As filed with the Securities and Exchange Commission on December 20, 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)
Delaware 4812 13-3585278
(State or other jurisdiction (Primary standard (I.R.S. Employer
of incorporation industrial Identification Number)
or organization) classification code number)
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:
David Alan Miller, Esq.
Graubard Mollen & Miller
600 Third Avenue
New York, New York 10016
Telephone: (212) 818-8800
Fax: (212) 818-8881
Approximate date of commencement of proposed sale to the public: As soon
as practicable after this Registration Statement becomes 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. |_|
================================================================================
<PAGE>
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
===================================================================================================================================
Title of Shares Amount to be Proposed Maximum Proposed Maximum Amount of
to be Registered Registered Aggregate Price Per Share Aggregate Offering Price Registration Fee
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par
value $.01 per share 850,000 shares(1)(2) $20.875(3) $17,743,750(3) $6,118.53
===================================================================================================================================
</TABLE>
(1) Represents shares to be sold by the Selling Stockholder, which shares are
issuable to it upon conversion, at the election of the Company, of a
certain promissory note ("Convertible Note") into shares of Common Stock.
(2) Number of shares is estimated based on the principal amount of the
Convertible Note divided by the last sale price of the Common Stock as
quoted on the Nasdaq National Market on December 17, 1996.
(3) Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rule 457 promulgated under the Securities Act
of 1933, as amended.
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>
PRELIMINARY PROSPECTUS DATED DECEMBER 20, 1996
SUBJECT TO COMPLETION
850,000 SHARES
WINSTAR COMMUNICATIONS, INC.
COMMON STOCK
--------------
This Prospectus relates to up to 850,000 shares ("Conversion Shares") of
Common Stock, par value $.01 per share, of WinStar Communications, Inc.
("Company") that may be offered for resale for the accounts of Locate, L.L.C.
("Locate LLC") and Local Area Telecommunications, Inc. ("Locate" and, together
with Locate LLC, the "Selling Stockholders"), upon conversion at the option of
the Company by the Selling Stockholders of an aggregate of $17.5 million
principal amount of the Company's 8% convertible promissory notes (the "Locate
Notes") and interest accrued thereon.
All of the Conversion Shares are being offered hereby for the respective
accounts of the Selling Stockholders. The Conversion Shares may be offered from
time to time by the Selling Stockholders through ordinary brokerage transactions
in the over-the-counter market, over the Nasdaq National Market, in negotiated
transactions or otherwise, at market prices prevailing at the time of sale or at
negotiated prices. See "Selling Stockholders and Plan of Distribution."
The Common Stock is traded on the Nasdaq National Market under the symbol
"WCII." The last reported sale price of the Common Stock on the Nasdaq National
Market on December 17, 1996 was $20.875 per share.
The Company will not receive any cash proceeds from the issuance of the
Conversion Shares upon conversion of the Locate Notes, but will immediately
retire, without the payment of additional consideration, the debt attributable
to the Locate Notes. The Company will not derive any proceeds from the sale of
the Conversion Shares by the Selling Stockholders. All costs, expenses and fees
in connection with the registration of the Conversion Shares offered by this
Prospectus will be borne by the Company. Such expenses are estimated to be
approximately $100,000.
SEE "RISK FACTORS" BEGINNING ON PAGE 11 OF THIS PROSPECTUS FOR
INFORMATION THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
--------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
--------------
The date of this Prospectus is _______ __ , 1997
1
<PAGE>
TABLE OF CONTENTS
Page
----
Incorporation of Certain Documents by
Reference............................................................... 3
Prospectus Summary........................................................ 4
Risk Factors.............................................................. 11
Price Range of Common Stock............................................... 25
Dividend Policy........................................................... 25
Capitalization............................................................ 26
Selected Financial Data................................................... 27
Management's Discussion and
Analysis of Financial Condition and
Results of Operations................................................... 29
Business.................................................................. 37
Management................................................................ 59
Principal Stockholders.................................................... 63
Description of Certain Indebtedness....................................... 65
Description of Capital Stock.............................................. 67
Shares Eligible for Future Sale........................................... 68
Legal Matters............................................................. 69
Experts................................................................... 69
Available Information..................................................... 69
Index to Consolidated Financial
Statements.............................................................. F-1
Wireless Fiber(SM) is a service mark and WinStar(R) is a trademark of WinStar
Communications, Inc.
2
<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents or information have been filed by the Company with
the Securities and Exchange Commission (the "Commission") pursuant to the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and are
incorporated herein by reference:
(1) Transition Report on Form 10-KSB for the ten months ended December
31, 1995;
(2) Quarterly Reports on Form 10-Q for the quarters ended March 31,
1996, June 30, 1996 and September 30, 1996;
(3) Proxy Statement dated May 3, 1996;
(4) Current Report on Form 8-K dated October 8, 1996; and
(5) The description of the Company's Common Stock contained in the
Company's registration statement on Form 8-A under the Exchange Act
(File No. 1-10726).
All documents subsequently filed by the Company with the Commission
pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date
of this Prospectus and prior to the termination of the offering covered by this
Prospectus shall be deemed incorporated by reference into this Prospectus and to
be a part hereof from the date of filing of such documents. Any statement
contained in a document incorporated by reference herein shall be deemed to be
modified or superseded for purposes of this Prospectus to the extent that a
statement contained herein modifies or supersedes such statement. Any statement
so modified or superseded shall not be deemed, except as so modified or
superseded, to constitute a part of this Prospectus.
The Company hereby undertakes to provide without charge to each person to
whom a copy of this Prospectus has been delivered, upon the written or oral
request of such person to WinStar Communications, Inc., 230 Park Avenue, New
York, New York 10169 (telephone 212-687-7577), Attention: Investor Relations
(extension 153), a copy of any and all of the documents referred to above (other
than exhibits to such documents) which have been incorporated by reference in
this Prospectus.
3
<PAGE>
- --------------------------------------------------------------------------------
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the
more detailed information and financial statements, including the notes thereto,
appearing elsewhere in this Prospectus. Unless otherwise indicated, references
herein to the "Company" 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 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 is the largest holder of 38 GHz licenses in the United States
and utilizes this position to provide facilities-based telecommunications
services. The Company is in the process of rolling out its competitive local
exchange carrier ("CLEC") business and plans to offer a full range of
telecommunications services, including local, long distance and Internet access
services, to small and medium-sized businesses in major metropolitan areas
throughout the United States. The Company also offers a variety of broadband,
high-capacity digital network services to other telecommunications providers
("Carrier Services") on a wholesale basis. In addition, as a complement to its
telecommunications services offerings, the Company produces and distributes
information and entertainment content.
By exploiting its Wireless Fiber(SM) services as a key component of its
transmission capabilities and deploying a strategic network of switches, the
Company seeks to distinguish itself in its markets as a value-added, economical
provider of high-capacity, local telecommunications services and an attractive
alternative to the local exchange carriers ("LECs"), such as the regional Bell
operating companies ("RBOCs").
Wireless Fiber services deliver high-quality transmission via digital,
wireless capacity in the 38 GHz portion of the radio spectrum, pursuant to
licenses ("Wireless Licenses") granted by the Federal Communications Commission
("FCC"). The Wireless Licenses enable the Company to provide Wireless Fiber
services in, among other major metropolitan areas, the 31 most populated
Metropolitan Statistical Areas ("MSAs") in the United States, including Atlanta,
Boston, Chicago, Los Angeles, New York and San Francisco. The MSAs covered by
the Wireless Licenses include more than 100 cities with populations exceeding
100,000 each and encompass an aggregate population of almost 110 million. In
addition, the Company has entered into an agreement to acquire a significant
number of additional 38 GHz licenses, as described below under "-- Pending
Acquisition of Milliwave."
Wireless Fiber services are engineered to provide up to 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 Company offers local exchange services as a CLEC to end users in New
York City and is currently introducing such services in Atlanta, Boston,
Chicago, Hartford, Los Angeles, Milwaukee, San Diego and Stamford. The Company
is rolling out 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 competition
in local exchange markets nationwide and permits CLECs, such as the Company,
- --------------------------------------------------------------------------------
4
<PAGE>
- --------------------------------------------------------------------------------
to offer a full range of local exchange services, including local dial tone,
custom calling features and toll services, to business and residential customers
within Local Access Transport Areas ("LATAs").
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
enable the Company to provide a broad range of telecommunications services
within markets covered by the Wireless Licenses. This infrastructure will
utilize the Company's Wireless Fiber capabilities, together with switches
acquired or leased by the Company and facilities leased or purchased from other
carriers, to originate and terminate traffic. The Company's Wireless Fiber
capabilities provide it with critical broadband capacity and enables the Company
to provide services as a facilities-based carrier to a customer more quickly and
less expensively than telecommunications providers that rely on the installation
of terrestrial lines for connection to customer locations.
In building its infrastructure, the Company is following a
building-centric network plan, pursuant to which it is identifying strategically
located sites in each metropolitan area covered by the Wireless Licenses. The
customer buildings initially targeted by the Company each have more than 100,000
square feet of commercial space and, in many instances, are not served by
competitive access providers ("CAPs") or CLECs. The Company estimates that there
are more than 8,000 buildings in this target group, populated by approximately
9.7 million workers using more than 2.1 million phone lines, and that these
buildings represent an aggregate local exchange service market exceeding $3.3
billion of aggregate revenue per annum. These estimates do not include
multi-dwelling residential buildings, universities, hospitals or buildings
occupied by a single tenant and do not include long distance, data transmission
or Internet services or enhanced communications services, such as messaging.
In addition to its CLEC services, the Company utilizes its Wireless Fiber
capabilities to provide Carrier Services, including last-mile local access and
other broadband, high-capacity services, primarily to other telecommunications
services providers and large institutional end users. The Company has been
developing and marketing its Wireless Fiber-based local access and other Carrier
Services since late 1994. In 1995, after an initial market-education phase, in
which the Company demonstrated the efficacy and reliability of its Wireless
Fiber services for such purposes, principally though the use of field
demonstrations and the installation of trial-basis Wireless Fiber links, the
Company began receiving initial orders for Wireless Fiber services.
Since October 1995, the number of customers utilizing the Company's
Wireless Fiber-based Carrier Services has increased significantly. Such
customers include Ameritech Cellular, Cellular One, Geotek Communications Inc.,
Reed Elsevier PLC, Siemens Stromberg-Carlson, Teleport Communications Group,
Inc. ("Teleport") and Western Wireless Corporation. In addition, the Company has
entered into master service agreements with Pacific Bell ("PacBell"), American
Communications Services, Inc. ("ACSI"), Electric Lightwave, Inc. (a subsidiary
of Citizens Utilities ("Electric Lightwave")), MCI Communications Corp. ("MCI"),
ICG Telecom Group ("ICG") and Century Telephone Enterprises, Inc. ("Century
Telephone"), under which such companies utilize or are expected to utilize
Wireless Fiber services as a component of their own telecommunications networks.
The Company is in the process of negotiating additional master service
agreements with other telecommunications providers.
Strategy
Key elements of the Company's strategy include:
Accelerating Rollout of CLEC Services and Leveraging of Wireless Fiber
Capabilities. In addition to the major metropolitan areas where it is already
providing or introducing its CLEC services, the Company intends to introduce
such services in each of the other markets where it has multiple-channel
Wireless Licenses during the next three years. As the Company commences its CLEC
business in each market, in order to gain initial market penetration in that
market, it may initially resell the local exchange services of other service
providers, such as other CLECs and the incumbent LECs, until it has established
- --------------------------------------------------------------------------------
5
<PAGE>
- --------------------------------------------------------------------------------
the Wireless Fiber and switch-based infrastructure required to provide its local
exchange services in that city. The Company commissioned its first switch in New
York City in October 1996 and currently intends to install, pursuant to an
agreement with Lucent Technologies, Inc. ("Lucent"), approximately 40 additional
switches in its major markets during the next three years.
Exploiting First to Market and Leading Spectrum Holder Advantages. The
Company currently enjoys a "first-to-market" advantage as one of the few holders
of 38 GHz licenses with an established operating and management infrastructure
and the capital necessary to rapidly exploit and roll out its 38 GHz services on
a commercial basis. The Company believes that its competitive advantage is
further strengthened by its position as the holder of the largest aggregate
amount of 38 GHz bandwidth capacity in the United States and by the broad
geographic scope encompassed by its Wireless Licenses.
Marketing Wireless Fiber Services to Other Telecommunications Providers.
The Company targets other telecommunications service providers in marketing its
Wireless Fiber-based last-mile local access and high-capacity, broadband
services. The Company believes that its Wireless Fiber services present an
attractive, economical method for other telecommunications service providers to
add a high-capacity extension to 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. The Company currently offers its Wireless
Fiber services to long distance carriers, RBOCs and other LECs, other CAPs and
CLECs, providers of personal communications services ("PCS") and cellular and
specialized mobile radio services (collectively "CMRS providers"). The Company
also markets its Wireless Fiber services to telecommunications service providers
as viable, cost-efficient alternate routes for their telecommunications traffic
in situations where primary routes are incapacitated and/or network reliability
concerns require alternate multiple telecommunications paths.
Marketing Wireless Fiber Services as a Solution to Growing Volume of Data
Communications and Internet Traffic and for Private Network Services. The
Company believes that demand for its Wireless Fiber services will be amplified
by the growing volume of data communications traffic resulting from increasing
Internet usage and other high-volume transmissions. This type of traffic
increasingly requires high-capacity, end-to-end networks that are often
difficult to provide economically with existing RBOC and LEC inrastructure. The
total amount of bandwidth of each 38 GHz channel is 100 MHz, which supports high
broadband, interactive transmiion paths. Wireless Fiber DS-3 links (each of
which currently transmits at a rate up to 45 MHz) provide 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 recently established its first major relationship with an Internet
service provider and is actively pursuing relationships with additional Internet
service providers. See "Business -- Carrier Services -- Internet Services." The
Company also offers its Wireless Fiber services to businesses, government
agencies and institutions with multiple locations that seek to establish their
own independent local telecommunications systems for dedicated private-line
voice and data networks, including LAN and WAN applications.
Acquiring Information and Content Services to Complement
Telecommunications Service Offerings. The Company believes that participants in
the telecommunications market will increasingly seek to offer "content" -- such
as legal, human resources, training, news, stock quotes and other value-added
information--to differentiate their services and attract traffic onto their
transmission networks. It is believed that the ability to deliver information
and other content will play an especially important role in business users'
choice of a telecommunications provider.
Re-focusing and Expanding the Company's Long Distance Operations. The
Company has shifted the focus of its long distance operations toward providing
long distance services to business users as a complement to its CLEC services.
As such, the Company is not currently marketing long distance services to
residential customers on an active basis, except through established affinity
group and other targeted
- --------------------------------------------------------------------------------
6
<PAGE>
- --------------------------------------------------------------------------------
programs. Consistent with this approach, the Company is seeking to expand and
improve its long distance operations by (i) bundling its long distance services
with its local telecommunications services, (ii) broadening its business
customer base and increasing customer retention rates and (iii) improving
operating efficiencies by reducing costs associated with the provision of its
long distance services.
Pending Acquisition of Milliwave
In June 1996, the Company entered into an agreement to acquire (the
"Milliwave Acquisition") all of the outstanding partnership interests in
Milliwave Limited Partnership ("Milliwave"), a holder of 38 GHz licenses (the
"Milliwave Licenses") that allow for the provision of services in more than 80
major markets, encompassing an aggregate population of greater than 160 million.
The Milliwave Acquisition is subject to certain regulatory approvals, but is
expected to be consummated during the first quarter of 1997. Upon consummation
of the Milliwave Acquisition, Dennis Patrick, Chief Executive Officer of
Milliwave and a former Chairman of the FCC, is expected to join the Company's
Board of Directors. See "Business -- Telecommunications Services -- Wireless
Fiber -- Pending Milliwave Acquisition."
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 nonstrategic subsidiary acquired in 1992. That
subsidiary 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 telecommunications
business, the Company raised net proceeds of $214.5 million from a private
placement ("1995 Debt Placement") of units, each unit consisting of two 14%
Senior Discount Notes due 2005 ("Senior Notes") and one 14% Convertible Senior
Subordinated Discount Note ("Convertible 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. As a result of the
Company's accelerated strategy, it now plans capital expenditures of $240
million and $330 million for 1997 and 1998, respectively.
Management anticipates, based on current plans and assumptions relating to
its operations, that the Company's existing financial resources (including
proceeds raised in the 1995 Debt Placement) and equipment financing arrangements
that the Company is currently seeking, will be sufficient to fund the Company's
growth and operations for approximately 12 to 15 months from the date of this
Prospectus. Management believes that the Company's capital needs at the end of
such period will continue to be significant and the Company will continue to
seek additional sources of capital. Further, in the event the Company's plans or
assumptions change or prove to be inaccurate, or if the Company consummates any
acquisitions of businesses or assets (including additional spectrum licenses, by
auction or otherwise), or if the Company does not consummate its equipment lease
financings, the Company may be required to seek additional sources of capital
sooner than currently anticipated. See "Risk Factors -- Significant Capital
Requirements" and "-- Risks Related to CLEC Strategy; Anticipated Initial
Negative Operating Margins in CLEC Business."
- --------------------------------------------------------------------------------
7
<PAGE>
- --------------------------------------------------------------------------------
THE OFFERING
Common Stock offered by the
Selling Stockholders.......... 850,000 Shares
Proceeds........................ The Company will not derive any cash proceeds
from the issuance of the Conversion Shares
upon conversion of the Locate Notes, but will
immediately retire, without the payment of
any additional consideration, the debt
attributable to the Locate Notes. The Company
will not derive any cash proceeds from the
sale of Locate Shares by the Selling
Stockholders.
Nasdaq Stock Market Symbol...... WCII
- --------------------------------------------------------------------------------
8
<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 nine months ended
September 30, 1995 and 1996 and the ten months ended December 31, 1994 have been
derived from unaudited consolidated financial statements of the Company included
elsewhere in this Prospectus. In the opinion of management, the unaudited
financial statements have been prepared on the same basis as the audited
financial statements and include all adjustments, which consist only of normal
recurring adjustments, necessary for a fair presentation of the financial
position and the results of operations for these periods. This data should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the pro forma and historical
consolidated financial statements, including the notes thereto, appearing
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
Ten Months Ended
December 31, Nine Months Ended September 30,
--------------------------------------- -------------------------------
Pro Forma Pro Forma
Year Ended Pro As Pro As
February 28, Actual Forma Adjusted Actual Forma Adjusted
----------------- ----------- -----------------
1994 1995 1994 1995 1995(1)(2) 1995(3) 1995 1996(4) 1996(1) 1996(3)
---- ---- ---- ---- ---------- -------- ---- ------- ------- --------
(In thousands, except per share data)
<S> <C> <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 $ 7,797 $27,958 $30,235 $30,235
Information services.. -- 474 193 2,648 2,698 2,698 2,790 7,479 7,479 7,479
Merchandising......... 7,120 10,182 8,405 13,987 13,987 13,987 10,038 12,544 12,544 12,544
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total net sales..... 15,625 25,565 22,018 29,771 35,901 35,901 20,625 47,981 50,058 50,058
Operating income (loss):
Telecommunications.... (744) (3,423) (2,067) (6,945) (8,650) (8,650) (4,189) (21,076) (22,677) (22,677)
Information Services.. -- (117) (115) 238 (238) (238) 299 (369) (369) (369)
Merchandising......... 223 307 329 756 756 756 436 151 151 151
General corporate..... (1,547) (2,378) (1,609) (3,861) (3,861) (3,861) (2,968) (8,495) (8,495) (8,495)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total operating loss (2,068) (5,611) (3,462) (9,812) (11,517) (11,517) (6,422) (29,789) (31,390) (31,390)
Interest expense........ 744 637 505 7,630 8,800 7,633 869 27,388 28,469 27,419
Interest income......... (109) (385) (297) (2,890) (2,902) (2,902) (492) (8,174) (6,683) (6,683)
Other expenses, net..... 5,687 1,367 948 1,305 771 771 1,594 1,023 1,293 1,293
Net loss................ (8,195) (7,230) (4,618) (15,857) (18,186) (17,020) (8,394) (50,027) (54,008) (53,158)
Net loss per common share (1.06) (0.42) (0.28) (0.70) (0.68) (0.61) (.40) (1.81) (1.75) (1.65)
Weighted average common
shares outstanding.... 7,719 17,122 16,609 22,770 26,745 27,797 21,222 27,691 31,091 32,144
Other Financial Data:
Capital expenditures.... $ 307 $ 1,816 $ 1,465 $ 8,652 $12,264 $12,264 $ 4,591 $29,719 $30,877 $30,877
EBITDA(6)............... (1,845) (5,179) (3,116) (8,952) (8,213) (8,213) (6,040) (28,034) (27,669) (27,669)
</TABLE>
<TABLE>
<CAPTION>
As of September 30, 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....... $162,978 $125,935 $125,935
Property and equipment, net............................. 44,162 47,604 47,604
Total assets............................................ 288,158 392,182 392,182
Current portion of long-term debt and capital lease
obligations........................................... 3,643 21,172 3,672
Long-term debt and capital lease obligations,
less current portion and discount..................... 272,195 272,429 272,429
Stockholders' equity (deficit).......................... (20,536) 64,465 81,964
</TABLE>
(footnotes on next page)
- --------------------------------------------------------------------------------
9
<PAGE>
- --------------------------------------------------------------------------------
- ----------
(1) Gives effect to the acquisitions by the Company of Milliwave, the assets
of Local Area Telecommunications, Inc. ("Locate," a holder of 38 GHz
licenses and other telecommunications assets) and Avant-Garde
Telecommunications, Inc. ("Avant-Garde," the original holder of many of
the Wireless Licenses), and financings thereof, 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. Assumes the issuance of 3.4 million
shares of Common Stock at $25 per share in connection with the Milliwave
Acquisition.
(2) On a pro forma basis giving effect to the acquisitions and financings in
footnote (1) above (collectively, the "Transactions"), pro forma sales,
operating loss, interest expense, net loss and negative EBITDA for the
twelve months ended December 31, 1995 amounted to $40 million, $13
million, $8 million, $19 million and $12 million, respectively.
(3) Adjusted to reflect the acquisitions and financings described in footnote
(1) and the issuance of the Conversion Shares upon conversion of the
Locate Notes and the resulting retirement of debt, as if they occurred at
the beginning of the respective periods.
(4) In the first nine months of 1996, the Company settled a dispute with
another carrier regarding the unauthorized switching of the Company's
customers to the other carrier. The Company recognized revenue of
approximately $1.5 million and cost of sales of approximately $850,000 in
connection with this settlement, the majority of which related to minutes
of use during that period.
(5) The Company has generated nominal revenues from its Wireless Fiber
services.
(6) EBITDA consists of loss before interest, income taxes, depreciation and
amortization and other income and expense. EBITDA is provided because it
is a measure commonly used in the telecommunications industry. It is
presented to enhance an understanding of the Company's operating results
and is not intended to represent cash flow or results of operations in
accordance with generally accepted accounting principles for the periods
indicated. See the Company's consolidated financial statements contained
elsewhere in this Prospectus.
(7) Gives effect to the acquisitions of Milliwave and Locate as if they
occurred on September 30, 1996.
(8) Adjusted to reflect the acquisitions of Milliwave and Locate and the
issuance of the Conversion Shares upon conversion of the Locate Notes and
the resulting retirement of debt, as if they occurred on September 30,
1996.
- --------------------------------------------------------------------------------
10
<PAGE>
RISK FACTORS
An investment in the Common Stock involves a significant degree of risk.
In determining whether to make an investment in the Common Stock, prospective
investors should consider carefully all of the information set forth in this
Prospectus and, in particular, the following risk factors.
Historical and Anticipated Future Net and Operating Losses and Negative EBITDA
The Company has incurred significant operating and net losses attributable
in substantial part to the development of its telecommunications businesses. The
Company historically has had net losses and negative EBITDA, including a net
loss and negative EBITDA of approximately $15.9 million and $9.0 million,
respectively, for the ten months ended December 31, 1995, and $50.0 million and
$28 million, respectively, for the nine months ended September 30, 1996. The
Company has been offering local access and other Carrier Services 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 as it establishes a sufficient
revenue-generating customer base. As a result of increased expenses, principally
relating to an increase in the number of employees, in connection with the
rollout of CLEC services, and expenses relating to the servicing of debt, there
will be substantial increases in the Company's net loss, operating loss and
negative EBITDA in the fourth quarter of 1996 as compared to prior quarters and
for 1996 and 1997 as compared to prior years. There can be no assurance that the
Company will achieve or sustain positive EBITDA or profitability or at any time
have sufficient financial resources to make principal and interest payments on
its outstanding debt. In addition, if the Company does not achieve and sustain
positive EBITDA and profitability, the value of the Common Stock may be
adversely affected. See "-- Competition -- Long Distance Market," "Selected
Financial Data" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
Risks Related to CLEC Strategy; Anticipated Initial Negative Operating Margins
in CLEC Business
The Company is pursuing an accelerated 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 other local service providers; the negotiation of
interconnection agreements with RBOCs and other incumbent LECs; the failure of
LECs and RBOCs to honor the letter and spirit of consummated interconnection
agreements; the ability of third-party equipment providers and installation and
maintenance contractors to meet the Company's switch rollout schedule; the
recruitment of additional personnel in a timely manner, so as to be able to
attract and service new customers but not incur excessive personnel costs in
advance of the rollout; the Company's ability to attract and retain new
customers and to deliver high quality services; the potential adverse reaction
to the Company's services by the Company's carrier customers, who may view the
Company as a competitor; and the Company's ability to manage the simultaneous
implementation of its plan in multiple markets. The Company commenced marketing
its local exchange services in New York City in April 1996 on a resale basis and
began providing switch-based services in that city in October 1996. The Company
is also currently introducing its CLEC services on a resale basis in eight
additional cities: Atlanta, Boston, Chicago, Hartford, Los Angeles, Milwaukee,
San Diego and Stamford.
Although the Company's initial implementation of its CLEC strategy often
will entail the resale of the facilities and services of other service
providers, which itself is dependent on the negotiation and availability of
satisfactory resale arrangements, the principal component of the Company's CLEC
strategy will require significant capital investment related to the purchase and
installation of numerous switches and
11
<PAGE>
the interconnection of these facilities to customers' buildings and other local
networks, including through the installation of Wireless Fiber links and the
build out of other facility infrastructure, in advance of generating material
revenues.
As the Company rolls out its CLEC operations, it anticipates experiencing
negative operating margins while it develops its facilities. After initial
rollout of its CLEC services in a particular city, the Company expects operating
margins for such operations to improve only when and if (i) sales efforts result
in sufficiently increased volumes of traffic originated and terminated over the
Company's Wireless Fiber and switching 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
will permit customers to retain their telephone numbers when switching
carriers), which are mandated by the Telecommunications Act, will reduce the
Company's costs of providing local exchange services and facilitate the
marketing of such services, there can be no assurance that the Company's CLEC
operations will become profitable due to, among other factors, lack of customer
demand, competition from other CLECs and pricing pressure from the LECs and
other CLECs. The Company's failure to implement its CLEC strategy successfully
would have an adverse effect on the value of the Common Stock. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Business -- Strategy for Telecommunications Business Growth" and "--
Telecommunications Services -- CLEC Services."
Negative Operating Margins in the Initial Provision of Wireless Fiber-Based
Carrier Services
The Company has experienced negative operating margins in connection with
the development and initial provision of its Wireless Fiber-based Carrier
Services (which includes CAP services) and expects to continue to experience
negative operating margins until it develops a revenue-generating customer base
sufficient to fund operating expenses attributable to the provision of such
services. In order to demonstrate the efficacy of Wireless Fiber, the Company
often provides complementary service on a trial basis for a limited period. The
Company expects to improve operating margins in the provision of its Carrier
Services over time by (i) obtaining appropriate sites for its operations, (ii)
acquiring and retaining an adequate customer base, (iii) placing
telecommunications traffic of new customers and additional telecommunications
traffic of existing customers across Wireless Fiber links, (iv) inducing
providers of telecommunications services to utilize and market the Company's
Wireless Fiber services as part of their own networks, systems and services,
thereby reducing the Company's related marketing costs and (v) taking advantage
of recent procompetitive regulatory initiatives and changes that permit the
Company to provide additional local telecommunications services, thereby
facilitating the marketability of higher-margin enhanced and premium services
utilizing the Company's Wireless Fiber capabilities. If the Company fails to
accomplish any of the foregoing, particularly acquiring and retaining an
adequate customer base, it will not be able to improve the operating margins of
its Carrier Services business. There can be no assurance that the Company will
be able to achieve or sustain positive operating margins. Failure to achieve
positive operating margins would have an adverse effect on the value of the
Common Stock. For a discussion of factors that affect results described in the
forward-looking statements contained in this paragraph, see "-- Competition,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business -- Competition in the Telecommunications Industry" and
"-- Telecommunications Services -- Carrier Services."
Risks Associated with Rapid Expansion and Acquisitions
The Company intends to pursue a strategy of aggressive and rapid growth,
including the accelerated rollout of its CLEC services, acquisitions of
businesses and assets, continued aggressive marketing of its Carrier 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
12
<PAGE>
Company's business, financial condition and results of operations and the value
of the Common Stock. As part of its strategy, the Company may acquire
complementary assets or businesses. The pursuit of acquisition opportunities
will place significant demands on the time and attention of the Company's senior
management and will involve considerable financial and other costs with respect
to identifying and investigating acquisition candidates, negotiating acquisition
agreements and integrating the acquired businesses with the Company's existing
operations. Employees and customers of acquired businesses may sever their
relationship with such businesses during or after the acquisition. There can be
no assurance that the Company will be able to successfully consummate any
acquisitions or integrate any business or assets which it may acquire into its
operations. See "Business--Strategy for Telecommunications Business Growth."
Substantial Indebtedness; Ability to Service Indebtedness
The Company has significant indebtedness and interest expense as a result
of the 1995 Debt Placement. At September 30, 1996, on a pro forma basis giving
effect to the Acquisitions, the Company would have had, on a consolidated basis,
approximately $293.3 million of indebtedness, including capitalized lease
obligations. The accretion of original issue discount on the Senior and
Convertible Notes will significantly increase the Company's liabilities (except
to the extent that the Convertible Notes are converted to Common Stock). At
September 30, 1996, on a pro forma as adjusted basis giving effect to the
issuance of the Common Stock upon conversion of the Locate Note and the
resulting retirement of the Locate Note, the Company would have had, on a
consolidated basis, approximately $275.8 million of indebtedness. The indentures
related to the Senior and Convertible Notes ("Indentures") limit, but do not
prohibit the incurrence of additional indebtedness by the Company and
subsidiaries. Additionally, the Indentures do not limit the amount of
indebtedness that may be incurred by the Company's new media and consumer
products subsidiaries.
The level of the Company's indebtedness could have important consequences,
including the following: (i) the ability of the Company to obtain any necessary
financing in the future for working capital, capital expenditures, debt service
requirements or other purposes may be limited; (ii) a substantial portion of the
Company's cash flow from operations, if any, must be dedicated to the payment of
principal and interest on its indebtedness and other obligations and will not be
available for use in the Company's business; (iii) the Company's level of
indebtedness could limit its flexibility in planning for, or reacting to changes
in, its business; (iv) the Company is more highly leveraged than many of its
competitors, which may place it at a competitive disadvantage; and (v) the
Company's high degree of indebtedness could make it more vulnerable in the event
of a downturn in its business or if operating cash flow does not significantly
increase.
The Company had net losses and negative EBITDA during the ten months ended
December 31, 1995 (and prior fiscal years) and the first nine months of 1996 and
management anticipates that such net losses and negative EBITDA will continue
(and increase) in the foreseeable future. As the Company expands its operations,
it expects to continue to experience increasing net and operating losses and
negative EBITDA. There can be no assurance that the Company will be able to
attain profitability or positive EBITDA or that the Company will be able to meet
its debt service obligations. If the Company's cash flow is inadequate to meet
its obligations or fund its operations, the Company could face substantial
liquidity problems. If the Company is unable to generate sufficient cash flow or
otherwise obtain funds necessary to make required payments or, if the Company
otherwise fails to comply with the material terms of its indebtedness, it would
be in default thereunder, which would permit the holders of such indebtedness to
accelerate the maturity of such indebtedness and could cause defaults under
other indebtedness of the Company, including the Notes. Such defaults would
adversely affect the market price of the Common Stock. The ability of the
Company to meet its obligations will be dependent upon the future performance of
the Company, which will be affected by prevailing economic conditions and to
financial, business and other factors, including factors beyond the control of
the Company. See "Description of Certain Indebtedness."
Competition
The Company is subject to intense competition in each of the areas in
which it operates. Many of the Company's competitors have longer-standing
relationships with customers and suppliers in their
13
<PAGE>
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 for new entrants and currently is dominated by the RBOCs
and other LECs. The Company has been marketing local access and other Carrier
Services only since December 1994 and local exchange services only since April
1996, and the Company has not obtained significant market share in any of the
areas where it offers such services, nor does it expect to do so given the size
of the local telecommunications services market, the intense competition and the
diversity of customer requirements. In each area covered by the Wireless
Licenses, the services offered by the Company compete with those offered by the
LECs, such as the RBOCs, which currently dominate the provision of local
services in their markets. The LECs have long-standing relationships with their
customers, have the ability to subsidize competitive services with revenues from
a variety of other services and benefit from existing state and federal
regulations that currently favor the LECs over the Company in certain respects.
While legislative and regulatory changes have provided increased business
opportunities for competitive telecommunications providers such as the Company,
these same decisions have given the LECs increased flexibility in their pricing
of services. This may allow the LECs to offer special discounts to the Company's
(and other CLECs') customers and potential customers. Further, as competition
increases in the local telecommunications market, the Company anticipates that
general pricing competition and pressures will increase significantly. As LECs
lower their rates, other telecommunications providers will be forced by market
conditions to charge less for their services in order to compete, which could
have an adverse effect on the Company and on the value of the Common Stock.
In addition to competition from the LECs, the Company also faces
competition from a growing number of new market entrants, such as other CAPs and
CLECs, competitors offering wireless telecommunications services, including
leading telecommunications companies, such as AT&T Wireless, and other entities
that hold or have applied for 38 GHz licenses or which may acquire such licenses
or other wireless licenses from others or the FCC. There is at least one other
CAP and/or CLEC in each major metropolitan area covered by the Company's
Wireless Licenses, including, in many such areas, companies such as ACSI, ICG,
Brooks Fiber Properties ("Brooks Fiber"), MCI, MFS Communications Company, Inc.
("MFS"), Teleport and Time Warner, Inc. ("Time Warner"). Many of these entities
(and the LECs) already have existing infrastructure which allows them to provide
local telecommunications services with lower marginal costs than the Company can
currently attain and which could 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 also faces or anticipates facing competition from
other entities which offer, or are licensed to offer, 38 GHz services, such as
Advanced Radio Telecom Corp. ("ART") and BizTel Communications, Inc. ("BizTel"),
and could face competition in certain aspects of its existing and proposed
businesses from competitors providing wireless services in other portions of the
radio spectrum, such as CAI Wireless Systems, Inc. ("CAI"), a provider of
wireless Internet access services, CellularVision USA, Inc. ("CellularVision"),
a provider of wireless television services which, in the future, also may
provide wireless Internet access and other local telecommunications services,
and Associated Communications LLC ("Associated"), a provider of wireless CAP and
other services. In many instances, these service providers hold 38 GHz licenses
or licenses for other frequencies in geographic areas which encompass or overlap
the Company's market areas. Additionally, some of these entities enjoy the
substantial backing of, or include among their stockholders, major
telecommunications entities, such as Ameritech with respect to ART, Teleport
with respect to BizTel, and NYNEX and Bell Atlantic with respect to CAI. Due to
the relative ease and speed of deployment of 38 GHz and some other
wireless-based technologies, the Company could face intense price competition
from these and other wireless-based service providers. Furthermore, a notice of
proposed rulemaking ("NPRM") issued by the FCC contemplates an auction of
additional channels in the 38 GHz spectrum band, which have not been previously
available for commercial use, and the FCC recently has stated its intention to
auction licenses in other portions of the spectrum, including 28 GHz, which may
provide licensees with capabilities similar to and, in some instances, possibly
superior, to those of the Company. The grant of additional licenses by the FCC
in the 38 GHz band, or other portions of the spectrum with similar or superior
characteristics, as well as the development of new technologies, could result in
increased competition. The Company believes that, assuming the adoption
14
<PAGE>
of the NPRM as currently proposed, entities having greater resources than the
Company could acquire licenses to provide 38 GHz services.
The Company also may face competition in the provision of local
telecommunications services from cable companies, electric utilities, LECs
operating outside their current local service areas and long distance carriers.
The great majority of these entities provide transmission services primarily
over fiber optic-, copper-based and/or microwave networks, which, unlike the
Company's Wireless Fiber services, enjoy proven market acceptance for the
transmission of telecommunications traffic. Moreover, the consolidation of
telecommunications companies and the formation of strategic alliances within the
telecommunications industry, which are expected to accelerate as a result of the
passage of the Telecommunications Act, could give rise to significant new or
stronger competitors. There can be no assurance that the Company will be able to
compete effectively in any of its markets.
The Company's Internet services also are likely to face significant
competition, including, among others, from cable television operators deploying
cable modems, which provide high speed data capability over existing coaxial
cable television networks. Although cable modems currently are not widely
available and do not provide for two-way data transfer rates that are as rapid
as those which can be provided by Wireless Fiber services, the Company believes
that the cable industry may support the deployment of cable modems to
residential cable customers through methods such as price subsidies.
Notwithstanding the cable industry's interest in rapid deployment of cable
modems, the Company believes that in order to provide broadband capacity to a
significant number of users, cable operators will be required to spend
significant time and capital in order to upgrade their existing networks to a
more advanced hybrid fiber coaxial network architecture. However, there can be
no assurance that cable modems will not emerge as a source of competition to the
Company's Internet business. Further, Internet service providers using existing
technologies such as ISDN and, in the future, such technologies as asymmetrical
digital subscriber loop ("ADSL") and high speed digital subscriber loop ("HDSL")
will likely provide additional sources of competition to the Company's Internet
access services. Additionally, the Company believes that many other
telecommunication service providers already are promoting their Internet
services. See "Business -- Competition in the Telecommunications Industry --
Local Telecommunications Market" and "-- Government Regulation of
Telecommunications Operations."
Long Distance Market. The long distance market has relatively
insignificant barriers to entry, numerous entities competing for the same
customers and a high (and increasing) average churn rate as customers frequently
change long distance providers in response to the offering of lower rates or
promotional incentives by competitors. Historically, a substantial majority of
the Company's telecommunications revenues have been derived primarily from
residential long distance customers. In light of the early acceptance of the
Company's CLEC business model, as well as regulatory actions and increasing
price competition in the residential market, the Company has determined to
re-focus its efforts and active marketing of its long distance services
primarily on small and medium-sized business customers as a complement to its
CLEC operations. As such, the Company is not currently marketing long distance
services to residential customers on an active basis, except through established
affinity group and other targeted programs.
The Company competes for long distance customers with major carriers such
as AT&T Corp. ("AT&T"), MCI and Sprint, as well as other national and regional
long distance carriers and resellers, many of whom own substantially all of
their own facilities and are able to provide services at costs lower than the
Company's current costs since the Company generally leases its access
facilities. The Company believes that the RBOCs as well as other CLECs also will
become significant competitors in the long distance telecommunications industry.
The Company believes that the principal competitive factors affecting its market
share are sales and marketing programs, pricing, customer service, accurate
billing, clear pricing policies and, to a lesser extent, variety of services.
The ability of the Company to compete effectively will depend upon its ability
to maintain high quality, market-driven services at prices generally perceived
to be equal to or below those charged by its competitors. To maintain its
competitive posture, the Company believes that it must be in a position to
reduce its prices in order to meet reductions in rates, if any, by others. Any
such reductions could adversely affect the Company. In addition, LECs have been
obtaining additional pricing and regulatory flexibility. This may enable LECs to
grant volume discounts to larger long distance companies, which also could put
the Company's long distance business at a
15
<PAGE>
disadvantage in competing with larger providers. See "Business -- Competition in
the Telecommunications Industry."
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.
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."
Limited Operating History in Telecommunications Industry
The Company shifted its business focus in 1992 from marketing consumer
products to providing telecommunications services in order to capitalize on
emerging opportunities in the evolving telecommunications industry. The Company
began reselling long distance telecommunications services in 1993. The Company
began marketing its local access and other Carrier Services in December 1994 and
offering local exchange services as a CLEC in April 1996. It currently provides
CLEC services on a facilities and resale basis in New York City and is currently
introducing CLEC services in Atlanta, Boston, Chicago, Hartford, Los Angeles,
Milwaukee, San Diego and Stamford. 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
16
<PAGE>
intense competition. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Significant Capital Requirements
The expansion of the Company's telecommunications operations and the
continued funding of operating expenses will require substantial capital
investment. Additionally, as part of its strategy, the Company may seek to
acquire complementary assets or businesses (including additional spectrum
licenses, by auction or otherwise), which also could require substantial capital
investment. The Company's decision to accelerate the development of its CLEC
operations in response to the Telecommunications Act has substantially increased
the Company's capital expenditure requirements. Management anticipates, based on
current plans and assumptions relating to its operations, that the Company's
existing financial resources (including proceeds raised in the 1995 Debt
Placement) and equipment financing arrangements that the Company is currently
seeking, will be sufficient to fund the Company's growth and operations for
approximately 12 to 15 months from the date of this Prospectus. Management
believes that the Company's capital needs at the end of such period will
continue to be significant and the Company will continue to seek additional
sources of capital. Further, in the event the Company's plans or assumptions
change or prove to be inaccurate, or if the Company consummates any acquisitions
of businesses or assets (including additional spectrum licenses, by auction or
otherwise), or if the Company does not consummate its equipment lease
financings, 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 the value of the Common
Stock. For a discussion of other factors that could affect the forward-looking
statements contained in this paragraph, see the other risk factors and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Company Overview" and "-- Liquidity and Capital Resources."
Government Regulation
The Company's telecommunications services are subject to varying degrees
of federal, state and local regulation. Generally, the FCC exercises
jurisdiction over all telecommunications services providers to the extent such
services involve the provision of jurisdictionally interstate or international
telecommunications, including the resale of long distance services, the
provision of local access services necessary to connect callers to long distance
carriers, and the use of electromagnetic spectrum (i.e., wireless services).
With the passage of the Telecommunications Act, the FCC's jurisdiction has been
extended to include certain interconnection and related issues that
traditionally have been considered subject primarily to state regulation. The
state regulatory commissions retain nonexclusive jurisdiction over the provision
of telecommunications services to the extent such services involve the provision
of jurisdictionally intrastate telecommunications. Municipalities also may
regulate limited aspects of the Company's business by, for example, imposing
zoning requirements or right-of-way permit procedures, certain taxes or
franchise fees.
The Telecommunications Act is intended to remove the formal barriers
between the long distance and local telecommunications services markets,
allowing service providers from each market (as well as providers of cable
television and other services) to compete in all communications markets. The
Telecommunications Act will permit the RBOCs eventually to compete in the
provision of interLATA long distance services. Additionally, the FCC must
promulgate new regulations over the next several years to address mandates
contained in the Telecommunications Act, which will change the regulatory
environment significantly. The Telecommunications Act generally requires LECs to
provide competitors with interconnection and nondiscriminatory access to the LEC
network on more favorable terms than have been available in the past. However,
such interconnection and the terms thereof are subject to negotiations with each
LEC, which may involve considerable delays, and may not necessarily be obtained
on terms and conditions that are acceptable to the Company. In such instances,
although the Company may petition the proper regulatory agency to arbitrate
disputed issues, there can be no assurance that the Company
17
<PAGE>
will be able to obtain acceptable interconnection agreements. In addition, the
Telecommunications Act requires the promulgation of regulations to implement
universal service reform, to revise the existing subsidy system which is
intended to provide support for the provision of ubiquitous telephone service,
and to effect access charge reform to more closely align the access charges
required to be paid by the long distance carriers to the LECs to the actual cost
of providing service.
The Company is unable to predict what effect the Telecommunications Act
will have on the telecommunications industry in general and on the Company in
particular. No assurance can be given that any regulation will broaden the
opportunities available to the Company or will not have a material adverse
effect on the Company and its operations. Further, there can be no assurance
that the Company will be able to comply with additional applicable laws,
regulations and licensing requirements or have sufficient resources to take
advantage of the opportunities which may arise from this dynamic regulatory
environment.
As required by the Telecommunications Act, in August 1996 the FCC adopted
new rules implementing the Telecommunications Act (the "Interconnection Order").
These rules constitute a pro-competitive, deregulatory national policy
framework designed to remove or minimize the regulatory, economic and
operational impediments to full competition for local services, including
switched local exchange service. Although setting minimum, uniform, national
rules, the Interconnection Order also relies heavily on states to apply these
rules and to exercise their own discretion in implementing a pro-competitive
regime in their local telephone markets. Among other things, the Interconnection
Order: establishes rules requiring incumbent LECs to interconnect with new
entrants such as the Company at specified network points; requires incumbent
LECs to provide carriers nondiscriminatory access to network elements on an
unbundled basis at any technically feasible point at rates that are just,
reasonable and nondiscriminatory; establishes rules requiring incumbent LECs to
allow interconnection via physical and virtual collocation; requires the states
to set prices for interconnection, unbundled elements, and termination of local
calls that are nondiscriminatory and cost-based (using a forward looking
methodology which excludes embedded costs but allows a reasonable
cost-of-capital profit); requires incumbent LECs to offer for resale any
telecommunications service that the carrier provides at retail to end users at
prices to be established by the states but which generally are at retail prices
minus reasonably avoided costs; and requires LECs and utilities to provide new
entrants with nondiscriminatory access to poles, ducts, conduit and rights of
way owned or controlled by LECs or utilities. Exemptions to some of these rules
are available to LECs which qualify as rural LECs under the Telecommunications
Act. The Interconnection Order also requires that: intraLATA presubscription
(pursuant to which LECs must allow customers to choose different carriers for
intraLATA toll service without having to dial extra digits) be implemented no
later than February 1999; LECs provide new entrants with nondiscriminatory
access to directory assistance services, directory listings, telephone numbers,
and operator services; and LECs comply with certain network disclosure rules
designed to ensure the interoperability of multiple local switched networks.
There can be no assurance how the Interconnection Order will be implemented or
enforced or as to what affect such implementation or enforcement will have on
competition within the telecommunications industry generally or on the
competitive position of the Company specifically. A number of LECs, the National
Association of Regulatory Utility Consumers and others, have filed in Federal
court seeking to appeal aspects of the Interconnection Order and to stay some or
all of the rules adopted therein. In October 1996, the United States Court of
Appeals for the Eighth Circuit granted a stay of effectiveness of certain
provisions of the Interconnection Order, including pricing and the pick and
choose provisions, pending the lower court's review of the merits of the case.
Oral argument on this appeal of the Interconnection Order is scheduled for
January 1997. The Company believes that the stay will not adversely affect its
CLEC operations and may positively affect the operations of the Carrier Services
business.
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
18
<PAGE>
construction and usage requirements and an auction procedure for issuance of
licenses in the 37-40 GHz band where mutually exclusive applications have been
filed. In addition, the FCC ordered that those applications that are subject to
mutual exclusivity with other applicants or that were placed on public notice by
the FCC after September 13, 1995 would be held in abeyance and not processed by
the FCC pending the outcome of the proceeding initiated by the NPRM. Final rules
with respect to the changes proposed by the NPRM have not been adopted and the
changes proposed by the NPRM have been, and are expected to continue to be, the
subject of numerous comments by members of the telecommunications industry, the
satellite industry, various government agencies and others. Consequently, there
can be no assurance that the NPRM will result in the issuance of rules
consistent with the rules initially proposed in the NPRM, or that any rules will
be adopted. Until final rules are adopted, the rules currently in existence
remain in effect with respect to outstanding licenses.
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 Inc. ("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. In September 1996, MSSI filed an application at the FCC to
offer broadband satellite services using a portion of the radio spectrum that
includes the 38.6 to 40 GHz band where the Company holds its Wireless Licenses.
If the FCC were to allow transmissions from space to earth as proposed by MSSI,
such transmissions could adversely affect the Company's existing or future
operations by creating interference or causing the FCC to institute power and
other limitations upon the Company's transmissions. If adopted as proposed, the
MSSI application would likely require changes in the FCC's rules, although it
would likely be a number of years before MSSI's satellite system could be
launched. The extent of the adverse impact upon the Company's operations if the
MSSI application were to be granted in its current form is unknown, and there
can be no assurance that the Company's operations would not be adversely
effected.
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, Georgia, Illinois, Massachusetts, Michigan, New York,
Pennsylvania, Tennessee, Texas, Washington and Wisconsin, and is seeking or
intends to seek authorization in numerous other jurisdictions. However, there
can be no assurance that the Company will obtain or retain such state
authorizations. Further, as a CLEC, the Company will be subject to additional
state regulatory and service parameters, including those relating to quality of
service.
The FCC is required by the Telecommunications Act to examine and modify
existing universal service and access charge policies by May 1997. In doing so,
it will likely allocate the cost of subsidizing universal service initiatives to
all telecommunications carriers and reduce substantially the access charges that
interexchange carriers pay to LECs for access to the public switched network.
CAPs provide local access (i.e., the transmission of a long distance call from
the caller's location to the long distance carrier's POP, and from the
terminating POP to the recipient of the call) at rates that are discounted from
the rates charged by LECs. If the FCC were to mandate reductions in LECs' local
access charges, CAPs might be forced to substantially reduce the rates they
charge long distance providers, resulting in lower gross margins (which, in the
case of the Company, are currently negative). This could have a material adverse
effect on the Company's Carrier Services operations. See "Business --
Telecommunications Industry Overview," "-- Government Regulation of
Telecommunications Operations" and "-- Competition in the Telecommunications
Industry."
19
<PAGE>
Finite Initial Term of Wireless Licenses; Potential License Renewal Costs;
Fluctuations in the Value of Wireless Licenses; Transfer of Control
The FCC's current policy is to align the expiration dates of all 38 GHz
licenses such that all such licenses mature concurrently and then to renew all
such licenses for ten years. The initial term of all currently outstanding 38
GHz licenses, including the Company's licenses, expires in February 2001. While
the Company believes that all of its Wireless Licenses will be renewed based
upon FCC custom and practice establishing a presumption in favor of licensees
that have complied with their regulatory obligations during the initial license
period, there can be no assurance that any Wireless License will be renewed upon
expiration of its initial term.
In the NPRM, the FCC proposed auctioning licenses for currently
unallocated 38 GHz channels. Given the current political climate with respect to
balancing the federal budget, there is a risk that the FCC will require
significant payments upon renewal of the Company's Wireless Licenses. The FCC's
failure to renew, or imposition of significant charges for renewal of, one or
more Wireless Licenses could have a material adverse effect on the Company and
could adversely affect the value of the Common Stock.
The Wireless Licenses are a significant asset of the Company, the value of
which will depend significantly upon the success of the Company's wireless
telecommunications operations and the future direction of the wireless
telecommunications segment of the telecommunications industry. The value of
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.
The Company has entered into acquisition and related agreements with
Milliwave. The transfer of licenses issued by the FCC, including 38 GHz licenses
(as well as a change of control of entities holding licenses), is subject to the
prior consent of the FCC, which consent generally turns on a number of factors
including the identity, background and qualifications of the transferee and the
satisfaction of certain other regulatory requirements. In addition, the
existence of proposed channel limitations in the NPRM, which in at least one
licensed area may result in the Company exceeding the proposed maximum number of
licenses for that area, may result in the FCC denying consent for one or more
license transfers. In light of the foregoing, the newness of this service, and
the uncertainty of final regulations to be issued in connection with the NPRM,
there can be no assurance that the FCC will approve all or any of the proposed
acquisitions or, if approved, that the FCC will not impose limitations on the
ultimate number of licenses held in any particular licensed area. See "Business
- -- Telecommunications Services -- Wireless Fiber -- Wireless Licenses" and "--
Government Regulation of Telecommunications Operations."
Changes in Technology, Services and Industry Standards
The telecommunications industry has been characterized by rapid
technological change, changing end-user requirements, frequent new service
introductions and evolving industry standards. The Company believes that its
future success will depend on its ability to anticipate or adapt to such changes
and to offer, on a timely basis, services that meet these evolving industry
standards. The extent to which competitors using existing or currently
undeployed methods of delivery of local telecommunications services will compete
with the Company's Wireless Fiber services cannot be anticipated. There can be
no assurance that existing, proposed or as yet undeveloped technologies will not
become dominant in the future and render 38 GHz-based (and other spectrum-based)
systems less profitable or less viable. For example, there are several existing
technologies that may be able to allow the transmission of high bandwidth
traffic over existing copper lines. There can be no assurance that the Company
will have sufficient resources to make the investments necessary to acquire new
technologies or to introduce new services that could compete with future
technologies or that equipment held by the Company in inventory will not be
rendered obsolete, any of which would have an adverse effect on the value of the
Common Stock. See "Business -- Telecommunications Industry Overview."
20
<PAGE>
Certain Financial and Operating Restrictions
The indebtedness of the Company and the Indentures impose significant
operating and financial restrictions on the Company, affecting, and in certain
cases limiting, among other things, the ability of the Company to incur
additional indebtedness or create liens on its assets, pay dividends, sell
assets, engage in mergers or acquisitions or make investments. Failure to comply
with any such restrictions could limit the availability of borrowings or result
in a default under the terms of any such indebtedness, and there can be no
assurance that the Company will be able to comply with such restrictions.
Moreover, these restrictions could limit the Company's ability to engage in
certain business transactions which the Company may desire to consummate. The
Company's inability to consummate any such transaction could have an adverse
effect on the Company's operations and the value of the Common Stock. See
"Description of Certain Indebtedness."
Dependence on Third Parties for Service and Marketing; Possible Service
Interruptions and Equipment Failures
The Company's long distance resale business is dependent on utilizing the
facilities of major long distance carriers to carry its customers' long distance
telephone calls and, in many instances, especially during initial market
penetrations, the Company's CLEC business will be dependent on the facilities of
the LECs and other local exchange service providers to carry its customers'
local telephone calls. The Company has agreements with long distance carriers
that provide it with access to such carriers' networks and has entered or is
entering into interconnect agreements with various LECs, and other CLECs, to
access their local exchange facilities. Although the Company believes that it
currently has sufficient access to long distance networks and will be able to
obtain sufficient access to local exchange facilities, any increase in the rates
or access fees charged by the owners of such facilities or their unwillingness
to provide access to such facilities to the Company, as well as potential
reticence of the LECs to honor appropriate provisioning and service intervals
with respect to interconnection arrangements, could material ly adversely affect
the Company's operations. Failure to obtain continuing access to such networks
and facilities also would have a material adverse effect on the Company, and
could require the Company to significantly curtail or cease its operations.
Further, the Company's CLEC operations will rely to some extent upon network
elements which the LECs must provide pursuant to the Telecommunications Act and
the Interconnection Order. These facilities often use copper wire for "last
mile" access to end users. To the extent that the Company relies upon LEC
facilities that use copper wire, the Company may not be able to offer potential
customers the benefits of Wireless Fiber with respect to high transmission
capacity. In addition, the Company's operations require that the networks leased
by it, and any facilities which may be developed by the Company, operate on a
continuous basis. It is not unusual for networks and switch ing facilities to
experience periodic service interruptions and equipment failures. It is
therefore possible that the networks and facilities utilized by the Company may
from time to time experience service interruptions or equipment failures
resulting in material delays which would adversely affect consumer confidence as
well as the Company's business operations and reputation and the value of the
Common Stock. See "Business -- Telecommunications Services -- Long Distance
Services."
The Company utilizes, in certain cases, third parties for marketing its
Wireless Fiber services and maintaining its operational systems. The Company has
entered into master service agreements with each of PacBell, ACSI, Electric
Lightwave, MCI, ICG and Century Telephone, which allow those companies to
utilize and resell the Company's Wireless Fiber services to their own customers.
The Company also has an agreement with Lucent to provide field service for, and
network monitoring of, the Company's Wireless Fiber facilities and another
agreement with Lucent for the purchase by the Company of telecommunications
switches and related equipment. The failure of any of these third parties to
perform under their respective agreements or the loss of any of these agreements
could have a material adverse effect on the Company's results of operations or
its ability to service its customers. The Company plans to enter into master
service agreements with other telecommunications service providers, and the
failure to do so could have an adverse effect on the Company's development and
results of operations and the value of the Common Stock. See "Business --
Telecommunications Services -- Carrier Services."
21
<PAGE>
Reliance on Equipment Suppliers
The Company currently purchases substantially all of its wireless
telecommunications equipment, including transceivers and network monitoring
equipment, from a single supplier and its switches and related equipment from a
single supplier even though, in each case, there are other manufacturers of such
equipment. Any reduction or interruption in supply from its suppliers could have
a material adverse effect on the Company until sufficient alternative supply
sources are established. The Company does not manufacture, nor does it have the
capability to manufacture, any of its telecommunications equipment. Although
there are other manufacturers who have, or are developing, equipment that would
satisfy the Company's needs, there can be no assurance that the Company would be
able to replace its current primary suppliers on commercially reasonable terms.
In addition, no industry standard or uniform protocol currently exists for 38
GHz equipment. Consequently, a single manufacturer's equipment must be used in
establishing each wireless link. See "Business -- Telecommunications Services --
Wireless Fiber -- Wireless Fiber Links."
Line of Sight; Distance Limitations Imposed by Rainfall Conditions in Certain
Geographic Areas; Roof Rights
In order to provide quality transmission, Wireless Fiber services require
an unobstructed line of sight between two transceivers comprising a link, with a
maximum distance between any two corres ponding transceivers of five miles (or
shorter distances in certain areas; weather conditions may necessitate distances
as short as 1.1 miles between transceivers to maintain desired transmission
quality). The areas in which such shorter distances are required are those where
rainfall intensity and the size of the raindrops adversely impact transmission
quality at longer distances. Other weather conditions, such as snow, electrical
storms and high winds, have not, in the Company's experience, affected Wireless
Fiber services. The establishment of Wireless Fiber services may require
additional transceivers to triangulate around obstacles (such as buildings).
Similarly, to establish Wireless Fiber services covering a distance in excess of
five miles, additional transceivers are required to establish a chain with links
no more than five miles apart or to establish a system of interconnected hub
sites. The cost of additional transceivers where required by weather, physical
obstacles or distance may render Wireless Fiber uneconomical in certain
instances. The Company must obtain Roof Rights (or rights to access other
locations where lines of sight are available) in each building where a
transceiver will be placed. The Company seeks to prequalify and obtain Roof
Rights at buildings targeted by potential customers in its licensed areas in
advance of anticipated orders. There can be no assurance, however, that the
Company will be successful in obtaining Roof Rights necessary to establish its
Wireless Fiber services in its potential markets. The Company's prequalification
activities often require the payment of option fees to the owners of buildings
that are being prequalified. Notwithstanding its prequalification activities,
there can be no assurance that the Company will receive orders for Wireless
Fiber services which allow the Company to utilize Roof Rights it obtains. See
"Business -- Telecommunications Services -- Wireless Fiber -- Wireless Fiber
Links."
Uncertainty of Market Acceptance of Wireless Fiber Services
The Company has been marketing its Wireless Fiber services since December
1994 and such services currently are generating revenues that are insignificant.
The Company has not obtained a signifi cant 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
telecom munications 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
22
<PAGE>
of telecommunications service providers in general and wireless broadband
systems in particular (including the enactment of new statutes and the
promulgation of changes in the interpretation or enforcement of existing or new
rules and regulations). In addition, the extent of the potential demand for
wireless broadband services in the Company's market areas cannot be estimated
with certainty. There can be no assurance that one or more of these factors will
not have an adverse effect on the Company's financial condition and results of
operations and the value of the Common Stock. See "Business --
Telecommunications Services."
Reliance on Key Personnel
The efforts of a small number of key management and operating personnel
will largely determine the Company's success. The loss of any of such personnel
could adversely affect the Company. The Company's success also depends in part
upon its ability to hire and retain highly skilled and qualified operating,
marketing, financial and technical personnel. The competition for qualified
personnel in the telecommunications industry is intense and, accordingly, there
can be no assurance that the Company will be able to hire or retain necessary
personnel. See "Management."
Volatility of Market Price of Common Stock
Since the Common Stock has been publicly traded, the market price of the
Common Stock has fluctuated over a wide range and may continue to do so in the
future. The market price of the Common Stock could be subject to significant
fluctuations in response to various factors and events, including, among other
things, the depth and liquidity of the trading market of the Common Stock,
variations in the Company's operating results, press reports, including with
respect to regulation and industry trends, and the difference between actual
results and the results expected by investors and analysts. In addition, the
stock market in recent years has experienced broad price and volume fluctuations
that have often been unrelated to the operating performance of companies,
particularly telecommunications companies. These broad market fluctuations also
may adversely affect the market price of the Common Stock. See "Price Range of
Common Stock."
Shares Eligible for Future Sale
As of September 30, 1996, the Company had 28,290,525 shares of Common
Stock outstanding. Although a significant number of the outstanding shares of
Common Stock are "restricted securities," as that term is defined in Rule 144
under the Securities Act ("Restricted Shares"), and may not be sold unless such
sale is registered under the Securities Act or is made pursuant to an exemption
from registration under the Securities Act, including the exemption provided by
Rule 144, substantially all of such Restricted Shares either have been
registered for resale under the Securities Act or are currently, or will soon
become, available for sale pursuant to Rule 144. In addition, the Company is
obligated to issue a substantial number of shares of Common Stock in connection
with the Milliwave Acquisition, which would be subject to registration rights
requiring the Company to register them for resale. Sales or the expectation of
sales of a substantial number of shares of Common Stock in the public market
could adversely affect the prevailing market price of the Common Stock. See
"Shares Eligible for Future Sale."
Effect of Outstanding Options, Warrants and Other Convertible Securities
As of September 30, 1996, there were outstanding options and warrants with
respect to an aggregate of 9,597,968 shares of Common Stock at per-share
exercise prices ranging from $1.06 to $31.12. Additionally, the Convertible
Notes are convertible into shares of Common Stock and the Company intends to
convert the Locate Notes by issuing the Conversion Shares (all with no
additional cash payment to the Company). Moreover, substantially all of the
shares underlying such securities have been or will be registered for resale
under the Securities Act. The Company has two existing stock option plans under
which options to purchase up to an additional 1,338,833 shares of Common Stock
may be granted. The exercise of outstanding stock options, warrants and other
convertible securities will dilute the percentage ownership of the Company's
stockholders, and any sales in the public market of shares of Common Stock
issuable upon the exercise of such stock options, warrants and convertible
securities may adversely affect prevailing market prices for the Common Stock.
See "Description of Certain Indebtedness," "Description of Capital Stock" and
"Shares Eligible for Future Sale."
23
<PAGE>
Anti-takeover Provisions
The Company's corporate charter provides that directors serve staggered
three-year terms and authorizes the issuance of up to 15,000,000 preferred
shares with such designations, rights and prefer ences as may be determined from
time to time by the Company's Board of Directors. The affirmative vote of the
holders of at least two-thirds of the capital stock of the Company is required
to amend the provisions of the charter relating to the classification of the
Board. The staggered board provision could increase the likelihood that, in the
event of a possible takeover of the Company, incumbent directors would retain
their positions and, consequently, may have the effect of discouraging, delaying
or preventing a change in con trol or management of the Company. While the
Company has no commitments to issue Preferred Stock, the authorization of
preferred shares empowers the Board of Directors, without further stockholder
approval, to issue preferred shares with dividend, liquidation, conversion,
voting or other rights which could adversely affect the voting power or other
rights of the holders of the Common Stock. In the event of issuance, the
preferred shares could be utilized, under certain circumstances, as a method of
discouraging, delaying or preventing a change of control of the Company.
Additionally, certain of the Company's indebtedness (including the Notes)
contains provisions which would allow holders, at their election, to require
prepayment in the event of a change in control of the Company, which could also
serve to delay or prevent such a change in control from occurring. Moreover, the
Company's By-Laws provide that a stockholder entitled to vote for the election
of directors at a meeting may nominate a person or persons for election as
director only if written notice of such stockholder's intent to make such
nomination is given to the Company's Secretary not later than sixty days in
advance of such meeting, and the Company's stock option plans contain a
provision which accelerates the vesting of outstanding options in the event of
certain changes in control of the Company, both of which could serve to delay or
prevent a change in control from occurring. In addition, the Company is and,
subject to certain conditions, will continue to be, subject to the anti-takeover
provisions of the Delaware General Corporation Law, which could have the effect
of delaying or preventing a change of control of the Company. Furthermore, trans
fers of control and/or certain assets of telecommunications entities, such as
the Company, may require the approval of the FCC and/or state regulatory
commissions. With respect to 38 GHz licenses such as the Company's Wireless
Licenses, assignments of such licenses and changes of control involving entities
holding licenses require prior FCC and state regulatory approval and are subject
to restrictions and limitations on the identity and status of the assignee or
successor. See "Description of Capital Stock."
24
<PAGE>
PRICE RANGE OF COMMON STOCK
The Company's Common Stock has been quoted on the Nasdaq National Market
since June 27, 1994, under the symbol "WCII."
The following table sets forth, for the fiscal periods indicated, the high
and low last sale prices of the Common Stock as reported on the Nasdaq National
Market or the Nasdaq SmallCap Market, as the case may be. The quotes represent
"inter-dealer" prices without adjustment or mark-ups, mark-downs or commissions
and may not necessarily represent actual transactions.
Common Stock Price
------------------
Period Ended High Low
- ------------ ---- ---
November 30, 1994......................................... 9-11/16 6
February 28, 1995......................................... 9-1/8 5-1/32
May 31, 1995.............................................. 7-1/32 6
August 31, 1995........................................... 13-3/8 5
November 30, 1995......................................... 21-13/16 13-1/2
December 31, 1995 (commencing December 1, 1995)........... 17-3/8 14
March 31, 1996............................................ 18-1/2 13-3/8
June 30, 1996............................................. 32-1/4 16
September 30, 1996........................................ 29 15-3/4
October 1 to December 17, 1996............................ 23-7/8 16-1/2
See the cover page of this Prospectus for a recent reported last sale
price of the Common Stock on the Nasdaq National Market. As of December 17,
1996, there were 361 holders of record of the Common Stock. The Company believes
that there are more than 1,000 beneficial holders of the Common Stock.
DIVIDEND POLICY
The Company has not declared or paid any dividends on the Common Stock and
does not intend to pay dividends on the Common Stock in the foreseeable future.
The Company intends to retain future earnings, if any, to finance the
development and expansion of its business. Certain covenants in the Indentures
currently effectively prohibit the Company from declaring or paying cash
dividends. See "Description of Certain Indebtedness."
25
<PAGE>
CAPITALIZATION
The following table sets forth the cash and capitalization of the Company
as of September 30, 1996: (i) on a historical basis, (ii) on a pro forma basis
that gives effect to the acquisitions of Milliwave and Locate and financing
thereof, as if they occurred on September 30, 1996 and (iii) on a pro forma as
adjusted basis that gives effect to the conversion of the Locate Notes, as if it
occurred on September 30, 1996. This table should be read in conjunction with
the Consolidated Financial Statements and related notes thereto included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
September 30, 1996
-----------------------------------
Pro Forma
Actual Pro Forma As Adjusted
--------- --------- -----------
(in thousands)
<S> <C> <C> <C>
Cash, cash equivalents and short term investments . $ 162,978 $ 125,935 $ 125,935
========= ========= =========
Current portion of long-term debt and capital lease
obligations ..................................... $ 3,643 $ 21,172 $ 3,672
========= ========= =========
Long-term debt and capital lease obligations:
Senior Notes .................................... $ 170,356 $ 170,356 $ 170,356
Convertible Notes ............................... 85,178 85,178 85,178
Other notes ..................................... 10,680 10,680 10,680
Capital lease obligations, net of current portion 5,981 6,215 6,215
--------- --------- ---------
Total long-term debt and capital lease
obligations ................................ 272,195 272,429 272,429
--------- --------- ---------
Stockholders' equity:
Preferred stock of the Company, 15,000,000
shares authorized, none issued and
outstanding ................................... -- -- --
Common Stock, $.01 par value, 75,000,000
shares authorized, 28,290,525 shares issued
and outstanding, 31,690,525 shares issued and
outstanding on a pro forma basis, 32,743,157
shares issued and outstanding on an as
adjusted basis(1) ............................. 283 317 327
Additional paid-in capital ...................... 70,501 155,467 172,957
Accumulated deficit ............................. (91,338) (91,338) (91,338)
--------- --------- ---------
(20,554) 64,446 81,946
Less: treasury stock ........................... -- -- --
Unrealized gain on long term investments ..... 19 19 19
--------- --------- ---------
Total stockholders' equity ...................... (20,535) 64,465 81,965
--------- --------- ---------
Total capitalization .......................... $ 251,660 $ 336,894 $ 354,394
--------- --------- ---------
</TABLE>
- ----------
(1) Does not include (i) an aggregate of 1,175,852 shares of Common Stock
issuable upon exercise of options granted or which may be granted under
the 1992 Performance Equity Plan ("1992 Plan"), (ii) an aggregate of
3,500,000 shares of Common Stock issuable upon exercise of options granted
or which may be granted under the 1995 Performance Equity Plan ("1995
Plan") and (iii) 6,660,949 shares of Common Stock issuable upon exercise
of other outstanding options and warrants. See "Description of Certain
Indebtedness" and notes 17, 18 and 22 to the Consolidated Financial
Statements. The exercise and conversion prices of certain of the foregoing
securities are below the current market price of the Common Stock as of
the date of this Prospectus. Assumes the issuance of 3,400,000 shares of
Common Stock in connection with the Milliwave Acquisition.
26
<PAGE>
SELECTED FINANCIAL DATA
The summary financial data presented below, as of and for the two years
ended February 28, 1994 and 1995 and for the ten months ended December 31, 1995,
have been derived from the Company's audited financial statements and the
summary financial data presented below as of and for the nine months ended
September 30, 1995 and 1996 and the ten months ended December 31, 1994 have been
derived from unaudited consolidated financial statements of the Company included
elsewhere in this Prospectus. In the opinion of management, the unaudited
financial statements have been prepared on the same basis as the audited
financial statements and include all adjustments, which consist only of normal
recurring adjustments, necessary for a fair presentation of the financial
position and the results of operations for these periods. This data should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the pro forma and historical
consolidated financial statements, including the notes thereto, appearing
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
Year Ended Ten Months Ended Nine Months
February 28, December 31, Ended September 30,
---------------- ---------------- -------------------
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 $ 7,797 $ 27,958
Information services ................... -- 474 193 2,648 2,790 7,479
Merchandising .......................... 7,120 10,182 8,405 13,987 10,038 12,544
-------- -------- -------- -------- -------- --------
Total net sales ...................... 15,625 25,565 22,018 29,771 20,625 47,981
Operating income (loss):
Telecommunications ..................... (744) (3,423) (2,067) (6,945) (4,189) (21,076)
Information Services ................... -- (117) (115) 238 299 (369)
Merchandising .......................... 223 307 329 756 436 151
General corporate ...................... (1,547) (2,378) (1,609) (3,861) (2,968) (8,495)
-------- -------- -------- -------- -------- --------
Total operating loss ................. (2,068) (5,611) (3,462) (9,812) (6,422) (29,789)
Interest expense ......................... 744 637 505 7,630 869 27,388
Interest income .......................... (109) (385) (297) (2,890) (492) (8,174)
Other expenses, net ...................... 5,687 1,367 948 1,305 1,594 1,023
Net loss ................................. (8,195) (7,230) (4,618) (15,857) (8,394) (50,027)
Net loss per common share ................ $ (1.06) $ (0.42) $ (0.28) $ (0.70) $ (.40) $ (1.81)
Weighted average common shares outstanding 7,719 17,122 16,609 22,770 21,222 27,691
Other Financial Data:
Capital expenditures ..................... $ 307 $ 1,816 $ 1,465 $ 8,652 $ 4,591 $ 29,719
EBITDA(3) ................................ (1,845) (5,179) (3,116) (8,952) (6,040) (28,034)
</TABLE>
<TABLE>
<CAPTION>
As of As of
As of February 28, December 31, September 30,
------------------ ------------ -------------
1994 1995 1995 1996
---- ---- ---- ----
(in thousands) (in thousands) (in thousands)
<S> <C> <C> <C> <C>
Balance Sheet Data:
Cash, cash equivalents and short term investments....... $ 719 $3,156 $211,701 $162,978
Property and equipment, net............................. 1,301 2,663 15,898 44,162
Total assets............................................ 14,610 29,509 285,363 288,158
Current portion of long-term debt and capital
lease obligations 2,851 332 9,643 3,643
Long-term debt and capital lease obligations,
less current portion and discount...................... 3,084 5,165 240,455 272,195
Stockholders' equity.................................... 4,719 18,280 21,752 (20,536)
</TABLE>
(footnotes on next page)
27
<PAGE>
- ----------
(1) In the first nine months of 1996, the Company settled a dispute with
another carrier regarding the unauthorized switching of the Company's
customers from the other carrier. The Company recog nized revenue of
approximately $1.5 million and cost of sales of approximately $850,000 in
con nection with this settlement, the majority of which related to minutes
of use during that period.
(2) The Company has generated nominal revenues from its Wireless Fiber
services.
(3) EBITDA consists of loss before interest, income taxes, depreciation and
amortization and other income and expense. EBITDA is provided because it
is a measure commonly used in the telecommunications industry. It is
presented to enhance an understanding of the Company's operating results
and is not intended to represent cash flow or results of operations in
accordance with generally accepted accounting principles for the periods
indicated. See the Company's consolidated financial statements contained
elsewhere in this Prospectus.
28
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Company Overview
The Company is the largest holder of 38 GHz licenses in the United States.
It utilizes this position to provide telecommunications services in the United
States. As a complement to its telecommunications operations, the Company
produces and distributes information and entertainment content. The Company also
operates a non-strategic consumer products company with distribution through
national retailers in the United States and Canada.
The Company is quickly becoming an integrated provider of bundled
telecommunications services to small and medium-sized business customers. In
connection with this effort, the Company recently commenced the rollout of its
local exchange services as a value-added, economical alternative to the LECs,
particularly through the exploitation of the Company's Wireless Fiber
capabilities. The Company sells local, long distance, Internet access services
and other services primarily through a direct sales force to small and
medium-sized businesses.
The Company also provides Wireless Fiber-based dedicated local access
services to enable other carriers to expand their networks or meet end user
demand via the Company's digital wireless capacity in the 38 GHz portion of the
radio spectrum. Wireless Fiber services currently are marketed in most major
metropolitan areas to incumbent LECs, long distance carriers, fiber-based
competitive access providers, CLECs, cellular or specialized mobile radio
services, cable companies, Internet service providers, value-added resellers and
systems integrators.
The Company expects revenues to grow substantially over the next several
years as it focuses on building market share and customer relationships.
Historically, substantially all of the Company's revenues have been generated
through sales of residential long distance telecommunications, information and
entertainment content and consumer products. This revenue mix is now shifting
towards local and business long distance communications as a result of the above
described activities. The Company expects the shift in revenue mix to become
more pronounced in the next few quarters as the Company's revenues from its CLEC
activities and the sale of 38 GHz services to other carriers grow. Indeed,
revenues from the Company's local telecommunications businesses have already
started to grow as a result of increased carrier sales, driven in part by
capacity constraints caused by consumers' increasing data driven
telecommunications usage, and as a result of the introduction of the Company's
CLEC business. Conversely, revenues from the residential long distance business
will continue to decline due to the Company's decision to withdraw from actively
selling to that market segment.
During the past several months, the Company launched its CLEC offering in
New York City and is currently in the process of introducing such services in
five additional markets. By the end of 1997, the Company currently plans to be
offering its CLEC services in a total of 16 markets. The Company is installing
its own switches and is utilizing its Wireless Fiber capacity, together with
facilities leased or purchased from other carriers, to originate and terminate
local switched telecommunications traffic in major markets. The Company plans to
begin providing CLEC services in all 41 of its licensed areas over the next
three years.
The Company also has accelerated the expansion of its Wireless Fiber-based
wholesale business. This business will serve a significant portion of the local
access needs of the Company's CLEC business, including backbone interconnections
of hub, main switch and local node sites, and the origination and termination of
local traffic for the Company's local exchange customers. The Company has signed
master service agreements with a number of large industry customers, including
recent agreements with PacBell and ACSI, each of which have forecasted demand
for several thousand T-1 and DS-3 circuits to be provided by the Company over
the term of its agreement.
In connection with the Company's rollout of its local communications
services, the Company is continuing to acquire and develop its business
information services. One of the Company's goals in this area is to make
available an Internet-delivered group of targeted services for the small to
medium-sized business market. It is currently anticipated that these services
will be sold through the Company's direct
29
<PAGE>
sales force and will be structured as tiered-channels of licensed and customized
information, which will serve as a one-stop, easy-to-use desktop information
resource for business customers.
Revenues
Revenues generated by the operations of the Company's telecommunications
businesses will represent an increasingly larger percentage of the Company's
consolidated revenues as the Company expands into the local telecommunications
services market. Factors driving the mix of revenues are as follows:
o CLEC revenues will be driven primarily by the number of local exchange
circuits installed and in service. Customers generally are billed a flat monthly
fee plus a per-minute usage charge or fraction thereof. Revenue growth depends
on the introduction of local exchange services in new cities, the purchase and
installation of switches to service those areas, and the addition of new
customers. Additionally, if bundled services, such as long distance and Internet
access and Internet related services are purchased by the Company's customers,
revenue per circuit will increase. Other anticipated sources of revenue include
resale agreements for CMRS services, advanced data services, broadband data
transmission services and video conferencing. The Company believes that as its
local exchange services business grows, it will become the most significant
component of the Company's revenues. Local exchange services that are offered by
the Company on a resale basis can be provided, and revenues generated thereby,
shortly after receipt of customer orders. Currently, the sales cycle for the
resale of local exchange services is approximately one to three weeks in
duration. The Company anticipates that the sales cycle for local exchange
services provided using its Wireless Fiber capabilities and its own switches
will be approximately the same duration as that experienced in the resale of
local exchange services. CLECs, including the Company, currently set prices at a
discount to those charged by LECs. The Company anticipates ongoing price
reductions for provision of local exchange services, including those provided by
the Company, in the future.
o Carrier Services 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's local access services are sold through a sales cycle that has averaged
9 to 12 months in duration because of the need to (i) demonstrate the efficacy
and reliability of Wireless Fiber-based services to potential customers, as such
services involve technology that is relatively new to the United States
telecommunications industry and (ii) acquire the Roof Rights to install the
Wireless Fiber links necessary to address the specific requirements of a
customer. The Company believes that this sales cycle will become shorter going
forward as (i) the efficacy and reliability of Wireless Fiber services become
more widely accepted in the industry (thereby shortening or eliminating the
customer education phase of the sales cycle), (ii) the Company's strategy of
prequalifying buildings for Roof Rights results in the acquisition of key
locations that will enable the Company to more rapidly address the specific
requirements of many potential customers and (iii) existing customers broaden
their use of the Company's Wireless Fiber services, especially those which have
entered into master service agreements with the Company. CAPs, including the
Company, currently set prices at a discount to those charged by LECs. The
Company anticipates significant ongoing price reductions for CAP services,
including those provided by the Company, in the future. See "Risk Factors --
Uncertainty of Market Acceptance of Wireless Fiber Services."
o Long distance telecommunications services revenues are driven
principally by the size and type of the customer base, with the largest
percentage of the Company's long distance telecommunications services revenues
currently derived from residential customers. Customers are billed on the basis
of minutes or fractions thereof. The Company is focusing on the sale of long
distance services to small and medium-sized business customers as part of its
CLEC rollout and is not currently marketing long distance services to
residential customers on an active basis, except through established affinity
group and other targeted programs. As a result, it is allowing its revenues from
long distance service to decline through attrition, as it focuses on its core
small to medium-sized business market.
30
<PAGE>
o Information and entertainment content revenues are generated
principally by (i) sales of content and related services, such as business
information documentaries, sports programming and foreign films, to traditional
content customers, such as cable networks and radio stations, (ii) sales of
content to new media distribution channels, such as on-line services, (iii)
sales of advertising and (iv) the bundling of content with the Company's
telecommunications services. Revenues also are driven by the size and quality of
the Company's programming library and the release of new programs, which affects
quarter to quarter comparability.
o 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:
o 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 purchases of switching equipment, 38 GHz radios, site acquisition fees
and expenses (including option fees for the prequalification of buildings for
Roof Rights) and strategic preplacement of a limited number of radios and
related equipment in connection with the Company's building-centric network plan
(i.e., hubbing). In addition, the Company will have substantial start-up costs
related to its CLEC business that will not be capitalized, including costs of
engineering, sales office and service personnel, marketing, administrative and
other personnel, who will be needed in advance of related revenues. When the
Company commences operations in a city, it will initially resell the local
exchange services of LECs or other CLECs. The Company will carry more of its
traffic on its own facilities as it develops and installs the switches, radios
and interconnections required to provide services in a particular city. However,
the Company always will carry significant amounts of its traffic over leased
facilities at lower margins. The resale of local exchange services typically
will result in greater operating costs than the provision of services over the
Company's own facilities and such costs will therefore decrease as a percentage
of total CLEC operating costs as the Company begins to provide more services
over its own facilities. Additionally, site acquisition and switch costs will
become a lower percentage of cost per minute of service as more buildings are
connected and as the Company increases the number of customers and lines per
building. The Company is following a city-by-city, building-centric network plan
to establish its own local exchange services facilities. The up-front capital
costs of establishing the initial infrastructure required for the Company to
provide its own local exchange services are substantial and much greater than
those relating to the Company's CAP business.
o Costs associated with the Company's Carrier Services business include
site acquisition (including option fees for the prequalification of buildings
for Roof Rights) and equipment related fees and expenses, including costs
incurred in connection with the acquisition of Roof Rights and the purchase of
38 GHz radios. In addition, the Company will continue to incur substantial
start-up costs related to its CAP business that will not be capitalized,
including costs of engineering, marketing, administrative and other personnel
who will be needed in advance of related revenues. The Company anticipates that
the cost per Wireless Fiber link will be reduced as increased traffic is
generated in buildings in which the Company already has established service and
the Company qualifies for volume discounts from its principal equipment vendors.
The Company also expects that equipment costs will continue to drop as
technological improvements are made and more vendors begin to offer 38 GHz
radios and other equipment.
o Costs associated with the Company's long distance business include
expenses related to minutes purchased from major carriers for resale, 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
31
<PAGE>
the Company. The Company has never paid or been required to pay any under
utilization charges. Such costs will be reduced as the Company installs its own
switches and certain services are no longer required.
o The Company's information services businesses have production,
distribution and services costs. Film production costs include those related to
producing original products and licensing third-party products and are
capitalized as incurred and are expensed as productions are completed. Overhead
costs in the production division are also capitalized and allocated to films in
progress, and are subsequently expensed as such films are completed. The
distribution divisions incur royalty costs payable to third-party producers and
selling costs, both of which vary directly with sales of acquired product, as
well as administrative costs, substantially personnel related costs, which are
primarily fixed in nature and which are expensed as incurred.
o 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
Nine Months Ended September 30, 1996 Compared to Nine Months Ended
September 30, 1995
The Company has experienced and expects to continue to experience rapid
revenue growth for the next several years. Net sales for the nine months ended
September 30, 1996 increased by $27,356,000, or 133%, to $47,981,000 from
$20,625,000 for the nine months ended September 30, 1995. This increase was
attributable to increased revenues generated by the Company's telecommunications
and information services segments. Telecommunications services revenues
increased by $20,161,000 to $27,958,000. The Company's revenues from WinStar
Wireless increased to $2,131,000 from $90,000 for same period in 1995. WinStar
Wireless derived a significant portion of its revenue from the Company's systems
integration business, with Milliwave being the largest customer. Revenues at
WinStar Telecom remain insignificant for the period ($103,000), but are expected
to increase rapidly as the Company expands the provision of its local
telecommunications services in New York and other cities.
Residential long distance revenues through WinStar Gateway Network
increased by $18,017,000 to $25,724,000 for the nine months ended September 30,
1996. The Company is currently focusing on the sale of long distance services to
small and medium-sized business customers through its CLEC sales force and is
allowing its revenues from residential long distance services to decline through
attrition, as it focuses on its core business.
Revenues from the information services segment through WinStar New Media
increased by $4,689,000 to $7,479,000, due to continued growth of this segment
internally and through acquisition.
During the most recent quarter ended September 30, 1996, operations of the
Company's CLEC business advanced on many fronts, including the addition of
personnel, regulatory authorizations in several states, negotiation of
interconnect and resale agreements with other local carriers, and new
relationships with equipment vendors. The Company established sales and
marketing offices in six cities. Its first switch was installed and is operating
in New York City. Switches for four additional cities will be installed by the
Company over the next several months. The Company also began an advertising
campaign in New York City on November 17, 1996, targeting small and medium-sized
businesses.
WinStar Wireless, the Company's carrier sales subsidiary, has seen a
significant increase in demand, has recently signed master service agreements
with Pacific Bell and ACSI, and is currently negotiating with other regional
Bell operating companies and other potential carrier customers. In part, this
increase in demand is the result of local network capacity constraint which is
an indirect result of growing online and Internet usage. Pacific Bell and ACSI,
for example, have each forecasted demand for several thousand T-1 and DS-3
circuits to be provided by WinStar Wireless.
32
<PAGE>
Cost of sales for the nine months ended September 30, 1996 increased by
$13,648,000, or 93%, from $14,626,000 for the nine months ended September 30,
1995. The increase was principally attributable to the growth in the
telecommunications and information services business.
Gross profit for the nine months ended September 30, 1996 increased by
$13,708,000, or 228%, to $19,707,000. Gross profit as a percentage of net sales
increased to 41% compared with 29% for the same period of 1995. This increase
was primarily attributable to improving margins in the telecommunications and
information services businesses. The gross profit margin in the
telecommunications businesses increased from 25.6% in 1995 to 45.8% in 1996.
The Company expects gross profit to continue to increase as the Company's
local telecommunications business expands. However, fluctuations in gross profit
margin are anticipated to continue during the rollout of the CLEC business. The
gross profit margin of this business will initially be lower as it enters each
city as a reseller. When its local exchange switches are installed and in
operation, such margins are expected to increase. The Company's carrier sales
business is expected to have a positive impact on margins as revenues increase.
Long distance margins are expected to be lower in the near term due to the
Company's shift in its long distance marketing strategy. While these decreased
long distance margins may have a greater effect on the Company's overall gross
profit margin in the near term, (e.g. the telecommunications margin decrease
from 47.9% in the second quarter to 43.2% in the third quarter is directly
attributable to the Company's withdrawal from residential marketing efforts),
the impact of the consumer long distance business on margins is expected to
decrease as the Company begins providing more switched long distance service to
a greater number of commercial customers and as revenues from other business
segments increase. The gross profit margins at the Company's information
services and consumer products segments fluctuate from quarter to quarter based
on seasonality and product mix.
Selling, general and administrative expenses increased by $35,703,000 to
$47,742,000, or 99% of net sales, for the nine months ended September 30, 1996,
from $12,039,000, or 58% of net sales, for the comparable period of the prior
year. Selling, general and administrative expense increases are and will
continue to be generated predominantly from telecommunications segments as the
Company continues to hire sales, marketing, network and software engineering,
and related technical and support personnel in connection with accelerated
rollout of its CLEC operations and growth in its other telecommunications
businesses.
Interest expense for the nine months ended September 30, 1996 was
$27,388,000 compared with $869,000 for the same period in 1995. The increase was
primarily attributable to $24,577,000 in interest accreted on the Company's
senior and convertible notes payable issued in the October 1995 Debt Placement,
which is not payable in cash until after 1999. Interest income for the nine
months ended September 30, 1996 increased by $7,682,000 to $8,174,000, from
$492,000 for the nine months ended September 30, 1995. The increase is
attributable to short-term investment earnings on the proceeds of the 1995 Debt
Placement, which raised net proceeds of $214,000,000.
For the reasons noted above, the net loss for the nine months ended
September 30, 1996 was $50,027,000, compared with a net loss of $8,394,000 for
the nine months ended September 30, 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.
33
<PAGE>
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 months ended December 31, 1995 increased by
$2,968,000, or 41%, to $10,225,000, from $7,257,000 for the ten months ended
December 31, 1994. Gross profit as a percentage of sales increased to 34.3% for
the ten months ended December 31, 1995, compared to 33.0% in the comparable
period of the prior year. The increase was principally attributable to an
increase in gross margins at WinStar Global Products resulting from sales price
increases and product cost decreases relating to better material pricing and
factory efficiencies.
Selling, general and administrative expenses increased by $9,292,277 to
$19,266,466, or 64.7% of net sales, for the ten months ended December 31, 1995,
from $9,974,189, or 45.3% of net sales, in the comparable period of the prior
year. The acquisition of Avant-Garde and the consolidation of that entity's
results of operations into the Company's financial statements from July 17, 1995
onward, as well as the growth in the administrative infrastructure at WinStar
Wireless, accounted for approximately 36% of the total increase. In particular,
expenses were incurred to develop operating systems, to market services to
targeted customers and to prepare for future growth in the wireless business.
Corporate general and administrative expenses accounted for approximately 23% of
the total increase because of the hiring of additional personnel and the
expansion of the Company's infrastructure to manage future growth in the
wireless business. Selling and marketing expenses incurred by WinStar Global
Products to service increased revenues accounted for approximately 22% of the
total increase.
For the reasons noted above, the operating loss for the ten months ended
December 31, 1995, was $9,811,629, compared to an operating loss of $3,462,037
in the comparable period of the prior year.
Interest expense increased by $7,125,000 to $7,630,000 for the ten months
ended December 31, 1995, from $505,000 for the ten months ended December 31,
1994, reflecting principally the non-cash accretion of interest to the Senior
and Convertible Notes.
Interest income for the ten months ended December 31, 1995 increased by
$2,593,000, to $2,890,000, compared with $297,000 for the same period during the
prior year. The increase was attributable to earnings on the 1995 Debt
Placement, which raised net proceeds of $214.5 million.
Other expense, net, for the ten months ended December 31, 1995 increased
by $357,000, to $1,306,000, compared with $949,000 for the same period of the
prior year. The cost of the acquisition of Avant-Garde has been allocated
primarily to the 38 GHz licenses held by Avant-Garde at the time of the
acquisition, and the amortization of this asset beginning in June 1995, when
such licenses were placed into service, caused an increase in amortization
expense of $258,000.
For the reasons noted above, the Company reported a net loss of
$15,857,459 for the ten months ended December 31, 1995, compared to a net loss
of $4,618,358 in the comparable period of the prior year.
Year Ended February 28, 1995 Compared to Year Ended February 28, 1994
Net sales for the year ended February 28, 1995, were $25,564,760, up 63.6%
from the prior year's sales of $15,625,019. During the year ended February 28,
1995, WinStar Gateway reported net sales of $14,909,225, compared to net sales
of $8,505,282 in the year ended February 28, 1994, an increase of 75.3%. Sales
growth resulted primarily from growth in the customer base at WinStar Gateway.
WinStar Global Products also experienced substantial sales growth, from
$7,119,737 in the year ended February 28, 1994, to $10,182,143 in the year ended
February 28, 1995, an increase of 43%. This increase was attributable to
approximately $3,600,000 in additional sales from the bath and body product line
acquired in the year ended February 28, 1994, as well as growth in the personal
care products line. These sales increases were offset by a reduction of
approximately $1,200,000 in sales from discontinued business lines. WinStar New
Media generated $473,392 in sales in the year ended February 28, 1995, its first
year of operation.
34
<PAGE>
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 continue 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 and lease facilities. Cash used to fund negative EBITDA during
the nine months ended September 30, 1996 was $28.0 million. In October 1995, the
Company raised net proceeds of approximately $214 million from the 1995 Debt
Placement to fund the expansion of its wholesale telecommunications business.
Cash payment of interest expense on such debt is not required to begin until
October 2000. At September 30, 1996 and December 31, 1995, working capital was
$170 million and $215 million, respectively, including cash, cash equivalents
and short term investments of $163 million and $212 million, respectively.
The passage of the Telecommunications Act in February 1996 resulted in
opportunities that motivated the Company to accelerate the development and
expansion of its telecommunications businesses. To capitalize on these
opportunities, the Company has expanded and accelerated its capital expenditure
program. Capital expenditures for the nine months ended September 30, 1996, and
the ten months ended December 31, 1995 were $29.7 million and $8.7 million,
respectively. As a result of the acceleration of the development and expansion
of the Company's telecommunications business, the
35
<PAGE>
Company's current plans are for capital expenditures of approximately $240
million and $330 million for 1997 and 1998, respectively.
A significant portion of the Company's increased capital requirements will
result from the roll-out of the Company's CLEC business on a nation-wide basis.
The Company is building a direct sales force, has opened sales offices in nine
major cities, and is in the process of expanding into other metropolitan areas.
Additionally, the Company is in the process of ordering and installing switching
and other network equipment to be placed in its key markets. Accordingly, the
Company expects that its working capital requirements, capital expenditure
needs, and selling, general and administrative expenses may continue to increase
as this expansion takes place, and that such increases may require the Company
to continue to seek additional capital.
The Company has two working capital facilities with a total of $8.3
million outstanding thereunder as of September 30, 1996, with terms expiring in
1998 and 1999.
As of September 30, 1996, the Company has commitments during the next year
(i) to purchase $26 million of telecommunications capital equipment, (ii) to pay
an aggregate of approximately $41 million in cash (plus 3.4 million shares of
its Common Stock) upon consummation of the Milliwave and other acquisitions, and
(iii) to pay $17.5 million in cash upon maturity of the Locate Notes, assuming
such notes are not converted by the Company into the Conversion Shares.
Management anticipates, based on current plans and assumptions relating to
its operations, that the proceeds of this offering, together with the Company's
existing financial resources (including proceeds raised in the 1995 Debt
Placement) and equipment financing arrangements which the Company intends to
seek, will be sufficient to fund the Company's growth and operations for
approximately 12 to 15 months from the date of this Prospectus. After such time,
the Company will be required to obtain additional sources of significant
capital. Further, in the event the Company's plans or assumptions change or
prove to be inaccurate, or if the Company consummates any acquisitions of
businesses or assets (including additional 38 GHz licenses, by auction or
otherwise) or if the Company does not consummate its equipment financings, the
Company may be required to seek additional sources of capital sooner than
currently anticipated. See "Risk Factors -- Significant Capital Requirements"
and "-- Risks Related to CLEC Strategy; Anticipated Initial Negative Operating
Margins in CLEC Business" and "Use of Proceeds."
Forward Looking Statements
When used in this and in future filings by the Company with the Securities
and Exchange Commission, in the Company's press releases and in oral statements
made with the approval of an authorized executive officer of the Company, the
words or phrases "will likely result," expects," "plans," "will continue," "is
anticipated," "estimated," "project" or "outlook" or similar expressions
(including confirmations by an authorized executive officer of the Company of
any such expressions made by a third party with respect to the Company) are
intended to identify "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. The Company wishes to caution
readers not to place undue reliance on any such forward-looking statements, each
of which speak only as of the date made. Such statements are subject to certain
risks and uncertainties that could cause actual results to differ materially
from historical earnings and those presently anticipated or projected. Such
risks and other aspects of the Company's business and operations are described
in "Risk Factors." The Company has no obligation to publicly release the result
of any revisions which may be made to any forward-looking statements to reflect
anticipated or unanticipated events or circumstances occurring after the date of
such statements.
36
<PAGE>
BUSINESS
General
The Company is the largest holder of 38 GHz licenses in the United States
and utilizes this position to provide facilities-based telecommunications
services. The Company is in the process of rolling out its CLEC business and
plans to offer a full range of telecommunications services, including local,
long distance and Internet access services, to small and medium-sized businesses
in major metropolitan areas throughout the United States. The Company also
offers its Carrier Services, a variety of broadband, high-capacity digital
network services, to other telecommunications providers on a wholesale basis. In
addition, as a complement to its telecommunications services offerings, the
Company produces and distributes information and entertainment content.
By exploiting its Wireless Fiber services as a key component of its
transmission capabilities and deploying a strategic network of switches, the
Company seeks to distinguish itself in its markets as a value-added, economical
provider of high-capacity, local telecommunications services and an attractive
alternative to the LECs, such as the RBOCs.
Wireless Fiber services deliver high-quality transmission via digital,
wireless capacity in the 38 GHz portion of the radio spectrum, pursuant to the
Wireless Licenses. The Wireless Licenses enable the Company to provide Wireless
Fiber services in, among other major metropolitan areas, the 31 most populated
Metropolitan Statistical Areas ("MSAs") in the United States, including Atlanta,
Boston, Chicago, Los Angeles, New York and San Francisco. The MSAs covered by
the Wireless Licenses include more than 100 cities with populations exceeding
100,000 each and encompass an aggregate population of almost 110 million. In
addition, the Company has entered into an agreement to acquire a significant
number of additional 38 GHz licenses, as described below under "--
Telecommunications Services -- Wireless Fiber -- Pending Milliwave Acquisition."
Wireless Fiber services are engineered to provide up to 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 ISDN
lines. The wireless nature of the Company's services enables it 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 and to
offer integrated (i.e., bundled local, long distance and other)
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 services providers such as the Company.
General
The present structure of the telecommunications marketplace was shaped
principally by the court-directed divestiture ("Divestiture") of the Bell System
in 1984. In connection with the Divestiture, the United States was divided into
194 local regions known as LATAs and the Bell System was separated into a long
distance carrier, AT&T, to provide long distance services between LATAs, and
seven RBOCs, including, for example, Bell Atlantic and NYNEX, to provide local
telecommunications services.
37
<PAGE>
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. The Telecommunications Act, however, opens the local
exchange services market to competition on a nation-wide 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, in addition to long distance and other services, a full range of local
exchange services, including local dial tone, custom calling features and
intraLATA toll services, to both business and residential customers. It requires
LECs to allow alternate carriers, such as the Company, to interconnect with
their networks and establishes additional procompetitive obligations upon the
incumbent LECs. These obligations include allowing unbundled access to the
incumbent LECs' networks, resale of local exchange services, number portability,
dialing parity, access to rights-of-way and mutual compensation for the
termination of switched local traffic. In addition, the legislation codifies the
LECs' equal access and nondiscrimination obligations and preempts inconsistent
state regulation. The Telecommunications Act also contains certain provisions
that ultimately will eliminate the restrictions that currently prohibit the
RBOCs from providing interLATA services.
The full extent of the effects of the Telecommunications Act and the FCC's
Interconnection Order implementing such Act (the "Interconnection Order") on the
Company and other telecommunications companies is as of yet unknown,
particularly because it contains many provisions that require enabling
regulations, many of which have not yet been promulgated or which are not yet
final or are still subject to reconsideration or appeal or both. However, the
Company believes that both competition and opportunity in the telecommunications
industry will be increased by the Telecommunications Act, as telecommunications
providers seek to enter quickly into newly-opened markets. The Company believes
that such opportunity is amplified by (i) growing consumer interest, especially
among business users, in alternatives to their existing carriers for improved
customer service, and for more capacity in the form of broader digital bandwidth
channels to customer premises, better pricing terms and route diversity, (ii)
long distance carriers' desire to connect their long distance networks to local
origination and termination points at rates lower than available from the
incumbent LECs', (iii) a monopoly position and pricing structure in the local
exchange services market which historically has provided little economic
incentive for the incumbent LECs to upgrade their existing networks or to
provide specialized services, (iv) technological advances in data and video
services and products requiring greater transmission capacity and reliability
and (v) ongoing regulatory initiatives to allow other providers of local
telecommunications services to interconnect their networks with those owned by
the incumbent LECs.
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 wireless
telecommunications links between two fixed points. 38 GHz technology was first
deployed on a commercial basis in Europe by PCS providers for the
interconnection of their cell sites.
By early 1994, technological advances combined with growing use in Europe
led to increasing awareness of and interest in the potential uses of 38 GHz in
the United States. After Avant-Garde (which was acquired by the Company in July
1995 and which was the original recipient of many of the Company's Wireless
Licenses) received its initial 30 multiple-channel 38 GHz licenses in September
1993 (each license providing for four channels for an aggregate of 400 MHz of
bandwidth capacity), other entities, including several large telecommunications
companies such as Pacific Telesis, Inc., GTE and MCI, sought similar
multiple-channel 38 GHz licenses for the provision of wireless local
telecommunications services. However, in September 1994, the FCC began to follow
new procedures with respect to the granting of 38 GHz licenses, including
limiting bandwidth capacity to a single 100 MHz channel per licensee in a
particular licensed geographic area and, in November 1995, established a freeze
on the issuance of new licenses in this spectrum pending the outcome of a
rulemaking proceeding. See "-- Government Regulation of Telecommunications
Operations."
38
<PAGE>
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:
o Efficient Channel Re-Use 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 re-use of
bandwidth capacity in a licensed area. The ability to re-use capacity allows the
38 GHz license holder to densely deploy its 38 GHz services in a given
geographic area, providing services to multiple customers over the same 38 GHz
channel and conserving bandwidth capacity, thereby enhancing the types of
services that can be provided and increasing the number of customers to which
such services can be provided. Due to the limited dispersion characteristics of
38 GHz, numerous T-1 circuits and/or DS-3 circuits can be placed in close
proximity without interfering with each other. The Company believes that the use
of multiple 100 MHz channels allows, and in many instances is required, for
dense re-use where multiple DS-3 paths are being deployed in a given area. The
Company currently utilizes one 100 MHz channel to provide either four T-1
circuits, eight T-1 circuits or one DS-3 circuit depending on the specific radio
equipment utilized and its configuration. The specific equipment and capacity
deployed are determined by the capacity needed on each link.
38 GHz licenses have been granted by the FCC on a geographic basis and
cover areas originally defined by the applicant, allowing the license holder to
install and operate as many transmission links as can be engineered in the
entire licensed area without obtaining further approval from the FCC. This is a
significant difference from most other comparable portions of the radio spectrum
(i.e., those that are used for most 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.
o 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.
o 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).
o 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.
o 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, both above and below 38 GHz for applications, such as
satellite and
39
<PAGE>
wireless cable services, and, accordingly, are not available. 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
Key elements of the Company's strategy include:
Accelerating Rollout of CLEC Services and Leveraging of Wireless Fiber
Capabilities. In addition to the major metropolitan areas where its is already
providing or introducing its CLEC services, the Company intends to introduce
such services in each of the other markets where it has multiple-channel
Wireless Licenses during the next three years. As the Company commences its CLEC
business in each market, in order to gain initial market penetration in that
market, it may initially resell the local exchange services of other service
providers, such as other CLECs and the incumbent LECs, until it has established
the Wireless Fiber and switch-based infrastructure required to provide its local
exchange services in that city. The Company commissioned its first switch in New
York City in October 1996 and currently intends to install, approximately 40
additional switches in its major markets during the next three years. In July
1996, the Company entered into a three-year agreement with Lucent allowing the
Company to purchase the switching systems and related equipment and software it
will need to build its CLEC infrastructure. Under the agreement, switches will
be provided to the Company at discounted prices so long as the Company purchases
certain minimum numbers of switches during each year of the agreement.
The Company also has entered into interconnection agreements with local
exchange service providers, including incumbent LECs, under which the Company
will be able to exchange customer traffic with such providers and obtain network
elements and/or services on an unbundled basis. These agreements are with
carriers such as Ameritech for Illinois and Michigan, PacBell for California,
GTE for California and Tampa, Florida, NYNEX for New York and Massachusetts,
Bell South for Florida, Georgia and Tennessee, Sprint for the Chicago
metropolitan area, and Bell Atlantic for Pennsylvania, the District of Columbia,
New Jersey and Delaware, among others. The Company is also in the process of
negotiating a number of additional interconnection agreements encompassing
cities covered by Wireless Licenses.
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 more costly
fiber-optic lines or using the facilities of the LECs, the Company believes that
it will be able to provide many types of bundled local exchange, long distance,
Internet services, enhanced communications and information services to its
target customers at lower cost than many of its competitors, with equal or
better quality. See "-- Telecommunications Services -- CLEC and Long Distance
Services."
Exploiting First to Market and Leading Spectrum Holder Advantages. The
Company currently enjoys a "first-to-market" advantage as one of the few holders
of 38 GHz licenses with an established operating and management infrastructure
and the capital necessary to rapidly exploit and roll out its 38 GHz services on
a commercial basis. The Company believes that its competitive advantage is
further strengthened by its position as the holder of the largest aggregate
amount of 38 GHz bandwidth capacity in the United States and by the broad
geographic scope encompassed by its Wireless Licenses. The Company holds 45
Wireless Licenses, 30 of which provide for 400 MHz of bandwidth capacity per
licensed area and 15 of which provide for 100 MHz of bandwidth capacity per
licensed area, and which allow the Company to address an aggregate of more than
400 million channel pops (i.e, the aggregate population in the areas covered by
the Wireless Licenses multiplied by the aggregate number of 100 MHz channels
allocated to the Company under those licenses). The acquisition described under
"--Pending Acquisition of Milliwave" will substantially increase the Company's
38 GHz bandwidth holdings. 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.
40
<PAGE>
Marketing Wireless Fiber Services to Other Telecommunications Providers.
The Company targets other telecommunications service providers in marketing its
Wireless Fiber-based last-mile local access and high-capacity, broadband
services. The Company believes that its Wireless Fiber services present an
attractive, economical method for other telecommunications service providers to
add a high-capacity extension to 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, RBOCs and other LECs, other CAPs and CLECs,
providers of personal communications services ("PCS") and cellular and
specialized mobile radio services (collectively "CMRS providers"). The Company
also markets its Wireless Fiber services to telecommunications service providers
as viable, cost-efficient alternate routes for their telecommunications traffic
in situations where primary routes are incapacitated and/or network reliability
concerns require alternate multiple telecommunications paths. See "--
Telecommunications Services -- Carrier Services."
Marketing Wireless Fiber Services as a Solution to Growing Volume of Data
Communications and Internet Traffic and for Private Network Services. The
Company believes that demand for its Wireless Fiber services will be amplified
by the growing volume of data communications traffic resulting from increasing
Internet usage and other high-volume transmissions. This type of traffic
increasingly requires high-capacity, end-to-end networks that are often
difficult to provide economically with existing RBOC and LEC infrastructure. The
Company markets 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
services. The total amount of bandwidth of each 38 GHz channel is 100 MHz, which
supports high broadband, interactive transmission paths. Wireless Fiber DS-3
links (each of which currently transmits at a rate up to 45 MHz) provide
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 recently established its first major
relationship with an Internet service provider and is actively pursuing
relationships with additional Internet service providers. The Company also
offers its Wireless Fiber services to businesses, government agencies and
institutions with multiple locations that seek to establish their own
independent local telecommunications systems for dedicated private-line voice
and data networks, including LAN and WAN applications. See "--
Telecommunications Services -- Carrier Services."
Acquiring Information and Content Services to Complement
Telecommunications Service Offerings. The Company believes that participants in
the telecommunications market will increasingly seek to offer "content" -- such
as legal, human resources, training, news, stock quotes and other value-added
information-- to differentiate their services and attract traffic onto their
transmission networks. It is believed that the ability to deliver information
and other content will play an especially important role in business users'
choice of a telecommunications provider. Accordingly, the Company seeks to
bundle proprietary content that it controls with various telecommunications
services it offers to provide higher-margin products and services. The Company
currently is developing an Internet-delivered network of proprietary services
and productivity tools to be targeted primarily to its business customers. It
also produces entertainment content, focusing on niche programming such as
documentaries, foreign films and multimedia sports programming. The Company also
provides support services, including financial, marketing and telecommunications
services, in connection with the development and delivery of proprietary
information content services and products by others in order to create
proprietary positions in these sources of content. See "-- New Media Business."
Re-focusing and Expanding the Company's Long Distance Operations. The
Company has shifted the focus of its long distance operations toward providing
long distance services to business users as a complement to its CLEC services.
As such, the Company is not currently marketing long distance services to
residential customers on an active basis, except through established affinity
group programs. Consistent with this approach, the Company is seeking to expand
and improve its long distance operations by (i) bundling its long distance
services with its local telecommunications services, (ii) broadening its
business customer base and increasing customer retention rates and (iii)
improving operating efficiencies
41
<PAGE>
by reducing costs associated with the provision of its long distance services.
The Company also anticipates that it will be able to leverage the intelligent
network platforms developed in connection with its long distance services to
enhance the marketability of its local telecommunications services and will be
able to improve margins on its long distance services by shifting long distance
traffic to the Company's switches as they are deployed. See "--
Telecommunications Services -- CLEC and Long Distance Services."
Telecommunications Services
The Company began implementing its CLEC business on an accelerated basis
with the passage of the Telecommunications Act in February 1996. The Company is
quickly becoming an integrated provider of bundled telecommunications services
and seeks to become a value-added, economical alternative to the LECs,
particularly through the exploitation of the Company's Wireless Fiber
capabilities. The Company currently provides local exchange services on a
switched and resale basis in New York City and is currently introducing CLEC
services in Atlanta, Boston, Chicago, Hartford, Los Angeles, Milwaukee, San
Diego and Stamford. Since late 1994, the Company has also focused on the
development and marketing of its Wireless Fiber-based Carrier Services,
including local access services. After an initial market-education phase, in
which the Company demonstrated the efficacy and reliability of its Wireless
Fiber services, principally through the use of field demonstrations and the
installation of trial-basis Wireless Fiber links, the Company began receiving
orders for Wireless Fiber services in 1995.
Wireless Fiber
The Company utilizes its Wireless Fiber capacity in connection with its
Carrier Services business and will employ its Wireless Fiber capacity as an
integral component of its CLEC facilities for the origination and termination of
local traffic and hubbing of switch sites and other facilities constructed or
accessed by the Company.
Wireless Fiber Links.
Each Wireless Fiber link currently provides up to eight T-1s of capacity
(equivalent to 192 voice lines) or one DS-3 of capacity (equivalent to 672 voice
lines). The Company believes that with future developments in 38 GHz technology
there will be substantial increases in the capacity of each Wireless Fiber link.
The Company's Wireless Fiber links meet or exceed general telephone industry
standards, provide transmission quality equivalent to that produced by fiber
optic-based facilities, and address the growing demand for high speed, high
capacity, digital telecommunications services for voice, data and video
applications, including traditional local access, Internet access and network
interconnection services. Accordingly, the Company believes that its Wireless
Fiber capacity meets or exceeds the majority of potential customers'
requirements in the Company's present and future target markets.
Each Wireless Fiber path consists of transmission links, which are paired
digital millimeter wave radio transceivers placed at a distance of up to five
miles from one another within a direct, unobstructed line of sight. The
transceivers currently used by the Company to create its Wireless Fiber paths
are primarily the Tel-Link 38 Radio Systems supplied by P-Com, Inc. ("P-Com")
pursuant to a four-year nonexclusive supply agreement ("Tel-Link Agreement")
executed in November 1994, which may be terminated by the Company upon 90 days'
notice to P-Com (subject to certain liquidated damages provisions if certain
purchase minimums are not met). The transceivers are installed where lines of
sight can be established between transceivers, such as on rooftops or towers or
in windows. The Tel-Link Agreement includes provisions whereby the Company pays
a higher price per link at the beginning of the contract period, with the excess
recoverable by the Company in the form of significantly discounted links once
certain volume levels have been achieved. The contract also stipulates certain
minimum annual volume levels which must be met in order to maintain the agreed
upon pricing structure. The Company has entered into an amendment to the
Tel-Link Agreement with P-Com, pursuant to which the requirements for volume
discount pricing were revised. The Company has not yet qualified for significant
volume discounts. The amendment also added another year to such term, reduced
the purchase commitment provisions upon termination, and revised the type of
Tel-Links to be provided by P-Com such that a greater proportion of higher
capacity transceivers (including DS-3 capable transceivers), will be delivered
under the agreement.
42
<PAGE>
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 for channel interference; (ii) 100 MHz bandwidth in each channel,
allowing for high subdivision of voice and data traffic; (iii) a range of up to
five miles between transmission links; (iv) performance engineered to provide up
to 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 hiring of
qualified personnel, the development of management and operating systems, and
the recently completed construction of a modern, state-of-the-art SOCC in Tysons
Corner, Virginia.
Transmission links in the Company's Wireless Fiber paths are connected via
dial-up modems to both the Company-maintained SOCC in Virginia. The SOCC
provides the Company with points of contact for network monitoring,
troubleshooting and dispatching repair personnel in each MSA. The SOCC provides
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 covering a
distance in excess of five miles or to establish a system of interconnected hub
sites, 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 Carrier Services 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. Upon consummation of the
Locate Acquisition, the Company gained 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 Carrier Services and CLEC operations.
Wireless Licenses.
The Wireless Licenses allow the Company to provide Wireless Fiber services
in the 31 most populated MSAs in the United States and 41 of the 45 most
populated MSAs, which include more than 100 cities with populations exceeding
100,000 each and encompass an aggregate population of almost
43
<PAGE>
110 million people. The Company has the largest aggregate amount of 38 GHz
bandwidth capacity in the United States, holding 45 Wireless Licenses, 30 of
which provide for 400 MHz of bandwidth capacity per licensed area ("400 MHz
Wireless Licenses"). The 400 MHz Wireless Licenses allow for the provision of
wireless local telecommunications services over four of the fourteen 38 GHz
channels allocated in each of the following metropolitan areas: Atlanta,
Baltimore, Boston, Buffalo, Chicago, Cincinnati, Cleveland, Dallas, Denver,
Detroit, Houston, Kansas City, Los Angeles, Miami, Milwaukee, Minneapolis/St.
Paul, New York (Long Island), New York City, New York West (Newark and Northern
New Jersey), Oakland, Philadelphia, Phoenix, Pittsburgh, San Diego, San
Francisco, Seattle, Spokane, St. Louis, Tacoma, Tampa Bay and Washington, D.C.
The Company's remaining 15 Wireless Licenses, providing for 100 MHz of bandwidth
capacity per licensed area ("100 MHz Wireless Licenses"), were issued under FCC
procedures adopted in September 1994 which have limited recent grants of 38 GHz
licenses to 100 MHz of bandwidth capacity per licensee in a particular licensed
area. The 100 MHz Wireless Licenses allow for the provision of wireless local
telecommunications services over two additional channels in the New York City
metropolitan area, over one additional channel in each of Baltimore and
Philadelphia and over one channel in each of the following metropolitan areas:
Austin-San Marcos, Boise, Charlotte, Indianapolis, Jacksonville, Memphis, New
Orleans, Oklahoma City, Omaha, Portland (Oregon), Richmond, San Antonio and
Stamford.
The 400 MHz Wireless Licenses were granted in September 1993 and the
majority of the 100 MHz Wireless Licenses have been granted since June 1995. The
FCC's current policy is to align the expiration dates of all outstanding 38 GHz
licenses such that all such licenses mature concurrently and then to renew all
such licenses for a matching period. The initial term of all currently
outstanding 38 GHz licenses, including the Wireless Licenses, expires in
February 2001. While the Company believes that all of its Wireless Licenses will
be renewed, based upon FCC custom and practice establishing a presumption in
favor of licensees that have complied with their regulatory obligations during
the initial license period, there can be no assurance that any Wireless License
will be renewed upon expiration of its initial term. See "Risk Factors -- Finite
Initial Term of Wireless Licenses; Potential License Renewal Costs; Fluctuations
in the Value of Wireless Licenses; Buildout Requirements for Milliwave and Other
New Licenses; Transfer of Control."
Pending Milliwave Acquisition.
The Company expects that the Milliwave Acquisition will expand its
geographic coverage, provide additional capacity in existing markets, provide
economies of scale and permit the Company to achieve greater network efficiency.
The following chart sets forth the change in the Company's Wireless License
asset base after giving effect to the consummation of the Milliwave Acquisition:
WinStar
WinStar Milliwave Pro Forma
------- --------- ---------
Population Coverage (millions)............ 109 160 170(1)
Channel Pops (millions)................... 413 160 573(1)
Licensed Areas with Multiple Channels..... 30 0 39(2)
- ----------
(1) Pro forma population coverage and channel pops are not additive because of
overlapping licensed areas.
(2) Milliwave has only one channel in each of its licensed areas; however,
when combined with WinStar, the overlapping single channel licensed areas
increase WinStar's pro forma multiple channel coverage by nine licensed
areas, bringing the aggregate population covered by multiple channels to
over 100 million.
Upon consummation of the Milliwave Acquisition, the Company will obtain 88
additional 38 GHz licenses, each providing for 100 MHz of bandwidth. The
Milliwave Licenses allow for the provision of
44
<PAGE>
service in more than 80 major markets, encompassing an aggregate population of
greater than 160 million. The cities covered by the Milliwave Licenses include
many already serviceable by the Company under its existing Wireless Licenses,
such as Boston, Chicago, Dallas, Los Angeles and New York, among others, which
will increase the Company's aggregate bandwidth capacity in each such city. The
Milliwave Licenses also cover many cities which currently are not serviceable by
the Company under its existing Wireless Licenses, including, among others,
Honolulu, Nashville, Orlando, Raleigh/Durham and Rochester (New York). The
Company also has entered into a (i) services agreement with Milliwave pursuant
to which it has agreed to provide services to Milliwave in connection with the
buildout by Milliwave of its licensed areas in consideration for payment of
monthly site access and management fees, as well as installation fees, and (ii)
a two-year transmission path lease agreement with Milliwave permitting the
Company to use up to 488 radio links in Milliwave's licensed areas.
The purchase price for the Milliwave Merger will be $40 million in cash
and 3.4 million shares of Common Stock (which had an aggregate market value of
$85 million based on a $25 per share market price at the time the Milliwave
Merger Agreement was executed). The number of shares to be issued in connection
with the Milliwave Merger is subject to upward or downward adjustment depending
on the average market price of the Common Stock for the ten trading days prior
to the consummation of the transaction (i.e., upward adjustment if the average
price is below $22.06 per share and downward adjustment if the average price is
above $27.94 per share); provided that the Company may determine not to
consummate the transaction if the adjustment results in the Company being
required to issue in excess of 4.5 million shares. All of the consideration is
to be paid at the time the Milliwave Merger is consummated; however, the Company
has placed $5 million of the cash consideration in an escrow account pending
consummation of the Milliwave Merger. The Milliwave Acquisition is subject to
certain regulatory approvals, but is expected to be consummated in the second
quarter of 1997. Milliwave has generated insignificant revenue to date.
Recent Acquisition of Locate.
The Company recently consummated the acquisition (the "Locate
Acquisition") of the assets of Local Area Telecommunications, Inc. ("Locate")
comprising Locate's business as a CAP providing microwave-based local access
services to corporations and long distance and other common carriers (the
"Locate Business"), for a purchase price of $17.5 million. Among Locate's key
assets are two 38 GHz licenses, each providing 100 MHz of bandwidth, for the New
York City metropolitan area, including Long Island and Northern New Jersey. In
addition, Locate, together with its existing customers, has access to the roofs
of numerous buildings, including the World Trade Center and other key sites in
New York City, which the Company anticipates using in its CAP and CLEC
operations. As part of the Locate Acquisition, the Company also acquired from
Locate certain licenses for the provision of point-to-point services in other
portions of the radio spectrum, including, among others, 10, 12, 16 and 18 GHz.
CLEC and Long Distance Services
An integral part of the Company's telecommunications business strategy is
the creation of a Wireless Fiber-based infrastructure on a city-by-city basis
that will allow the Company to provide a broad range of communications services
within cities covered by the Wireless Licenses. This infrastructure will utilize
the Company's Wireless Fiber capabilities, together with acquired or to be
acquired by the Company and facilities leased or purchased from other carriers,
to originate and terminate local traffic and to connect long distance traffic to
the interLATA facilities of other carriers. 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 to serve as hubs for its network in each
city. These hub sites are or be interconnected via Wireless Fiber links to fiber
optic facilities leased or purchased from other carriers as well as to end
users.
CLEC Services.
In October 1996, the Company commissioned its first switch in New York
city and intends to install approximately 40 additional switches during the next
three years. The Company intends to have at least
45
<PAGE>
five additional major metropolitan areas serviced by its own switches by the end
of the second quarter of 1997. In July 1996, the Company entered into a
three-year agreement with Lucent providing for the purchase from Lucent of the
switching systems and related equipment and software the Company will need to
build its CLEC infrastructure. Switches will be provided to the Company at
discounted prices so long as the Company purchases certain switches during each
year of the agreement.
The Company has commenced a program designed to obtain, by the end of
1999, authorization to operate as a CLEC in virtually every state where the
Company has Wireless Licenses, which will allow the Company to file tariffs and
provide local exchange services in such states once authorization is granted.
The Company currently is authorized to operate as a CLEC in California,
Connecticut, Florida, Georgia, Illinois, Massachusetts, Michigan, New York,
Pennsylvania, Tennessee, Texas, Washington and Wisconsin, is in the process of
seeking authorization to operate as a CLEC in several additional states, and
intends to seek such authorization in a number of additional states. The Company
has entered into a number of interconnection agreements for states that
encompass various cities covered by the Wireless Licenses. These agreements are
with carriers such as Ameritech Corp. ("Ameritech") for Illinois and Michigan,
Pacific Bell ("PacBell") for California, GTE for California and Tampa, Florida,
NYNEX for New York and Massachusetts, Bell South for Florida, Georgia and
Tennessee and Bell Atlantic or Pennsylvania, Maryland, the District of Columbia,
New Jersey and Delaware, among others. It also is in the process of negotiating
additional interconnection agreements with various local exchange service
providers, including incumbent LECs.
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 switches in up to 40 additional cities through 1999. See
"Risk Factors -- Risks Related to CLEC Strategy; Anticipated Initial Negative
Operating Margins in CLEC Business" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
The Company offers local exchange services on a resale and switched basis
in New York City to various customers and is currently in the process of
introducing CLEC services in eight additional cities. As the Company commences
its CLEC business in each city, in order to gain initial market penetration in
that city, it initially may resell the local exchange services of other service
providers, such as CLECs and the incumbent LECs, until such time that it has
established the Wireless Fiber and switch-based infrastructure required to
provide its own local exchange services in that city.
In connection with the plan to build its CLEC networks on a city-by-city
basis, the Company is hiring numerous engineering, installation, maintenance,
customer service, and marketing and sales personnel in order to create a direct
sales force organization which will provide a high level of service to the
business and multi-dwelling residential markets. A sales force has been deployed
in New York and in a number of other cities, and, the Company currently plans to
have a sales force in all metropolitan areas covered by the Wireless Licenses by
the end of 1999. The Company also is developing joint marketing, reselling and
agency relationships. For example, pursuant to the Digex Agreement, the Company
will purchase from Digex, during the next six years, a minimum of $5 million of
Internet services with the right to purchase additional amounts, in each case on
a discounted basis. The Company will resell these Internet services under the
Company's own brand name, including through the bundling of such services with
the Company's other telecommunications services.
The Company seeks to make its CLEC business an attractive choice for
potential customers by (i) offering a broad range of telecommunications services
that specifically address its target customers' needs, while providing levels of
customer satisfaction that exceed those provided by larger competitors and (ii)
exploiting the Company's Wireless Fiber service whenever feasible for economical
origination and termination of customer traffic, thereby allowing for attractive
pricing of services.
Long Distance Services.
As a complement to its CLEC services, the Company offers its business
customers long distance services on a resale basis through agreements with major
long distance carriers (AT&T, MCI, WorldCom, Inc. and U.S. Long Distance, Inc.)
which allow it to utilize their networks. In addition to providing basic
46
<PAGE>
long distance service, the Company is able to provide toll-free services,
international call-back, prepaid phone cards and certain enhanced services.
The Company's agreements with certain major long distance carriers are for
between one- and four-year terms and provide the Company with access to long
distance carriers' networks at rates which are typically discounted, varying
with monthly traffic generated by the Company through each carrier. Generally,
the Company is obligated to generate certain minimum monthly usage through each
network and, if such traffic is less than the minimum monthly usage commitment,
may be required to pay an underutilization fee in addition to its monthly bill
equal to a certain percentage of the difference between such minimum commitments
and the traffic actually generated by the Company. The Company has never paid or
been required to pay any underutilization charges. During 1995, the Company
established a reserve for possible underutilization charges.
The Company continues to provide long distance services to its existing
residential customers, through its wholly-owned subsidiary, WinStar Gateway
Network, Inc., though it no longer actively markets such services to that
segment of the market. As a result of this change in focus, the Company's
residential long distance customer base has and will continue to decrease due to
attrition.
Carrier Services
The Company markets and provides wireless broadband, high capacity local
access and other network services primarily to other carriers. 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.
Local Bypass For The Long Distance Industry
[Diagram]
47
<PAGE>
Wireless Complement to CAP and LEC Networks. Currently, CAPs typically
compete with LECs by utilizing their own fiber optic cable rings and lease the
other facilities necessary to complete their networks from the LECs. Due to the
large capital investment required to construct such networks, CAPs generally
build their networks in limited, densely populated areas and offer services
primarily to large customers such as long distance carriers, medium- to
large-size businesses, government agencies and institutions. CAPs can utilize
Wireless Fiber services to bypass facilities typically leased by them from the
LECs (see diagram on next page). CAPs also can utilize the Company's Wireless
Fiber services to facilitate the build out and enhance the reliability of their
own local telecommunications networks and expand their marketing opportunities.
The Company believes that the relative ease and low cost of installation of
Wireless Fiber services in comparison to fiber optic-based facilities can
provide CAPs with the ability to expand their networks to reach some customers
in areas where demand levels are insufficient to justify the cost and time
involved in constructing fiber optic capacity. CAPs, as well as LECs, also can
utilize the Company's Wireless Fiber services to extend their own networks to
provide services to areas within a licensed area to which it is not
cost-efficient to run fiber optic cable or to which such cable simply has not
yet been run. CAPs and LECs also may utilize the Company's Wireless Fiber
services to provide redundant and back-up capacity to their own existing
networks.
Wireless Complement To Fiber Network
[Diagram]
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
below). The Company also anticipates that entities that acquired licenses in the
PCS auctions or which will acquire licenses in subsequent PCS auctions conducted
by the FCC, also will find Wireless Fiber services attractive to carry their
backbone network traffic. By utilizing Wireless Fiber services for their
backbone network needs, CMRS carriers can maintain greater control over their
systems by monitoring traffic carried over the Wireless Fiber services component
of their systems, reduce costs of construction of their networks, increase the
flexibility of their services and reduce the lead time involved in the provision
of services in their respective licensed areas. Wireless Fiber services also can
be used by CMRS carriers to provide redundant and back-up capacity for the fiber
optic and/or copper wire portions of their backbone networks.
Cellular/PCS Site Interconnect
[Diagram]
48
<PAGE>
Dedicated Private Network Services. The Company also markets its Wireless
Fiber services to businesses, government agencies and institutions with multiple
locations within the Company's licensed areas and which generate heavy
telecommunications traffic between such locations. These entities can utilize
Wireless Fiber services to establish their own independent telecommunications
systems for dedicated private network services (see diagram below). Wireless
Fiber services present entities with (i) a method for providing
telecommunications connections between their buildings on a cost-effective
basis, (ii) a viable alternative to the LECs' networks that frequently use
low-capacity copper wire for "last mile" delivery, generally allowing for
faster, more reliable data transmissions, (iii) greater control over their local
telecommunications traffic and costs and (iv) greater security because of the
private line nature of the Company's Wireless Fiber services.
End User Private Network
[Diagram]
Network and Internet Access. The ability to access and distribute
information quickly has become critical to business and government end users.
Data traffic is becoming an increasing portion of overall telecommunications
traffic because of the proliferation of LANs, WANs, Internet services and video
teleconferencing. The Company's Wireless Fiber capacity enables it to provide
high-speed data transmission services to end users.
WAN Services. The Company recently introduced dedicated WAN services. The
Company's high-speed data telecommunications services permit businesses to
transport data between buildings and between personal computers or workstations.
These dedicated services allow personal computers and workstations on one LAN to
communicate with personal computers and workstations on another LAN at the same
speed at which these LANs operate. The Company's WAN services are offered at a
variety of capacities to allow customers to choose the level which meets their
needs.
Internet Services. The expanding demand for Internet access and the
growing importance of audio, video and graphic Internet applications to both
businesses and consumers also has created a growing market opportunity for the
Company. The Company can offer Internet service providers timely, reliable and
affordable access at high speed data rates. The Company can provide wireless
broadband links between customers and their Internet service providers and
between Internet service providers' POPs and the Internet backbone. In addition
to accommodating standard voice and data requirements, 45 Mbps data transmission
rates can allow end users to receive real time, full motion video and 3-D
graphics and to utilize highly interactive applications on the Internet and
other networks. The Company is actively pursuing relationships with Internet
service providers. In June 1996, the Company entered into an agreement with
Digex, Inc. 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
49
<PAGE>
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.
Advertising and Marketing of Telecommunications Services
CLEC and Long Distance Services
Over the next three years, the Company intends to commence marketing its
local exchange services in substantially all markets covered by its Wireless
Licenses through direct sales, television, print and other media advertisements.
The Company introduced its first series of television commercials and print
advertising in the New York City market in November 1996 and intends to utilize
media advertising campaigns in each market in which it commences offering its
CLEC services, including broadcast media in specific major markets.
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 customer buildings initially
targeted by the Company each have more than 100,000 square feet of commercial
space and, in many instances, are not served by competitive access providers
("CAPs") or CLECs. The Company estimates that there are more than 8,000
buildings in this target group, populated by approximately 9.7 million workers
using more than 2.1 million phone lines, and that these buildings represent an
aggregate local exchange service market exceeding $3.3 billion of aggregate
revenue per annum. These estimates do not include multi-dwelling residential
buildings, universities, hospitals or buildings occupied by a single tenant and
do not include long distance, data transmission or Internet services or enhanced
communications services, such as messaging.
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.
Consistent with its telecommunications marketing strategy of emphasizing
small and medium-sized business customers, the Company has, among other things,
introduced products and services readily marketable to business long distance
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).
Carrier Services
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 PacBell, ACSI, Electric Lightwave, MCI, ICG and
Century Telephone. These 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, pricing, 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.
50
<PAGE>
The Company currently markets or intends to market its Carrier 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 existing and potential customers of the Company's other
telecommunications services.
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
and other Carrier Services only since December 1994 and local exchange services
as a CLEC only since April 1996, and the Company has not obtained 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, general pricing competition and pressures will
increase significantly. As LECs lower their rates, other telecommunications
providers will be forced by market conditions to charge less for their services
in order to compete.
In addition to competition from the LECs, the Company also faces
competition from a growing number of new market entrants, such as other CAPs and
CLECs, competitors offering wireless telecommunications services, including
leading telecommunications companies, such as AT&T Wireless, and other entities
that hold or have applied for 38 GHz licenses or which may acquire such licenses
or other wireless licenses from others or the FCC. There is at least one other
CAP and/or CLEC in each metropolitan area covered by the Company's Wireless
Licenses, including, in many such areas, companies such as IntelCom, ICG, MCI,
MFS, TCG 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 also faces competition from other entities which
offer, or are licensed to offer, 38 GHz services, such as ART and BizTel, and
could face competition in certain aspects of its existing and proposed
businesses from competitors providing wireless services in other portions of the
radio spectrum, such as CAI, a provider of wireless Internet access services,
CellularVision, a provider of wireless television services which, in the future,
also may provide wireless Internet access and other local telecommunications
services and Associated, a potential provider of wireless CAP and other
services. In many instances, these service providers hold 38 GHz licenses or
licenses for other frequencies (such as 18 and 28 GHz) in geographic areas which
encompass or overlap the Company's market areas. Additionally, some of these
entities enjoy the substantial backing of, or include among their stockholders,
major telecommunications entities, such as Ameritech with respect to ART, TCG
with respect to BizTel, and NYNEX and Bell Atlantic with respect to CAI. Due to
the relative ease and speed of deployment of 38 GHz and some other
wireless-based technologies, the Company could face intense price competition
from these and other wireless-based service providers. Furthermore, the NPRM
issued by the FCC contemplates an auction of the lower 16 channels in the 38 GHz
spectrum band, which have not been previously available for commercial use. The
grant of additional licenses by the FCC in the 38 GHz band, or other portions of
the spectrum with similar characteristics, as well as the development of new
51
<PAGE>
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. There can be no assurance that the Company
will be able to compete effectively in any of its markets.
The Company's Internet services also are likely to face significant
competition from other Internet service providers as well as from cable
television operators deploying cable modems, which provide high speed data
capability over installed coaxial cable television networks. Although cable
modems currently are not widely available and do not provide for data transfer
rates that are as rapid as those which can be provided by Wireless Fiber
services, the Company believes that the cable industry may support the
deployment of cable modems to residential cable customers through methods such
as price subsidies. Notwithstanding the cable industry's interest in rapid
deployment of cable modems, the Company believes that in order to provide
broadband capacity to a significant number of business and government users,
cable operators will be required to spend significant time and capital in order
to upgrade their existing networks to a more advanced hybrid fiber coaxial
network architecture. However, there can be no assurance that cable modems will
not emerge as a source of competition to the Company's Internet business.
Further, Internet 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 as customers frequently change long distance providers in
response to the offering of lower rates or promotional incentives by
competitors. The Company competes with major carriers such as AT&T, MCI and
Sprint, as well as other national and regional long distance carriers and
resellers, many of whom own substantially all of their own facilities and are
able to provide services at costs lower than the Company's current costs since
the Company generally leases its access facilities. The Company believes that
the RBOCs also will become significant competitors in the long distance
telecommunications industry for certain types of services and that Internet
service providers also will compete in this market. The Company believes that
the principal competitive factors affecting its market share are pricing,
customer service, accurate billing, clear pricing policies and, to a lesser
extent, variety of services. The ability of the Company to compete effectively
will depend upon its ability to maintain high quality, market-driven services at
prices generally perceived to be equal to or below those charged by its
competitors. To maintain its competitive posture, the Company believes that it
must be in a position to reduce its prices in order to meet reductions in rates,
if any, by others. Any such reductions could adversely affect the Company. In
addition, LECs have been obtaining additional pricing flexibility. This may
enable LECs to grant volume discounts to larger long distance companies, which
also would put the Company's long distance business at a disadvantage in
competing with larger providers.
Government Regulation of Telecommunications Operations
The Company's telecommunications services are subject to varying degrees
of federal, state and local regulation. Generally, the FCC exercises
jurisdiction over all telecommunications services providers to the extent such
services involve the provision of jurisdictionally interstate or international
telecommunications, including the resale of long distance services, the
provision of local access services necessary to connect callers to long distance
carriers, and the use of electromagnetic spectrum (i.e.,
52
<PAGE>
wireless services). With the passage of the Telecommunications Act, the FCC's
jurisdiction has been extended to include certain interconnection and related
issues that traditionally have been considered subject primarily to state
regulation. The state regulatory commissions retain nonexclusive jurisdiction
over the provision of telecommunications services to the extent such services
involve the provision of jurisdictionally intrastate telecommunications.
Municipalities also may regulate limited aspects of the Company's business by,
for example, imposing zoning requirements or permit right-of-way procedures, and
certain taxes or franchise fees.
The Telecommunications Act is intended to remove the formal barriers
between the long distance and local telecommunications services markets,
allowing service providers from each market (as well as providers of cable
television and other services) to compete in all communications markets. The
Telecommunications Act will permit the RBOCs to compete in the provision of
interLATA long distance services. Additionally, the FCC must promulgate new
regulations over the next several years to address mandates contained in the
Telecommunications Act, which may change the regulatory environment
significantly. The Telecommunications Act generally requires LECs to provide
competitors with interconnection and nondiscriminatory access to the LEC network
on more favorable terms than have been available in the past. However, such
interconnection and the terms thereof are subject to negotiations with each LEC,
which may involve considerable delays, and may not necessarily be obtained on
terms and conditions that are acceptable to the Company. In such instances,
although the Company may petition the proper regulatory agency to arbitrate
disputed issues, there can be no assurance that the Company will be able to
obtain acceptable interconnection agreements.
The Company is unable to predict what effect the Telecommunications Act
will have on the telecommunications industry in general and on the Company in
particular. No assurance can be given that any regulation will broaden the
opportunities available to the Company or will not have a material adverse
effect on the Company and its operations. Further, there can be no assurance
that the Company will be able to comply with additional applicable laws,
regulations and licensing requirements or have sufficient resources to take
advantage of the opportunities which may arise from this dynamic regulatory
environment.
As required by the Telecommunications Act, in August 1996 the FCC adopted
the Interconnection Order. These rules constitute a pro-competitive,
deregulatory national policy framework designed to remove or minimize the
regulatory, economic and operational impediments to full competition for local
services, including switched local exchange service. Although setting minimum,
uniform, national rules, the Interconnection Order also relies heavily on states
to apply these rules and to exercise their own discretion in implementing a
pro-competitive regime in their local telephone markets. Among other things, the
Interconnection Order: establishes rules requiring incumbent LECs to
interconnect with new entrants such as the Company at specified network points;
requires incumbent LECs to provide carriers nondiscriminatory access to network
elements on an unbundled basis at any technically feasible point at rates that
are just, reasonable and nondiscriminatory; establishes rules requiring
incumbent LECs to allow interconnection via physical and virtual collocation;
requires the states to set prices for interconnection, unbundled elements, and
termination of local calls that are nondiscriminatory and cost-based (using a
forward looking methodology which excludes embedded costs but allows a
reasonable cost-of-capital profit); requires incumbent LECs to offer for resale
any telecommunication service that the carrier provides at retail to end users
at prices to be established by the states but which generally are at retail
prices minus reasonably avoided costs; and requires LECs and utilities to
provide new entrants with nondiscriminatory access to poles, ducts, conduit and
rights' of way owned or controlled by LECs or utilities. Exemptions to some of
these rules are available to LECs which qualify as rural LECs under the
Telecommunications Act. The Interconnection Order also requires that: intraLATA
presubscription (pursuant to which LECs must allow customers to choose different
carriers for intraLATA toll service without having to dial extra digits) be
implemented no later than February 1999; LECs provide new entrants with
nondiscriminatory access to directory assistance services, directory listings,
telephone numbers, and operator services; and LECs comply with certain network
disclosure rules designed to ensure the interoperability of multiple local
switched networks. There can be no assurance how the Interconnection Order will
be implemented or enforced or as to what affect such implementation or
enforcement will have on competition within the telecommunications industry
generally or on the competitive position of the Company specifically. A number
of LECs, as well as the National Association of Regulatory Utility Consumers and
others, have filed in Federal court seeking to appeal aspects of the
Interconnection Order and to stay some or all of
53
<PAGE>
the rules adopted therein. In October 1996, the United States Court of Appeals
for the Eighth Circuit granted a stay of effectiveness of certain provisions of
the Interconnection Order, including the pricing provisions and the pick and
choose rule, pending the lower court's review of the merits of the case. Oral
argument on this appeal of the Interconnection Order is scheduled for January
1997. The Company does not believe that the stay will adversely affect its CLEC
operations and may positively affect the operations of the Carrier Services
business.
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 another
POP of that long distance carrier or another long distance carrier, and between
an end user and a long distance carrier's POP.
The Company currently is not subject to price-cap or rate-of-return
regulation and it may install and operate non-radio facilities for the
transmission of interstate communications without prior FCC authorization.
In addition, the Company has filed tariffs with the FCC as required with
respect to its provision of interstate service. However, pursuant to authority
granted to it under the Telecommunications Act, in October 1996 the FCC ruled
that non-dominant inter-exchange carriers such as the Company may no longer file
tariffs with the FCC and old tariffs will no longer be applicable. The Company
also has received certification or other appropriate regulatory authority to
provide intrastate non-switched service in 28 states and has applied for
authority in eight additional states.
Some of the Company's services may be classified as intrastate and
therefore currently subject primarily to state regulation. In all states where
the Company is offering jurisdictionally intrastate Carrier Services or CLEC
service, the Company (through its state-specific operating subsidiaries) is
certified or otherwise operating with appropriate state authorization. The
Company provides intrastate long distance service pursuant to certification,
registration or (where appropriate) on a deregulated basis in more than 40
states and is currently seeking intrastate authority in the remaining
continental states. The Company expects that as its business and product lines
expand and as more procompetitive regulation of the local telecommunications
industry is implemented, it will offer additional intrastate service. The
Company is seeking to expand the scope of its intrastate service in various
jurisdictions, a process which depends upon regulatory action and, in some
cases, legislative action in the individual states. Interstate and intrastate
regulatory requirements are changing rapidly and will continue to change.
Although the Company believes that it is in substantial compliance with
all material laws, rules and regulations governing its operations and has
obtained, or is in the process of obtaining, all licenses and approvals
necessary and appropriate to conduct its operations, changes in existing laws
and regulations, including those relating to the provision of wireless local
telecommunications services via 38 GHz and/or the future granting of 38 GHz
licenses, or any failure or significant delay in obtaining necessary regulatory
approvals, could have a material adverse effect on the Company. On November 13,
1995, the FCC released an order freezing the acceptance for filing of new
applications for 38 GHz frequency licenses. On December 15, 1995, the FCC
announced the issuance of an NPRM, pursuant to which it proposed to amend its
current rules relating to 38 GHz, including, among other items, the imposition
of minimum construction and usage requirements and an auction procedure for
issuance of licenses in the 37-40 GHz band where mutually exclusive applications
have been filed. In addition, the FCC ordered that those applications that are
subject to mutual exclusivity with other applicants or that were placed on
public notice by the FCC after September 13, 1995 would be held in abeyance and
not processed by the FCC pending the outcome of the proceeding initiated by the
NPRM. Final rules with respect to the changes proposed by the NPRM have not been
adopted and the changes proposed by the NPRM have been, and are expected to
continue to be, the subject of numerous comments by members of the
telecommunications industry, the satellite industry, various government agencies
and others. Consequently, there can be no assurance that the NPRM will result in
the issuance of rules consistent with the rules initially proposed in
54
<PAGE>
the NPRM, or that any rules will be adopted. Until final rules are adopted, the
rules currently in existence remain in effect with respect to outstanding
licenses.
Pursuant to an international treaty to which the United States is a
signatory, the 38.6-40.0 GHz band is allocated on a co-primary basis to the
Fixed Satellite Services ("FSS") and the 37.5-40.5 GHz band is allocated on a
co-primary basis to the Mobile Satellite Services Inc. ("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. In September 1996, MSSI filed an application at the FCC to
offer broadband satellite services using a portion of the radio spectrum that
includes the 38.6 to 40 GHz band where the Company holds its Wireless Licenses.
If the FCC were to allow transmissions from space to earth as proposed by MSSI,
such transmissions could adversely affect the Company's existing or future
operations by creating interference or causing the FCC to institute power and
other limitations upon the Company's transmissions. If adopted as proposed, the
MSSI application would likely require changes in the FCC's rules, although it
would likely be a number of years before MSSI's satellite system could be
launched. The extent of the adverse impact upon the Company's operations if the
MSSI application were to be granted in its current form is unknown, and there
can be no assurance that the Company's operations would not be adversely
effected.
The FCC is required by the Telecommunications Act to examine and modify
existing universal service and access charge policies by May 1997. In doing so,
it will likely allocate the cost of subsidizing universal service initiatives to
all telecommunications carriers and reduce substantially the access charges that
interexchange carriers pay to LECs for access to the public switched network.
CAPs provide local access (i.e., the transmission of a long distance call from
the caller's location to the long distance carrier's POP, and from the
terminating POP to the recipient of the call) at rates that are discounted from
the rates charged by LECs. If the FCC were to mandate reductions in LECs' local
access charges, CAPs might be forced to substantially reduce the rates they
charge long distance providers, resulting in lower gross margins (which, in the
case of the Company, are currently negative). This could have a material adverse
effect on the Company's Carrier Services operations.
In connection with the rulemaking proceedings required under the
Telecommunications Act, the FCC will consider reform of the existing access
charge mechanisms, including possibly substantial reductions in the rates
charged by LECs to long distance service providers for local "access" (i.e., the
transmission of a long distance call from the caller's location to the long
distance provider's POP and from the terminating POP to the recipient of the
call). CAPs, such as the Company's Carrier Services operations, provide local
access at rates that are discounted from the rates charged by LECs. If the FCC
were to mandate reductions in LECs' local access charges, CAPs might be forced
to substantially reduce the rates they charge long distance providers, resulting
in lower gross margins (which, in the case of the Company, are currently
negative).
Additionally, providers of long distance services, including the major
interexchange carriers as well as resellers, such as the Company, are coming
under intensified regulatory scrutiny for marketing activities by them or their
agents that result in alleged unauthorized switching of customers from one long
distance service provider to another. The FCC and a number of state authorities
are seeking to introduce more stringent regulations or take other actions to
curtail the intentional or erroneous switching of customers, which could
include, among other things, the imposition of fines, penalties and possible
operating restrictions on entities which engage or have engaged in unauthorized
switching activities. In addition, the Telecommunications Act requires the FCC
to prescribe regulations imposing procedures for verifying the switching of
customers and additional remedies on behalf of carriers for unauthorized
switching of their customers. The effect, if any, of the adoption of any such
proposed regulations or other actions on the long distance industry and the
manner of doing business therein, cannot be anticipated. Statutes and
regulations which are or may become applicable to the Company as it expands
could require the Company to alter methods of operations, at costs which could
be substantial, or otherwise limit the types of services offered by the Company.
55
<PAGE>
New Media Business
The Company believes 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 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
Associates, Inc. ("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.
From April 1994 through April 1996, the Company has acquired an 80% equity
interest in The Winning Line, Inc. ("TWL"). The Company has the right to require
the stockholders of TWL who own the remaining 20% equity interest in TWL to
sell, and such stockholders have the right to require the Company to purchase,
the remaining 20% equity interest based upon certain criteria. TWL operates
SportsFan, a multimedia sports programming and production company that provides
live sports programming to more than 200 sports and talk format radio stations
across the United States, up to 24 hours a day, including to stations in 90 of
the top 100 United States markets. SportsFan owns and operates The Pete Rose
Show, among others, and also has developing interests in television and on-line
distribution channels. In addition, in October 1996, the Company acquired
certain assets of Major Sports, a producer of sports radio programming. Among
the assets purchased are radio programs such as "Costas Coast to Coast," "John
Madden Sports Quiz" and "Pat O'Brien's Sports Flashback."
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.
In September 1996 and November 1996, respectively, the Company acquired an
80% equity interest in Millennium Marketing, Inc. (which does business as
WinStar Interactive Media Sales ("WIMS")) and 100% of Global Media Sales, Inc.
("GMS"). The Company has the right to require the stockholders of WIMS who own
the remaining 20% equity interest in S&A to sell, and such stockholders have the
right to require the Company to purchase, the remaining 20% equity interest
based upon certain criteria. WIMS is a full service agency to media sellers,
with a focus on the provision of advertising sales representation and/or related
consulting services for content-driven interactive media properties. GMS is a
distributor of broadcast advertising on radio properties.
The industry in which the Company's new media operation 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
56
<PAGE>
the Company's new media operation 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, Inc. ("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 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.
57
<PAGE>
Employees
As of December 15, 1996 the Company had approximately 770 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, 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, as extended. The Company has executed leases
for additional office space of approximately 6,000 square feet and 18,500 square
feet, each at 230 Park Avenue, for rent of approximately $188,000 per annum and
approximately $567,000 per annum, respectively. Each of the above-described
leases expires in November 2006. The Company maintains leases on other
properties used in the operations of its subsidiaries. The Company believes that
its insurance coverage on its properties is adequate and that the Company, and
each of its subsidiaries, as the case may be, is in compliance with the related
leases.
Legal Proceedings
WinStar Gateway receives inquiries from state authorities with respect to
consumer complaints concerning the provision of telecommunications services,
including allegations of unauthorized switching of long distance carriers and
misleading marketing. The Company believes such inquiries are common in the long
distance industry and addresses such inquiries in the ordinary course of
business. During 1996, WinStar Gateway experienced an increased level of
consumer and regulatory complaints, a substantial majority of which arose from
the activities of a limited number of independent marketing agents. On May 10,
1996, WinStar Gateway adopted a policy of mandatory independent verification for
100% of customer orders received from these agents' programs, and effective June
10, 1996, no longer accepts customer orders from these programs. In December
1996, the FCC and WinStar Gateway entered into a consent decree which terminated
an inquiry by the FCC into any alleged violations of unauthorized carrier
conversions through the use of box programs by some of WinStar Gateway's agents.
The FCC cited WinStar Gateway's efforts in identifying the problems caused by
these agents and its proactive response in implementing remedial actions on its
own as significant factors leading to the consent decree in lieu of initiating a
formal investigation. The Company does not believe that resolution of these
issues will have a material adverse effect on the Company, its financial
condition or its results of operations.
In June 1996 the Company, as plaintiff, commenced an action for
declaratory judgment against Nelson Thibodeaux, a former officer of WinStar
Gateway, in the Federal District Court for the Southern District of New York,
seeking a declaration that the Company has no obligation to Mr. Thibodeaux under
stock option agreements granted to him during his employment with WinStar
Gateway. Further, because the Company believes that any and all claims that may
be advanced by Mr. Thibodeaux with regard to his stock option agreements would
be frivolous, the Company has notified Mr. Thibodeaux and his counsel of its
intention to seek sanctions and such other remedies as may be available against
Mr. Thibodeaux and his counsel in the event that Mr. Thibodeaux and his counsel
seek to assert any defense to the Company's action. Additionally, the Company
seeks monetary damages arising from an alleged breach by Mr. Thibodeaux of the
non-competition and related provisions contained in his employment agreement
with the Company. Mr. Thibodeaux answered the Company's complaint in August
1996, denying all of the Company's assertions. The Company intends to diligently
proceed with this action.
58
<PAGE>
MANAGEMENT
The following table sets forth certain information with respect to the
executive officers and directors of the Company.
Name Age Position
- ---- --- --------
William J. Rouhana, Jr.(1)(2)(3)(4)... 44 Chairman of the Board of
Directors and Chief Executive
Officer
Nathan Kantor(5)...................... 54 President, Chief Operating
Officer and Director
Steven G. Chrust(6)................... 47 Vice Chairman of the Board of
Directors
Fredric E. von Stange(6).............. 41 Executive Vice President, Chief
Financial Officer and Director
Bert Wasserman(2)(5).................. 63 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
- ----------
(1) Term expires at annual meeting of stockholders in 1997
(2) Member of Audit Committee
(3) Member of Compensation Committee
(4) Member of Nominating Committee
(5) Term expires at annual meeting of stockholders in 1999
(6) Term expires at annual meeting of stockholders in 1998
Mr. Rouhana has been a director of the Company since its inception, its
Chairman of the Board since February 1991, and its Chief Executive Officer since
May 1994. Mr. Rouhana was President and Chief Executive Officer of WinStar
Companies, Inc. ("WinStar Companies") from 1983 until November 1995. Through
WinStar Companies, he served, from August 1987 to February 1989, as Vice
Chairman of the Board and Chief Operating Officer of Management Company
Entertainment Group, Inc., a diversified distributor of entertainment products
and, thereafter, as its Vice Chairman of the Board until May 1990. Since August
1992, Mr. Rouhana has been a director of TII Industries, Inc. ("TII
Industries"), a telecommunications equipment manufacturing company. From May
1991 through September 1994, he was director of Lancit Media Productions, Ltd.,
a creator of children's television programming. Mr. Rouhana was in private legal
practice from 1977 to 1984, specializing in the financing of entities involved
in the development of entertainment products and information services. Mr.
Rouhana is Vice Chairman of the Board of Governors of the United Nations
Association and is a member of certain other associations, including Business
Executives for National Security. He is a Phi Beta Kappa graduate of Colby
College, a Thomas J. Watson Fellow (1972-1973) and a graduate of Georgetown
University School of Law. Mr. Rouhana is the brother-in-law of Fredric E. von
Stange.
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
59
<PAGE>
and Chief Operating Officer of the Company, at which time services provided by
ITC to the Company ceased. Mr. Kantor also is currently the Chairman of the
Board and Chief Executive Officer of Image Telecommunications Corp. ("Image
Telecom"), a company involved in the development of information and video
servers. From January 1985 to December 1990, he was President of MCI
Telecommunications Corporation (Northeast Division). Mr. Kantor was a founder of
MCI International, Inc., and served as its President and Chief Operating Officer
from its founding in July 1982 to December 1984. Mr. Kantor is a graduate of
Florida State University and the United States Military Academy at West Point.
Mr. Chrust has been a director of the Company since January 1994 and has
been employed by the Company as its Vice Chairman of the Board since January
1995, in which capacity he is responsible for strategic planning, financing and
corporate development. He has been the President of SGC Advisory Services, Inc.
("SGC"), a discretionary money-management services firm specializing in the
telecommunications and technology sector, since he founded it in October 1992.
From August 1987 to September 1992, Mr. Chrust was a director of AMNEX, Inc., an
operator services long distance company, and served as its Chairman of the
Board, Chief Executive Officer and President between October 1990 and October
1992. From August 1985 through December 1989, Mr. Chrust was the Executive Vice
President of Executone Information Systems, Inc., a telecommunications equipment
company. Mr. Chrust was Director of Technology Research and a stockholder of
Sanford C. Bernstein & Co., Inc., a Wall Street investment firm, where he was
ranked in the top tier of telecommunications analysts for more than ten years
and as the first-ranked analyst in that sector for five consecutive years. He
was associated with Sanford C. Bernstein & Co., Inc., from 1970 through 1985.
From November 1993 until February 1996, Mr. Chrust was a director of American
Communications Services, Inc., a fiber optic-based competitive access provider.
Mr. Chrust is a graduate of Baruch College.
Mr. von Stange has been a director of the Company since its inception, its
Executive Vice President since January 1993, and its Chief Financial Officer
since March 1994. Mr. von Stange was Executive Vice President of WinStar
Companies, a merchant bank and a principal stockholder of the Company from 1983
until November 1995. 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 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.
60
<PAGE>
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. 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 in 1999, and the term of office of the third class of
directors (Class III), currently consisting of William J. Rouhana, Jr., William
J. vanden Heuvel and Steven B. Magyar, will expire in 1997. In each case, each
director will hold office until the next annual meeting of stockholders at which
his class of directors is to be elected, or until his successor is duly
qualified and appointed. As of August 5, 1996, the Company's by-laws have been
amended to provide that, through August 5, 1999, at each annual meeting of
stockholders in which directors are elected, persons will be elected so that a
majority of the members of the Board will be independent directors.
The responsibilities of the Audit Committee, which currently is composed
of William J. Rouhana, Jr., Bert Wasserman and Steven B. Magyar, include, in
addition to such other duties as the Board may specify, (i) recommending to the
Board the appointment of independent accountants; (ii) reviewing the timing,
scope and results of the independent accountant's audit examination and the
related fees; (iii) reviewing periodic comments and recommendations by the
Company's independent accountants and the Company's response thereto; (iv)
reviewing the scope and adequacy of internal accounting controls and
61
<PAGE>
internal auditing activities; and (v) making recommendations to the Board with
respect to significant changes in accounting policies and procedures. As of
August 5, 1996, the Company's by-laws have been amended to provide that, through
August 5, 1999, a majority of the members of this Committee must be independent
directors.
The responsibilities of the Compensation Committee, which currently is
composed of William J. Rouhana, Jr., Steven B. Magyar, William Harvey and
William J. vanden Heuvel, include, in addition to such other duties as the Board
may specify, (i) reviewing and recommending to the Board the salaries,
compensation and benefits of the executive officers and key employees of the
Company, (ii) reviewing any related party transactions on an ongoing basis for
potential conflicts of interest and (iii) administering the Company's stock
option plans. As of August 5, 1996, the by-laws of the Company have been amended
to provide that, through August 5, 1999, a majority of the members of this
Committee must be independent directors and that, absent approval of a majority
of the independent members of the Compensation Committee, the Company will not
enter into any material transaction with any director or affiliate of any
director of the Company.
The responsibilities of the Nominating Committee, which currently is
composed of William J. Rouhana, Jr., William J. vanden Heuvel and Steven B.
Magyar, include, in addition to such other duties as the Board may specify,
considering and recommending to the Board nominees for directors.
Director Compensation
The Company pays each outside director $500 for attendance at each meeting
of a committee of which such director is a member and $1,000 for attendance at
each meeting of the Board of Directors. On January 13th of each year, persons
who are directors at such date are granted options to purchase 10,000 shares of
Common Stock at a per-share exercise price equal to the last sale price of a
share of Common Stock on the last trading day prior to such grant.
62
<PAGE>
PRINCIPAL STOCKHOLDERS
The table and accompanying footnotes set forth certain information as of
December 17, 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 become 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, New York, New York
10169.
Percent Beneficially Owned
<TABLE>
<CAPTION>
Number of Shares Before After
Name and Address of Beneficial Owner Beneficially Owned Offering Offering(1)
- ------------------------------------ ------------------ -------- -----------
<S> <C> <C> <C>
William J. Rouhana, Jr........................... 2,123,002(2) 6.7% 5.9%
Nathan Kantor.................................... 863,901(3) 2.4 2.1
Steven G. Chrust................................. 530,333(4) 1.8 1.6
Fredric E. von Stange............................ 822,499(5) 2.6 2.3
Steven B. Magyar................................. 50,706(6) * *
Two Pine Point
Lloyd Harbor, New York 11742
William J. vanden Heuvel......................... 57,500(7) * *
812 Park Avenue
New York, New York 10021
Bert Wasserman................................... 60,000(8) * *
126 East 56th Street
New York, New York 10022
William Harvey................................... 20,000(9) * *
c/o Next Century Media, Inc.
11 North Chestnut Street
New Paltz, New York 12561
Timothy R. Graham................................ 435,852(10) 1.4 1.2
Keystone Investment Management
Company........................................ 2,166,800 6.9 6.1
200 Berkeley Street
Boston, Massachusetts 02116
All Directors and Executive Officers as a 4,963,793(11) 14.7 13.5
Group (9 persons)..............................
</TABLE>
- ----------
* Less than 1%.
(1) Reflects the issuance of approximately 850,000 shares of Common Stock upon
the conversion of the Locate Notes, including accrued interest thereon of
approximately $225,000, one day after the date of this Prospectus.
(2) Includes 408,333 shares of Common Stock issuable upon exercise of certain
options. Does not include 150,000 shares of Common Stock issuable upon
exercise of options which become exercisable in March 1997 and 116,667
shares of Common Stock issuable upon exercise of options which become
exercisable in two equal annual installments in July 1997 and 1998.
(footnotes continued on following page)
63
<PAGE>
Mr. Rouhana has agreed that, during the term of Nathan Kantor's employment
agreement with the Company, he would vote all shares of Common Stock he
controls in favor of Mr. Kantor as a director of the Company.
(3) Includes 641,999 shares of Common Stock issuable upon exercise of certain
options. Also includes 6,500 shares of Common Stock owned by Mr. Kantor's
son and 26,000 shares of Common Stock owned by a trust (a trustee of which
is Mr. Kantor's spouse), over all of which Mr. Kantor disclaims beneficial
ownership. Does not include 233,334 shares of Common Stock issuable upon
exercise of other options which become exercisable in two equal annual
installments commencing in September 1997 and 66,667 of Common Stock
issuable upon exercise of options which become exercisable in two equal
annual installments commencing in August 1997.
(4) Includes (i) 12,000 shares of Common Stock owned by the pension plan for
SGC Advisory Services, Inc., a telecommunications consulting firm of which
Mr. Chrust is President and owner, and (ii) 518,333 shares issuable upon
exercise of certain options owned by Mr. Chrust or members of his family.
Does not include 320,000 shares issuable upon exercise of other options
which become exercisable in three equal annual installments commencing in
January 1998 and 66,667 shares issuable upon exercise of other options
which become exercisable in two equal annual installments in July 1997 and
1998.
(5) Includes 216,666 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 and
33,334 shares of Common Stock issuable upon the exercise of options which
become exercisable in two equal annual installments commencing in October
1997.
(6) Includes (i) 1,000 shares of Common Stock owned by Mr. Magyar's spouse,
over which Mr. Magyar disclaims beneficial ownership, (ii) 1,670 shares of
Common Stock owned by benefit plans of which Mr. Magyar is the sole
trustee and primary beneficiary, and (iii) 30,000 shares of Common Stock
issuable upon exercise of certain options.
(7) Includes 50,000 shares of Common Stock issuable upon exercise of certain
options. Does not include 20,000 shares of Common Stock issuable upon
exercise of other options which become exercisable in June 1997. Also
includes 500 shares owned by Mr. vanden Heuvel's spouse, as to which he
disclaims beneficial ownership.
(8) Includes 50,000 shares of Common Stock issuable upon exercise of certain
options. Does not include 20,000 shares of Common Stock issuable upon
exercise of other options which become exercisable in June 1997.
(9) Represents 20,000 shares of Common Stock issuable upon exercise of
options.
(10) Includes 260,000 shares of Common Stock issuable upon exercise of certain
options. Does not include 50,000 shares of Common Stock issuable upon
exercise of other options which become exercisable in October 1997.
(11) Includes shares referred to as being included in notes (2) through (10).
Excludes shares referred to in such notes as being excluded.
64
<PAGE>
DESCRIPTION OF CERTAIN INDEBTEDNESS
In October 1995, the Company raised net proceeds of $214.5 million from
the 1995 Debt Placement. There will not be any accrual of interest on the Senior
or Convertible Notes (collectively, the "Notes") issued in such transaction
prior to October 15, 2000, nor payment of cash interest on the Notes prior to
April 15, 2001; however, the principal value of such Notes have accreted since
issuance and at maturity, the Senior Notes will have an aggregate principal
amount of $294.2 million and the Convertible Notes will have an aggregate
principal amount of $147.1 million. From and after October 15, 2000, the Notes
will accrue interest at the rate of 14% per annum, payable semi-annually in cash
commencing April 15, 2001. The Notes mature on October 15, 2005.
The Convertible Notes are convertible, at any time, at the option of the
holder, into that number of shares of Common Stock derived by dividing the
principal amount of the Convertible Notes being converted by $20.625. In
addition, if the closing sale price of the Common Stock on the Nasdaq National
Market during any twelve-month period from October 15, 1995 through October 15,
1999 (each a "Market Citeria Period") has exceeded the Market Criteria (as
defined in the Indenture governing the Convertible Notes) and a registration
statement with respect to Common Stock issuable upon conversion of the
Convertible Notes ("Conversion Shares"), effective and available, all of the
Convertible Notes automatically will be converted into Conversion Shares at the
close of business on the last day of the Market Criteria Period. The Company has
caused to be declared effective a registration statement registering the
issuance or resale of the Conversion Shares.
The Indentures contain certain covenants which, among other things,
restrict the ability of the Company and certain of its subsidiaries to: incur
additional indebtedness; create liens; engage in sale-leaseback transactions;
pay dividends or make distributions in respect of their capital stock; make
investments or make certain other restricted payments; sell assets; issue or
sell stock of such subsidiaries; enter into transactions with stockholders or
affiliates; acquire assets or businesses not constituting "telecommunications
assets" (as defined in such Indentures); or consolidate, merge or sell all or
substantially all of their assets. The covenants contained in the Indentures are
subject to exceptions and the Company's new media and consumer products
subsidiaries are not subject to many of the covenants contained therein,
although the Company's ability to make additional investments in such
subsidiaries is limited.
In September 1995, the Company's wholly-owned subsidiary, WinStar
Wireless, Inc. ("WinStar Wireless") entered into an equipment lease financing
arrangement (the "Equipment Lease Financing") with ML Investors Services, Inc.
("ML"), pursuant to which ML agreed to make equipment financing available to
WinStar Wireless. ML has made available $7.0 million under the Equipment Lease
Financing, which facility expired in September 1996. Pursuant to a master lease
agreement between WinStar Wireless and ML (the "Lease") entered into in
connection with the Equipment Lease Financing, WinStar Wireless has leased
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), which lease payment obligations are
non-cancelable for sixty months. After twelve months, however, 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 issued 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 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 1998. 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
65
<PAGE>
accounts receivable limited to 80% and 50% (less appropriate reserves as
determined by The CIT Group). In addition, WinStar Gateway is prohibited from
paying dividends to the Company. The Company also is party to a keepwell
agreement requiring the Company to make a monthly contribution to WinStar
Gateway in an amount equal to WinStar Gateway's net income (loss), plus its
depreciation and amortization, minus its capital expenditures, if such amount is
less than zero for a particular month. Borrowings bear interest at a rate of
3.0% in excess of the prime commercial lending rate of The Chase Manhattan Bank,
N.A. ("Chase Manhattan") and are secured by a lien on all of WinStar Gateway's
assets as well as a guarantee from the Company as to the first $2.2 million in
borrowings. The CIT Loan Agreement also provides for an annual fee of $50,000 as
well as certain underutilization fees. As additional consideration for providing
the CIT Credit Facility, the Company issued to The CIT Group warrants to
purchase 50,000 shares of Common Stock until November 3, 1998 at an exercise
price of $6.975 per share, which warrants have been exercised.
In August 1996, WinStar Global Products entered into an Amended and
Restated Credit and Security Agreement ("Credit Agreement") with IBJ Schroder
Bank & Trust Company (the "Lender"), pursuant to which the Lender agreed to make
a $12,000,000 revolving credit facility (the "Revolving Credit Facility") and a
$250,000 Letter of Credit facility (included within the $12,000,000 facility)
available to WinStar Global Products until August 8, 1999. Pursuant to the terms
of the Credit Agreement, borrowings are limited to an amount equal to the sum of
(a) 85% of eligible accounts receivable plus (b) the lesser of 50% of eligible
inventory or $4,500,000 plus (c) for the period commencing March 1 of each year
through January 31 of the following year, $3,000,000 (the "Overadvance").
Borrowings bear interest at a rate of 0.75% in excess of the base lending rate
of the Lender and are secured by a lien on all of the assets of WinStar Global
Products as well as a guaranty from the Company of the Overadvance. The Credit
Agreement also provides for certain periodic fees to be paid by WinStar Global
Products and places certain affirmative and negative covenants upon it,
including restrictions upon its ability to pay dividends or make other payments
to the Company. The Revolving Credit Facility amends the $6,000,000 credit
facility from Century Business Credit Corporation ("Century") which was
established in 1994 and was assigned (including a $3,000,000 guaranty by the
Company) by Century to the Lender.
66
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Common Stock
The authorized capital stock of the Company includes 75,000,000 shares of
Common Stock, $.01 par value. The holders of Common Stock are entitled to one
vote for each share held of record on all matters submitted to a vote of
stockholders. Although the Company has no present intention of paying any
dividends, holders of Common Stock are entitled to receive ratably such
dividends as may be declared by the Board of Directors out of funds legally
available therefor. In the event of a liquidation or dissolution of the Company,
holders of Common Stock are entitled to share ratably in all assets remaining
after payment of liabilities and liquidation preference of preferred shares, if
any.
Holders of Common Stock have no preemptive rights and have no rights to
convert their Common Stock into any other securities. There are no redemption or
sinking fund provisions applicable to the Common Stock. All of the outstanding
shares of Common Stock are fully paid and nonassessable.
The Company's Certificate of Incorporation, as amended, provides (i) for a
Board of Directors divided into three classes, each of which will generally
serve for a term of three years, with only one class of directors being elected
in each year; (ii) that directors may be removed with or without cause and only
by at least a majority in interest of the capital stock of the Company entitled
to vote thereon; and (iii) that an affirmative vote of the holders of at least
two-thirds of the capital stock of the Company entitled to vote thereon is
required to alter, amend or repeal the provisions relating to the classification
of, and the removal of members from, the Board of Directors. Nominations for the
Board of Directors may be made by the Board or by any stockholder entitled to
vote for the election of directors. A stockholder entitled to vote for the
election of directors at a meeting may nominate a person or persons for election
as director only if written notice of such stockholder's intent to make such
nomination is given to the Company's Secretary not later than sixty days in
advance of such meeting. The Company's Certificate of Incorporation and ByLaws
do not provide for cumulative voting rights which means that holders of more
than one-half of the outstanding voting rights, voting for the election of
directors, can elect all of the directors to be elected, if they so choose and,
in such event, the holders of the remaining shares will not be able to elect any
of the Company's directors. A special meeting of stockholders of the Company may
be called by the request of the holders of at least 10% of the outstanding
capital stock of the Company entitled to vote generally in all matters.
The registrar and transfer agent for the Common Stock of the Company is
Continental Stock Transfer & Trust Company, 2 Broadway, New York, New York
10004.
Preferred Stock
The authorized capital stock of the Company includes 15,000,000 shares of
"blank check" preferred stock, which may be issued from time to time in one or
more series upon authorization by the Company's Board of Directors. There
currently are no shares of preferred stock issued or outstanding. The Board of
Directors, without further approval of the stockholders, is authorized to fix
the dividend rights and terms, conversion rights, voting rights, redemption
rights and terms, liquidation preferences, and any other rights, preferences,
privileges and restrictions applicable to each series of preferred stock. The
issuance of preferred stock (and the ability of the Board of Directors to do so
without stockholder approval), while providing flexibility in connection with
possible acquisitions and other corporate purposes could, among other things,
adversely affect the voting power of the holders of Common Stock and, under
certain circumstances, make it more difficult for a third party to gain control
of the Company, discourage bids for the Company's Common Stock at a premium or
otherwise adversely affect the market price of the Common Stock.
Statutory Provisions Affecting Stockholders
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law. In general, the statute prohibits a publicly held
Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder unless prior to
the date the stockholder became an
67
<PAGE>
interested stockholder the board approved either the business combination or the
transaction that resulted in the stockholder becoming an interested stockholder
or unless one of the following two exceptions to the prohibitions are satisfied:
(i) upon consummation of the transaction that resulted in such person becoming
an interested stockholder, the interested stockholder owned at least 85% of the
Company's voting stock outstanding at the time the transaction commenced
(excluding, for purposes of determining the number of shares outstanding, shares
owned by certain directors or certain employee stock plans) or (ii) on or after
the date the stockholder became an interested stockholder, the business
combination is approved by the board of directors and authorized by the
affirmative vote (and not by written consent) of at least two-thirds of the
outstanding voting stock, excluding the stock owned by the interested
stockholder. A "business combination" includes a merger, asset sale or other
transaction resulting in a financial benefit to the interested stockholder. An
"interested stockholder" is a person who (other than the corporation and any
direct or indirect majority-owned subsidiary of the corporation), together with
affiliates and associates, owns (or, as an affiliate or associate, within three
years prior, did own) 15% or more of the corporation's outstanding voting stock.
It is possible that these provisions may have the effect of delaying, deterring
or preventing a change in control of the Company.
SHARES ELIGIBLE FOR FUTURE SALE
As of September 30, 1996, there were outstanding options and warrants with
respect to an aggregate of 9,597,968 shares of Common Stock at per-share
exercise prices ranging from $1.06 to $31.12. Additionally, the Convertible
Notes are convertible into shares of Common Stock and the Company intends to
convert the Locate Notes by issuing the Conversion Shares (all with no
additional cash payment to the Company) and the Company may elect to pay certain
defined and/or contingent portions of the purchase price for GMS by issuing
shares of Common Stock. Although a significant number of the outstanding shares
of Common Stock are "restricted securities," as that term is defined in Rule 144
under the Securities Act ("Restricted Shares"), and may not be sold unless such
sale is registered under the Securities Act or is made pursuant to an exemption
from the registration under the Securities Act, including the exemption provided
by Rule 144, substantially all of such Restricted Shares have been registered
for resale under the Securities Act or are currently, or will soon become,
available for sale pursuant to Rule 144. In addition, the Company will issue a
substantial number of shares of Common Stock in connection with the Milliwave
Acquisition which would be subject to registration rights requiring the Company
to register them for resale. Sales or the expectation of sales of a substantial
number of shares of Common Stock in the public market could adversely affect the
prevailing market price of the Common Stock.
In general, under Rule 144 as currently in effect, if two years have
elapsed since the later of the date of acquisition of Restricted Shares from the
Company or any "affiliate" of the Company, as that term is defined under the
Securities Act, the holder is entitled to sell within any three-month period a
number of shares of Common Stock that does not exceed the greater of 1% of the
then-outstanding shares of Common Stock or the average weekly trading volume of
shares of Common Stock on all exchanges and reported through the automated
quotation system of a registered securities association during the four calendar
weeks preceding the date on which notice of the sale is filed with the
Commission. Sales under Rule 144 are also subject to certain restrictions on the
manner of sales, notice requirements and the availability of current public
information about the Company. If three years have elapsed since the date of
acquisition of Restricted Shares from the Company or from any "affiliate" of the
Company, and the holder thereof is deemed not to have been an affiliate of the
Company at any time during the 90 days preceding a sale, such person would be
entitled to sell such Common Stock in the public market under Rule 144(k)
without regard to the volume limitations, manner of sale provisions, public
information requirements or notice requirements.
The Commission recently has proposed amendments to Rule 144 and Rule
144(k) that would permit resales of restricted securities under Rule 144 after a
one-year, rather than a two-year, holding period, subject to compliance with the
other provisions of Rule 144, and would permit unlimited resales of restricted
securities by non-affiliates under Rule 144(k) after a two-year, rather than a
three-year, holding period. Adoption of such amendments could result in resales
of restricted securities sooner than would be the case under Rule 144 and Rule
144(k) as currently in effect. The Company is unable to determine when or if
such proposed amendments will be adopted.
68
<PAGE>
LEGAL MATTERS
The legality of the securities offered hereby and certain tax matters will
be passed upon for the Company by Graubard Mollen & Miller, New York, New York.
Certain partners and employees of Graubard Mollen & Miller own shares of Common
Stock.
EXPERTS
The consolidated financial statements and financial statement schedule of
the Company as of December 31, 1995 and February 28, 1995, and for the ten
months ended December 31, 1995 and for the two years in the period ended
February 28, 1995, the financial statements of Avant-Garde Telecommunications,
Inc. as of February 28, 1995 and for the two years in the period ended February
28, 1995 and the financial statements of Milliwave Limited Partnership as of
December 31, 1995 and for the period April 25, 1995 (inception) through December
31, 1995 included in this Prospectus, have been audited by Grant Thornton LLP,
independent certified public accountants, to the extent and for the periods
indicated in their reports thereon, and are included herein in reliance upon the
authority of such firm as experts in giving such reports.
The financial statements of the Microwave Division of Local Area
Telecommunications, Inc. as of December 31, 1995 and 1994, and for each of the
years then ended, appearing in this Prospectus and Registration Statement have
been audited by Ernst & Young LLP, independent auditors, as set forth in their
report thereon (which contains an explanatory paragraph with respect to the
Division's ability to continue as a going concern as discussed in Note 1 to the
financial statements) appearing elsewhere herein, and are included in reliance
upon such report given upon the authority of such firm as experts in accounting
and auditing.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Exchange
Act, and, in accordance therewith, is required to file reports, proxy statements
and other information with the Commission. Such reports, proxy statements and
other information can be inspected and copied at the Public Reference Section of
the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and
at the Commission's regional offices at Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661 and 7 World Trade Center, Suite
1300, New York, New York 10048. Copies of the reports, proxy statements and
other information can be obtained from the Public Reference Section of the
Commission, Washington, D.C. 20549, 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 http:\\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 on Form S-3 (No. 333-________ ) with respect to the
securities offered by the Company pursuant to this Prospectus. As permitted by
the rules and regulations of the Commission, this Prospectus does not contain
all of the information set forth in the Registration 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 Statements, each such
statement being qualified in all respects by such reference. Copies of each such
document may be obtained from the Commission at its principal office in
Washington, D.C. upon payment of the charges prescribed by the Commission.
69
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page
----
WinStar Communications, Inc. and Subsidiaries
Report of Independent Certified Public Accountants...................... F-2
Consolidated Balance Sheets as of September 30, 1996
(unaudited), December 31,1995 and February 28, 1995.................. F-3
Consolidated Statements of Operations, Nine Months
Ended September 30, 1996 and 1995 (unaudited),
Ten Months Ended December 31, 1995 and 1994
(unaudited as to 1994), and Years Ended February
28, 1995 and 1994.................................................... F-4
Consolidated Statements of Stockholders' Equity, Ten
Months Ended December 31, 1995, and Years Ended
February 28, 1995 and 1994........................................... F-5
Consolidated Statements of Cash Flows, Nine Months
Ended September 30, 1996 and 1995 (unaudited),
Ten Months Ended December 31, 1995, and Years Ended
February 28, 1995 and 1994........................................... F-8
Notes to Consolidated Financial Statements.............................. F-9
The Microwave Division of Local Area Telecommunications, Inc.
Report of Independent Auditors.......................................... F-33
Balance Sheets as of September 30, 1996 (unaudited),
December 31, 1995 and 1994........................................... F-34
Statements of Operations, Nine Months Ended September
30, 1996 and 1995 (unaudited) and Years Ended
December 31, 1995 and 1994........................................... F-35
Statements of Divisional (Deficit) Surplus, Nine Months
Ended September 30, 1996 (unaudited) and Years
Ended December 31, 1995 and 1994..................................... F-36
Statements of Cash Flows, Nine Months Ended September 30,
1996 and 1995 (unaudited) and Years Ended December 31,
1995 and 1994........................................................ F-37
Notes to Financial Statements........................................... F-38
Avant-Garde Telecommunications, Inc.
Report of Independent Certified Public Accountants...................... F-42
Balance Sheet as of February 28, 1995................................... F-43
Statements of Operations, Period March 1, 1995 to July 17,
1995 (unaudited) and Years Ended February 28, 1995 and 1994.......... F-44
Statements of Cash Flows, Period March 1, 1995 to July 17,
1995 (unaudited) and Years Ended February 28, 1995 and 1994.......... F-45
Notes to Financial Statements........................................... F-46
Milliwave Limited Partnership
Report of Independent Certified Public Accountants...................... F-49
Balance Sheets as of September 30, 1996 (unaudited) and
December 31, 1995.................................................... F-50
Statement of Operations, Nine Months Ended September 30, 1996........... F-51
Statement of Changes in Partners' Capital, April 25, 1995
(inception) through December 31, 1995 and the Nine Months
Ended September 30, 1996 (unaudited)................................. F-52
Statement of Cash Flows, Nine Months Ended September 30, 1996........... F-53
Notes to Financial Statements........................................... F-54
Unaudited Pro Forma Condensed Consolidated Financial Statements
Unaudited Pro Forma Condensed Consolidated Balance Sheet
as of September 30, 1996............................................. F-57
Unaudited Pro Forma Condensed Consolidated Statement of
Operations, Nine Months Ended September 30, 1996..................... F-58
Unaudited Pro Forma Condensed Consolidated Statement of
Operations, Ten Months Ended December 31, 1995....................... F-59
Notes to Unaudited Pro Forma Condensed Consolidated Financial
Statements........................................................... F-60
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
WinStar Communications, Inc.
We have audited the accompanying consolidated balance sheets of WinStar
Communications, Inc. and Subsidiaries as of December 31, 1995 and February 28,
1995, and the related consolidated statements of operations, stockholders'
equity, and cash flows for the ten months ended December 31, 1995 and the years
ended February 28, 1995 and 1994. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatements. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of WinStar
Communications, Inc. and Subsidiaries as of December 31, 1995 and February 28,
1995, and the consolidated results of their operations and their consolidated
cash flows for the ten months ended December 31, 1995 and the years ended
February 28, 1995 and 1994, in conformity with generally accepted accounting
principles.
GRANT THORNTON LLP
New York, New York
March 8, 1996
F-2
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31, February 28,
1996 1995 1995
------------- ------------- -------------
(unaudited)
<S> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents ......................... $ 54,467,888 $ 138,105,824 $ 3,156,354
Short term investments ............................ 108,510,243 73,594,849 --
------------- ------------- -------------
Total cash, cash equivalents and short term
investments ................................... 162,978,131 211,700,673 3,156,354
Investments in marketable equity securities ....... 1,068,800 6,515,250 --
Accounts receivable, net of allowance for
doubtful accounts of $1,496,000, $800,000
and $824,000 .................................... 14,750,130 8,683,860 4,035,007
Notes receivable .................................. 218,818 199,635 706,329
Inventories ....................................... 12,450,043 7,391,686 4,232,927
Prepaid expenses and other current assets ......... 15,242,599 3,568,448 983,380
------------- ------------- -------------
Total current assets ............................ 206,708,521 238,059,552 13,113,997
Property and equipment, net ......................... 44,162,410 15,898,005 2,663,068
Notes receivable .................................... 333,778 3,488,948 2,289,002
Investments and advances ............................ 399,729 322,733 7,866,927
Licenses, net ....................................... 12,885,294 12,556,281 --
Intangible assets, net .............................. 10,271,905 3,033,505 3,213,785
Deferred financing costs ............................ 10,896,527 10,525,301 --
Other assets ........................................ 2,499,988 1,478,530 362,673
------------- ------------- -------------
Total assets .................................... $ 288,158,152 $ 285,362,855 $ 29,509,452
============= ============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Loans payable ..................................... $ 1,839,404 $ 8,287,461 $ --
Accounts payable and accrued expenses ............. 32,855,042 13,513,369 5,732,039
Capitalized lease obligations ..................... 1,803,591 1,355,255 332,239
------------- ------------- -------------
Total current liabilities ....................... 36,498,037 23,156,085 6,064,278
Senior notes payable ................................ 170,356,225 153,971,508 --
Convertible notes payable ........................... 85,178,112 76,985,754 --
Other notes payable ................................. 10,680,478 3,416,288 4,410,753
Capitalized lease obligations ....................... 5,980,970 6,081,299 754,525
------------- ------------- -------------
Total liabilities ............................... 308,693,822 263,610,934 11,229,556
------------- ------------- -------------
Commitments and contingencies
Stockholders' equity
Preferred stock ................................... -- 688,900 732,691
Common stock, $.01 par value, authorized
75,000,000 shares, issued 28,290,525,
29,707,792 and 20,146,934 shares;
outstanding 28,290,525, 27,201,029 and
20,146,934 shares ............................... 282,906 297,079 201,470
Additional paid-in capital ........................ 70,501,060 103,836,510 42,583,679
Accumulated deficit ............................... (91,338,436) (41,311,075) (25,237,944)
------------- ------------- -------------
(20,554,470) 63,511,414 18,279,896
Less Treasury stock ................................ -- (39,677,743) --
Deferred compensation ...................... -- (1,100,000) --
Unrealized gain (loss) on investments in
marketable equity securities ............. 18,800 (981,750) --
------------- ------------- -------------
Total stockholders' equity ............... (20,535,670) 21,751,921 18,279,896
------------- ------------- -------------
Total liabilities and stockholders' equity $ 288,158,152 $ 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 nine months For the ten months For the years ended
ended September 30, ended December 31, February 28,
--------------------------- --------------------------- ---------------------------
(unaudited) (unaudited)
1996 1995 1995 1994 1995 1994
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net sales ............... $ 47,980,633 $ 20,624,996 $ 29,771,472 $ 22,018,106 $ 25,564,760 $ 15,625,019
Cost of sales ........... 28,273,656 14,626,073 19,546,351 14,761,290 17,702,570 10,712,090
------------ ------------ ------------ ------------ ------------ ------------
Gross profit .......... 19,706,977 5,998,923 10,225,121 7,256,816 7,862,190 4,912,929
Selling, general and
administrative
expenses .............. 47,741,812 12,039,179 19,266,466 9,974,189 12,688,859 6,887,913
Restructuring expense ... -- -- -- 607,609 607,609 --
Depreciation ............ 1,754,540 382,304 770,284 137,055 177,158 92,537
------------ ------------ ------------ ------------ ------------ ------------
Operating loss .......... (29,789,375) (6,422,560) (9,811,629) (3,462,037) (5,611,436) (2,067,521)
Other (income) expenses
Interest expense ...... 27,388,356 869,266 7,630,079 504,857 637,028 744,371
Interest income ....... (8,174,077) (492,210) (2,889,813) (297,051) (384,572) (109,320)
Amortization of
intangibles ......... 762,193 370,086 439,888 181,972 225,176 239,993
Equity in loss of
Avant-Garde ......... -- 1,224,309 865,676 766,543 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 .......... (49,765,847) (8,394,011) (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 ................. (49,765,847) (8,394,011) (15,857,459) (4,618,358) (7,230,195) (8,195,468)
Income taxes ............ 261,514 -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Net loss .............. $(50,027,361) $ (8,394,011) $(15,857,459) $ (4,618,358) $ (7,230,195) $ (8,195,468)
============ ============ ============ ============ ============ ============
Net loss per share
Before extraordinary
item .................. $ (1.81) $ (0.40) $ (0.70) $ (0.28) $ (0.42) $ (1.09)
Extraordinary item .... -- -- -- -- -- 0.03
------------ ------------ ------------ ------------ ------------ ------------
Net loss .............. $ (1.81) $ (0.40) $ (0.70) $ (0.28) $ (0.42) $ (1.06)
============ ============ ============ ============ ============ ============
Weighted average
shares outstanding .. 27,691,452 21,222,182 22,769,770 16,609,305 17,122,318 7,718,988
============ ============ ============ ============ ============ ============
</TABLE>
See Notes to Consolidated Financial Statements
F-4
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE TEN MONTHS ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
Preferred Stock
---------------------------------------------
B E Common Stock Additional
----------------- ------------------- --------------------- Paid-in
Shares Amount Shares Amount Shares Amount Capital
------ ------ ------ ------ ------ ------ ----------
<S> <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
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
Issuance of
restricted stock
to employee ....... 150,000 1,500 1,236,000
Private exchange
transaction ....... 3,741,224 37,412 39,640,331
Issuance of
common stock in
connection with the
conversion of
convertible notes
payable ........... 539,255 5,393 3,408,928
Amortization of
deferred
compensation
expense ...........
Change in market
value of
investments in
marketable equity
securities ........
Other .............. (432,458)
Net loss ...........
------- ---------- ---------- ------------- ------------- ------------- -------------
Balances at
December 31, 1995 688.90 $ 688,900 0.00 $ -- 29,707,792 $ 297,079 $ 103,836,510
======= ========== ========== ============= ============= ============= =============
<CAPTION>
Treasury Stock
-------------------------------------------------
Common Stock Preferred Stock B
Accumulated Deferred
Deficit Shares Amount Shares Amount Compensation
----------- ------ ------ ------ ------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balances at
February 28, 1995 $ (25,237,944) -- $ -- -- $ -- $ --
Issuances of
common stock for
cash (exercise of
options and
otherwise) ........
Issuance of
common stock for
the acquisition of
Avant-Garde ......
Issuance of
Preferred Stock E .
Warrants and
common stock
equivalents
issued in
connection with
convertible notes .
Common stock
equivalents issued
in connection with
lease financing ...
Conversion of
preferred stock ...
Preferred stock
dividends ......... (215,672)
Issuance of
restricted stock
to employee ....... (1,237,500)
Private exchange
transaction ....... (2,506,763) (36,348,065) (688.90) (3,329,678)
Issuance of
common stock in
connection with the
conversion of
convertible notes
payable ...........
Amortization of
deferred
compensation
expense ........... 137,500
Change in market
value of
investments in
marketable equity
securities ........
Other ..............
Net loss ........... (15,857,459)
-------------- ------------- ------------- --------- ----------- -----------
Balances at
December 31, 1995 $ (41,311,075) (2,506,763) $ (36,348,065) (688.90) $(3,329,678) $(1,100,000)
============== ============= ============= ========= =========== ===========
</TABLE>
Unrealized
Loss on
Investments
in Marketable Total
Equity Stockholders'
Securities Equity
------------- -------------
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 ....... --
Private exchange
transaction ....... --
Issuance of
common stock in
connection with the
conversion of
convertible notes
payable ........... 3,414,321
Amortization of
deferred
compensation
expense ........... 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 $ (981,750) $ 21,751,921
============= =============
See Notes to Consolidated Financial Statements
F-5
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED FEBRUARY 28, 1995
<TABLE>
<CAPTION>
Preferred Stock
------------------------------------------------------------------------------
B C D
-------------------- ------------------ -------------------
Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Balances at February 28, 1994 ... 1,203.79 $ 1,203,791 173.00 $ 173,000 225,000 $ 900,000
Exercise of Series A and Series B
Warrants ......................
Exercise of Series D and Series E
Warrants ......................
Conversion of Preferred Stock C . (173.00) (173,000)
Conversion of Preferred Stock B . (533.00) (533,000)
Conversion of Preferred Stock D . (225,000) (900,000)
Issuances of common stock for
cash (exercise of options and
otherwise) ....................
Issuance of Preferred B stock
dividend ...................... 61.90 61,900
Issuance of common stock for
the acquisition of NFF, Inc. ..
Other ...........................
Net loss ........................
--------- ------------ ------------ ------------ ------------ ------------
Balances at February 28, 1995 ... 732.69 $ 732,691 -- $ -- -- $ --
========= ============ ============ ============ ============ ============
<CAPTION>
Common Stock Additional Total
-------------------- Paid-in Accumulated Stockholders'
Shares Amount Capital Deficit Equity
------ ------ ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balances at February 28, 1994 ... 9,842,670 $ 98,427 $ 20,289,677 $(17,945,849) $ 4,719,046
Exercise of Series A and Series B
Warrants ...................... 3,291,417 32,914 10,657,038 10,689,952
Exercise of Series D and Series E
Warrants ...................... 2,814,142 28,141 2,081,137 2,109,278
Conversion of Preferred Stock C . 82,381 824 172,176 --
Conversion of Preferred Stock B . 177,665 1,777 531,223 --
Conversion of Preferred Stock D . 225,000 2,250 897,750 --
Issuances of common stock for
cash (exercise of options and
otherwise) .................... 3,685,087 36,852 7,767,569 7,804,421
Issuance of Preferred B stock
dividend ...................... (61,900) --
Issuance of common stock for
the acquisition of NFF, Inc. .. 28,572 285 199,715 200,000
Other ........................... (12,606) (12,606)
Net loss ........................ (7,230,195) (7,230,195)
------------ ------------ ------------ ------------ ------------
Balances at February 28, 1995 ... 20,146,934 $ 201,470 $ 42,583,679 $(25,237,944) $ 18,279,896
============ ============ ============ ============ ============
</TABLE>
See Notes to Consolidated Financial Statements
F-6
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED FEBRUARY 28, 1994
<TABLE>
<CAPTION>
Preferred Stock
----------------------------------------------------------------------
B C D
-------------------- ------------------- ------------------
Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Balances at February 28, 1993........... 1,135.66 $1,135,662 222.60 $222,600 0 $ --
Issuances of common stock
for cash...............................
Issuance of common stock
for acquisition of WGN, Inc............
Issuance of common stock
for acquisition of Inne
Dispensibles, Inc......................
Issuance of Preferred Stock
D for acquisition of
Avant-Garde............................ 225,000 900,000
Conversion of Preferred
Stock C................................ (50.00) (50,000)
Conversion of Series D
Warrants...............................
Issuance of common stock
for services rendered..................
Issuance of common stock
to retire debt.........................
Issuance of Preferred B
stock dividend......................... 68.13 68,129
Issuance of Preferred C
stock dividend.........................
Purchase and retirement of
treasury stock.........................
Performance stock options...............
Net loss................................
Adjustments............................. 0.40 400
-------- ---------- ------ -------- ------- --------
Balances at
February 28, 1994...................... 1,203.79 $1,203,791 173.00 $173,000 225,000 $900,000
======== ========== ====== ======== ======= ========
<CAPTION>
Common Stock Additional Total
-------------------- Paid-in Accumulated Stockholders'
Shares Amount Capital Deficit Equity
------ ------ ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balances at February 28, 1993........... 6,539,475 $65,394 $ 9,986,348 $ (9,662,872) $1,747,132
Issuances of common stock
for cash............................... 1,687,436 16,875 3,197,684 3,214,559
Issuance of common stock
for acquisition of WGN, Inc............ 1,271,351 12,714 1,457,286 1,470,000
Issuance of common stock
for acquisition of Inne
Dispensibles, Inc...................... 39,506 395 99,605 100,000
Issuance of Preferred Stock
D for acquisition of
Avant-Garde............................ 900,000
Conversion of Preferred
Stock C................................ 23,810 238 49,762 --
Conversion of Series D
Warrants............................... 205,000 2,050 135,300 137,350
Issuance of common stock
for services rendered.................. 63,406 634 48,096 48,730
Issuance of common stock
to retire debt......................... 50,000 500 56,531 57,031
Issuance of Preferred B
stock dividend......................... (68,129) --
Issuance of Preferred C
stock dividend......................... 10,789 108 19,272 (19,380) --
Purchase and retirement of
treasury stock......................... (48,103) (481) (76,474) (76,955)
Performance stock options............... 5,316,667 5,316,667
Net loss................................ (8,195,468) (8,195,468)
Adjustments............................. (400) --
--------- ------- ----------- ------------ ----------
Balances at
February 28, 1994...................... 9,842,670 $98,427 $20,289,677 $(17,945,849) $4,719,046
========= ======= =========== ============ ==========
</TABLE>
See Notes to Consolidated Financial Statements
F-7
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Ten Months
Nine Months ended September 30, Ended
------------------------------- December 31,
1996 1995 1995
---- ---- ----
(unaudited)
<S> <C> <C> <C>
Cash flows from operating activities, net of the effects of acquisitions
Net loss ................................................................. $ (50,027,361) $ (8,394,011) $ (15,857,459)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation and amortization .......................................... 3,742,118 560,872 860,103
Amortization of licenses and intangibles ............................... 759,659 370,338 439,888
Provision for doubtful accounts ........................................ 1,066,748 503,513 887,425
Equity in unconsolidated results of Avant--Garde ....................... -- 1,208,537 865,676
Non cash interest expense .............................................. 24,630,478 -- 6,151,090
Extraordinary gain from extinguishment of debt ......................... -- -- --
Performance stock option expense ....................................... -- -- --
Non cash loss on discontinuation of product lines ...................... -- -- --
Other .................................................................. -- 86,584 177,735
(Increase) decrease in operating assets
Accounts receivable ................................................. (2,814,522) (779,402) (5,526,618)
Inventories ......................................................... (3,881,615) (2,834,681) (3,158,759)
Prepaid expenses and other current assets ........................... (12,658,451) (659,133) (2,478,501)
Other assets ........................................................ (983,723) (91,841) (268,650)
Increase in accounts payable and accrued expenses ...................... 11,664,993 2,949,556 6,306,466
------------- ------------- -------------
Net cash used in operating activities ...................................... (28,501,676) (7,079,668) (11,601,604)
------------- ------------- -------------
Cash flows from investing activities
Investments in and advances to Avant--Garde ............................ -- (7,285,542) (5,703,608)
Acquisitions ........................................................... -- -- --
Increase in short-term investments, net ................................ (34,915,394) (764,089) (73,593,849)
Decrease (increase) in investments in marketable equity securities ..... 6,447,000 -- (7,497,000)
Collections of notes receivable ........................................ 140,602 1,183,859 1,003,859
Increase in notes receivable ........................................... (763,498) (1,641,553) (1,370,974)
Purchase of property and equipment, net ................................ (29,718,743) (4,590,765) (8,607,794)
Cash proceeds from sale of skiwear brands .............................. -- -- --
License acquisition costs .............................................. (731,682) (358,704) (129,413)
Cash acquired through acquisitions ..................................... 96,154 319 --
Other .................................................................. -- 294,736 (3,251)
------------- ------------- -------------
Net cash provided by (used in) investing activities ........................ (59,445,561) (13,161,739) (95,902,030)
------------- ------------- -------------
Cash flows from financing activities
Proceeds from (repayment of) loans payable ............................. 73,921 1,386,995 3,849,233
Proceeds from notes payable ............................................ -- 7,505,800 221,946,330
Repayment of notes payable ............................................. -- -- --
Payment of dividends ................................................... -- -- (113,303)
Debt financing costs ................................................... (969,842) -- (784,791)
Proceeds from equipment lease financing ................................ 966,325 5,343,000 6,997,600
Proceeds of cash collateral ............................................ -- -- --
Payment of capital lease obligations ................................... (1,253,282) (389,794) (700,828)
Net proceeds from equity transactions .................................. 5,492,179 11,514,257 11,258,863
------------- ------------- -------------
Net cash provided by financing activities .................................. 4,309,301 25,360,258 242,453,104
------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents ....................... (83,637,936) 5,118,851 134,949,470
Cash and cash equivalents at beginning of period ........................... 138,105,824 5,287,188 3,156,354
------------- ------------- -------------
Cash and cash equivalents at end of period ................................. 54,467,888 10,406,039 138,105,824
Short-term investments at end of period .................................... 108,510,243 783,611 73,594,849
------------- ------------- -------------
Cash, cash equivalents and short-term investments at end of period ......... $ 162,978,131 $ 11,189,650 $ 211,700,673
============= ============= =============
<CAPTION>
Year Ended February 28,
-----------------------
1995 1994
---- ----
<S> <C> <C>
Cash flows from operating activities, net of the effects of acquisitions
Net loss ................................................................. $ (7,230,195) $ (8,195,468)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation and amortization .......................................... 432,502 223,088
Amortization of licenses and intangibles ............................... 225,176 239,993
Provision for doubtful accounts ........................................ 893,857 343,694
Equity in unconsolidated results of Avant--Garde ....................... 1,108,962 --
Non cash interest expense .............................................. -- --
Extraordinary gain from extinguishment of debt ......................... -- (194,154)
Performance stock option expense ....................................... -- 5,316,667
Non cash loss on discontinuation of product lines ...................... -- 292,376
Other .................................................................. 78,374 (155,086)
(Increase) decrease in operating assets
Accounts receivable ................................................. (1,409,862) (1,438,263)
Inventories ......................................................... (1,729,395) (337,781)
Prepaid expenses and other current assets ........................... (440,188) (249,496)
Other assets ........................................................ (90,637) (12,049)
Increase in accounts payable and accrued expenses ...................... 1,635,189 1,531,892
------------- -------------
Net cash used in operating activities ...................................... (6,526,217) (2,634,587)
------------- -------------
Cash flows from investing activities
Investments in and advances to Avant--Garde ............................ (7,128,947) (632,000)
Acquisitions ........................................................... (678,566) 27,679
Increase in short-term investments, net ................................ -- --
Decrease (increase) in investments in marketable equity securities ..... -- --
Collections of notes receivable ........................................ 360,000 600,000
Increase in notes receivable ........................................... (2,234,636) --
Purchase of property and equipment, net ................................ (1,055,167) (227,787)
Cash proceeds from sale of skiwear brands .............................. -- 276,695
License acquisition costs .............................................. -- --
Cash acquired through acquisitions ..................................... -- --
Other .................................................................. (50,140) --
------------- -------------
Net cash provided by (used in) investing activities ........................ (10,787,456) 44,587
------------- -------------
Cash flows from financing activities
Proceeds from (repayment of) loans payable ............................. 1,695,447 (1,772,550)
Proceeds from notes payable ............................................ -- 1,966,498
Repayment of notes payable ............................................. (431,793) (300,625)
Payment of dividends ................................................... -- --
Debt financing costs ................................................... (329,483) --
Proceeds from equipment lease financing ................................ -- --
Proceeds of cash collateral ............................................ -- 100,000
Payment of capital lease obligations ................................... (250,871) (115,249)
Net proceeds from equity transactions .................................. 19,067,386 2,800,739
------------- -------------
Net cash provided by financing activities .................................. 19,750,686 2,678,813
------------- -------------
Net increase (decrease) in cash and cash equivalents ....................... 2,437,013 88,813
Cash and cash equivalents at beginning of period ........................... 719,341 630,528
------------- -------------
Cash and cash equivalents at end of period ................................. 3,156,354 719,341
Short-term investments at end of period .................................... -- --
------------- -------------
Cash, cash equivalents and short-term investments at end of period ......... $ 3,156,354 $ 719,341
============= =============
</TABLE>
See Notes to Consolidated Financial Statements
F-8
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information with respect to the nine months
ended September 30, 1996 and 1995 is unaudited)
Note 1--Summary of Significant Accounting Policies
Consolidation
The consolidated financial statements include the accounts of WinStar
Communications, Inc. ("WCI") and its wholly owned subsidiaries, WinStar
Wireless, Inc. ("WWI"); WinStar Wireless Fiber Corp. ("WWFC"); WinStar Gateway
Network, Inc. (formerly Communications Gateway Network, Inc., "WGN"); WinStar
Global Products, Inc. (formerly Beauty Labs, Inc., "WGP"); WinStar New Media
Company, Inc. ("WNM"); and Non Fiction Films, Inc. ("NFF") (collectively
referred to as the "Company"). All material intercompany transactions and
accounts have been eliminated in consolidation.
Nature of Business
The Company provides local and long distance telecommunications services
in the United States. The Company offers its Wireless FiberSM local
telecommunications services on a point-to-point basis in many major metropolitan
areas via its digital wireless capacity in the 38.6 to 40 gigahertz portion of
the radio spectrum, where it has licenses granted by the Federal Communications
Commission("FCC"). The Company's Wireless FiberSM services deliver high quality
voice and data transmissions which meet or exceed telephone industry standards
and provide transmission quality equivalent to that produced by fiber
optic-based facilities. The Company also offers resale- and facilities-based
long distance services and has authority in several states to provide local
switched telecommunications services. As regulatory and competitive conditions
permit, the Company intends to offer its customers integrated local and long
distance telecommunications services, thereby participating in both the $90
billion local exchange market and the $60 billion long distance market in the
United States. As a complement to its telecommunications operations, the Company
acquires rights to distribute and otherwise control certain information and
entertainment content and services. The Company also markets consumer products
nationwide through a subsidiary acquired prior to the Company's entry into the
telecommunications industry. The Company's telecommunications services are
subject to varying degrees of federal, state and local regulation.
Fiscal Year
The Company changed its fiscal year end from February 28 to December 31,
effective January 1, 1996. Accordingly, these financial statements present a
transition period of the ten months ended December 31, 1995.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. Cash
equivalents consist of money market fund investments, short-term certificates of
deposit, and commercial paper. Exclusive of cash in banks, cash equivalents were
approximately $137,370,000 at December 31, 1995, and approximate fair value.
Short Term Investments
Short term investments are widely diversified and principally consist of
certificates of deposit and money market deposits, U.S. government or government
agency securities, commercial paper rated "A- 1/P-1" or higher, and municipal
securities rated "A" or higher with an original maturity of greater than three
months and less than six months. Short term investments are considered
held-to-maturity and are stated at amortized cost which approximates fair value.
As of December 31, 1995, cash, cash equivalents and short term investments
totaled $211,700,673.
F-9
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Information with respect to the nine months
ended September 30, 1996 and 1995 is unaudited)
Note 1 - Summary of Significant Accounting Policies - (Continued)
Inventories
Inventories in the merchandising division are valued at the lower of cost
or market, principally using the first-in, first-out method.
Film inventories include direct and indirect production costs, which are
amortized to expense in the proportion that revenue recognized during the year
for each film bears to the estimated total revenue to be received from all
sources under the individual film forecast method. Management's estimate of
forecasted revenues exceeds the unamortized costs on an individual program
basis. Such forecasted revenue is subject to revision in future periods if
warranted by changing market conditions.
Property and Equipment
Property and equipment is stated at cost. Depreciation and amortization
are computed using the straight-line method over the estimated useful lives of
the related assets.
Intangible Assets
Intangible assets are being amortized by the straight-line method over
their estimated useful lives.
The Company's policy is to measure goodwill impairment by considering a
number of factors as of each balance sheet date including (i) current operating
results of the applicable business, (ii) projected future operating results of
the applicable business, (iii) the occurrence of any significant regulatory
changes which may have an impact on the continuity of the business, and (iv) any
other material factors that affect the continuity of the applicable business.
The amortization period for goodwill is determined on a case-by-case basis for
each acquisition from which goodwill arises based on a review of the nature of
the business acquired as well as the factors cited above (Note 14).
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
109"). Pursuant to SFAS 109, deferred income taxes are recognized for temporary
differences between financial statement and income tax bases of assets and
liabilities and loss carryforwards and tax credit carryforwards for which income
tax benefits are expected to be realized in future years. A valuation allowance
is to be established to reduce deferred tax assets if it is more likely than not
that all, or some portion, of such deferred tax assets will not be realized. The
effect on deferred taxes of a change in tax rates is recognized in income in the
period that includes the enactment date.
Revenue Recognition
In the telecommunications division, sales are recorded upon placing of
calls or rendering of other related services. In the merchandising division,
sales are recorded upon shipment of merchandise and are presented in the
accompanying consolidated statement of operations net of merchandise returns.
The Company provides for future estimated returns of merchandise at the time of
sale. Revenues from film productions are recognized when a program is accepted
by the licensee and is available for broadcast.
F-10
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Information with respect to the nine months
ended September 30, 1996 and 1995 is unaudited)
Note 1 - Summary of Significant Accounting Policies - (Continued)
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 September 30, 1996 and the
unaudited consolidated statements of operations and statements of cash flows for
the nine months ended September 30, 1996 and 1995 are condensed financial
statements in accordance with the rules and regulations of the Securities and
Exchange Commission. Accordingly, they omit certain information included in
complete financial statements and should be read in connection with the
information for the ten months ended December 31, 1995 and the years ended
February 28, 1995 and 1994. In the opinion of the Company, the accompanying
unaudited consolidated financial statements include all adjustments (consisting
only of normal recurring adjustments) necessary to present fairly the financial
position as of September 30, 1996 and results of operations and the cash flows
for the nine months ended September 30, 1996 and 1995.
F-11
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Information with respect to the nine months
ended September 30, 1996 and 1995 is unaudited)
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 Nine Months For the Ten Months For the Twelve
Ended Ended Months Ended
September 30, 1995 December 31, 1995 February 28, 1995
------------------ ----------------- -----------------
<S> <C> <C> <C>
Net sales ............. $ 20,628,000 $ 29,744,251 $ 25,572,218
Net loss .............. (9,209,000) (16,769,516) (8,422,780)
Net loss per share .... $ (0.42) $ (0.72) $ (0.46)
</TABLE>
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
F-12
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Information with respect to the nine months
ended September 30, 1996 and 1995 is unaudited)
over the fair value of the net assets acquired, aggregating approximately
$828,000, has been recorded as goodwill.
Note 3--WGN Acquisition-- (Continued)
The assets purchased and liabilities assumed have been valued as follows
March 10,
1993
Acquisition
-----------
Current assets
Cash.............................................. $ 451,490
Accounts receivable............................... 148,834
Other current assets.............................. 5,334
----------
Total current assets.............................. 605,658
Property and equipment............................ 733,675
Intangible assets................................. 18,386
Other assets...................................... 4,754
----------
Total assets...................................... 1,362,473
----------
Current liabilities
Capitalized lease obligations..................... 97,517
Accounts payable and accrued expenses............. 310,388
----------
Total current liabilities......................... 407,905
Capitalized lease obligations..................... 528,674
Minority interest................................. 208,688
----------
Total liabilities................................. 1,145,267
----------
Net assets at acquisition date.................... $ 217,206
==========
Through a stock exchange offer, the Company acquired the remaining 49%
interest in WGN on August 6, 1993, and paid approximately $1,470,000 through an
exchange of 127.135 shares of the Company's common stock for each WGN share
outstanding. The exchange ratio was based on the closing price of the Company's
common stock on July 16, 1993 of $1 5/32, as reported by NASDAQ. The purchase
price was determined as a multiple of revenues. This transaction impacted the
Company's financial statements as follows (1) the elimination of the minority
interest of WGN of $53,602, which was originally $208,688 on March 10, 1993, and
was subsequently reduced by $155,086, the 49% minority interest in WGN's losses
during the period March 10, 1993 through August 6, 1993, (2) the recording of
the unallocated purchase price as goodwill aggregating $1,468,037, (3) the
increase in equity of $1,470,000 resulting from the issuance of 1,271,351 shares
of the Company's common stock, and (4) the increase in accounts payable of
$51,639 for fees incurred in connection with this transaction.
Certain former stockholders of WGN (the "Affiliated Shareholders") were
and are affiliated with WCI. At the formation of WGN in May 1992, the Affiliated
Shareholders individually invested a combined total of approximately $82,000 in
a WGN private placement in which they received a combination of promissory notes
and an approximate 14% equity interest. One Affiliated Shareholder also received
a 5% equity interest in return for services rendered in connection with the
formation of WGN. As a result of the aforementioned acquisitions and subsequent
exchange of notes and stock of WGN for securities of the Company, the Affiliated
Shareholders received shares of the Company's common stock with an aggregate
market value of approximately $283,000 and approximately $82,000 in notes from
the aforementioned March 1993 private placement, all on the same basis as the
other WGN shareholders.
F-13
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Information with respect to the nine months
ended September 30, 1996 and 1995 is unaudited)
Note 3--WGN Acquisition--(Continued)
Unaudited pro forma results of operations, which reflect the combined
operations of the Company and WGN as if the merger occurred as of the beginning
of fiscal 1994, are as follows
For the Year Ended
February 28, 1994
-----------------
Net sales.......................................... $ 15,651,885
Net loss before extraordinary item................. (8,622,407)
Net loss per share before extraordinary item....... $ (1.04)
Note 4--NFF Acquisition
On July 8, 1994, WinStar NFF Inc. ("WNFF"), a newly incorporated and
wholly-owned subsidiary of WCI, entered into an agreement with Non Fiction
Films, Inc. ("NFF") pursuant to which WNFF purchased 95 shares, or 19%, of the
common stock of NFF for a purchase price of $200,000 in cash. NFF is a producer
of non-fiction programming for cable television and for other media.
Additionally, the principal of NFF granted to WNFF an option to purchase all of
the shares of NFF owned by such principal, thereby making NFF a wholly-owned
subsidiary of WNFF. Effective December 1, 1994, WNFF exercised its option and
purchased the remaining 81% of NFF for 28,572 shares of WCI common stock valued
at $200,000. NFF was merged into WNFF, and the surviving corporation was renamed
Non Fiction Films, Inc. The transaction was treated as a "purchase" for purposes
of generally accepted accounting principles, with the purchase price allocated
based on the fair value of the assets acquired and liabilities assumed. The
total purchase price was $476,000 and the excess of the purchase price over the
fair value of the net assets acquired, aggregating approximately $495,000 has
been recorded as goodwill.
Unaudited pro forma results of operations, which reflect the combined
operations of the Company and NFF as if the merger occurred as of the beginning
of the year ended February 28, 1995 are as follows
For the Year Ended
February 28, 1995
-----------------
Net sales.......................................... $ 26,099,553
Net loss........................................... (7,470,205)
Net loss per share................................. $ (0.44)
No pro forma results of operations are shown for the year ended February
28, 1994, as NFF only commenced operations in March 1994.
Note 5--Preferred Stock E
In April 1995, the Company completed a private placement of 932,040 shares
of Series E Convertible Preferred Stock ("Preferred Stock E") at a price of
$6.4375 per share for gross proceeds of $6,000,000. Preferred Stock E holders
were entitled to dividends at the rate of 9% per annum, payable quarterly
beginning on June 30, 1995. During the ten month period ended December 31, 1995,
the entire 932,040 shares of Preferred Stock E were converted into 634,228
shares of common stock.
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,
F-14
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Information with respect to the nine months
ended September 30, 1996 and 1995 is unaudited)
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
Note 6--Restructuring--(Continued)
February 28, 1995, including $235,000 in benefits related to the termination of
19 employees. Of the amount recorded at February 28, 1995, $349,000 related to
future cash outflows, with the balance representing charges related to amounts
paid or to write-off of assets purchased prior to February 28, 1995. During the
ten month period ended December 31, 1995, the Company incurred approximately
$111,000 of the expected cash outflows, leaving a remaining liability balance of
approximately $238,000 at December 31, 1995.
Note 7--Investments in Marketable Equity Securities
On December 13, 1995, the Company purchased 714,000 shares of a publicly
traded interactive media and telecommunications services company at $10.50 per
share, for a total cash consideration of $7,497,000. At December 31, 1995, the
investment has been reflected at the market value of the shares held by the
Company, $6,515,250. In accordance with the treatment of the investment as an
available for sale security under Statement of Financial Accounting Standards
No. 115, "Accounting for Certain Investments in Debt and Equity Securities", the
$981,750 difference between the market value of the investment at December 31,
1995, and the original purchase price has been reflected in unrealized losses on
long term investments, a component of stockholders' equity. At September 30,
1996, a $18,800 difference between the market value of the investment at
September 30, 1996 and the original purchase price has been reflected as an
unrealized gain on long term investments in 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
==========
- ----------
(a) WNM's stated business purpose is to capitalize upon opportunities in
the media content industry by acquiring distribution and other
rights in and from emerging companies in this field. On April 8,
1994, WNM entered into an agreement with The Winning Line, Inc.
("TWL"), a producer of sports programming. As subsequently amended,
the agreement provides for WNM to make periodic cash advances to
TWL, with such advances being collateralized by a first lien on all
of the assets of TWL as well as by shares of TWL common stock owned
by certain individuals. Advances made to date are payable on demand
and bear interest at a rate of 12% or at a rate 3% in excess of the
prime commercial lending rate (8.25% at December 31, 1995). WNM had
the right, which was exercised in April 1996, to convert up to
$970,000 of advances made, together with all accrued interest
thereon, into 65% of TWL's then issued and outstanding shares of
common stock (Note 28).
F-15
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Information with respect to the nine months
ended September 30, 1996 and 1995 is unaudited)
Note 8--Notes Receivable--(Continued)
(b) In connection with the sale of its skiwear brands product line in
April 1993 to Robern Skiwear, Inc., the Company has a note
receivable from the buyer. The note bore interest at 8% per annum
payable quarterly, through January 31, 1996. Effective February 1,
1996, the note was modified such that interest now accrues at 9% per
annum and is payable monthly. The $540,000 of outstanding principal
is payable in 22 monthly
installments of $19,054, inclusive of interest, beginning January 31,
1996, through October 31, 1997, with a final payment of $180,000 to be
paid in a lump sum on November 30, 1997. The note is guaranteed by the
principals of Robern Skiwear, Inc. as well as certain other individuals.
Note 9--Discontinuation of Products Lines
As of February 28, 1994, the Company discontinued its remaining apparel
and tennis racquet product lines as a result of lower-than-expected sales and
continuing losses in these lines. Included as a loss on the discontinuation of
product lines for the year ended February 28, 1994, is the writedown of the net
assets of these product lines (primarily intangible assets) as well as the
accrual of certain expenses incurred in the windup of these lines, amounting to
$292,000 in total.
Note 10--Performance Stock Option Expense
In connection with the Company's initial public offering in April 1991,
options to purchase 1,000,000 shares of common stock of the Company at $0.01 per
share were granted to the original shareholders of the company (Note 22).
Subsequent to February 28, 1994, the conditions for exercise of these options
were met, and in connection therewith, the Company recorded a non-cash expense
of $5,316,667 at February 28, 1994, representing the difference between the
option price and the market price on the day the options actually became
exercisable.
Note 11--Gain From Extinguishment of Debt
On September 7, 1993, the Company paid the following in full satisfaction
of an obligation of approximately $501,000 (i) $250,000 in cash, and (ii) 50,000
shares of the Company's common stock valued at $57,031. The gain of $194,154 on
the payment of the indebtedness is classified in the statement of operations as
an extraordinary item. No tax provision has been recorded as a result of the
Company's tax loss carryforwards.
Note 12--Inventories
Components of inventories are as follows
September 30, December 31, February 28,
1996 1995 1995
----------- ----------- -----------
(unaudited)
Finished goods .............. $ 1,442,849 $ 1,432,951 $ 1,190,670
Raw materials ............... 6,502,526 4,017,655 2,092,101
Film inventories ............ 4,504,668 1,941,080 950,156
----------- ----------- -----------
$12,450,043 $ 7,391,686 $ 4,232,927
=========== =========== ===========
F-16
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Information with respect to the nine months
ended September 30, 1996 and 1995 is unaudited)
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.
Note 15--Loans Payable
Loans payable consist of the following
December 31, February 28,
1995 1995
------------ ------------
Loan payable-financial institution(a) ........ $3,153,821 $1,668,743
Loan payable-financial institution(b) ........ 4,338,099 2,742,010
Other(c) ..................................... 795,541 --
---------- ----------
$8,287,461 $4,410,753(d)
========== ==========
- ----------
(a) In November 1994, WGN entered into a Loan and Security Agreement
with a financial institution providing for the financing of WGN's
receivables. Borrowings under this agreement are limited to 90% of
most eligible accounts receivable, with availability of certain
types of accounts receivable limited to 80% and 50%, subject to a
maximum credit availability of $5,000,000. Borrowings bear interest
at a rate ranging from 2.5% to 3% in excess of the prime commercial
lending rate and are secured by a lien on all WGN assets as well as
a guarantee from WCI as to the first $2,200,000 in borrowings. The
agreement
F-17
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Information with respect to the nine months
ended September 30, 1996 and 1995 is unaudited)
Note 15--Loans Payable--(Continued)
also calls for an annual fee of $50,000 as well as certain
underutilization fees. This agreement expires November 3, 1996.
(b) In August 1996, WGP entered into an Amended and Restated Credit and
Security Agreement ("Credit Agreement") with a lender pursuant to
which the lender agreed to make a $12,000,000 revolving credit
facility (the "Revolving Credit Facility") and a $250,000 Letter of
Credit facility (included within the $12,000,000 facility) available
to WGP until August 8, 1999. Pursuant to the terms of the Credit
Agreement, borrowings are limited to an amount equal to the sum of
(a) 85% of eligible accounts receivable plus (b) the lesser of 50%
of eligible inventory or $4,500,000 plus (c) for the period
commencing March 1 of each year through January 31 of the following
year, $3,000,000 (the "Overadvance"). Borrowings bear interest at a
rate of 0.75% in excess of the base lending rate of the lender and
are secured by a lien on all of the assets of WGP as well as a
guaranty from WCI of the Overadvance. The Credit Agreement also
provides for certain periodic fees to be paid by WGP and places
certain affirmative and negative covenants upon it, including
restrictions upon its ability to pay dividends or make other
payments to the Company. The Revolving Credit Facility amends the
$6,000,000 credit facility which was established in 1994 and was
assigned (including a $3,000,000 guaranty by WCI) to the lender.
(c) In April 1995, NFF secured a production loan from an Irish limited
partnership. NFF issued a letter of credit to the creditor in the
amount of $807,000 which may be presented at any time from March
1996 forward. The letter of credit is secured by an equal amount of
investments in U.S. Treasury Bills on deposit with the financial
institution which issued the letter of credit.
(d) Included in long-term other notes payable at February 28, 1995.
Note 16--Capital Lease Obligations
In September 1995, WinStar Wireless entered into a $10,000,000 equipment
lease financing facility, of which $7,000,000 has been made available as of
December 31, 1995. As of December 31, 1995, the Company has utilized
substantially all of the amount available under this facility. Borrowings bear
interest at a rate of 13% per annum and are payable over sixty months. After
twelve months, WinStar Wireless has the option to purchase the equipment at a
price that will provide a return of 15% to the lessor. As additional
consideration, the Company has agreed to issue options to purchase up to 100,000
shares of stock to the lessor, of which options to purchase 70,000 shares of
stock have been issued through December 31, 1995.
The Company leases its transmission equipment utilized by WWI and its
switch equipment utilized by WGN as well as certain computer and other equipment
used by the Company. Such leases have been accounted for as capital leases in
accordance with Statement of Financial Accounting Standards No. 13, "Accounting
for Leases".
F-18
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Information with respect to the nine months
ended September 30, 1996 and 1995 is unaudited)
Note 16--Capital Lease Obligations--(Continued)
Future minimum lease payments on these capital leases are as follows
Year Ending December 31,
- ------------------------
1996........................................ $2,364,838
1997........................................ 2,420,841
1998........................................ 1,963,914
1999........................................ 1,910,601
2000........................................ 1,324,164
----------
9,984,358
Less amount representing interest........... (2,547,805)
----------
Present value of minimum lease payments..... $7,436,553
==========
The carrying value of assets under capital leases was $8,052,000 at
December 31, 1995 and is included in property and equipment. Amortization of
these assets is included in depreciation expense.
Note 17--Senior and Convertible Notes Payable
In October 1995, the Company completed a $225 million private placement of
debt securities with institutional investors (the "Debt Placement"). The
transaction was structured as a unit offering with two components $150 million
of Senior Discount Notes due in 2005 (the "Senior Notes"), and $75 million of
Convertible Senior Subordinated Discount Notes due in 2005 (the "Convertible
Notes"), convertible at $20.625, a 10% premium over the closing price on October
18, 1995, the day of pricing. Both securities accrue interest at 14% per annum,
with no interest payable during the first five years, and principal payable only
at maturity in October 2005. After five years, both securities require the
payment of interest only, in cash, until maturity. In addition, the Convertible
Notes, including accretion thereon, will be automatically converted during the
initial five year period if the market price of the Company's common stock
exceeds certain levels for thirty consecutive trading days, ranging from $37.50
per share in the first year to $44.00 per share in the fifth year.
Under the terms of the Debt Placement, the Company was obligated to
consummate an exchange offer with respect to the Senior Notes by April 23, 1996,
whereby these notes would be exchanged for new notes (the "New Notes") which
would be identical in every respect to the original Senior Notes except that the
New Notes would be registered under the Securities Act of 1933. Pursuant to such
obligation, the Company filed an offer to exchange the Senior Notes for the New
Notes on January 31, 1996, upon which all Senior Notes were subsequently
converted. The Company is also obligated to cause to be declared effective a
registration statement registering the issuance or resale of the shares
underlying the convertible Notes (the "Conversion Shares") by October 23, 1996.
If the exchange offer or the registration of the Conversion Shares does not take
place prior to the respective deadlines, the Company will be obligated to pay
additional interest on the Senior Notes and/or lower the conversion price on the
Convertible Notes. The Company filed such registration statement in September
1996. The terms of the Debt Placement also place certain restrictions on the
ability of the Company to pay dividends, incur additional indebtedness, issue
guarantees, sell assets, or enter into certain other specified transactions.
F-19
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Information with respect to the nine months
ended September 30, 1996 and 1995 is unaudited)
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 November 1996, the noteholders converted all remaining
outstanding Notes into 554,880 shares of common stock of the Company.
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)
(Information with respect to the nine months
ended September 30, 1996 and 1995 is unaudited)
Note 19--Commitments and Contingencies--(Continued)
b. Employment Contracts
Amounts due under employment contracts are as follows
Year ending December 31,
------------------------
1996............................... $2,450,000
1997............................... 1,750,000
1998............................... 861,000
1999............................... 525,000
2000............................... 54,000
----------
$5,640,000
c. Litigation
In January 1995, the Company's directors, certain other persons, and the
Company (as a nominal defendant) were named in one or more of four actions
brought by various stockholders of the Company in the Court of Chancery of the
State of Delaware in and for New Castle County. These actions subsequently were
consolidated into a single lawsuit, which has been settled. The complaint
alleged that certain transactions including (i) the payment of consideration to
certain directors and others in connection with the Company's acquisition of WGN
and (ii) the payment of compensation (including the granting of options and the
issuance of warrants) to certain directors and others involved self dealing,
waste of corporate assets or otherwise were unfair to the Company. Although the
Company believed that the allegations were completely without merit, in order to
halt the expense, inconvenience and distraction of continued litigation, the
Company entered into a court approved settlement agreement pursuant to which the
Company agreed to amend its bylaws to formalize certain corporate governance
issues, and to pay legal fees and expenses of plaintiffs' counsel in the amount
of $246,500, a portion of which is covered by the Company's insurance.
The Company occasionally receives inquiries from state authorities arising
with respect to consumer complaints concerning the provision of
telecommunications services, including allegations of unauthorized switching of
long distance carriers and misleading marketing. The Company believes such
inquiries are common in the long distance industry and addresses such inquiries
in the ordinary course of business. In 1996, the Company experienced an
increased level of consumer and regulatory complaints, a substantial majority of
which arose from the activities of several independent marketing companies
involving contest programs and the use of executed written letters of
authorization ("LOAs") to switch long distance carriers. The inquiries primarily
arose from allegations of unauthorized or misleading switching of long distance
carriers. In order to eliminate further complaints from these programs, the
Company, on May 10, 1996, adopted a policy of mandatory independent verification
for one hundred percent of LOAs received from these programs and effective as of
June 10, 1996 no longer accepts LOAs from these programs. In December 1996, the
FCC and WGN entered into a consent decree which terminated an inquiry by the FCC
into any alleged violations of unauthorized carrier conversions through the use
of box programs by some of WGN's agents. The FCC cited WGN's efforts in
identifying the problems caused by these agents and its proactive response in
implementing remedial actions on its own as significant factors leading to the
consent decree. 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 or results of
operations.
F-21
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Information with respect to the nine months
ended September 30, 1996 and 1995 is unaudited)
In June, 1996, the Company commenced an action for declaratory judgment
against a former officer of WinStar Gateway, who recently notified the Company
of his belief that he was entitled to the issuance of certain shares of Common
Stock (or payment of the cash value thereof) having an aggregate market value in
excess of $27 million under the terms of stock options granted to him during his
employment with WinStar Gateway from the Company. He has based his beliefs on
standard anti-dilution language contained in his stock option agreement which
was designed and intended to adjust the number of shares purchasable thereunder
in the event of a merger or capital restructuring of the Company. As the Company
has never been subject of a merger or capital restructuring, the former officer
was immediately notified of the Company's belief that his claim was without
merit in law or fact. To expedite resolution of these issues, the Company
currently is seeking declaratory judgment that it has no obligation to the
former officer. Further, because the Company believes that any and all claims
that may be advanced by the former officer with regard to the foregoing issue
would be frivolous, the Company has notified the former officer and his counsel
of its intention to seek Rule 11 sanctions and such other remedies as may be
available against the former officer and his counsel in the event that the
former officer and his counsel seek to assert any defense to the Company's
action for declaratory judgment or otherwise proceed with respect to the issue.
d. Other
In November 1994, and as subsequently amended in December 1995, the
Company entered into a non-exclusive, four year agreement with P-Com, Inc.
("P-Com"), a manufacturer and distributor of radio links, providing for the
purchase of radio links from P-Com. The contract pricing structure includes
provisions whereby the Company pays additional amounts above the agreed upon
price for links purchased at the beginning of the contract period. These amounts
will be recovered in the form of discounted radio links once certain volume
levels have been reached. An annual minimum volume requirement must be met in
order to maintain the agreed upon pricing structure. The contract is cancelable
by the Company subject to certain conditions, primarily the acceptance of a
minimum number of links and the guarantee of the next 90 days' purchases in
accordance with an agreed upon schedule. As of December 31, 1995, the Company's
noncancellable purchase commitment was approximately $15,600,000. These
conditions to cancellation become more favorable to the Company as certain
volume levels are reached.
Note 20--Income Taxes
SFAS 109 requires the use of the liability method in accounting for income
taxes. Temporary differences and carryforwards that give rise to deferred tax
assets and liabilities are as follows
December 31, February 28,
1995 1995
------------ ------------
Deferred tax assets
Net operating loss carry forward ........ $ 14,700,000 $ 9,230,000
Allowance for doubtful accounts ......... 1,025,000 440,000
Other ................................... 2,275,000 380,000
------------ ------------
Gross deferred tax assets .................. 18,000,000 10,050,000
Valuation allowance ..................... (18,000,000) (10,050,000)
------------ ------------
Net deferred tax assets .............. $ -- $ --
============ ============
If not utilized, the net operating loss carryforwards will expire in
various amounts through the year 2010. The tax loss carryforwards relating to
WGP are limited by the Separate Return Limitation Year rules and Section 382 of
the Internal Revenue Code with respect to the amount utilizable each year. The
Company's remaining net operating loss carryforwards are also subject to
limitation under the Internal Revenue Code. These limitations will reduce the
Company's ability to utilize the net operating loss carryforwards included
above. The amount of the limitation has not been quantified by the Company.
F-22
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Information with respect to the nine months
ended September 30, 1996 and 1995 is unaudited)
SFAS 109 requires a valuation allowance against deferred tax assets if,
based on the weight of available evidence, it is more likely than not that some
or all of the deferred tax assets may not be realized. The valuation allowances
at February 28, 1995, and December 31, 1995, primarily pertain to uncertainties
with respect to future utilization of net operating loss carry forwards.
Note 21--Stockholders' Equity
Common Stock
The authorized capital stock of WCI includes 75,000,000 shares of common
stock, $.01 par value. The holders of common stock are entitled to one vote for
each share held of record on all matters submitted to a vote of stockholders.
Although the Company has no present intention of paying any dividends, holders
of common stock are entitled to receive ratably such dividends as may be
declared by the Board of Directors out of funds legally available therefor. In
the event of a liquidation or dissolution of WCI, holders of common stock are
entitled to share ratably in all assets remaining after payment of liabilities
and liquidation preference of preferred shares.
Holders of common stock have no preemptive rights and have no rights to
convert their common stock into any other securities. There are no redemption or
sinking fund provisions applicable to the common stock.
Preferred Stock
The authorized capital stock of the Company includes 15,000,000 shares of
preferred stock, $.01 par value, which may be issued from time to time in one or
more series upon authorization by the Company's Board of Directors. There are
currently no shares of preferred stock outstanding. The Board of Directors,
without further approval of the stockholders, is authorized to fix the rights
and terms, conversion rights, voting rights, redemption rights and terms,
liquidation preferences and any other rights, preferences, privileges and
restrictions applicable to each series of preferred stock. In March 1994, all
173 outstanding shares of Preferred Stock C were converted into an aggregate of
82,381 shares of common stock of the Company. In addition, in accordance with
the terms of the Preferred Stock C, the holders of the Preferred Stock C
received 41,191 Series B Warrants upon conversion, all of which were
subsequently exercised during the year ended February 28, 1995. In December
1994, all 225,000 outstanding shares of Preferred Stock D were automatically
converted into 225,000 shares of common stock as a result of the market value of
the Company's common stock having met certain criteria. In November 1995, all
outstanding shares of Preferred Stock B were acquired in the Private Exchange
transaction (Note 23). As of December 31, 1995, all classes of preferred stock
other than Preferred Stock B have been retired.
Treasury Stock
Included in treasury stock at cost are 2,506,763 shares of common stock
and 689 shares of Preferred Stock B which were acquired in the Private Exchange
transaction (Note 23). The treasury stock was constructively retired as of
September 30, 1996.
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
F-23
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Information with respect to the nine months
ended September 30, 1996 and 1995 is unaudited)
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.
Note 22--Stock Options and Stock Purchase Warrants--(Continued)
In 1990, the Board of Directors adopted a non-qualified common stock
incentive plan, as amended, pursuant to which options to purchase an aggregate
of 150,000 shares of common stock may be granted to key employees of the Company
as selected by the Board of Directors. The exercise price for shares covered by
options granted pursuant to this plan will not be less than the fair market
value of the shares on the date of the grant. In 1992, the Board of Directors
adopted and stockholders approved the 1992 Performance Equity Plan ("1992
Plan"), which authorizes the granting of awards up to 1,000,000 shares of common
stock to the Company's key employees, officers, directors and consultants.
Awards consist of stock options (both non-qualified and options intended to
qualify as "incentive" stock options under the Internal Revenue Code),
restricted stock awards, deferred stock awards, stock appreciation rights and
other stock-based awards. The plan provides for automatic issuance of 10,000
stock options annually to each director on January 13, at the fair market value
at that date, subject to availability. In June 1995, the Board of Directors
adopted the 1995 Performance Equity Plan ("1995 Plan") which was approved by the
stockholders of the Company at the Annual Meeting of Stockholders in September
1995. The 1995 Plan authorizes the granting of awards of up to 1,500,000 shares
of Common Stock to the Company's key employees, officers, directors and
consultants. The 1995 Plan is similar to the 1992 Plan, except that the 1995
Plan does not allow for annual automatic annual director grants. In addition to
these three plans, the Company has granted options to certain individuals not
under any plan (Note 28).
The Company has granted options to purchase common stock as follows:
Number Price Per Share
------ ---------------
Balance, March 1, 1993 .................. 3,064,000 $1.63 - $5.25
Granted ................................. 2,570,067 $1.06 - $6.17
Canceled ................................ (616,500) $1.69 - $3.63
----------
Balance, February 28, 1994 .............. 5,017,567 $1.06 - $6.17
Granted ................................. 2,851,360 $4.22 - $9.50
Exercised ............................... (1,389,547) $1.50 - $4.90
Canceled ................................ (235,050) $1.69 - $9.03
----------
Balance, February 28, 1995 .............. 6,244,330 $1.06 - $9.50
Granted ................................. 3,896,000 $5.50 - $19.75
Exercised ............................... (2,091,572) $1.06 - $6.88
Canceled ................................ (708,133) $2.13 - $8.81
----------
Balance, December 31, 1995 .............. 7,340,625 $1.06 - $19.75
==========
In addition to the above, in May 1992, the Company granted to WinStar
Venture II, Inc. ("WVII"), an affiliate of a Director of the Company, an option
through August 31, 1998 to purchase shares of Series C preferred stock in the
amount of $2,000,000 in return for WVII's guarantee of certain company debt.
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)
(Information with respect to the nine months
ended September 30, 1996 and 1995 is unaudited)
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
F-25
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Information with respect to the nine months
ended September 30, 1996 and 1995 is unaudited)
stock for the exercise of 1,995,000 Series D Warrants and 1,200,000 Series E
Warrants. The common shares which were issued upon exercise of all Series D and
Series E Warrants were restricted shares.
Note 23--Related Party Transactions
Management Agreement
The Company and WinStar Services, a wholly-owned subsidiary of WinStar
Companies, a corporation of which two of the Company's directors are principal
officers and stockholders, were parties to a five-year management agreement
which provided, as amended, that WinStar Services would render financial,
advisory and management services in connection with the capital, acquisition and
planning needs of the Company. The Company agreed to pay WinStar Services as
compensation for such services $200,000 per year plus certain contingent
performance fees, in addition to reimbursement of all out-of-pocket expenses
incurred by WinStar Services. In August 1993, the terms of the management
agreement were extended to August 31, 1998, and the Company granted to WinStar
Services options to purchase 500,000 shares of the Company's Common Stock at the
then current market price of $2.13 per share which options were exercised in
connection with the transaction between WinStar Companies, WinStar Services and
WinStar Venture II, Inc. The expiration date for these options as well as for
any options or warrants previously granted to WinStar companies and its
subsidiaries was set at August 31, 1998. During the years ended February 28,
1995 and 1994, an aggregate of $254,560 and $254,095, respectively, was paid to
WinStar Services by the Company as management fees and reimbursement of
expenses. Additionally, the Company paid $481,039 and $78,040 in cash and issued
notes amounting to $481,038 and $78,040 in payment of contingent performance
fees to WinStar Services during the years ended February 28, 1995 and 1994,
respectively. These contingent performance fees related to specific debt and
equity financing and investment transactions in excess of $33.6 million. During
the year ended February 28, 1995, all such notes were satisfied when they were
used to pay for the exercise of warrants and stock options held by WinStar
Services and its affiliates. See Private Exchange Transaction.
The management agreement was terminated prospectively as of February 28,
1995.
Private Exchange Transaction
On November 29, 1995, the Company acquired, in exchange for the issuance
of 3,741,224 shares of its Common Stock ("Private Exchange"), substantially all
of the assets of WinStar Companies, whose assets consisted of (i) all the
outstanding capital stock of WinStar Services and WinStar Venture, two
wholly-owned subsidiaries of WinStar Companies, and (ii) 389,580 shares of the
Company's Common Stock owned by WinStar Companies. The sole assets of WinStar
Services and WinStar Venture were 2,117,183 shares of the Company's Common Stock
and other securities of the Company that were exercisable or convertible into
1,429,633 shares of the Company's Common Stock. Accordingly, the Company issued
3,741,224 shares of Common Stock and, in exchange, acquired 3,936,396 shares of
Common Stock and Common Stock equivalents. All of the Common Stock and certain
of the Common Stock equivalents received in the Private Exchange are included in
Treasury Stock at December 31, 1995. WinStar Companies, WinStar Services and
WinStar Venture had no liabilities at the time of the closing of the Private
Exchange other than a liability previously assumed by the Company or liabilities
for which the Company is being indemnified.
The new shares of the Company's Common Stock issued in the Private
Exchange represented that number of shares which had an aggregate market value
based upon the average of the last sale price of the Company's Common Stock on
the 30 trading days preceding November 15, 1995, the date as of which the
exchange agreement regarding the above-described transaction was executed, equal
to the market value of the Company's Common Stock (i) transferred by WinStar
Companies to the Company, (ii) owned by WinStar Services and WinStar Venture and
(iii) underlying certain other securities of the
F-26
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Information with respect to the nine months
ended September 30, 1996 and 1995 is unaudited)
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 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,
F-27
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Information with respect to the nine months
ended September 30, 1996 and 1995 is unaudited)
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 nine months ended September 30, 1996,
the ten months ended December 31, 1995, and the years ended February 28, 1995
and 1994 was $2,643,000, $1,270,000, $621,000, and $726,000, respectively.
During the ten month period ended December 31, 1995, the Company completed
the following material non-cash transactions (i) the conversion of $3,750,000 of
convertible notes plus accrued interest thereon; (ii) the conversion of
Preferred Stock E; (iii) the acquisition of approximately $7,500,000 in property
and equipment through various capitalized leases; (iv) the Private Exchange
transaction; (v) the settlement of the Company's placement expenses from the
gross proceeds of the Debt Placement; (vi) the acquisition of Avant-Garde.
During the year ended February 28, 1995, the Company completed the
following material non-cash transactions (i) the conversion of the Series D and
Series E Warrants through the assignment of notes payable and accrued interest
(Note 22); (ii) the satisfaction of approximately $600,000 in notes payable
through the exercise of stock options; (iii) conversions of Preferred Stock B,
C, and D; (iv) the acquisition of approximately $740,000 in property and
equipment through various capitalized leases; and (v) the purchase of Non
Fiction Films, Inc., wherein the purchase price was satisfied in part through
the issuance of 28,572 shares of common stock valued at $200,000.
During the year ended February 28, 1994, the Company completed the
following material non-cash transactions (i) the sale of the net assets of the
skiwear brands product line, net of cash received, for a $1,500,000 note
receivable; (ii) the private placement of $458,717 in notes for non-cash
consideration; (iii) the purchases, in March and August 1993, of WGN, whose net
assets, including cash acquired, have been valued at $1,470,000 for 1,271,351
shares of the Company's common stock (Note 3); (iv) the exercise by an investor
of 200,000 Series D warrants with a total exercise price of $134,000 through the
releasing of $100,000 owed him by the Company, with the balance paid in cash;
(v) the purchase of certain assets of a bath products company, valued at
$100,000 net of cash paid, for 39,506 shares of the Company's common stock; (vi)
the sale of 287,043 shares of common stock for stock subscriptions receivable of
$758,065, which amount was included in other current assets at February 28,
1994, and was realized in March 1994; and (vii) the acquisition of an investment
in AGT valued at $1,691,950 for $232,000 in notes payable, $900,000 in Series D
preferred stock and $27,950 in accounts payable, with the balance paid in cash.
F-28
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Information with respect to the nine months
ended September 30, 1996 and 1995 is unaudited)
Note 25--Major Customers
No customer individually amounted to more than 10% of net sales for the
ten months ended December 31, 1995 and the years ended February 28, 1995 and
1994.
Note 26--Business Segments
The Company's business segments are telecommunications, information
services, and merchandising. The following table is a summary of these segments
for the ten months ended December 31, 1995 and the years ended February 28, 1995
and 1994. For the year ended February 28, 1994, information related to the
telecommunications business segment relates only to the period from March 10,
1993 (date of acquisition of WGN) to February 28, 1994, and no amounts are shown
for the information services segment, which commenced operations in the year
ended February 28, 1995.
<TABLE>
<CAPTION>
Information Total 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
For the year ended
February 28, 1995
Net sales ............ $ 14,909,225 $ 473,392 $ 10,182,143 $ 25,564,760 $ -- $ 25,564,760
Operating income
(loss) ............. (3,422,937) (117,605) 307,097 (3,233,445) (2,377,991) (5,611,436)
Depreciation and
amortization ....... 263,839 744 153,731 418,314 14,188 432,502
Amortization of
intangibles ........ 128,117 6,165 90,894 225,176 -- 225,176
Capital expenditures . 1,328,938 4,486 286,583 1,620,007 196,321 1,816,328
Identifiable assets at
February 28, 1995 .. $ 14,594,048 $ 4,218,579 $ 6,911,270 $ 25,723,897 $ 3,785,555 $ 29,509,452
For the year ended
February 28, 1994
Net sales ............ $ 8,505,282 $ -- $ 7,119,737 $ 15,625,019 $ -- $ 15,625,019
Operating income
(loss) ............. (743,613) -- 222,611 (521,002) (1,546,519) (2,067,521)
Depreciation and
amortization ....... 116,635 -- 102,823 219,458 3,630 223,088
Amortization of
intangibles ........ 74,944 -- 165,049 239,993 -- 239,993
Capital expenditures . 274,940 -- 25,531 300,471 6,591 307,062
Identifiable assets at
February 28, 1994 .. $ 8,013,203 $ -- $ 5,118,512 $ 13,131,715 $ 1,478,220 $ 14,609,935
</TABLE>
F-29
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Information with respect to the nine months
ended September 30, 1996 and 1995 is unaudited)
Note 27--New Accounting Standards Not Yet Adopted
In 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed of" ("SFAS No. 121"),
which provides guidance on when to assess and how to measure impairment of
long-lived assets, certain intangibles and goodwill related to those assets to
be held and used, and for long-lived assets and certain identifiable intangibles
to be disposed of. The Financial Accounting Standards Board also issued
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"), which gives companies a choice of the method of
accounting used to determine stock-based compensation. Companies may account for
such compensation either by using the intrinsic value-based method provided in
APB Opinion 25, "Accounting for Stock Issued to Employees" ("APB No. 25") or the
fair market value-based method provided in SFAS No. 123. These accounting
standards are effective for financial statements for fiscal years beginning
after December 15, 1995. As of January 1, 1996, the Company adopted SFAS No. 121
and SFAS No. 123. The adoption of SFAS No. 121 had no effect on the Company. The
Company intends to continue to use the intrinsic value-based method provided in
APB No. 25 to determine stock-based compensation, and therefore the sole effect
of the adoption of SFAS No. 123 will be the obligation to comply with the new
disclosure requirements provided thereunder.
Note 28--Subsequent Events To December 31, 1995 (Unaudited)
Agreement To Acquire Milliwave Limited Partnership
In June 1996, a subsidiary of the Company entered into certain agreements
with Milliwave Limited Partnership ("Milliwave") whereby the Company would
acquire Milliwave for a purchase price of $40 million in cash and 3.4 million
shares of the Company's common stock (which had an aggregate market value of $85
million based on a $25 per share market price at the time the agreements were
executed). The number of shares to be issued in connection with the acquisition
is subject to upward or downward adjustment depending on the market price of the
Company's Common Stock at the time the transaction is closed; provided, however,
that the Company may determine not to consummate the transaction if the
adjustment results in the Company being required to issue in excess of 4.5
million shares. The acquisition is subject to certain regulatory approvals, but
is expected to be consummated in the second quarter of calendar year 1997. The
Company also has entered into a (i) services agreement with Milliwave pursuant
to which it has agreed to provide services to Milliwave in connection with the
buildout by Milliwave of its licensed areas in consideration for payment of
monthly site access and management fees, as well as installation fees, and (ii)
a two-year transmission path lease agreement with Milliwave permitting the
Company to use up to 488 radio links in Milliwave's licensed areas.
Agreement To Acquire Pinnacle Nine Communications, LLC
In June 1996, the Company entered into an agreement to acquire the
outstanding membership interests of Pinnacle Nine Communications, LLC which is
the holder of three 38 GHz licenses. The acquisition is subject to certain
regulatory approvals, but is expected to be consummated in the last quarter of
1996.
Acquisition of Local Area Telecommunications, Inc.
In April 1996, a subsidiary of the Company entered into an agreement which
was completed in October 1996 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 was $17,500,000, which was 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
F-30
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Information with respect to the nine months
ended September 30, 1996 and 1995 is unaudited)
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.
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 80% 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, which was increased to 80% in August 1996.
TWL operates the SportsFan Radio Network ("SportsFan"). SportsFan is a
multimedia sports programming and production company which provides live sports
programming to more than 500 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 20% equity interest in TWL to sell, and such principals have the right
to require WNM to purchase the remaining 20% equity interest based upon certain
criteria. At WNM's option, the purchase price in either instance can be paid in
shares of the Company's common stock (Note 8).
Stock Option Plan
On April 26, 1996, the Board of Directors approved an amendment to the
1992 and 1995 Plans, increasing the number of shares of common stock available
for grant to 1,500,000 and 3,500,000, respectively, subject to stockholder
approval.
F-31
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Information with respect to the nine months
ended September 30, 1996 and 1995 is unaudited)
Agreement with Digex, Inc.
In June 1996, the Company entered into a six-year agreement with Digex,
Inc. ("Digex"), a national provider of Internet access services. Pursuant to
this agreement, the Company has the right of first refusal to provide all of
Digex's local access and/or customer interconnection requirements through the
use of the Company's Wireless Fiber or other services. The Company also will
purchase from Digex, during the term of the agreement, a minimum of $5 million
of Internet access services on a discounted basis.
Other Acquisitions
In September 1996 and November 1996, respectively, the Company acquired an
80% equity interest in Millennium Marketing, Inc. (which does business as
WinStar Interactive Media Sales ("WIMS")) and 100% of Global Media Sales, Inc.
("GMS"). The Company has the right to require the stockholders of WIMS who own
the remaining 20% equity interest in S&A to sell, and such stockholders have the
right to require the Company to purchase, the remaining 20% equity interest
based upon certain criteria. WIMS is a full service agency to media sellers,
with a focus on the provision of advertising sales representation and/or related
consulting services for content-driven interactive media properties. GMS is a
distributor of broadcast advertising on radio properties.
Other
As of September 30, 1996, the Company has commitments during the next year
to purchase $26 million of telecommunications capital equipment.
F-32
<PAGE>
Report of Independent Auditors
The Board of Directors and Shareholders
Local Area Telecommunications, Inc.
We have audited the accompanying balance sheets of the Microwave Division
of Local Area Telecommunications, Inc. as of December 31, 1995 and 1994, and the
related statements of operations, divisional (deficit) surplus and cash flows
for the years then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Microwave Division of
Local Area Telecommunications, Inc. at December 31, 1995 and 1994, and the
results of its operations and its cash flows for the years then ended, in
conformity with generally accepted accounting principles.
As discussed in Note 1 to the financial statements, the Microwave
Division's recurring losses from operations and divisional deficit raise
substantial doubt about its ability to continue as a going concern. The
financial statements do not include any adjustment that might result from the
outcome of this uncertainty. As also discussed in Note 1, on April 1, 1996, the
Company entered into an agreement to sell certain of the assets of the Microwave
Division to WinStar Communications, Inc.
Ernst & Young LLP
MetroPark, New Jersey
April 9, 1996
F-33
<PAGE>
The Microwave Division of
Local Area Telecommunications, Inc.
Balance Sheets
<TABLE>
<CAPTION>
September 30, December 31,
1996 --------------------------
------------- 1995 1994
(Unaudited) ---- ----
<S> <C> <C> <C>
ASSETS
Current assets
Cash ................................... $ -- $ 441,994 $ 1,772,460
Accounts receivable, net of
allowance for doubtful accounts of
$101,000, $90,000 and $73,000 at
September 30, 1996 and
December 31, 1995 and 1994 ........... 772,899 538,269 526,391
Inventories ............................ 3,410,528 3,353,641 2,895,981
Prepaids and other current assets ...... 2,536 171,752 619,885
------------ ------------ -----------
Total current assets ..................... 4,185,963 4,505,656 5,814,717
Property and equipment, net .............. 8,148,692 10,015,056 11,531,900
Security deposits ........................ 147,903 83,308 85,164
------------ ------------ -----------
Total assets ............................. $ 12,482,558 $ 14,604,020 $17,431,781
============ ============ ===========
LIABILITIES AND DIVISIONAL
(DEFICIT) SURPLUS
Current liabilities
Accounts payable and accrued
expenses ............................. $ 767,238 $ 874,001 $ 1,945,129
Obligations under capital leases ....... 27,461 107,816 65,535
Interest payable ....................... 2,997,013 1,645,708 641,579
Notes payable .......................... 17,300,000 17,300,000
------------ ------------ -----------
Total current liabilities ................ 21,091,712 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 ........................ 21,350,574 20,186,387 15,912,538
Divisional (deficit) surplus ............. (8,868,016) (5,582,367) 1,519,243
------------ ------------ -----------
Total liabilities and divisional (deficit)
surplus ................................ $ 12,482,558 $ 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>
Nine Months Ended
September 30, Year ended December 31,
------------------------- -------------------------
1996 1995 1995 1994
---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C>
Revenues:
Sales of communications services .. $ 2,896,258 3,084,292 $ 4,264,664 $ 4,946,988
Sales of communications systems ... 957,610 2,281,062 2,656,718 1,842,828
Installation charges .............. 41,458 255,095 169,165 88,151
----------- ----------- ----------- -----------
3,895,326 5,620,449 7,090,547 6,877,967
Operating expenses
Network services .................. 2,020,983 1,795,078 2,320,374 2,381,922
Cost of systems sold .............. 630,955 1,514,144 1,714,429 1,302,601
Selling, general and administrative 1,278,412 2,021,899 2,582,894 2,780,982
Depreciation and amortization ..... 1,899,152 2,010,239 2,784,156 2,608,765
----------- ----------- ----------- -----------
5,829,502 7,341,360 9,401,853 9,074,270
----------- ----------- ----------- -----------
Loss from operations ................ (1,934,176) (1,720,911) (2,311,306) (2,196,303)
Other income (expense)
Interest income ................... 4,784 8,416 11,736 7,370
Interest expense .................. (1,448,751) (1,136,543) (1,587,851) (1,012,434)
----------- ----------- ----------- -----------
(1,443,967) (1,128,127) (1,576,115) (1,005,064)
----------- ----------- ----------- -----------
Net loss .......................... $(3,378,143) ($2,849,038) $(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
Nine months ended September 30, 1996
and years ended December 31, 1995 and 1994
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) ........................................ (3,378,143)
Net activity with Locate (unaudited) ........................ 92,494
-----------
Divisional deficit at September 30, 1996 (unaudited) .......... $(8,868,016)
===========
See accompanying notes.
F-36
<PAGE>
The Microwave Division of
Local Area Telecommunications, Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
Nine Months, Year ended
Ended September 30, December 31
------------------------- ---------------------------
1996 1995 1995 1994
---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C>
Operating activities
Net loss .................. $(3,378,143) $(2,849,038) $ (3,887,421) $(3,201,367)
Adjustments to
reconcile net loss to net
cash used in operating
activities
Depreciation and
amortization ........ 1,899,152 2,010,239 2,784,156 2,608,765
Changes in assets and
liabilities
Accounts receivable ... (234,630) (256,443) (11,878) 142,512
Inventory ............. (56,887) (353,004) (457,660) (228,059)
Prepaids and other .... 104,621 380,852 449,989 (291,231)
Accounts payable and
accrued expenses .... (106,763) (222,604) (1,071,128) (223,308)
Interest payable ...... 1,351,305 587,679 1,004,129 2,918
----------- ----------- ------------ -----------
Net cash used in operating
activities .............. (421,345) (702,319) (1,189,813) (1,189,770)
----------- ----------- ------------ -----------
Investing activities
Capital expenditures ...... (32,788) (988,881) (1,164,712) (432,099)
----------- ----------- ------------ -----------
Net cash used in investing
activities .............. (32,788) (988,881) (1,164,712) (432,099)
----------- ----------- ------------ -----------
Financing activities
Payments made under
capital lease obligation (80,355) (53,586) (36,752) (20,471)
Payments made on long-
term debt ............... (25,000) (7,500,000)
Proceeds from issuance of
long-term debt .......... 2,275,000 4,300,000 10,500,000
Payments to Locate ........ (4,535,551) (6,073,442) (3,109,794)
Payments from Locate ...... 92,494 2,262,048 2,859,253 2,952,997
----------- ----------- ------------ -----------
Net cash provided by (used
in) financing activities 12,139 (52,089) 1,024,059 2,822,732
----------- ----------- ------------ -----------
Net (decrease) increase in
cash .................... (441,994) (1,743,289) (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 ..... $ -- $ 29,171 $ 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
September 30, 1996 and 1995 (Unaudited)
1. Summary of Significant Accounting Policies
Organization and Basis of Presentation
Local Area Telecommunications, Inc. (the Company), a subsidiary of
MobileMedia Corporation (MobileMedia), was incorporated on October 21, 1981. The
Company's Microwave Division (the Division) is engaged in operations pertaining
to the installation, servicing and maintenance of digital microwave radiosystems
for business use within major metropolitan areas. The Division provides voice,
data and image transmission between dispersed locations through point-to-point,
point-to-multipoint and point-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 Mobile Media and/or other sources. There can
be no assurance that such funding will be received.
In October 1994, following a comprehensive review of the operations of the
Company, the Company's Board of Directors developed a plan to sell substantially
all of the assets of the Company by October 1995, retaining an investment banker
to market the assets. At December 31, 1994, in accordance with Accounting
Principles Board Opinion No. 30, "Reporting the Results of Operations--Reporting
the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions", the Company accrued losses
in anticipation of disposal prior to December 31, 1995. At December 31,1995, the
Microwave Division remained unsold and the Company accrued additional losses
expected to be incurred due to the delay in consummating the disposal. The
accrued losses at December 31, 1995 and 1994 have been recorded in the Company's
accounts, and the accompanying financial statements do not reflect any
allocation therefrom.
On April 1, 1996, the Company entered into an agreement (the "Sale
Agreement") to sell the assets of the Microwave Division, excluding cash,
accounts receivable and certain security deposits, to WinStar Communications,
Inc. (WinStar) in exchange for the assumption of certain liabilities and $17.5
million in the form of notes bearing interest at 8% (the WinStar Notes). The
WinStar Notes are convertible into common stock of WinStar at the option of
WinStar.
Consummation of the sale noted above is subject to regulatory approval.
There can be no assurance, however, that the sale will be consummated or that,
if consummated, it will be consummated on the terms described above.
In connection with the Sale Agreement, the Company entered into a service
agreement ("Services Agreement") for a term commencing in April 1996 and
terminating upon the earlier to occur of (i) the closing of the Sale Agreement,
or (ii) termination of the Sale Agreement. Pursuant to the Services Agreement,
WinStar provides management services for the Company. As full compensation for
WinStar's performance of such services, the Company pays WinStar a fee of
$125,000 per month during the term
F-38
<PAGE>
1. Summary of Significant Accounting Policies--(Continued)
of the agreement, subject to certain adjustments.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Unaudited Interim Financial Statements
The interim financial information as of September 30, 1996 and the nine
months ended September 30, 1996 and 1995 contained herein is unaudited but, in
the opinion of management, includes all adjustments of a normal recurring nature
which are necessary for a fair presentation of the financial position, results
of operations, and cash flows for the periods presented. Results of operations
for the periods presented herein are not necessarily indicative of results of
operations for the entire year.
Inventories
Inventories consist of the cost of communications equipment not yet placed
in service plus the net book value of equipment previously in service which the
Company anticipates returning to service within one year. All inventory is
recorded at the lower of average cost or market.
Property and Equipment
Property and equipment additions, as well as the labor costs associated
with the installation thereof, are capitalized at cost. Depreciation is computed
on the straight-line method based upon estimated useful lives ranging from 5 to
10 years.
Revenue Recognition
The Company recognizes revenue for communication services when the services
are provided. Sales of communication systems are recognized upon delivery and
installation.
Impairment of Long-Lived Assets
In March 1995, the FASB issued Statement No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,
which requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. Statement No. 121 also addresses the accounting for long-lived
assets that are expected to be disposed of. The Division adopted Statement No.
121 as of January 1, 1996, which had no effect on the Division's financial
position or results of operations.
Income Taxes
The Division is included in the consolidated federal income tax return of
MobileMedia. No consolidated federal income tax expense or benefit is allocated
to the Division.
F-39
<PAGE>
The Microwave Division of
Local Area Telecommunications, Inc.
Notes to Financial Statements--(Continued)
2. Property and Equipment
The components of property and equipment were as follows
September
30, 1996 December 31
---------- --------------------------
(Unaudited) 1995 1994
---- ----
Equipment placed in service ....... $26,375,649 $26,472,594 $26,641,661
Furniture and fixtures ............ 1,823,247 1,715,051 1,452,478
----------- ----------- -----------
28,198,896 28,187,645 28,094,139
Less accumulated depreciation ..... 20,050,204 18,172,589 16,562,239
----------- ----------- -----------
$ 8,148,692 $10,015,056 $11,531,900
=========== =========== ===========
Included in equipment placed in service is certain equipment obtained under
capital leases. At September 30, 1996, this equipment has a gross book value of
approximately $429,000 and a net book value of approximately $245,000.
3. Notes Payable
Notes payable, all of which are unsecured, consisted of the following
September
30, 1996 December 31
---------- --------------------------
(Unaudited) 1995 1994
---- ----
12% super senior note payable ..... $ 7,300,000 $ 7,300,000 $ 3,000,000
10% senior notes payable, due
March 31, 1996 .................. 7,500,000 7,500,000 7,500,000
10 % senior note payable, due
September 15, 1996 .............. 2,500,000 2,500,000 2,500,000
12% Subordinated Note ............. 25,000 25,000 50,000
----------- ----------- -----------
$17,325,000 $17,325,000 $13,050,000
=========== =========== ===========
In December 1994, the Division refinanced $7,500,000 of its $10,000,000 10%
note payable, due September 15, 1996 with two $3,750,000 10% senior notes
payable (the Senior Notes), due January 1, 1996. On April 28, 1995, the due
dates of the two $3,750,000 Senior Notes were extended to March 31, 1996.
In December 1994, the Division borrowed $3,000,000 from a MobileMedia
shareholder in exchange for a 12% super senior note payable due January 1, 1996.
During 1995, the Division borrowed $4,300,000 in exchange for six additional 12%
super senior notes (collectively, the "Super Senior Notes").
As of April 9, 1996, neither the Senior Notes nor the Super Senior Notes
(collectively, the "Notes") were repaid. It is anticipated that the Notes will
be exchanged for WinStar Notes acquired by the Company pursuant to the Sale
Agreement (Note 1).
Total interest paid for the nine months ended September 30, 1996 and 1995,
and for the years ended December 31, 1995 and 1994 was approximately $94,000,
$603,000, $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 nine months ended September 30, 1996 and 1995, and for the years
ended December 31, 1995 and 1994, the Division had sales to MobileMedia of
approximately $26,000, $53,000, 35,000, $70,000 and $721,000, respectively.
In December 1995, on behalf of the Division, the Company acquired certain
vehicles, totaling approximately $103,000, under capital lease agreements (the
Agreements) with Roos Capital Planners, Inc., a related party. The Agreements
require the Company to make 36 monthly installments of $4,000.
5. Commitments and Contingencies
On behalf of the Division, the Company leases space under cancelable and
noncancellable operating leases which expire at various dates through 2000.
Total rental expense for the nine months ended September 30, 1996 and 1995, and
for the years ended December 31, 1995 and 1994 was approximately $1,054,000,
$1,170,000, $1,586,000 and $1,811,000, respectively. Additionally, the Company
is obligated under capital leases for certain equipment.
Future minimum payments under capital leases and noncancellable operating
leases with initial terms of one year or more consists of the following as of
December 31, 1995
Capital Operating
Leases Leases
------ ------
1996 ..................................................... $147,900 $ 630,000
1997 ..................................................... 147,900 538,000
1998 ..................................................... 122,708 18,000
1999 ..................................................... 8,000
2000 ..................................................... 3,000
-------- ----------
Total future minimum payments ............................ 418,508 $1,197,000
==========
Less amount representing interest ........................ 76,830
--------
Present value of net minimum lease payments (including
current portion of $107,816) ............................. $341,678
========
The Company has employment agreements with certain executives through
December 31, 1996 requiring the payment of $428,645 per year in compensation
with increases of 5% per annum. Additionally, payments of $1,500,000 may be
required in certain circumstances by the Company in the event of the termination
of employment of the executives within six months from the date of sale of the
Company, as defined in the employment agreements. Also, if the earnings before
interest, depreciation, taxes and amortization of MobileMedia increase by more
than 30% and 50%, the Chief Executive Officer is entitled to a payment of
$350,000 for each noted percentage increase. Based on the specified performance
criteria, $350,000 was expensed in each of 1994 and 1995, and is included in the
results of operations of the Division.
F-41
<PAGE>
REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
Board of Directors
Avant-Garde Telecommunications, Inc.
We have audited the accompanying balance sheet of Avant-Garde
Telecommunications, Inc. as of February 28, 1995, and the related statements of
operations, and cash flows for each of the two years in the period ended
February 28, 1995. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Avant-Garde
Telecommunications, Inc. as of February 28, 1995, and the results of its
operations and its cash flows for each of the two years in the period ended
February 28, 1995, in conformity with generally accepted accounting principles.
GRANT THORNTON LLP
New York, New York
July 28, 1995
F-42
<PAGE>
Avant--Garde Telecommunications, Inc.
Balance Sheet
February 28, 1995
ASSETS
Cash .......................................................... $ 237
Accounts receivable ........................................... --
Other current assets .......................................... 97,140
-----------
Total current assets ...................................... 97,377
Property and equipment, net ................................... 3,149,911
Other assets .................................................. 432,683
-----------
Total assets .............................................. $ 3,679,971
===========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Accounts payable and accrued expenses ......................... $ 2,765,578
Due to affiliate .............................................. 3,350,510
-----------
Total liabilities ............................................. 6,116,088
-----------
Stockholders' Deficiency
Preferred stock, $.001 par value; authorized 50,000
shares, no shares issued and outstanding .................. --
Common stock, $.001 par value; authorized 200,000 shares,
issued and outstanding 2,250 shares ....................... 2
Additional paid-in capital .................................... 20
Accumulated deficit ............................................. (2,436,139)
-----------
Total stockholders' deficiency ............................ (2,436,117)
-----------
Total liabilities and stockholders' deficiency ............ $ 3,679,971
===========
See Notes to Financial Statements
F-43
<PAGE>
Avant--Garde Telecommunications, Inc.
Statements of Operations
For the Period
March 1 to For the Year
July 17, 1995 Ended February 28
--------------- ------------------------
(unaudited) 1995 1994
---- ----
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)
=========== =========== =========
See Notes to Financial Statements
F-44
<PAGE>
Avant--Garde Telecommunications, Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
For the Period For the Year Ended
March 1 to February 28,
July 17, 1995 ------------------------
-------------- 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 payable, are included in Due to
Affiliate in the accompanying balance sheets and are non-interest bearing.
F-46
<PAGE>
AVANT-GARDE TELECOMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Note 2--Due to Affiliate--(Continued)
On April 10, 1995, WCII entered into an agreement with all of the Company's
shareholders pursuant to which WCII agreed to acquire the remaining 51% of the
Company in exchange for 1,275,000 restricted shares of WCII's common stock
valued at $5,100,000. This agreement was contingent upon the Company obtaining
consent from the FCC to transfer control of its licenses. On June 26, 1995, such
consent was granted by the FCC, and on July 17, 1995, this agreement was
consummated and the transfer took place. Pursuant to the terms of the agreement,
the Company merged into WinStar Wireless Fiber Corporation, a wholly-owned
subsidiary of WCII which is the sole surviving corporation.
Note 3--Property and Equipment
Property and equipment consist of the following
February 28, 1995
Communications Network ................................... $ 2,532,103
Computer Systems and Equipment ........................... 592,901
Furniture, Fixtures & Equipment .......................... 48,230
Other .................................................... 2,549
-----------
$ 3,175,783
Accumulated Depreciation ................................. (25,872)
-----------
$ 3,149,911
===========
Note 4--P-Com Contract
In November 1994, the Company entered into a non-exclusive, three year
agreement with P-Com, Inc. ("P-Com"), a manufacturer and distributor of radio
links, providing for the purchase of radio links from P-Com. The contract
pricing structure includes provisions relating to the volume of purchases under
the agreement. An annual minimum volume requirement must be met in order to
maintain the agreed upon pricing structure. The contract is cancelable by the
Company subject to certain conditions, such as the guarantee of the next 90
days' purchases in accordance with an agreed upon schedule as well as the
payment of certain deferred billings. As of February 28, 1995, the Company's
noncancellable purchase commitment was approximately $7,250,000. These
conditions to cancellation become more favorable to the Company as certain
volume levels are reached.
Certain amounts paid under the contract are prepayments for future
purchases and are included in communications equipment in property and equipment
but are not being depreciated. In future periods, as certain volume levels are
attained, these amounts may be recovered. This prepaid amounts as of February
28, 1995 is $822,500.
F-47
<PAGE>
AVANT-GARDE TELECOMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Note 5--Income Taxes
The Company follows Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes," which requires the use of the asset and liability
method of accounting for income taxes. Under this method, deferred income taxes
are recognized for the tax consequences of temporary differences by applying
enacted statutory rates applicable to future years to differences between the
financial statement carrying amounts and the tax bases of existing assets and
liabilities.
The temporary differences which result in deferred tax assets consist of
net operating loss carryforwards. The tax effect of this temporary difference is
as follows
February 28, 1995
Net operating loss carryforwards .......................... $ 826,000
Valuation allowance ....................................... (826,000)
---------
$ --
=========
Due to losses incurred by the Company, a full valuation of the deferred tax
asset has been provided because realization of this future benefit cannot
currently be assured. The Company's net operating loss carryforwards of
approximately $3,534,000 will begin to expire in 2009, if not utilized. The
Company's ability to utilize its net operating losses deductions to offset
future taxable income is limited due to the change in control as defined in
Internal Revenue Code Section 382.
Note 6--Commitments
In May 1995, Wireless completed a private placement of $7,500,000 of five
year secured convertible notes (the "Notes"). These Notes are guaranteed by the
Company, and the security for the Notes includes a pledge by Wireless of its
shares of the Company.
F-48
<PAGE>
REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
The Partners
Milliwave Limited Partnership
We have audited the accompanying balance sheet of Milliwave Limited
Partnership (a Florida limited partnership) as of December 31, 1995 and the
related statement of changes in partners' capital for the period April 25, 1995
(inception) through December 31, 1995. These financial statements are the
responsibility of the management of Milliwave Limited Partnership. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Milliwave Limited
Partnership as of December 31, 1995, in conformity with generally accepted
accounting principles.
GRANT THORNTON LLP
New York, New York
June 27, 1996
F-49
<PAGE>
Milliwave Limited Partnership
BALANCE SHEETS
September 30, December 31,
1996 1995
------------- ------------
(unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents ...................... $2,956,935 $ 11,222
Other current assets ........................... 65,439 --
---------- --------
Total current assets ....................... 3,022,374 11,222
Property and equipment, net .................... 1,108,935 --
Licenses ....................................... 899,444 317,581
Other assets ................................... 130,540 --
---------- --------
Total assets ............................... $5,161,293 $328,803
========== ========
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES
Loan Payable ................................... $ 1,500 $ --
Accounts payable and accrued expenses .......... 726,392 53,803
---------- --------
Total current liabilities ................. 727,892 53,803
PARTNERS' CAPITAL ................................ 4,433,401 275,000
---------- --------
Total liabilities and partners' capital ... $5,161,293 $328,803
========== ========
The accompanying notes are an integral part of these statements.
F-50
<PAGE>
Milliwave Limited Partnership
STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(Unaudited)
Revenues ......................................... $ 662
Operating expenses
Consulting and contracted services ............ $ 252,707
Professional fees ............................. 294,330
Depreciation and amortization ................. 66,622
Travel ........................................ 29,571
Salaries ...................................... 46,600
Office and sundry ............................. 31,241
---------
721,071
Net loss from operations ......................... (720,409)
Interest income ............................... 63,746
Interest Expense ................................. (3,679)
---------
Net loss ......................................... $(660,342)
=========
F-51
<PAGE>
Milliwave Limited Partnership
STATEMENT OF CHANGES IN PARTNERS' CAPITAL
April 25, 1995 (inception) through December 31, 1995
and the nine months ended September 30, 1996
(unaudited)
Cost of contributed license applications ...................... $ 122,654
Cash contributed .............................................. 152,346
-----------
Partners' capital at December 31, 1995 ........................ 275,000
Cash contributed .............................................. 5,000,000
Syndication costs ............................................. (181,257)
Net loss ...................................................... (660,342)
-----------
Partners' capital at September 30, 1996 (unaudited) ........... $ 4,433,401
===========
The accompanying notes are an integral part of these statements.
F-52
<PAGE>
Milliwave Limited Partnership
STATEMENT OF CASH FLOWS
For the nine months ended September 30, 1996
(unaudited)
Cash flows from operating activities:
Net loss ................................................... $ (660,342)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation ............................................... 66,622
Increase in other current assets ........................... (23,049)
Increase in other assets ................................... (42,390)
Increase in accounts payable and accrued expense ........... 672,589
-----------
Net cash provided by operating activities .................... 13,430
-----------
Cash flows from investing activities:
Purchases of equipment ..................................... (1,125,349)
Licenses ................................................... (758,026)
Organizational costs ....................................... (4,585)
-----------
Net cash used in investing activities ........................ (1,887,960)
-----------
Cash flows from financing activities:
Proceeds from partners' loans .............................. 201,500
Repayment of partners' loans ............................... (200,000)
Capital contributions ...................................... 5,000,000
Syndication costs .......................................... (181,257)
-----------
Net cash provided by financing activities .................... 4,820,243
-----------
Net increase in cash and cash equivalents .................... 2,945,713
Cash and cash equivalents at beginning of period ............. 11,222
-----------
Cash and cash equivalents at end of period ................... $ 2,956,935
===========
The accompanying notes are an integral part of these statements.
F-53
<PAGE>
Milliwave Limited Partnership
NOTES TO FINANCIAL STATEMENTS
December 31, 1995 and September 30, 1996 (unaudited)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General
Milliwave Limited Partnership (a Florida limited partnership, hereinafter
referred to as the "Partnership") was formed on April 25, 1995 to apply for and
obtain licenses from the Federal Communications Commission ("FCC") and to
exploit such licenses for commercial purposes. As of September 30, 1996, the
Partnership had met its minimum construction requirements for 58 of its licensed
service areas on a timely basis. The Partnership is required to complete minimum
construction requirements for the remaining 30 licenses granted to it at various
dates from November 1996 to September 1997. From inception through December 31,
1995, the Partnership had no operations.
A summary of the significant accounting policies applied in the preparation
of the accompanying balance sheet follows
1. Property and Equipment
Property and equipment is stated at cost. Depreciation is calculated using
the straight line method over the estimated useful lives of the related assets.
2. Cash and Cash Equivalents
The Partnership considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
3. Income Taxes
No provision for Federal, state or local income taxes has been provided as
the Partnership is not a taxable entity and the partners are individually liable
for the taxes on their shares of the Partnership's income.
4. Use of Estimates
In preparing financial statements in conformity with generally accepted
accounting principles, the Partnership is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and revenues and expenses during the reporting period. Actual results
could differ from those estimates.
5. Unaudited Financial Statements
In the opinion of the Partnership, the accompanying unaudited balance sheet
as of September 30, 1996 and the unaudited statements of operations, changes in
partners' capital, and cash flows for the nine months ended September 30, 1996
include all adjustments (consisting only of normal recurring adjustments)
necessary to present fairly the financial position of the Partnership as of
September 30, 1996 and the results of operations and cash flows for the nine
months ended September 30, 1996.
NOTE 2--NATURE OF BUSINESS AND LICENSES
The Partnership holds 88 licenses granted by the FCC. These licenses allow
the Partnership to deliver communication services over the 38 GHz band specified
in the licenses. The licenses were issued at various dates through March 15,
1996. Under the terms of the licenses, the Partnership must construct a minimum
of one radio link per licensed service area within eighteen months of the date
of grant or risk revocation of the licenses by the FCC. The Partnership is
required to complete its minimum construction requirement for the licenses
granted at various dates from August 1996 through September 1997. As of
F-54
<PAGE>
October 1996, construction requirements have been completed on all the Licenses.
At September 30, 1996 and December 31, 1995, the Partnership has capitalized
$899,444 and $317,581, respectively, of license costs consisting of filing,
application and legal fees relative to the licenses.
NOTE 3--LOANS PAYABLE-PARTNERS
In March 1996 the Partnership issued two $100,000 promissory notes to two
limited partners bearing interest at 5.86% per annum. These notes were to mature
on December 31, 1996 but were repaid out of the proceeds of a sale of limited
partnership interests. (Reference is made to Note 4).
In May 1996, the Partnership borrowed $1,500 from a limited partner for
short-term cash requirements. This amount is unsecured without a stated interest
rate. As of September 30, 1996, this amount is outstanding and due the limited
partner.
NOTE 4--PARTNERS' CAPITAL
For the period May 1994 through the formation of the Partnership in April
1995, one of the partners incurred $122,654 in license application costs, which
were contributed to the Partnership at cost and included in the capital of the
Partnership.
The balance of the capital contributed during the period ended December 31,
1995 represented cash contributed of $152,346.
On May 30, 1996, the Partnership amended and restated its limited
partnership agreement to provide for Series A and Series B Limited Partners.
Concurrent with the amendment, the Partnership sold $5,000,000 of Series B
Limited Partnership interests. Syndication costs relating to the sale amounted
to $181,257.
The general partner provides management services to the partnership.
Management fees for the nine months ended September 30, 1996 totaled $87,991.
NOTE 5--COMMITMENTS AND CONTINGENCIES
The Partnership has entered into site license and service agreements with
WinStar Communications, Inc. ("WinStar") in conjunction with the installation
and operation of up to a total of seventy-eight 38 GHz radio links. For each
link, the agreements call for payment from the Partnership to WinStar of: a
one-time fee of 8,500 for site identification, survey and equipment
installation; a monthly fee of $150 for monitoring and maintenance of radio
system equipment; and, a monthly fee of $200 or access to and use of radio
system sites. As of September 30, 1996, these charges had been applied towards
48 links. In addition, WinStar makes monthly payments to the Partnership for
capacity leased under a two-year transmission path lease agreement. Such amounts
vary from $10-$75 per link.
The Partnership leases office space under a lease agreement which expires
in December 1996. Rent expense for the nine months ended September 30, 1996
totaled $6,492.
In 1996, the Partnership accepted the assignment of contingent sublease and
personal property sale agreements from a company owned by a limited partner. The
total amount due under these agreements is $100,000.
Subsequent to December 31, 1995, the Partnership entered into purchase
orders to purchase radio links from P-Com, Inc. amounting to approximately
$570,000. As of September 30, 1996, the purchase commitment has been satisfied.
On November 13, 1995, the FCC released an order freezing the acceptance for
filing of new applications for 38 GHz frequency licenses. On December 15, 1995,
the FCC announced the issuance of an NPRM, pursuant to which it proposed to
amend its current rules relating to 38 GHz including, among other items, the
imposition of minimum construction requirements and an auction procedure for
issuance of licenses in the 37-40 GHz band. In addition, the FCC ordered that
those applications that are subject
F-55
<PAGE>
to mutual exclusivity with other applicants or that were placed on public notice
by the FCC after September 13, 1995 would be held in abeyance and not processed
by the FCC pending the outcome of the proceeding initiated by the NPRM. Final
rules with respect to the changes proposed by the NPRM have not been adopted and
the changes proposed by the NPRM have been, and are expected to continue to be,
the subject of numerous comments by members of the telecommunications industry
and others. Consequently, there can be no assurance that the NPRM will result in
the issuance of rules consistent with the rules initially proposed in the NPRM.
Until final rules are adopted, the rules currently in existence remain in effect
with respect to outstanding licenses.
NOTE 6--WINSTAR COMMUNICATIONS, INC. AGREEMENT
In June 1996, the Partnership entered into an agreement with WinStar whereby
WinStar would acquire the Partnership for a purchase price of $40 million in
cash and 3.4 million shares of WinStar common stock. At the date of signing the
agreement, the market value of the common stock was approximately $85,000,000.
The number of shares issued is subject to adjustment, depending on WinStar's
stock price on the date of closing of the transaction with a maximum of 4.5
million shares and an ability for WinStar to issue fewer than 3.4 million shares
if the stock price exceeds certain levels. The acquisition is subject to FCC
approval, but is expected to be consummated in the second quarter of calendar
year 1997. The Partnership also has entered into a (i) services agreement with
WinStar pursuant to which WinStar has agreed to provide services to the
Partnership in connection with the buildout of its licensed areas in
consideration for payment of monthly site access and management fees, as well as
installation fees, and (ii) a two-year transmission path lease agreement with
WinStar permitting its use of up to 488 radio links in the Partnerships'
licensed areas.
F-56
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma condensed consolidated balance sheet has
been prepared by taking the September 30, 1996 consolidated balance sheet of
WinStar Communications, Inc. and subsidiaries (the "Company") and the balance
sheets of Milliwave Limited Partnership ("Milliwave") and certain assets of the
Microwave Division of Local Area Telecommunications, Inc. ("Locate"), as if the
acquisitions of Milliwave and Locate had occurred on September 30, 1996. The
following unaudited pro forma "as adjusted" balance sheet gives effect to these
acquisitions as well as to the issuance of Common Stock in this Offering and the
resulting retirement of debt, as if they occurred on September 30, 1996. The
unaudited pro forma condensed consolidated balance sheet has been prepared for
information purposes only and does not purport to be indicative of the financial
condition that necessarily would have resulted had these transactions taken
place on September 30, 1996.
The following unaudited pro forma condensed consolidated statements of
operations for the ten month period ended December 31, 1995 and for the nine
months ended September 30, 1996 give effect to the Company's acquisitions of
Milliwave, certain assets of Locate and the remaining 51% of Avant- Garde
Telecommunications, Inc. ("AGT"), 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 nine
month period ended September 30, 1996 give effect to these acquisitions as well
as to the issuance of Common Stock in this Offering and the resulting retirement
of debt, as if they occurred as of the beginning of the respective periods. The
revenues and results of operations included in the following unaudited pro forma
condensed consolidated statements of operations are not indicative of
anticipated results of operations for periods subsequent to the acquisitions and
the issuance of Common Stock in this Offering, nor are they considered
necessarily to be indicative of the results of operations for the periods
specified had the acquisitions and the issuance of Common Stock in this Offering
and the resulting retirement of debt actually been completed at the beginning of
each respective period.
These financial statements should be read in conjunction with the notes to
the unaudited pro forma condensed consolidated financial statements, which
follow, the consolidated financial statements of the Company and the financial
statements of Milliwave, Locate and AGT, and the related notes thereto,
appearing elsewhere in the Prospectus.
F-57
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
Pro Forma
Adjustments
Increase/
The Company, Milliwave, Locate, (Decrease) Pro Forma
Historical Historical Historical for Acquisitions for Acquisitions
---------- ---------- ---------- ---------------- ----------------
ASSETS
<S> <C> <C> <C> <C> <C>
Current assets
Cash and cash equivalents $ 54,467,888 $ 2,956,935 $ -- (40,000,000)(b) $ 17,424,823
Short term investments 108,510,243 -- -- 108,510,243
------------- ----------- ------------ ------------- -------------
Cash, cash equivalents and short-term
investments 162,978,131 2,956,935 -- (40,000,000) 125,935,066
Investments in marketable equity securities 1,068,800 -- -- 1,068,800
Accounts receivable, net 14,750,130 662 772,899 15,523,691
Notes receivable 218,818 -- -- 218,818
Inventories 12,450,043 -- 3,410,528 (2,726,607)(a) 13,133,964
Prepaid expenses and other current assets 15,242,599 64,777 2,536 15,309,912
------------- ----------- ------------ ------------- -------------
Total current assets 206,708,521 3,022,374 4,185,963 (42,726,609) 171,190,251
Property and equipment, net 44,162,410 1,108,935 8,148,692 (5,816,235)(a) 47,603,802
Notes receivable 333,778 -- -- 333,778
Investments and advances 399,729 -- -- 399,729
Licenses, net 12,885,294 899,444 -- 120,566,599(b) 148,707,699
14,356,362(a)
Intangible assets, net 10,271,905 -- -- 10,271,905
Deferred financing costs 10,896,527 -- -- 10,896,527
Other assets 2,499,988 130,540 147,903 2,778,431
------------- ----------- ------------ ------------- -------------
Total assets $ 288,158,152 $ 5,161,293 $ 12,482,558 $ 86,380,119 $ 392,182,122
============= =========== ============ ============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Loans payable $ 1,839,404 $ 1,500 $ 17,300,000 $ 17,500,000(a) $ 19,340,904
(17,300,000)(a)
Accounts payable and accrued expenses 32,855,042 726,392 3,764,251 (3,229,496)(a) 34,116,189
Capitalized lease obligations 1,803,591 -- 27,461 -- 1,831,052
------------- ----------- ------------ ------------- -------------
Total current liabilities 36,498,037 727,892 21,091,712 (3,029,496) 55,288,145
Senior notes payable 170,356,225 -- -- 170,356,225
Convertible notes payable 85,178,112 -- -- 85,178,112
Other notes payable 10,680,478 -- 25,000 (25,000)(a) 10,680,478
Capitalized lease obligations 5,980,970 -- 233,862 6,214,832
------------- ----------- ------------ ------------- -------------
Total liabilities 308,693,822 727,892 21,350,574 (3,054,496) 327,717,792
------------- ----------- ------------ ------------- -------------
Commitments and contingencies
Stockholders' equity:
Preferred stock -- -- -- --
Common stock, $.01 par value; authorized
75,000,000 shares, issued and outstanding
28,290,525 shares, pro forma issued and 282,906 -- 34,000(b) 316,906
outstanding 31,690,525 shares and pro
forma as adjusted issued and outstanding
32,743,157 shares
Partners Capital 4,433,401 (4,433,401)(b) --
Additional paid-in capital 70,501,060 -- 84,966,000(b) 155,467,060
Accumulated deficit (91,338,436) (8,868,016) 8,868,016(a) (91,338,436)
------------- ----------- ------------ ------------- -------------
(20,554,470) 4,433,401 (8,868,016) 89,434,615 64,445,530
Less, Treasury stock -- -- -- --
Deferred compensation -- -- -- --
Unrealized gain (loss) on investments in
marketable securities 18,800 -- -- 18,800
------------- ----------- ------------ ------------- -------------
Total stockholders' equity (20,535,670) 4,433,401 (8,868,016) 89,434,615 64,464,330
------------- ----------- ------------ ------------- -------------
Total liabilities and stockholders' equity $ 288,158,152 $ 5,161,293 $ 12,482,558 $ 86,380,119 $ 392,182,122
============= =========== ============ ============= =============
<CAPTION>
Pro Forma
Adjustments
Increase/
(Decrease)
for the
Locate Pro Forma
Conversion As Adjusted
---------- -----------
ASSETS
<S> <C> <C>
Current assets
Cash and cash equivalents 17,424,823
Short term investments 108,510,243
------------- -------------
Cash, cash equivalents and short-term
investments -- 125,935,066
Investments in marketable equity securities 1,068,800
Accounts receivable, net 15,523,691
Notes receivable 218,818
Inventories 13,133,964
Prepaid expenses and other current assets 15,309.912
------------- -------------
Total current assets -- 171,190,251
Property and equipment, net 47,603,802
Notes receivable 333,778
Investments and advances 399,729
Licenses, net 148,707,699
Intangible assets, net 10,271,905
Deferred financing costs 10,896,527
Other assets 2,778,431
------------- -------------
Total assets -- 392,182,122
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Loans payable (17,500,000)(c) 1,840,904
Accounts payable and accrued expenses 34,116,189
Capitalized lease obligations -- 1,831,052
------------- -------------
Total current liabilities (17,500,000) 37,788,145
Senior notes payable 170,356,225
Convertible notes payable 85,178,112
Other notes payable 10,680,478
Capitalized lease obligations 6,214,832
------------- -------------
Total liabilities (17,500,000) 310,217,792
------------- -------------
Commitments and contingencies
Stockholders' equity:
Preferred stock --
Common stock, $.01 par value; authorized
75,000,000 shares, issued and outstanding
28,290,525 shares, pro forma issued and 10,526(c) 327,432
outstanding 31,690,525 shares and pro
forma as adjusted issued and outstanding
32,579,719 shares
Partners Capital --
Additional paid-in capital 17,489,474(c) 172,956,534
Accumulated deficit (91,338,436)
------------- -------------
17,500,000 81,945,530
Less, Treasury stock --
Deferred compensation --
Unrealized loss on investments in
marketable securities 18,800
------------- -------------
Total stockholders' equity 17,500,000 81,964,330
------------- -------------
Total liabilities and stockholders' equity $ -- $ 392,182,122
============= =============
</TABLE>
F-58
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
Pro Forma
Adjustments
Increase/
The Company, Milliwave LP, Locate, (Decrease) Pro Forma
Historical Historical Historical for Acquisitions As Adjusted
------------ ------------ ---------- ---------------- -----------
<S> <C> <C> <C> <C> <C>
Net sales $ 47,980,633 $ 662 $ 3,895,326 $(1,618,828)(g) $ 50,257,793
Cost of sales 28,273,656 -- 2,651,938 (1,090,480)(g) 29,835,114
------------ --------- ----------- ----------- ------------
Gross profit 19,706,977 662 1,243,388 (528,348) 20,422,679
Selling, general and
administrative expenses 47,741,812 654,449 1,278,412 (32,676)(g) 49,641,997
Depreciation 1,754,540 66,622 1,899,152 (1,549,283)(l) 2,171,031
------------ --------- ----------- ----------- ------------
Operating loss (29,789,375) (720,409) (1,934,176) 1,053,611 (31,390,349)
Other income (expense)
Interest expense 27,388,356 3,679 1,448,751 (371,751)(a) 28,469,035
Interest income (expense) (8,174,077) (63,746) (4,784) 1,560,000(i) (6,682,607)
Amortization of intangibles 762,193 -- -- 269,182(b) 1,031,375
------------ --------- ----------- ----------- ------------
Net loss before income taxes (49,765,847) (660,342) (3,378,143) (403,820) (54,208,152)
Income taxes 261,514 -- -- 261,514
------------ --------- ----------- ----------- ------------
Net loss $(50,027,361) $(660,342) $(3,378,143) $ (403,820) $(54,469,666)
============ ========= =========== =========== ============
Net loss per share $ (1.81) $ (1.75)
============ ============
Weighted average shares
outstanding $ 27,691,452 3,400,000(j) 31,091,452
============ =========== ============
</TABLE>
Pro Forma
Adjustments
Increase/
(Decrease)
for the Locate Pro Forma
Conversions As Adjusted
-------------- -----------
Net sales $ $ 50,257,793
Cost of sales 29,835,114
----------- ------------
Gross profit -- 20,422,679
Selling, general and
administrative expenses 49,641,997
Depreciation 2,171,031
----------- ------------
Operating loss -- (31,390,349)
------------
Other income (expense)
Interest expense (1,050,000)(k) 27,419,035
Interest income (expense) (6,682,607)
Amortization of intangibles 1,031,375
----------- ------------
Net loss before income taxes 1,050,000 (53,158,152)
Income taxes 261,514
----------- ------------
Net loss $ 1,050,000 $(53,419,666)
=========== ============
Net loss per share $ (1.65)
============
Weighted average shares
outstanding 1,052,632(h) 32,144,084
=========== ============
F-59
<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
AGT, Adjustments
Historical Increase/
The Company, Milliwave LP, March 1 to Locate, (Decrease) Pro Forma
Historical Historical July 17, 1995 Historical for Acquisitions for Acquisitions
------------ ------------ ------------- ---------- ---------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Net sales .......................... $ 29,771,472 $ -- $ 17,779 $ 7,090,547 $ (934,181)(c) $ 35,900,617
(45,000)(d)
Cost of sales ...................... 19,546,351 -- 4,034,803 (622,132)(c) 22,959,022
------------ ---------- ------------ ------------ ------------ ------------
Gross profit ................... 10,225,121 -- 17,779 3,055,744 (357,049) 12,941,595
Selling, general and administrative
expenses ......................... 19,266,466 1,704,294 2,582,894 23,240,294
(268,360)(c)
(45,000)(d)
Depreciation ....................... 770,284 -- 59,250 2,784,156 (2,395,413)(i) 1,218,277
------------ ---------- ------------ ------------ ------------ ------------
Operating loss ..................... (9,811,629) -- (1,745,765) (2,311,306) 2,351,724 (11,516,976)
Other (income) expense
Interest expense ................. 7,630,079 -- 1,587,851 (191,778)(a) 8,799,935
(226,217)(c)
Interest income .................. (2,889,813) (11,736) (2,901,549)
Amortization of intangibles ...... 439,888 -- 31,978 -- 299,091(b) 770,957
Equity in loss of AGT ............ 865,676 -- -- (865,676)(e) --
------------ ---------- ------------ ------------ ------------ ------------
Net loss ........................... $(15,857,459) $ -- $ (1,777,743) $ (3,887,421) $ (3,336,304) $(18,186,319)
============ ========== ============ ============ ============ ============
Net loss per share ................. $ (0.70) $ (0.68)
============ ============
3,400,000(j)
575,000(f)
Weighted average shares outstanding 22,769,770 -- 26,744,770
============ ========== ============ ============
</TABLE>
Pro Forma
Adjustments
Increase/
(Decrease)
for the
Locate Pro Forma
Conversion As Adjusted
----------- -----------
Net sales .......................... $ $ 35,900,617
Cost of sales ...................... 22,959,022
------------ ------------
Gross profit ................... 12,941,595
Selling, general and administrative
expenses ......................... 23,240,294
Depreciation ....................... 1,218,277
------------ ------------
Operating loss ..................... (11,516,976)
Other (income) expense
Interest expense ................. (1,166,667)(k) 7,633,268
Interest income .................. (2,901,549)
Amortization of intangibles ...... 770,957
Equity in loss of AGT ............ --
------------ ------------
Net loss ........................... $ (1,166,667) $(17,019,652)
============ ============
Net loss per share ................. $ (0.61)
============
Weighted average shares outstanding 1,052,632(h) 27,797,402
============ ============
F-60
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The adjustments below were prepared based on data currently available and
in some cases are based on estimates or approximations. It is possible that the
actual amounts to be recorded may have an impact on the results of operations
and the balance sheet different from that reflected in the accompanying
unaudited pro forma condensed consolidated financial statements. It is therefore
possible that the entries presented below will not be the amounts actually
recorded at the closing date. Deferred income taxes have not been considered in
the pro forma balance sheet because they are not expected to be material at the
time of the consummation of the acquisitions. Amortization of licenses has not
been recorded on the proforma licenses from the Milliwave Acquisition since such
licenses are not yet in full commercial service.
Balance Sheet at September 30, 1996
(a) To record the issuance of $17,500,000 in notes payable in payment for
certain assets of Locate, to eliminate assets and liabilities not acquired or
assumed and division deficiency, and to allocate the excess of the purchase
price over the fair value of the assets acquired to the licenses acquired.
(b) To record the acquisition of Milliwave Limited Partnership as follows
Increase/
(Decrease)
----------
Record cash payment to Milliwave partners .................. $ (40,000,000)
Allocate excess purchase price to licenses ................. 120,566,599
-------------
Total asset adjustments ............................... $ 80,566,599
=============
Eliminate Partners' Capital accounts ....................... $ (4,433,401)
Record the issuance of 3,400,000 shares of the
Company's common stock at an assumed price of
$25.00 per share
Common Stock .......................................... 34,000
Additional Paid in Capital ............................ 84,966,000
-------------
Total equity adjustments ................................. $ 80,566,599
=============
The number of WinStar common shares issued is subject to adjustment, depending
on the Company's stock price on the date of closing of the Transaction.
(c) To record the issuance of 1,052,632 shares of Common Stock in this
Offering to be issued, at an assumed price of $16.625 per share, upon the
conversion of the $17,500,000 principal amount of the Locate Note, as if the
conversion and the resulting retirement occurred on September 30, 1996.
Statements of Operations for the Ten Months Ended December 31, 1995
and For the Nine Months Ended September 30, 1996
(a) To eliminate interest expense incurred by Locate on liabilities not
assumed by the Company, offset in part by an adjustment to record interest
expense at 8% per annum on a $17.5 million promissory note to be issued by the
Company in connection with the acquisition of certain assets of Locate.
(b) To record amortization of licenses acquired in the Locate transaction.
F-61
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(c) To adjust the historical results of operations to a ten month period.
The historical results of operations reflected in the December 31, 1995
unaudited pro forma condensed consolidated statement of operations for Locate
are for the twelve months ended December 31, 1995. These adjustments are made to
restate these historical results for the ten months ended December 31, 1995.
(d) To eliminate management fees charged by the Company to AGT pursuant to
a management agreement.
(e) To eliminate the Company's proportionate share of AGT's results for the
period, recorded previously under the equity method.
(f) To record shares issued in accordance with the AGT merger agreement as
being outstanding for the entire period.
(g) To eliminate sales, management fees, and cost of sales recorded by the
Company pursuant to management and other agreements with Milliwave and Locate.
(h) To record the issuance of Common Stock upon the conversion of the
Locate Note, plus accrued interest, as if such shares were outstanding for the
entire respective periods.
(i) To eliminate interest income, at an assumed rate of 5.2% per annum, on
$40 million cash, assuming such cash was paid at the beginning of the period in
connection with the Milliwave Limited Partnership acquisition.
(j) To record 3,400,000 shares of the Company's Common Stock issued in
connection with the Milliwave Limited Partnership acquisition at an assumed
price of $25.00 per share.
(k) To eliminate the pro forma interest expense adjustment to record
interest expense at 8% per annum on a $17.5 million promissory note which was
issued by the Company in connection with the acquisition of certain assets of
Locate.
(l) To adjust depreciation expense recorded by Locate on property and
equipment to the amount of depreciation expense which would have been recorded
by the Company as if the fair value of such property and equipment had been
depreciated over an estimated five year life as of the beginning of the period.
F-62
<PAGE>
REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTS 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 Prospectus constituting Part I of this
Registration Statement, we have also audited Schedule II 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
New York, New York
March 8, 1996
S-1
<PAGE>
WinStar Communications, Inc. and Subsidiaries
Schedule II - Valuation and Qualifying Accounts
Column A Column B Column C Column D Column E
- -------- -------- -------- -------- --------
Balance at Additions
Beginning Charged to Costs Balance at
Description of Period and Expenses Deductions End of Period
- ----------- --------- ------------ ---------- -------------
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, $196,015 $343,694 $181,866(b) $357,843
1994 ======== ======== ======== ========
Allowance for doubtful
accounts (a)
- ----------
(a) Deducted from accounts receivable.
(b) Uncollectible accounts receivable charged against allowance.
S-2
<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
Common Stock offered hereby, other than underwriting discounts and commissions:
SEC registration fee................................................ $6,118.53
Printing and engraving expenses..................................... *
Legal fees and expenses............................................. *
Accounting fees and expenses........................................ *
Miscellaneous....................................................... *
Total.......................................................... *
=========
* To be filed by amendment.
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
II-1
<PAGE>
shall be made in respect of any claim, issue or matter as to which such person
shall have been 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.
II-2
<PAGE>
(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 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
Exhibit
Number Description
- ------ -----------
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)
II-4
<PAGE>
Exhibit
Number Description
- ------ -----------
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))
3.6(a) Amendment to By-Laws of the Company (Incorporated by reference to
Exhibit 3.6(a) to the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1996)
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)
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)
II-5
<PAGE>
Exhibit
Number Description
- ------ -----------
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)
II-6
<PAGE>
Exhibit
Number Description
- ------ -----------
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))
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))
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)
II-7
<PAGE>
Exhibit
Number Description
- ------ -----------
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))
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)
II-8
<PAGE>
Exhibit
Number Description
- ------ -----------
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
II-9
<PAGE>
Exhibit
Number Description
- ------ -----------
to Exhibit 10.35 to the Company's Annual Report on Form 10-KSB
for the fiscal year ended February 28, 1995)
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))
II-10
<PAGE>
Exhibit
Number Description
- ------ -----------
10.36 Security Agreement and Conditional Assignment between WinStar
Wireless and Everest Capital Limited (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 Everest Capital
Limited (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 Everest Capital Limited 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 Everest Capital Limited 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 Everest Capital Limited
(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 Everest Capital Limited (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)
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))
II-11
<PAGE>
Exhibit
Number Description
- ------ -----------
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
Company's 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
Company's 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
Company's 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 Company's 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 Company's 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
II-12
<PAGE>
Exhibit
Number Description
- ------ -----------
reference to Exhibit 10.29(a) to the Company's Registration
Statement on Form S-1, asamended 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)
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, Inc. ("WinStar Locate"), MobileMedia Corporation
("MobileMedia") and Local Area Telecommunications, Inc., a
wholly-owned subsidiary of MobileMedia ("Locate") (Incorporated
by reference to Exhibit 10.69 to the Company's Quarterly Report
on Form 10-Q for the quarter ended March 31, 1996)
II-13
<PAGE>
Exhibit
Number Description
- ------ -----------
10.71 Agreement between the Company and Source Media (Incorporated by
reference to Exhibit 10.72 to the Company's Registration
Statements on Form S-3 (Nos. 333-6073 and 333- 6079))
10.72 Purchase Agreement between and among Pinnacle Seven
Communications, Inc. ("P7C"), Pinnacle Eight Communications, Inc.
("P8C"), Pinnacle Nine Communications, LLC ("P9C") and WinPinn
Corp. (Incorporated by reference to Exhibit 10.73 to the
Company's Registration Statements on Form S-3 (Nos. 333-6073 and
333-6079))
10.73 Service Agreement by and between WinStar Wireless, P7C and P9C
(Incorporated by reference to Exhibit 10.74 to the Company's
Registration Statements on Form S-3 (Nos.
333-6073 and 333-6079))
10.74 Transmission Path Lease Agreement between P7C, P9C and WinStar
Wireless (Incorporated by reference to Exhibit 10.75 to the
Company's Registration Statements on Form S-3 (Nos. 333-6073 and
333-6079))
10.75 Agreement and Plan of Merger among Milliwave Limited Partnership
("Milliwave"), WinStar Milliwave, Inc. and the Company
(Incorporated by reference to Exhibit 10.79 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30,
1996)
10.76 Services Agreement between WinStar Wireless and Milliwave
(Incorporated by reference to Exhibit 10.80 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30,
1996)
10.77 Transmission Path Lease Agreement between Milliwave and WinStar
Wireless (Incorporated by reference to Exhibit 10.81 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1996)
10.78 Amendment to the Purchase and Sale Agreement by and among the
Company, WinStar Locate, MobileMedia and Locate (Incorporated by
reference to Exhibit 2 to the Company's Current Report on Form
8-K, dated October 8, 1996)
10.79 Amended and Restated Credit and Security Agreement among WinStar
Global Products, IBJ Schroder Bank & Trust Company ("IBJ"), as
lender, and IBJ, as agent (Incorporated by reference to Exhibit
10.79 to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1996)
10.80 Pledge Agreement by WinStar Global Products in favor of IBJ, as
agent (Incorporated by reference to Exhibit 10.80 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1996)
10.81 Subordination Agreement between the Company and IBJ, as agent
(Incorporated by reference to Exhibit 10.81 to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1996)
II-14
<PAGE>
Exhibit
Number Description
- ------ -----------
10.82 Amended and Restated Guaranty between the Company and IBJ, as
agent (Incorporated by reference to Exhibit 10.82 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1996)
10.83 First Supplemental Indenture (Senior Notes) between the Company
and United States Trust Company of New York, as trustee ("U.S.
Trust") (Incorporated by reference to Exhibit 10.83 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1996)
10.84 First Supplemental Indenture (Convertible Notes) between the
Company and U.S. Trust (Incorporated by reference to Exhibit
10.84 to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1996)
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 Grant Thornton LLP with respect to Milliwave (filed
herewith)
23.4 Consent of Ernst & Young LLP (filed herewith)
24.1 Power of Attorney (filed herewith)
(b) Schedules
S-1 Report of Independent Certified Public Accountants on Schedules
S-2 Schedule II-Valuation and Qualifying Accounts.
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
II-15
<PAGE>
date of the registration statement (or the most recent post-effective amendment
thereof) which, individuallyor 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.
(c) 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 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.
II-16
<PAGE>
(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-17
<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 this 19th day of
December, 1996.
WINSTAR COMMUNICATIONS, INC.
By: /s/ William J. Rouhana, Jr.
---------------------------
William J. Rouhana, Jr.
Chairman of the Board of Directors
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 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 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, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated.
/s/ William J. Rouhana, Jr. Chairman of the Board December 19, 1996
- ---------------------------- of Directors and Chief
William J. Rouhana, Jr. Executive Officer (and
principal executive officer)
/s/ Nathan Kantor President, Chief Operating December 19, 1996
- ---------------------------- Officer and Director
Nathan Kantor
/s/ Steven G. Chrust Vice Chairman of the Board December 19, 1996
- ---------------------------- of Directors
Steven G. Chrust
/s/ Fredric E. von Stange Executive Vice President, December 19, 1996
- ---------------------------- Chief Financial Officer
Fredric E. von Stange and Director (and principal
accounting officer)
/s/ Bert W. Wasserman Director December 19, 1996
- ----------------------------
Bert W. Wasserman
/s/ William J. vanden Heuvel Director December 19, 1996
- ----------------------------
William J. vanden Heuvel
/s/ William Harvey Director December 19, 1996
- ----------------------------
William Harvey
/s/ Steven B. Magyar Director December 19, 1996
- ----------------------------
Steven B. Magyar
II-18
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. We consent to the use of the aforementioned reports and
the incorporation by reference in the Registration Statement and to the use of
our name as it appears under the caption "Experts".
/s/ GRANT THORNTON LLP
- ------------------------------
GRANT THORNTON LLP
New York, New York
December 17, 1997
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 and Prospectus. 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."
/s/ GRANT THORNTON LLP
- ------------------------------
GRANT THORNTON LLP
New York, New York
December 17, 1996
Exhibit 23.3
CONSENT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
We have issued our report dated June 27, 1996, accompanying the balance
sheet and statement of partners' capital of Milliwave Limited Partnership
contained in the Registration Statement and Prospectus. 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".
/s/ GRANT THORNTON LLP
- ------------------------------
GRANT THORNTON LLP
New York, New York
December 17, 1996
Exhibit 23.4
CONSENT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
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 shares of its common stock in
connection with the potential conversion of the Locate Notes.
Ernst & Young LLP
Metropark, New Jersey
December 19, 1996
