required information is furnished to the
Service.
TAX CONSEQUENCES TO NON-U.S. HOLDERS
PORTFOLIO INTEREST EXEMPTION
A Non-U.S. Holder will generally, under the portfolio interest exemption of
the Code, not be subject to United States federal income taxes and/or United
States federal withholding tax, on payments of principal, if any, on the Notes,
and original issue discount on the Notes or interest paid on the Notes,
provided that (i) the Non-U.S. Holder does not actually or constructively own
10% or more of the total combined voting power of all classes of stock of the
Company entitled to vote, (ii) the Non-U.S. Holder is not (a) a bank receiving
original issue discount or interest pursuant to a loan agreement entered into in
the ordinary course of its trade or business or (b) a controlled foreign
corporation that is related to the Company through stock ownership, (iii) such
original issue discount or interest is not effectively connected with a United
States trade or business and (iv) either (a) the beneficial owner of the Notes
certifies to the Company or its agent, under penalties of perjury, that it is
not a U.S. Holder (i.e., a holder other than a Non-U.S. Holder) and provides a
completed IRS Form W-8
108
<PAGE>
("Certificate of Foreign Status") or (b) a securities clearing organization,
bank or other financial institution which holds customers' securities in the
ordinary course of its trade or business (a "financial institution") and holds
the Notes, certifies to the Company or its agent, under penalties of
perjury, that it has received Form W-8 from the beneficial owner or that it has
received from another financial institution a Form W-8 and furnishes the payor
with a copy thereof. If any of the situations described in proviso (i), (ii) or
(iv) of the preceding sentence do not exist, interest on the Notes when
received is subject to United States withholding tax at the rate of 30% unless
an income tax treaty between the United States and the country of which the
Non-U.S. Holder is a tax resident provides for the elimination or reduction in
the rate of United States federal withholding tax.
If a holder of a Note who is a Non-U.S. Holder is engaged in a trade or
business in the United States and interest (including original issue discount)
on the Note is effectively connected with the conduct of such trade or business,
such holder, although exempt from United States federal withholding tax as
discussed in the preceding paragraph (or by reason of the delivery of a properly
completed Form 4224), will be subject to United States federal income tax on
such interest (including original issue discount) and on any gain realized on
the sale, exchange or other disposition of a Note in the same manner as if it
were a U.S. Holder. In addition, if such Non-U.S. Holder is a foreign
corporation, it may be subject to a branch profits tax equal to 30% of its
effectively connected earnings and profits for that taxable year, unless it
qualifies for a lower rate under an applicable income tax treaty.
FEDERAL ESTATE TAX
Notes 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 excluded from the
individual's gross estate for the United States federal estate tax purposes and
will not be subject to United States federal estate tax if the nonresident
qualifies for the portfolio interest exemption discussed above.
SALE OF NOTES
A Non-U.S. Holder generally will not be subject to United States federal
income tax on any gain realized in connection with the sale, exchange or
retirement of Notes, unless (i) (a) the gain is effectively connected with a
trade or business carried on by the Non-U.S. Holder within the United States or,
(b) if a tax treaty applies, the gain is generally attributable to the 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 Notes as capital
asset, such holder is present in the United States for 183 days or more in the
taxable year of disposition and certain other conditions are satisfied, or (iii)
the Non-U.S. Holder is subject to tax pursuant to provisions of the Code
applicable to United States expatriates.
INFORMATION REPORTING AND BACKUP WITHHOLDING TAX
In general, there is no United States information reporting requirement or
backup withholding tax on payments to Non-U.S. Holders who provide the
appropriate certification described above regarding qualification for the
portfolio interest exemption from United States federal income tax for payments
of interest (including original interest discount) on the Notes.
In general, backup withholding and information reporting will not apply to a
payment of the gross proceeds of a sale of Notes 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
109
<PAGE>
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. Recently proposed Treasury Regulations (the "Proposed
Regulations") would provide alternative methods for satisfying the certification
requirement described in clause (iv)(a) and (b) under "Portfolio Interest
Exemption" above. The Proposed Regulations also would require, in the case of
Notes held by foreign partnerships, that (i) the certification described in
clause (iv)(a) and (b) under "Portfolio Interest Exemption" above be provided by
the partners rather than by the foreign partnership and (ii) the partnership
provide certain information, including a United States taxpayer identification
number. A look-through rule would apply in the case of tiered partnerships. The
Proposed Regulations are proposed to be effective for payments made after
December 31, 1997. There can be no assurance that the Proposed Regulations will
be adopted or as to the provisions they will include if and when adopted in
temporary or final form. 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.
Payment by the Company of principal on the Notes or payment by a United
States office of a broker of the proceeds of a sale of Notes is subject to both
backup withholding and information reporting unless the beneficial owner
provides a completed IRS Form W-8 which certifies under penalties of perjury
that it is a Non-U.S. Holder who meets all the requirements for exemption from
United States federal income tax on any gain from the sale, exchange or
retirement of the Notes. 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 United States 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 NOTES IN LIGHT OF
ITS PARTICULAR CIRCUMSTANCES AND INCOME TAX SITUATION. HOLDERS SHOULD CONSULT
THEIR OWN TAX ADVISOR AS TO THE SPECIFIC TAX CONSEQUENCES TO THEM FROM THE
PURCHASE, OWNERSHIP AND DISPOSITION OF THE NOTES, 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.
110
<PAGE>
UNDERWRITER
Under the terms and subject to the conditions in the Underwriting Agreement
dated the date hereof (the "Underwriting Agreement"), Morgan Stanley & Co.
Incorporated (the "Underwriter") has agreed to purchase, and the Company has
agreed to sell to the Underwriter, the Notes.
The Underwriting Agreement provides that the obligations of the Underwriter
to pay for and accept delivery of the Notes offered hereby are subject to the
approval of certain legal matters by their counsel and to certain other
conditions. The Underwriter is obligated to take and pay for all of the Notes
offered hereby if any are taken.
The Underwriter proposes to offer part of the Notes directly to the public
at the Price to Public set forth on the cover page hereof and part to certain
dealers at a price which represents a concession not in excess of . % of the
public offering price for the Senior Notes and . % of the public offering
price for the Senior Subordinated Notes. The Underwriter may allow, and such
dealers may reallow, a concession to certain other dealers not in excess of
. % of the public offering price for the Senior Notes and . % of the public
offering price for the Senior Subordinated Notes. After the initial offering of
the Notes, the offering price and other selling terms may from time to time be
varied by the Underwriter.
The Company does not intend to apply for listing of the Notes on any
national securities exchange, but has been advised by the Underwriter that it
currently intends to make a market in the Notes, as permitted by applicable laws
and regulations. The Underwriter is not obligated, however, to make a market in
the Notes and any such market making may be discontinued at any time without
notice, at its sole discretion. Accordingly, no assurance can be given as to the
liquidity of, or the existence of trading markets for, the Notes.
The Company and the Underwriter have agreed to indemnify each other against
certain liabilities, including liabilities under the Securities Act.
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. Certain legal matters will be passed upon for the Underwriter by
Shearman & Sterling, New York, New York.
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 and 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 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 report.
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.
111
<PAGE>
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, 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 a Registration Statement under the
Securities Act with respect to the securities offered by 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 Statement. For
further information about the Company and the securities offered hereby,
reference is made to the Registration Statement 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
Statement, 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.
112
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE><CAPTION>
PAGE
----
<S> <C>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES:
Report of Independent Auditors..................................................... F-2
Consolidated Balance Sheets as of March 31, 1996 (unaudited), December 31, 1995 and
February 28, 1995.................................................................... F-3
Consolidated Statements of Operations, Three Months Ended March 31, 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, Three Months Ended March 31, 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 March 31, 1996 (unaudited), December 31, 1995 and 1994........ F-34
Statements of Operations, Three Months Ended March 31, 1996 and 1995 (unaudited)
and Years Ended December 31, 1995 and 1994........................................... F-35
Statements of Divisional (Deficit) Surplus, Three Months Ended March 31, 1996
(unaudited) and Years Ended December 31, 1995 and 1994............................... F-36
Statements of Cash Flows, Three Months Ended March 31, 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 Auditors..................................................... 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
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:..................... F-49
Unaudited Pro Forma Condensed Consolidated Balance Sheet as of March 31, 1996...... F-50
Unaudited Pro Forma Condensed Consolidated Statement of Operations, Three Months
Ended March 31, 1996................................................................. F-51
Unaudited Pro Forma Condensed Consolidated Statement of Operations, Ten Months
Ended December 31, 1995.............................................................. F-52
Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements........... F-53
</TABLE>
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>
MARCH 31, DECEMBER 31, FEBRUARY 28,
1996 1995 1995
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents....................... $176,130,544 $138,105,824 $ 3,156,354
Short term investments.......................... 27,372,707 73,594,849 --
------------ ------------ ------------
Total cash, cash equivalents and short term
investments....................................... 203,503,251 211,700,673 3,156,354
Investments in marketable equity securities..... 6,158,250 6,515,250 --
Accounts receivable, net of allowance for
doubtful accounts of $878,000, $800,000 and
$824,000.......................................... 9,746,373 8,683,860 4,035,007
Notes receivable................................ 374,908 199,635 706,329
Inventories..................................... 7,895,211 7,391,686 4,232,927
Prepaid expenses and other current assets....... 2,819,192 3,568,448 983,380
------------ ------------ ------------
Total current assets........................ 230,497,185 238,059,552 13,113,997
Property and equipment, net....................... 18,089,226 15,898,005 2,663,068
Notes receivable.................................. 4,029,280 3,488,948 2,289,002
Investments and advances.......................... 322,733 322,733 7,866,927
Licenses, net..................................... 12,443,408 12,556,281 --
Intangible assets, net............................ 3,071,629 3,033,505 3,213,785
Deferred financing costs.......................... 10,515,964 10,525,301 --
Other assets...................................... 1,503,366 1,478,530 362,673
------------ ------------ ------------
Total assets................................ $280,472,791 $285,362,855 $ 29,509,452
------------ ------------ ------------
------------ ------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Loans payable................................... $ 8,876,316 $ 8,287,461 $ --
Accounts payable and accrued expenses........... 11,169,254 13,513,369 5,732,039
Capitalized lease obligations................... 1,437,852 1,355,255 332,239
------------ ------------ ------------
Total current liabilities................... 21,483,422 23,156,085 6,064,278
Senior notes payable.............................. 159,194,067 153,971,508 --
Convertible notes payable......................... 79,597,033 76,985,754 --
Other notes payable............................... 3,436,314 3,416,288 4,410,753
Capitalized lease obligations..................... 5,809,745 6,081,299 754,525
------------ ------------ ------------
Total liabilities........................... 269,520,581 263,610,934 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 29,740,306,
29,707,792, and 20,146,934 shares; outstanding
27,233,543, 27,201,029, and 20,146,934
shares............................................ 297,404 297,079 201,470
Additional paid-in capital...................... 103,989,159 103,836,510 42,583,679
Accumulated deficit............................. (52,009,885) (41,311,075) (25,237,944)
------------ ------------ ------------
52,965,578 63,511,414 18,279,896
Less: Treasury stock.............................. (39,677,743) (39,677,743) --
Deferred compensation........................ (996,875) (1,100,000) --
Unrealized loss on investments in marketable
equity securities........................... (1,338,750) (981,750) --
------------ ------------ ------------
Total stockholders' equity.................. 10,952,210 21,751,921 18,279,896
------------ ------------ ------------
Total liabilities and stockholders'
equity............................................ $280,472,791 $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 THREE MONTHS ENDED FOR THE TEN MONTHS ENDED FOR THE YEARS ENDED
MARCH 31, DECEMBER 31, FEBRUARY 28,
-------------------------- -------------------------- -------------------------
(UNAUDITED) (UNAUDITED)
1996 1995 1995 1994 1995 1994
------------ ----------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net sales............................ $ 14,509,042 $ 6,157,949 $ 29,771,472 $22,018,106 $25,564,760 $15,625,019
Cost of sales........................ 8,573,271 4,598,541 19,546,351 14,761,290 17,702,570 10,712,090
------------ ----------- ------------ ----------- ----------- -----------
Gross profit........................ 5,935,771 1,559,408 10,225,121 7,256,816 7,862,190 4,912,929
Selling, general and administrative
expenses............................. 10,191,903 3,769,658 19,266,466 9,974,189 12,688,859 6,887,913
Restructuring expense................ -- -- -- 607,609 607,609 --
Depreciation......................... 361,510 58,994 770,284 137,055 177,158 92,537
------------ ----------- ------------ ----------- ----------- -----------
Operating loss....................... (4,617,642) (2,269,244) (9,811,629) (3,462,037) (5,611,436) (2,067,521)
Other (income) expense
Interest expense.................... 8,814,547 183,999 7,630,079 504,857 637,028 744,371
Interest income..................... (3,056,656) (125,107) (2,889,813) (297,051) (384,572) (109,320)
Amortization of intangibles......... 194,594 62,734 439,888 181,972 225,176 239,993
Equity in loss of Avant-Garde....... -- 536,595 865,676 766,543 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.................... (10,570,127) (2,927,465) (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......... (10,570,127) (2,927,465) (15,857,459) (4,618,358) (7,230,195) (8,195,468)
Income taxes......................... 128,683 -- -- -- -- --
------------ ----------- ------------ ----------- ----------- -----------
Net loss............................ $(10,698,810) $(2,927,465) $(15,857,459) $(4,618,358) $(7,230,195) $(8,195,468)
------------ ----------- ------------ ----------- ----------- -----------
------------ ----------- ------------ ----------- ----------- -----------
Net loss per share:
Before extraordinary item........... $ (0.39) $ (0.15) $ (0.70) $ (0.28) $ (0.42) $ (1.09)
Extraordinary item.................. -- -- -- -- -- 0.03
------------ ----------- ------------ ----------- ----------- -----------
Net loss............................ $ (0.39) $ (0.15) $ (0.70) $ (0.28) $ (0.42) $ (1.06)
------------ ----------- ------------ ----------- ----------- -----------
------------ ----------- ------------ ----------- ----------- -----------
Weighted average shares
outstanding.......................... 27,214,281 19,934,710 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>
TREASURY
STOCK
PREFERRED STOCK ----------
------------------------------------------
COMMON
B E COMMON STOCK ADDITIONAL STOCK
------------------ --------------------- --------------------- PAID-IN ACCUMULATED ----------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT SHARES
------- -------- -------- ---------- ---------- -------- ------------ ------------ ----------
<S> <C> <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 (2,506,763)
Issuance of
common stock
in connection
with the
converson 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) (2,506,763)
------- -------- -------- ---------- ---------- -------- ------------ ------------ ----------
------- -------- -------- ---------- ---------- -------- ------------ ------------ ----------
<CAPTION>
UNREALIZED LOSS
PREFERRED STOCK B ON INVESTMENTS TOTAL
--------------------- DEFERRED IN MARKETABLE STOCKHOLDERS'
AMOUNT SHARES AMOUNT COMPENSATION EQUITY SECURITIES EQUITY
------------ ------- ----------- ------------ ----------------- -------------
<S> <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
Common stock
equivalents
issued 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... (36,348,065) (688.90) (3,329,678) --
Issuance of
common stock
in connection
with the
converson 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.......... $(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 COMMON STOCK ADDITIONAL
--------------------- ------------------- -------------------- --------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL
-------- ---------- ------- --------- -------- --------- ---------- -------- -----------
<S> <C> <C> <C> <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 9,842,670 $ 98,427 $20,289,677
Exercise of Series A and
Series B Warrants........ 3,291,417 32,914 10,657,038
Exercise of Series D and
Series E Warrants........ 2,814,142 28,141 2,081,137
Conversion of Preferred
Stock C................. (173.00) (173,000) 82,381 824 172,176
Conversion of Preferred
Stock B................. (533.00) (533,000) 177,665 1,777 531,223
Conversion of Preferred
Stock D................. (225,000) (900,000) 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
Issuance of Prefered B
stock dividend.......... 61.90 61,900
Issuance of common stock
for the acquisition of
NFF, Inc................. 28,572 285 199,715
Other.................... (12,606)
Net loss.................
-------- ---------- ------- --------- -------- --------- ---------- -------- -----------
Balances at February 28,
1995..................... 732.69 $ 732,691 -- $ -- -- $ -- 20,146,934 $201,470 $42,583,679
-------- ---------- ------- --------- -------- --------- ---------- -------- -----------
-------- ---------- ------- --------- -------- --------- ---------- -------- -----------
<CAPTION>
TOTAL
ACCUMULATED STOCKHOLDERS'
DEFICIT EQUITY
------------ -------------
<S> <C> <C>
Balances at February 28,
1994..................... $(17,945,849) $ 4,719,046
Exercise of Series A and
Series B Warrants........ 10,689,952
Exercise of Series D and
Series E Warrants........ 2,109,278
Conversion of Preferred
Stock C................. --
Conversion of Preferred
Stock B................. --
Conversion of Preferred
Stock D................. --
Issuances of common stock
for cash (exercise of
options and
otherwise)............... 7,804,421
Issuance of Prefered B
stock dividend.......... (61,900) --
Issuance of common stock
for the acquisition of
NFF, Inc................. 200,000
Other.................... (12,606)
Net loss................. (7,230,195) (7,230,195)
------------ -------------
Balances at February 28,
1995..................... $(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 COMMON STOCK ADDITIONAL
--------------------- ---------------- ----------------- ------------------ PAID-IN
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL
--------- ---------- ------ -------- ------- -------- --------- ------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at February 28, 1993.... 1,135.66 $1,135,662 222.60 $222,600 0 $ -- 6,539,475 $65,394 $ 9,986,348
Issuances of common stock for
cash............................. 1,687,436 16,875 3,197,684
Issuance of common stock for
acquisition of WGN, Inc......... 1,271,351 12,714 1,457,286
Issuance of common stock for
acquisition of Inne
Dispensibles, Inc................ 39,506 395 99,605
Issuance of Preferred Stock D for
acquisition of Avant-Garde....... 225,000 900,000
Conversion of Preferred Stock
C................................ (50.00) (50,000) 23,810 238 49,762
Conversion of Series D
Warrants......................... 205,000 2,050 135,300
Issuance of common stock for
services rendered............... 63,406 634 48,096
Issuance of common stock to
retire debt...................... 50,000 500 56,531
Issuance of Preferred B stock
dividend......................... 68.13 68,129
Issuance of Preferred C stock
dividends........................ 10,789 108 19,272
Purchase and retirement of
treasury stock.................. (48,103) (481) (76,474)
Performance stock options........ 5,316,667
Net loss.........................
Adjustments...................... 0.40 400 (400)
--------- ---------- ------ -------- ------- -------- --------- ------- -----------
Balances at February 28, 1994.... 1,203.79 $1,203,791 173.00 $173,000 225,000 $900,000 9,842,670 $98,427 $20,289,677
--------- ---------- ------ -------- ------- -------- --------- ------- -----------
--------- ---------- ------ -------- ------- -------- --------- ------- -----------
<CAPTION>
TOTAL
ACCUMULATED STOCKHOLDERS'
DEFICIT EQUITY
------------ -------------
<S> <C> <C>
Balances at February 28, 1993.... $ (9,662,872) $ 1,747,132
Issuances of common stock for
cash............................. 3,214,559
Issuance of common stock for
acquisition of WGN, Inc......... 1,470,000
Issuance of common stock for
acquisition of Inne
Dispensibles, Inc................ 100,000
Issuance of Preferred Stock D for
acquisition of Avant-Garde....... 900,000
Conversion of Preferred Stock
C................................ --
Conversion of Series D
Warrants......................... 137,350
Issuance of common stock for
services rendered............... 48,730
Issuance of common stock to
retire debt...................... 57,031
Issuance of Preferred B stock
dividend......................... (68,129) --
Issuance of Preferred C stock
dividends........................ (19,380) --
Purchase and retirement of
treasury stock.................. (76,955)
Performance stock options........ 5,316,667
Net loss......................... (8,195,468) (8,195,468)
Adjustments...................... --
------------ -------------
Balances at February 28, 1994.... $(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>
THREE MONTHS
ENDED TEN MONTHS YEAR ENDED
MARCH 31, ENDED FEBRUARY 28,
-------------------------- DECEMBER 31, -------------------------
1996 1995 1995 1995 1994
------------ ----------- ------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities, net of the
effects of the purchases of Avant-Garde in the ten
months ended December 31, 1995, and of WGN in the
year ended February 28, 1994
Net loss......................................... $(10,698,810) $(2,927,465) $(15,857,459) $(7,230,195) $(8,195,468)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization................. 846,205 131,271 860,103 432,502 223,088
Amortization of licenses and intangibles...... 192,413 62,985 439,888 225,176 239,993
Provision for doubtful accounts............... 380,758 204,384 887,425 893,857 343,694
Equity in unconsolidated results of
Avant-Garde......................................... -- 520,560 865,676 1,108,962 --
Non cash interest expense..................... 7,853,864 -- 6,151,090 -- --
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......................................... -- 32,952 177,735 78,374 (155,086)
(Increase) decrease in operating assets:
Accounts receivable........................ (1,443,271) 1,542,678 (5,526,618) (1,409,862) (1,438,263)
Inventories................................ (503,525) (1,116,507) (3,158,759) (1,729,395) (337,781)
Prepaid expenses and other current
assets.............................................. 749,256 306,392 (2,478,501) (440,188) (249,496)
Other assets............................... (116,667) 4,552 (268,650) (90,637) (12,049)
(Decrease) increase in accounts payable and
accrued expenses.................................... (2,146,939) 396,591 6,306,466 1,635,189 1,531,892
------------ ----------- ------------ ----------- -----------
Net cash used in operating activities............... (4,886,716) (841,607) (11,601,604) (6,526,217) (2,634,587)
------------ ----------- ------------ ----------- -----------
Cash flows from investing activities:
Investments in and advances to Avant-Garde....... -- (2,213,961) (5,703,608) (7,128,947) (632,000)
Acquisitions..................................... -- -- -- (678,566) 27,679
Decrease (increase) in short-term investments,
net................................................. 46,222,142 -- (73,593,849) -- --
Increase in other investments.................... -- -- (7,497,000) -- --
Collections of notes receivable.................. 34,331 180,000 1,003,859 360,000 600,000
Increase in notes receivable..................... (749,936) (806,158) (1,370,974) (2,234,636) --
Purchase of property and equipment, net.......... (2,576,983) (541,325) (8,607,794) (1,055,167) (227,787)
Cash proceeds from sale of skiwear brands........ -- -- -- -- 276,695
License acquisition costs........................ (118,729) -- (129,413) -- --
Other............................................ -- 294,736 (3,251) (50,140) --
------------ ----------- ------------ ----------- -----------
Net cash provided by (used in) investing
activities.......................................... 42,810,825 (3,086,708) (95,902,030) (10,787,456) 44,587
------------ ----------- ------------ ----------- -----------
Cash flows from financing activities:
Proceeds from (repayment of) loans payable....... 588,855 (1,549,673) 3,849,233 1,695,447 (1,772,550)
Proceeds from notes payable...................... -- -- 221,946,330 -- 1,966,498
Repayment of notes payable....................... -- -- -- (431,793) (300,625)
Payment of dividends............................. -- -- (113,303) -- --
Debt financing costs............................. (303,744) -- (784,791) (329,483) --
Proceeds from equipment lease financing.......... -- -- 6,997,600 -- --
Proceeds of cash collateral...................... -- -- -- -- 100,000
Payment of capital lease obligations............. (308,572) (60,779) (700,828) (250,871) (115,249)
Net proceeds from equity transactions............ 124,072 2,533,832 11,258,863 19,067,386 2,800,739
------------ ----------- ------------ ----------- -----------
Net cash provided by financing activities........... 100,611 923,380 242,453,104 19,750,686 2,678,813
------------ ----------- ------------ ----------- -----------
Net increase (decrease) in cash and cash
equivalents......................................... 38,024,720 (3,004,935) 134,949,470 2,437,013 88,813
Cash and cash equivalents at beginning of period.... 138,105,824 5,287,188 3,156,354 719,341 630,528
------------ ----------- ------------ ----------- -----------
Cash and cash equivalents at end of period.......... 176,130,544 2,282,253 138,105,824 3,156,354 719,341
Short-term investments at end of period............. 27,372,707 -- 73,594,849 -- --
------------ ----------- ------------ ----------- -----------
Cash, cash equivalents, and short-term investments
at end of period.................................... $203,503,251 $ 2,282,253 $211,700,673 $ 3,156,354 $ 719,341
------------ ----------- ------------ ----------- -----------
------------ ----------- ------------ ----------- -----------
</TABLE>
See Notes to Consolidated Financial Statements
F-8
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 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.
F-9
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
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.
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.
F-10
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
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.
NET LOSS PER COMMON SHARE:
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 March 31, 1996 and the
unaudited consolidated statements of operations and statements of cash flows for
the three months ended March 31, 1996 and 1995 are condensed financial
statements in accordance with the rules and regulations of the Securities
F-11
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
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 March 31, 1996 and results of operations and the cash flows for
the three months ended March 31, 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 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:
<TABLE>
<CAPTION>
FOR THE
THREE FOR THE TEN FOR THE TWELVE
MONTHS ENDED MONTHS ENDED MONTHS ENDED
MARCH 31, DECEMBER 31, FEBRUARY 28,
1995 1995 1995
------------ ------------ --------------
<S> <C> <C> <C>
Net sales.......................................... $ 6,161,027 $ 29,744,251 $ 25,572,218
Net loss........................................... (3,488,205) (16,769,516) (8,422,780)
Net loss per share................................. $ (0.16) $ (0.72) $ (0.46)
</TABLE>
F-12
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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.
F-13
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 3--WGN ACQUISITION--(CONTINUED)
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.
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........................................ (.44)
No pro forma results of operations are shown for the year ended February 28,
1994, as NFF only commenced operations in March 1994.
F-14
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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 and
March 31, 1996.
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 March 31, 1996, a
$1,338,750 difference between the market value of the investment at March 31,
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--Robern Skiwear(b)............................ 540,000
Other.......................................................... 139,635
----------
Total.......................................................... 3,688,583
Less: current portion.......................................... 199,635
----------
Long-term notes receivable..................................... $3,488,948
----------
----------
F-15
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 8--NOTES RECEIVABLE--(CONTINUED)
- ------------
<TABLE>
<C> <S>
(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).
(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.
</TABLE>
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.
F-16
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 12--INVENTORIES
Components of inventories are as follows:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31, FEBRUARY 28,
1996 1995 1995
----------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
Finished goods......................................... $ 1,715,871 $1,432,951 $ 1,190,670
Raw materials.......................................... 4,423,420 4,017,655 2,092,101
Film inventories....................................... 1,755,920 1,941,080 950,156
----------- ------------ ------------
$ 7,895,211 $7,391,686 $ 4,232,927
----------- ------------ ------------
----------- ------------ ------------
</TABLE>
NOTE 13--PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, FEBRUARY 28, ESTIMATED
1995 1995 USEFUL LIFE
------------ ------------ -----------------
<S> <C> <C> <C>
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
------------ ------------
------------ ------------
</TABLE>
NOTE 14--INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, FEBRUARY 28, ESTIMATED
1995 1995 USEFUL LIFE
------------ ------------ -------------
<S> <C> <C> <C>
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
------------ ------------
------------ ------------
</TABLE>
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.
F-17
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 15--LOANS PAYABLE
Loans payable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, FEBRUARY 28,
1995 1995
------------ ------------
<S> <C> <C>
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)
------------ ------------
------------ ------------
</TABLE>
- ------------
<TABLE>
<C> <S>
(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 also calls for an annual fee of $50,000 as well as certain underutiliza-
tion 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.
</TABLE>
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 intends to file such registration statement in a
timely manner. 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. The complaint alleges 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 and, in each case, were in violation of
the fiduciary obligations of certain directors to the Company.
The Company believes that the allegations set forth in the complaint are
based on misstatements of fact and misunderstandings of relevant facts and
further believes that there are meritorious defenses to all of the allegations.
The Company recently has entered into a settlement agreement with the plaintiffs
pursuant to which the Company has agreed to amend its bylaws to formalize
certain corporate governance changes and to payment of legal fees of plaintiffs'
counsel. The settlement agreement is subject to notice to stockholders and
approval of the Delaware Chancery Court. The Company believes that the
resolution of this lawsuit will not have a material adverse impact on the
Company's financial position.
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 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.
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
F-21
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 19--COMMITMENTS AND CONTINGENCIES--(CONTINUED)
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 cancellable 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:
<TABLE>
<CAPTION>
DECEMBER 31, FEBRUARY 28,
1995 1995
------------ ------------
<S> <C> <C>
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 asset....................................... 18,000,000 10,050,000
Valuation allowance.......................................... (18,000,000) (10,050,000)
------------ ------------
Net deferred tax assets.................................. $ -- $ --
------------ ------------
------------ ------------
</TABLE>
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.
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
F-22
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 21--STOCKHOLDERS' EQUITY--(CONTINUED)
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 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
F-23
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 22--STOCK OPTIONS AND STOCK PURCHASE WARRANTS--(CONTINUED)
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:
<TABLE>
<CAPTION>
NUMBER PRICE PER SHARE
---------- ---------------
<S> <C> <C>
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
----------
----------
</TABLE>
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.
At December 31, 1995, options for 2,848,462 shares were exercisable at
exercise prices ranging from $1.06 to $17.13 per share.
F-24
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 22--STOCK OPTIONS AND STOCK PURCHASE WARRANTS--(CONTINUED)
Warrants to purchase the Company's common stock were issued as follows:
<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.
F-25
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 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,
F-26
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 23--RELATED PARTY TRANSACTIONS--(CONTINUED)
(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.
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 sports-related 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
F-27
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 23--RELATED PARTY TRANSACTIONS--(CONTINUED)
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.
NOTE 24--SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest during the three months ended March 31, 1996, the ten
months ended December 31, 1995, and the years ended February 28, 1995 and 1994
was $972,000, $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
F-28
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 24--SUPPLEMENTAL CASH FLOW INFORMATION--(CONTINUED)
$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>
TOTAL
INFORMATION BUSINESS 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
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
</TABLE>
F-29
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 26--BUSINESS SEGMENTS--(CONTINUED)
<TABLE>
<CAPTION>
TOTAL
INFORMATION BUSINESS GENERAL
TELECOMMUNICATIONS SERVICES MERCHANDISING SEGMENTS CORPORATE CONSOLIDATED
------------------ ----------- ------------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
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>
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.
F-30
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 28--SUBSEQUENT EVENTS TO DECEMBER 31, 1995 (UNAUDITED)
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 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.
F-31
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 28--SUBSEQUENT EVENTS TO DECEMBER 31, 1995 (UNAUDITED)--(CONTINUED)
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.
PUBLIC OFFERING:
The Company has filed Registration Statements to offer to the public four
million shares of the Company's common stock and $200 million of Senior Notes
and Senior Subordinated Notes (the "Offering"). There can be no assurance that
the Offering will be completed.
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.
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>
DECEMBER 31
MARCH --------------------------
31, 1996 1995 1994
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash.............................................. $ 71,961 $ 441,994 $ 1,772,460
Accounts receivable, net of allowance for doubtful
accounts of $75,000, $90,000 and $73,000 at
March 31, 1996 and December 31, 1995 and 1994....... 441,906 538,269 526,391
Inventories....................................... 3,366,607 3,353,641 2,895,981
Prepaids and other current assets................. 148,191 171,752 619,885
----------- ----------- -----------
Total current assets................................ 4,028,665 4,505,656 5,814,717
Property and equipment, net......................... 9,409,962 10,015,056 11,531,900
Security deposits................................... 84,077 83,308 85,164
----------- ----------- -----------
Total assets........................................ $13,522,704 $14,604,020 $17,431,781
----------- ----------- -----------
----------- ----------- -----------
LIABILITIES AND DIVISIONAL (DEFICIT) SURPLUS
Current liabilities:
Accounts payable and accrued expenses............. $ 528,941 $ 874,001 $ 1,945,129
Obligations under capital leases.................. 80,050 107,816 65,535
Interest payable.................................. 2,059,013 1,645,708 641,579
Notes payable..................................... 17,300,000 17,300,000
----------- ----------- -----------
Total current liabilities........................... 19,968,004 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................................... 20,226,866 20,186,387 15,912,538
Divisional (deficit) surplus........................ (6,704,162) (5,582,367) 1,519,243
----------- ----------- -----------
Total liabilities and divisional (deficit)
surplus............................................. $13,522,704 $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>
THREE MONTHS ENDED
MARCH 31 YEAR ENDED DECEMBER 31
------------------------- --------------------------
1996 1995 1995 1994
----------- ---------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues:
Sales of communication services....... $ 987,007 $1,097,650 $ 4,264,664 $ 4,946,988
Sales of communications systems....... 225,530 680,729 2,656,718 1,842,828
Installation charges.................. 3,500 4,665 169,165 88,151
----------- ---------- ----------- -----------
1,216,037 1,783,044 7,090,547 6,877,967
Operating expenses:
Network services...................... 673,540 616,601 2,320,374 2,381,922
Cost of systems sold.................. 158,159 493,243 1,714,429 1,302,601
Selling, general and administrative... 456,187 530,355 2,582,894 2,780,982
Depreciation and amortization......... 637,109 686,322 2,784,156 2,608,765
----------- ---------- ----------- -----------
1,924,995 2,326,521 9,401,853 9,074,270
----------- ---------- ----------- -----------
Loss from operations.................... (708,958) (543,477) (2,311,306) (2,196,303)
Other income (expense):
Interest income....................... 2,407 4,974 11,736 7,370
Interest expense...................... (480,080) (350,004) (1,587,851) (1,012,434)
----------- ---------- ----------- -----------
(477,673) (345,030) (1,576,115) (1,005,064)
----------- ---------- ----------- -----------
Net loss.............................. $(1,186,631) $ (888,507) $(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
THREE MONTHS ENDED MARCH 31, 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)......................................................... (1,186,631)
Net activity with Locate (unaudited)......................................... 64,836
-----------
Divisional deficit at March 31, 1996 (unaudited)............................... $(6,704,162)
-----------
-----------
</TABLE>
See accompanying notes.
F-36
<PAGE>
THE MICROWAVE DIVISION OF
LOCAL AREA TELECOMMUNICATIONS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS YEAR ENDED
ENDED MARCH 31, DECEMBER 31
-------------------------- --------------------------
1996 1995 1995 1994
----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss............................... $(1,186,631) $ (888,507) $(3,887,421) $(3,201,367)
Adjustments to reconcile net loss to
net cash used in operating
activities:
Depreciation and amortization........ 637,109 683,822 2,784,156 2,608,765
Changes in assets and liabilities:
Accounts receivable................ 96,363 (216,240) (11,878) 142,512
Inventory.......................... (12,966) (51,785) (457,660) (228,059)
Prepaids and other................. 22,792 9,559 449,989 (291,231)
Accounts payable and accrued
expenses............................... (345,060) (407,414) (1,071,128) (223,308)
Interest payable................... 413,305 (89,422) 1,004,129 2,918
----------- ----------- ----------- -----------
Net cash used in operating
activities............................. (375,088) (959,987) (1,189,813) (1,189,770)
INVESTING ACTIVITIES
Capital expenditures................... (32,015) (137,719) (1,164,712) (432,099)
----------- ----------- ----------- -----------
Net cash used in investing
activities............................. (32,015) (137,719) (1,164,712) (432,099)
FINANCING ACTIVITIES
Cash overdraft......................... 300,553
Payments made under capital lease
obligation............................. (27,766) (15,776) (36,752) (20,471)
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..................... (1,499,988) (6,073,442) (3,109,794)
Payments from Locate................... 64,836 540,457 2,859,253 2,952,997
----------- ----------- ----------- -----------
Net cash provided by (used in)
financing activities................. 37,070 (674,754) 1,024,059 2,822,732
----------- ----------- ----------- -----------
Net (decrease) increase in cash........ (370,033) (1,772,460) (1,330,466) 1,200,863
Cash at beginning of period............ 441,994 1,772,460 1,772,460 571,597
----------- ----------- ----------- -----------
Cash at end of period.................. $ 71,961 $ -- $ 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
MARCH 31, 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 radio
systems 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-to-point 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 MobileMedia 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 performs certain consulting and related services for the Company. As
full
F-38
<PAGE>
THE MICROWAVE DIVISION OF
LOCAL AREA TELECOMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
compensation for WinStar's performance of such services, the Company pays
WinStar a fee of $125,000 per month during the term 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 March 31, 1996 and the three months
ended March 31, 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:
<TABLE>
<CAPTION>
DECEMBER 31
MARCH --------------------------
31, 1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
(UNAUDITED)
<CAPTION>
<S> <C> <C> <C>
Equipment placed in service......................... $26,504,158 $26,472,594 $26,641,661
Furniture and fixtures.............................. 1,691,465 1,715,051 1,452,478
----------- ----------- -----------
28,195,623 28,187,645 28,094,139
Less accumulated depreciation....................... 18,785,661 18,172,589 16,562,239
----------- ----------- -----------
$ 9,409,962 $10,015,056 $11,531,900
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
Included in equipment placed in service is certain equipment obtained under
capital leases. At March 31, 1996, this equipment has a gross book value of
approximately $429,000 and a net book value of approximately $366,000.
3. NOTES PAYABLE
Notes payable, all of which are unsecured, consisted of the following:
<TABLE>
<CAPTION>
MARCH DECEMBER 31
31, 1996 1995 1994
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
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
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
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 three months ended March 31, 1996 and 1995, and
for the years ended December 31, 1995 and 1994 was approximately $67,000,
$439,000, $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 three months ended March 31, 1996 and 1995, and for the years ended
December 31, 1995 and 1994, the Division had sales to MobileMedia of
approximately $9,000, $18,000, $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 cancellable and
noncancellable operating leases which expire at various dates through 2000.
Total rental expense for the three months ended March 31, 1996 and 1995, and for
the years ended December 31, 1995 and 1994 was approximately $402,000, $373,000,
$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:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
-------- ----------
<S> <C> <C>
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
--------
--------
</TABLE>
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
<TABLE>
<S> <C>
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
-----------
-----------
</TABLE>
See Notes to Financial Statements
F-43
<PAGE>
AVANT--GARDE TELECOMMUNICATIONS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
FOR THE PERIOD FEBRUARY 28,
MARCH 1 TO ------------------------
JULY 17, 1995 1995 1994
-------------- ----------- ---------
(UNAUDITED)
<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 YEAR ENDED
FOR THE PERIOD FEBRUARY 28,
MARCH 1 TO ------------------------
JULY 17, 1995 1995 1994
-------------- ----------- ---------
(UNAUDITED)
<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
F-46
<PAGE>
AVANT-GARDE TELECOMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 2--DUE TO AFFILIATE--(CONTINUED)
payable, are included in Due to Affiliate in the accompanying balance sheets and
are non-interest bearing.
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:
<TABLE>
<CAPTION>
FEBRUARY 28, 1995
-----------------
<S> <C>
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
-----------------
-----------------
</TABLE>
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:
<TABLE>
<CAPTION>
FEBRUARY 28, 1995
-----------------
<S> <C>
Net operating loss carryforwards........................... $ 826,000
Valuation allowance........................................ (826,000)
-----------------
$--
-----------------
-----------------
</TABLE>
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>
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 March 31, 1996 consolidated balance sheets of
WinStar Communications, Inc. and subsidiaries (the "Company"), the Microwave
Division of Local Area Telecommunications, Inc. ("Locate"), The Winning Line,
Inc. ("TWL"), and Fox Lorber Associates, Inc. ("Fox/Lorber"), and giving effect
to the acquisitions of 65% of TWL, 80% of Fox/Lorber, and certain assets of
Locate by the Company as if they occurred on March 31, 1996. The following
unaudited pro forma "as adjusted" balance sheet gives effect to each of these
acquisitions as well as to the Stock Offering and Debt Offering as if they
occurred on March 31, 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 March 31, 1996.
The following unaudited pro forma condensed consolidated statements of
operations for the ten month period ended December 31, 1995 and for the three
months ended March 31, 1996 give effect to the Company's acquisition of 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 Old 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 three
month period ended March 31, 1996 give effect to these acquisitions and
financings as well as to the Stock Offering and Debt Offering 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 transactions, nor are they
considered necessarily to be indicative of the results of operations for the
periods specified had the transactions 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 related notes
thereto, the financial statements of Locate and related notes thereto, and the
financial statements of AGT and related notes thereto, appearing elsewhere in
the Prospectus.
F-49
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF MARCH 31, 1996
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS
INCREASE/
(DECREASE)
THE COMPANY, LOCATE, TWL, FOX/LORBER, FOR
HISTORICAL HISTORICAL HISTORICAL HISTORICAL ACQUISITIONS
------------ ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents..................... $176,130,544 $ 71,961 $ 11,126 $ 175,293 $ (25,000)(b)
(71,961)(a)
Short term investments 27,372,707 -- -- -- --
------------ ----------- ----------- ----------- ------------
Total cash, cash equivalents and short term
investments................................... 203,503,251 71,961 11,126 175,293 (96,961)
Investments in marketable equity securities... 6,158,250 -- -- --
Accounts receivable, net...................... 9,746,373 441,906 335,869 3,978,467 (441,906)(a)
Notes receivable.............................. 374,908 -- -- --
Inventories................................... 7,895,211 3,366,607 -- 1,642,336
Prepaid expenses and other current assets..... 2,819,192 148,191 24,552 82,899 (200,312)(c)
(148,191)(a)
(222,937)(d)
------------ ----------- ----------- ----------- ------------
Total current assets........................ 230,497,185 4,028,665 371,547 5,878,995 (1,110,307)
Property and equipment, net................... 18,089,226 9,409,962 166,918 194,990
Notes receivable.............................. 4,029,280 -- -- -- (970,000)(c)
(2,623,555)(d)
Investments and advances...................... 322,733 -- -- 76,996
Licenses, net................................. 12,443,408 -- -- -- 5,037,343(a)
Intangible assets, net........................ 3,071,629 -- -- 68,187 3,090,724(b)
3,953,864(c)
Deferred financing costs...................... 10,515,964 -- -- -- --
Other assets.................................. 1,503,366 84,077 54,390 223,559 (64,080)(c)
(84,077)(a)
------------ ----------- ----------- ----------- ------------
Total assets............................... $280,472,791 $13,522,704 $ 592,855 $ 6,442,727 $ 7,229,912
------------ ----------- ----------- ----------- ------------
------------ ----------- ----------- ----------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Loans payable................................. $ 8,876,316 $17,300,000 $ 3,619,055 $ 820,380 $ 17,500,000(a)
(136,508)(b)
(970,000)(c)
(17,300,000)(a)
(2,623,555)(d)
Accounts payable and accrued expenses......... 11,169,254 2,587,954 1,092,584 7,444,263 23,033(b)
(429,312)(c)
(2,587,954)(a)
(222,937)(d)
Capitalized lease obligations................. 1,437,852 80,050 -- 17,000
------------ ----------- ----------- ----------- ------------
Total current liabilities................... 21,483,422 19,968,004 4,711,639 8,281,643 (6,747,233)
Old senior notes payable...................... 159,194,067 -- -- --
New senior notes offered hereby............... -- -- -- -- --
New senior subordinated notes offered
hereby........................................ -- -- -- -- --
Old convertible notes payable................. 79,597,033 -- -- --
Other notes payable........................... 3,436,314 25,000 -- 167,270 (25,000)(a)
Capitalized lease obligations................. 5,809,745 233,862 -- 3,013
------------ ----------- ----------- ----------- ------------
Total liabilities........................... 269,520,581 20,226,866 4,711,639 8,451,926 (6,772,233)
------------ ----------- ----------- ----------- ------------
Commitments and contingencies
Stockholders' equity:
Preferred stock............................... 688,900 -- -- 3,151,800 (3,151,800)(b)
Common stock, $.01 par value; authorized
75,000,000 shares, issued 29,740,306 and
outstanding 27,233,543 shares, pro forma
issued 29,807,739 and outstanding 27,300,976
shares, and pro forma as adjusted issued
33,807,739 and outstanding 31,300,976
shares........................................ 297,404 -- 746,291 290,118 (289,444)(b)
(746,291)(c)
Additional paid-in capital.................... 103,989,159 -- -- -- 1,169,326(b)
Accumulated deficit........................... (52,009,885) (6,704,162) (4,865,075) (5,042,854) 5,042,854(b)
6,704,162(a)
4,865,075(c)
------------ ----------- ----------- ----------- ------------
52,965,578 (6,704,162) (4,118,784) (1,600,936) 13,593,882
Less: Treasury stock.......................... (39,677,743) -- -- (408,263) 408,263(b)
Deferred compensation...................... (996,875) -- -- --
Unrealized loss on investments in
marketable equity securities............ (1,338,750) -- -- --
------------ ----------- ----------- ----------- ------------
Total stockholders' equity.................... 10,952,210 (6,704,162) (4,118,784) (2,009,199) 14,002,145
------------ ----------- ----------- ----------- ------------
Total liabilities and stockholders' equity.... $280,472,791 $13,522,704 $ 592,855 $ 6,442,727 $ 7,229,912
------------ ----------- ----------- ----------- ------------
------------ ----------- ----------- ----------- ------------
<CAPTION>
PRO FORMA
ADJUSTMENTS
PRO FORMA INCREASE/
AS ADJUSTED (DECREASE)
FOR FOR THE PRO FORMA
ACQUISITIONS OFFERINGS AS ADJUSTED
------------ ------------ ------------
<S> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents..................... $176,291,963 $297,672,500(e) $473,964,463
Short term investments 27,372,707 27,372,707
------------ ------------ ------------
Total cash, cash equivalents and short term
investments................................... 203,664,670 297,672,500 501,337,170
Investments in marketable equity securities... 6,158,250 6,158,250
Accounts receivable, net...................... 14,060,709 14,060,709
Notes receivable.............................. 374,908 374,908
Inventories................................... 12,904,154 12,904,154
Prepaid expenses and other current assets..... 2,503,394 2,503,394
------------ ------------ ------------
Total current assets........................ 239,666,085 297,672,500 537,338,585
Property and equipment, net................... 27,861,096 27,861,096
Notes receivable.............................. 435,725 435,725
Investments and advances...................... 399,729 399,729
Licenses, net................................. 17,480,751 17,480,751
Intangible assets, net........................ 10,184,404 10,184,404
Deferred financing costs...................... 10,515,964 7,925,000(e) 18,440,964
Other assets.................................. 1,717,235 1,717,235
------------ ------------ ------------
Total assets............................... $308,260,989 $305,597,500 $613,858,489
------------ ------------ ------------
------------ ------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Loans payable................................. $ 27,085,688 $ $ 27,085,688
Accounts payable and accrued expenses......... 19,076,885 850,000(e) 19,926,885
Capitalized lease obligations................. 1,534,902 1,534,902
------------ ------------ ------------
Total current liabilities................... 47,697,475 850,000 48,547,475
Old senior notes payable...................... 159,194,067 -- 159,194,067
New senior notes offered hereby............... -- 100,000,000(e) 100,000,000
New senior subordinated notes offered
hereby........................................ -- 100,000,000(e) 100,000,000
Old convertible notes payable................. 79,597,033 -- 79,597,033
Other notes payable........................... 3,603,584 3,603,584
Capitalized lease obligations................. 6,046,620 6,046,620
------------ ------------ ------------
Total liabilities........................... 296,138,779 200,850,000 496,988,779
------------ ------------ ------------
Commitments and contingencies
Stockholders' equity:
Preferred stock............................... 688,900 688,900
Common stock, $.01 par value; authorized
75,000,000 shares, issued 29,740,306 and
outstanding 27,233,543 shares, pro forma
issued 29,807,739 and outstanding 27,300,976
shares, and pro forma as adjusted issued
33,807,739 and outstanding 31,300,976
shares........................................ 298,078 40,000(e) 338,078
Additional paid-in capital.................... 105,158,485 104,707,500(e) 209,865,985
Accumulated deficit........................... (52,009,885) (52,009,885)
------------ ------------ ------------
54,135,578 104,747,500 158,883,078
Less: Treasury stock.......................... (39,677,743) (39,677,743)
Deferred compensation...................... (996,875) (996,875)
Unrealized loss on investments in
marketable equity securities............ (1,338,750) (1,338,750)
------------ ------------ ------------
Total stockholders' equity.................... 12,122,210 104,747,500 116,869,710
------------ ------------ ------------
Total liabilities and stockholders' equity.... $308,260,989 $305,597,500 $613,858,489
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
F-50
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1996
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS
INCREASE/ PRO FORMA
(DECREASE) AS ADJUSTED
THE COMPANY, LOCATE, TWL, FOX/LORBER, FOR FOR
HISTORICAL HISTORICAL HISTORICAL HISTORICAL ACQUISITIONS ACQUISITIONS
------------ ----------- ---------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net sales.............................. $ 14,509,042 $ 1,216,037 $ 391,108 $ 1,779,879 $ $ 17,896,066
Cost of sales.......................... 8,573,271 831,699 338,628 1,115,958 10,859,556
------------ ----------- ---------- ----------- ------------ ------------
Gross profit........................ 5,935,771 384,338 52,480 663,921 -- 7,036,510
Selling, general and administrative
expenses............................... 10,191,903 456,187 475,729 647,472 11,771,291
Depreciation........................... 361,510 637,109 8,250 7,000 1,013,869
------------ ----------- ---------- ----------- ------------ ------------
Operating loss......................... (4,617,642) (708,958) (431,499) 9,449 -- (5,748,650)
Other (income) expense
Interest expense...................... 8,492,345 480,080 104,969 21,044 (132,810)(a) 8,965,628
Interest income....................... (2,734,454) (2,407) -- -- (2,736,861)
Amortization of intangibles........... 194,594 -- 1,800 1,500 119,807(b) 317,701
------------ ----------- ---------- ----------- ------------ ------------
Net loss before income taxes........... (10,570,127) (1,186,631) (538,268) (13,095) 13,003 (12,295,118)
Income taxes........................... 128,683 -- -- -- 128,683
------------ ----------- ---------- ----------- ------------ ------------
Net loss............................... $(10,698,810) $(1,186,631) $ (538,268) $ (13,095) $ 13,003 $(12,423,801)
------------ ----------- ---------- ----------- ------------ ------------
------------ ----------- ---------- ----------- ------------ ------------
Net loss per share..................... $ (0.39) $ (0.46)
------------ ------------
------------ ------------
Weighted average shares outstanding.... 27,214,281 67,443 27,281,724
------------ ------------ ------------
------------ ------------ ------------
<CAPTION>
PRO FORMA
ADJUSTMENTS
INCREASE/
(DECREASE)
FOR
THE PRO FORMA
OFFERINGS AS ADJUSTED
------------ ------------
<S> <C<C> <C>
Net sales.............................. $ $ 17,896,066
Cost of sales.......................... 10,859,556
------------ ------------
Gross profit........................ -- 7,036,510
Selling, general and administrative
expenses............................... 11,771,291
Depreciation........................... 1,013,869
------------ ------------
Operating loss......................... -- (5,748,650)
Other (income) expense
Interest expense...................... 7,073,125(k) 16,038,753
Interest income....................... (2,736,861)
Amortization of intangibles........... 317,701
------------ ------------
Net loss before income taxes........... (7,073,125) (19,368,243)
Income taxes........................... 128,683
------------ ------------
Net loss............................... $ (7,073,125) $(19,496,926)
------------ ------------
------------ ------------
Net loss per share..................... $ (0.62)
------------
------------
Weighted average shares outstanding.... 4,000,000(l) 31,281,724
------------ ------------
------------ ------------
</TABLE>
F-51
<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>
PRO FORMA
ADJUSTMENTS
INCREASE/
AGT, (DECREASE)
HISTORICAL, FOR ACQUISITIONS
THE COMPANY, MARCH 1 TO LOCATE, TWL, FOX/LORBER, AND PRIOR
HISTORICAL JULY 17, 1995 HISTORICAL HISTORICAL HISTORICAL FINANCINGS
------------ ------------- ----------- ----------- ----------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Net sales......................... $ 29,771,472 $ 17,779 $ 7,090,547 $ 1,381,319 $ 7,534,876 $ (2,189,994)(c)
(45,000)(e)
Cost of sales..................... 19,546,351 -- 4,034,803 957,190 5,679,399 (1,568,699)(c)
------------ ------------- ----------- ----------- ----------- ----------------
Gross profit..................... 10,225,121 17,779 3,055,744 424,129 1,855,477 (666,295)
Selling, general and
administrative expenses........... 19,266,466 1,704,294 2,582,894 1,470,831 2,296,448 (70,000)(d)
(651,101)(c)
(45,000)(e)
Depreciation...................... 770,284 59,250 2,784,156 25,000 27,521 (450,786)(c)
------------ ------------- ----------- ----------- ----------- ----------------
Operating loss.................... (9,811,629) (1,745,765) (2,311,306) (1,071,702) (468,492) 550,592
Other (income) expense
Interest expense 7,309,258 -- 1,587,851 244,454 79,174 (197,782)(a)
(239,413)(c)
21,705,785(i)
155,421(j)
Interest income.................. (2,568,992) -- (11,736) -- --
Amortization of intangibles...... 439,888 31,978 -- 7,045 5,619 399,357(b)
(937)(c)
Other expense.................... -- -- -- -- 126,188 (21,031)(c)
Equity in loss of AGT............ 865,676 -- -- -- -- (865,676)(f)
------------ ------------- ----------- ----------- ----------- ----------------
Net loss.......................... $(15,857,459) $ (1,777,743) $(3,887,421) $(1,323,201) $ (679,473) $ (20,385,132)
------------ ------------- ----------- ----------- ----------- ----------------
------------ ------------- ----------- ----------- ----------- ----------------
Net loss per share................ $ (0.70)
------------
------------
Weighted average shares
outstanding....................... 22,769,770 575,000(h)
67,433(g)
----------------
----------------
<CAPTION>
PRO FORMA
PRO FORMA ADJUSTMENTS
AS ADJUSTED INCREASE/
FOR ACQUISITIONS (DECREASE)
AND PRIOR FOR THE PRO FORMA
FINANCINGS OFFERINGS AS ADJUSTED
---------------- ------------ ------------
<S> <C> <C> <C>
Net sales......................... $ 43,560,999 $ $ 43,560,999
Cost of sales..................... 28,649,044 28,649,044
---------------- ------------ ------------
Gross profit..................... 14,911,955 14,911,955
Selling, general and
administrative expenses........... 26,554,832 26,554,832
Depreciation...................... 3,215,425 3,215,425
---------------- ------------ ------------
Operating loss.................... (14,858,302) (14,858,302)
Other (income) expense
Interest expense 30,644,748 24,207,500(k) 54,852,248
Interest income.................. (2,580,728) (2,580,728)
Amortization of intangibles...... 882,950 882,950
Other expense.................... 105,157 105,157
Equity in loss of AGT............ -- --
---------------- ------------ ------------
Net loss.......................... $ (43,910,429) $(24,207,500) $(68,117,929)
---------------- ------------ ------------
---------------- ------------ ------------
Net loss per share................ $ (1.88) $ (2.48)
---------------- ------------
---------------- ------------
Weighted average shares
outstanding....................... 23,412,203 4,000,000(l) 27,412,203
---------------- ------------ ------------
---------------- ------------ ------------
</TABLE>
F-52
<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.
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 80% of Fox/Lorber as follows:
INCREASE/
(DECREASE)
----------
Reduce cash for payment of closing costs....................... $ (25,000)
Allocate excess purchase price to goodwill..................... 3,090,724
----------
Total asset adjustments.................................. $3,065,724
----------
----------
Reduce notes payable acquired from minority shareholder and
canceled....................................................... $ (136,508)
Accrue additional closing costs................................ 73,000
Reduce miscellaneous accruals.................................. (49,967)
Acquire and cancel preferred stock............................. (3,151,800)
Eliminate subsidiary equity.................................... 5,160,999
Record issuance of 67,433 shares of the Company's common stock
at approximately $17.375 per share............................. 1,170,000
----------
Total liability and equity adjustments................... $3,065,724
----------
----------
(c) To record the acquisition of 65% of TWL as follows:
INCREASE/
(DECREASE)
-----------
Eliminate notes and interest receivable converted into equity
in TWL...................................................... $(1,170,312)
Allocate excess purchase price to goodwill.................... 3,953,864
Other......................................................... (64,080)
-----------
Total asset adjustments................................. $ 2,719,472
-----------
-----------
Accrue additional closing costs............................... $ 20,000
Eliminate management fees payable by TWL to the Company....... (249,000)
Eliminate subsidiary equity................................... 2,948,472
-----------
Total liability and equity adjustments.................. $ 2,719,472
-----------
-----------
(d) To eliminate the remaining $2,623,555 in notes and $222,937 in interest
payable by TWL to the Company.
(e) To record the Stock Offering of 4,000,000 shares of common stock (at an
assumed public offering price of $27.75 per share), the $200 million Debt
Offering and related fees and expenses.
F-53
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
STATEMENTS OF OPERATIONS FOR THE TEN MONTHS ENDED DECEMBER 31, 1995
AND FOR THE THREE MONTHS ENDED MARCH 31, 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.
(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 Old Notes issued in
October 1995, bearing interest at 14% per annum compounding semiannually, as if
the Old 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 record interest expense on $200 million of New Notes issued in the
Debt Offering, at an assumed interest rate of 13.5% on the New Senior Notes and
14% on the New Senior Subordinated Notes, including amortization of debt
offering costs and other related fees, as if the New Notes were issued as of the
beginning of the respective periods. If the interest rate on the New Notes
changed by 0.5%, interest expense would change by approximately $0.9 million and
$0.3 million for the ten months ended December 31, 1995 and the three months
ended March 31, 1996, respectively.
(l) To record the issuance of the Common Stock issued in the Stock Offering
as if such shares were outstanding for the entire respective periods.
F-54
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following is an itemized statement of the estimated amounts of all
expenses payable by the Registrant in connection with the registration of the
Notes offered hereby, other than underwriting discounts and commissions:
SEC registration fee.......................................... $ 68,965.51
NASD filing fee............................................... 20,500.00
Printing and engraving expenses............................... 100,000.00
Legal fees and expenses....................................... 125,000.00
Accounting fees and expenses.................................. 75,000.00
Miscellaneous................................................. 35,534.49
-----------
Total..................................................... $425,000.00
-----------
-----------
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Certificate of Incorporation provides that all directors,
officers, employees and agents of the Registrant shall be entitled to be
indemnified by the Company to the fullest extent permitted by law.
Section 145 of the Delaware General Corporation Law concerning
indemnification of officers, directors, employees and agents is set forth below.
"Section 145. Indemnification of officers, directors, employees and agents;
insurance.
(a) A corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation) by reason of the
fact that he is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful. The
termination of any action, suit or proceeding by judgment, order, settlement,
conviction, or upon a plea of nolo contendere or its equivalent, shall not, of
itself, create a presumption that the person did not act in good faith and in a
manner which he reasonably believed to be in or not opposed to the best
interests of the corporation, and with respect to any criminal action or
proceeding, had reasonable cause to believe that his conduct was unlawful.
(b) A corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the corporation to procure a judgement in its favor
by reason of the fact that he is or was a director, officer, employee or agent
of the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection with the defense or
settlement of such action or suit if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation and except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been
II-1
<PAGE>
adjudged to be liable for negligence or misconduct in the performance of his
duty to the corporation unless and only to the extent that the Court of Chancery
or the court in which such action or suit was brought shall determine upon
application that, despite the adjudication of liability but in view of all the
circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Court of Chancery or such other court
shall deem proper.
(c) To the extent that a director, officer, employee or agent of a
corporation has been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to in subsections (a) and (b) of this
section, or in defense of any claim, issue or matter therein, he shall be
indemnified against expenses (including attorneys' fees) actually and reasonably
incurred by him in connection therewith.
(d) Any indemnification under sections (a) and (b) of this section (unless
ordered by a court) shall be made by the corporation only as authorized in the
specific case upon a determination that indemnification of the director,
officer, employee or agent is proper in the circumstances because he has met the
applicable standard of conduct set forth in subsections (a) and (b) of this
section. Such determination shall be made (1) by the board of directors by a
majority vote of a quorum consisting of directors who were not parties to such
action, suit or proceeding, or (2) if such a quorum is not obtainable, or, even
if obtainable, a quorum of disinterested directors so directs, by independent
legal counsel in a written opinion, or (3) by the stockholders.
(e) Expenses incurred by an officer or director in defending a civil or
criminal action, suite or proceeding may be paid by the corporation in advance
of the final disposition of such action, suit or proceeding upon receipt of an
undertaking by or on behalf of such director or officer, to repay such amount if
it shall ultimately be determined that he is not entitled to be indemnified by
the corporation as authorized in this section. Such expenses incurred by other
employees and agents may be so paid upon such terms and conditions, if any, as
the board of directors deems appropriate.
(f) The indemnification and advancement of expenses provided by, or granted
pursuant to, the other subsections of this section shall not be deemed exclusive
of any other rights to which those seeking indemnification or advancement of
expenses may be entitled under any bylaw, agreement, vote of stockholders or
disinterested directors or otherwise, both as to action in his official capacity
and as to action in another capacity while holding such office.
(g) A corporation shall have power to purchase and maintain insurance on
behalf of any person who is or was director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against any liability asserted against him
and incurred by him in any such capacity, or arising out of his status as such,
whether or not the corporation would have the power to indemnify him against
such liability under this section.
(h) For purposes of this section, references to "the corporation" shall
include, in addition to the resulting corporation, any constituent corporation
(including any constituent of a constituent) absorbed in a consolidation or
merger which, if its separate existence had continued, would have had power and
authority to indemnify its directors, officers, and employees or agents, so that
any person who is or was a director, officer, employee or agent of such
constituent corporation, or is or was serving at the request of such constituent
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, shall stand in the same
position under this section with respect to the resulting or surviving
corporation as he would have with respect to such constituent corporation if its
separate existence had continued.
(i) For purposes of this section, references to "other enterprises" shall
include employee benefit plans; references to "fines" shall include any excise
taxes assessed on a person with respect to an employee benefit plan; and
references to "serving at the request of the corporation" shall include any
service as a director, officer, employee or agent of the corporation which
imposes duties on, or involves
II-2
<PAGE>
services by, such director, officer, employee or agent with respect to an
employee benefit plan, its participants or beneficiaries; and a person who acted
in good faith an in a manner he reasonably believed to be in the interest of the
participants and beneficiaries of an employee benefit plan shall be deemed to
have acted in a manner "not opposed to the best interests of the corporation" as
referred to in this section.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "Securities Act"), may be permitted to directors,
officers, and controlling persons of the Company pursuant to the foregoing
provisions, or otherwise, the Company has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the Company of expenses incurred or paid by a director, officer
or controlling person of the Company in a successful defense of any action, suit
or proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Company will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to the court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
II-3
<PAGE>
ITEM 16.
(A) EXHIBITS
<TABLE><CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------- ----------------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement (filed herewith)
2.1 Agreement by and among the Company, WinStar New Media, TWL, and the principals of
TWL relating to certain financing provided by the Company to TWL and related
matters (Incorporated by reference to Exhibit 2.3 to the Company's Annual Report
on Form 10-KSB for the fiscal year ended February 28, 1994)
2.2 First Amendment to Agreement by and among the Company, WinStar New Media, TWL and
the principals of TWL (Incorporated by reference to Exhibit 2.2 to the Company's
Annual Report on Form 10-KSB for the fiscal year ended February 28, 1995)
2.3 Second Amendment to Agreement by and among the Company, WinStar New Media, TWL and
the principals of TWL (Incorporated by reference to Exhibit 2.2 to the Company's
Annual Report on Form 10-KSB for the fiscal year ended February 28, 1995)
2.4 Merger Agreement by and among WinStar Wireless, WinCom Corp., Avant-Garde, Leo
George and The Larry D. Hudson Trust (Incorporated by reference to Exhibit 2.5 to
the Company's Annual Report on Form 10-KSB for the fiscal year ended February 28,
1995)
2.5 Preferred Stock E Subscription Agreement between the Company and GFL Ultra Fund
Limited ("GFL") for the purchase by GFL of 932,040 shares of Preferred Stock E
(Incorporated by reference to Exhibit 2.6 to the Company's Annual Report on Form
10-KSB for the fiscal year ended February 28, 1995)
2.6 Agreement and Plan of Merger by and among the Company, WinStar NFF Inc. ("WinStar
NFF") and Non Fiction Films Inc. ("NFF") (Incorporated by reference to Exhibit 2.7
to the Company's Annual Report on Form 10-KSB for the fiscal year ended February
28, 1995)
3.1 Restated Certificate of Incorporation of the Company (Incorporated by reference to
Exhibit 3.1 to the Company's Registration Statement on Form S-18 (No. 33-37024))
3.2 Amendment to Certificate of Incorporation of the Company effecting name change
from "Robern Apparel, Inc." to "Robern Industries, Inc." (Incorporated by
reference to Exhibit 3.1(b) to the Company's Registration Statement on Form S-4
(No. 33-52716))
3.3 Second Amendment to Certificate of Incorporation of the Company effecting name
change from "Robern Industries, Inc." to "WinStar Communications, Inc."
(Incorporated by reference to Exhibit 3.1(b) to the Company's Registration
Statement on Form S-1 (No. 33-43915))
3.4 Certificate of Designations, Preferences and Rights of Series B Preferred Stock
(Incorporated by reference to Exhibit 3.3 to the Company's Registration Statement
on Form S-1 (No. 33-43915))
3.5 Certificate of Designations, Preferences and Rights of Series E Preferred Stock
(Incorporated by reference to Exhibit 3.6 to the Company's Annual Report on Form
10-KSB for the fiscal year ended February 28, 1995)
3.6 By-Laws of the Company (Incorporated by reference to Exhibit 3.2 to the Company's
Registration Statement on Form S-18 (No. 33-37024))
3.7 Certificate of Incorporation of WinStar Wireless (Incorporated by reference to
Exhibit 7 to the Company's Current Report on Form 8-K, dated February 11, 1994)
3.8 By-Laws of WinStar Wireless (Incorporated by reference to Exhibit 8 to the
Company's Current Report on Form 8-K, dated February 11, 1994)
3.9 Certificate of Incorporation of WinStar Gateway (Incorporated by reference to
Exhibit 3.5 to the Company's Annual Report on Form 10-KSB for the fiscal year
ended February 28, 1993)
3.10 Amendment to Certificate of Incorporation of WinStar Gateway effecting name change
from "Communications Gateway Network, Inc." to "WinStar Gateway Network, Inc."
(Incorporated by reference to Exhibit 3.11 to the Company's Annual Report on Form
10-KSB for the fiscal year ended February 28, 1995)
</TABLE>
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<PAGE>
<TABLE><CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------- ----------------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement
3.11 By-Laws of WinStar Gateway (Incorporated by reference to Exhibit 3.6 to the
Company's Annual Report on Form 10-KSB for the fiscal year ended February 28,
1993)
3.12 Certificate of Incorporation of WinStar New Media (Incorporated by reference to
Exhibit 3.9 to the Company's Annual Report on Form 10-KSB for the fiscal year
ended February 28, 1994)
3.13 Amendment to Certificate of Incorporation of WinStar New Media effecting name
change from "WinStar Interactive Media Company, Inc." to "WinStar New Media
Company, Inc." (Incorporated by reference to Exhibit 3.14 to the Company's Annual
Report on Form 10-KSB for the fiscal year ended February 28, 1995)
3.14 By-Laws of WinStar New Media (Incorporated by reference to Exhibit 3.10 to the
Company's Annual Report on Form 10-KSB for the fiscal year ended February 28,
1994)
3.15 Certificate of Incorporation of WinCom Corp. (Incorporated by reference to Exhibit
3.16 to the Company's Annual Report on Form 10-KSB for the fiscal year ended
February 28, 1995)
3.16 Amendment to Certificate of Incorporation of WinCom Corp. effecting name change to
"WinStar Wireless Fiber Corp." (Incorporated by reference to Exhibit 3.17 the
Company's Registration Statement on Form S-3 (No. 33-95242))
3.17 Certificate of Merger effecting merger of Avant-Garde Telecommunications, Inc.
into Wireless Fiber Corp (Incorporated by reference to Exhibit 3.18 the Company's
Registration Statement on Form S-3 (No. 33-95242))
3.18 By-Laws of WinCom Corp. (Incorporated by reference to Exhibit 3.17 to the
Company's Annual Report on Form 10-KSB for the fiscal year ended February 28,
1995)
3.19 Certificate of Incorporation of WinStar Global Products (Incorporated by reference
to Exhibit 3.3 to the Registration Statement on Form S-18 of WinStar Global
Products (No. 33-12549))
3.20 Amendment to Certificate of Incorporation of WinStar Global Products to change its
name from "Beauty Labs, Inc." to "WinStar Global Products, Inc." (Incorporated by
reference to Exhibit 3.19 to the Company's Annual Report on Form 10-KSB for the
fiscal year ended February 28, 1995)
3.21 By-Laws of WinStar Global Products (Incorporated by reference to Exhibit 3.4 to
the Registration Statement on Form S-18 of WinStar Global Products (No. 33-12549))
3.22 Certificate of Incorporation of WinStar NFF Inc. ("WinStar NFF") (Incorporated by
reference to Exhibit 3.21 to the Company's Annual Report on Form 10-KSB for the
fiscal year ended February 28, 1995)
3.23 By-laws of WinStar NFF (Incorporated by reference to Exhibit 3.22 to the Company's
Annual Report on Form 10-KSB for the fiscal year ended February 28, 1995)
3.24 Certificate of Merger of NFF with and into WinStar NFF, with WinStar NFF as the
merger's surviving entity (Incorporated by reference to Exhibit 3.23 to the
Company's Annual Report on Form 10-KSB for the fiscal year ended February 28,
1995)
3.25 Amendment to Certificate of Incorporation of WinStar NFF changing its name from
"WinStar NFF Inc." to "Non Fiction Films Inc." (Incorporated by reference to
Exhibit 3.24 to the Company's Annual Report on Form 10-KSB for the fiscal year
ended February 28, 1995)
3.26 Certificate of Incorporation of WinStar Telecommunications, Inc. (Incorporated by
reference to Exhibit 3.26 of the Company's Transitional Report on Form 10-KSB for
the ten months ended December 31, 1995)
3.27 By-laws of WinStar Telecommunications, Inc. (Incorporated by reference to Exhibit
3.27 of the Company's Transitional Report on Form 10-KSB for the ten months ended
December 31, 1995)
4.1 Specimen of Common Stock Certificate (Incorporated by reference to Exhibit 4.3 to
the Registration Statement of Company on Form S-18 (No.33-37024))
4.2 Specimen of Preferred Stock B Certificate (Incorporated by reference to Exhibit
4.4 to the Company's Registration Statement on Form S-1 (No. 33-43915))
</TABLE>
II-5
<PAGE>
<TABLE><CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------- ----------------------------------------------------------------------------------
<C> <S>
4.3 Specimen of Preferred Stock C Certificate (Incorporated by reference to Exhibit
4.4(a) to the Company's Registration Statement on Form S-1 (No. 33-43915))
4.4 Specimen of Preferred Stock E Certificate (Incorporated by reference to Exhibit
4.5 to the Company's Annual Report on Form 10-KSB for the fiscal year ended
February 28, 1995)
4.6 EC-A Warrants issued to Everest Capital Fund, L.P. ("Fund") for 130,500 shares of
Common Stock and to Everest Capital International, L.P. ("Capital") for 169,500
shares of Common Stock (Incorporated by reference to Exhibit 4.6 to the Company's
Registration Statement on Form S-3 (No. 33-95242))
4.7 EC-B Warrants issued to Fund for 43,500 shares of Common Stock and to Capital for
56,500 shares of Common Stock (Incorporated by reference to Exhibit 4.7 to the
Company's Registration Statement on Form S-3 (No. 33-95242))
4.8 EC-C Warrants issued to Fund for 65,250 shares of Common Stock and to Capital for
84,750 shares of Common Stock (Incorporated by reference to Exhibit 4.8 to the
Company's Registration Statement on Form S-3 (No. 33-95242))
4.9 Form of Senior Notes Indenture (To be filed by amendment)
4.10 Form of Senior Subordinated Notes Indenture (To be filed by amendment)
5.1 Opinion of Graubard Mollen & Miller (To be filed by amendment)
10.1 Agreement between the Company and ITC Group (Incorporated by reference to Exhibit
10.9 to the Company's Annual Report on Form 10-KSB for the fiscal year ended
February 28, 1995)
10.2 Lease for 230 Park Avenue, New York, New York facilities (Incorporated by
reference to Exhibit 10.10 to the Company's Annual Report on Form 10-KSB for the
fiscal year ended February 28, 1995)
10.2(a) Lease for additional space at 230 Park Avenue, New York, New York 10169
(Incorporated by reference to Exhibit 10.2(a) to the Company's Transitional Report
on Form 10-KSB for the ten months ended December 31, 1995)
10.3 Lease for 60 Oser Avenue, Hauppauge, New York facilities ((Incorporated by
reference to Exhibit 10.10 to the Company's Registration Statement on Form S-4
(No. 33-52716))
10.4 Lease for 144 Fairfield Road, Fairfield, New Jersey facilities (Incorporated by
reference to Exhibit 10.12 to the Company's Annual Report on Form 10-KSB for the
fiscal year ended February 28, 1995)
10.5 Lease for 5221 North O'Connor Boulevard, Irving, Texas facilities (Incorporated by
reference to Exhibit 10.17 to the Company's Registration Statement on Form S-1, as
amended on Form SB-2 (No. 33-43915))
10.6 Lease for 500 South Ervay Street, Dallas, Texas facilities (Incorporated by
reference to Exhibit 10.11(a) to the Company's Registration Statement on Form S-1,
as amended on Form SB-2 (No. 33-43915))
10.7 Lease for 7799 Leesburg Pike, Tysons Corner, Virginia facilities (Incorporated by
reference to Exhibit 10.15 to the Company's Annual Report on Form 10-KSB for the
fiscal year ended February 28, 1995)
10.7(a) Amendment to Leesburg Pike Lease (Incorporated by reference to Exhibit 10.7(a) of
the Company's Transitional Report on Form 10-KSB for the ten months ended December
31, 1995)
10.8 Common Stock Incentive Plan (1990) (Incorporated by reference to Exhibit 10.19 to
the Company's Registration Statement on Form S-18 (No. 33-37024))
10.9 1992 Performance Equity Plan (Incorporated by reference to Exhibit 10.53 to the
Company's Registration Statement on Form S-18 (No. 33-37024))
10.10 Asset Purchase Agreement by and among Inne Dispensables Inc., a wholly-owned
subsidiary of WinStar Global Products ("Inne Dispensables"), Savonnerie, Inc.
("Savonnerie") and John Todd (Incorporated by reference to Exhibit 10.81 to the
Company's Registration Statement on Form S-1, as amended by Form SB-2 (No. 33-
43915))
</TABLE>
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<PAGE>
<TABLE><CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------- ----------------------------------------------------------------------------------
<C> <S>
10.11 Assignment of Trademarks from Savonnerie to WinStar Global Products (Incorporated
by reference to Exhibit 10.82 to the Company's Registration Statement on Form S-1,
as amended on Form SB-2 (No. 33-43915))
10.12 Loan and Security Agreement between WinStar Gateway and The CIT Group/Credit
Finance, Inc. ("CIT") (Incorporated by reference to Exhibit 10.22 to the Company's
Annual Report on Form 10-KSB for the fiscal year ended February 28, 1995)
10.13 Stock Purchase Warrant issued by the Company to CIT in connection with Exhibit
10.12 above (Incorporated by reference to Exhibit 10.23 to the Company's Annual
Report on Form 10-KSB for the fiscal year ended February 28, 1995)
10.14 Registration Rights Agreement between the Company and CIT in connection with
Exhibits 10.12 and 10.13 above (Incorporated by reference to Exhibit 10.24 to the
Company's Annual Report on Form 10-KSB for the fiscal year ended February 28,
1995)
10.15 Guaranty and Surety Agreement between the Company and CIT in connection with
Exhibit 10.12 above (Incorporated by reference to Exhibit 10.25 to the Company's
Annual Report on Form 10-KSB for the fiscal year ended February 28, 1995)
10.16 Subordination Agreement between the Company and CIT in connection with Exhibit
10.12 above (Incorporated by reference to Exhibit 10.26 to the Company's Annual
Report on Form 10-KSB for the fiscal year ended February 28, 1995)
10.17 Keepwell Agreement between the Company and CIT in connection with Exhibit 10.12
above (Incorporated by reference to Exhibit 10.27 to the Company's Annual Report
on Form 10-KSB for the fiscal year ended February 28, 1995)
10.18 Agreement between CIT and Zero Plus Dialing, Inc. regarding Escrow and Disbursing
Agreement with Texas Commerce Bank and Assignment of Outstanding Accounts
Receivable in connection with Exhibit 10.22 above (Incorporated by reference to
Exhibit 10.28 to the Company's Annual Report on Form 10-KSB for the fiscal year
ended February 28, 1995)
10.19 Loan and Security Agreement between Century Business Credit Corporation
("Century") and WinStar Global Products (Incorporated by reference to Exhibit
10.29 to the Company's Annual Report on Form 10-KSB for the fiscal year ended
February 28, 1995)
10.20 Supplement Letter of Credit Security Agreement between Century and WinStar Global
Products in connection with Exhibit 10.19 above (Incorporated by reference to
Exhibit 10.30 to the Company's Annual Report on Form 10-KSB for the fiscal year
ended February 28, 1995)
10.21 Trademark Collateral Security Agreement between Century and WinStar Global
Products in connection with Exhibit 10.19 above (Incorporated by reference to
Exhibit 10.31 to the Company's Annual Report on Form 10-KSB for the fiscal year
ended February 28, 1995)
10.22 Trademark Assignment of Security by WinStar Global Products to Century in
connection with Exhibits 10.19 and 10.21 above (Incorporated by reference to
Exhibit 10.32 to the Company's Annual Report on Form 10-KSB for the fiscal year
ended February 28, 1995)
10.23 Trademark Collateral Security Agreement between Century and Inne Dispensables in
connection with Exhibit 10.19 above (Incorporated by reference to Exhibit 10.33 to
the Company's Annual Report on Form 10-KSB for the fiscal year ended February 28,
1995)
10.24 Trademark Assignment of Security by Inne Dispensables Inc. to Century in
connection with Exhibits 10.19 and 10.23 above (Incorporated by reference to
Exhibit 10.34 to the Company's Annual Report on Form 10-KSB for the fiscal year
ended February 28, 1995)
10.25 Landlord's Waiver and Consent with respect to the facilities at 60 Oser Avenue,
Hauppauge, New York in connection with Exhibit 10.19 above (Incorporated by
reference to Exhibit 10.35 to the Company's Annual Report on Form 10-KSB for the
fiscal year ended February 28, 1995)
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------- ----------------------------------------------------------------------------------
<C> <S>
10.26 Intercreditor and Subordination Agreement between the Company and Century in
connection with Exhibit 10.19 above (Incorporated by reference to Exhibit 10.36 to
the Company's Annual Report on Form 10-KSB for the fiscal year ended February 28,
1995)
10.27 Guaranty of Inne Dispensables in connection with Exhibit 10.19 above (Incorporated
by reference to Exhibit 10.37 to the Company's Annual Report on Form 10-KSB for
the fiscal year ended February 28, 1995)
10.28 Limited Guaranty of the Company in connection with Exhibit 10.19 above
(Incorporated by reference to Exhibit 10.38 to the Company's Annual Report on Form
10-KSB for the fiscal year ended February 28, 1995)
10.29 Guaranty Security Agreement between Inne Dispensables and Century in connection
with Exhibit 10.27 above (Incorporated by reference to Exhibit 10.39 to the
Company's Annual Report on Form 10-KSB for the fiscal year ended February 28,
1995)
10.30 Executive Incentive Compensation Program (Incorporated by reference to Exhibit
10.40 to the Company's Annual Report on Form 10-KSB for the fiscal year ended
February 28, 1995)
10.31 Agreement Terminating the Management Agreement between the Company and WinStar
Services, Inc. (Incorporated by reference to Exhibit 10.41 to the Company's Annual
Report on Form 10-KSB for the fiscal year ended February 28, 1995)
10.32 Note and Warrant Purchase Agreement by and among the Company, WinStar Wireless and
Avant-Garde and the Fund and Capital (the Fund and Capital collectively referred
to herein as the "Purchasers") and Everest Capital Limited ("Agent") (Incorporated
by reference to Exhibit 10.42 to the Company's Registration Statement on Form S-3
(No. 33-95242))
10.33 Promissory Notes payable to Fund for $3,262,500 and to Capital for $4,237,500
(Incorporated by reference to Exhibit 10.43 to the Company's Registration
Statement on Form S-3 (No. 33-95242))
10.34 Conversion Rights Agreement among the Company, WinStar Wireless and the Purchasers
(Incorporated by reference to Exhibit 10.44 to the Company's Registration
Statement on Form S-3 (No. 33-95242))
10.35 Registration Rights Agreement between the Company and the Purchasers (Incorporated
by reference to Exhibit 10.45 to the Company's Registration Statement on Form S-3
(No. 33-95242))
10.36 Security Agreement and Conditional Assignment between WinStar Wireless and the
Agent (Incorporated by reference to Exhibit 10.46 to the Company's Registration
Statement on Form S-3 (No. 33-95242))
10.37 Security Agreement between Avant-Garde and the Agent (Incorporated by reference to
Exhibit 10.47 to the Company's Registration Statement on Form S-3 (No. 33-95242))
10.38 Guarantee from the Company to the Agent on behalf of the Purchasers (Incorporated
by reference to Exhibit 10.48 to the Company's Registration Statement on Form S-3
(No. 33-95242))
10.39 Guarantee from Avant-Garde to the Agent on behalf of the Purchasers (Incorporated
by reference to Exhibit 10.49 to the Company's Registration Statement on Form S-3
(No. 33-95242))
10.40 Pledge Agreement between the Company and the Agent (Incorporated by reference to
Exhibit 10.50 to the Company's Registration Statement on Form S-3 (No. 33-95242))
10.41 Pledge Agreement between the Avant-Garde, Leo I. George, as Voting Trustee, and
the Agent (Incorporated by reference to Exhibit 10.51 to the Company's
Registration Statement on Form S-3 (No. 33-95242))
10.42 Lease for 12 Gardner Road, Fairfield, New Jersey facilities (Incorporated by
reference to Exhibit 10.52 to the Company's Registration Statement on Form S-3
(No. 33-95242))
10.43 Agreement between the Company, WinStar Wireless and P-Com, Inc. (Incorporated by
reference to Exhibit 10.11 to the Registration Statement on Form S-1 of P-Com,
Inc. (No. 33-88492) on file with the Commission)
</TABLE>
II-8
<PAGE>
<TABLE><CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------- ----------------------------------------------------------------------------------
<C> <S>
10.44 Employment Agreement between the Company and Nathan Kantor, together with voting
stipulation given by William J. Rouhana, Jr. to Mr. Kantor (Incorporated by
reference to Exhibit 10.54 to the Company's Registration Statement on Form S-3
(No. 33-95242))
10.45 Form of Stock Option Agreement between the Company and Nathan Kantor for the
purchase of 350,000 shares of Common Stock (Incorporated by reference to Exhibit
10.55 to the Company's Registration Statement on Form S-3 (No. 33-95242))
10.46 Form of Stock Option Agreement between the Company and Nathan Kantor for the
purchase of 350,000 additional shares of Common Stock (Incorporated by reference
to Exhibit 10.56 to the Company's Registration Statement on Form S-3 (No.
33-95242))
10.47 Employment Agreement between the Company and William J. Rouhana, Jr. (Incorporated
by reference to Exhibit 10.57 to the Company's Registration Statement on Form S-3
(No. 33-95242))
10.48 Employment Agreement between the Company and Fredric E. von Stange (Incorporated
by reference to Exhibit 10.58 to the Company's Registration Statement on Form S-3
(No. 33-95242))
10.49 Facility Agreement between ML Investors Services, Inc. ("ML") and WinStar Wireless
(Incorporated by reference to Exhibit 10.59 to the Company's Registration
Statement on Form S-3 (No. 33-95242))
10.50 Master Lease Agreement between ML and WinStar Wireless (Incorporated by reference
to Exhibit 10.60 to the Company's Registration Statement on Form S-3 (No.
33-95242))
10.51 Form of Stock Option Agreement between the Company and ML (Incorporated by
reference to Exhibit 10.61 to the Company's Registration Statement on Form S-3
(No. 33-95242))
10.52 Lease Guaranty between the Company and ML (Incorporated by reference to Exhibit
10.62 to the Company's Registration Statement on Form S-3 (No. 33-95242))
10.53 Service Agreement between WinStar Wireless and AT&T (Incorporated by reference to
Exhibit 10.63 to the Company's Registration Statement on Form S-3 (No. 33-95242))
(confidentiality granted under Rule 406 promulgated under the Act; accordingly,
certain information has been omitted from this exhibit and filed separately with
the Commission)
10.54 Placement Agreement between the Company and Morgan Stanley & Co. Incorporated,
entered into in connection with the 1995 Debt Placement (Incorporated by reference
to Exhibit 1 to the Current Report on Form 8-K, dated October 23, 1995)
10.55 Senior Notes Indenture, including form of Restricted Global Senior Note, entered
into in connection with the 1995 Debt Placement (Incorporated by reference to
Exhibit 2 to the Current Report on Form 8-K, dated October 23, 1995)
10.56 Convertible Notes Indenture, including form of Restricted Global Convertible
Notes, entered into in connection with the 1995 Debt Placement (Incorporated by
reference to Exhibit 3 to the Current Report on Form 8-K, dated October 23, 1995)
10.57 Senior Notes Registration Rights Agreement, entered into in connection with the
1995 Debt Placement (Incorporated by reference to Exhibit 4 to the Current Report
on Form 8-K, dated October 23, 1995)
10.58 Convertible Notes Registration Rights Agreement, entered into in connection with
the 1995 Debt Placement (Incorporated by reference to Exhibit 5 to the Current
Report on Form 8-K, dated October 23, 1995)
10.59 Employment Agreement between WinStar Global Products and Joseph Dwyer
(Incorporated by reference to Exhibit 10.4 to the Company's Registration Statement
on Form S-4 (No. 33-52716))
10.60 Employment Agreement between the Company and Doreen F. Davidson (Incorporated by
reference to Exhibit 10.29(a) to the Company's Registration Statement on Form S-1,
as amended on Form SB-2 (No. 33-43915))
10.61 Employment Agreement between WinStar Wireless and Leo I. George (Incorporated by
reference to Exhibit 10.4 to the Company's Annual Report on Form 10-KSB for the
fiscal year ended February 28, 1995)
</TABLE>
II-9
<PAGE>
<TABLE><CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------- ----------------------------------------------------------------------------------
<C> <S>
10.62 Employment Agreement between NFF and Stuart B. Rekant (Incorporated by reference
to Exhibit 10.5 to the Company's Annual Report on Form 10-KSB for the fiscal year
ended February 28, 1995)
10.63 Employment Agreement between WinStar New Media and Stuart B. Rekant (Incorporated
by reference to Exhibit 10.6 to the Company's Annual Report on Form 10-KSB for the
fiscal year ended February 28, 1995)
10.64 Employment Agreement between WinStar Telecommunications Group and David Ackerman
(Incorporated by reference to Exhibit 10.7 to the Company's Annual Report on Form
10-KSB for the fiscal year ended February 28, 1995)
10.65 Employment Agreement between the Company and Amy Newmark (Incorporated by
reference to Exhibit 10.8 to the Company's Annual Report on Form 10-KSB for the
fiscal year ended February 28, 1995)
10.66 Exchange Agreement, dated November 15, 1995, between the Company and WinStar
Companies, Inc. (Incorporated by reference to Exhibit 10.69 to the Company's
Current Report on Form 8-K, dated December 11, 1995)
10.67 Letter from Everest Capital electing to convert certain debt of the Company into
shares of Common Stock (Incorporated by reference to Exhibit 10.67 to the
Company's Transitional Report on Form 10-KSB for the ten months ended December 31,
1995)
10.68 Agreement and Plan of Reorganization by and among Non Fiction Films Inc., the
Company, GFL, Fox/Lorber Associates, a wholly-owned subsidiary of GFL, and Richard
Lorber (Incorporated by reference to Exhibit 10.67 to the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1996)
10.69 Security Agreement between Fox/Lorber and WinStar New Media (Incorporated by
reference to Exhibit 10.68 to the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1996)
10.70 Purchase and Sale Agreement by and among the Company, WinStar Locate, MobileMedia
Corporation and Local Area Telecommunications, Inc., a wholly-owned subsidiary of
MobileMedia (Incorporated by reference to Exhibit 10.69 to the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1996)
10.71 Private Network Contract between the Company and Digex, Inc. (Filed herewith)
10.72 Agreement between the Company and Source Media (To be filed by amendment)
12.1 Ratio of Earnings to Fixed Charges (Filed herewith)
17.1 Letter of Resignation delivered by Richard Russano to the Company pursuant to
which he resigns as a director of the Company (Incorporated by reference to
Exhibit 17.1 to the Company's Registration Statement on Form S-3 (No. 33-95242))
21.1 Schedule of Company's Subsidiaries (Incorporated by reference to the Company's
Transitional Report on Form 10-KSB for the ten months ended December 31, 1995)
23.1 Consent of Grant Thornton LLP with respect to the Company (Filed herewith)
23.2 Consent of Grant Thornton LLP with respect to Avant-Garde (Filed herewith)
23.3 Consent of Ernst & Young LLP (Filed herewith)
23.4 Consent of Graubard Mollen & Miller (To be included in Exhibit 5.1)
24.1 Power of Attorney (Included on signature page to Registration Statement)
25.1 Statement of Eligibility of Trustee (Filed herewith)
</TABLE>
(B) SCHEDULES
<TABLE>
<C> <S>
S-1 Report of Independent Certified Public Accountants on Schedules
S-2 Schedule II-Valuation and Qualifying Accounts
</TABLE>
II-10
<PAGE>
ITEM 17. UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment of this registration statement;
(i) To include any prospectus required by Section 10(a)(3) of the Securities
Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high and of the
estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in the
maximum aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;
provided, however, that paragraphs (1)(i) and (1)(ii) do not apply if the
registration statement is on Form S-3, Form S-8 or Form F-3, and the information
required to be included in a post-effective amendment by those paragraphs is
contained in periodic reports filed with or furnished to the Commission by the
registrant pursuant to Section 13 or Section 15(d) of the Securities Exchange
Act of 1934 that are incorporated by reference in the registration statement.
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(h) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a
II-11
<PAGE>
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be governed by the
final adjudication of such issue.
(i) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-12
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of New York, State of New York on June 14, 1996.
WINSTAR COMMUNICATIONS, INC.
By: /s/ WILLIAM J. ROUHANA, JR.
..................................
William J. Rouhana, Jr.
Chairman of the Board and Chief
Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints William J. Rouhana, Jr., and/or Fredric E. von
Stange his true and lawful attorneys-in-fact and agents, each acting alone, with
full power of substitution and resubstitution, for him and in his name, place
and stead, in any and all capacities, to sign any or all amendments to this
Registration Statement, including post-effective amendments, and to file the
same, with all exhibits thereto, and all documents in connection therewith, with
the Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, and hereby ratifies and confirms all that said attorneys-in-fact and
agents, each acting alone, or their substitute or substitutes, may lawfully do
or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE><CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------- ------------------------------------- --------------
<S> <C> <C>
/s/ WILLIAM J. ROUHANA, JR. Chief Executive Officer and Chairman June 14, 1996
..................................... of the Board
William J. Rouhana, Jr.
/s/ FREDRIC E. VON STANGE Executive Vice President, Director, June 14, 1996
..................................... Chief Financial Officer and
Fredric E. von Stange Principal Accounting Officer
/s/ STEVEN CHRUST Vice Chairman of the Board June 14, 1996
.....................................
Steven Chrust
/s/ NATHAN KANTOR President, Chief Operating Officer June 14, 1996
..................................... and Director
Nathan Kantor
/s/ WILLIAM HARVEY Director June 14, 1996
.....................................
William Harvey
/s/ STEVEN MAGYAR Director June 14, 1996
.....................................
Steven Magyar
/s/ WILLIAM J. VANDEN HEUVEL Director June 14, 1996
.....................................
William J. vanden Heuvel
/s/ BERT WASSERMAN Director June 14, 1996
.....................................
Bert Wasserman
</TABLE>
II-13
<PAGE>
REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS ON SCHEDULES
Board of Directors
WINSTAR COMMUNICATIONS, INC.
In connection with our audit of the consolidated financial statements of
WinStar Communications, Inc. and Subsidiaries referred to in our report dated
March 8, 1996, which is included in the Propectus constituting Part I of this
Registration Statement, we have also audited Schedule II as of December 31,
1995, February 28, 1995 and 1994 and for the ten months ended December 31, 1995
and the years ended February 28, 1995 and 1994.
In our opinion, this schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information required to be set forth therein.
GRANT THORNTON LLP
New York, New York
March 8, 1996
S-1
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
- -------------------------------------------------------------------------------------------------------------------
COLUMN C
-----------------
COLUMN B COLUMN E
COLUMN A -------------------- ADDITIONS CHARGED COLUMN D --------------
- --------------------------- BALANCE AT BEGINNING TO COSTS AND ---------------------- BALANCE AT END
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS OF PERIOD
- --------------------------- -------------------- ----------------- ---------------------- --------------
<S> <C> <C> <C> <C>
Reserves deducted from
assets to which they
apply:
Ten months ended December
31, 1995
Allowance for doubtful
accounts (a)............... $823,709 $ 887,425 $911,403(b) $799,731
---------- ----------------- ---------- --------------
---------- ----------------- ---------- --------------
Year ended February 28,
1995
Allowance for doubtful
accounts (a)............... $357,843 $ 893,857 $427,991(b) $823,709
---------- ----------------- ---------- --------------
---------- ----------------- ---------- --------------
Year ended February 28,
1994
Allowance for doubtful
accounts (a)............... $196,015 $ 343,694 $181,866(b) $357,843
---------- ----------------- ---------- --------------
---------- ----------------- ---------- --------------
</TABLE>
- ------------
(a) Deducted from accounts receivable.
(b) Uncollectible accounts receivable charged against allowance.
S-2
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE NO.
- ----------- ------------------------------------------------------------------------ --------
<C> <S> <C>
1.1 Form of Underwriting Agreement
10.71 Private Network Contract between the Company and Digex, Inc.............
12.1 Ratio of earnings to fixed charges......................................
23.1 Consent of Grant Thornton LLP with respect to the Company...............
23.2 Consent of Grant Thornton LLP with respect to Avant-Garde...............
23.3 Consent of Ernst & Young LLP............................................
25.1 Statement of Eligibility of the Trustee.................................
</TABLE>
Exhibit 1.1
WINSTAR COMMUNICATIONS, INC.
__% Senior Notes due 2006
__% Senior Subordinated Notes due 2006
FORM OF
UNDERWRITING AGREEMENT
____________ __, 1996
<PAGE>
__________ __, 1996
Morgan Stanley & Co. Incorporated
1585 Broadway
New York, New York 10036
Ladies and Gentlemen:
WinStar Communications, Inc., a Delaware corporation (the "Company"),
proposes to issue and sell to you (the "Underwriter") $_____________ principal
amount at maturity of its __% Senior Notes due 2006 (the "Senior Notes") and
$__________ principal amount at maturity of its __% Senior Subordinated Notes
due 2006 (the "Senior Subordinated Notes" and, together with the Senior Notes,
the "Notes"). The Senior Notes are to be issued pursuant to the provisions of
an Indenture to be dated as of ____________ __, 1996 (the "Senior Notes
Indenture") between the Company and United States Trust Company of New York
("U.S. Trust"), as trustee (in such capacity, the "Senior Notes Trustee") and
the Senior Subordinated Notes are to be issued pursuant to the provisions of an
Indenture to be dated as of __________ __, 1996 (the "Senior Subordinated Notes
Indenture" and, together with the Senior Note Indenture, the "Indentures")
between the Company and U.S. Trust, as trustee (in such capacity, the "Senior
Subordinated Notes Trustee" and, also in its capacity as the Senior Note
Trustee, the "Trustee"). Concurrent with the Notes offering, the Company will
make a public offering of its Common Stock (the "Common Stock Offering"). The
closings of this Notes offering and the Common Stock Offering are conditioned
upon one another.
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement, including a prospectus, relating to the
Notes. The registration statement as amended at the time it becomes effective,
including the information (if any) deemed to be part of the registration
statement at the time of effectiveness pursuant to Rule 430A under the
Securities Act of 1933, as amended (the "Securities Act"), is hereinafter
referred to as the "Original Registration Statement"; the prospectus in the form
first used to confirm sales of Notes is hereinafter referred to as the
"Prospectus". As used herein, the term "Registration Statement" shall include
all exhibits thereto and the terms "Registration Statement", "Prospectus" and
"preliminary prospectus" shall include all documents incorporated therein by
reference pursuant to Form S-3 under the Securities Act as of the date of the
Registration Statement, Prospectus or the preliminary prospectus, as the case
may be. The terms "supplement" and "amendment" or "amend" as used in this
Agreement shall include all documents subsequently filed by the Company with the
Commission pursuant to the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), that are deemed to be incorporated by reference in the
Prospectus pursuant to Form S-3 under the Securities Act. If the Company files
a registration statement to register a portion of the Notes and relies on Rule
462(b) for such registration statement to become effective upon filing with the
Commission (the "Rule 462(b) Registration Statement"), then any reference to the
"Registration Statement" shall be deemed to refer to both
<PAGE>
2
the registration statement referred to above (Commission File No. 333-____) and
the Rule 462(b) Registration Statement, in each case as amended from time to
time.
I.
The Company represents and warrants to, and agrees with, the
Underwriter that as of the date hereof:
(a) The Original Registration Statement has become effective, and if
the Company has elected to rely upon Rule 462(b) under the Securities Act,
the Rule 462(b) Registration Statement shall have become effective not
later than the earlier of (i) 10:00 p.m. Eastern time on the date hereof
and (ii) the time confirmations are sent or given, as specified by Rule
462(b) under the Securities Act; no stop order suspending the effectiveness
of the Registration Statement is in effect, and no proceedings for such
purpose are pending before or, to the Company's knowledge, threatened by
the Commission.
(b) (i) Each part of the Registration Statement, when such part
became effective, did not contain and each such part, as amended or
supplemented, if applicable, will not contain any untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading, (ii)
the Registration Statement and the Prospectus comply and, as amended or
supplemented, if applicable, will comply in all material respects with the
Securities Act and the applicable rules and regulations of the Commission
thereunder, (iii) each document filed or to be filed pursuant to the
Exchange Act and incorporated by reference in the Prospectus complied or
will comply when so filed in all material respects with the Exchange Act
and the applicable rules and regulations of the Commission thereunder and
(iv) the Prospectus does not contain and, as amended or supplemented, if
applicable, will not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading,
except that the representations and warranties set forth in this paragraph
(b) do not apply to statements or omissions in the Registration Statement
or the Prospectus based upon information relating to the Underwriter
furnished to the Company in writing by you expressly for use therein or to
that part of the Registration Statement that constitutes the Statement of
Eligibility and Qualification (Form T-1) under the Trust Indenture Act of
1939, as amended (the "Trust Indenture Act"), of the Trustee.
(c) The Company has been duly incorporated, is validly existing as a
corporation in good standing under the laws of Delaware, has the corporate
power and authority to own its property and to conduct its business as
described in the Prospectus
<PAGE>
3
and is duly qualified to transact business and is in good standing in each
jurisdiction in which the conduct of its business or its ownership or
leasing of property requires such qualification, except to the extent that
the failure to be so qualified or be in good standing would not have a
material adverse effect on the Company and its subsidiaries, taken as a
whole.
(d) Each subsidiary of the Company has been duly incorporated under
the laws of the jurisdiction of its incorporation, is validly existing as a
corporation in good standing under the laws of the jurisdiction of its
incorporation, has the corporate power and authority to own its property
and to conduct its business as described in the Prospectus and is duly
qualified to transact business and is in good standing in each jurisdiction
in which the conduct of its business or its ownership or leasing of
property requires such qualification, except to the extent that the failure
to be so qualified or be in good standing would not have a material adverse
effect on the Company and its subsidiaries, taken as a whole. The
significant subsidiaries of the Company are WinStar Global Products, Inc.,
WinStar Telecommunications, Inc., WinStar Gateway Network, Inc., WinStar
Wireless, Inc., WinStar Wireless Fiber Corp., WinStar New Media Company
Inc. and Non Fiction Films, Inc.
(e) Each of the Indentures has been duly qualified under the Trust
Indenture Act and has been duly authorized, and when executed and delivered
by the Company, will be a valid and binding agreement of the Company,
enforceable in accordance with its terms except as (i) the enforceability
thereof may be limited by bankruptcy, insolvency or similar laws affecting
creditors' rights generally and (ii) rights of acceleration and the
availability of equitable remedies may be limited by equitable principles
of general applicability.
(f) The Senior Notes and Senior Subordinated Notes have been duly
authorized and, when executed and authenticated in accordance with the
terms of the Indenture and delivered to and paid for by the Underwriter in
accordance with the terms of this Agreement, (A) will be entitled to the
benefits of the Senior Note Indenture or the Senior Subordinated Note
Indenture, as the case may be, and (B) will be valid and binding
obligations of the Company, enforceable in accordance with their terms
except as (i) the enforceability thereof may be limited by bankruptcy,
insolvency or similar laws affecting creditors' rights generally and (ii)
rights of acceleration and the availability of equitable remedies may be
limited by equitable principles of general applicability.
(g) This Agreement has been duly authorized, executed and delivered
by the Company.
(h) The execution and delivery by the Company of, and the performance
by the Company of its obligations under, this Agreement, the Indentures and
the Notes
<PAGE>
4
(collectively, the "Transaction Documents") will not contravene any
provision of applicable law or the certificate of incorporation or by-laws
of the Company or any applicable law or any agreement or other instrument
binding upon the Company or any of its subsidiaries that is material to the
Company and its subsidiaries, taken as a whole, or any judgment, order or
decree of any governmental body, agency or court having jurisdiction over
the Company or any subsidiary (except, with respect to any such agreement,
instrument, judgment, order or decree, where such contravention (singly or
in the aggregate) will not have a material adverse effect on the Company
and its subsidiaries, taken as a whole, or materially adversely affect the
Company's ability to perform its obligations under the Transaction
Documents), and no consent, approval, authorization or order of, or
qualification with, any governmental body or agency is required for the
performance by the Company of its obligations under this Agreement, the
Indentures or the Notes, except such as have been obtained or such as may
be required by the securities laws or Blue Sky laws of the various states
in connection with the offer and sale of the Notes by the Underwriter.
(i) There has not occurred any material adverse change, or any
development involving a prospective material adverse change, in the
condition, financial or otherwise, or in the earnings, business or
operations of the Company and its subsidiaries, taken as a whole, from that
set forth in the Prospectus.
(j) There are no legal or governmental proceedings pending or, to the
Company's knowledge, threatened to which the Company or any of its
subsidiaries is a party or to which any of the properties of the Company or
any of its subsidiaries is subject, other than proceedings accurately
described in all material respects in the Prospectus and proceedings that
could not reasonably be expected to have a material adverse effect on the
Company and its subsidiaries, taken as a whole, or on the power or ability
of the Company to perform its obligations under this Agreement, the
Indentures or the Notes or to consummate the transactions contemplated by
the Prospectus.
(k) Each of the Company and its subsidiaries owns or possesses all of
the licenses, permits, franchises and other governmental and private
authorizations, or rights with respect to the foregoing, reasonably
necessary for the present conduct of its business, without any conflict
with the rights of others known to the Company or any of its subsidiaries,
except for such licenses, permits, franchises, authorizations and rights,
the failure to possess which would not have a material adverse effect on
the properties, assets, prospects, condition, financial or otherwise,
present conduct of its business or operations of the Company and its
subsidiaries, taken as a whole, and, with respect to the Company's
prospects, except licenses that the Company is in the process of obtaining,
which it reasonably expects to obtain. The Company and its subsidiaries
collectively hold [41] microwave radio licenses granted by the Federal
Communications Commission (the "FCC"), expiring on February 1, 2001, a
true, correct and complete
<PAGE>
5
listing of which has been provided to you (the "Licenses"). The Wireless
Licenses enable the Company to provide Wireless Fiber services in the 31
largest 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 top 45 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. Each of the Licenses was validly issued by the FCC and is in full
force and effect throughout the entire geographical area specified therein.
Each of the Company and its subsidiaries is in full compliance with all
material terms and conditions of each License and with all material FCC
rules, rulings, and policies applicable to the Company or any of its
subsidiaries or the Licenses. Except as disclosed in the Prospectus,
neither the Company nor any of its subsidiaries is aware, after diligent
inquiry, of any event or circumstances or omission that exists or has
occurred that may permit or is likely to lead to the revocation,
nonrenewal, modification, impairment, restriction, or suspension of any
License or any right or authority thereunder in whole or in part. In
particular, and without limitation, the Company and its subsidiaries have
filed in a timely manner all required reports, certifications, notices,
lists, and other filings, and has completed all construction and engaged in
such operation of facilities authorized by each of the Licenses as is
necessary, as of the date hereof, to maintain each of the Licenses in full
force and effect.
(l) Each preliminary prospectus filed as part of the Registration
Statement as originally filed or as part of any amendment thereto, or filed
pursuant to Rule 424 or Rule 462 under the Securities Act, complied when so
filed in all material respects with the Securities Act and the rules and
regulations of the Commission thereunder.
(m) The Company is not and, after giving effect to the offering and
sale of the Notes and the application of the proceeds thereof as described
in the Prospectus, will not be an "investment company" nor an entity
"controlled" by an "investment company", as such terms are defined in the
Investment Company Act of 1940, as amended.
(n) The Company and its subsidiaries are (i) in compliance with any
and all applicable foreign, federal, state and local laws and regulations
relating to the protection of human health and safety, the environment or
hazardous or toxic substances or wastes, pollutants or contaminants
("Environmental Laws"), (ii) have received all permits, licenses or other
approvals required of them under applicable Environmental Laws to conduct
their respective businesses and (iii) are in compliance with all terms and
conditions of any such permit, license or approval, except where such
noncompliance with Environmental Laws, failure to receive required permits,
licenses or other approvals or failure to comply with the terms and
conditions of such permits, licenses or approvals would not, singly or in
the aggregate, have a material adverse effect on the Company and its
subsidiaries, taken as a whole.
<PAGE>
6
(o) The Company has complied with all provisions of Section 517.075,
Florida Statutes (Chapter 92-198, Laws of Florida).
(p) The terms of the Notes and the Indentures conform in the
Prospectus in all material respects to the descriptions thereof contained
in the Prospectus under the heading "Description of the Notes".
II.
The Company hereby agrees to sell to the Underwriter, and the
Underwriter, upon the basis of the representations and warranties herein
contained but subject to the conditions hereinafter stated, agrees to purchase
from the Company the respective (a) principal amount of the Senior Notes and (b)
principal amount of the Senior Subordinated Notes, each as set forth in Schedule
I hereto at a purchase price of __% of the principal amount of the Senior Notes
and __% of the principal amount of the Senior Subordinated Notes -- plus accrued
amortization of original issue discount on the Notes, if any, from ________ __,
1996 to the date of payment and delivery.
III.
The Company is advised by you that you propose to make a public
offering of the Senior Notes as soon after the Original Registration Statement
and this Agreement have become effective as in your judgment is advisable. The
Company is further advised by you that the Senior Notes are to be offered to the
public initially at __% of their principal amount at maturity, the "Senior Note
Public Offering Price" -- plus accrued amortization of original issue discount
on the Senior Notes, if any, and to certain dealers selected by you at a price
that represents a concession not in excess of __% of the Senior Notes Public
Offering Price, and that you may allow, and such dealers may reallow, a
concession, not in excess of __% of the Senior Notes Public Offering Price, to
you or to certain other dealers.
The Company is advised by you that you propose to make a public
offering of
<PAGE>
7
the Senior Subordinated Notes as soon after the Registration Statement and this
Agreement have become effective as in your judgment is advisable. The Company
is further advised by you that the Senior Subordinated Notes are to be offered
to the public initially at __% of their principal amount at maturity, the
"Senior Subordinated Note Public Offering Price" -- plus accrued amortization of
original issue discount on the Senior Subordinated Notes, if any, and to certain
dealers selected by you at a price that represents a concession not in excess of
__% of the Senior Subordinated Notes Public Offering Price, and that you may
allow, and such dealers may reallow, a concession, not in excess of __% of the
Senior Subordinated Notes Public Offering Price, to you or to certain other
dealers.
IV.
Payment for the Notes shall be made to the Company in Federal or other
funds immediately available in New York City against delivery of the Notes for
the account of the Underwriter at a closing to be held at the offices of
Shearman & Sterling, 599 Lexington Avenue, New York, New York, at 10:00 A.M.,
New York City time, on _______ __, 1996, or at such other time on the same or
such other date, not later than _______ __, 1996, as shall be designated in
writing by you. The time and date of such payment are hereinafter referred to
as the "Closing Date".
Payment for the Notes shall be made against delivery to you for the
account of the Underwriter of the Notes registered in such names and in such
denominations as you shall request in writing not later than one full business
day prior to the date of delivery, with any transfer taxes payable in connection
with the transfer of the Notes to the Underwriter duly paid.
V.
The obligations of the Company and the obligations of the Underwriter
hereunder are subject to the condition that the Registration Statement shall
have become effective not later than the date hereof.
The obligations of the Underwriter hereunder are subject to the
following further conditions:
(a) Subsequent to the execution and delivery of this Agreement and
prior to the Closing Date,
(i) there shall not have occurred any downgrading, nor shall any
notice have been given of any intended or potential downgrading or of
any review for a possible change that does not indicate the direction
of the possible change, in the rating accorded any of the Company's
securities by any "nationally recognized
<PAGE>
8
statistical rating organization", as such term is defined for purposes
of Rule 436(g)(2) under the Securities Act; and
(ii) there shall not have occurred any change, or any development
involving a prospective change, in the condition, financial or
otherwise, or in the earnings, business or operations, of the Company
and its subsidiaries, taken as a whole, from that set forth in the
Registration Statement, that, in your reasonable judgment, is material
and adverse and that makes it, in your reasonable judgment,
impracticable to market the Notes on the terms and in the manner
contemplated in the Prospectus.
(b) You shall have received on the Closing Date a certificate, dated
the Closing Date and signed by two executive officers of the Company
reasonably acceptable to the Underwriter on behalf of the Company, to the
effect set forth in clause (a)(i) above and to the effect that the
representations and warranties of the Company contained in this Agreement
are true and correct in all material respects as of the Closing Date and
that the Company has complied with all of the agreements and satisfied all
of the conditions on its part to be performed or satisfied hereunder on or
before the Closing Date.
(c) No stop order suspending the effectiveness of the Registration
Statement shall be in effect and no proceedings for such purpose shall be
pending before or, to the knowledge of the Company or the Underwriter,
threatened by the Commission.
(d) You shall have received on the Closing Date (i) an opinion of
Graubard Mollen & Miller, counsel for the Company, dated the Closing Date,
to the effect set forth in Exhibit A and (ii) an opinion of Willkie, Farr &
Gallagher, special regulatory counsel for the Company, dated the Closing
Date, to the effect set forth in Exhibit B.
(e) You shall have received on the Closing Date an opinion of
Shearman & Sterling, counsel for the Underwriter, dated the Closing Date,
with respect to such matters as you may reasonably request.
(f) You shall have received, on each of the date hereof and the
Closing Date a letter dated the date hereof or the Closing Date, as the
case may be, in form and substance satisfactory to you, from Grant Thornton
L.L.P., independent public accountants for the Company, containing
statements and information of the type ordinarily included in accountants'
"comfort letters" to underwriters with respect to the financial statements
and certain financial information contained in the Registration Statement
and the Prospectus.
<PAGE>
9
(g) The Company shall have complied with the provisions of
Article VI(a) hereof with respect to the furnishing of Prospectuses on the
business day next succeeding the date of this Agreement, in such quantities
as you shall have reasonably requested.
(h) You shall have received such other documents and certificates as
are reasonably requested by you or your counsel.
The obligations of the Underwriter hereunder are also subject to the
concurrent closing of the Common Stock Offering, as described in the Prospectus.
VI.
In further consideration of the agreements of the Underwriter herein
contained in this Agreement, the Company covenants as follows:
(a) To furnish to you, without charge, three signed copies of the
Registration Statement (including exhibits thereto and documents
incorporated by reference) and, during the period mentioned in paragraph
(c) below, as many copies of the Prospectus, any documents incorporated
therein by reference and any supplements and amendments thereto or to the
Registration Statement as you may reasonably request. In the case of the
Prospectus, to furnish to you copies of the Prospectus in New York City,
prior to 10:00 p.m., on the business day following the date of this
Agreement, in such quantities as you reasonably request.
(b) Before amending or supplementing the Registration Statement or
the Prospectus, to furnish to you a copy of each such proposed amendment or
supplement and not to file any such proposed amendment or supplement to
which you reasonably object.
(c) If, during such period after the first date of the public
offering of the Notes as in the opinion of your counsel the Prospectus is
required by law to be delivered in connection with sales by you or a
dealer, any event shall occur or condition shall exist as a result of which
it is necessary in your counsel's reasonable judgment to amend or
supplement the Prospectus in order to make the statements therein, in the
light of the
<PAGE>
10
circumstances when the Prospectus is delivered to a purchaser, not
misleading, or if, in the reasonable opinion of your counsel, it is
necessary to amend or supplement the Prospectus to comply with applicable
law, the Company shall forthwith prepare, file with the Commission and
furnish, at its own expense, to the Underwriter and to the dealers (whose
names and addresses you will furnish to the Company) to which Notes may
have been sold by you and to any other dealers upon request, either
amendments or supplements to the Prospectus so that the statements in the
Prospectus as so amended or supplemented will not, in the light of the
circumstances when the Prospectus is delivered to a purchaser, be
misleading or so that the Prospectus, as amended or supplemented, will
comply with law.
(d) To endeavor to qualify the Notes for offer and sale under the
securities or Blue Sky laws of such jurisdictions as you shall reasonably
request and to pay all expenses (including fees of counsel) in connection
with such qualification and in connection with any review of the offering
of the Notes by the National Association of Securities Dealers, Inc.
(e) If the Company elects to rely on Rule 462(b) under the Securities
Act, the Company shall file a Rule 462(b) Registration Statement with the
Commission in compliance with Rule 462(b) under the Securities Act no later
than the earlier of (i) 10:00 p.m. Eastern time on the date hereof and (ii)
the time confirmations are sent or given, as specified by Rule 462(b) under
the Securities Act, and shall pay the applicable fees in accordance with
Rule 111 under the Securities Act.
(f) To make generally available to the Company's security holders and
to you, as soon as practicable an earnings statement of the Company
covering such twelve-month period that satisfies the provisions of Section
11(a) of the Securities Act and the rules and regulations of the Commission
thereunder.
(g) During the period beginning on the date hereof and continuing to
and including the Closing Date, not to offer, sell, contract to sell or
otherwise dispose of any debt securities of the Company or warrants to
purchase securities of the Company substantially similar to the Notes
(other than the Notes and the _________ shares of Common Stock sold in the
Stock Offering) without your prior written consent.
(h) Whether or not the transactions contemplated in this Agreement
are consummated or this Agreement is terminated, to pay or cause to be paid
all expenses incidental to the performance of its obligations under this
Agreement including: (i) the fees, disbursements and expenses of the
Company's counsel and the Company's accountants in connection with the
registration and delivery of the Notes under the Securities Act and all
other fees or expenses in connection with the preparation and filing of the
Registration Statement, any preliminary prospectus, the Prospectus and
<PAGE>
11
amendments and supplements to any of the foregoing, including all printing
costs associated therewith, and the mailing and delivering of copies
thereof to the Underwriter and dealers, in the quantities specified above,
(ii) all costs and expenses related to the preparation and delivery of the
Notes to the Underwriter, including any transfer or other taxes payable
thereon, (iii) the cost of printing or producing any Blue Sky or Legal
Investment memorandum in connection with the offer and sale of the Notes
under state securities laws and all expenses in connection with the
qualification of the Notes for offer and sale under state securities laws
as provided in paragraph (d) above, including filing fees and the
reasonable fees and disbursements of counsel for the Underwriter in
connection with such qualification and in connection with the Blue Sky or
Legal Investment memorandum, (iv) all filing fees and disbursements of
counsel to the Underwriter incurred in connection with the review and
qualification of the offering by the National Association of Securities
Dealers, Inc., (v) the cost of printing certificates representing the
Notes, (vi) the costs and charges of the Trustee, (vii) the costs and
expenses of the Company relating to investor presentations on any "road
show" undertaken in connection with the marketing of the offering,
including, without limitation, expenses associated with the production of
road show slides and graphics, fees and expenses of any consultants engaged
in connection with the road show presentations with the prior approval of
the Company, travel and lodging expense of the representatives and officers
of the Company and any such consultants, and the cost of any aircraft
chartered in connection with the road show and (viii) all other costs and
expenses incident to the performance of the obligations of the Company
hereunder for which provision is not otherwise made in this paragraph. It
is understood, however, that except as provided in this Article, Article
VII and the third paragraph of Article IX below, the Underwriter will pay
all of their costs and expenses, including fees and disbursements of their
counsel, transfer taxes payable on resale of any of the Notes by them, and
any advertising expenses connected with any offers they may make.
VII.
The Company agrees to indemnify and hold harmless the Underwriter and
each person, if any, who controls the Underwriter within the meaning of either
Section 15 of the Securities Act or Section 20 of the Exchange Act, from and
against any and all losses, claims, damages and liabilities (including, without
limitation, any legal or other expenses reasonably incurred by the Underwriter
or any such controlling or affiliated person in connection with defending or
investigating any such action or claim) caused by any untrue statement or
alleged untrue statement of a material fact contained in the Registration
Statement or any amendment thereof, any preliminary prospectus or the Prospectus
(as amended or supplemented if the Company shall have furnished any amendments
or supplements thereto), or caused by any omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein in light of the circumstances under which they were
<PAGE>
12
made not misleading, except (i) insofar as such losses, claims, damages or
liabilities are caused by any such untrue statement or omission or alleged
untrue statement or omission based upon information relating to the Underwriter
furnished to the Company in writing by the Underwriter expressly for use therein
and (ii) that the foregoing agreement with respect to any preliminary prospectus
shall not inure to the benefit of the Underwriter or any person controlling the
Underwriter, if a copy of the Prospectus (as then amended or supplemented if the
Company shall have furnished any amendments or supplements thereto) was not sent
or given by or on behalf of the Underwriter to a purchaser, if required by law
to be sent, with or prior to the written confirmation of the sale of the Notes
to such purchaser, and if the Prospectus (as so amended or supplemented) would
have cured the defect giving rise to such losses, claims, damages or
liabilities.
The Underwriter agrees to indemnify and hold harmless the Company, its
directors, its officers who sign the Registration Statement and each person, if
any, who controls the Company within the meaning of either Section 15 of the
Securities Act or Section 20 of the Exchange Act to the same extent as the
foregoing indemnity from the Company to the Underwriter, but only with reference
to information relating to the Underwriter furnished to the Company in writing
by the Underwriter expressly for use in the Registration Statement, any
preliminary prospectus, the Prospectus or any amendments or supplements thereto.
In case any proceeding (including any governmental investigation)
shall be instituted involving any person in respect of which indemnity may be
sought pursuant to either of the two preceding paragraphs of this Article VII,
such person (the "indemnified party") shall promptly notify the person against
whom such indemnity may be sought (the "indemnifying party") in writing and the
indemnifying party, upon request of the indemnified party, shall retain counsel
reasonably satisfactory to the indemnified party to represent the indemnified
party and any others the indemnifying party may designate in such proceeding and
shall pay the fees and disbursements of such counsel related to such proceeding.
In any such proceeding, any indemnified party shall have the right to retain its
own counsel, but the fees and expenses of such counsel shall be at the expense
of such indemnified party unless (i) the indemnifying party and the indemnified
party shall have mutually agreed to the retention of such counsel or (ii) the
named parties to any such proceeding (including any impleaded parties) include
both the indemnifying party and the indemnified party and representation of both
parties by the same counsel would be inappropriate due to actual or potential
differing interests between them. It is understood that the indemnifying party
shall not, in connection with any proceeding or related proceedings in the same
jurisdiction, be liable for the fees and expenses of more than one separate firm
(in addition to any local counsel) for all such indemnified parties and that all
such fees and expenses shall be reimbursed as they are incurred. Such firm shall
be designated in writing by Morgan Stanley & Co. Incorporated, in the case of
parties indemnified pursuant to the first preceding paragraph of this Article
VII, and by the Company, in the case of parties indemnified pursuant to the
second preceding paragraph of this Article VII. The indemnifying party shall
not be liable for any settlement of any proceeding effected without its written
consent,
<PAGE>
13
but if settled with such consent or if there be a final judgment for the
plaintiff, the indemnifying party agrees to indemnify the indemnified party from
and against any loss or liability by reason of such settlement or judgment.
Notwithstanding the foregoing sentence, if at any time an indemnified party
shall have requested in writing an indemnifying party to reimburse the
indemnified party for fees and expenses of counsel as contemplated by the second
and third sentences of this third paragraph, the indemnifying party agrees that
it shall be liable for any settlement of any proceeding effected without its
written consent if (i) such settlement is entered into more than 30 days after
receipt by such indemnifying party of the aforesaid request and (ii) such
indemnifying party shall not have reimbursed the indemnified party in accordance
with such request prior to the date of such settlement. No indemnifying party
shall, without the prior written consent of the indemnified party, effect any
settlement of any pending or threatened proceeding in respect of which any
indemnified party is or could have been a party and indemnity could have been
sought hereunder by such indemnified party, unless such settlement includes an
unconditional release of such indemnified party from all liability on claims
that are the subject matter of such proceeding.
To the extent the indemnification provided for in the first or second
paragraph of this Article VII is unavailable to an indemnified party or
insufficient in respect of any losses, claims, damages or liabilities referred
to therein, then each indemnifying party under such paragraph, in lieu of
indemnifying such indemnified party thereunder, shall contribute to the amount
paid or payable by such indemnified party as a result of such losses, claims,
damages or liabilities (i) in such proportion as is appropriate to reflect the
relative benefits received by the Company on the one hand and the Underwriter on
the other hand from the offering of the Notes or (ii) if the allocation provided
by clause (i) above is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause (i)
above but also the relative fault of the Company on the one hand and of the
Underwriter on the other hand in connection with the statements or omissions
that resulted in such losses, claims, damages or liabilities, as well as any
other relevant equitable considerations. The relative benefits received by the
Company on the one hand and the Underwriter on the other hand in connection with
the offering of the Notes shall be deemed to be in the same respective
proportions as the net proceeds from the offering of the Notes (before deducting
expenses) received by the Company and the total underwriting discounts and
commissions received by the Underwriter, in each case as set forth in the table
on the cover of the Prospectus, bear to the aggregate public offering price of
the Notes. The relative fault of the Company on the one hand and of the
Underwriter on the other hand shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Company or by the Underwriter and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission.
The Company and the Underwriter agree that it would not be just or
equitable if contribution pursuant to this Article VII were determined by pro
---
rata allocation or by any other
- ----
<PAGE>
14
method of allocation that does not take account of the equitable considerations
referred to in the immediately preceding fourth paragraph of this Article VII.
The amount paid or payable by an indemnified party as a result of the losses,
claims, damages and liabilities referred to in the immediately preceding
paragraph shall be deemed to include, subject to the limitations set forth
above, any legal or other expenses reasonably incurred by such indemnified party
in connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this Article VII, the Underwriter shall not be
required to contribute any amount in excess of the amount by which the total
price at which the Notes underwritten by it and distributed to the public were
offered to the public exceeds the amount of any damages that the Underwriter has
otherwise been required to pay by reason of such untrue or alleged untrue
statement or omission or alleged omission. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation.
The indemnity and contribution provisions contained in this Article
VII and the representations and warranties of the Company contained in this
Agreement shall remain operative and in full force and effect regardless of (i)
any termination of this Agreement, (ii) any investigation made by or on behalf
of the Underwriter or any person controlling the Underwriter or by or on behalf
of the Company, its officers or directors or any person controlling the Company
and (iii) acceptance of and payment for any of the Notes. The remedies provided
for in this Article VII are not exclusive and shall not limit any right or
remedies which may otherwise be available to any indemnified party at law or in
equity.
VIII.
This Agreement shall be subject to termination by notice given by you
to the Company, if (a) after the execution and delivery of this Agreement and
prior to the Closing Date (i) trading generally shall have been suspended or
materially limited on or by, as the case may be, any of the New York Stock
Exchange, the American Stock Exchange, the National Association of Securities
Dealers, Inc. Automated Quotation System, the Chicago Board of Options Exchange,
the Chicago Mercantile Exchange or the Chicago Board of Trade, (ii) trading of
any securities of the Company shall have been suspended on any exchange or in
any over-the-counter market, (iii) a general moratorium on commercial banking
activities in New York shall have been declared by either Federal or New York
State authorities or (iv) there shall have occurred any outbreak or escalation
of hostilities or any change in financial markets or any calamity or crisis
that, in your reasonable judgment, is material and adverse and (b) in the case
of any of the events specified in clauses (a)(i) through (iv), such event singly
or together with any other such event makes it, in your reasonable judgment,
impracticable to market the Notes on the terms and in the manner contemplated in
the Prospectus.
<PAGE>
15
IX.
This Agreement shall become effective upon the later of (x) execution
and delivery hereof by the parties hereto and (y) release of notification of the
effectiveness of the Original Registration Statement by the Commission.
If this Agreement shall be terminated by the Underwriter because of
any failure or refusal on the part of the Company to comply with any material
terms or to fulfill any of the material conditions of this Agreement, or if for
any reason the Company shall be unable to perform any of its material
obligations under this Agreement, the Company will reimburse the Underwriter,
for all out-of-pocket expenses (including the fees and disbursements of their
counsel) reasonably incurred by the Underwriter in connection with this
Agreement or the offering contemplated hereunder.
This Agreement may be signed in counterpart, each of which shall be an
original, with the same effect as if the signatures thereto and hereto were upon
the same instrument.
This Agreement shall be governed by the laws of the State of New York.
Very truly yours,
WINSTAR COMMUNICATIONS, INC.
By
-------------------------------------------
Accepted, , 1996
MORGAN STANLEY & CO.
Incorporated
By_______________________
<PAGE>
SCHEDULE I
Principal Amount
----------------
_____% Senior Notes Due 2006 . . . . . . . . . . . $___________
_____% Senior Subordinated Notes Due 2006 . . . . . $
==============
Total . . . . . . . . . . . . . . . . . . $
=========
<PAGE>
EXHIBIT A
---------
OPINION OF GRAUBARD, MOLLEN & MILLER
The opinion of counsel for the Company to be delivered pursuant to
Section 5(d) of the Underwriting Agreement shall be to the effect that:
(A) the Company has been duly incorporated, is validly existing as a
corporation in good standing under the laws of the State of Delaware and has the
corporate power and authority to own its property and to conduct its business as
described in the Prospectus (references herein to the Prospectus being taken to
mean the same, as amended or supplemented);
(B) each of WinStar Gateway Network, Inc., WinStar
Telecommunications, Inc., WinStar Wireless, Inc., WinStar Wireless Fiber Corp.,
WinStar New Media Company Inc., Non Fiction Films Inc. and WinStar Global
Products, Inc. is a subsidiary of the Company, has been duly incorporated, is
validly existing as a corporation in good standing under the laws of the State
of Delaware, has the corporate power and authority to own its property and to
conduct its business as described in the Prospectus.
the following subsidiaries are duly qualified to conduct business and
are in good standing in the following jurisdictions:
Subsidiary Jurisdiction
---------- ------------
WinStar Gateway California
Florida
Illinois
New Jersey
New York
Ohio
Pennsylvania
Texas
WinStar Telecommunications
WinStar Wireless Virginia
WinStar Wireless Fiber
WinStar Global Products New York
New Jersey;
<PAGE>
A-2
(C) the Underwriting Agreement has been duly authorized, executed and
delivered by the Company;
(D) each of the Senior Notes and the Senior Subordinated Notes has
been duly authorized and, when executed, authenticated and delivered to and paid
for by the Underwriter in accordance with the terms of the Underwriting
Agreement, will (x) be a valid and binding obligations of the Company
enforceable in accordance with their terms, except as (A) the enforceability
thereof may be limited by bankruptcy, insolvency or similar laws affecting
creditors' rights generally and (B) rights of acceleration, if applicable, and
the availability of equitable remedies may be limited by equitable principles of
general applicability and (y) be entitled to the benefits of the Senior Notes
Indenture or Senior Subordinated Notes Indenture, as the case may be;
(E) each of the Indentures has been duly authorized, executed and
delivered by, and is a valid and binding agreement of, the Company, enforceable
in accordance with its terms except as (x) the enforceability thereof may be
limited by bankruptcy, insolvency or similar laws affecting creditors' rights
generally and (y) rights of acceleration, if applicable, and the availability of
equitable remedies may be limited by equitable principles of general
applicability;
(F) the execution and delivery by the Company of, and the performance
by the Company of its obligations under, the Underwriting Agreement, each of the
Indentures and the Notes will not contravene (i) any provision of applicable
law, (ii) the certificate of incorporation or by-laws of the Company, (iii) any
agreement or other instrument known to such counsel (after due inquiry of the
Company's executive officers) and binding upon the Company or any of its
subsidiaries that is material to the Company and its subsidiaries, taken as a
whole, or (iv) any judgment, or decree of any governmental body, agency or court
having jurisdiction over the Company or any subsidiary that is known to such
counsel) after due inquiry of the Company's executive officers (except, with
respect to clauses (iii) and (iv), where such contravention (singly or in the
aggregate) will not have a material adverse effect on the Company and its
subsidiaries, taken as a whole or materially adversely affect the Company's
ability to perform its obligations under the Underwriting Agreement). To such
counsel's knowledge after due inquiry of the Company's executive officers), no
consent, approval, authorization or order of, or qualification with, any
governmental body or agency is required for the performance by the Company or
its subsidiaries of their obligations under the Underwriting Agreement, the
Indentures or the Notes, except such as have been obtained or as may be required
by the securities laws or Blue Sky laws of the various states of the United
States and foreign jurisdictions in connection with the offer and sale of the
Notes;
(G) the statements (i) in the Prospectus under the captions "Business
- - Legal Proceedings," "Description of the Notes", "Underwriter" and "Description
of Certain Indebtedness," (ii) in the Registration Statement in Item 15 and
(iii) under the captions
<PAGE>
A-3
"Employment Agreements" and "Certain Transactions" in the Definitive Proxy
Statement of the Company dated May 3, 1996, in each case insofar as such
statements constitute summaries of the legal matters, documents or proceedings
referred to therein, fairly summarize the matters referred to therein;
(H) based solely on such counsel's discussions with executive
officers of the Company and such counsel's representation of the Company, such
counsel does not know of any legal or governmental proceedings pending or
threatened to which the Company or any of its subsidiaries is a party or to
which any of the properties of the Company or any of its subsidiaries is subject
other than proceedings fairly summarized in all material respects in the
Prospectus and proceedings which could not reasonably be expected to have a
material adverse effect on the Company and its subsidiaries, taken as a whole,
or on the power or ability of the Company to perform its obligations under the
Underwriting Agreement, the Indentures or the Notes or to consummate the
transactions contemplated by the Prospectus;
(I) the Company is not, and immediately after giving effect to the
offering and sale of the Common Stock and the application of the proceeds
thereof as described in the Prospectus will not be, an "investment company" or
an entity "controlled" by an "investment company", as such terms are defined in
the Investment Company Act of 1940, as amended;
(J) the statements in the Prospectus, under the caption "Certain
Federal Income Tax Consequences to Non-U.S. Holders," are accurate and fairly
summarize the matters referred to therein; and
(K) each document filed pursuant to the Exchange Act and incorporated
by reference in the Registration Statement and the Prospectus (except as to the
financial statements and other than financial data and schedules included or
incorporated by reference therein as to which such counsel need not express any
opinion) complied when so filed as to form in all material respects with the
Exchange Act and the rules and regulations of the Commission thereunder and the
Registration Statement and Prospectus (except as to the financial statements and
other than financial data and schedules included therein as to which such
counsel need not express any opinion) comply as to form in all material respects
with the Securities Act and the rules and regulations of the Commission
thereunder.
Additionally, such counsel shall state that, in the course of preparation of the
Registration Statement and the Prospectus, it has participated in conferences
with Officers and other representatives of the Company with respect to the
Registration Statement and Prospectus and, although such counsel is not passing
upon and does not assume any responsibility for the accuracy, completeness or
fairness of the statements contained in the Registration Statement or Prospectus
(except as otherwise set forth in the Opinion), no facts have come to its
attention which give it reason to believe that the Registration Statement or any
amendment thereto at the time it became effective (including the documents
incorporated by reference therein, as supplemented by the Registration Statement
and the Prospectus, as supplemented) contained any untrue statement of a
material fact required to be stated therein or omitted to state any material
fact required to be stated therein or necessary to make the statements therein
not misleading or that the Prospectus or any supplement thereto (including the
documents incorporated by reference therein, as
<PAGE>
A-4
supplemented by the Registration Statement and the Prospectus, as supplemented)
when issued, or on the Closing Date, contains any untrue statement of a material
fact or omits to state a material fact necessary in order to make statements
therein, in light of the circumstances under which they were made, not
misleading (except, in the case of both the Registration Statement and any
amendment thereto and the Prospectus and any supplement thereto (and any
documents incorporated by reference therein), for the financial statements,
notes thereto and other financial information, statistical data and schedules
contained therein (including without limitation, the pro forma financial
information), as to which such counsel need express no belief).
Counsel may state that their opinion and belief are based upon their
participation in the preparation of the Registration Statement and Prospectus
(and any amendments or supplements thereto) and any documents incorporated
therein by reference and review and discussion of the contents thereof, but are
without independent check or verification except with respect to paragraphs (G)
and (J) above.
<PAGE>
EXHIBIT B
---------
OPINION OF SPECIAL REGULATORY COUNSEL FOR THE COMPANY
The opinion of special regulatory counsel for the Company to be
delivered pursuant to Section 5(d) of the Underwriting Agreement shall be to the
effect that:
(A) the thirty 400 MHz Wireless Licenses authorize WCI to use 400 MHz
of bandwidth capacity, and the thirteen WinStar Licenses authorize WCI to
use 100 MHz of bandwidth capacity, to offer voice, data and video
transmission services on certain channels in the 38.6 GHz - 40 GHz band
within the service areas designated in the respective Licenses. Each of
the Licenses was validly issued by the FCC. WCI is in full compliance with
all material terms and conditions of each License and with all material FCC
Rules applicable to the Licenses. WCI has filed in a timely manner all
required reports, certifications, notices, lists, and other filings as are
necessary to maintain each of the Licenses in full force and effect;
(B) the FCC has the authority, under certain circumstances, to modify
radio licenses that it has issued. The FCC may propose and/or adopt rules
to auction portions of the 38.6 GHz - 40.0 GHz and surrounding radio
spectrum available for commercial use. If it does, the FCC may adopt
changes to the existing regulations governing 38 GHz licensees, which could
have an impact on the scope of the Licenses and the operations of WCI and
its subsidiaries. As of the Closing Date, such counsel is not aware of any
official FCC action that may permit or is likely to lead to the revocation,
nonrenewal, modification, impairment, restriction, or suspension of any
License or any right or authority thereunder in whole or in part;
(C) the execution of the Underwriting Agreement, each of the
Indentures and the Notes (the "Transaction Documents"), and the performance
by the parties to the Transaction Documents of their obligations
thereunder, and the exercise by them of their remedies thereunder in
accordance with the terms thereof, do not violate the Communications Act of
1934 or the Rules thereunder;
(D) the statements in the Prospectus under the captions "Risk Factors
-- Government Regulation," "Business -- Telecommunications Services --
Wireless Fiber -- Wireless Licenses" and "Business -- Government Regulation
of Telecommunications Operations" in the Prospectus, insofar as such
statements constitute a summary of the legal matters, licenses, procedures
or proceedings referred to therein, fairly summarize the matters referred
to therein relating to applicable federal law;
(E) the six 100 MHz Wireless Licenses granted on June 20, 1995
require WCI to complete construction by December 20, 1996, and the five
licenses that became
<PAGE>
effective on July 18, 1995 require WCI to complete construction by January
18, 1997; and
(F) construction has been completed with respect to each of the 400
MHz Wireless Licenses and WCI is operating the facilities authorized by
each of the 400 MHz Wireless Licenses in accordance with the Act and the
Rules and in such manner as is necessary to maintain each of the Licenses
in full force and effect.
With respect, however, to the question of whether the extent of the
construction and operation of the facilities completed as of March 15, 1995
was sufficient to satisfy the requirements of the FCC's Rules, such counsel
is of the opinion that the FCC, in a properly argued and presented case,
should find that construction of the Wireless Fiber licensed facilities was
completed on or before March 15, 1995, and WCI is currently operating those
facilities as required by the Act and the Rules.
EXHIBIT 10.71
DIGEX Private Network Contract
DIGEX, Inc., a Maryland corporation, with offices at 6800 Virginia
- ------------ -------------
Manor Road, Beltsville, Maryland 20705, hereinafter referred as
- --------------------------------------
"DIGEX", and WINSTAR Communications, Inc. with offices at 230 Park
----- ---------------------------- --------
Avenue, Suite 3126, New York, New York 10169, hereinafter referred to
- ---------------------------------------------
as "WINSTAR", agree that the following terms and conditions shall
-------
govern the sale and discounting of Products as herein defined.
1. Definitions.
-----------
1.1 Parties, Party. "Parties" means DIGEX and WINSTAR, collectively.
--------------
"Party" means either DIGEX and WINSTAR.
1.2 Agreement. "Agreement" refers to this contract for Private Network
---------
Capacity agreed to between WINSTAR and DIGEX.
1.3 Territory. "Territory" is designated as: Continental United
---------
States and shall include all other locations where DIGEX provides
Service during the term hereof.
1.4 Service(s). The term "Service" or "Services" as used herein
----------
shall mean one or more of the items listed on EXHIBITs "A & B"
hereto, as changed from time to time in accordance with the
provisions of this Agreement, and all future DIGEX products and
services (which shall be added to EXHIBIT "B").
1.5 Network Availability. The term is defined as the cumulative time
--------------------
the "Network Backbone" (as defined below) is available to process
Internet usage as measured by the HP Open View software package
(as defined in EXHIBIT "A").
1.6 Network Backbone. The term is defined as any network
----------------
interconnection that exists between a DIGEX Internet gateway
interconnection or Network Access Point ("NAP") and any DIGEX
interconnection device(s).
2. Appointment.
-----------
2.1 Authorization. DIGEX hereby sells private network capacity to
-------------
WINSTAR which includes nationwide Internet access with which
WINSTAR will privately label and market, distribute, and solicit
orders for Services to WINSTAR Customers (defined as customers of
WINSTAR utilizing DIGEX Internet access Services on a non-
exclusive basis) subject to the terms and conditions of this
Agreement.
A. WINSTAR at its option can disclose in its advertisements,
materials and to Customers that it is using the services of
DIGEX and DIGEX can also do so, as to WINSTAR but neither
Party can use the trademarks, service marks, etceteras
without the prior written consent of the other.
B. DIGEX will grant to WINSTAR roof rights and other access to
DIGEX at DIGEX owned facilities, or leased facilities (If
facility is leased, lease agreement between DIGEX and the
leasing party must permit DIGEX to grant roof rights; In
addition, local statutes, regulations and laws must permit
such rights) as WINSTAR requires and WINSTAR will have the
right to place its equipment in DIGEX owned or leased
premises for any purpose relating to this Agreement.
WINSTAR employees and consultants will have access to such
premises and equipment.
Page 1
<PAGE>
2.2 Public Release of Information. No news releases, articles,
-----------------------------
brochures, advertisements, speeches or other informational
releases concerning this Agreement, the terms contained herein,
or the relationship of the Parties shall be made without written
approval from the other Party. Both Parties agree to give four
(4) hours advance time for review of any material submitted for
approval. Review shall be completed within four (4) business
hours. To the extent that disclosure is required by legal
obligation to any governmental entity or pursuant to judicial,
quasi judicial and/or government action no consent is required,
though notice shall be given.
2.3 No Authority to Make Agreements. Except as expressly permitted
-------------------------------
herein, neither Party shall have the authority to make any
agreement or incur any liability on behalf of the other Party.
2.4 Reserved Rights. DIGEX reserves the right to market the Services
----------------
in any manner and without limitation, provided however that DIGEX
will not knowingly directly market to WINSTAR's Customers.
Should this occur DIGEX will pay to WINSTAR a ten (10%) percent
commission on the sale of the Service(s) sold to such
customer(s).
3. Commencement Date And Term.
--------------------------
3.1 Commencement Date. This Agreement shall be effective, upon
-----------------
execution by both Parties.
3.2 Term. The initial term of this Agreement shall be for seventy-
----
two (72) months from the commencement date specified herein.
3.3 Renewal. This Agreement shall automatically renew for two
-------
additional renewal terms, each consisting of three (3) year
periods. WINSTAR may terminate upon written notice no later than
sixty (60) days prior to the end of any term.
4. Reserved
--------
5. Commitment
----------
5.1 Total Commitment. WINSTAR hereby agrees to purchase from DIGEX
----------------
Five Million ($5,000,000) dollars of Services less any Service
Credits at the Port Acquisition and Revenue Rates received by
WINSTAR from DIGEX for failure to meet Performance Specifications
or any other credits or offsets given to WINSTAR over a seventy-
two (72) month period (the "Commitment"). WINSTAR further
anticipates that it will purchase an additional Five Million
($5,000,000) dollars of Services during the initial term of this
Agreement.
5.2 WINSTAR's satisfaction of the Commitment will vary depending on
the Term remaining as follows:
a. WINSTAR agrees to pay DIGEX the amount of Five Million
($5,000,000) dollars Commitment within eight (8) business
days of the Commencement Date. This Five Million
($5,000,000) dollars will be applied against Services sold
by WINSTAR to its Customers over the initial seventy-two
month period of the Agreement.
b. WINSTAR shall be invoiced for all Services sold over the
Term of the contract. Invoices shall state the amount of
Services sold by WINSTAR and the remaining credit from the
Five Million ($5,000,000) dollar Commitment amount.
Payment of invoices once the Five Million ($5,000,000)
dollar Commitment amount has been fully credited, are due
thirty (30) days from date of invoice.
c. DIGEX agrees to a discount rate of twenty (20%) off of
Services as stated on the DIGEX PNC Rate Cards from Zero
to Ten Million dollars ($0 - $10,000,000) in EXHIBIT "B".
Page 2
<PAGE>
d. DIGEX agrees to a discount rate of twenty-five (25%)
percent off of Services as stated in the DIGEX PNC Rate
Cards from Ten Million and One dollars and above,
($10,000,001 and above) in EXHIBIT "B".
6. Responsibilities of WINSTAR.
---------------------------
6.1 WINSTAR agrees to provide DIGEX, monthly, a rolling three
month sales forecast by POP. ("POP") is defined as any Point
of Presence where DIGEX connects or is planning a connection
to a WINSTAR Customer). This plan will be submitted by
WINSTAR to DIGEX for review. The forecast is due the first
Monday of every month for review and incorporation into the
DIGEX network operations and planning, Point of Presence
("POP") build-out, and revenue forecast.
6.2 . WINSTAR shall not use in its marketing effort any materials or
make any warranties or representations to WINSTAR Customers
regarding the Services from DIGEX that are misleading or
inaccurate, or otherwise not in accordance with DIGEX's
specifications, unless approved in advance in writing by
DIGEX.
6.3 WINSTAR will act as a single point of contact for its
customer(s) and will be responsible for all customer premise
management, initial service trouble shooting, marketing, sales
and billing issues.
7. Responsibilities of DIGEX.
-------------------------
DIGEX's responsibilities under this Agreement shall, in
addition to any others contained herein, be as follows:
7.1 Provision of Service. DIGEX will provide the Service for use
--------------------
throughout the Territory. The Service will be available
following the successful placement into revenue service of a
POP; completion, integration, and testing of the POP; and
receipt by DIGEX of all necessary regulatory approvals,
permits, licenses and certifications for the POP.
7.2 Port Access Records. DIGEX will provide WINSTAR on an agreed
-------------------
upon monthly basis with Port Access Records of WINSTAR
Customers in reasonable detail sufficient to enable WINSTAR to
bill its customers, but in no greater detail than DIGEX
generates for its own billing and record keeping purposes.
DIGEX will provide the Port Access Records to WINSTAR on media
and in a format agreed upon by the Parties. In the event that
WINSTAR requests in writing that the Port Access Records be
tailored to a more detailed format, DIGEX reserves the right
to charge WINSTAR for DIGEX's additional reasonable out of
pocket costs of preparation and delivery, including but not
limited to any hardware/software modifications required to be
made to DIGEX's systems. DIGEX will advise WINSTAR in advance
and obtain WINSTAR's approval in advance, in writing of any
such costs prior to the generation of a new formatted report.
7.3 Deactivation of Services. DIGEX shall, upon receipt of agreed
------------------------
upon notice from WINSTAR requesting deactivation of a Service,
promptly arrange for such deactivation, but WINSTAR shall be
liable for all charges for port fees for WINSTAR, activated at
WINSTAR's request, until the end of the business day next
succeeding the date on which DIGEX receives agreed upon notice
from WINSTAR to deactivate such Services.
7.4 DIGEX will provide to WINSTAR upon WINSTAR's request product
and services training to WINSTAR as required at a fee of Two
Thousand Five Hundred ($2,500) dollars per each full day for
training and expenses. DIGEX will provide to WINSTAR, at a
reasonable price, the necessary marketing and technical
materials required to effectively market the DIGEX Service
offerings.
Page 3
<PAGE>
7.5 DIGEX will provide the Services to WINSTAR and hence WINSTAR's
Customers equal to or better than the Services provided to
other DIGEX customers.
7.6 DIGEX will provide, install and own the Internet node
configuration, hardware and software including but not limited
to nodal routers and news servers.
7.7 WINSTAR has the right of first refusal to provide to DIGEX all
of DIGEX's local access and/or customer interconnection
service requirements, subject to WINSTAR's rates in the
appropriate geographic area being equal to or better than
those provided and offered in writing by MCI Metro, the
Regional Bell Operating Companies, Local Exchange Carriers,
Competitive Access Providers, AT&T, and Worldcom for similar
provisioning interval, volume, term, traffic, and
access/termination type commitments.
7.8 DIGEX will be responsible for and shall pay the costs
associated with delivering the Services which include the DS3
backhaul costs from the DIGEX POP to the Internet Network
Access Port ("NAP"). This does not encompass the customer
premise equipment or the local access loop between the
customer premise and the DIGEX POP.
7.9 DIGEX agrees to schedule any downtime maintenance at times
which will minimize WINSTAR Customer interruption. DIGEX
will try to notify WINSTAR thirty (30) days in advance, but
in no event less than three (3) days in advance, of its
downtime maintenance schedule, and upon reasonable request
from WINSTAR, DIGEX will re-schedule such maintenance at the
convenience of WINSTAR.
7.10 Performance Specifications: DIGEX agrees to meet the
--------------------------
"Performance Specifications" (as set forth in EXHIBIT "A")
including but not limited to Tier 2 customer service
obligations.
7.11 DIGEX shall not be responsible for the performance,
maintenance, or ongoing support of customer premises
equipment or interconnection services.
7.12 DIGEX will provide to WINSTAR, monthly, a rolling three
month DIGEX POP build-out schedule and a mutually agreed
upon capacity measurement by POP. ("POP" is defined as any
Point of Presence where DIGEX connects or is planning a
connection). This plan will be submitted by DIGEX to
WINSTAR for review and/or modification. The forecast is due
the first Monday of every month during the Term of this
Agreement for review and incorporation into the WINSTAR
network operations and planning, POP build-out, and revenue
forecast.
8. Service Integration.
-------------------
8.1 Testing and implementation: The Parties shall within 45
days after the date of this Agreement, enter into a plan for
testing and implementation of the Service ("Implementation
Plan"). The Implementation Plan shall address, at a minimum,
the following:
A. The schedule for implementation of individual Services
provided by DIGEX, e.g., Leased Line, Frame Relay,
Fractional, SMDS, FNS, Servers, and Software products;
B. Testing of the Service, both as to geographic coverage,
transmission quality and integration of the Service
with WINSTAR's other products, services, and
facilities;
C. How customer service will be provided to WINSTAR and
WINSTAR Customers;
D. Configuration parameters of the customer premise
equipment, including procedures for commissioning;
E. Procedures for billing of services, subject to the
provisions of this Agreement;
F. Plans and procedures for addressing failure, if any, of
the Services to meet acceptable quality standards;
Page 4
<PAGE>
G. Procedures for the ordering, installation, and ongoing
management of WINSTAR provided and/or WINSTAR managed
access services to DIGEX as provided for in SECTION
"7.7" of this Agreement;
H. Such other procedures, policies, and matters as the
Parties may agree upon in writing.
9. Fraud Prevention.
----------------
9.1 The Services are provided subject to the condition that
there will be no abuse or fraudulent use thereof. Abuse and
fraudulent use shall mean the following or such other things
as may be agreed upon by both Parties:
A. Obtaining, interrupting, accessing, altering, or
destroying, or attempting to obtain, interrupt, access,
alter, or destroy, any files, programs, information
and/or use of the Services of another DIGEX customer
or user by rearranging, tampering with, or making
connection to any facilities of DIGEX by any trick,
scheme, false representation, or through any other
fraudulent means or devices; or
B. Assisting another to perform any of the acts prohibited
in subparagraph of this SECTION " 9.1".
9.2 WINSTAR and DIGEX shall cooperate to prevent abuse or
fraudulent usage of the Services, and WINSTAR shall promptly
terminate any WINSTAR Customer, or participation in or
access to the Services by its vendors after receipt of
notice from DIGEX of fraudulent use of the Services by
WINSTAR's Customer(s) provided, however that such notice
must be validated by WINSTAR prior to the Customer(s)
termination by DIGEX and any such termination must be in
accordance with any applicable laws and/or governmental
regulations.
10. Rates.
-----
10.1 Rates and charges for the Services shall be as set forth in
EXHIBIT "B", which is attached to and made a part of this
Agreement. Services can be ordered and/or provisioned
either individually (unbundled) or together (bundled).
10.2 Most Favored Nation Clause: DIGEX will assure WINSTAR of the
--------------------------
status of a "Most Favored Nation" (as defined below) for
existing Services and new Services maintained or ordered
during the Term of the Agreement. "Most Favored Nation" is
defined as the understanding between the Parties that the
prices, contractual and business benefits offered by DIGEX
to WINSTAR shall be equal to or better than the prices,
business and contractual benefits provided to other DIGEX
customers. In the event that DIGEX shall fail in this
regard as determined by (the "Audit") set forth in SECTION
"10.3" below, DIGEX shall credit WINSTAR the required
difference for the period of time WINSTAR did not receive
Most Favored Nation status and provide WINSTAR the pricing,
contractual, and business benefits not received.
10.3 The Audit. Not more than once annually, and upon not less
---------
than thirty (30) business days written notice to the other
Party, WINSTAR shall have the right to engage a certified
public accounting firm or such other assistance, other then
the assistance of a direct competitor, as it deems desirable
to conduct an audit of all books and records of DIGEX
directly related to the status of WINSTAR as a Most Favored
Nation hereunder. WINSTAR may cause any person or firm
retained for this purpose to execute a non-disclosure
agreement in favor of the other Party. Such audit shall be
conducted during regular business hours at the office of the
audited Party where such books and records are regularly
maintained and shall be paid for by the requesting Party,
provided however that if there is a material discrepancy
(more than 10%) the audited party shall pay reasonable fees.
10.4 Twenty (20%) Percent Discount for WINSTAR: For the
-----------------------------------------
Commitment, DIGEX agrees to provide to WINSTAR at all times
at least a twenty (20%) discount for Services to WINSTAR
Page 5
<PAGE>
below what DIGEX provides in its to its own retail
customers. Further, DIGEX agrees to provide pricing to
WINSTAR such that the DIGEX whole sale prices will always
remain at least thirty-five (35%) percent below the list
retail rates of standalone Internet Leased Line Services for
Tier one (1) Internet service providers to include UUNET,
PSINET, Netcom, AT&T/BBN Planet, MCI, and SprintNet.
10.5 The rates shown in EXHIBIT "B" are based on the Commitment.
If WINSTAR exceeds the Commitment, WINSTAR shall have the
opportunity to re-negotiate all or part of this agreement
including terms and rates as set forth herein.
11. Billing of Charges.
------------------
WINSTAR shall pay all charges for access to and use of the
Services as set forth in this SECTION "11".
11.1 Monthly Billing. Installation and recurring charges will be
---------------
billed in arrears in the month following the month in which
they are incurred. For purposes of computing partial month
charges for Port charges, each day is considered to be 1/30
(one-thirtieth) of a month. A first invoice may contain
charges from a previous billing period for service provided
from the date of installation through the current invoice
period.
12. Taxes.
-----
All rates set forth in this Agreement are exclusive of
Applicable Taxes. For purposes of this Agreement,
"Applicable Taxes" are taxes, assessments, surcharges,
levies, or similar items assessed by a governmental body for
Service. WINSTAR is liable for, and shall indemnify DIGEX
from and against, all Applicable Taxes which may be passed
directly through to WINSTAR or WINSTAR Customers, and all
Applicable Taxes (excluding DIGEX income taxes), properly
chargeable to WINSTAR or WINSTAR Customers with respect to
DIGEX's provision of Service to WINSTAR or relating to
WINSTAR's use, resale, or lease of the Service to WINSTAR
Customers or others, and/or any penalty and interest thereon
if assessed by the applicable governmental body. DIGEX will
invoice WINSTAR for such penalties and interest, and WINSTAR
shall pay such invoices in accordance with the provisions of
SECTION "13" of this Agreement.
13. Terms of Payment.
----------------
13.1 Payment due date. After WINSTAR's initial Five Million
----------------
($5,000,000) dollars has been drawn down, WINSTAR shall pay
to DIGEX all invoiced charges, including Applicable Taxes
and any penalties and interest thereon, whether or not such
charges have been paid to WINSTAR by WINSTAR Customers,
within thirty (30) days of the date of invoice. Payments
received will be applied to the earliest outstanding amounts
due under this Agreement.
13.2 Disputed amounts. WINSTAR shall notify DIGEX in writing
----------------
within fifteen (15) business days after the date of invoice
of any dispute or disagreement with invoiced charges. The
disputed amount is to be resolved by WINSTAR and DIGEX
within sixty (60) days of the invoice date. WINSTAR is
responsible for leading the resolution process by bringing
supporting documentation forward and DIGEX will maintain
good faith negotiations. DIGEX will not perform
unreasonable requests which include providing information
out of that normally available or from its legacy systems.
All disputed amounts resolved in WINSTAR's favor will be
credited against amounts owing on subsequent invoices.
Page 6
<PAGE>
14. Record Keeping and Audit.
------------------------
14.1 Maintenance of Records. As required by law, each Party
----------------------
shall, directly or through a third party service bureau,
create and maintain full, complete and accurate records of
business conducted pursuant to this Agreement, including but
not limited to data relating to customer activation,
deposits, port charges, invoices, payments, and Service
credits.
15. Service Credits.
---------------
15.1 In the event that DIGEX does not meet Network Availability
(as defined in Section 1.5 of the Agreement), DIGEX will
grant to WINSTAR a "Service Credit(s)" (as set forth in
EXHIBIT "A").
15.2 The liability of DIGEX for any interruption of the Service
shall in no event exceed the Service Credit(s) provided for
in this SECTION "15" and EXHIBIT "A". Except for such
Service Credits, DIGEX shall not be liable to WINSTAR for
any loss or damage incurred by reason of or incidental to
any delay or interruption of this Service.
16. Termination by DIGEX.
--------------------
DIGEX may terminate this Agreement, immediately, without
penalty or liability to WINSTAR or any third party if any of
the following occur:
A. WINSTAR fails to pay all charges hereunder, including,
without limitation, all charges based on the Port
Installation and Recurring Rates (excluding any
disputed amounts), within sixty (60) days after receipt
of notice from DIGEX that the same are overdue; and
B. WINSTAR fails, upon written notice from DIGEX, to
terminate, as required under SECTION "9" of this
Agreement, a customer or vendor that has made material
fraudulent use of or access to the Service or any other
DIGEX facility; provided, however, such termination
shall not violate any laws, statutes and/or
regulations.
17. Termination by WINSTAR
----------------------
17.1 With Cause. WINSTAR may terminate this Agreement,
----------
immediately, without penalty or liability to DIGEX or any
third party if any of the following occur:
a) DIGEX fails to meet the Network Availability
Performance set forth in Section 4.(b) of EXHIBIT "A".
b) DIGEX provides any information to, or makes any
representations or warranties to, WINSTAR in connection
with the Service, or otherwise in connection with any
information required to be provided by it hereunder,
which proves to have been false or misleading in any
material respect as of the date provided or made.
c) Failure to honor DIGEX warranties under this
Agreement.
18. Termination by either Party.
---------------------------
18.1 Either DIGEX or WINSTAR (the "Terminating Party") may
terminate this Agreement and the use of the Services
hereunder if the other Party (the "Defaulting Party), as
follows:
A. Dissolves or liquidates; or
Page 7
<PAGE>
B. Becomes the subject of voluntary or involuntary
bankruptcy, insolvency, reorganization or liquidation
proceedings, makes an assignment for the benefit of
creditor, or admits in writing its inability to pay its
debts as they mature, or a receiver is appointed for
any of its assets or properties, and the same is not
dismissed, vacated, or stayed within thirty (30)
business days, or the Party seeking to terminate has
reason to believe that the commencement of any such
proceeding or assignment for the benefit of creditors
is imminent.
18.2 Termination under this SECTION "18" shall be effective
immediately upon receipt by the Defaulting Party of written
notice of default, or at the end of such period as the
Terminating Party may grant the cure of the default; and the
non-defaulting Party may pursue any remedies available to it
in law or equity.
19. Termination Rights.
------------------
19.1 Upon any termination of the Service, DIGEX promptly shall
refund or return to WINSTAR, as appropriate, the advance
payments (including any amount remaining on the Commitment)
and/or all deposits, letters of credit and other forms of
security provided by WINSTAR, less only such amounts as are
due for implementation or use of the Service before
termination and such other amounts as DIGEX reasonably shall
determine are due and owing, or will become due and owing,
from WINSTAR. Reconciliation is required within thirty (30)
days of the invoice date, as certified by the CFO and
President in written certificate to WINSTAR. DIGEX shall
pay WINSTAR simple interest on the amount of any cash
deposit so refunded from the dates of its deposit with DIGEX
to the date refunded at a per annum rate equal to the prime
lending rate published in the "Money Rates" column of The
---
Wall Street Journal as of the date of the termination of the
-------------------
Service.
19.3 Upon termination of this Agreement, each Party shall, at its
expense, promptly return to the other Party, all copies of
Confidential Information, including but not limited to any
marketing or other materials.
19.4 In the event of termination for any reason under this
Agreement, the Parties will arbitrate the withdrawal of
their respective Customers from either Parties network. The
arbitration should take no longer than six (6) months.
20. Security / Pledge.
-----------------
As security for WINSTAR's Five Million ($5,000,000) dollar
payment (less Services credited against the Five Million
($5,000,000) dollar payment) as described in Paragraph
5.2(a), DIGEX hereby pledges its assets (current and
hereinafter acquired) to WINSTAR, provided however, that
upon the successful conclusion of DIGEX's initial public
offering or fulfillment of DIGEX's Twenty Million
($20,000,000) financing objective, this Security / Pledge
shall automatically terminate. DIGEX will cooperate with
WINSTAR to execute and provide to WINSTAR a UCC financing
statement and any other documentation reasonably requested
by WINSTAR to perfect WINSTAR's security interest.
21. Non-Solicitation of Employees.
-----------------------------
In order to protect each Party's trade secrets and
confidential information and to prevent disclosure of
important competitive information, each Party agrees that,
during the term of this Agreement and for a period of six
(6) months after its termination or expiration, it shall
not, directly solicit employment of any person employed in a
full-time position by the other Party at that time, or who
has been so employed by such other Party within the six-
month period prior to the offer.
Page 8
<PAGE >
Each Party agrees that the restriction is reasonable and
necessary to protect proprietary information of the other
and thus, is a material term of this Agreement.
22. Warranty Limitations.
--------------------
A. DIGEX warrants that the Services furnished under this
Agreement will be free from defects and delivered
pursuant to the highest standards in the industry; and
B. DIGEX has obtained and shall maintain full authority to
grant the rights herein without the consent of any
other person or entity.
THE EXPRESS WARRANTIES IN THIS AGREEMENT ARE IN LIEU OF
ALL OTHER WARRANTIES, EXPRESS OR IMPLIED, INCLUDING,
BUT NOT LIMITED TO, THOSE OF MERCHANTABILITY AND
FITNESS FOR A PARTICULAR PURPOSE. IN ADDITION, TO ALL
OTHER REMEDIES AT LAW AND IN EQUITY AVAILABLE TO IT,
WINSTAR SHALL HAVE THE RIGHT TO SEEK REPLACEMENT OF THE
DEFECTIVE MATERIALS OR A REFUND OF THE PAYMENTS MADE BY
WINSTAR TO DIGEX FOR THE AFFECTED SERVICES AFTER
WINSTAR HAS PROVIDED DIGEX WITH A THIRTY (30) BUSINESS
DAY PERIOD TO CURE.
23. Indemnification and Limitation of Damages.
-----------------------------------------
In light of the rapidly changing regulatory environment
applicable to Services and the technological limitations
involved in the provision of Services, DIGEX will NOT be
---
responsible for the following, provided, however, DIGEX is
in full compliance with all applicable laws and fully
satisfying industry standards required of other Internet
service providers: (a) protecting from unauthorized access
WINSTAR Customers' transmission facilities or WINSTAR
Customer-owned premise equipment, or for alteration, theft
or destruction of WINSTAR or WINSTAR Customers' data files,
programs, or information through any means; or (b) claims or
damages caused by a WINSTAR Customer (including relating to
the transmissions or storage of defamatory content), to a
third party through fault or negligence of WINSTAR to
perform WINSTAR Customers' responsibilities, claims against
WINSTAR Customer by any other party, or any act of omission
of any third party furnishing services or products to
WINSTAR's Customers.
Notwithstanding anything to the contrary in this Agreement
or the EXHIBITS or Appendices hereto, in no event will
either Party be liable to the other Party for special,
indirect or consequential damages, under any theory of
recovery, unless such damages are part of an award to a
third party for which indemnification is properly due
hereunder.
Should DIGEX purchase insurance to cover slander and/or
liable (defamation) claims, WINSTAR will be a named party
for the term of this Agreement and for six years after.
24. Compliance with Law.
-------------------
WINSTAR and DIGEX shall comply with all applicable laws,
statutes, and regulations relating to the performance of
their respective duties and obligations under this
Agreement.
25. Patent/Copyright Indemnification.
--------------------------------
DIGEX shall defend and indemnify any suit or proceeding
brought against WINSTAR or WINSTAR and its Customers
(collectively, "Indemnified Parties") based on a claim of a
third party that the Services or any party thereof (but not
any information transmitted or stored by customer or any
third party by using the Services) furnished by DIGEX
constitutes an infringement
Page 9
<PAGE>
of any United States patent or copyright, provided that DIGEX
is notified promptly in writing and given authority,
information and assistance (at DIGEX's expense) for the
defense of such a suit or proceeding, and DIGEX will pay all
damages and costs awarded against the Indemnified Parties or
any related settlements made by DIGEX on behalf of the
Indemnified Parties. If DIGEX / the Indemnified Parties
prevail DIGEX shall be entitled to recover any attorney and
other legal fees related to its indemnification or defense.
If a claim of infringement occurs and the use of the Services
is enjoined, DIGEX, at its expense, shall either (a) if the
performance thereof will not be materially affected, promptly
replace and/or modify the Services(s) so that they become non-
infringing or (b) promptly obtain the right for the
Indemnified Parties to continue using the Service(s). In the
event that DIGEX cannot satisfy (a) and (b) above, in addition
to all other legal rights in law and equity available to the
Indemnified Parties, DIGEX agrees to assist the Indemnified
Parties in finding an alternative Internet service provider
and to compensate WINSTAR and its customers for the expenses
associated in migrating the affected Services(s) to such new
Internet service provider.
EXCEPT AS EXPRESSLY SET FORTH HEREIN, DIGEX SHALL HAVE NO
OTHER LIABILITY OR OBLIGATION TO WINSTAR WITH RESPECT TO
PATENT OR COPYRIGHT INFRINGEMENT MATTERS.
26. General.
-------
26.1 Confidential Information. Should confidential or proprietary
------------------------
information of either WINSTAR or DIGEX be disclosed to the
other in the performance of this Agreement, the Party
receiving such confidential or proprietary information
(hereinafter "Recipient") hereby agrees to receive such
information in confidence, and take such precautions as may be
necessary to protect same from disclosure to others, during
the Term of this Agreement and for one (1) year following
termination of this Agreement. Precautions taken shall be at
least equivalent to Recipient's precautions with respect to
its own confidential and proprietary information, but in no
event less than a reasonable standard of care. ("Confidential
Information" shall mean: (1) any written information marked as
confidential or proprietary, or (2) if verbally disclosed,
shall be identified as confidential and/or proprietary at the
time of disclosure and summarized in writing to the Recipient
within fifteen (15) days of disclosure. Confidential
Information shall not include information which (i) at the
time of disclosure to Recipient is in the public domain
through no acts or omission of Recipient or subsequently
becomes into the public domain through no acts or omission of
Recipient; (ii) as shown by written records, is already known
by Recipient; (iii) is revealed to Recipient by a third party
who does not thereby breach any obligation of confidentiality
and who discloses such information in good faith; or (iv) is
disclosed pursuant to a legal obligation to disclose same to
any governmental entity or pursuant to judicial or quasi
judicial action (so long as Recipient gives disclosing Party
prompt prior written notice) and provided further that
Recipient will disclose only such confidential information as
is legally required and will use its reasonable efforts to
obtain confidential treatment for any confidential or
proprietary information so disclosed.
26.2 Each Party acknowledges that the disclosing Party's
information is proprietary, and agrees, that the disclosing
Party is entitled to seek equitable relief, including without
limitation, specific performance and injunctions, in addition
to any other remedies at law or equity.
26.3 Arbitration. All disputes (except for recovery of the
-----------
Commitment and/or foreclosure on WINSTAR's security interest
as provided in Section 20 of this Agreement) concerning the
terms and conditions of this Agreement shall be subject to
binding arbitration of the American Arbitration Association
("AAA") subject to the rules of the AAA then in effect
relating to commercial arbitration. There shall be three
arbitrators. Each Party shall choose one arbitrator within
thirty (30) days of initiation of the arbitration, and the two
so chosen shall in turn choose the third within fifteen (15)
days. The arbitration shall be held in New York City and
shall be completed within
Page 10
<PAGE>
ninety (90) days of selection of the initial two arbitrators.
Judgment upon the award rendered in any arbitration may be
entered in any court having jurisdiction of the manner.
26.4 Attorney's Fees. If any arbitration, litigation, or other
---------------
legal proceeding occurs between the Parties relating to this
Agreement, the prevailing Party shall be entitled to recover
(in addition to any other relief awarded or granted) its
reasonable cost and expenses, including attorneys' fees,
incurred in the proceeding.
26.5 Notices. Unless otherwise expressly provided for, all
-------
notices, requests, demands, consents or other communications
required or pertaining to this Agreement must be in writing
and must be delivered personally or sent by certified or
registered mail (postage prepaid and return receipt requested)
to the other Party at the address set forth below (or to any
other address given by either Party to the other Party in
writing:
TO: DIGEX - Private Networks Group
6800 Virginia Manor Road
Beltsville, Maryland 20705
Attention: DIGEX/WINSTAR Sr. Account Manager
TO: WINSTAR Communications, Inc.
230 Park Avenue, Suite 3126
New York, New York 10169
Attention: General Counsel
In case of mailing, the effective date of delivery of any
notice, demand, or consent shall be considered to be five (5)
days after proper mailing.
26.6 Waiver and Amendment. No waiver, amendment, or modification
--------------------
of this Agreement shall be effective unless in writing and
signed by both Parties. No failure or delay by either Party
in exercising any right, power or remedy under this Agreement,
shall operate as a waiver of the right, power or remedy.
26.7 Benefit. This Agreement is binding upon and inures to the
-------
benefit of the successors and assigns of the Parties.
26.8 No third party's Rights. This Agreement is not for the
-----------------------
benefit of any third party and shall not be deemed to grant
any right or remedy to any third party, whether or not
referred to in this Agreement, except as otherwise provided at
Section 25 of this Agreement.
26.9 Headings. The SECTION and paragraph headings of this
--------
Agreement are intended as a convenience only, and shall not
affect the interpretation of its provisions.
26.10 Singular and Plural Terms. Where the context of this
-------------------------
Agreement requires, singular terms shall be considered plural
and plural terms shall be considered singular.
26.11 Severability. If any provision(s) of this Agreement is
------------
finally held by a court or arbitration panel of competent
jurisdiction to be unlawful, the remaining provisions of this
Agreement shall remain in full force and effect to the extent
that the intent of the Parties can be enforced.
26.12 Governing Law and Forum. The validity, construction, and
-----------------------
performance of this Agreement is governed by the laws of New
York. Both Parties agree that this Agreement is considered to
be entered into in New York, and that all payment obligations
of the Parties under this Agreement are to be performed in New
York. The Parties consent to personal jurisdiction in New
York with
Page 11
<PAGE>
respect to any arbitration or suit brought relating to this
Agreement. The Parties waive all objections to venue to the
extent permitted by law.
26.13 Relationship of the Parties. This Agreement does not
---------------------------
constitute a partnership agreement, nor does it create a joint
venture or agency relationship between the Parties.
26.14 Survivorship. All obligations and duties hereunder which
------------
shall be their nature extend beyond the expiration or
termination of this Agreement, including 20, 21, 22, 23, 24,
25, and 26 shall survive and remain in effect beyond any
expiration or termination hereof.
26.15 Force Majeure. Neither Party shall be responsible for
-------------
any delay or failure in performance of any part of this
Agreement or order to the extent that such delay or failure is
caused by fire, flood, explosion, war, strike, embargo,
government requirement, action of civil or military authority,
or act of God. In the event of any such delay, the time of
performance that was delayed for such causes will be extended
for a period equal to the time lost by reason of the delay.
26.16 Conflicting Terms. The Parties agree that the terms and
-----------------
conditions of this Agreement shall prevail, notwithstanding
the contrary or additional terms, in any purchase order, sales
acknowledgment, confirmation or any other document issued by
either Party effecting the purchase and/or sale of Services.
26.17 Escalation Procedures. Any customer service or
---------------------
operational system problems will be handled by DIGEX in
accordance with EXHIBIT "A".
26.18 Entire Agreement. This Agreement including all
----------------
appendices and EXHIBITS, constitutes the complete and final
Agreement between the Parties, and supersedes all prior
negotiations and agreements between the Parties concerning its
subject matter. This Agreement may be executed in
counterparts, all of which, when taken together, shall
constitute one original Agreement.
IN WITNESS WHEREOF, the Parties have caused this Agreement to be
executed by their duly authorized representatives intending to be
legally bound.
DIGEX, Inc. WINSTAR Communications,
Inc.
By: /s/ By: /s/
--------------------------- -------------------------------
Title: VP-GM Private Networks Title: Vice Chairman
------------------------ ----------------------------
Date: 6/10/96 Date: 6/10/96
------------------------- ----------------------------
Page 12
<PAGE>
EXHIBIT "A"
DIGEX Network Performance Specifications
----------------------------------------
Performance Specifications Supplemental to Agreement. Timely performance of the
obligations provided hereunder is of the essence; therefore failure to timely
perform shall constitute a breach of the Agreement. Any credits received by
WINSTAR from DIGEX will reduce the Commitment (as defined in the Agreement).
1. Provisioning.
-------------
a) DIGEX will provide to WINSTAR the Services identified in EXHIBIT "B"
(the "Service") at the corresponding rates (the "Rates") attached
thereto.
b) Access Service Types
i) DIGEX shall support both Fractional, Frame Relay and Private Line
access types at the full range of speeds from 56Kbps to 1.54 Mbps
(56K, 128K, 192K, 256K, 384K, 512K, 768K, 1.54 Mbps) (Defined herein
as "Access Service Types"). Should DIGEX upgrade its capacity, DIGEX
will promptly make it available to WINSTAR.
2. If DIGEX fails to meet the following provisioning intervals for
installations in any one month, DIGEX will credit one hundred (100%) of the
DIGEX monthly recurring charges to WINSTAR for all WINSTAR Customers'
affected.
a) Provisioning Intervals:
i) DIGEX shall provide the Services listed in EXHIBIT "B" within twenty
(20) business days from the receipt of an order (such activity
defined as "Provisioning"). For DS3 level service (defined herein as
a DS3 Leased Line), Provisioning shall be performed within a sixty
(60) business day period.
ii) In the event DIGEX fails to meet the Provisioning timeframe, DIGEX
will provide a credit to WINSTAR equal to one hundred (100%) percent
of the installation fee to WINSTAR for all Customer(s) affected.
iii) The only exception to the timeframes set forth above in this Section,
is an "Inaccurate Forecast" (defined in Section 5). In the event of
an Inaccurate Forecast, WINSTAR Customers who exceed the WINSTAR
Forecast by twenty (20%) percent in a particular month for a
particular POP shall be defined as ("Overflow Customers") and will
receive Provisioning as follows:
a) In the event that an Inaccurate Forecast materially and directly
causes a shortage and congestion in the National Network Backbone
(defined in Section 1.6 of the Agreement), DIGEX will have sixty
(60) business days from receipt of the WINSTAR order to procure
additional capacities; otherwise, provisioning will be completed
for WINSTAR Overflow Customers within twenty (20) business days.
b) If Provisioning is not performed for the Overflow Customers in
accordance with this Section, DIGEX will provide a credit equal
to one hundred (100%) percent of the installation fee to WINSTAR
for all Customer(s) affected.
3. Maintenance.
------------
The Parties shall perform the following maintenance.
a) Customer Service Support for Trouble Resolution
i) WINSTAR shall provide first level support ("Tier 1"). Tier 1
consists of the following:
Page 1
<PAGE>
EXHIBIT "A"
a) First point of contact for all WINSTAR Customer problems;
b) Resolution of all customer premises equipment problems;
c) Resolution of all customer circuit provisioning related problems;
d) Resolution of Local Loop problems;
e) Referral of trouble tickets to DIGEX via electronic mail.
ii) DIGEX shall provide second level support ("Tier 2"). Tier 2
consists of the following:
a) Acceptance of trouble tickets from WINSTAR via electronic mail;
b) Resolution of all DIGEX related Internet Protocol routing and/or
facility problems;
c) Resolution of all Network Backbone and/or network elements
(routers, bridges, switches) and related problems (excluding
CPE);
d) From 8 a.m. to 8 p.m. daily, EST time, DIGEX shall respond to
electronic messages within thirty (30) minutes; from 8:01 p.m. to
7:59 a.m., EST time, DIGEX must respond to electronic messages
within forty-five (45) minutes; and
e) DIGEX will provide "Network Operations Center Support" (defined
below") to WINSTAR on a seven (7) days a week, twenty-four (24)
hours a day, three hundred and sixty-five (365) days a year
(cumulatively referred to as "24x7x365"). ("Network Operations
Center Support" is defined as WINSTAR's provisioning of customer
service and/or network management support.)
b) Time to Repair Standards:
i) "Unmanned" Point of Presence ("POP") locations. ("Unmanned" means
no DIGEX personnel at the POP for repair):
a) Router Replacement: Not to exceed eight (8) hours;
b) Router Component Replacement: Not to exceed eight (8) hours; and
c) All other Service Repairs: Not to exceed six (6) hours.
ii) "Manned" POP Locations (includes Hayward, CA; Chicago, IL;
Waynesville, OH; Atlanta, GA; Houston, TX; Washington, DC and New
York, NY). ("Manned" means DIGEX personnel at the POP for repairs).
The POPs will be Manned 24x7x365 (with the exception of Houston, TX
which will be Manned, Monday through Friday, 24x5).
a) Router Replacement: Not to exceed eight (8) hours;
b) Router Component Replacement: Not to exceed four (4) hours; and
c) All other Service Repairs: Not to exceed four (4) hours.
iii) Failure of Network Backbone (defined in Section 1.5 of the
Agreement):
Page 2
<PAGE>
EXHIBIT "A"
a) Time to reroute - Not to exceed four (4) hours to reroute Services
from the time of the failure of the Network Backbone.
iv) DIGEX shall credit WINSTAR for one hundred (100%) percent of the
WINSTAR monthly recurring Service charge for all Customer(s) affected
by DIGEX's failure to meet the Time to Repair / Re-Route Standards.
4. Service Performance Guarantees.
-------------------------------
Network Availability will be measured and determined by the DIGEX network
performance monitoring tool - Hewlett Packard Open View software ("HP Open
View"). Provided however that the Parties shall agree upon the network
management methodology and the standards for implementation for that
methodology.
a) DIGEX shall meet a "Network Availability" (as defined in Section 1.5
of the Agreement) of ninety-nine (99%) percent per month ("Network
Availability Performance")
i) If Service is not available to a WINSTAR Customer for a total of sixty
(60) minutes in any one month, DIGEX shall credit WINSTAR one hundred
(100%) percent of the WINSTAR monthly recurring Service fee for all
Customer(s) affected; and
ii) In addition, if Service is not available to a WINSTAR Customer for a
total of thirty (30) minutes of within a twenty-four hour period in
any one month, DIGEX shall credit WINSTAR one hundred (100%) percent
of the WINSTAR daily recurring Service fee for all Customer(s)
affected;
iii) Notwithstanding Section 4.a (i) or (ii) above, if WINSTAR has provided
an Inaccurate Forecast to DIGEX with respect to the Customer daily
and/or monthly (as appropriate) recurring Service fee NO credit will
be given to WINSTAR with respect to such WINSTAR Customers affected by
the Inaccurate Forecast.
b) If, for three consecutive months, DIGEX does not satisfy its Network
Availability Performance Goal for the entire DIGEX national network,
then WINSTAR will have the right to terminate this Agreement; provided
however, that this right to terminate will not arise if WINSTAR has
delivered an Inaccurate Forecast for the three (3) month period, as
measured for the entire DIGEX national network.
5. Inaccurate Forecast.
--------------------
On a monthly basis, WINSTAR shall provide DIGEX a rolling three month sales
forecast by product and DIGEX POP location to be used for forecast planning.
If WINSTAR exceeds its sales forecast by more than twenty (20%) percent in a
month for a particular DIGEX POP, such activity is referred to as an
"Inaccurate Forecast".
Page 3
<PAGE>
EXHIBIT "B"
DIGEX PNC RATE CARDS
PNC INTERNET LEASED LINE PRICING:
- --------------------------------
$ 0 - $ 10,000,000 PRICE SCHEDULE
---------------------------------
MINIMUM MONTHLY
SERVICE CIR INSTALLATION RECURRING NOTES
- ------------------------------------------------------------------------------
56 Kbps Frame Relay 56Kbps $ 240 $ 160 3
T1 Frame Relay 128 Mbps $ 800 $ 212 1, 2, 3, 4
192 Kbps $ 1,200 $ 280 1, 2, 3, 4
256 Kbps $ 1,200 $ 348 1, 2, 3, 4
384 Kbps $ 1,200 $ 428 1, 2, 3
512 Mbps $ 1,200 $ 508 1, 2, 3
768 Mbps $ 1,200 $ 668
56 Kbps Leased Line 56 Kbps $ 1,440 $ 400 3
T1 Leased Line 1.54 Mbps $ 2,400 $ 960 3
T3 Leased Line 45 Mbps $12,000 $27,000 3
Fractional T1 128 Mbps $ 2,400 $ 480 3
192 Kbps $ 2,400 $ 520 3
256 Kbps $ 2,400 $ 560 3
384 Kbps $ 2,400 $ 640 3
512 Mbps $ 2,400 $ 720 3
768 Mbps $ 2,400 $ 800
SMDS 1.17 Mbps $ 1,840 $ 1,200 3
4 Mbps $ 2,800 $ 2,900 3
10 Mbps $ 2,800 $ 4,400 3
16 Mbps $ 4,400 $ 6,500 3
25 Mbps $ 6,400 $ 8,000 3
34 Mbps $ 8,400 $ 9,200 3
FNS - Ethernet 10 Mbps $ 3,600 $ 4,000 3
FNS - Token Ring 4 Mbps $ 6,500 $ 4,000 3
16 Mbps $11,600 $ 6,800 3
- ------------------------------------------------------------------------------
NOTES:
1) No charges for minimum speed increases to 768 Kbps.
2) All circuits will burst up to double their CIR rates.
3) No, IP resale permitted on any DIGEX provisioned circuit; a 500%
assessment fee on the monthly port fee will be charged in addition to the
port fee and possible termination of circuit.
4) $400 install cost if upgraded to 256K or higher in the first 90
(ninety) days.
All leased line services include Domain Name Service, NNTP news feed, and
network addresses as required. $100 for InterNIC domain name registration.
Typical circuit installation time without local loop is 15 business days.
- ------------------------------------------------------------------------------
CPE, DIGEX will offer for resale, the following prices for customer premise
equipment. It is the Customers responsibility to configure, install and maintain
all CPE.
UNIT PRICE UNIT PRICE
---------- ----------
CISCO 250 Router (T1/56K/FR) $1,695 AdTran 56K CSU/DSU $255
CISCO 1005 Router (T1/56K/FR) $1,105 Imatek 56K CSU/DSU/
Digital Link Prelude T1/FR CSU/DS $ 855 Router (preconfigured) $1,015
<PAGE>
DIGEX PNC RATE CARDS
PNC INTERNET LEASED LINE PRICING:
- ---------------------------------
$ 10,000,001 AND ABOVE PRICE SCHEDULE
-------------------------------------
MINIMUM MONTHLY
SERVICE CIR INSTALLATION RECURRING NOTES
- ------------------------------------------------------------------------------
56 Kbps Frame Relay 56 Kbps $ 225 $ 150 3
T1 Frame Relay 128 Mbps $ 750 $ 199 1, 2, 3, 4
192 Kbps $ 1,125 $ 263 1, 2, 3, 4
256 Kbps $ 1,125 $ 326 1, 2, 3, 4
384 Kbps $ 1,125 $ 405 1, 2, 3
512 Mbps $ 1,125 $ 476 1, 2, 3
768 Mbps $ 1,125 $ 626
56 Kbps Leased
Line 56 Kbps $ 1,350 $ 375 3
T1 Leased Line 1.54 Mbps $ 2,250 $ 900 3
T3 Leased Line 45 Mbps $11,250 $25,313 3
Fractional T1 128 Mbps $ 2,250 $ 450 3
192 Kbps $ 2,250 $ 488 3
256 Kbps $ 2,250 $ 525 3
384 Kbps $ 2,250 $ 600 3
512 Mbps $ 2,250 $ 675 3
768 Mbps $ 2,250 $ 750
SMDS 1.17 Mbps $ 1,725 $ 1,125 3
4 Mbps $ 2,625 $ 2,725 3
10 Mbps $ 2,625 $ 4,125 3
16 Mbps $ 4,125 $ 6,100 3
25 Mbps $ 6,000 $ 7,500 3
34 Mbps $ 7,875 $ 8,625 3
FNS - Ethernet 10 Mbps $ 3,375 $ 3,750 3
FNS - Token Ring 4 Mbps $ 4,875 $ 3,750 3
16 Mbps $10,875 $ 6,375 3
- ------------------------------------------------------------------------------
NOTES:
1) No charges for minimum speed increases to 768 Kbps.
2) All circuits will burst up to double their CIR rates.
3) No, IP resale permitted on any DIGEX provisioned circuit; a 500%
assessment fee on the monthly port fee will be charged in addition to the
port fee and possible termination of circuit.
4) $400 install cost if upgraded to 256K or higher in the first 90
(ninety) days.
All leased line services include Domain Name Service, NNTP news feed, and
network addresses as required. $100 for InterNIC domain name registration.
Typical circuit installation time without local loop is 15 business days.
- ------------------------------------------------------------------------------
CPE, DIGEX will offer for resale, the following prices for customer premise
equipment. It is the Customers responsibility to configure, install and maintain
all CPE.
UNIT PRICE UNIT PRICE
---------- ----------
CISCO 250 Router (T1/56K/FR) $1,695 AdTran 56K CSU/DSU $ 255
CISCO 1005 Router (T1/56K/FR) $1,105 Imatek 56K CSU/DSU/
Digital Link Prelude T1/FR CSU/DS $ 855 Router (preconfigured) $1,015
Page 2
<PAGE>
DIGEX PNC RATE CARDS
PNC INTERNET DIAL UP PRICING:
- -----------------------------
*MONTHLY NUMBER OF USERS 500 750 1000 1500 2500
--- --- ---- ---- ----
Activation with out DIGEX Help $10.00 $10.00 $10.00 $10.00 $10.00
Desk
Monthly Access Fee Per User $19.99 $17.99 $15.99 $15.99 $15.99
Activation with DIGEX Help Desk $15.00 $15.00 $15.00 $15.00 $15.00
Monthly Access Fee Per User $30.00 $30.00 $30.00 $25.00 $19.95
1. Pricing and quantity is based on a per city basis.
2. DIGEX / WINSTAR will collaborate to try to lower the cost dial up with
help desk.
Page 3
<PAGE>
DIGEX PNC RATE CARDS
DIGEX INTERNET SERVERS
- ----------------------
DEDICATED HARDWARE PLATFORM NOT SHARED WITH OTHER CUSTOMERS
- ---------------------------
- Fast Internet connectivity
- 10 Mbps local Ethernet
- 45 Mbps T3 to other peering points
- Redundant circuits for backup Internet connectivity
- Current version Sun OS software installation and initial
configuration
- Domain registration for your organization Domain name server
- Installation and initial configuration Installation and initial
configuration of one server software package (server installation
only, customer adds information content)
- One user shell account setup
- Tape backups of your data are made on a daily or weekly basis.
HARDWARE CONFIGURATION OPTIONS
HARDWARE OPTION MEMORY/DISK INSTALLATION MONTHLY
Sun 3/60 4 MB RAM/50 MB $ 240 $ 240
Sun 3/60 12 MB RAM/100 MB $ 320 $ 400
Sun Sparc Station 2 16 MB RAM/1 GB $ 800 $ 800
Sun Sparc Station 2 32 MB RAM/2 GB $ 1,200 $ 1,040
Sun Sparc Station 5 32 MB RAM/2 GB $ 2,000 $ 2,800
Sun Sparc Station 5 64 MB RAM/4 GB $ 2,800 $ 3,600
Custom configuration available upon request.
100% credit of previous installation cost on upgrade.
Dedicated tape backup $2,000 $ 240
Dedicated CD-ROM drive $1,200
SERVER SOFTWARE OPTIONS
(Additional network server software)
World Wide Web (WWW) server $ 200 $ 40
Anonymous FTP server $ 200 $ 40
Gopher Server $ 200 $ 40
POP3 Mail Server $ 200 $ 40
Mailing list server ** $ 200 $ 80
SERVER MANAGEMENT OPTIONS
Root access privilege (privileged user)* $ 1,200 n/c
Initial domain name (domain.com) InterNIC charges apply
Additional domain names (domain2.com) $ 80 n/c
Temporary CD-ROM drive $ 80
CD-ROM mounting $ 40
Page 4
<PAGE>
DIGEX PNC RATE CARDS
DIGEX INTERNET FIREWALL PRODUCTS INCLUDE:
RAPTOR EAGLETM FIREWALL SECURITY SOLUTIONS
Complete, proven firewall solution using the Raptor Eagle firewall product
family. Includes hardware, software, two day on-site installation and 30 day
customer support (phone and e-mail).
EAGLE FIREWALL HARDWARE PLATFORMS Sun SPARC 4 model 110 (new) or a Sun SPARC 2
(refurbished). Both systems come with a one year warranty offered by Raptor
Systems third party vendor at the option of the PNC's Customer and are
configured with 32 MB RAM, 1 GB disk drive, CD-ROM, 5 GB 4mm DAT tape drive, two
include travel time and or additional expenses.
Sun SPARC 2 platform Sun SPARC 4 model 110 platform
50 users $10,000 50 users $11,600
200 users $10,800 200 users $12,400
unlimited users $11,600 unlimited users $13,200
EAGLE VPN (VIRTUAL PRIVATE NETWORKING) OPTION FOR THE EAGLE FIREWALL
1st license $ 4,000
Additional License $ 1,600
EAGLE LAN
Sun SPARC 2 platform Sun SPARC 4 model 110 platform
unlimited users $ 9,600 unlimited users $11,200
EAGLE REMOTE
Sun SPARC 2 platform Sun SPARC 4 model 110 platform
50 users $10,000 50 users $11,600
250 users $12,400 250 users $14,000
unlimited users $15,600 unlimited users $17,200
EAGLE NOMAD $ 79
EAGLE DESK $ 79
HOT SPARE EAGLE FIREWALL
Clone of primary firewall system, used as an on-site "hot" swap spare. Includes
hardware, software, installation, and training on hot spare implementation
procedures.
Sun SPARC 2 platform Sun SPARC 4 model 110 platform
50 users $ 5,040 50 users $ 6,440
200 users $ 5,360 200 users $ 6,760
unlimited users $ 5,680 unlimited users $ 7,080
ANNUAL HARDWARE MAINTENANCE PROGRAMS
1 year hardware warranty included with all Eagle firewall products. SPARC 4
hardware support program offered by Sun Microsystems. SPARC 2 hardware support
is provided via third party at the option of the PNC's Customer.
SPARC 2 platform $ 714 SPARC 4 platform $ 300
ANNUAL SOFTWARE MAINTENANCE PROGRAMS
Eagle 50 users $ 840
Eagle 200 users $ 1,800
Eagle unlimited users $ 3,000
Eagle Nomad $ 12
Eagle Desk $ 12
Page 5
EXHIBIT 12.1
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
RATIO OF EARNINGS TO FIXED CHARGES
The following table sets forth the ratio of earnings to fixed charges for
the years ended February 28, 1994 and 1995, the ten months ended December 31,
1994 and 1995, and the three months ended March 31, 1995 and 1996.
<TABLE><CAPTION>
TEN MONTHS ENDED TEN MONTHS ENDED
DECEMBER 31, MARCH 31,
---------------------------------- ----------------------------------
PRO PRO
YEAR ENDED PRO FORMA AS PRO FORMA AS
FEBRUARY 28 ACTUAL FORMA ADJUSTED ACTUAL FORMA ADJUSTED
-------------- --------------- ------- -------- --------------- ------- --------
1994 1995 1994 1995 1995(1) 1995(2) 1995 1996 1996(1) 1996(2)
------ ------ ------ ------- ------- -------- ------ ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Ratio of earnings to fixed
charges(3)................. -- -- -- -- -- -- -- -- -- --
Deficiency in the coverage
of fixed charges by
earnings before fixed
charges, in thousands..... $8,544 $7,230 $4,618 $15,857 $43,910 $ 68,117 $2,927 $10,570 $12,295 $ 19,368
</TABLE>
- ------------
(1) Gives effect to the acquisitions of Locate, Fox/Lorber, TWL and Avant-Garde,
the Everest Financing and the issuance of the Old 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.
(2) Adjusted to reflect the acquisitions and financings referred to in footnote
(1) above and the Debt Offering as if they occurred as of the beginning of
the respective periods. Interest expense has been adjusted to include
approximately $24.2 million and $7.1 million consisting of (i) interest on
the Notes for the ten months ended December 31, 1995 and the three
months ended March 31, 1996, respectively, at an assumed interest rate of
13.5% on the Senior Notes and 14% on the Senior Subordinated Notes
and (ii) amortization of the $7.9 million of debt offering costs and other
related fees using an amortization period of ten years, but not to include
interest income earned on additional available cash. If the interest rate on
the Notes changed by 0.5%, interest expense would change by
approximately $0.9 million and $0.3 million for the ten months ended
December 31, 1995 and the three months ended March 31, 1996, respectively.
(3) The ratio of earnings to fixed charges equals earnings before fixed charges
divided by fixed charges. For purposes of calculating the ratio of earnings
to fixed charges, earnings before fixed charges consist of earnings (loss)
before income taxes, extraordinary item, and minority interest in losses of
majority owned subsidiaries, plus fixed charges. Fixed charges consist of
interest charges and amortization of debt expense and discount on premium
related to indebtedness, whether expensed or capitalized, and that portion
of rental expense (one-third) that the Company believes to be representative
of interest.
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
We have issued our reports dated March 8, 1996, accompanying the consolidated
financial statements and schedule of WinStar Communications, Inc. and
Subsidiaries contained in the Registration Statement and Prospectus and our
report dated March 8, 1996 appearing in the Transition Report on Form 10-KSB for
the ten months ended December 31, 1995 which is incorporated by reference in the
Registration Statement and Prospectus. We consent to the use of the
aforementioned reports and the incorporation by reference in the Registration
Statement and Prospectus and to the use of our name as it appears under the
captions "Experts" and "Selected Financial Information."
GRANT THORNTON LLP
New York, New York
June 12, 1996
Exhibit 23.2
CONSENT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
We have issued our report dated July 28, 1995, accompanying the financial
statements of Avant-Garde Telecommunications, Inc. contained in the
Registration Statement. We consent to the use of the aforementioned
report in the Registration Statement, and to the use of our name as it
appears under the caption "Experts."
GRANT THORNTON LLP
New York, New York
June 12, 1996
Exhibit 23.3
Consent of Independent Auditors
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated April 9, 1996, with respect to the financial
statements of the Microwave Division of Local Area Telecommunications, Inc.
included in the Form S-3 Registration Statement and related Prospectus of
WinStar Communications, Inc. for the registration of its Senior Notes Due 2006
and Senior Subordinated Notes Due 2006.
/s/ Ernst & Young LLP
Ernst & Young LLP
MetroPark, New Jersey
June 14, 1996
Exhibit 25.1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM T-1
STATEMENT OF ELIGIBILITY
UNDER THE TRUST INDENTURE ACT OF 1939 OF
A CORPORATION DESIGNATED TO ACT AS TRUSTEE
------------------
CHECK IF AN APPLICATION TO DETERMINE
ELIGIBILITY OF A TRUSTEE PURSUANT TO
SECTION 305(b)(2)_____
------------------
UNITED STATES TRUST COMPANY OF NEW YORK
(Exact name of trustee as specified in its charter)
New York 13-3818954
(Jurisdiction of incorporation (I.R.S. Employer
if not a U.s. national bank) Identification No.)
114 West 47th Street 10036
New York, New York (Zip Code)
(address of principal
executive offices)
----------------------------
Winstar Communications, Inc.
(Exact name of obligor as specified in its charter)
Delaware 13-3585278
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
230 Park Avenue 10169
New York, New York (Zip code)
(Address of principal executive
offices)
-----------------------------
Senior Notes due 2006 and Senior Subordinated Notes due 2006
(Title of the indenture securities)
==============================================================================
<PAGE>
-2-
GENERAL
1. General Information
-------------------
Furnish the following information as to the trustee:
(a) Name and address of each examining or supervising authority to which
it is subject.
Federal Reserve Bank of New York (2nd District), New York, New York
(Board of Governors of the Federal Reserve System).
Federal Deposit Insurance Corporation, Washington, D.C.
New York State Banking Department, Albany, New York
(b) Whether it is authorized to exercise corporate trust powers.
The trustee is authorized to exercise corporate trust powers.
2. Affiliations with the Obligor
-----------------------------
If the obligor is an affiliate of the trustee, describe each such
affiliation.
None.
3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14 and 15.
Winstar Communications, Inc. is currently not in default under any of
its outstanding securities for which United States Trust Company of
New York is Trustee. Accordingly, responses to Items 3, 4, 5, 6, 7, 8, 9,
10, 11, 12, 13, 14 and 15 of Form T-1 are not required under General
Instruction B.
16. List of Exhibits
----------------
T-1.1 -- Organization Certificate, as amended, issued by the State of
New York Banking Department to transact business as a Trust
Company, is incorporated by reference to Exhibit T-1.1 to Form
T-1 filed on September 15, 1995 with the Commission pursuant
to the Trust Indenture Act of 1939, as amended by the Trust
Indenture Reform Act of 1990 (Registration No. 33-97056).
<PAGE>
-3-
16. List of Exhibits
(cont'd)
T-1.2 -- Included in Exhibit T-1.1.
T-1.3 -- Included in Exhibit T-1.1.
T-1.4 -- The By-Laws of United States Trust Company of New York, as
amended, is incorporated by reference to Exhibit T-1.4 to
Form T-1 filed on September 15, 1995 with the Commission
pursuant to the Trust Indenture Act of 1939, as amended by the
Trust Indenture Reform Act of 1990 (Registration No. 33-97056).
T-1.6 -- The consent of the trustee required by Section 321(b) of the
Trust Indenture Act of 1939, as amended by the Trust Indenture
Reform Act of 1990.
T-1.7 -- A copy of the latest report of condition of the trustee pursuant
to law or the requirements of its supervising or examining
authority.
NOTE
As of June 12, 1996, the trustee had 2,999,020 shares of Common Stock
outstanding, all of which are owned by its parent company, U.S. Trust
Corporation. The term "trustee" in Item 2, refers to each of United States
Trust Company of New York and its parent company, U.S. Trust Corporation.
In answering Item 2 in this statement of eligibility, as to matters
peculiarly within the knowledge of the obligor or its directors, the
trustee has relied upon information furnished to it by the obligor and will
rely on information to be furnished by the obligor and the trustee
disclaims responsibility for the accuracy or completeness of such
information.
----------------------
<PAGE>
-4-
Pursuant to the requirements of the Trust Indenture Act of 1939, the
trustee, United States Trust Company of New York, a corporation organized
and existing under the laws of the State of New York, has duly caused this
statement of eligibility to be signed on its behalf by the undersigned,
thereunto duly authorized, all in the City of New York, and State of New
York, on the 12th day of June, 1996.
UNITED STATES TRUST COMPANY OF
NEW YORK, Trustee
By: /s/ Margaret Ciesmelewski
--------------------------------
Margaret Ciesmelewski
Assistant Vice President
PC/pg
<PAGE>
Exhibit T-1.6.
--------------
The consent of the trustee required by Section 321(b) of the Act.
United States Trust Company of New York
114 West 47th Street
New York, NY 10036
September 1, 1995
Securities and Exchange Commission
450 5th Street, N.W.
Washington, DC 20549
Gentlemen:
Pursuant to the provisions of Section 321(b) of the Trust Indenture Act of 1939,
as amended by the Trust Indenture Reform Act of 1990, and subject to the
limitations set forth therein, United States Trust Company of New York
("U.S. Trust") hereby consents that reports of examinations of U.S. Trust by
Federal, State, Territorial or District authorities may be furnished by such
authorities to the Securities and Exchange Commission upon request therefor.
Very truly yours,
UNITED STATES TRUST COMPANY
OF NEW YORK
By: ___________________________
S/Gerard F. Ganey
Senior Vice President
<PAGE>
EXHIBIT T-1.7
UNITED STATES TRUST COMPANY OF NEW YORK
CONSOLIDATED STATEMENT OF CONDITION
MARCH 31, 1996
--------------
($ IN THOUSANDS)
ASSETS
------
Cash and Due from Banks $ 47,046
Short-Term Investments 50
Securities, Available for Sale 748,118
Loans 1,221,210
Less: Allowance for Credit Losses 13,113
---------
Net Loans 1,208,097
Premises and Equipment 58,360
Other Assets 125,979
---------
Total Assets $ 2,197,650
---------
LIABILITIES
-----------
Deposits:
Non-Interest Bearing $ 387,509
Interest Bearing 1,446,148
Total Deposits 1,833,657
Short-Term Credit Facilities 82,285
Accounts Payable and Accrued Liabilities 128,745
---------
Total Liabilities $ 2,044,687
---------
STOCKHOLDER'S EQUITY
--------------------
Common Stock 14,995
Capital Surplus 42,394
Retained Earnings 96,511
Unrealized Gains on Securities Available
for Sale (Net of Taxes) (937)
--------
Total Stockholder's Equity 152,963
---------
Total Liabilities and $ 2,197,650
---------
Stockholder's Equity
I, Richard E. Brinkman, Senior Vice President & Comptroller of the named bank do
hereby declare that this Statement of Condition has been prepared in conformance
with the instructions issued by the appropriate regulatory authority and is true
to the best of my knowledge and belief.
Richard E. Brinkman, SVP & Controller
June 7, 1996
