As filed with the Securities and Exchange Commission on September 6, 1996.
Registration No. 333-6073
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------
AMENDMENT NO. 2
TO
Form S-3
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
-------------------
WINSTAR COMMUNICATIONS, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 13-3585278
(State of Incorporation) (I.R.S. Employer
Identification Number)
230 Park Avenue
New York, New York 10169
(212) 687-7577 (Phone)
(Address and telephone number of principal executive offices)
-------------------
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 (Phone)
(Name, address and telephone number of agent for service)
-------------------
Copies to:
David Alan Miller, Esq.
Graubard Mollen & Miller
600 Third Avenue
New York, New York 10016
(212) 818-8800 (Phone)
(212) 818-8881 (Telecopy)
-------------------
Approximate date of commencement of proposed sale to the public: As soon
as practicable after the effective date of this registration statement.
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, check the following box: |X|
-------------------
<TABLE>
<CAPTION>
==================================================================================================
Proposed Proposed
Title of Each Class Amount Maximum Maximum Amount of
of Securities To Be Offering Price Aggregate Registration
to Be Registered Registered Per Share Offering Price Fee
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
5,935,484
Shares of Common Stock(1)(2)..... shares $20.625 $122,419,350 $42,214(3)
- --------------------------------------------------------------------------------------------------
Total..................................................... $122,419,350 $42,214
==================================================================================================
</TABLE>
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.
(1) Pursuant to Rule 416, there are also being registered such indeterminable
number of additional shares of Common Stock as may be issued as a result
of certain anti-dilution provisions applicable to the shares of Common
Stock being registered hereby.
(2) An additional 1,197,516 shares to be issued by the Company are being
registered under a second registration statement on Form S-3 (No.
333-6079)(the "Additional Registration Statement") simultaneously herewith
and for the same purposes and an additional 2,216,922 shares of Common
Stock have been registered under a third Registration Statement on Form
S-3 (File No. 33-95242) which was declared effective by the Securities and
Exchange Commission on November 3, 1995 ("Reseller Registration
Statement") and which is being amended by the filing of this Registration
Statement pursuant to Rule 429. Accordingly, all three registration
statements use the prospectus which constitutes a part of this
Registration Statement.
(3) Previously paid.
<PAGE>
WINSTAR COMMUNICATIONS, INC.
-------------------
CROSS REFERENCE SHEET
-------------------
Form S-3 Caption or Location
Item Number and Heading in Prospectus
----------------------- -------------------
1. Forepart of the Registration Statement and Outside Front Cover Page
Outside Front Cover Page of Prospectus
2. Inside Front and Outside Back Cover Inside Front Cover Page
Pages of Prospectus
3. Summary Information and Risk Factors Prospectus Summary;
Risk Factors
4. Use of Proceeds Use of Proceeds
5. Determination of Offering Price Outside Front Cover Page;
Selling Stockholders
and Plan of Distribution
6. Dilution Not Applicable
7. Selling Security Holders Selling Stockholders and
Plan of Distribution
8. Plan of Distribution Outside Front Cover Page;
Selling Stockholders
and Plan of Distribution
9. Description of Securities Not Applicable
to be Registered
10. Interest of Named Experts and Counsel Experts
11. Material Changes Not Applicable
12. Incorporation of Certain Information by Incorporation of Certain
Reference Documents by Reference
13. Disclosure of Commission Position Not Applicable
on Indemnification for Securities
Act Liabilities
ii
<PAGE>
PRELIMINARY PROSPECTUS DATED SEPTEMBER 6, 1996
SUBJECT TO COMPLETION
9,349,922 SHARES
WINSTAR COMMUNICATIONS, INC.
COMMON STOCK
--------------------
This Prospectus relates to the issuance by the Company of up to 7,133,000
shares of Common Stock to the holders of the Company's 14% convertible senior
subordinated discount notes due 2005 (the "Convertible Notes") upon conversion
thereof. The Convertible Notes are convertible, at the option of the holder,
into that number of shares of Common Stock equal to the accreted value
("Accreted Value") of the Convertible Notes being converted (on the date of
conversion) divided by $20.625, subject to adjustment in certain events (the
"Conversion Ratio"). Accordingly, the number of shares of Common Stock issuable
upon conversion of the Convertible Notes will increase as the Accreted Value of
the Convertible Notes increases. On October 23, 1996, the date on which the
Convertible Notes are first convertible, the aggregate Accreted Value of the
Convertible Notes will be approximately $85.88 million, which would be
convertible into an aggregate of approximately 4,164,000 shares of Common Stock.
Immediately prior to maturity in October 2005, assuming no Convertible Notes
have yet been converted, the aggregate Accreted Value of the Convertible Notes
will be approximately $147.1 million, which will be convertible into an
aggregate of approximately 7,133,000 shares of Common Stock. In addition to the
foregoing, if at any time after October 23, 1996 the market price of the Common
Stock exceeds certain prices set forth herein, the Convertible Notes will
automatically be converted into the number of shares of Common Stock derived by
application of the Conversion Ratio.
This Prospectus also relates to the sale by certain financial
institutions, institutional investors and other persons ("Selling Stockholders")
of up to 2,216,922 shares of Common Stock previously issued by the Company in
private placements or issuable upon conversion of certain other convertible
promissory notes and options and upon exercise of warrants, which convertible
promissory notes, options and warrants were sold in private placements. The
Common Stock may be offered from time to time by the Selling Stockholders
through ordinary brokerage transactions in the over-the-counter market, over the
Nasdaq National Market, in negotiated transactions or otherwise, at market
prices prevailing at the time of sale or at negotiated prices.
See "Selling Stockholders and Plan of Distribution."
The Common Stock is traded on the Nasdaq National Market under the symbol
"WCII." The last reported sale price of the Common Stock on the Nasdaq National
Market on September 3, 1996 was $19 per share.
The Company will not receive any cash proceeds from the issuance of Common
Stock upon conversion of the Conversion Shares, but will immediately retire,
without the payment of additional consideration, the debt attributable to the
Convertible Notes converted. The Company will not derive any proceeds from the
sale of Common Stock by the Selling Stockholders. All costs, expenses and fees
in connection with the registration of the shares of Common Stock offered by
this Prospectus will be borne by the Company. Such expenses are estimated at
approximately $700,000.
<PAGE>
--------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 15 OF THIS
PROSPECTUS FOR INFORMATION THAT SHOULD BE
CONSIDERED BY PROSPECTIVE INVESTORS.
--------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
--------------------
The date of this Prospectus is September , 1996
<PAGE>
No person is authorized in connection with the offering made hereby to
give any information or to make any representation not contained in this
Prospectus and, if given or made, such information or representation must not be
relied upon as having been authorized by the Company or any Underwriter. This
Prospectus does not constitute an offer to sell or a solicitation of an offer to
buy any security other than the Common Stock offered hereby, nor does it
constitute an offer to sell or a solicitation of an offer to buy any securities
offered hereby, to any person in any jurisdiction in which it is unlawful to
make any such offer or solicitation to such person. Neither the delivery of this
Prospectus nor any sale made hereunder shall under any circumstance imply that
the information contained herein is correct as of any date subsequent to the
date hereof.
------------------------
TABLE OF CONTENTS
Page
----
Incorporation of Certain Documents by Reference............................. 3
Prospectus Summary.......................................................... 4
Risk Factors................................................................ 15
Price Range of Common Stock................................................. 30
Dividend Policy............................................................. 30
Capitalization.............................................................. 31
Selected Financial Data..................................................... 32
Management's Discussion and Analysis of
Financial Condition and Results of Operations............................. 34
Business.................................................................... 44
Management.................................................................. 67
Principal Stockholders...................................................... 71
Selling Stockholders and Plan of Distribution............................... 73
Description of Certain Indebtedness......................................... 76
Description of Capital Stock................................................ 79
Shares Eligible for Future Sale............................................. 80
Certain United States Federal Income Tax Considerations..................... 81
Legal Matters............................................................... 86
Experts..................................................................... 86
Available Information....................................................... 86
Index to Consolidated Financial Statements.................................. F-1
Wireless Fiber(SM) is a service mark 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 Report on Form 10-Q for the quarters ended March 31, 1996
and June 30, 1996;
(3) Proxy Statement dated May 3, 1996; and
(4) The description of the Company's Common Stock contained in the
Company's registration statement on Form 8-A under the Exchange Act
(File No. 1-10726).
All documents subsequently filed by the Company with the Commission
pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date
of this Prospectus and prior to the termination of the offering covered by this
Prospectus shall be deemed incorporated by reference into this Prospectus and to
be a part hereof from the date of filing of such documents. Any statement
contained in a document incorporated by reference herein shall be deemed to be
modified or superseded for purposes of this Prospectus to the extent that a
statement contained herein modifies or supersedes such statement. Any statement
so modified or superseded shall not be deemed, except as so modified or
superseded, to constitute a part of this Prospectus.
The Company hereby undertakes to provide without charge to each person to
whom a copy of this Prospectus has been delivered, upon the written or oral
request of such person to WinStar Communications, Inc., 230 Park Avenue, New
York, New York 10169 (telephone 212-687-7577), Attention: Investor Relations
(extension 153), a copy of any and all of the documents referred to above (other
than exhibits to such documents) which have been incorporated by reference in
this Prospectus.
3
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the
more detailed information and financial statements, including notes thereto,
appearing elsewhere in this Prospectus. References herein to the "Company" or
"WinStar" refer to WinStar Communications, Inc. and, where appropriate, its
subsidiaries. Certain of the information contained in this summary and elsewhere
in this Prospectus, including under "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and information with respect to
the Company's CAP and CLEC (as defined below) businesses and related strategy
and financing, are forward-looking statements. For a discussion of important
factors that could cause actual results to differ materially from the
forward-looking statements, see "Risk Factors" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations." Effective January 1,
1996, the Company changed its fiscal year end from the last day in February to
December 31.
THE COMPANY
The Company delivers telecommunications services in the United States as a
competitive access provider ("CAP"), competitive local exchange carrier
("CLEC"), and long distance and private network services provider. Beginning in
the third quarter of 1996, the Company also plans to offer Internet services.
The Company utilizes its Wireless FiberSM services as a key component of its
transmission capabilities. Wireless Fiber services deliver high quality
transmission via digital, wireless capacity in the 38.6 to 40 gigahertz portion
of the radio spectrum ("38 GHz"), where the Company is the holder of the largest
aggregate amount of bandwidth in the United States pursuant to licenses
("Wireless Licenses") granted by the Federal Communications Commission ("FCC").
The Wireless Licenses enable the Company to provide Wireless Fiber services in
the 31 most populated Metropolitan Statistical Areas ("MSAs") in the United
States, including Atlanta, Boston, Chicago, Los Angeles, New York and San
Francisco, among others, and 41 of the 45 most populated MSAs. The MSAs covered
by the Wireless Licenses include more than 100 cities with populations exceeding
100,000 and encompass an aggregate population of almost 110 million. The Company
recently has entered into three agreements pursuant to which it has agreed to
acquire a significant number of additional 38 GHz licenses as described below
under "-- Pending Acquisition of Milliwave" and "-- Other Recent Developments --
Pending Acquisition of Locate" and "-- Pending Acquisition of Pinnacle." By
exploiting its Wireless Fiber capabilities, the Company seeks to become a
value-added, economical provider of local telecommunications services and an
attractive alternative to the local exchange carriers ("LECs"), such as the
regional Bell operating companies ("RBOCs"), in substantially all of the
metropolitan areas covered by the Wireless Licenses.
The Company believes that its Wireless Fiber services provide it with
certain critical competitive advantages in the evolving telecommunications
market. Wireless Fiber services are engineered to provide 99.999% reliability,
with a 10-13 bit error rate (unfaded), performance equivalent to that provided
by fiber optic-based networks and exceeding that generally provided by
copper-based networks. Wireless Fiber services provide a high capacity,
cost-effective solution for voice and broadband applications, providing data
transfer rates equivalent to fiber-optic products and significantly exceeding
those provided by the fastest dial-up modems and integrated services digital
network ("ISDN") lines. The above-ground, installation-to-meet-demand nature of
the Company's Wireless Fiber services enables the Company to provide services to
a customer more quickly and less expensively than telecommunications providers
that rely on the installation of fiber optic- or copper-based lines for
connection to customer locations. As a CAP, the Company provides local access
services that utilize the Company's Wireless Fiber services on a point-to-point
basis, primarily to other telecommunications providers and large institutional
end users. Since late 1994, the Company has focused on the development and
initial marketing of its Wireless Fiber-based local access services. After an
initial market-education phase, in which the Company demonstrated the efficacy
and reliability of its Wireless
4
<PAGE>
Fiber services, principally though the use of field demonstrations and the
installation of trial-basis Wireless Fiber links, the Company began receiving
initial orders for Wireless Fiber service. Since October 1995, the number of
customers utilizing the Company's Wireless Fiber-based services has increased
significantly and include such companies as American Communications Services,
Inc., Ameritech Cellular, Cellular One, Geotek Communications Inc., IntelCom
Group (U.S.A.), Inc., ("IntelCom"), Reed Elsevier PLC, Siemens
Stromberg-Carlson, Teleport Communications Group, Inc. ("Teleport") and Western
Wireless Corporation. In addition, the Company has entered into master service
agreements with Electric Lightwave, Inc. (a subsidiary of Citizens Utilities
("Electric Lightwave")), MCImetro Access Transmission Services, Inc.
("MCImetro," a subsidiary of MCI Communications Corp. ("MCI")), ICG Telecom
Group ("ICG," a subsidiary of IntelCom) and Century Telephone Enterprises, Inc.
("Century Telephone"), under which such companies are expected to utilize
Wireless Fiber services as a component of their own telecommunications networks.
The Company is in the process of negotiating additional master service
agreements with other telecommunications providers. Although the Company
believes it has made substantial progress in the initial rollout of its CAP
business, the Company currently is generating only nominal revenues from such
business.
In addition to continuing the expansion of its CAP business, the Company
is implementing its CLEC business on an accelerated basis to exploit
opportunities emerging as a result of the Telecommunications Act of 1996 (the
"Telecommunications Act"), which was enacted in February 1996. The
Telecommunications Act provides for the removal of legal barriers to entering
the local exchange market on a nationwide basis and will permit CLECs, such as
the Company, to offer a full range of local exchange services, including local
dial tone, custom calling features and toll services within Local Access
Transport Areas ("LATAs"), to both business and residential customers. The
Company recently initiated its CLEC business, offering local exchange services
to end users on a retail basis. An integral part of the Company's CLEC business
strategy is the creation of a Wireless Fiber-based infrastructure on a
city-by-city basis that will allow the Company to provide a broad range of local
exchange services within cities covered by the Wireless Licenses. This
infrastructure will utilize the Company's Wireless Fiber capabilities, together
with switches that will be acquired or leased by the Company and facilities
leased or purchased from other carriers, to originate and terminate local
traffic. The Company believes that its Wireless Fiber capabilities will provide
it with a critical economic advantage over many other service providers because
of the high costs such other service providers encounter in connecting end users
to fiber optic backbone. In building its infrastructure, the Company is
following a building-centric network plan, pursuant to which the Company is
identifying strategically-located buildings in areas covered by its Wireless
Licenses that can serve as hubs for its network in each city. These hub sites
will be connected via Wireless Fiber links to end user customers and fiber optic
facilities leased or purchased from other carriers. The Company believes that
establishing a limited number of hub buildings (generally less than a dozen) in
each metropolitan area where it has Wireless Licenses will enable it to address
the vast majority of all commercial buildings targeted by the Company in that
area. The buildings the Company is initially targeting each have more than
100,000 square feet of space and, in many instances, are not served by other
CAPs or CLECs. The Company estimates that there are more than 8,000 buildings in
this target group, populated by approximately 9.7 million people using more than
2.1 million phone lines, and that these buildings represent an aggregate local
exchange service market exceeding $3.3 billion per annum. These estimates do not
include multi-dwelling residential buildings, universities, hospitals or
buildings occupied by a single tenant, and account only for voice lines and not
data lines.
Strategy
By exploiting its Wireless Fiber capabilities, the Company seeks to become
a leading provider of integrated telecommunications services in the United
States. Key elements of the Company's strategy include:
5
<PAGE>
Accelerating Rollout of CLEC Services and Leveraging of Wireless Fiber
Capabilities. The Company has commenced offering local exchange services on a
limited, resale basis in New York City and it is anticipated that the Company
will begin offering such services in a number of additional cities during the
next nine months. As the Company commences its CLEC business in each city, in
order to gain initial market penetration in that city, it intends to initially
resell the local exchange services of other service providers, such as other
CLECs and the incumbent LECs, until it has established the Wireless Fiber and
switch-based infrastructure required to provide its own local exchange services
in that city. The Company currently intends to install approximately 17 main
switches and 24 remote nodes during the next three years and plans to install
its first main switch in New York City in October 1996. In July 1996, the
Company entered into a three-year agreement with Lucent Technologies Inc.
("Lucent") allowing the Company to purchase the switching systems and related
equipment and software it will need to build its CLEC infrastructure. Under the
agreement, switches will be provided to the Company at discounted prices so long
as the Company purchases certain minimum numbers of switches during each year of
the agreement. The Company is hiring sales and marketing personnel to commence
marketing efforts that primarily will target businesses located in those
buildings in which the Company's Wireless Fiber services can be utilized for
rapid, cost-effective, high-capacity linkage to fiber-based networks. By
utilizing its Wireless Fiber services to originate and terminate customer
traffic without connecting to end users through the extension of fiber-optic
lines or using the facilities of the LECs, the Company believes that it will be
able to provide many types of bundled local exchange, long distance, Internet
access, enhanced communications and information services to its target customers
at lower cost than many of its competitors, with equal or better quality.
Continuing to Market CAP Services to Other Telecommunications Providers.
The Company is continuing to target other telecommunications service providers
in marketing its Wireless Fiber-based local access services. The Company
believes that its Wireless Fiber services present an attractive, economical
vehicle for other telecommunications service providers to extend their own
networks and service territories, especially as they seek to rapidly penetrate
new markets opening up to them as a result of the Telecommunications Act. By
having its Wireless Fiber services packaged with the service offerings of other
telecommunications providers or utilized as a seamless component of such
providers' own telecommunications networks, the Company also hopes to leverage
the marketing and distribution capabilities of such providers. The Company
currently offers its Wireless Fiber services to long distance carriers; other
CAPs and CLECs; providers of personal communications services ("PCS") and
cellular and specialized mobile radio services (collectively "CMRS providers");
LECs and end users. The Company also markets its Wireless Fiber services to
telecommunications service providers as viable, cost-efficient alternate routes
for their telecommunications traffic in situations where primary routes are
incapacitated and/or network reliability concerns require alternate
telecommunications paths.
Providing Wireless Internet Access and Private Network Services. The
Company is marketing its Wireless Fiber services to take advantage of the
characteristics that make it an attractive solution for entities seeking
cost-effective, high capacity Internet access and private voice and data network
services. The total amount of bandwidth of each 38 GHz channel is 100 MHz, which
supports high broadband capability. One Wireless Fiber DS-3 link provides
transfer rates which are over 1,500 times the rate of the fastest dial-up modem
currently in use and over 350 times the rate of the fastest ISDN line currently
in use. In addition to accommodating standard voice and data requirements,
Wireless Fiber services can allow end users to receive real time, full motion
video and 3-D graphics and to utilize highly interactive applications on the
Internet and other networks. The Company offers its Wireless Fiber services to
businesses, government agencies and institutions with multiple locations that
seek to establish their own independent local telecommunications systems for
dedicated private line voice and data networks, including LAN and WAN
applications. The Company also recently established its first major relationship
with an Internet service provider (as described below under "-- Recent
Developments -- Agreement with Digex") and is actively pursuing relationships
with additional Internet service providers.
6
<PAGE>
Exploiting First to Market and Leading Spectrum Holder Advantages. The
Company currently enjoys a "first-to-market" advantage as one of the few holders
of 38 GHz licenses with an established operating and management infrastructure
and the capital necessary to rapidly exploit and roll out its 38 GHz services on
a commercial basis. The Company believes that its competitive advantage is
further strengthened by its position as the holder of the largest aggregate
amount of 38 GHz bandwidth capacity in the United States and by the broad
geographic scope allocated under its Wireless Licenses. The Company holds 43
Wireless Licenses, 30 of which provide for 400 MHz of bandwidth capacity per
licensed area and 13 of which provide for 100 MHz of bandwidth capacity per
licensed area, and which allow the Company to address an aggregate of more than
400 million channel pops (i.e, the aggregate population in the areas covered by
the Wireless Licenses multiplied by the aggregate number of 100 MHz channels
allocated under those licenses). Based on existing and proposed FCC regulations,
the Company believes that it will be difficult, in the near term, for other
entities seeking to provide wireless local telecommunications services similar
to those of the Company to obtain the aggregate bandwidth capacity and
widespread geographic coverage afforded to the Company under its Wireless
Licenses.
Expanding and Improving the Company's Long Distance Operations. The
Company is seeking to expand and improve its long distance operations by (i)
bundling its resale of long distance services with its local telecommunications
services, (ii) broadening its business customer base and increasing customer
retention rates, (iii) improving operating efficiencies by reducing costs
associated with the provision of its long distance services, (iv)
differentiating its long distance services, most notably, in the near term,
through the use of less complicated billing systems, (v) using intelligent
network platforms for the provision of enhanced telecommunications services, and
(vi) acquiring and integrating customer bases from other telecommunications
providers. The Company also anticipates that it will be able to leverage upon
the billing systems and intelligent network platforms developed in connection
with its long distance services to enhance the marketability of its local
telecommunications services.
Acquiring Content to Complement Telecommunications Service Offerings. The
Company believes that, over time, participants in the telecommunications market
increasingly will seek to offer "content" -- from information programming,
sports, weather, business and stock market information to music, films and
literature -- to differentiate their services and attract traffic onto their
transmission networks and that the ability to deliver entertainment and
information content to consumers will play an increasingly important role in
consumers' choice of a telecommunications provider. Accordingly, as a complement
to its telecommunications service offerings, the Company produces and
distributes information and entertainment content, focusing on niche programming
such as documentaries, foreign films and multimedia sports programming. The
Company believes that, in the future, it will be able to bundle proprietary
content that it controls with various telecommunications services it offers to
provide higher-margin products and services.
Pending Acquisition of Milliwave
In June 1996, the Company entered into certain agreements to acquire (the
"Milliwave Acquisition") all of the outstanding partnership interests in
Milliwave Limited Partnership ("Milliwave"), a holder of 38 GHz licenses (the
"Milliwave Licenses") that allow for the provision of services in more than 80
major markets, encompassing an aggregate population of greater than 160 million.
The purchase price for the Milliwave Merger will be $40 million in cash and 3.4
million shares of Common Stock (which had an aggregate market value of $85
million based on a $25 per share market price at the time the Milliwave Merger
Agreement was executed). The number of shares to be issued in connection with
the Milliwave Merger is subject to upward or downward adjustment depending on
the average market price of the Common Stock for the ten trading days prior to
the consummation of the transaction (i.e., upward adjustment if the average
price is below $22.06 per share and downward adjustment if the average price is
above $27.94 per share); provided that the Company may determine not to
consummate the transaction if the adjustment results in the Company being
7
<PAGE>
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 no revenues to date. The agreements
provide for the Company to assist in the development and management of the
Milliwave Licenses during the interim period prior to the consummation of the
Milliwave Acquisition. Upon consummation of the Milliwave Acquisition, Dennis
Patrick, Chief Executive Officer of Milliwave and former Chairman of the FCC, is
expected to join the Company's Board of Directors.
The Company expects that the Milliwave Acquisition will expand its
geographic coverage, provide additional capacity in existing markets, provide
economies of scale and permit the Company to achieve greater network efficiency.
The following chart sets forth the change in the Company's Wireless License
asset base after giving effect to the consummation of the Milliwave Acquisition:
WinStar
WinStar Milliwave Pro Forma
------- --------- ---------
Population Coverage (millions).......... 109 160 170(1)
Channel Pops (millions)................. 413 160 573
Licensed Areas with Multiple Channels... 30 0 39(2)
- ----------
(1) Pro forma population coverage is not additive because of overlapping
licensed areas.
(2) Milliwave has only one channel in each of its licensed areas; however,
when combined with WinStar, the overlapping single channel licensed areas
increase WinStar's pro forma multiple channel coverage by nine licensed
areas, bringing the aggregate population covered by multiple channels to
over 100 million.
Other Recent Developments
In furtherance of its strategy, the Company recently has accomplished the
following:
Commencement of Rollout of CLEC Services. In April 1996, the Company
commenced providing local exchange services to customers in New York City. The
Company also commenced a program designed to obtain, by the end of 1999,
authorization to operate as a CLEC in substantially all of the states where the
Company has Wireless Licenses. The Company currently is authorized to operate as
a CLEC in California, Connecticut, Florida, Georgia, Illinois, Massachusetts,
Michigan, New York, Pennsylvania, Tennessee, Texas, Washington and Wisconsin; is
in the process of seeking authorization to operate as a CLEC in several
additional states; and intends to seek such authorization in a number of
additional states. It also is in the process of negotiating interconnection
agreements with various local exchange service providers, including incumbent
LECs, under which the Company will obtain services on an unbundled basis. The
Company has entered into a number of interconnection agreements for states that
encompass various cities covered by the Wireless Licenses. These agreements are
with carriers such as Ameritech Corp. ("Ameritech") for Illinois, Pacific Bell
("PacBell"), GTE Telecommunications ("GTE") for California, NYNEX for New York
and Massachusetts, and Bell South for Florida, Georgia and Tennessee, among
others.
8
<PAGE>
Prequalification of Wireless Fiber Link Sites. In connection with the
development of its Wireless Fiber capacity for both its CAP and CLEC businesses,
the Company has been following a plan pursuant to which it seeks to negotiate,
prior to receipt of actual service orders, roof rights ("Roof Rights") for the
installation of Wireless Fiber links on buildings specifically identified by
existing and potential customers in the metropolitan areas covered by the
Wireless Licenses, including buildings that can provide interconnection access
to long distance carriers' points of presence ("POPs"), switch locations and
local access nodes.
Establishment of New Relationships with Other Service Providers and
Customers. In addition to an existing master service agreement with Electric
Lightwave, the Company recently has entered into master service agreements with
each of MCImetro, ICG and Century Telephone. The master service agreements
contemplate that the carriers will utilize Wireless Fiber services as a
component of their own networks and set forth the general terms of the
relationship between the Company and each carrier, including the initial term of
the relationship, basic pricing schedules and service and installation
parameters. The Company also recently began to provide Wireless Fiber services
to the City of New York as a back-up disaster recovery system for certain of its
facilities, providing it with redundancy in the event that the city's land-based
telecommunications service fails for any reason.
Agreement with Digex. In June 1996, the Company entered into a six-year
agreement ("Digex Agreement") with Digex, Inc. ("Digex"), a provider of Internet
access services that primarily serves commercial, governmental and institutional
end users as well as Internet access resellers. Pursuant to the Digex Agreement,
the Company has the right of first refusal to provide all of Digex's local
access and/or customer interconnection requirements through the use of the
Company's Wireless Fiber services or the resale of other facilities, as
appropriate. The Company also will purchase from Digex, during the next six
years, a minimum of $5 million of Internet access services with the right to
purchase additional amounts, in each case on a discounted basis. The Company
intends to resell these Internet access services under the Company's own brand
name, including through the bundling of such services with the Company's other
telecommunications services.
Pending Acquisition of Locate. In April 1996, the Company entered into an
agreement to acquire (the "Locate Acquisition") the assets of Local Area
Telecommunications, Inc. ("Locate") comprising its business as a CAP providing
microwave-based local access services to corporations and long distance and
other common carriers (the "Locate Business"), for a purchase price of $17.5
million. The Locate Acquisition is subject to certain regulatory approvals, but
is expected to be consummated in the last quarter of 1996. Among Locate's key
assets are two 38 GHz licenses, each providing 100 MHz of bandwidth, for the New
York City metropolitan area, including Long Island and Northern New Jersey. In
addition, Locate, together with its existing customers, has access to the roofs
of numerous buildings, including the World Trade Center and other key sites in
New York City, which the Company anticipates using in its CAP and CLEC
operations. As part of the Locate Acquisition, the Company also will acquire
from Locate certain link-specific licenses for the provision of point-to-point
services in other portions of the radio spectrum, including, among others, 10,
12, 16 and 18 GHz.
Pending Acquisition of Pinnacle. In June 1996, the Company entered into an
agreement to acquire the outstanding equity interests of Pinnacle Nine
Communications, LLC, which is the holder of three 38 GHz licenses providing for
100 MHz of bandwidth in each of Baltimore, Dallas and Philadelphia. The
acquisition of the equity interests is subject to obtaining applicable
regulatory approvals and is expected to be consummated once the required
regulatory approvals have been received.
Acquisition of Content and Information Providers. In April 1996, the
Company acquired an 80% equity interest in Fox/Lorber Associates, Inc.
("Fox/Lorber"), an independent distributor of films, entertainment series and
documentaries in the television and home video markets. Also, since April 1996,
the Company
9
<PAGE>
has acquired an 80% equity interest in The Winning Line, Inc. ("TWL"), which
operates the SportsFan Radio Network ("SportsFan"). SportsFan is a multimedia
sports programming and production company which provides live sports programming
to more than 200 sports and talk format radio stations across the United States,
up to 24 hours a day, including to stations in 90 of the top 100 United States
markets. SportsFan owns and operates The Pete Rose Show and The Bob Golic Show,
among others, and also has interests in television and on-line distribution
channels. In June 1996, the Company entered into an agreement with Source Media
Inc. ("Source Media"), a provider of interactive technology and programming.
Pursuant to this agreement, the Company has the exclusive right, in the 38 GHz
spectrum, to use Source Media's technology and programming in connection with
entertainment and information services the Company may offer.
Other Business
Prior to the Company's entry into the telecommunications industry, it
marketed and distributed consumer products, including personal care and bath and
beauty products, through a subsidiary acquired in 1992. The Company continues to
sell such products, primarily to large retailers, mass merchandisers, discount
stores, department stores, national and regional drug store chains and other
regional chains.
Corporate Information
The Company was incorporated under the laws of the State of Delaware in
September 1990. Its principal offices are located at 230 Park Avenue, New York,
New York 10169 and its phone number is (212) 687-7577.
Financing Plan
In October 1995, to finance the initial rollout of its CAP business, the
Company raised net proceeds of $214.5 million from a private placement ("1995
Debt Placement") of units, each unit consisting of two 14% Senior Discount Notes
due 2005 ("Senior Notes") and one Convertible Note. The passage of the
Telecommunications Act has resulted in opportunities that have caused the
Company to accelerate the development and expansion of its telecommunications
businesses. To capitalize on these opportunities, the Company has undertaken an
expanded capital expenditure program and intends to make significant capital
expenditures during the remainder of 1996 and 1997. Management anticipates,
based on current plans and assumptions relating to its operations, that the
Company's existing financial resources (including proceeds raised in the 1995
Debt Placement) and equipment financing arrangements which the Company intends
to seek, will be sufficient to fund the Company's growth and operations for
approximately 16 to 24 months from the date of this Prospectus. After such time,
the Company will be required to obtain additional sources of significant
capital. In the event the Company's plans or assumptions change or prove to be
inaccurate, or if the Company consummates any acquisitions of businesses or
assets (including additional 38 GHz licenses, by auction or otherwise), the
Company may be required to seek additional sources of capital sooner than
currently anticipated. See "Use of Proceeds" and "Risk Factors -- Significant
Capital Requirements" and "-- Risks Related to CLEC Strategy; Anticipated
Initial Negative Operating Margins in CLEC Business."
THE OFFERING
Common Stock offered by the
Company..................................................... 7,133,000 shares
Common Stock offered by Selling
Stockholders................................................ 2,216,922 shares
10
<PAGE>
Proceeds.......................... The Company will not derive any cash proceeds
from the issuance of Common Stock upon
conversion of the Convertible Notes, but will
immediately retire, without the payment of
any additional consideration, the debt
attributable to the Convertible Notes
converted. The Company will not derive any
cash proceeds from the sale of Common Stock
by the Selling Stockholders.
Conversion Ratio.................. The Convertible Notes are convertible, at the
option of the holder, into that number of
shares of Common Stock of the Company equal
to the Accreted Value of the Convertible
Notes being converted (on the date of
conversion) divided by $20.625, subject to
adjustment in certain events (the "Conversion
Ratio"). Accordingly, the number of shares of
Common Stock issuable upon conversion of the
Convertible Notes will increase as the
Accreted Value of the Convertible Notes
increases. On October 23, 1996, the date on
which the Convertible Notes are first
convertible, the aggregate Accreted Value of
the Convertible Notes will be approximately
$85.88 million, which would be convertible
into an aggregate of approximately 4,164,000
shares of Common Stock. Immediately prior to
maturity in October 2005, assuming no
Convertible Notes have yet been converted,
the aggregate Accreted Value of the
Convertible Notes will be approximately
$147.1 million, which will be convertible
into an aggregate of approximately 7,133,000
shares of Common Stock.
Mandatory Conversion.............. If the closing sale price of the Common Stock
on the Nasdaq National Market during any
period described below has exceeded the price
for such period referred to below for at
least 30 consecutive trading days ("Market
Criteria," with the 30-day period being
referred to as the "Market Criteria Period"),
all of the Convertible Notes will be
11
<PAGE>
automatically converted into that number of
shares of Common Stock derived by application
of the Conversion Ratio at the close of
business on the last day of the Market
Criteria Period; provided, however, that if
the Market Criteria is satisfied prior to
October 23, 1996, the conversion will not
occur until such date and will occur only if
the closing sale price of the Common Stock is
at least $37.50 on such date:
Number of
Shares
Issuable
if Closing
Price Met
12 Months Closing (as of last
Beginning Sale Price day of period)
---------------- ---------- --------------
October 15, 1995 $37.50 3,636,378
October 15, 1996 $39.13 4,150,725
October 15, 1997 $40.75 4,752,224
October 15, 1998 $42.38 5,440,802
October 15, 1999 $44.00 6,229,155
Common Stock Nasdaq National
Market Symbol................... WCII
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<PAGE>
SUMMARY FINANCIAL DATA
The summary financial data presented below, as of and for the two years
ended February 28, 1994 and 1995 and for the ten months ended December 31, 1995,
have been derived from the Company's audited financial statements and the
summary financial data presented below as of and for the six months ended June
30, 1995 and 1996 and the ten months ended December 31, 1994 have been derived
from unaudited consolidated financial statements of the Company included
elsewhere in this Prospectus. In the opinion of management, the unaudited
financial statements have been prepared on the same basis as the audited
financial statements and include all adjustments, which consist only of normal
recurring adjustments, necessary for a fair presentation of the financial
position and the results of operations for these periods. This data should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the pro forma and historical
consolidated financial statements, including the notes thereto, appearing
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
Ten Months Ended
December 31, Six Months Ended June 30,
--------------------------------------- ------------------------------------
Actual Actual
----------------- ----------------
Year Ended Pro Forma Pro
February 28, As Pro Forma
-------------- Pro Forma Adjusted Forma As
1994 1995 1994 1995 1995(1)(2) 1995(3) 1995 1996(4) 1996(1) Adjusted(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 $ 4,553 $ 20,573 $ 23,102 $ 23,102
Information services .. -- 474 193 2,648 10,308 10,308 2,052 3,423 6,171 6,171
Merchandising ......... 7,120 10,182 8,405 13,987 13,987 13,987 5,835 6,688 6,688 6,688
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total net sales ..... 15,625 25,565 22,018 29,771 43,561 43,561 12,440 30,684 35,961 35,961
Operating income (loss):
Telecommunications .... (744) (3,423) (2,067) (6,945) (10,599) (10,599) (2,140) (9,027) (10,569) (10,569)
Information Services .. -- (117) (115) 238 (1,154) (1,154) 284 (365) (880) (880)
Merchandising ......... 223 307 329 756 756 756 115 (163) (163) (163)
General corporate ..... (1,547) (2,378) (1,609) (3,861) (3,861) (3,861) (1,979) (6,249) (6,249) (6,249)
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total operating loss (2,068) (5,611) (3,462) (9,812) (14,858) (14,858) (3,720) (15,804) (17,861) (17,861)
Interest expense ........ 744 637 505 7,630 30,966 21,624 430 18,015 18,862 13,252
Interest income ......... (109) (385) (297) (2,890) (2,902) (2,902) (294) (5,658) (4,634) (4,634)
Other expenses, net ..... 5,687 1,367 948 1,305 988 988 1,253 654 860 860
Net loss ................ (8,195) (7,230) (4,618) (15,857) (43,910) (34,569) (5,109) (28,815) (32,949) (27,338)
Net loss per common share (1.06) (0.42) (0.28) (0.70) (1.64) (1.14) (.25) (1.05) (1.07) (.79)
Weighted average common
shares outstanding .... 7,719 17,122 16,609 22,770 26,812 30,449 20,184 27,468 30,910 34,643
Other Financial Data:
Capital expenditures .... 307 1,816 1,465 8,652 12,310 12,310 1,023 10,405 10,469 10,469
EBITDA(6) ............... (1,845) (5,179) (3,116) (8,952) (11,554) (11,554) (3,401) (13,145) (13,922) (13,922)
As of June 30, 1996
--------------------------------------
(In thousands)
Pro Forma
Actual Pro Forma(7) As Adjusted(8)
------ ------------ --------------
Balance Sheet Data:
Cash, cash equivalents and
short term investments .............. $ 191,061 $155,846 $155,846
Property and equipment, net ........... 25,788 34,808 34,808
Total assets .......................... 289,345 392,782 388,292
Current portion of long-term debt
and capital lease obligations ....... 10,287 27,842 27,842
Long-term debt and capital lease
obligations, less current
portion and discount ................ 256,110 256,344 173,986
Stockholders' equity (deficit) ........ (790) 84,210 162,078
</TABLE>
(footnotes on next page)
13
<PAGE>
- ----------
(1) Gives effect to the acquisitions of Milliwave, Locate, Fox/Lorber
Associates, Inc., a producer and distributor of entertainment and
information programming ("Fox/Lorber"), The Winning Line, Inc., a producer
of radio sports programming ("TWL"), and Avant-Garde Telecommunications,
Inc., the original holder of many of the Wireless Licenses
("Avant-Garde"), and financings thereof, a financing (the "Everest
Financing") provided to the Company by Everest Capital Limited and certain
of its affiliates (as described under "Description of Certain
Indebtedness") and the issuance of the Senior and Convertible Notes as if
they occurred as of the beginning of the respective periods. See notes 2,
8, 17, 18 and 28 to the Consolidated Financial Statements. Excludes the
Pinnacle Acquisition because of its immaterial effect on the pro forma
amounts. Milliwave, Locate, Pinnacle and Avant-Garde have not generated
material revenues to date. Assumes the issuance of 3.4 million shares of
Common Stock in connection with the Milliwave Acquisition.
(2) On a pro forma basis giving effect to the acquisitions and financings
described in footnote (1) above (collectively, the "Transactions"), pro
forma sales, operating loss, interest expense, net loss and negative
EBITDA for the twelve months ended December 31, 1995 amounted to $49.4
million, $16.1 million, $37.3 million, $51.5 million and $12.2 million,
respectively.
(3) Adjusted to reflect the acquisitions and financings described in footnote
(1) and the issuance of the Common Stock in this Offering and the
resulting retirement of debt, as if they occurred at the beginning of the
respective periods.
(4) In the first six months of 1996, the Company settled a dispute with
another carrier regarding the unauthorized switching of the Company's
customers to the other carrier. The Company recognized revenue of
approximately $1.5 million and cost of sales of approximately $850,000 in
connection with this settlement, the majority of which related to minutes
of use during that period.
(5) The Company has generated nominal revenues from its Wireless Fiber
services.
(6) EBITDA consists of loss before interest, income taxes, depreciation and
amortization and other income and expense. EBITDA is provided because it
is a measure commonly used in the telecommunications industry. It is
presented to enhance an understanding of the Company's operating results
and is not intended to represent cash flow or results of operations in
accordance with generally accepted accounting principles for the periods
indicated. See the Company's consolidated financial statements contained
elsewhere in this Prospectus.
(7) Gives effect to the acquisitions of Milliwave and Locate and financings
thereof as if they occurred on June 30, 1996. Excludes the Pinnacle
Acquisition because of its immaterial effect on the pro forma amounts.
(8) Adjusted to reflected the acquisitions and financings of Milliwave and
Locate and the financings thereof and the issuance of Common Stock in
this Offering and the resulting retirement of debt, as if they occurred
on June 30, 1996.
14
<PAGE>
RISK FACTORS
An investment in the Common Stock involves a significant degree of risk.
In determining whether to make an investment in the Common Stock, prospective
investors should consider carefully all of the information set forth in this
Prospectus and, in particular, the following risk factors.
Historical and Anticipated Future Net and Operating Losses and Negative EBITDA
The Company has incurred significant operating and net losses attributable
in substantial part to the development of its telecommunications businesses. The
Company historically has had net losses and negative EBITDA, including a net
loss and negative EBITDA of approximately $15.9 million and $9.0 million,
respectively, for the ten months ended December 31, 1995, and $28.8 million and
$13.1 million, respectively, for the six months ended June 30, 1996. The Company
has been offering local access services as a CAP only since December 1994, and
local exchange services as a CLEC only since April 1996, and has made and is
making significant expenditures in the development of its wireless local
telecommunications services operations, including expenditures associated with
establishing an operating infrastructure and introducing and marketing its
telecommunications services. The Company expects to continue to incur
significant and increasing operating and net losses and to generate increasingly
negative EBITDA while it develops and expands its telecommunications businesses
and until such time that it establishes a sufficient revenue-generating customer
base. As a result of expected lower telecommunications revenues and increased
expenses, principally relating to an increase in the number of employees, in
connection with the rollout of CLEC services, there will be substantial
increases in the Company's net loss, operating loss and negative EBITDA in the
third quarter of 1996 as compared to prior quarters and for 1996 and 1997 as
compared to prior years. There can be no assurance that the Company will achieve
or sustain positive EBITDA or profitability or at any time have sufficient
financial resources to make principal and interest payments on its outstanding
debt. In addition, if the Company does not achieve and sustain positive EBITDA
and profitability, the value of the Common Stock may be adversely affected. See
"-- Competition -- Long Distance Market," "Selected Financial Data" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Risks Related to CLEC Strategy; Anticipated Initial Negative Operating Margins
in CLEC Business
The Company is pursuing an aggressive strategy to enter the local exchange
services market as a CLEC in the metropolitan areas in which it has Wireless
Licenses and to develop and obtain the facilities necessary to provide its own
local exchange services. The Company has virtually no experience providing local
exchange services and there can be no assurance that the Company's CLEC strategy
will be successful. In addition, local exchange service providers have never
utilized 38 GHz wireless-based systems as a significant segment of their local
exchange services facilities and there can be no assurance that the Company will
be successful in implementing its Wireless Fiber-based system. The Company's
CLEC strategy is subject to risks relating to: the receipt of necessary
regulatory approvals; the negotiation of resale agreements with LECs and other
CLECs; the negotiation of interconnection agreements with RBOCs and other
incumbent LECs; the ability of third-party equipment providers and installation
and maintenance contractors to meet the Company's accelerated switch and remote
node rollout schedule; the recruitment of additional personnel in a timely
manner, so as to be able to attract and service new customers but not incur
excessive personnel costs in advance of the rollout; the Company's ability to
attract and retain new customers and to deliver high quality services; the
potential adverse reaction to the Company's services by the Company's carrier
customers, who may view the Company as a competitor; and the Company's ability
to manage the simultaneous implementation of its plan in multiple markets. The
Company currently does not have any local exchange services facilities in place,
but plans to install its first main switch in New York in October 1996. The
Company commenced marketing of its local exchange services in April 1996 and
currently offers such services only in New York City and only on a resale basis.
The Company currently is generating revenues from its CLEC operations that are
insignificant. The Company does not expect significant revenues from its
15
<PAGE>
CLEC business during 1996. As a new participant in the CLEC business, without an
existing infrastructure or recognized brand name, the Company may need to offer
lower prices than its competitors to attract customers.
Although the Company's initial implementation of its CLEC strategy often
will entail the resale of the facilities and services of other service
providers, which itself is dependent on the negotiation and availability of
satisfactory resale arrangements, the principal component of the Company's CLEC
strategy will require significant capital investment related to the purchase and
installation of numerous main switches and remote nodes and the interconnection
of these facilities to customers' buildings and other local networks, including
through the installation of Wireless Fiber links and build out of other facility
infrastructure, in advance of generating material revenues.
As the Company rolls out its CLEC operations, it anticipates experiencing
negative operating margins while it develops its facilities. After initial
rollout of its CLEC services in a particular city, the Company expects operating
margins for such operations to improve only when and if (i) sales efforts result
in sufficiently increased volumes of traffic originated and terminated over the
Company's Wireless Fiber facilities instead of LEC or other CLEC facilities and
(ii) higher margin-enhanced services are provided to and accepted by customers.
While the Company believes that the unbundling and resale of LEC services and
the implementation of local telephone number portability, which are mandated by
the Telecommunications Act, will reduce the Company's costs of providing local
exchange services and facilitate the marketing of such services, there can be no
assurance that the Company's CLEC operations will become profitable due to,
among other factors, lack of customer demand, competition from other CLECs and
pricing pressure from the LECs and other CLECs. The Company does not expect to
generate significant revenues from its CLEC business during 1996. The Company's
failure to implement its CLEC strategy successfully would have an adverse effect
on the value of the Common Stock. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Business -- Strategy for
Telecommunications Business Growth" and "-- Telecommunications Services -- CLEC
Services."
Negative Operating Margins in the Initial Provision of Wireless Fiber-Based CAP
Services
The Company has experienced negative operating margins in connection with
the development and initial provision of its Wireless Fiber-based CAP services
and expects to continue to experience negative operating margins until it
develops a revenue-generating customer base sufficient to fund operating
expenses attributable to the provision of such services. In order to demonstrate
the efficacy of Wireless Fiber, the Company often provides complementary service
on a trial basis for a limited period. The Company expects to improve operating
margins in the provision of its CAP services over time by (i) obtaining
appropriate sites for its operations, (ii) acquiring and retaining an adequate
customer base, (iii) placing telecommunications traffic of new customers and
additional telecommunications traffic of existing customers across Wireless
Fiber links, (iv) inducing providers of telecommunications services to utilize
and market the Company's Wireless Fiber services as part of their own networks,
systems and services, thereby reducing the Company's related marketing costs and
(v) taking advantage of recent procompetitive regulatory initiatives and changes
that permit the Company to provide additional local telecommunications services,
thereby facilitating the marketability of higher-margin enhanced and premium
services utilizing the Company's Wireless Fiber capabilities. If the Company
fails to accomplish any of the foregoing, particularly acquiring and retaining
an adequate customer base, it will not be able to improve the operating margins
of its CAP business. There can be no assurance that the Company will be able to
achieve or sustain positive operating margins. Failure to achieve positive
operating margins would have an adverse effect on the value of the Common Stock.
For a discussion of factors that affect results described in the forward-looking
statements contained in this paragraph, see "-- Competition," "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Business -- Competition in the Telecommunications Industry" and "--
Telecommunications Services -- CAP Services -- Marketing."
16
<PAGE>
Risks Associated with Rapid Expansion and Acquisitions
The Company intends to pursue a strategy of aggressive and rapid growth,
including the accelerated rollout of its CLEC services, acquisitions of
businesses and assets, continued aggressive marketing of its CAP services and
the hiring of additional management, technical and marketing personnel, all of
which will result in significantly higher operating expenses. Rapid expansion of
the Company's operations may place a significant strain on the Company's
management, financial and other resources. The Company's ability to manage
future growth, should it occur, will depend upon its ability to monitor
operations, control costs, maintain effective quality controls and significantly
expand the Company's internal management, technical and accounting systems. Any
failure to expand these areas and to implement and improve such systems,
procedures and controls in an efficient manner at a pace consistent with the
growth of the Company's business could have a material adverse effect on the
Company's business, financial condition and results of operations and the value
of the Common Stock. As part of its strategy, the Company may acquire
complementary assets or businesses and may use a portion of the proceeds from
the Offerings for such acquisitions. The pursuit of acquisition opportunities
will place significant demands on the time and attention of the Company's senior
management and will involve considerable financial and other costs with respect
to identifying and investigating acquisition candidates, negotiating acquisition
agreements and integrating the acquired businesses with the Company's existing
operations. Employees and customers of acquired businesses may sever their
relationship with such businesses during or after the acquisition. There can be
no assurance that the Company will be able to successfully consummate any
acquisitions or integrate any business or assets which it may acquire into its
operations. See "Use of Proceeds" and "Business -- Strategy for
Telecommunications Business Growth."
Substantial Indebtedness; Ability to Service Indebtedness
The Company has significant indebtedness and interest expense as a result
of the 1995 Debt Placement. At June 30, 1996, on a pro forma basis giving effect
to the Transactions, the Company would have had, on a consolidated basis,
approximately $284.3 million of indebtedness, including capitalized lease
obligations. The accretion of original issue discount on the Senior and
Convertible Notes will significantly increase the Company's liabilities (except
to the extent that the Convertible Notes are converted to Common Stock). At June
30, 1996, on a pro forma as adjusted basis giving effect to the issuance of the
Common Stock offered hereby and the resulting retirement of the Convertible
Notes (assuming conversion of all such Notes), the Company would have had, on a
consolidated basis, approximately $202.0 million of indebtedness. The indentures
related to the Senior and Convertible Notes ("Indentures") limit, but do not
prohibit the incurrence of additional indebtedness by the Company and
subsidiaries. Additionally, the Indentures do not limit the amount of
indebtedness that may be incurred by the Company's new media and consumer
products subsidiaries.
The level of the Company's indebtedness could have important consequences,
including the following: (i) the ability of the Company to obtain any necessary
financing in the future for working capital, capital expenditures, debt service
requirements or other purposes may be limited; (ii) a substantial portion of the
Company's cash flow from operations, if any, must be dedicated to the payment of
principal and interest on its indebtedness and other obligations and will not be
available for use in the Company's business; (iii) the Company's level of
indebtedness could limit its flexibility in planning for, or reacting to changes
in, its business; (iv) the Company is more highly leveraged than many of its
competitors, which may place it at a competitive disadvantage; and (v) the
Company's high degree of indebtedness could make it more vulnerable in the event
of a downturn in its business or if operating cash flow does not significantly
increase.
The Company had net losses and negative EBITDA during the ten months ended
December 31, 1995 (and prior fiscal years) and the first six months of 1996 and
management anticipates that such net losses and negative EBITDA will continue
(and increase) in the foreseeable future. For the same periods, on a pro forma
basis after giving effect to the Transactions, the Company's earnings before
fixed charges would have been
17
<PAGE>
insufficient to cover fixed charges by approximately $43.9 million and $32.8
million, respectively. In addition, for the same periods on the same pro forma
basis, the Company's EBITDA minus capital expenditures and interest expense
would have been negative $54.8 million and negative $43.3 million, respectively.
As the Company expands its operations, it expects to continue to experience
increasing net and operating losses and negative EBITDA. There can be no
assurance that the Company will be able to attain profitability or positive
EBITDA or that the Company will be able to meet its debt service obligations. If
the Company's cash flow is inadequate to meet its obligations or fund its
operations, the Company could face substantial liquidity problems. If the
Company is unable to generate sufficient cash flow or otherwise obtain funds
necessary to make required payments or, if the Company otherwise fails to comply
with the material terms of its indebtedness, it would be in default thereunder,
which would permit the holders of such indebtedness to accelerate the maturity
of such indebtedness and could cause defaults under other indebtedness of the
Company, including the Notes. Such defaults would adversely affect the market
price of the Common Stock. The ability of the Company to meet its obligations
will be dependent upon the future performance of the Company, which will be
affected by prevailing economic conditions and to financial, business and other
factors, including factors beyond the control of the Company. See "Description
of Certain Indebtedness."
Competition
The Company is subject to intense competition in each of the areas in
which it operates. Many of the Company's competitors have longer-standing
relationships with customers and suppliers in their respective industries,
greater name recognition and significantly greater financial, technical and
marketing resources than the Company.
Local Telecommunications Market. The local telecommunications market is
intensely competitive and currently is dominated by the RBOCs and LECs. The
Company has been marketing local access services as a CAP only since December
1994 and local exchange services as a CLEC only since April 1996, and the
Company has not obtained a significant market share in any of the areas where it
offers such services, nor does it expect to do so given the size of the local
telecommunications services market, the intense competition and the diversity of
customer requirements. In each area covered by the Wireless Licenses, the
services offered by the Company compete with those offered by the LECs, such as
the RBOCs, which currently dominate the provision of local services in their
markets. The LECs have long-standing relationships with their customers, have
the ability to subsidize competitive services with revenues from a variety of
other services and benefit from existing state and federal regulations that
currently favor the LECs over the Company in certain respects. While legislative
and regulatory changes have provided increased business opportunities for
competitive telecommunications providers such as the Company, these same
decisions have given the LECs increased flexibility in their pricing of
services. This may allow the LECs to offer special discounts to the Company's
(and other CLECs') customers and potential customers. Further, as competition
increases in the local telecommunications market, the Company anticipates that
general pricing competition and pressures will increase significantly. As LECs
lower their rates, other telecommunications providers will be forced by market
conditions to charge less for their services in order to compete, which could
have an adverse effect on the Company and on the value of the Common Stock.
In addition to competition from the LECs, the Company also faces
competition from a growing number of new market entrants, such as other CAPs and
CLECs, competitors offering wireless telecommunications services, including
leading telecommunications companies, such as AT&T Wireless, and other entities
that hold or have applied for 38 GHz licenses or which may acquire such licenses
or other wireless licenses from others or the FCC. There is at least one other
CAP and/or CLEC in each metropolitan area covered by the Company's Wireless
Licenses, including, in many such areas, companies such as American
Communications Services, Inc. ("ACSI"), IntelCom, ICG, Brooks Fiber Properties
("Brooks Fiber"), MCImetro, MFS Communications Company, Inc. ("MFS"), Teleport
and Time Warner, Inc. ("Time Warner"). Many of these entities (and the LECs)
already have existing infrastructure which allows them to provide local
telecommunications services with lower marginal costs than the Company can
currently attain and which could
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allow them to exert significant pricing pressure in the markets where the
Company provides or seeks to provide telecommunications services. In addition,
many CAPs and CLECs have acquired or plan to acquire switches in order to offer
a broad range of local telecommunications services.
The Company currently faces or anticipates facing competition from other
entities which offer, or are licensed to offer, 38 GHz services, such as
Advanced Radio Telecom Corp. ("ART") and BizTel Communications, Inc. ("BizTel"),
and could face competition in certain aspects of its existing and proposed
businesses from competitors providing wireless services in other portions of the
radio spectrum, such as CAI Wireless Systems, Inc. ("CAI"), a provider of
wireless Internet access services, CellularVision USA, Inc. ("CellularVision"),
a provider of wireless television services which, in the future, also may
provide wireless Internet access and other local telecommunications services,
and Associated Communications LLC ("Associated"), a provider of wireless CAP and
other services. In many instances, these service providers hold 38 GHz licenses
or licenses for other frequencies in geographic areas which encompass or overlap
the Company's market areas. Additionally, some of these entities enjoy the
substantial backing of, or include among their stockholders, major
telecommunications entities, such as Ameritech with respect to ART, Teleport
with respect to BizTel, and NYNEX and Bell Atlantic with respect to CAI. Due to
the relative ease and speed of deployment of 38 GHz and some other
wireless-based technologies, the Company could face intense price competition
from these and other wireless-based service providers. Furthermore, a notice of
proposed rulemaking ("NPRM") issued by the FCC contemplates an auction of
additional channels in the 38 GHz spectrum band, which have not been previously
available for commercial use, and the FCC recently has stated its intention to
auction licenses in other portions of the spectrum, including 28 GHz, which may
provide licensees with capabilities similar to and, in some instances, possibly
superior, to those of the Company. The grant of additional licenses by the FCC
in the 38 GHz band, or other portions of the spectrum with similar
characteristics, as well as the development of new technologies, could result in
increased competition. The Company believes that, assuming the adoption of the
NPRM as currently proposed, entities having greater resources than the Company
could acquire licenses to provide 38 GHz services.
The Company also may face competition in the provision of local
telecommunications services from cable companies, electric utilities, LECs
operating outside their current local service areas and long distance carriers.
The great majority of these entities provide transmission services primarily
over fiber optic-, copper-based and/or microwave networks, which, unlike the
Company's Wireless Fiber services, enjoy proven market acceptance for the
transmission of telecommunications traffic. Moreover, the consolidation of
telecommunications companies and the formation of strategic alliances within the
telecommunications industry, which are expected to accelerate as a result of the
passage of the Telecommunications Act, could give rise to significant new or
stronger competitors. There can be no assurance that the Company will be able to
compete effectively in any of its markets.
The Company's Internet services also are likely to face significant
competition, including, among others, from cable television operators deploying
cable modems, which provide high speed data capability over existing coaxial
cable television networks. Although cable modems currently are not widely
available and do not provide for two-way data transfer rates that are as rapid
as those which can be provided by Wireless Fiber services, the Company believes
that the cable industry may support the deployment of cable modems to
residential cable customers through methods such as price subsidies.
Notwithstanding the cable industry's interest in rapid deployment of cable
modems, the Company believes that in order to provide broadband capacity to a
significant number of users, cable operators will be required to spend
significant time and capital in order to upgrade their existing networks to a
more advanced hybrid fiber coaxial network architecture. However, there can be
no assurance that cable modems will not emerge as a source of competition to the
Company's Internet business. Further, Internet service providers using existing
technologies such as ISDN and, in the future, such technologies as asymmetrical
digital subscriber loop ("ADSL") and high speed digital subscriber loop ("HDSL")
will likely provide additional sources of competition to the Company's Internet
access services. Additionally, the Company believes that many other
telecommunication service providers already
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are promoting their Internet services. See "Business -- Competition in the
Telecommunications Industry -- Local Telecommunications Market" and "--
Government Regulation of Telecommunications Operations."
Long Distance Market. The long distance market has relatively
insignificant barriers to entry, numerous entities competing for the same
customers and a high (and increasing) average churn rate (especially among
residential customers, which the Company historically has emphasized in its long
distance reselling business, and customers acquired in mergers and acquisitions,
which are part of the Company's business strategy), as customers frequently
change long distance providers in response to the offering of lower rates or
promotional incentives by competitors. The Company recently has terminated
several "contest" and other marketing programs conducted by marketing agents,
which were responsible for generating a substantial majority of the Company's
telecommunications revenues during the 12 months ended March 31, 1996. These
programs had been extremely successful in generating new long distance business
primarily from consumers and were instrumental in allowing the Company to
rapidly expand its customer base. As a result of certain consumer and regulatory
complaints arising from these programs, on May 10, 1996, the Company adopted a
policy of mandatory independent verification of all written letters of
authorization ("LOAs") arising from these programs and, effective as of June 10,
1996, no longer accepts LOAs submitted from these programs. Although the Company
is considering several alternative marketing programs, it does not expect that
such alternative programs will, individually or in the aggregate, be as
successful as the contest programs in the short term in attracting and retaining
customers. Based on internal financial reports, the Company's telecommunications
net sales for April, May and June 1996 were approximately $4.4 million, $3.5
million and $3.0 million, respectively. This trend is the result of customer
attrition that has exceeded the rate at which new long distance customers have
been added to the Company's customer base since the termination of these
marketing programs. The Company expects to continue to experience low or
negative rates of growth in its long distance business in the near term and
expects a reduction in long distance revenues in the third quarter of 1996. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Revenues."
The Company competes with major carriers such as AT&T Corp. ("AT&T"), MCI
and Sprint, as well as other national and regional long distance carriers and
resellers, many of whom own substantially all of their own facilities and are
able to provide services at costs lower than the Company's current costs since
the Company generally leases its access facilities. The Company believes that
the RBOCs as well as other CLECs also will become significant competitors in the
long distance telecommunications industry. The Company believes that the
principal competitive factors affecting its market share are sales and marketing
programs, pricing, customer service, accurate billing, clear pricing policies
and, to a lesser extent, variety of services. The ability of the Company to
compete effectively will depend upon its ability to maintain high quality,
market-driven services at prices generally perceived to be equal to or below
those charged by its competitors. In 1995, the FCC announced a decision pursuant
to which AT&T no longer will be regulated as a dominant long distance carrier.
This decision is expected to increase AT&T's flexibility in competing in the
long distance telecommunications services market and, in particular, will
eliminate the longer advance tariff notice requirements previously applicable
only to AT&T. To maintain its competitive posture, the Company believes that it
must be in a position to reduce its prices in order to meet reductions in rates,
if any, by others. Any such reductions could adversely affect the Company. In
addition, LECs have been obtaining additional pricing and regulatory
flexibility. This may enable LECs to grant volume discounts to larger long
distance companies, which also could put the Company's long distance business at
a disadvantage in competing with larger providers. See "Business -- Competition
in the Telecommunications Industry -- Long Distance Market."
New Media Business. The industry in which the Company's new media
subsidiary competes consists of a very large number of entities producing,
owning or controlling news, sports, entertainment, educational and informational
content and services, including telecommunications companies, television
broadcast companies, sports franchises, film and television studios, record
companies, newspaper and magazine publishing companies, universities and on-line
computer services. Competition is intense for timely and highly
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marketable or usable information and entertainment content. Almost all of the
entities with which the Company's new media subsidiary competes have
significantly greater presence in the various media markets and greater
resources than the Company, including existing content libraries, financial
resources, personnel and existing distribution channels. There can be no
assurance that the Company will be able to compete successfully in the emerging
new media industry. See "Business -- New Media Business."
Consumer Products Business. The consumer products industry is subject to
changes in styles and consumer tastes. An unanticipated change in consumer
preferences inconsistent with the Company's merchandise lines could have a
serious and adverse effect upon its operations. The Company's product lines are
subject to intense competition with numerous manufacturers and distributors of
hair, beauty and bath products. Mass merchandisers, drug store chains, and other
mass volume retailers typically utilize freestanding pegboard fixtures or
pegboard wall fixtures, as well as in-line shelving and end-cap displays, to
display their products. Competition for shelf and wall space for product
placement is intense, as many companies seek to have their products
strategically placed within the store. Competition also exists with respect to
product name recognition and pricing, since retailers and consumers often choose
products on the basis of name brand, cost and value. Many of the Company's
competitors have greater product and name recognition than it does, as well as
much larger and more sophisticated sales forces, product development, marketing
and advertising programs and facilities. The Company generally competes by
attempting to offer retail customers quality, service and products at reasonable
prices. See "Business -- Consumer Products -- Competition."
Limited Operating History in Telecommunications Industry
The Company shifted its business focus in 1992 from marketing consumer
products to providing telecommunications services in order to capitalize on
emerging opportunities in the evolving telecommunications industry. The Company
began reselling long distance telecommunications services in 1993. The Company
began marketing its local access services as a CAP in December 1994 and offering
local exchange services as a CLEC in April 1996 and currently offers such CLEC
services only in New York City and only on a resale basis. To date, the
Company's CAP and CLEC operations have generated only nominal revenues. Although
a number of persons comprising the Company's senior management team have
extensive experience in the telecommunications industry, the Company has a
limited operating history in the telecommunications industry. The Company's
prospects, therefore, must be considered in light of the risks, expenses,
delays, problems and difficulties frequently encountered in the establishment of
a new business in an evolving industry characterized by intense competition. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Significant Capital Requirements
The expansion of the Company's telecommunications operations and the
continued funding of operating expenses will require substantial capital
investment. Additionally, as part of its strategy, the Company may seek to
acquire complementary assets or businesses (including additional spectrum
licenses, by auction or otherwise), which also could require substantial capital
investment. The Company's decision to accelerate the development of its CLEC
operations in response to the Telecommunications Act has substantially increased
the Company's capital expenditure requirements. Management anticipates, based on
current plans and assumptions relating to its operations, that existing
financial resources (including proceeds raised in the 1995 Debt Placement) and
equipment financing arrangements which the Company intends to seek, will be
sufficient to fund the Company's growth and operations for approximately 16 to
24 months following consummation of the Offerings. Management believes that the
Company's capital needs at the end of such period will continue to be
significant and the Company will continue to seek additional sources of capital.
Further, in the event the Company's plans or assumptions change or prove to be
inaccurate, or if the Company consummates any acquisitions of businesses or
assets (including additional spectrum licenses, by auction or otherwise), the
Company may be required to seek additional sources of
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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 "Use of Proceeds," "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Company Overview" and "--
Liquidity and Capital Resources."
Government Regulation
The Company's telecommunications services are subject to varying degrees
of federal, state and local regulation. Generally, the FCC exercises
jurisdiction over all telecommunications services providers to the extent such
services involve the provision of jurisdictionally interstate or international
telecommunications, including the resale of long distance services, the
provision of local access services necessary to connect callers to long distance
carriers, and the use of electromagnetic spectrum (i.e., wireless services).
With the passage of the Telecommunications Act, the FCC's jurisdiction has been
extended to include certain interconnection and related issues that
traditionally have been considered subject primarily to state regulation. The
state regulatory commissions retain nonexclusive jurisdiction over the provision
of telecommunications services to the extent such services involve the provision
of jurisdictionally intrastate telecommunications. Municipalities also may
regulate limited aspects of the Company's business by, for example, imposing
zoning requirements or right-of-way permit procedures, certain taxes or
franchise fees.
The Telecommunications Act is intended to remove the formal barriers
between the long distance and local telecommunications services markets,
allowing service providers from each market (as well as providers of cable
television and other services) to compete in all communications markets. The
Telecommunications Act will permit the RBOCs eventually to compete in the
provision of interLATA long distance services. Additionally, the FCC must
promulgate new regulations over the next several years to address mandates
contained in the Telecommunications Act, which will change the regulatory
environment significantly. The Telecommunications Act generally requires LECs to
provide competitors with interconnection and nondiscriminatory access to the LEC
network on more favorable terms than have been available in the past. However,
such interconnection and the terms thereof are subject to negotiations with each
LEC, which may involve considerable delays, and may not necessarily be obtained
on terms and conditions that are acceptable to the Company. In such instances,
although the Company may petition the proper regulatory agency to arbitrate
disputed issues, there can be no assurance that the Company will be able to
obtain acceptable interconnection agreements. In addition, the
Telecommunications Act requires the promulgation of regulations to implement
universal service reform, to revise the existing subsidy system which is
intended to provide support for the provision of ubiquitous telephone service,
and to effect access charge reform to more closely align the access charges
required to be paid by the long distance carriers to the LECs to the actual cost
of providing service.
The Company is unable to predict what effect the Telecommunications Act
will have on the telecommunications industry in general and on the Company in
particular. No assurance can be given that any regulation will broaden the
opportunities available to the Company or will not have a material adverse
effect on the Company and its operations. Further, there can be no assurance
that the Company will be able to comply with additional applicable laws,
regulations and licensing requirements or have sufficient resources to take
advantage of the opportunities which may arise from this dynamic regulatory
environment.
As required by the Telecommunications Act, in August 1996 the FCC adopted
new rules implementing the Telecommunications Act (the "Interconnection Order").
These rules constitute a pro-competitive,
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deregulatory national policy framework designed to remove or minimize the
regulatory, economic and operational impediments to full competition for local
services, including switched local exchange service. Although setting minimum,
uniform, national rules, the Interconnection Order also relies heavily on states
to apply these rules and to exercise their own discretion in implementing a
pro-competitive regime in their local telephone markets. Among other things, the
Interconnection Order establishes rules requiring incumbent LECs to interconnect
with new entrants such as the Company at specified network points; requires
incumbent LECs to provide carriers nondiscriminatory access to network elements
on an unbundled basis at any technically feasible point at rates that are just,
reasonable and nondiscriminatory; establishes rules requiring incumbent LECs to
allow interconnection via physical and virtual collocation; requires the states
to set prices for interconnection, unbundled elements, and termination of local
calls that are nondiscriminatory and cost-based (using a forward looking
methodology which excludes embedded costs but allows a reasonable
cost-of-capital profit); requires incumbent LECs to offer for resale any
telecommunication service that the carrier provides at retail to end users at
prices to be established by the states but which generally are at retail prices
minus reasonably avoided costs; and which requires LECs and utilities to provide
new entrants with nondiscriminatory access to poles, ducts, conduit and rights
of way owned or controlled by LECs or utilities. Exemptions to some of these
rules are available to LECs which qualify as rural LECs under the
Telecommunications Act. The Interconnection Order also requires that intraLATA
presubscription (pursuant to which LECs must allow customers to choose different
carriers for intraLATA toll service without having to dial extra digits) be
implemented no later than February 1999; that LECs provide new entrants with
nondiscriminatory access to directory assistance services, directory listings,
telephone numbers, and operator services; and that LECs comply with certain
network disclosure rules designed to ensure that interoperability of multiple
local switched networks. There can be no assurance how the Interconnection Order
will be implemented or enforced or as to what affect they will have on
competition within the telecommunications industry generally or on the
competitive position of the Company specifically. A number of LECs, including
the National Association of Regulatory Utility Consumers and others have
indicated publicly that they intend to appeal aspects of the Interconnection
Order. On August 28, 1996 GTE and the Southern New England Telephone Company
("SNET") filed a motion with the FCC in which they indicated they would seek
judicial appeal of at least certain aspects of the Interconnection Order and in
which they requested a stay of all rules adopted in the Interconnection Order
until judicial appeal is finalized.
Although the Company believes that it is in substantial compliance with
all material laws, rules and regulations governing its operations and has
obtained, or is in the process of obtaining, all licenses and approvals
necessary and appropriate to conduct its operations, changes in existing laws
and regulations, including those relating to the provision of wireless local
telecommunications services via 38 GHz and/or the future granting of 38 GHz
licenses, or any failure or significant delay in obtaining necessary regulatory
approvals, could have a material adverse effect on the Company. On November 13,
1995, the FCC released an order freezing the acceptance for filing of new
applications for 38 GHz frequency licenses. On December 15, 1995, the FCC
announced the issuance of an NPRM, pursuant to which it proposed to amend its
current rules relating to 38 GHz, including, among other items, the imposition
of minimum construction and usage requirements and an auction procedure for
issuance of licenses in the 37-40 GHz band where mutually exclusive applications
have been filed. In addition, the FCC ordered that those applications that are
subject to mutual exclusivity with other applicants or that were placed on
public notice by the FCC after September 13, 1995 would be held in abeyance and
not processed by the FCC pending the outcome of the proceeding initiated by the
NPRM. Final rules with respect to the changes proposed by the NPRM have not been
adopted and the changes proposed by the NPRM have been, and are expected to
continue to be, the subject of numerous comments by members of the
telecommunications industry, the satellite industry, various government agencies
and others. Consequently, there can be no assurance that the NPRM will result in
the issuance of rules consistent with the rules initially proposed in the NPRM,
or that any rules will be adopted. Until final rules are adopted, the rules
currently in existence remain in effect with respect to outstanding licenses.
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Additionally, providers of long distance services, including the major
interexchange carriers, as well as resellers, such as the Company, are coming
under intensified scrutiny for marketing activities by them or their agents that
result in alleged unauthorized switching of customers from one long distance
provider to another. The FCC and a number of state authorities are seeking to
introduce more stringent regulations to curtail the intentional or erroneous
switching of customers, which could include the imposition of fines, penalties
and possible operating restrictions on entities which engage in unauthorized
switching activities. In addition, the Telecommunications Act requires the FCC
to prescribe regulations imposing procedures for verifying the switching of
customers and additional remedies on behalf of carriers for unauthorized
switching of their customers. The effect, if any, of the adoption of any such
proposed regulations on the long distance industry and the manner of doing
business therein, cannot be anticipated. Statutes and regulations which are or
may become applicable to the Company as it expands could require the Company to
alter methods of operations, at costs which could be substantial, or otherwise
limit the types of services offered by the Company.
The Company plans to operate as a CLEC in numerous states and to offer a
full range of local exchange services. However, the Company must obtain the
approval of state regulatory authorities prior to offering CLEC services in each
state. The Company currently is authorized to operate as a CLEC in California,
Connecticut, Florida, Georgia, Illinois, Massachusetts, Michigan, New York,
Pennsylvania, Tennessee, Texas, Washington and Wisconsin, and is seeking or
intends to seek authorization in numerous other states. However, there can be no
assurance that the Company will obtain or retain such state authorization.
Further, as a CLEC, the Company will be subject to additional state regulatory
and service parameters, including those relating to quality of service.
The FCC has announced that it will examine, and possibly modify, existing
universal service and access charge policies. In doing so, it will likely
consider reducing substantially the access charges that interexchange carriers
pay to LECs for access to the public switched network. CAPs, such as the
Company, provide local access (i.e., the transmission of a long distance call
from the caller's location to the long distance carrier's POP, and from the
terminating POP to the recipient of the call) at rates that are discounted from
the rates charged by LECs. If the FCC were to mandate reductions in LECs' local
access charges, CAPs might be forced to substantially reduce the rates they
charge long distance providers, resulting in lower gross margins (which, in the
case of the Company, are currently negative). This could have a material adverse
effect on the Company and its prospects, as well as the value of the Common
Stock. See "Business -- Telecommunications Industry Overview," "-- Government
Regulation of Telecommunications Operations" and "-- Competition in the
Telecommunications Industry."
Finite Initial Term of Wireless Licenses; Potential License Renewal Costs;
Fluctuations in the Value of Wireless Licenses; Buildout Requirements for
Milliwave and Other New Licenses; Transfer of Control
The FCC's current policy is to align the expiration dates of all 38 GHz
licenses such that all such licenses mature concurrently and then to renew all
such licenses for ten years. The initial term of all currently outstanding 38
GHz licenses, including the Company's licenses, expires in February 2001. While
the Company believes that all of its Wireless Licenses will be renewed based
upon FCC custom and practice establishing a presumption in favor of licensees
that have complied with their regulatory obligations during the initial license
period, there can be no assurance that any Wireless License will be renewed upon
expiration of its initial term.
In the NPRM, the FCC proposed auctioning licenses for currently
unallocated 38 GHz channels. Given the current political climate with respect to
balancing the federal budget, there is a risk that the FCC will require
significant payments upon renewal of the Company's Wireless Licenses. The FCC's
failure to renew, or imposition of significant charges for renewal of, one or
more Wireless Licenses could have a material adverse effect on the Company and
could adversely affect the value of the Common Stock.
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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. A holder of a 38 GHz license is
required to satisfy the FCC's rules and regulations relating to construction
within 18 months from the license's date of grant in order to prevent revocation
of the license. Of the Milliwave Licenses, 34 require such buildout prior to
October 1996. The Company currently is providing construction and support
services to Milliwave in connection with its buildout of the Milliwave Licenses
under the terms of a services agreement between the Company and Milliwave. As
the Company has secured Roof Rights in many of the cities covered by the
Milliwave Licenses and anticipates securing Roof Rights in the other remaining
cities, it is anticipated that all buildout requirements relating to the
Milliwave Licenses will be met, although there can be no assurance of this.
The Company has entered into acquisition and related agreements with each
of Milliwave, Locate and Pinnacle. The transfer of licenses issued by the FCC,
including 38 GHz licenses (as well as a change of control of entities holding
licenses), is subject to the prior consent of the FCC, which consent generally
turns on a number of factors including the identity, background and
qualifications of the transferee and the satisfaction of certain other
regulatory requirements. In addition, the existence of proposed channel
limitations in the NPRM, which in at least one licensed area may result in the
Company exceeding the proposed maximum number of licenses for that area, may
result in the FCC denying consent for one or more license transfers. In light of
the foregoing, the newness of this service, and the uncertainty of final
regulations to be issued in connection with the NPRM, there can be no assurance
that the FCC will approve all or any of the proposed acquisitions or, if
approved, that the FCC will not impose limitations on the ultimate number of
licenses held in any particular licensed area. See "Business --
Telecommunications Services -- Wireless Fiber -- Wireless Licenses" and "--
Government Regulation of Telecommunications Operations."
Changes in Technology, Services and Industry Standards
The telecommunications industry has been characterized by rapid
technological change, changing end-user requirements, frequent new service
introductions and evolving industry standards. The Company believes that its
future success will depend on its ability to anticipate or adapt to such changes
and to offer, on a timely basis, services that meet these evolving industry
standards. The extent to which competitors using existing or currently
undeployed methods of delivery of local telecommunications services will compete
with the Company's Wireless Fiber services cannot be anticipated. There can be
no assurance that existing, proposed or as yet undeveloped technologies will not
become dominant in the future and render 38 GHz-based (and other spectrum-based)
systems less profitable or less viable. For example, there are several existing
technologies that may be able to allow the transmission of high bandwidth
traffic over existing copper lines. There can be no assurance that the Company
will have sufficient resources to make the investments necessary to acquire new
technologies or to introduce new services that could compete with future
technologies or that equipment held by the Company in inventory will not be
rendered obsolete, any of which would have an adverse effect on the value of the
Common Stock. See "Business -- Telecommunications Industry Overview."
Certain Financial and Operating Restrictions
The indebtedness of the Company and the indentures ("Indentures") relating
to the Convertible Notes and Senior Notes impose significant operating and
financial restrictions on the Company, affecting, and in certain cases limiting,
among other things, the ability of the Company to incur additional indebtedness
or
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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 materially adversely affect
the Company's operations. Failure to obtain continuing access to such networks
and facilities also would have a material adverse effect on the Company, and
could require the Company to significantly curtail or cease its operations.
Further, the Company's CLEC operations will rely to some extent upon network
elements which the LECs must provide pursuant to the Telecommunications Act and
the Interconnection Order. These facilities often use copper wire for "last
mile" access to end users. To the extent that the Company relies upon LEC
facilities that use copper wire, the Company may not be able to offer potential
customers the benefits of Wireless Fiber with respect to high transmission
capacity. In addition, the Company's operations require that the networks leased
by it, and any facilities which may be developed by the Company, operate on a
continuous basis. It is not unusual for networks and switching facilities to
experience periodic service interruptions and equipment failures. It is
therefore possible that the networks and facilities utilized by the Company may
from time to time experience service interruptions or equipment failures
resulting in material delays which would adversely affect consumer confidence as
well as the Company's business operations and reputation and the value of the
Common Stock. See "Business -- Telecommunications Services -- Long Distance
Services."
The Company utilizes, in certain cases, third parties for marketing its
Wireless Fiber services and maintaining its operational systems. The Company has
entered into master service agreements with each of Electric Lightwave, MCImetro
and Century Telephone, which allow those companies to utilize and resell the
Company's Wireless Fiber services to their own customers. The Company also has
an agreement with Lucent to provide field service for, and network monitoring
of, the Company's Wireless Fiber facilities and another agreement with Lucent
for the purchase by the Company of telecommunications switches and related
equipment. The failure of any of these third parties to perform under their
respective agreements or the loss of any of these agreements could have a
material adverse effect on the Company's results of operations or its ability to
service its customers. The Company plans to enter into master service agreements
with other telecommunications service providers, and the failure to do so could
have an adverse effect on the Company's development and results of operations
and the value of the Common Stock. See "Business --Telecommunications Services
- -- CAP Services -- Marketing."
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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 corresponding transceivers of five miles (or
shorter distances in certain areas; weather conditions may necessitate distances
as short as 1.1 miles between transceivers to maintain desired transmission
quality). The areas in which such shorter distances are required are those where
rainfall intensity and the size of the raindrops adversely impact transmission
quality at longer distances. Other weather conditions, such as snow, electrical
storms and high winds, have not, in the Company's experience, affected Wireless
Fiber services. The establishment of Wireless Fiber services may require
additional transceivers to triangulate around obstacles (such as buildings).
Similarly, to establish Wireless Fiber services covering a distance in excess of
five miles, additional transceivers are required to establish a chain with links
no more than five miles apart. The cost of additional transceivers where
required by weather, physical obstacles or distance may render Wireless Fiber
uneconomical in certain instances. The Company must obtain Roof Rights (or
rights to access other locations where lines of sight are available) in each
building where a transceiver will be placed. The Company seeks to prequalify and
obtain Roof Rights at buildings targeted by potential customers in its licensed
areas in advance of anticipated orders. There can be no assurance, however, that
the Company will be successful in obtaining Roof Rights necessary to establish
its Wireless Fiber services in its potential markets. The Company's
prequalification activities often require the payment of option fees to the
owners of buildings that are being prequalified. Notwithstanding its
prequalification activities, there can be no assurance that the Company will
receive orders for Wireless Fiber services which allow the Company to utilize
Roof Rights it obtains. See "Business -- Telecommunications Services -- Wireless
Fiber -- Wireless Fiber Links."
Uncertainty of Market Acceptance of Wireless Fiber Services
The Company has been marketing its Wireless Fiber services since December
1994 and such services currently are generating revenues that are insignificant.
The Company has not obtained a significant market share in any of the licensed
areas where it offers Wireless Fiber services. The provision of wireless local
telecommunications services over 38 GHz represents an emerging sector of the
telecommunications industry and the demand for and acceptance of Wireless Fiber
services are subject to a high level of uncertainty. Despite the Company's
initial success in attracting customers, there can be no assurance that
substantial markets will develop for wireless local telecommunications services
delivered over 38 GHz, or that, even if such markets develop, the Company will
be able to succeed in positioning itself as a provider of such services or
provide such services profitably. The Company's success in providing wireless
broadband services is subject to a number of factors beyond the Company's
control. These factors include, without limitation, historical perceptions of
the unreliability and lack of security of previous microwave radio technologies,
changes in general and local economic conditions, availability of equipment,
changes in
27
<PAGE>
telecommunications service rates charged by other service providers, changes in
the supply and demand for wireless broadband services, competition from wireline
and wireless operators in the same market area, changes in the federal and state
regulatory schemes affecting the operations of telecommunications service
providers in general and wireless broadband systems in particular (including the
enactment of new statutes and the promulgation of changes in the interpretation
or enforcement of existing or new rules and regulations). In addition, the
extent of the potential demand for wireless broadband services in the Company's
market areas cannot be estimated with certainty. There can be no assurance that
one or more of these factors will not have an adverse effect on the Company's
financial condition and results of operations and the value of the Common Stock.
See "Business -- Telecommunications Services."
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 August 31, 1996, the Company had 28,173,484 shares of Common Stock
outstanding. Although a significant number of the outstanding shares of Common
Stock are "restricted securities," as that term is defined in Rule 144 under the
Securities Act ("Restricted Shares"), and may not be sold unless such sale is
registered under the Securities Act or is made pursuant to an exemption from
registration under the Securities Act, including the exemption provided by Rule
144, substantially all of such Restricted Shares either have been registered for
resale under the Securities Act or are currently, or will soon become, available
for sale pursuant to Rule 144. In addition, the Company may issue a substantial
number of shares of Common Stock in connection with the Milliwave Acquisition
and the Locate Acquisition, all of which would be subject to registration rights
requiring the Company to register them for resale. Sales or the expectation of
sales of a substantial number of shares of Common Stock in the public market
could adversely affect the prevailing market price of the Common Stock. See
"Shares Eligible for Future Sale."
Effect of Outstanding Options, Warrants and Other Convertible Securities
As of August 31, 1996, there were outstanding options and warrants with
respect to an aggregate of 9,557,464 shares of Common Stock at per-share
exercise prices ranging from $1.06 to $31.12. Additionally, the Convertible
Notes (assuming the Convertible Notes are converted on October 23, 1996, the
first possible date of conversion) and certain other convertible debt are
convertible into an aggregate of 4,699,353 shares
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<PAGE>
(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 1,231,900 shares of Common Stock
may be granted. The exercise of outstanding stock options, warrants and other
convertible securities will dilute the percentage ownership of the Company's
stockholders, and any sales in the public market of shares of Common Stock
issuable upon the exercise of such stock options, warrants and convertible
securities may adversely affect prevailing market prices for the Common Stock.
Further, the Company may be required to issue additional shares (up to 4.5
million shares) in connection with the Milliwave Acquisition and may, at its
election, convert the $17.5 million promissory note to be issued in the Locate
Acquisition into that number of shares of Common Stock equal to (a) the
principal and interest due on such note divided by (b) the average closing price
of the Common Stock for the five days ending on the date the Company gives
notice of its intention to convert such note. See "Description of Certain
Indebtedness," "Description of Capital Stock" and "Shares Eligible for Future
Sale."
Anti-takeover Provisions
The Company's corporate charter provides that directors serve staggered
three-year terms and authorizes the issuance of up to 15,000,000 preferred
shares with such designations, rights and preferences as may be determined from
time to time by the Company's Board of Directors. The affirmative vote of the
holders of at least two-thirds of the capital stock of the Company is required
to amend the provisions of the charter relating to the classification of the
Board. The staggered board provision could increase the likelihood that, in the
event of a possible takeover of the Company, incumbent directors would retain
their positions and, consequently, may have the effect of discouraging, delaying
or preventing a change in control or management of the Company. While the
Company has no present intention to issue Preferred Stock, the authorization of
preferred shares empowers the Board of Directors, without further stockholder
approval, to issue preferred shares with dividend, liquidation, conversion,
voting or other rights which could adversely affect the voting power or other
rights of the holders of the Common Stock. In the event of issuance, the
preferred shares could be utilized, under certain circumstances, as a method of
discouraging, delaying or preventing a change of control of the Company.
Additionally, certain of the Company's indebtedness (including the Notes)
contains provisions which would allow holders, at their election, to require
prepayment in the event of a change in control of the Company, which could also
serve to delay or prevent such a change in control from occurring. Moreover, the
Company's By-Laws provide that a stockholder entitled to vote for the election
of directors at a meeting may nominate a person or persons for election as
director only if written notice of such stockholder's intent to make such
nomination is given to the Company's Secretary not later than sixty days in
advance of such meeting, and the Company's stock option plans contain a
provision which accelerates the vesting of outstanding options in the event of
certain changes in control of the Company, both of which could serve to delay or
prevent a change in control from occurring. In addition, the Company is and,
subject to certain conditions, will continue to be, subject to the anti-takeover
provisions of the Delaware General Corporation Law, which could have the effect
of delaying or preventing a change of control of the Company. Furthermore,
transfers of control and/or certain assets of telecommunications entities, such
as the Company, may require the approval of the FCC and/or state regulatory
commissions. With respect to 38 GHz licenses such as the Company's Wireless
Licenses, assignments of such licenses and changes of control involving entities
holding licenses require prior FCC and state regulatory approval and are subject
to restrictions and limitations on the identity and status of the assignee or
successor. See "Description of Capital Stock."
29
<PAGE>
PRICE RANGE OF COMMON STOCK
The Company's Common Stock has been quoted on the Nasdaq National Market
since June 27, 1994, under the symbol "WCII" and prior thereto was quoted on the
Nasdaq SmallCap Market under the symbol "WCII" from April 4, 1991 to June 26,
1994.
The following table sets forth, for the fiscal periods indicated, the high
and low last sale prices of the Common Stock as reported on the Nasdaq National
Market or the Nasdaq SmallCap Market, as the case may be. The quotes represent
"inter-dealer" prices without adjustment or mark-ups, mark-downs or commissions
and may not necessarily represent actual transactions.
Common Stock Price
------------------
Period Ended High Low
- ------------ ---- ---
May 31, 1994................................ $6-9/16 $3-3/4
August 31, 1994............................. 6-11/16 4
November 30, 1994........................... 9-11/16 6
February 28, 1995........................... 9-1/8 5-1/32
May 31, 1995................................ 7-1/32 6
August 31, 1995............................. 13-3/8 5
November 30, 1995........................... 21-13/16 13-1/2
December 31, 1995 (commencing December 1, 1995) 17-3/8 14
March 31, 1996.............................. 18-1/2 13-3/8
June 30, 1996............................... 32-1/4 16
July 1 through September 3, 1996............ 29 15-3/4
See the cover page of this Prospectus for a recent reported last sale
price of the Common Stock on the Nasdaq National Market. As of August 31, 1996,
there were 326 holders of record of the Common Stock. The Company believes that
there are more than 1,000 beneficial holders of the Common Stock.
DIVIDEND POLICY
The Company has not declared or paid any dividends on the Common Stock and
does not intend to pay dividends on the Common Stock in the foreseeable future.
The Company intends to retain future earnings, if any, to finance the
development and expansion of its business. Certain covenants in the Indentures
currently effectively prohibit the Company from declaring or paying cash
dividends. See "Description of Certain Indebtedness."
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<PAGE>
CAPITALIZATION
The following table sets forth the cash and capitalization of the Company
as of June 30, 1996: (i) on a historical basis, (ii) on a pro forma basis that
gives effect to the acquisitions of Milliwave and Locate and financing thereof
as if they occurred on June 30, 1996 (assuming that the Company does not elect
to convert the $17.5 million note to the sellers of Locate into Common Stock)
and (iii) on a pro forma as adjusted basis that gives effect to the conversion
of all of the Convertible Notes as if it occurred on June 30, 1996. This table
should be read in conjunction with the Consolidated Financial Statements and
related notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
June 30, 1996
---------------------------------
Pro Forma
Actual Pro Forma As Adjusted
--------- --------- ---------
(in thousands)
<S> <C> <C> <C>
Cash, cash equivalents and short term investments ...... $ 191,061 $ 155,846 $ 155,846
========= ========= =========
Current portion of long-term debt and capital lease
obligations .......................................... $ 10,287 $ 27,842 $ 27,842
========= ========= =========
Long-term debt and capital lease obligations:
Senior Notes ......................................... $ 164,716 $ 164,716 $ 164,716
Convertible Notes .................................... 82,358 82,358 --
Other notes .......................................... 3,586 3,586 3,586
Capital lease obligations, net of current portion .... 5,450 5,684 5,684
--------- --------- ---------
Total long-term debt and capital lease
obligations ..................................... 256,110 256,344 173,986
--------- --------- ---------
Stockholders' equity:
Preferred stock of the Company, 150,000,000
shares authorized, 689 shares issued and held
in treasury, 0 outstanding ......................... 689 689 689
Common Stock, $.01 par value, 75,000,000
shares authorized, 30,694,260 shares
issued and 28,037,497 shares outstanding,
34,094,260 shares issued and 31,437,497
shares outstanding on a pro forma basis,
38,087,366 shares issued and 35,430,603 shares
outstanding on an as adjusted basis(1) ............. 307 341 381
Additional paid-in capital ........................... 111,186 196,152 273,980
Accumulated deficit .................................. (70,126) (70,126) (70,126)
--------- --------- ---------
42,056 127,056 204,924
Less: treasury stock ................................ (42,734) (42,734) (42,734)
Unrealized loss on long term investments .......... (112) (112) (112)
--------- --------- ---------
Total stockholders' equity ........................... (790) 84,210 162,078
--------- --------- ---------
Total capitalization ............................... $ 255,320 $ 340,554 $ 336,064
--------- --------- ---------
</TABLE>
- ----------
(1) Does not include (i) an aggregate of 1,036,582 shares of Common Stock
issuable upon exercise of options granted or which may be granted under
the 1992 Performance Equity Plan ("1992 Plan"), (ii) an aggregate of
3,500,000 shares of Common Stock issuable upon exercise of options granted
or which may be granted under the 1995 Performance Equity Plan ("1995
Plan"), (iii) 6,652,782 shares of Common Stock issuable upon exercise of
other outstanding options and warrants and (iv) 535,714 shares of Common
Stock which may be issued upon conversion of certain convertible debt
other than the Convertible Notes. See "Description of Certain
Indebtedness" and notes 17, 18 and 22 to the Consolidated Financial
Statements. The exercise and conversion prices of certain of the foregoing
securities are below the current market price of the Common Stock as of
the date of this Prospectus. Assumes the issuance of 3,400,000 shares of
Common Stock in connection with the Milliwave Acquisition.
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<PAGE>
SELECTED FINANCIAL DATA
The summary financial data presented below, as of and for the two years
ended February 28, 1994 and 1995 and for the ten months ended December 31, 1995,
have been derived from the Company's audited financial statements and the
summary financial data presented below as of and for the six months ended June
30, 1995 and 1996 and the ten months ended December 31, 1994 have been derived
from unaudited consolidated financial statements of the Company included
elsewhere in this Prospectus. In the opinion of management, the unaudited
financial statements have been prepared on the same basis as the audited
financial statements and include all adjustments, which consist only of normal
recurring adjustments, necessary for a fair presentation of the financial
position and the results of operations for these periods. This data should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the pro forma and historical
consolidated financial statements, including the notes thereto, appearing
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
Year Ended Ten Months Ended Six Months
February 28 December 31, Ended June 30,
--------------------- --------------------- ---------------------
1994 1995 1994 1995 1995 1996(1)
-------- -------- -------- -------- -------- --------
(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 $ 4,553 $ 20,573
Information services ........... -- 474 193 2,648 2,052 3,423
Merchandising .................. 7,120 10,182 8,405 13,987 5,835 6,688
-------- -------- -------- -------- -------- --------
Total net sales .............. 15,625 25,565 22,018 29,771 12,440 30,684
Operating income (loss):
Telecommunications ............. (744) (3,423) (2,067) (6,945) (2,140) (9,027)
Information Services ........... -- (117) (115) 238 284 (365)
Merchandising .................. 223 307 329 756 115 (163)
General corporate .............. (1,547) (2,378) (1,609) (3,861) (1,979) (6,249)
-------- -------- -------- -------- -------- --------
Total operating loss ......... (2,068) (5,611) (3,462) (9,812) (3,720) (15,804)
Interest expense ................. 744 637 505 7,630 430 18,015
Interest income .................. (109) (385) (297) (2,890) (294) (5,658)
Other expenses, net .............. 5,687 1,367 948 1,305 1,253 654
Net loss ......................... (8,195) (7,230) (4,618) (15,857) (5,109) (28,815)
Net loss per common share ........ (1.06) (0.42) (0.28) (0.70) (.25) (1.05)
Weighted average common
shares outstanding ............. 7,719 17,122 16,609 22,770 20,184 27,468
Other Financial Data:
Capital expenditures ............. 307 1,816 1,465 8,652 1,023 10,405
EBITDA(3) ........................ (1,845) (5,179) (3,116) (8,952) (3,401) (13,145)
</TABLE>
<TABLE>
<CAPTION>
As of As of
As of February 28 December 31, June 30,
----------------- ------------ --------
1994 1995 1995 1996
---- ---- ---- ----
(in thousands) (in thousands) (in thousands)
<S> <C> <C> <C> <C>
Balance Sheet Data:
Cash, cash equivalents and
short term investments ........... $ 719 $ 3,156 $211,701 $ 191,061
Property and equipment, net ........ 1,301 2,663 15,898 25,788
Total assets ....................... 14,610 29,509 285,363 289,345
Current portion of long-term debt
and capital lease obligations .... 2,851 332 9,643 10,287
Long-term debt and capital lease
obligations, less current portion
and discount ..................... 3,084 5,165 240,455 256,110
Stockholders' equity ............... 4,719 18,280 21,752 (790)
</TABLE>
(footnotes on next page)
32
<PAGE>
- ----------
(1) In the first six months of 1996, the Company settled a dispute with
another carrier regarding the unauthorized switching of the Company's
customers to the other carrier. The Company recognized revenue of
approximately $1.5 million and cost of sales of approximately $850,000 in
connection with this settlement, the majority of which related to minutes
of use during that period.
(2) The Company has generated nominal revenues from its Wireless Fiber
services.
(3) EBITDA consists of loss before interest, income taxes, depreciation and
amortization and other income and expense. EBITDA is provided because it
is a measure commonly used in the telecommunications industry. It is
presented to enhance an understanding of the Company's operating results
and is not intended to represent cash flow or results of operations in
accordance with generally accepted accounting principles for the periods
indicated. See the Company's consolidated financial statements contained
elsewhere in this Prospectus.
33
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion includes certain forward-looking statements. For
a discussion of important factors, including, but not limited to, continued
development of the Company's businesses, actions of regulatory authorities and
competitors, and other factors that could cause actual results to differ
materially from the forward-looking statements, see "Risk Factors" and the
Company's periodic reports incorporated herein by reference.
Company Overview
The Company provides local and long distance telecommunication services in
the United States. As a complement to its telecommunications operations, the
Company produces and distributes information and entertainment content. The
Company also maintains a consumer products company with distribution through
national retailers in the United States and Canada.
The Company operates its businesses through its wholly-owned subsidiaries
as follows:
o WinStar Wireless, Inc. ("WinStar Wireless"), through the Company's
operating subsidiaries, provides Wireless Fiber-based dedicated local access
services on a wholesale basis to other carriers in many major metropolitan areas
via the Company's digital wireless capacity in the 38 GHz portion of the radio
spectrum. Wireless Fiber services currently are marketed to long distance
carriers, fiber-based CAPs, CLECs, cellular and specialized mobile radio
services, LECs, cable companies, internet service providers, value added
resellers an systems intergrators and end user customers.
o WinStar Telecommunications, Inc. ("WinStar Telecom"), through the
Company's operating subsidiaries, is rolling out its local exchange services as
a value-added, economical alternative to the LECs, particularly through the
exploitation of the Company's Wireless Fiber capabilities, in substantially all
of the 41 licensed areas covered by the Company's 38 GHz licenses. WinStar
Telecom markets its services primarily through a direct sales force to small and
medium-sized businesses.
o WinStar Gateway Network, Inc. ("WinStar Gateway Network") is a long
distance telecommunications services reseller that provides service directly to
residential customers and which supports WinStar Telecom's offering of bundled
local and long distance service to businesses.
o WinStar New Media Company, Inc. ("WinStar New Media") produces and
distributes, domestically and abroad, information and entertainment content,
principally nonfiction and international programming and nationally syndicated
sports radio programming.
o WinStar Global Products, Inc. ("WinStar Global Products"), which was
acquired by the Company prior to its entry into the telecommunications industry,
designs, manufactures, markets and distributes personal care products,
principally bath and hair care products, and sells primarily through large
retailers, including mass merchandisers, discount stores, department stores and
national and regional drug store chains.
Perceiving emerging opportunities in an increasingly procompetitive
telecommunications industry, the Company shifted its focus in 1992 from
marketing consumer products to providing telecommunications services, and
entered the telecommunications business in 1993 with its acquisition of WinStar
Gateway. Substantially all of the Company's revenues have historically been
generated through its long distance telecommunications, information and
entertainment, and consumer products businesses. In 1994, the Company positioned
itself for entrance into the local telecommunications market with the
acquisition of Avant-Garde, the original holder of many of the Wireless
Licenses. Utilizing the Wireless Licenses, the Company
34
<PAGE>
(through WinStar Wireless) entered the local access services market as a CAP in
December 1994 and currently provides Wireless Fiber-based local access services
to a limited number of customers, generating nominal revenues to date. In April
1996, the Company (through WinStar Telecom) entered the local exchange services
market as a CLEC, and currently provides such services only on a resale basis in
New York City.
The passage of the Telecommunications Act of 1996 has resulted in
opportunities that have caused the Company to accelerate the development and
expansion of its telecommunications businesses. The Company's entry into the
local exchange services market, along with the continued development and
expansion of the Company's local access business, will require significantly
larger amounts of capital expenditures for the construction of Wireless Fiber
and switch-based infrastructure on a city-by-city basis, for working capital and
for funding of operating losses during the next several years. In connection
with its CLEC business, the Company is installing its own switches and remote
nodes and utilize its Wireless Fiber capacity, together with facilities leased
or purchased from other carriers, to originate and terminate local traffic. The
faster the Company's rollout of its CLEC business, the greater the near term
operating losses and capital expenditures will be. In addition, the Company is
expanding its Wireless Fiber-based CAP business because its CAP business will
serve a significant portion of the local access needs of the Company's CLEC
business, including for backbone interconnections of hub, main switch and local
nodes sites to be created by the Company in connection with its CLEC operations,
and for the origination and termination of local traffic generated by the
Company's local exchange customers.
Revenues
The Company anticipates that the revenues generated by the operations of
its telecommunications businesses will represent an increasingly larger
percentage of the Company's consolidated revenue as the Company expands into the
local telecommunications services market. Factors driving the mix of revenues
are as follows:
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. The Company currently is
generating revenues from this business that are insignificant. The Company does
not expect significant revenues from its CLEC business during 1996. Local
exchange services that are offered by the Company on a resale basis can be
provided, and revenues generated thereby, shortly after receipt of customer
orders. Currently, the sales cycle for the resale of local exchange services is
approximately one to three weeks in duration. The Company anticipates that the
sales cycle for local exchange services provided using its Wireless Fiber
capabilities and its own switches will be approximately the same duration as
that experienced in the resale of local exchange services. CLECs, including the
Company, currently set prices at a discount to those charged by LECs. The
Company anticipates ongoing price reductions for provision of local exchange
services, including those provided by the Company, in the future.
o CAP revenues are driven primarily by the number of Wireless Fiber
links in service and the capacity of each link (i.e., T-1s or DS-3s). Customers
generally are billed at a fixed monthly rate per unit of capacity. Since the
Company's local access customers have been, and will likely continue to be,
predominantly telecommunications service providers, the addition or loss of
several major customers would have a material impact on this business. The
Company currently is generating revenues from this business that are
insignificant. The Company does not expect significant revenues from its CAP
business during 1996.
35
<PAGE>
The Company's local access services are sold through a sales cycle that has
averaged 9 to 12 months in duration because of the need to (i) demonstrate the
efficacy and reliability of Wireless Fiber-based services to potential
customers, as such services involve technology that is relatively new to the
United States telecommunications industry and (ii) acquire the Roof Rights to
install the Wireless Fiber links necessary to address the specific requirements
of a customer. The Company believes that this sales cycle will become shorter
going forward as (i) the efficacy and reliability of Wireless Fiber services
become more widely accepted in the industry (thereby shortening or eliminating
the customer education phase of the sales cycle), (ii) the Company's strategy of
prequalifying buildings for Roof Rights results in the acquisition of key
locations that will enable the Company to more rapidly address the specific
requirements of many potential customers and (iii) existing customers broaden
their use of the Company's Wireless Fiber services, especially those which have
entered into master service agreements with the Company. CAPs, including the
Company, currently set prices at a discount to those charged by LECs. The
Company anticipates significant ongoing price reductions for CAP services,
including those provided by the Company, in the future. See "Risk Factors --
Uncertainty of Market Acceptance of Wireless Fiber Services."
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. New customers are generated through agent
programs, affinity group programs and direct marketing. It is expected that in
the future, larger percentages of the Company's long distance telecommunications
service revenues will be derived from direct sales efforts to smaller- and
medium-sized businesses as well as from customers which are purchasing local
exchange services through the Company's CLEC business. See "Risk Factors --
Competition."
o Information and entertainment content revenues are generated
principally by (i) sales of content, such as documentaries and foreign films, to
traditional content customers, such as cable networks, (ii) sales of content to
new media distribution channels, such as on-line services, (iii) sales of
advertising and (iv) the bundling of content with the Company's
telecommunications services. Revenues also are driven by the size and quality of
the Company's programming library and the release of new programs, which affects
quarter to quarter comparability.
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 expenditures relating to interconnection (i.e., the use of LEC
facilities to terminate calls), purchases of switching equipment, 38 GHz radios
site acquisition fees and expenses (including option fees for the
prequalification of buildings for Roof Rights) and strategic preplacement of a
limited number of radios and related equipment in connection with the Company's
building-centric network plan (i.e., hubbing). In addition, the Company will
have substantial start-up costs related to its CLEC business that will not be
capitalized, including costs of engineering, marketing, administrative and other
personnel, who will be needed in advance of related revenues. When the Company
commences operations in a city, it will initially resell the local exchange
services of LECs or other CLECs. The Company will carry more of its traffic on
its own facilities as it develops and installs the switches, radios and
interconnections required to provide services in
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a particular city. However, the Company always will carry significant amounts of
its traffic over leased facilities at lower margins. The resale of local
exchange services typically will result in greater operating costs than the
provision of services over the Company's own facilities and such costs will
therefore decrease as a percentage of total CLEC operating costs as the Company
begins to provide more services over its own facilities. Additionally, site
acquisition and switch costs will become a lower percentage of cost per minute
of service as more buildings are connected and as the Company increases the
number of customers and lines per building. The Company is following a
city-by-city, building-centric network plan to establish its own local exchange
services facilities. The up-front capital costs of establishing the initial
infrastructure required for the Company to provide its own local exchange
services are substantial and much greater than those relating to the Company's
CAP business.
o Costs associated with the Company's CAP business include site
acquisition (including option fees for the prequalification of buildings for
Roof Rights) and equipment related fees and expenses, including costs incurred
in connection with the acquisition of Roof Rights and the purchase of 38 GHz
radios. In addition, the Company will continue to incur substantial start-up
costs related to its CAP business that will not be capitalized, including costs
of engineering, marketing, administrative and other personnel who will be needed
in advance of related revenues. The Company anticipates that the cost per
Wireless Fiber link will be reduced as increased traffic is generated in
buildings in which the Company already has established service and the Company
qualifies for volume discounts from its principal equipment vendors. The Company
also expects that equipment costs will continue to drop as technological
improvements are made and more vendors begin to offer 38 GHz radios and other
equipment. The initial costs to complete a Wireless Fiber link and initiate
services across that link are much less than those required by the Company's
CLEC business because of the additional costs related to establishing CLEC
services, such as those related to the purchasing of switches and customer-site
equipment.
o Costs associated with the Company's long distance business include
expenses related to resalable minutes purchased from major carriers, and
accordingly fluctuate with revenue. Typically, reductions of such costs are
achieved through negotiated volume rebates and competitive contract pricing.
Generally, the Company is obligated to generate certain minimum monthly usage
with its long distance carriers and may be required to pay an underutilization
fee in addition to its monthly bill equal to a certain percentage of the
difference between such minimum commitments and the traffic actually generated
by the Company. The Company has never paid or been required to pay any under
utilization charges.
o The Company's information services businesses have both production
and distribution costs. Film production costs include those related to producing
original products and licensing third-party products and are capitalized as
incurred and are expensed as productions are completed. Overhead costs in the
production division are also capitalized and allocated to films in progress, and
are subsequently expensed as such films are completed. The distribution
divisions incur royalty costs payable to third-party producers and selling
costs, both of which vary directly with sales of acquired product, as well as
administrative costs, substantially personnel related costs, which are primarily
fixed in nature and which are expensed as incurred.
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
Six Months Ended June 30, 1996 Compared to Six Months Ended June 30, 1995
Net sales for the six months ended June 30, 1996 increased by $18,244,000,
or 147%, to $30,684,000, from $12,440,000 for the six months ended June 30,
1995. This increase was principally
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attributable to increased revenues generated by the Company's telecommunications
businesses, which had revenues of approximately $20,573,000 during the six
months ended June 30, 1996, compared with $4,553,000 for the six months ended
June 30, 1995.
The increase in telecommunications revenue relates primarily to the
Company's residential long distance telephone business, which is currently the
Company's largest source of telecommunications revenue. During the period,
however, the operations of the Company's new local communications businesses
were advanced on many fronts, including the addition of personnel and customers,
broader regulatory authorizations in several states, negotiation of interconnect
agreements with incumbent local exchange carriers, and new relationships with
equipment vendors. All of these accomplishments set the stage for future revenue
growth from this part of the Company's business. Over time, this focus on the
local communications market is expected to result in residential long distance
revenues accounting for lower percentage of the overall telecommunications
revenues of the Company. Furthermore, the Company intends to expand the
marketing of its long distance services to the business market through WinStar
Telecom, as part of its integrated telecommunications services offering.
During the second quarter, the Company stopped accepting new customer
orders for long distance services from certain independent marketing agents.
These agents were responsible for generating a substantial portion of the
Company's telecommunications revenues during the first six months of 1996,
through certain marketing programs which the Company concluded were not
consistent with its overall strategy. On May 10, 1996, the Company adopted a
policy of mandatory independent verification of all written customer orders as a
result of consumer and regulatory complaints from these programs. The Company is
developing alternative long distance marketing programs designed to attract a
broader base of customers, including the marketing and sales by its new CLEC
sales force of these services to small and medium size commercial customers, and
is continuing its efforts to increase its revenues through acquisitions. While
the Company expects overall revenues to increase in the third and fourth
quarters of 1996, to the extent that such new programs or acquisitions
individually or in the aggregate are not successful in the near term, the
Company is likely to experience a reduction in its residential long distance
revenues during the same period.
The Company also recorded a $1,370,000 increase in its information
services revenues to $3,423,000, from $2,052,000 for the six months ended June
30, 1995, principally resulting from the Fox/Lorber and TWL acquisitions which
occurred during the second quarter. The two New Media acquisitions are
consistent with the Company's low risk, low expenditure approach to the content
business. The acquisitions cost approximately $2.5 million consisting of cash,
stock and notes, and are expected to contribute approximately $7 million to
revenues for the balance of the year.
Gross profit for the six months ended June 30, 1996 increase by
$9,629,000, or 283%, to $13,036,000, from $3,407,000 for the six months ended
June 30, 1995. Gross profit as a percentage of net sales increased to 42.5% for
the six months ended June 30, 1996, from 27.4% for the six months ended June 30,
1995. This increase was primarily attributable to improving margins in the
Company's telecommunications business, which have been positively impacted by
lower cost of sales of its long distance business achieved through reduced
carrier costs resulting from renegotiated contracts with its long distance
service carriers. The telecommunications segment gross profit margin increased
to 46.7% for the period, up from 21.4% for the first six months of 1995. The
Company expects that gross profit margins of its long distance business for the
third and fourth quarter of 1996 will be lower due to the Company's shift in
long distance marketing strategy. Margin improvement was also recognized from
the information services segment, where the gross profit margin for the six
months ended June 30, 1996 was 36.0% compared with 28.6% for the first six
months of 1995.
The Company expects gross profit to continue to increase as the Company's
local communications business expands, however the gross profit margin is
expected to continue to fluctuate during this development phase. For example,
the gross profit margin of the Company's CLEC business will initially be
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lower, until its switches are installed and in operation, at which time margins
are expected to increase. The Company's CAP business is expected to positively
impact margins as revenues increase. Long distance margins are expected to be
lower in the near term, due to the Company's shift in its long distance
marketing strategy. While these decreased long distance margins may have a
greater effect on the overall gross profit margin in the near term, this is
expected to have a lesser effect on overall gross profit margin in time as
revenues from the other business segments accelerate. The Company's information
services and consumer product segments' gross profit margins fluctuate from
quarter to quarter based on seasonality and product mix.
Selling, general and administrative expenses increased by $21,039,000 to
$28,005,000, or 91% of net sales, for the six months ended June 30, 1996 from
$6,966,000, or 56% of net sales, for the comparable period of the prior year.
The telecommunications segment accounted for 71% of such increase. Significant
factors were the increase in sales, marketing, network and software engineering
and related technical and support personnel resulting from the accelerated
rollout of the Company's CLEC operations and growth in personnel at WinStar
Wireless. These expenses will continue to grow as a percentage of net sales in
the near term as the Company continues to emphasize the development of its local
communications business. The effect of the Fox/Lorber and TWL acquisitions
during the second quarter resulted in expense increases in the information
services segment, which generated 6% of the increase for the period. Corporate,
general and administrative expenses accounted for 20% of the total increase,
reflecting the expense of continued expansion of the Company's executive,
finance, information and human resource personnel and systems. For the reasons
noted above, the operating loss for the six months ended June 30, 1996 was
$15,804,000, compared with $3,720,000 for the six months ended June 30, 1995.
Interest expense for the six months ended June 30, 1996 was $18,015,000,
compared with $430,000 for the six months ended June 30, 1995. The increase was
primarily attributable to $16,116,000 in interest accreted on the senior and
convertible notes payable issued in the Company's October 1995 Debt Placement,
which is not payable in cash until after 1999. Interest income for the six
months ended June 30, 1996 increased by $5,364,000, to $5,658,000, from $294,000
for the six months ended June 30, 1995. The increase is attributable to earnings
on the proceeds of the 1995 Debt Placement.
Other expense for the six months ended June 30, 1996 decreased by
$786,000, to $467,000, from $1,253,000 for the six months ended June 30, 1995.
During the six months ended June 30, 1995, the Company recorded an expense of
$1,104,000 representing its equity interest in the losses of Avant-Garde. As a
result of the merger of Avant-Garde, the Company began to include all of
Avant-Garde's revenues and expenses in its consolidated statements of operations
effective July 17, 1995, and therefore this expense does not appear in the
statement of operations for the quarter ended June 30, 1996. In addition, the
cost of acquisition of Avant-Garde has been allocated primarily to licenses, and
the amortization of this asset caused an increase in the amortization expense
from $149,000 for the six months ended June 30, 1995, to $467,000 for the six
months ended June 30, 1996.
For the reasons noted above, the net loss for the six months ended June
30, 1996 was $28,815,000, compared with a net loss of $5,109,000 for the
comparable period of 1995.
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Ten Months Ended December 31, 1995 Compared to the Ten Months
Ended December 31, 1994
Net sales for the ten months ended December 31, 1995 increased by
$7,753,366, or 35.2%, to $29,771,472, from $22,018,106 in the comparable period
of the prior year. This increase was attributable to increased revenues in the
Company's information and entertainment services and consumer products
merchandising subsidiaries. During the ten months ended December 31, 1995,
WinStar Wireless had only nominal revenues. WinStar New Media, which reported
nominal revenues in the prior year, had revenues of approximately $2,648,000 for
the ten months ended December 31, 1995, related primarily to the completion of
certain documentary television products. WinStar Global Products also
experienced an increase in revenue of approximately $5,664,000, primarily due to
the growth in sales volume of its bath and body product lines.
Cost of sales for the ten months ended December 31, 1995 increased by
$4,785,000, or 32%, to $19,546,000, from $14,761,000 for the ten months ended
December 31, 1994. The increase was principally attributable to the growth in
the Company's information services and consumer products businesses.
Gross profit for the ten month ended December 31, 1995 increased by
$2,968,000, or 41%, to $10,225,000, from $7,257,000 for the ten months ended
December 31, 1994. Gross profit as a percentage of sales increased to 34.3% for
the ten months ended December 31, 1995, compared to 33.0% in the comparable
period of the prior year. The increase was principally attributable to an
increase in gross margins at WinStar Global Products resulting from sales price
increases and product cost decreases relating to better material pricing and
factory efficiencies.
Selling, general and administrative expenses increased by $9,292,277 to
$19,266,466, or 64.7% of net sales, for the ten months ended December 31, 1995,
from $9,974,189, or 45.3% of net sales, in the comparable period of the prior
year. The acquisition of Avant-Garde and the consolidation of that entity's
results of operations into the Company's financial statements from July 17, 1995
onward, as well as the growth in the administrative infrastructure at WinStar
Wireless, accounted for approximately 36% of the total increase. In particular,
expenses were incurred to develop operating systems, to market services to
targeted customers and to prepare for future growth in the wireless business.
Corporate general and administrative expenses accounted for approximately 23% of
the total increase because of the hiring of additional personnel and the
expansion of the Company's infrastructure to manage future growth in the
wireless business. Selling and marketing expenses incurred by WinStar Global
Products to service increased revenues accounted for approximately 22% of the
total increase.
For the reasons noted above, the operating loss for the ten months ended
December 31, 1995, was $9,811,629, compared to an operating loss of $3,462,037
in the comparable period of the prior year.
Interest expense increased by $7,125,000 to $7,630,000 for the ten months
ended December 31, 1995, from $505,000 for the ten months ended December 31,
1994, reflecting principally the non-cash accretion of interest to the Senior
and Convertible Notes.
Interest income for the ten months ended December 31, 1995 increased by
$2,593,000, to $2,890,000, compared with $297,000 for the same period during the
prior year. The increase was attributable to earnings on the 1995 Debt
Placement, which raised net proceeds of $214.5 million.
Other expense, net, for the ten months ended December 31, 1995 increased
by $357,000, to $1,306,000, compared with $949,000 for the same period of the
prior year. The cost of the acquisition of Avant-Garde has been allocated
primarily to the 38 GHz licenses held by Avant-Garde at the time of the
acquisition, and the amortization of this asset beginning in June 1995, when
such licenses were placed into service, caused an increase in amortization
expense of $258,000.
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For the reasons noted above, the Company reported a net loss of
$15,857,459 for the ten months ended December 31, 1995, compared to a net loss
of $4,618,358 in the comparable period of the prior year.
Year Ended February 28, 1995 Compared to Year Ended February 28, 1994
Net sales for the year ended February 28, 1995, were $25,564,760, up 63.6%
from the prior year's sales of $15,625,019. During the year ended February 28,
1995, WinStar Gateway reported net sales of $14,909,225, compared to net sales
of $8,505,282 in the year ended February 28, 1994, an increase of 75.3%. Sales
growth resulted primarily from growth in the customer base at WinStar Gateway.
WinStar Global Products also experienced substantial sales growth, from
$7,119,737 in the year ended February 28, 1994, to $10,182,143 in the year ended
February 28, 1995, an increase of 43%. This increase was attributable to
approximately $3,600,000 in additional sales from the bath and body product line
acquired in the year ended February 28, 1994, as well as growth in the personal
care products line. These sales increases were offset by a reduction of
approximately $1,200,000 in sales from discontinued business lines. WinStar New
Media generated $473,392 in sales in the year ended February 28, 1995, its first
year of operation.
Cost of sales for the year ended February 28, 1995 increased by
$6,990,000, or 65%, to $17,703,000, from $10,712,000 for the year ended February
28, 1994. The increase is principally attributable to the growth in the
Company's long distance telephone and consumer products businesses.
Gross profit for the year ended February 28, 1995 increased by $2,949,000,
or 60%, to $7,862,000, from $4,913,000 for the year ended February 28, 1994.
Gross profit as a percentage of sales was 30.8% in the year ended February 28,
1995, compared to 31.4% in the prior year. The slight decrease is attributable
to certain one-time charges recorded at WinStar Gateway relating to contractual
payments due to the Company's telecommunications providers.
Selling, general and administrative expenses increased by $5,800,946 to
$12,688,859, or 49.6% of net sales, for the year ended February 28, 1995, from
$6,887,913, or 44.1% of net sales, for the prior year. The increase was
attributable to increased operating expenses related to the growth of WinStar
Gateway and WinStar Global Products, the build up of the corporate
infrastructure to identify, acquire and manage opportunities for the Company's
continued telecommunications growth, and start-up expenses associated with
WinStar Wireless, offset by a reduction of expenses related to discontinued
business lines. The Company also recorded a restructuring charge of $607,609 and
other non-recurring charges of $481,872 in the year ended February 28, 1995,
related to its WinStar Gateway subsidiary. These charges include termination
costs for previous executive, management, and staff personnel as well as other
charges taken in connection with sales programs and other initiatives
implemented by previous management. For the reasons noted above, the operating
loss for the year ended February 28, 1995, was $5,611,436, compared to an
operating loss of $2,067,521 in the prior year.
Interest expense decreased to $637,000 in the year ended February 28, 1995
from $744,000 in the prior year. This improvement was due to the use of
approximately $2,000,000 in promissory notes by the holders thereof for the
payment of the exercise price of certain warrants.
Other expense, net, for the year ended February 28, 1995 decreased by
$4,321,000, to $1,366,000, from $5,687,000 for the year ended February 28, 1994.
In the year ended February 28, 1994, the Company recorded a non-cash expense of
$5,316,667 related to certain stock options issued in connection with the
Company's initial public offering in 1991, and an expense of $292,376 related to
discontinued business lines. The Company also recorded an extraordinary gain of
$194,154 resulting from the settlement of debt at a discount. These situations
did not recur in the year ended February 28, 1995. This decrease in other
expense was offset in part by the Company's proportionate share of expenses
incurred by Avant-Garde, aggregating $1.1 million.
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For the reasons noted above, the Company reported a net loss of $7,230,195
for the year ended February 28, 1995, compared to a net loss of $8,195,468 for
the year ended February 28, 1994.
Liquidity and Capital Resources
The Company has incurred significant operating and net losses due in large
part to the development of its telecommunications services business, and
anticipates that such losses will increase as the Company accelerates its growth
strategy. Historically, the Company has funded its operating losses and capital
expenditures through public and private offerings of debt and equity securities
and from credit facilities. Cash used to fund negative EBITDA during the six
months ended June 30, 1996 and the ten months ended December 31, 1995 was $13.1
million and $9.0 million, respectively. In October 1995, the Company raised net
proceeds of approximately $214.5 million from the placement of debt securities
(the "1995 Debt Placement") to fund the expansion of its CAP business. Interest
expense on such debt does not require payments of cash for the first five years.
At June 30, 1996 and December 31, 1995, working capital was $193 million and
$215 million, respectively, including cash, cash equivalents and short term
investments of $191 million and $212 million, respectively.
The passage of the Telecommunications Act has resulted in opportunities
that have caused the Company to accelerate the development and expansion of its
telecommunications businesses. To capitalize on these opportunities, the Company
has undertaken a plan to expand and accelerate its capital expenditure program.
Capital expenditures for the six months ended June 30, 1996, and the ten months
ended December 31, 1995 were $10.4 million and $8.7 million, respectively, and,
prior to the enactment of the Telecommunications Act, the Company's planned
capital expenditures for 1996 and 1997 were estimated at $36 million and $52
million, respectively. As a result of the acceleration of the development and
expansion of the Company's telecommunications businesses, the Company now plans
to significantly increase its capital expenditures.
A significant portion of the Company's increased capital requirements will
result from the rollout of the Company's CLEC business on a nationwide basis.
The Company has begun to build a direct sales force, has opened sales offices in
New York City, and is in the process of expanding into other metropolitan areas.
Additionally, the Company is in the process of ordering switching and other
network equipment to be placed in key markets. Accordingly, the Company expects
that its working capital, capital expenditure needs and selling, general and
administrative expenses will continue to increase as this expansion takes place,
which will accelerate the Company's need for additional capital.
The Company has two working capital facilities and an equipment lease
financing facility with a total of $14.4 million outstanding thereunder as of
June 30, 1996. One working capital facility, which was to expire in September
1996, was assigned to a new lender who has extended a similar facility through
September 1999. The Company is currently negotiating and expects to complete an
extension of the other working capital facility.
As of June 30, 1996, the Company also has commitments during the next year
(i) to purchase $23.5 million of telecommunications capital equipment, (ii) to
pay an aggregate of approximately $41 million upon consummation of the Milliwave
and other acquisitions, and (iii) to pay $17.5 million in short term notes or
Common Stock upon consummation of the Locate acquisition.
The proceeds of the Company's 1995 Debt Placement will be used principally
to fund the capital expenditures and operating losses resulting from the
accelerated development and expansion of the Company's telecommunications
businesses. Management anticipates, based on current plans and assumptions
relating to its operations, that the net proceeds from the 1995 Debt Placement,
together with its current financial resources and equipment financing
arrangements which the Company intends to seek, will be sufficient to fund the
Company's growth and operations for approximately 16 to 24 months. Management
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believes that the Company's capital needs at the end of such period will
continue to be significant and the Company will continue to seek additional
sources of capital. The Company anticipates that it will be able to raise
sufficient capital to implement its accelerated plan. Further, in the event the
Company's plans or assumptions change or prove to be inaccurate, or if the
Company successfully consummates any acquisitions of businesses or assets
(including additional 38 GHz licenses, by auction or otherwise), the Company may
be required to seek additional sources of capital sooner than currently
anticipated. Sources of additional capital may include public and private equity
and debt financings, sales of nonstrategic assets and other financing
arrangements. There can be no assurance that the Company will be able to obtain
financing, or, if such financing is available, that the Company will be able to
obtain it on acceptable terms. Failure to obtain additional financing, if
needed, could result in the delay or abandonment of some or all of the Company's
development and expansion plan, which would have a material adverse effect on
the Company's business and could adversely affect the Company's ability to
service its debt and the value of its Common Stock.
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BUSINESS
General
The Company delivers telecommunications services in the United States as a
CAP, CLEC, and long distance and private network services provider. Beginning in
the third quarter of 1996, the Company also plans to offer Internet access
services. The Company utilizes its Wireless Fiber services as a key component of
its transmission capabilities. As a complement to its telecommunications
operations, the Company produces and distributes information and entertainment
content.
Wireless Fiber services deliver high quality transmission via digital,
wireless capacity in the 38 GHz portion of the radio spectrum, where the Company
is the holder of the largest aggregate amount of 38 GHz bandwidth in the United
States pursuant to Wireless Licenses granted by the FCC. The Wireless Licenses
enable the Company to provide Wireless Fiber services in the 31 most populated
MSAs in the United States, including Atlanta, Boston, Chicago, Los Angeles, New
York and San Francisco, among others, and 41 of the 45 most populated MSAs. The
MSAs covered by the Wireless Licenses include more than 100 cities with
populations exceeding 100,000, and encompass an aggregate population of almost
110 million. By exploiting its Wireless Fiber capabilities, the Company seeks to
become a value-added, economical provider of local telecommunications services
and an attractive alternative to the LECs, such as the RBOCs, in substantially
all of the metropolitan areas covered by the Wireless Licenses.
The Company believes that its Wireless Fiber services provide it with
certain critical competitive advantages in the evolving telecommunications
market. The Company's Wireless Fiber services are engineered to provide 99.999%
reliability, with a 10-13 bit error rate (unfaded), performance equivalent to
that provided by fiber optic-based networks and exceeding that generally
provided by copper-based networks. The Company's Wireless Fiber services provide
a high capacity, cost-effective solution for voice and broadband applications,
providing data transfer rates equivalent to fiber-optic products and
significantly exceeding those provided by the fastest dial-up modems and ISDN
lines. The above-ground, installation-to-meet-demand nature of the Company's
Wireless Fiber services enables the Company to provide services to a customer
more quickly and less expensively than telecommunications providers that rely on
the installation of fiber optic- or copper-based lines for connection to
customer locations.
Telecommunications Industry Overview
The telecommunications industry is being reshaped by the deregulation of
telecommunications markets, growing demand for high speed, high capacity digital
telecommunications services and rapid advances in wireless technologies,
including 38 GHz-based technology. The long distance market has been opened to
competition for more than a decade and current deregulation is now allowing new
competitors to enter into the local telecommunications markets to compete with
the incumbent LECs in all aspects of local telecommunications services. The
accelerating growth of LANs, WANs, Internet services and video teleconferencing,
and the ongoing revolution in microprocessor power, are significantly increasing
the volume of broadband telecommunications traffic. The convergence of these
factors is creating significant opportunities for competitive telecommunications
service providers such as the Company.
General
The present structure of the telecommunications marketplace was shaped
principally by the court-directed divestiture ("Divestiture") of the Bell System
in 1984. In connection with the Divestiture, the United States was divided into
194 local regions known as LATAs and the Bell System was separated into a long
distance carrier, AT&T, to provide long distance services between LATAs, and
seven RBOCs, including, for example, Bell Atlantic and NYNEX, to provide local
telecommunications services. Long distance services involve the carriage of
telecommunications traffic between LATAs. Local telecommunications services
involve
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the provision of switched local traffic (local exchange services) and short-haul
(or intraLATA) toll service and the provision of local network access to long
distance carriers by the LECs, including the RBOCs, and independent long
distance carriers and resellers, thereby allowing long distance traffic to reach
end users in a different LATA (local access).
While the Divestiture facilitated competition in the long distance segment
of the telecommunications market, each LEC initially continued to enjoy a
monopoly in the provision of local telecommunications services in its respective
geographic service area. Beginning in the mid-1980s, however, certain entities
began constructing their own local networks and providing local access and
dedicated services designed to allow users to bypass a portion of a particular
LEC's local network. CAPs were the first alternative providers of these types of
services and the first competitors in the local telecommunications services
market. The demand for alternative local telecommunications services providers
in the past has been driven in large part by the significant charges levied by
the LECs on the long distance carriers for access to such LECs' local networks
(access charges), which have represented approximately 45% of such carriers'
long distance revenues. The CAPs' local networks typically consist of fiber
optic-based facilities connecting long distance carriers' POPs within a
metropolitan area, connecting end users (primarily large businesses and
government agencies) with long distance carriers' POPs and connecting different
locations of a particular customer. CAPs take advantage of the digital
technology employed by fiber optics and the substantial capacity and economies
of scale inherent in their networks to offer customers service that is generally
less expensive and of higher quality than that obtained from the LECs.
The Telecommunications Act opens the local exchange services market to
competition on a nationwide basis. The Telecommunications Act provides for the
removal of legal barriers to competition in the local exchange market and will
permit CLECs, such as the Company, to offer a full range of local exchange
services, including local dial tone, custom calling features and intraLATA toll
services, to both business and residential customers. It requires LECs to allow
alternate carriers, such as the Company, to interconnect with their networks and
establishes additional procompetitive obligations upon the incumbent LECs. These
obligations include allowing unbundled access to the incumbent LECs' networks,
resale of local exchange services, number portability, dialing parity, access to
rights-of-way and mutual compensation for the termination of switched local
traffic. In addition, the legislation codifies the LECs' equal access and
nondiscrimination obligations and preempts inconsistent state regulation. The
Telecommunications Act also contains certain provisions that ultimately will
eliminate the restrictions that currently prohibit the RBOCs from providing
interLATA services.
The full extent of the effects of the Telecommunications Act and the
Interconnection Order on the Company and other telecommunications companies is
as of yet unknown, particularly because it contains many provisions that require
enabling regulations, many of which have not yet been promulgated or which are
not yet final or are still subject to reconsideration or appeal or both.
However, the Company believes that both competition and opportunity in the
telecommunications industry will be increased by the Telecommunications Act, as
telecommunications providers seek to enter quickly into newly-opened markets.
The Company believes that such opportunity is amplified by (i) growing consumer
interest, especially among business users, in alternatives to their existing
carriers for more capacity in the form of broader bandwidth channels to customer
premises, better pricing terms and route diversity, (ii) long distance carriers'
desire to connect their long distance networks to local origination and
termination points at rates lower than available from the incumbent LECs', (iii)
a monopoly position and pricing structure in the local exchange services market
which historically has provided little economic incentive for the incumbent LECs
to upgrade their existing networks or to provide specialized services, (iv)
technological advances in data and video services and products requiring greater
transmission capacity and reliability and (v) ongoing regulatory initiatives to
allow other providers of local telecommunications services to interconnect their
networks with those owned by the incumbent LECs.
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38 GHz Technology
An aggregate of fourteen 100 MHz channels in 38 GHz currently are
allocated by the FCC in each 38 GHz licensed area with certain additional 100
MHz channels available for future licensing. Although FCC rules specify that 38
GHz be used for point-to-point transmissions, it has not mandated any particular
commercial services for such frequency. Prior to 1993, the 38 GHz portion of the
radio spectrum remained largely unassigned for commercial use in the United
States due to, among other factors, the lack of available technology to
efficiently utilize 38 GHz for commercial purposes. In the early 1990s, however,
technology became available which allowed for the provision of non-switched
wireless telecommunications links between two fixed points for the carriage of
telecommunications traffic. 38 GHz technology was first employed in Europe on a
commercial basis by PCS providers for the interconnection of their cell sites.
By early 1994, technological advances combined with growing use in Europe
led to increasing awareness of and interest in the potential uses of 38 GHz in
the United States. After Avant-Garde (which was acquired by the Company in July
1995 and which was the original recipient of many of the Company's Wireless
Licenses) received its initial 30 multiple-channel 38 GHz licenses in September
1993 (each license providing for four channels for an aggregate of 400 MHz of
bandwidth capacity), other entities, including several large telecommunications
companies such as Pacific Telesis, Inc., GTE and MCI, sought similar
multiple-channel 38 GHz licenses for the provision of wireless local
telecommunications services. However, in September 1994, the FCC began to follow
new procedures with respect to the granting of 38 GHz licenses, including
limiting bandwidth capacity to a single 100 MHz channel per licensee in a
particular licensed geographic area and, in November 1995, established a freeze
on the issuance of new licenses in this spectrum pending the outcome of a
rulemaking proceeding. See "-- Government Regulation of Telecommunications
Operations."
Point-to-point wireless local telecommunications services can be offered
in many portions of the radio spectrum. However, 38 GHz has several
characteristics that make it particularly well suited for the provision of such
services, including:
Efficient Channel Reuse Allowing for Dense and Controlled Network Designs.
Certain characteristics of 38 GHz, including the small amount of dispersion
(i.e., scattering) of the radio beam as compared to the more dispersed radio
beams produced in lower frequencies, allow for the reuse of bandwidth capacity
in a licensed area. The ability to reuse capacity allows the 38 GHz license
holder to densely deploy its 38 GHz services in a given geographic area,
providing services to multiple customers over the same 38 GHz channel and
conserving bandwidth capacity, thereby enhancing the types of services that can
be provided and increasing the number of customers to which such services can be
provided. Due to the limited dispersion characteristics of 38 GHz, numerous T-1
circuits and/or DS-3 circuits can be placed in close proximity without
interfering with each other. The Company believes that the use of multiple 100
MHz channels allows, and in many instances is required, for dense reuse where
multiple DS-3 paths are being deployed in a given area. The Company currently
utilizes one 100 MHz channel to provide either four T-1 circuits, eight T-1
circuits or one DS-3 circuit depending on the specific radio equipment utilized
and its configuration. The specific equipment and capacity deployed are
determined by the capacity needed on each link.
38 GHz licenses have been granted by the FCC on a geographic basis and
cover areas originally defined by the applicant, allowing the license holder to
install and operate as many transmission links as can be engineered in the
entire licensed area without obtaining further approval from the FCC. This is a
significant difference from most other comparable portions of the radio spectrum
(i.e., those that are used for other commercial point-to-point applications),
which are typically licensed on a link-by-link basis following frequency
coordination. Frequency coordination is often time consuming and problematic at
frequencies lower than 38 GHz because such frequencies are widely used and
signals at such frequencies are more dispersed. The exclusive right to use a
particular channel or channels within a broad geographic area gives the licensee
much greater control and flexibility over its network design. A 38 GHz licensee
can save costs, ensure interference-
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free operations and increase quality and reliability by designing efficient 38
GHz networks in advance of their deployment.
Higher Data Transfer Rates. The total amount of bandwidth for each 38 GHz
channel is 100 MHz, which exceeds the bandwidth of any other present terrestrial
wireless channel allotment and supports full broadband capability. For example,
one 38 GHz DS-3 channel at 45 Mbps today can transfer data at a rate which is
over 1,500 times the rate of the fastest dial-up modem currently in use (28.8
Kbps) and over 350 times the rate of the fastest ISDN line currently in use (128
Kbps). Data transfer rates of a 38 GHz DS-3 channel even exceed the data
transfer rates of cable modems (30 Mbps). The broadband capacity of 38 GHz
transmission provides improved speed and quality in transmissions, as compared
to transmissions that are carried over a "last mile" consisting of copper wire.
In addition to accommodating standard voice and data requirements, 45 Mbps data
transmission rates allow end users to receive full motion video and 3-D graphics
and to utilize highly interactive applications on the Internet and other
networks.
Rapid Deployment. 38 GHz technology generally can be deployed considerably
more rapidly than wireline (because of permit procedures and construction time
required for wireline buildout) and many other wireless technologies (because of
the need to follow FCC frequency coordination procedures in connection with the
installation of most wireless facilities).
Ease of Installation. The equipment used for point-to-point applications
in 38 GHz (i.e., antennae, transceivers and digital interface units) is
typically smaller, less obtrusive, less expensive and uses less power than
equipment used for similar applications at lower frequencies, making it often
relatively easier to obtain the Roof Rights required to install transceivers and
less costly to initiate 38 GHz-based services.
Additional Advantages Over Other Portions of Radio Spectrum. At
frequencies above 38 GHz, point-to-point applications become less practical
because the maximum distance between transceivers continually decreases as
attenuation increases. Additionally, the FCC has specified the use of many
portions of the spectrum for applications other than point-to-point, such as
satellite and wireless cable services, and, accordingly, these portions of the
radio spectrum often are not available for point-to-point applications. Finally,
38 GHz has characteristics which provide better signal quality and performance
in inclement weather than those offered in the immediately surrounding portions
of the radio spectrum.
Strategy for Telecommunications Business Growth
By exploiting its Wireless Fiber capabilities, the Company seeks to become
a leading provider of integrated telecommunications services in the United
States. Key elements of the Company's strategy include:
Accelerating Rollout of CLEC Services and Leveraging of Wireless Fiber
Capabilities. In response to the Telecommunications Act, the Company is
accelerating the rollout of its local exchange CLEC services. The Company has
commenced offering local exchange services on a limited, resale basis in New
York City and it is anticipated that the Company will begin offering such
services in a number of additional cities during the next nine months. As the
Company commences its CLEC business in each city, in order to gain initial
market penetration in that city, it intends to initially resell the local
exchange services of other service providers, such as other CLECs and the
incumbent LECs, until it has established the Wireless Fiber and switch-based
infrastructure required to provide its own local exchange services in that city.
The Company also is in the process of negotiating interconnection agreements
with various local exchange service providers, including incumbent LECs, under
which the Company will obtain network elements and/or services on an unbundled
basis. The Company has entered into a number of interconnection agreements for
states that encompass various cities covered by the Wireless Licenses. These
agreements are with carriers such as Ameritech for Illinois, PacBell and GTE for
California, NYNEX for New York and Massachusetts, and Bell South for Florida,
Georgia and Tennessee, among others. The Company is following a city-by-city,
building-centric network plan to establish its own local exchange services
facilities which will utilize the Company's own
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switches and Wireless Fiber services to link end user customers and fiber optic
facilities leased or purchased from service providers. By utilizing its Wireless
Fiber services to originate and terminate customer traffic without connecting to
end users through the extension of more costly fiber-optic lines or using the
facilities of the LECs, the Company believes that it will be able to provide
many types of bundled local exchange, long distance, Internet services, enhanced
communications and information services to its target customers at lower cost
than many of its competitors, with equal or better quality. See "--
Telecommunications Services -- CLEC Services."
Continuing to Market CAP Services to Other Telecommunications Providers.
The Company is continuing to target other telecommunications service providers
in marketing its Wireless Fiber-based local access services. The Company
believes that its Wireless Fiber services present an attractive, economical
vehicle for other telecommunications service providers to extend their own
networks and service territories, especially as they seek to rapidly penetrate
new markets opening up to them as a result of the Telecommunications Act. By
having its Wireless Fiber services packaged with the service offerings of other
telecommunications providers or utilized as a seamless component of such
providers' own telecommunications networks, the Company also hopes to leverage
the marketing and distribution capabilities of such providers. The Company
currently offers its Wireless Fiber services to long distance carriers; other
CAPs and CLECs; CMRS providers; and LECs. The Company also offers its Wireless
Fiber services to all types of telecommunications service providers as viable,
cost-efficient alternate routes for their telecommunications traffic in
situations where primary routes are incapacitated and/or network reliability
concerns require alternate telecommunications paths. See "-- Telecommunications
Services -- CAP Services."
Providing Wireless Internet Access and Private Network Services. The
Company is marketing its Wireless Fiber services to take advantage of the
characteristics that make it an attractive solution for entities seeking
cost-effective, high capacity Internet access and private voice and data network
services. The total amount of bandwidth of each 38 GHz channel is 100 MHz, which
supports high broadband capability. One Wireless Fiber DS-3 link provides
transfer rates which are over 1,500 times the rate of the fastest dial-up modem
currently in use and over 350 times the rate of the fastest ISDN line currently
in use. In addition to accommodating standard voice and data requirements,
Wireless Fiber services can allow end users to receive real time, full motion
video and 3-D graphics and to utilize highly interactive applications on the
Internet and other networks. In addition to its CAP and CLEC services, the
Company offers its Wireless Fiber services to businesses, government agencies
and institutions with multiple locations that seek to establish their own
independent local telecommunications systems for dedicated private line voice
and data networks, including LAN and WAN applications. The Company also recently
established its first major relationship with an Internet service provider and
is actively pursuing relationships with additional Internet service providers.
See "-- Telecommunications Services -- CAP Services."
Exploiting First to Market and Leading Spectrum Holder Advantages. The
Company currently enjoys a first-to-market advantage as one of the few holders
of 38 GHz licenses with an established operating and management infrastructure
and the capital necessary to rapidly exploit and roll out its 38 GHz services on
a commercial basis. The Company believes that its competitive advantage is
further strengthened by its position as the holder of the largest aggregate
amount of 38 GHz bandwidth capacity in the United States and by the broad
geographic scope allocated under its Wireless Licenses. The Company holds 43
Wireless Licenses, 30 of which provide for 400 MHz of bandwidth capacity per
licensed area and 13 of which provide for 100 MHz of bandwidth capacity per
licensed area, and which allow the Company to address an aggregate of more than
400 million channel pops. The Company will acquire a significant number of
additional 38 GHz licenses upon consummation of the Milliwave, Locate and
Pinnacle Acquisitions, which will enable the Company to address more than 175
million additional channel pops. Based on existing and proposed FCC regulations,
the Company believes that it will be difficult, in the near term, for other
entities seeking to provide wireless local telecommunications services similar
to those of the Company to obtain the aggregate bandwidth capacity and
widespread geographic coverage afforded to the Company under its Wireless
Licenses. The
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Company seeks to acquire other 38 GHz licenses as opportunities arise, which may
include the acquisition of interests in other licensees and participation in any
auction procedure for 38 GHz licenses that the FCC establishes. See "--
Telecommunications Services -- Wireless Fiber -- Wireless Licenses."
Expanding and Improving the Company's Long Distance Operations. The
Company is seeking to expand and improve its long distance operations by (i)
bundling its resale of long distance services with its local telecommunications
services, (ii) broadening its business customer base and increasing customer
retention rates, (iii) improving operating efficiencies by reducing costs
associated with the provision of its long distance services, (iv)
differentiating its long distance services, most notably, in the near term,
through the use of less complicated billing systems, (v) using intelligent
network platforms for the provision of enhanced telecommunications services,
(vi) enhancing the Company's internal marketing capabilities, and (vii)
acquiring and integrating customer bases from other telecommunications
providers. The Company also anticipates that it will be able to leverage upon
the billing systems and intelligent network platforms developed in connection
with its telecommunications services to enhance the marketability of such
services. See "-- Telecommunications Services -- Long Distance Services."
Acquiring Content to Complement Telecommunications Service Offerings. The
Company believes that, over time, participants in the telecommunications market
increasingly will seek to offer "content" -- from information programming,
sports, weather, business and stock market information to music, films and
literature -- to differentiate their services and attract traffic onto their
transmission networks and that the ability to deliver entertainment and
information content to consumers will play an increasingly important role in
consumers' choice of a telecommunications provider. Accordingly, as a complement
to its telecommunications service offerings, the Company produces and
distributes information and entertainment content, focusing on niche programming
such as documentaries, foreign films and multimedia sports programming. The
Company believes that, in the future, it will be able to bundle proprietary
content that it controls with various telecommunications services it offers to
provide higher-margin products and services. See "-- New Media Business."
Telecommunications Services
Since late 1994, the Company has focused primarily on the development and
initial marketing of its Wireless Fiber-based local access services. After an
initial market-education phase, in which the Company demonstrated the efficacy
and reliability of its Wireless Fiber services, principally though the use of
field demonstrations and the installation of trial-basis Wireless Fiber links,
the Company began receiving initial orders for Wireless Fiber services. In
addition to continuing the expansion of its CAP business, the Company is
implementing its CLEC business on an accelerated basis. The Company seeks to
develop its CLEC business into a value-added, economical alternative to the
LECs, particularly through the exploitation of the Company's Wireless Fiber
capabilities.
Wireless Fiber
The Company utilizes its Wireless Fiber capacity in connection with its
CAP business. The Company also will employ its Wireless Fiber capacity as an
integral component of its planned CLEC facilities for the origination and
termination of local traffic and hubbing of switch and local node sites and
other facilities constructed or accessed by the Company.
Wireless Fiber Links. Each Wireless Fiber link currently provides up to
eight T-1s of capacity (equivalent to 192 voice lines) or one DS-3 of capacity
(equivalent to 672 voice lines). The Company believes that with future
developments in 38 GHz technology there will be substantial increases in the
capacity of each Wireless Fiber link. The Company's Wireless Fiber links meet or
exceed general telephone industry standards, provide transmission 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
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video applications, including traditional local access, Internet access and
network interconnection services. Accordingly, the Company believes that its
Wireless Fiber capacity meets or exceeds the majority of potential customers'
requirements in the Company's present and future target markets.
Each Wireless Fiber path consists of transmission links, which are paired
digital millimeter wave radio transceivers placed at a distance of up to five
miles from one another within a direct, unobstructed line of sight. The
transceivers currently used by the Company to create its Wireless Fiber paths
are primarily the Tel-Link 38 Radio Systems supplied by P-Com, Inc. ("P-Com")
pursuant to a four-year nonexclusive supply agreement ("Tel-Link Agreement")
executed in November 1994, which may be terminated by the Company upon 90 days'
notice to P-Com (subject to certain liquidated damages provisions if certain
purchase minimums are not met). The transceivers are installed where lines of
sight can be established between transceivers, such as on rooftops or towers or
in windows. The Tel-Link Agreement includes provisions whereby the Company pays
a higher price per link at the beginning of the contract period, with the excess
recoverable by the Company in the form of significantly discounted links once
certain volume levels have been achieved. The contract also stipulates certain
minimum annual volume levels which must be met in order to maintain the agreed
upon pricing structure. The Company has entered into an amendment to the
Tel-Link Agreement with P-Com, pursuant to which the requirements for volume
discount pricing were revised. The Company has not yet qualified for significant
volume discounts. The amendment also added another year to such term, reduced
the purchase commitment provisions upon termination, and revised the type of
Tel-Links to be provided by P-Com such that a greater proportion of higher
capacity transceivers (including DS-3 capable transceivers), will be delivered
under the agreement. As of June 30, 1996, the Company's noncancellable purchase
commitment under the Tel-Link Agreement was approximately $12.5 million.
The Company's Wireless Fiber services are reliable and cost-efficient.
Significant features of the Company's Wireless Fiber services include: (i) 38
GHz digital millimeter wave transmissions having narrow beam width, reducing the
potential of channel interference; (ii) 100 MHz bandwidth in each channel,
allowing for high subdivision of voice and data traffic; (iii) a range of up to
five miles between transmission links; (iv) performance engineered to provide
99.999% reliability, as tested; (v) transmission accuracy engineered to provide
bit error rates of 10-13 (unfaded); (vi) 24-hour network monitoring by the
Company's and Lucent's System Operations Control Centers ("SOCCs"); (vii)
optional safeguards from link outages by installation of hot standbys that
remain powered up and switch "on line" if the primary link fails; (viii)
optional forward error correction ensuring the integrity of transmitted data
over Wireless Fiber paths; and (ix) relatively low cost (installed) for each
pair of transceivers comprising a transmission link.
In August 1995, the Company entered into a three-year service contract
with Lucent, pursuant to which Lucent has agreed to provide site survey,
installation, maintenance and network management services for the Company's
Wireless Fiber services 24-hours a day, 365 days a year, as required. The
Company also is in the process of expanding its own installation, maintenance
and network management capabilities, which expansion includes the development of
management and operating systems and the hiring of qualified personnel.
Transmission links in the Company's Wireless Fiber paths are connected via
dial-up modems to both the Company-maintained SOCC in Virginia and Lucent's SOCC
in Maryland. The SOCCs provide the Company with points of contact for network
monitoring, troubleshooting and dispatching repair personnel in each MSA. The
SOCCs provide a wide range of network surveillance functions for each Wireless
Fiber path, providing the Company with the ability to remotely receive data
regarding the diagnostics, status and performance of its transmission links.
In order to provide quality transmission, Wireless Fiber services require
an unobstructed line of sight between two transceivers comprising a link, with a
maximum distance between any two corresponding 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
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in which such shorter distances are required are those where rainfall intensity
and the size of the raindrops adversely impact transmission quality at longer
distances. Other weather conditions, such as snow, electrical storms and high
winds, have not, in the Company's experience, affected Wireless Fiber services.
The establishment of Wireless Fiber may require additional transceivers to
triangulate around obstacles (such as buildings). Similarly, to establish
Wireless Fiber services covering a distance in excess of five miles, additional
transceivers are required to establish a chain whose links are no more than five
miles apart at any given point. The cost of additional transceivers where
required by weather, physical obstacles or distance may render the provision of
Wireless Fiber services uneconomical in certain instances.
The Company must obtain Roof Rights (or rights to access other similar
locations where unobstructed lines of sight are available) on each building
where a transceiver will be placed. The Company's prequalification activities
often require the payment of option fees for the buildings that are being
prequalified. In connection with the development of its Wireless Fiber capacity
for both its CAP and CLEC businesses, the Company has been following a plan
pursuant to which it seeks to negotiate, prior to receipt of actual service
orders, Roof Rights for the installation of Wireless Fiber links on buildings
specifically identified by existing and potential customers in the metropolitan
areas covered by the Wireless Licenses, including buildings that can provide
interconnection access to long distance carriers' points of presence, switch
locations and local access nodes. In addition, upon consummation of the Locate
Acquisition, it is anticipated that the Company will gain roof access to a
number of buildings, including the World Trade Center and other key sites in New
York City, which the Company anticipates using in its CAP and CLEC operations.
Wireless Licenses. The Wireless Licenses allow the Company to provide
Wireless Fiber services in the 31 most populated MSAs in the United States and
41 of the 45 most populated MSAs, which include more than 100 cities with
populations exceeding 100,000 and encompasses an aggregate population of almost
110 million people. The Company has the largest aggregate amount of 38 GHz
bandwidth capacity in the United States, holding 43 Wireless Licenses, 30 of
which provide for 400 MHz of bandwidth capacity per licensed area ("400 MHz
Wireless Licenses"). The 400 MHz Wireless Licenses allow for the provision of
wireless local telecommunications services over four of the fourteen 38 GHz
channels allocated in each of the following metropolitan areas: Atlanta,
Baltimore, Boston, Buffalo, Chicago, Cincinnati, Cleveland, Dallas, Denver,
Detroit, Houston, Kansas City, Los Angeles, Miami, Milwaukee,
Minneapolis/St.Paul, New York (Long Island), New York City, New York West
(Newark and Northern New Jersey), Oakland, Philadelphia, Phoenix, Pittsburgh,
San Diego, San Francisco, Seattle, Spokane, St. Louis, Tacoma, Tampa Bay and
Washington, D.C. The Company's remaining 13 Wireless Licenses, providing for 100
MHz of bandwidth capacity per licensed area ("100 MHz Wireless Licenses"), were
issued under FCC procedures adopted in September 1994 which have limited recent
grants of 38 GHz licenses to 100 MHz of bandwidth capacity per licensee in a
particular licensed area. The 100 MHz Wireless Licenses allow for the provision
of wireless local telecommunications services over one of the fourteen 38 GHz
channels in each of the following metropolitan areas: Austin-San Marcos, Boise,
Charlotte, Indianapolis, Jacksonville, Memphis, New Orleans, Norfolk, Oklahoma
City, Omaha, Portland (Oregon), San Antonio and Stamford.
Upon consummation of the Milliwave Acquisition, the Company will obtain 88
additional 38 GHz licenses, each providing for 100 MHz of bandwidth. The
Milliwave Licenses allow for the provision of service in more than 80 major
markets, encompassing an aggregate population of greater than 160 million. The
cities covered by the Milliwave Licenses include many already serviceable by the
Company under its existing Wireless Licenses, such as Boston, Chicago, Dallas,
Los Angeles and New York, among others, which will increase the Company's
aggregate bandwidth capacity in each such city. The Milliwave Licenses also
cover many cities which currently are not serviceable by the Company under its
existing Wireless Licenses, 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
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transmission path lease agreement with Milliwave permitting the Company to use
up to 488 radio links in Milliwave's licensed areas.
Upon the consummation of the Locate Acquisition, the Company will acquire
two additional 38 GHz licenses, each providing 100 MHz of bandwidth, for the New
York City metropolitan area, including portions of Long Island and northern New
Jersey. Additionally, upon consummation of the Pinnacle Acquisition, the Company
will acquire three additional 38 GHz licenses, each providing 100 MHz of
bandwidth, in the Baltimore, Dallas and Philadelphia areas.
The 400 MHz Wireless Licenses were granted in September 1993. Under each
400 MHz Wireless License, Avant-Garde, the original licensee, was required to
construct a Wireless Fiber link in each geographic area covered by a Wireless
License by March 15, 1995 in order to prevent possible revocation of the
license. On or before March 15, 1995, Avant-Garde was operational in each of the
areas covered by the 400 MHz Licenses and it filed a certificate of completion
(FCC Form 494A) for each 400 MHz Wireless License with the FCC on March 15,
1995. The 100 MHz Wireless Licenses have been granted since June 1995. Under
each 100 MHz Wireless License, WinStar Wireless is required to construct a
Wireless Fiber link in each geographic area covered by a Wireless License within
18 months from its date of grant in order to prevent possible revocation of the
license. Such construction has occurred for all of the Wireless Licenses.
The FCC's current policy is to align the expiration dates of all
outstanding 38 GHz licenses such that all such licenses mature concurrently and
then to renew all such licenses for a matching period. The initial term of all
currently outstanding 38 GHz licenses, including the Wireless Licenses, expires
in February 2001. While the Company believes that all of its Wireless Licenses
will be renewed based upon FCC custom and practice establishing a presumption in
favor of licensees that have complied with their regulatory obligations during
the initial license period, there can be no assurance that any Wireless License
will be renewed upon expiration of its initial term. See "Risk Factors -- Finite
Initial Term of Wireless Licenses; Potential License Renewal Costs; Fluctuations
in the Value of Wireless Licenses; Buildout Requirements for Milliwave and Other
New Licenses; Transfer of Control."
CAP Services
The Company markets and provides wireless local access CAP services.
Utilizing its Wireless Licenses, the Company offers numerous wireless
telecommunications services to support a wide range of local access and
dedicated service needs with a high degree of reliability. The technology and
service applications in this field are evolving rapidly, and the Company
believes that its Wireless Fiber service offerings will expand over time to
include a broad range of voice, data and video applications. The Company
currently offers Wireless Fiber services for the following applications, among
others:
Local By-Pass for Long Distance Carriers. Long distance carriers can
utilize the Company's Wireless Fiber services to connect certain call
termination or origination points in a particular licensed area to such
carriers' POPs in the licensed area (see diagram on next page) at more
economical rates than those generally charged by LECs and to connect two or more
of their respective POPs in a single licensed area. Long distance carriers using
Wireless Fiber services may benefit from both the lower cost afforded by such
services and the wide-band capacity compared to LEC facilities, which, in many
instances, are based in part on copper infrastructure and are, therefore,
narrow-band. By utilizing the Company's Wireless Fiber services, long distance
carriers can avoid the capacity barrier inherent in copper wire connections that
typically has prevented them from providing their customers with end-to-end,
full digital service available under a fiber optic-or wireless-based system.
Wireless Fiber services also may be utilized to provide such carriers with
viable, cost-efficient paths to serve as physically diverse routes (redundant
and back-up capacity) for traffic in situations where primary routes are
incapacitated and/or network reliability concerns demand alternate
telecommunications paths.
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Local Bypass For The Long Distance Industry
[Diagram]
Wireless Complement to CAP and LEC Networks. Currently, CAPs typically
compete with LECs by utilizing their own fiber optic cable rings and lease the
other facilities necessary to complete their networks from the LECs. Due to the
large capital investment required to construct such networks, CAPs generally
build their networks in limited, densely populated areas and offer services
primarily to large customers such as long distance carriers, medium- to
large-size businesses, government agencies and institutions. CAPs can utilize
Wireless Fiber services to bypass facilities typically leased by them from the
LECs (see diagram on next page). CAPs also can utilize the Company's Wireless
Fiber services to facilitate the build out and enhance the reliability of their
own local telecommunications networks and expand their marketing opportunities.
The Company believes that the relative ease and low cost of installation of
Wireless Fiber services in comparison to fiber optic-based facilities can
provide CAPs with the ability to expand their networks to reach some customers
in areas where demand levels are insufficient to justify the cost and time
involved in constructing fiber optic capacity. CAPs, as well as LECs, also can
utilize the Company's Wireless Fiber services to extend their own networks to
provide services to areas within a licensed area to which it is not
cost-efficient to run fiber optic cable or to which such cable simply has not
yet been run. CAPs and LECs also may utilize the Company's Wireless Fiber
services to provide redundant and back-up capacity to their own existing
networks.
Wireless Complement To Fiber Network
[Diagram]
Backbone Interconnection and Redundancy for CMRS Service Providers.
Wireless Fiber services can be utilized by providers of mobile
telecommunications services, such as PCS, cellular and specialized mobile radio
carriers, for interconnecting traffic (backbone network traffic) between and
among cell sites, repeaters, MTSOs and the wired local networks (see diagram on
next page). The Company also anticipates that entities that acquired licenses in
the PCS auctions, or which will acquire licenses in subsequent PCS auctions
conducted by the FCC, also will find Wireless Fiber services attractive to carry
their backbone network traffic. By utilizing Wireless Fiber services for their
backbone network needs, CMRS carriers can maintain greater control over their
systems by monitoring traffic carried over the Wireless Fiber services component
of their systems, reduce costs of construction of their networks, increase the
flexibility of their services and reduce the lead time involved in the provision
of services in their respective licensed areas. Wireless Fiber services also can
be used by CMRS carriers to provide redundant and back-up capacity for the fiber
optic and/or copper wire portions of their backbone networks.
Cellular/PCS Site Interconnect
[Diagram]
Dedicated Private Network Services. The Company also markets its Wireless
Fiber services to businesses, government agencies and institutions with multiple
locations within the Company's licensed areas and which generate heavy
telecommunications traffic between such locations. These entities can utilize
Wireless Fiber services to establish their own independent telecommunications
systems for dedicated private network services (see diagram below). Wireless
Fiber services present entities with (i) a method for providing
telecommunications connections between their buildings on a cost-effective
basis, (ii) a viable alternative to the LECs' networks that frequently use
low-capacity copper wire for "last mile" delivery, generally allowing for
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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, a provider of Internet access services that primarily serves other
Internet access providers, as well as commercial, governmental and institutional
end users. Pursuant to the Digex Agreement, the Company has the right of first
refusal to provide all of Digex's local access and/or customer interconnection
requirements through the use of the Company's Wireless Fiber services or the
resale of other facilities, as appropriate.
Potential Interactive Video Applications. The inherent qualities of 38 GHz
also may offer substantial opportunities for broadband interactive video
applications appropriate for highly customized commercial demands. While the
specific service offerings utilizing 38 GHz for video applications are still in
development, the ability to commercially utilize certain aspects of this
technology appears to be possible. The narrow-beam characteristics of 38 GHz,
allowing for frequency reuse within a small area, coupled with its broadband
capacity and multichannel capabilities may offer a significant market
opportunity in the future as the appropriate technologies emerge, although there
can be no assurance of the consumer acceptance or commercial viability of such
video services. In June 1996, the Company entered into an agreement with Source
Media, a provider of interactive technology and programming. Pursuant to this
agreement, the Company has the exclusive right, in the 38 GHz spectrum, to use
Source Media's technology and programming in connection with entertainment and
information services the Company may offer.
Marketing. The Company began marketing its Wireless Fiber services in
December 1994. Wireless Fiber services currently are marketed by the Company
primarily to long distance carriers, CAPs, CMRS service providers and LECs, as
well as businesses, government agencies and institutions. The Company has
entered into master service agreements with each of Electric Lightwave,
MCImetro, ICG and Century Telephone. The master service agreements contemplate
that the carriers will utilize the Company's Wireless
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Fiber services as a component of their own networks and set forth the general
terms of the relationship between the Company and each carrier, including the
initial term of the relationship, basic pricing schedules and service and
installation parameters. The Company also recently began to provide Wireless
Fiber services to the City of New York as a back-up disaster recovery system for
certain of its facilities, providing the city with redundancy in the event that
its land-based telecommunications service fails for any reason.
The Company currently markets or intends to market its CAP services (i) by
performing field demonstrations and testing of Wireless Fiber services, (ii) by
providing potential customers with Wireless Fiber services at reduced rates, in
order to educate such customers about the efficacy and reliability of such
services, (iii) by appearing at trade shows and advertising in trade
publications, (iv) through national sales agents and direct sales and (v)
directly to existing and potential customers of the Company's long distance
services.
CLEC Services
An integral part of the Company's CLEC business strategy is the creation
of a Wireless Fiber-based infrastructure on a city-by-city basis that will allow
the Company to provide a broad range of communications services within cities
covered by the Wireless Licenses. This infrastructure will utilize the Company's
Wireless Fiber capabilities, together with switches that will be acquired by the
Company and facilities leased or purchased from other carriers, to originate and
terminate local traffic. The Company believes that its Wireless Fiber
capabilities will provide it with a critical economic advantage over many other
service providers because of the high costs such service providers encounter in
connecting fiber-optic lines to end users. In building its infrastructure, the
Company is following a building-centric network plan, pursuant to which the
Company is identifying strategically-located buildings in areas covered by its
Wireless Licenses that can serve as hubs for its network in each city. These hub
sites will be interconnected via Wireless Fiber links to fiber optic facilities
leased or purchased from other carriers as well as to end users. The Company
believes that the establishment of a limited number of hub buildings (generally
less than a dozen) in each metropolitan area where it has Wireless Licenses will
allow it to address the vast majority of all commercial buildings targeted by
the Company in that area.
The Company intends to install approximately 17 main switches and 24
remote nodes during the next three years and plans to install its first main
switch in New York City in October 1996. The Company intends to have at least
five additional major metropolitan areas serviced by its own switches or remote
nodes by the first quarter of 1997. In July 1996, the Company entered into a
three-year agreement with Lucent providing for the purchase from Lucent of the
switching systems and related equipment and software the Company will need to
build its CLEC infrastructure. Switches will be provided to the Company at
discounted prices so long as the Company purchases certain switches during each
year of the agreement.
The Company has commenced a program designed to obtain, by the end of
1999, authorization to operate as a CLEC in virtually every state where the
Company has Wireless Licenses, which will allow the Company to file tariffs and
provide local exchange services in such states once authorization is granted.
The Company currently is authorized to operate as a CLEC in California,
Connecticut, Florida, Georgia, Illinois, Massachusetts, Michigan, New York,
Pennsylvania, Tennessee, Texas, Washington and Wisconsin, is in the process of
seeking authorization to operate as a CLEC in several additional states, and
intends to seek such authorization in a number of additional states. It also is
in the process of negotiating interconnection agreements with various local
exchange service providers, including incumbent LECs, under which the Company
will obtain network elements and/or services on an unbundled basis. The Company
has entered into a number of interconnection agreements for states that
encompass various cities covered by the Wireless Licenses. These agreements are
with carriers such as Ameritech Corp. ("Ameritech") for Illinois, Pacific Bell
("PacBell") and GTE Telecommunications ("GTE") for California, and NYNEX for New
York and Massachusetts, and Bell South for Florida, Georgia and Tennessee, among
others.
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Implementation of the Company's CLEC strategy requires significant
up-front capital expenditures to obtain necessary Roof Rights for hub buildings,
to purchase 38 GHz radios and install Wireless Fiber links on hub buildings and
to purchase and install main switches and remote nodes in up to 41 cities
through 1999. See "Risk Factors -- Risks Related to CLEC Strategy; Anticipated
Initial Negative Operating Margins in CLEC Business" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations
- -- Liquidity and Capital Resources."
Marketing. The Company plans to offer a broad range of communications and
information services including local, long distance, enhanced, frame relay,
mobile, Internet and targeted information services.
The Company has commenced offering local exchange services on a limited,
resale basis in New York City to various customers and it is anticipated that
the Company will begin offering such services in a number of additional cities
during the next nine months. As the Company commences its CLEC business in each
city, in order to gain initial market penetration in that city, it initially
intends to resell the local exchange services of other service providers, such
as CLECs and the incumbent LECs, until such time that it has established the
Wireless Fiber and switch-based infrastructure required to provide its own local
exchange services in that city. Over the next three years, the Company intends
to commence marketing its local exchange services in substantially all markets
covered by its Wireless Licenses.
The Company is targeting small and medium-sized businesses, especially
those in buildings in which the Company's Wireless Fiber capacity can be
utilized, for economic competitive advantage, to originate and/or terminate
customers local telecommunications traffic. The buildings the Company is
initially targeting each have more than 100,000 square feet of space, and, in
many instances, are not currently served by other CAPs or CLECs. The Company
estimates that there are more than 8,000 buildings in this target group,
populated by approximately 9.7 million people using more than 2.1 million phone
lines, and that these buildings represent an aggregate local exchange service
market of greater than $3.3 billion per annum. These estimates do not include
multi-dwelling residential buildings, universities, hospitals or buildings
occupied by a single tenant, and account only for voice lines and not data
lines.
The Company also intends to market its services to residences in multiple
dwelling units, such as apartment buildings. The Company intends to enter into
the residential segment of the local exchange services market primarily by
entering into partnerships and agency arrangements with shared tenant services
providers and possibly partnerships or alliances with other telecommunications
services providers.
In connection with the plan to build its CLEC networks on a city-by-city
basis, the Company is hiring numerous engineering, installation, maintenance,
customer service, and marketing and sales personnel in order to create a direct
sales force organization which will provide a high level of service to the
business and multi-dwelling residential markets. A sales force has been deployed
in New York and the Company is in the process of developing sales forces in
several additional cities during the next nine months and currently plans to
have a sales force in all metropolitan areas covered by the Wireless Licenses by
the end of 1999. The Company also is developing joint marketing, reselling and
agency relationships. For example, pursuant to the Digex Agreement, the Company
will purchase from Digex, during the next six years, a minimum of $5 million of
Internet services with the right to purchase additional amounts, in each case on
a discounted basis. The Company will resell these Internet services under the
Company's own brand name, including through the bundling of such services with
the Company's other telecommunications services.
The Company seeks to make its CLEC business an attractive choice for
potential customers by (i) offering a broad range of telecommunications services
that specifically address its target customers' needs, while providing levels of
customer satisfaction that exceed those provided by larger competitors and (ii)
exploiting the Company's Wireless Fiber service whenever feasible for economical
origination and termination of customer traffic, thereby allowing for attractive
pricing of services.
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Long Distance Services
The Company resells long distance services through its wholly-owned
subsidiary, WinStar Gateway, which has its own agreements with major long
distance carriers (AT&T, MCI, WorldCom, Inc. and U.S. Long Distance, Inc.),
which allow it to utilize their networks. WinStar Gateway's services are
tariffed at the FCC; also, WinStar Gateway has obtained authority to provide
intrastate services in the large majority of states. The Company's current
customer base encompasses primarily residential customers and small- and
medium-sized businesses. The Company has been able to sell Wireless Fiber
services to a limited number of its long distance customers and expects to be
able to sell its Wireless Fiber services to a greater percentage of such
customers in the future. In addition to providing basic long distance services,
the Company provides toll-free services, international call-back, prepaid phone
cards and certain enhanced services.
The Company's agreements with certain major long distance carriers are for
between one- and four-year terms and provide the Company with access to long
distance carriers' networks at rates which are typically discounted, varying
with monthly traffic generated by the Company through each carrier. Generally,
the Company is obligated to generate certain minimum monthly usage through each
network and, if such traffic is less than the minimum monthly usage commitment,
may be required to pay an underutilization fee in addition to its monthly bill
equal to a certain percentage of the difference between such minimum commitments
and the traffic actually generated by the Company. The Company has never paid or
been required to pay any underutilization charges. During 1995, the Company
established a reserve for possible underutilization charges.
Marketing. The Company, like many long distance carriers, historically has
experienced high customer turnover rates, primarily because a large portion of
its customer base consists of residential customers who, as a group, are
generally less loyal to telecommunications providers than larger customers, such
as businesses. The Company believes customer turnover rates have recently
increased (and will continue to increase) in the long distance industry
generally, as well as for the Company. In order to reduce customer turnover
rates, the Company is increasing its direct sales force and has decided to
expand its marketing focus, which had been primarily on residential customers,
to emphasize small- to medium-sized businesses through the introduction of
products and services readily marketable to business customers, including
prepaid phone card services and a broad array of toll-free services, including
services which allow toll-free calls to be originated nationwide. The Company
also offers business customers several flexible billing services such as master
account billing (which enables customers to aggregate billing for several
locations for management and accounting purposes and to qualify for volume
discounts), project accounting codes (which reflect accounting codes of the
customer on the billing statement) and computerized call detail reports (which
provide call detail to customers on computer disks or tape for direct input into
the customer's computer for accounting or rebilling). The Company recently has
increased its customer service staff and will be seeking to reduce the turnover
rate of its residential customers through improved customer service and more
diverse service offerings.
The Company markets its telecommunications services primarily through
independent sales representatives and resellers, through affinity group programs
and to a lesser extent, through direct marketing to resellers and commercial
accounts. Independent sales representatives typically enter into agreements with
the Company providing for payments of commissions on business generated. The use
of independent sales representatives entails the risk that the activities of
such representatives may result in unauthorized switching of long distance
carriers. See "-- Government Regulation of Telecommunications Operations." The
Company has implemented a supervisory program with its agents to reduce this
risk. The Company also markets its services to end users through print
advertising and direct mail advertising in selected markets.
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Competition in the Telecommunications Industry
Local Telecommunications Market
The local telecommunications market is intensely competitive and currently
is dominated by the RBOCs and LECs. The Company has been marketing local access
services as a CAP only since December 1994 and local exchange services as a CLEC
only since April 1996, and the Company has not obtained a significant market
share in any of the areas where it offers such services, nor does it expect to
do so given the size of the local telecommunications services market, the
intense competition and the diversity of customer requirements. In each area
covered by the Wireless Licenses, the services offered by the Company compete
with those offered by the LECs, such as the RBOCs, which currently dominate the
provision of local services in their markets. The LECs have long-standing
relationships with their customers, have the potential to subsidize competitive
services with revenues from a variety of business services and benefit from
existing state and federal regulations that currently favor the LECs over the
Company in certain respects. While legislative and regulatory changes have
provided increased business opportunities for competitive telecommunications
providers such as the Company, these same decisions have given the LECs
increased flexibility in their pricing of services. This may allow the LECs to
offer special discounts to the Company's (and other CLECs') customers and
potential customers. Further, as competition increases in the local
telecommunications market, general pricing competition and pressures will
increase significantly. As LECs lower their rates, other telecommunications
providers will be forced by market conditions to charge less for their services
in order to compete.
In addition to competition from the LECs, the Company also faces
competition from a growing number of new market entrants, such as other CAPs and
CLECs, competitors offering wireless telecommunications services, including
leading telecommunications companies, such as AT&T Wireless, and other entities
that hold or have applied for 38 GHz licenses or which may acquire such licenses
or other wireless licenses from others or the FCC. There is at least one other
CAP and/or CLEC in each metropolitan area covered by the Company's Wireless
Licenses, including, in many such areas, companies such as IntelCom, ICG,
MCImetro, MFS, Teleport and Time Warner. Many of these entities (and the LECs)
already have existing infrastructure which allows them to provide local
telecommunications services at potentially lower marginal costs than the Company
currently can attain and which could allow them to exert significant pricing
pressure in the markets where the Company provides or seeks to provide
telecommunications services. In addition, many CAPs and CLECs have acquired or
plan to acquire switches so that they can offer a broad range of local
telecommunications services.
The Company currently faces competition from other entities which offer,
or are licensed to offer, 38 GHz services, such as ART and BizTel, and could
face competition in certain aspects of its existing and proposed businesses from
competitors providing wireless services in other portions of the radio spectrum,
such as CAI, a provider of wireless Internet access services, CellularVision, a
provider of wireless television services which, in the future, also may provide
wireless Internet access and other local telecommunications services and
Associated, a provider of wireless CAP and other services. In many instances,
these service providers hold 38 GHz licenses or licenses for other frequencies
(such as 18 and 28 GHz) in geographic areas which encompass or overlap the
Company's market areas. Additionally, some of these entities enjoy the
substantial backing of, or include among their stockholders, major
telecommunications entities, such as Ameritech with respect to ART, Teleport
with respect to BizTel, and NYNEX and Bell Atlantic with respect to CAI. Due to
the relative ease and speed of deployment of 38 GHz and some other
wireless-based technologies, the Company could face intense price competition
from these and other wireless-based service providers. Furthermore, the NPRM
issued by the FCC contemplates an auction of the lower 16 channels in the 38 GHz
spectrum band, which have not been previously available for commercial use. The
grant of additional licenses by the FCC in the 38 GHz band, or other portions of
the spectrum with similar characteristics, as well as the development of new
technologies, could result in increased competition. The
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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 services based on existing technologies such as ISDN and, in
the future, on such technologies as ADSL and HDSL will likely provide additional
sources of competition to the Company's Internet access services. Additionally,
the Company believes that many LECs and CLECs already are promoting other
Internet access services.
Long Distance Market
The long distance market has relatively insignificant barriers to entry,
numerous entities competing for the same customers and a high (and increasing)
average churn rate (especially among residential customers, which the Company
historically has emphasized in its long distance reselling business, and
customers acquired from other service providers, which acquisitions are part of
the Company's ongoing long distance business strategy), as customers frequently
change long distance providers in response to the offering of lower rates or
promotional incentives by competitors. The Company competes with major carriers
such as AT&T, MCI and Sprint, as well as other national and regional long
distance carriers and resellers, many of whom own substantially all of their own
facilities and are able to provide services at costs lower than the Company's
current costs since the Company generally leases its access facilities. The
Company believes that the RBOCs also will become significant competitors in the
long distance telecommunications industry. The Company believes that the
principal competitive factors affecting its market share are pricing, customer
service, accurate billing, clear pricing policies and, to a lesser extent,
variety of services. The ability of the Company to compete effectively will
depend upon its ability to maintain high quality, market-driven services at
prices generally perceived to be equal to or below those charged by its
competitors. In 1995, the FCC announced a decision pursuant to which AT&T no
longer will be regulated as a dominant long distance carrier. This decision is
expected to increase AT&T's flexibility in competing in the long distance
telecommunications services market and, in particular, will eliminate the longer
advance tariff notice requirements previously applicable only to AT&T. To
maintain its competitive posture, the Company believes that it must be in a
position to reduce its prices in order to meet reductions in rates, if any, by
others. Any such reductions could adversely affect the Company. In addition,
LECs have been obtaining additional pricing flexibility. This may enable LECs to
grant volume discounts to larger long distance companies, which also would put
the Company's long distance business at a disadvantage in competing with larger
providers.
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Government Regulation of Telecommunications Operations
The Company's telecommunications services are subject to varying degrees
of federal, state and local regulation. Generally, the FCC exercises
jurisdiction over all telecommunications services providers to the extent such
services involve the provision of jurisdictionally interstate or international
telecommunications, including the resale of long distance services, the
provision of local access services necessary to connect callers to long distance
carriers, and the use of electromagnetic spectrum (i.e., wireless services).
With the passage of the Telecommunications Act, the FCC's jurisdiction has been
extended to include certain interconnection and related issues that
traditionally have been considered subject primarily to state regulation. The
state regulatory commissions retain nonexclusive jurisdiction over the provision
of telecommunications services to the extent such services involve the provision
of jurisdictionally intrastate telecommunications. Municipalities also may
regulate limited aspects of the Company's business by, for example, imposing
zoning requirements or permit right-of-way procedures, and certain taxes or
franchise fees.
The Telecommunications Act is intended to remove the formal barriers
between the long distance and local telecommunications services markets,
allowing service providers from each market (as well as providers of cable
television and other services) to compete in all communications markets. The
Telecommunications Act will permit the RBOCs to compete in the provision of
interLATA long distance services. Additionally, the FCC must promulgate new
regulations over the next several years to address mandates contained in the
Telecommunications Act, which may change the regulatory environment
significantly. The Telecommunications Act generally requires LECs to provide
competitors with interconnection and nondiscriminatory access to the LEC network
on more favorable terms than have been available in the past. However, such
interconnection and the terms thereof are subject to negotiations with each LEC,
which may involve considerable delays, and may not necessarily be obtained on
terms and conditions that are acceptable to the Company. In such instances,
although the Company may petition the proper regulatory agency to arbitrate
disputed issues, there can be no assurance that the Company will be able to
obtain acceptable interconnection agreements.
The Company is unable to predict what effect the Telecommunications Act
will have on the telecommunications industry in general and on the Company in
particular. No assurance can be given that any regulation will broaden the
opportunities available to the Company or will not have a material adverse
effect on the Company and its operations. Further, there can be no assurance
that the Company will be able to comply with additional applicable laws,
regulations and licensing requirements or have sufficient resources to take
advantage of the opportunities which may arise from this dynamic regulatory
environment.
As required by the Telecommunications Act, in August 1996 the FCC adopted
the Interconnection Order. These rules constitute a pro-competitive,
deregulatory national policy framework designed to remove or minimize the
regulatory, economic and operational impediments to full competition for local
services, including switched local exchange service. Although setting minimum,
uniform, national rules, the Interconnection Order also relies heavily on states
to apply these rules and to exercise their own discretion in implementing a
pro-competitive regime in their local telephone markets. Among other things, the
Interconnection Order establishes rules requiring incumbent LECs to interconnect
with new entrants such as the Company at specified network points; requires
incumbent LECs to provide carriers nondiscriminatory access to network elements
on an unbundled basis at any technically feasible point at rates that are just,
reasonable and nondiscriminatory; establishes rules requiring incumbent LECs to
allow interconnection via physical and virtual collocation; requires the states
to set prices for interconnection, unbundled elements, and termination of local
calls that are nondiscriminatory and cost-based (using a forward looking
methodology which excludes embedded costs but allows a reasonable
cost-of-capital profit); requires incumbent LECs to offer for resale any
telecommunication service that the carrier provides at retail to end users at
prices to be established by the states but which generally are at retail prices
minus reasonably avoided costs; and which requires LECs and utilities to provide
new entrants with nondiscriminatory access to poles, ducts, conduit and rights'
of way owned or controlled by LECs or utilities. Exemptions to some of these
rules are available to
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LECs which qualify as rural LECs under the Telecommunications Act. The
Interconnection Order also requires that intraLATA presubscription (pursuant to
which LECs must allow customers to choose different carriers for intraLATA toll
service without having to dial extra digits) be implemented no later than
February 1999; that LECs provide new entrants with nondiscriminatory access to
directory assistance services, directory listings, telephone numbers, and
operator services; and that LECs comply with certain network disclosure rules
designed to ensure that interoperability of multiple local switched networks.
There can be no assurance how the Interconnection Order will be implemented or
enforced or as to what affect they will have on competition within the
telecommunications industry generally or on the competitive position of the
Company specifically. A number of LECs, including the National Association of
Regulatory Utility Consumers and others have indicated publicly that they intend
to appeal aspects of the Interconnection Order. On August 28, 1996, GTE and SNET
filed a motion with the FCC in which they indicated they would seek judicial
appeal of at least certain aspects of the Interconnection Order and in which
they requested a stay of all rules adopted in the Interconnection Order until
judicial appeal is finalized.
The allocation of jurisdiction between federal and state regulators over
dedicated circuits that carry both interstate and intrastate traffic (including
private line and special access services) poses jurisdictional questions.
Although the FCC does not generally rule on the jurisdictional nature of a
carrier's traffic, under current FCC practice, non-switched telecommunications
services are considered jurisdictionally interstate (subject to FCC
jurisdiction) unless more than 90% of the traffic is intrastate in nature.
Currently, the Company's dedicated service offerings are primarily
jurisdictionally interstate in nature. The Company believes that these services
include virtually all service between a long distance carrier's POP and a POP of
that long distance carrier or another long distance carrier, and between an end
user and a long distance carrier's POP.
Under the FCC's streamlined regulation of non-dominant carriers, the
Company must file tariffs with the FCC for jurisdictionally interstate services
on an ongoing basis, although the Telecommunications Act provides the FCC with
the statutory authority to forbear from filing tariffs and the FCC is
considering whether to do so. The Company currently is not subject to price-cap
or rate-of-return regulation and it may install and operate non-radio facilities
for the transmission of interstate communications without prior FCC
authorization.
In addition, the Company has filed tariffs with the FCC as required with
respect to its provision of interstate service and recently has filed for
certification (or similar authority for purposes of providing intrastate
service) in a number of the states where it is licensed by the FCC. The Company
has received certification or other appropriate regulatory authority to provide
intrastate non-switched service in 23 states and has applied for authority in
nine additional states.
Some of the Company's services may be classified as intrastate and
therefore currently subject primarily to state regulation. In all states where
the Company is offering CAP or CLEC service, the Company (through its
state-specific operating subsidiaries) is certified or otherwise operating with
appropriate state authorization. The Company, through WinStar Gateway, provides
intrastate long distance service pursuant to certification, registration or
(where appropriate) on a deregulated basis in more than 40 states and is
currently seeking intrastate authority in the remaining continental states. The
Company expects that as its business and product lines expand and as more
procompetitive regulation of the local telecommunications industry is
implemented, it will offer additional intrastate service. The Company is seeking
to expand the scope of its intrastate service in various jurisdictions, a
process which depends upon regulatory action and, in some cases, legislative
action in the individual states. Interstate and intrastate regulatory
requirements are changing rapidly and will continue to change.
Although the Company believes that it is in substantial compliance with
all material laws, rules and regulations governing its operations and has
obtained, or is in the process of obtaining, all licenses and approvals
necessary and appropriate to conduct its operations, changes in existing laws
and regulations, including those relating to the provision of wireless local
telecommunications services via 38 GHz and/or the
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future granting of 38 GHz licenses, or any failure or significant delay in
obtaining necessary regulatory approvals, could have a material adverse effect
on the Company. On November 13, 1995, the FCC released an order freezing the
acceptance for filing of new applications for 38 GHz frequency licenses. On
December 15, 1995, the FCC announced the issuance of an NPRM, pursuant to which
it proposed to amend its current rules relating to 38 GHz, including, among
other items, the imposition of minimum construction and usage requirements and
an auction procedure for issuance of licenses in the 37-40 GHz band where
mutually exclusive applications have been filed. In addition, the FCC ordered
that those applications that are subject to mutual exclusivity with other
applicants or that were placed on public notice by the FCC after September 13,
1995 would be held in abeyance and not processed by the FCC pending the outcome
of the proceeding initiated by the NPRM. Final rules with respect to the changes
proposed by the NPRM have not been adopted and the changes proposed by the NPRM
have been, and are expected to continue to be, the subject of numerous comments
by members of the telecommunications industry, the satellite industry, various
government agencies and others. Consequently, there can be no assurance that the
NPRM will result in the issuance of rules consistent with the rules initially
proposed in the NPRM, or that any rules will be adopted. Until final rules are
adopted, the rules currently in existence remain in effect with respect to
outstanding licenses.
Pursuant to an international treaty to which the United States is a
signatory, the 38.6-40.0 GHz band is allocated on a co-primary basis to the
Fixed Satellite Services ("FSS") and the 37.5-40.5 GHz band is allocated on a
co-primary basis to the Mobile Satellite Services ("MSS"). The FCC has not
proposed rules to implement the treaty provisions, although comments and a
petition for rule making recently have been filed with the FCC by Motorola
Satellite Communications Inc. ("Motorola") requesting that such rules be
considered and, in particular, power flux density limits. On May 21, 1996, the
FCC placed on public notice for comment the petition to allocate the 37.5-38.6
GHz bands to the FSS and to establish Technical Rules for the 37.5-38.6 GHz
band. In addition, Motorola requested the FCC to adopt the power flux density
limitations of the ITU Radio Regulations for the 37.5 to 40.5 GHz band in order
to allow FSS systems and terrestrial microwave operators to co-exist on a
co-primary basis. There can be no assurance that any proposed or final rules
will not have a material adverse effect on the Company.
As part of the rulemaking proceedings required under the
Telecommunications Act, the FCC will consider reform of the existing access
charge mechanisms, including possibly substantial reductions in the rates
charged by LECs to long distance service providers for local "access" (i.e., the
transmission of a long distance call from the caller's location to the long
distance provider's POP and from the terminating POP to the recipient of the
call). CAPs, such as the Company, provide local access at rates that are
discounted from the rates charged by LECs. If the FCC were to mandate reductions
in LECs' local access charges, CAPs might be forced to substantially reduce the
rates they charge long distance providers, resulting in lower gross margins
(which, in the case of the Company, are currently negative).
Additionally, providers of long distance services, including the major
interexchange carriers as well as resellers, such as the Company, are coming
under intensified regulatory scrutiny for marketing activities by them or their
agents that result in alleged unauthorized switching of customers from one long
distance service provider to another. The FCC and a number of state authorities
are seeking to introduce more stringent regulations or take other actions to
curtail the intentional or erroneous switching of customers, which could
include, among other things, the imposition of fines, penalties and possible
operating restrictions on entities which engage or have engaged in unauthorized
switching activities. In addition, the Telecommunications Act requires the FCC
to prescribe regulations imposing procedures for verifying the switching of
customers and additional remedies on behalf of carriers for unauthorized
switching of their customers. The effect, if any, of the adoption of any such
proposed regulations or other actions on the long distance industry and the
manner of doing business therein, cannot be anticipated. Statutes and
regulations which are or may become applicable to the Company as it expands
could require the Company to alter methods of operations, at costs which could
be substantial, or otherwise limit the types of services offered by the Company.
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New Media Business
The Company formed WinStar New Media based on its belief that the ability
to deliver entertainment and information content to consumers will play an
increasingly important role in consumers' choice of a telecommunications
provider. The Company actively seeks opportunities to acquire the rights or
means to market and distribute information and entertainment content and
services that are marketable to traditional markets and which also can enhance
the marketability of the Company's telecommunications services. The Company
believes that in the future, it will be able to bundle content that it controls
with various telecommunications services its offers to provide higher-margin
products and services.
In December 1994, the Company consummated the acquisition of Non Fiction
Films, Inc. ("NFF"), a producer of documentary programming. NFF's productions to
date include ten hours of programming for the Arts and Entertainment Network's
award winning Biography(R) series and "Divine MagicTM: The World of the
Supernatural," a ten-part series that traces ancient beliefs, miracles and
mysticism from their early beginnings.
In April 1996, NFF acquired an 80% equity interest in Fox/Lorber, an
independent distributor of films, entertainment series and documentaries.
Fox/Lorber distributes its content to television and home video markets
domestically and abroad. Its home video division emphasizes the distribution of
foreign and art films and has a home video library of over 100 titles. Its
television division emphasizes the distribution of educational and entertainment
program series, sports-related programs and documentaries to broadcast and cable
stations abroad and in the United States and Canada. Under the terms of an
agreement between NFF and the holder of the remaining 20% equity interest in
Fox/Lorber, NFF has the right to require such holder to sell, and such holder
has the right to require NFF to purchase, the remaining 20% equity interest
based upon certain criteria.
Beginning in April 1996, WinStar New Media acquired an 80% equity interest
in TWL. WinStar New Media has the right to require the stockholders of TWL who
own the remaining 20% equity interest in TWL to sell, and such stockholders have
the right to require WinStar New Media to purchase, the remaining 20% equity
interest based upon certain criteria. TWL operates SportsFan, a multimedia
sports programming and production company that provides live sports programming
to more than 200 sports and talk format radio stations across the United States,
up to 24 hours a day, including to stations in 90 of the top 100 United States
markets. SportsFan owns and operates The Pete Rose Show and the Bob Golic Show,
among others, and also has developing interests in television and on-line
distribution channels.
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.
In September 1996, WinStar New Media acquired an 80% equity interest in
Millennium Marketing, Inc. (which does business as S&A Associates ("S&A").
WinStar New Media has the right to require the stockholders of S&A who own the
remaining 20% equity interest in S&A to sell, and such stockholders have the
right to require WinStar New Media to purchase, the remaining 20% equity
interest based upon certain criteria. S&A is a full service agency to media
sellers, with a focus on the provision of advertising sales representation
and/or related consulting services for content-driven interactive media
properties.
The industry in which the Company's new media subsidiary competes consists
of a very large number of entities producing, owning or controlling news,
sports, entertainment, educational and informational content and services,
including telecommunications companies, television broadcast companies, sports
franchises, film and television studios, record companies, newspaper and
magazine publishing companies, universities and on-line computer services.
Competition is intense for timely and highly marketable or usable information
and entertainment content. Almost all of the entities with which the Company's
new media subsidiary competes have significantly greater presence in the various
media markets and greater resources than the Company, including existing content
libraries, financial resources, personnel and existing distribution channels.
There can be no assurance that the Company will be able to successfully compete
in the emerging new media industry.
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Consumer Products
The Company's consumer products business is operated through its
subsidiary, WinStar Global Products. WinStar Global Products designs, markets
and distributes personal care products, including hair brushes and certain hair
accessories, and bath products, including gels, lotions, bath oils and home
fragrance products including potpourri and candles.
Marketing and Distribution
WinStar Global Products' customers are primarily large retailers,
including mass merchandisers, discount stores, department stores, national and
regional drug store chains and other regional chains. WinStar Global Products'
customers sell through more than 20,000 individual retail outlets. Its current
customer list includes the following national and regional chain stores:
Walmart, Revco Drug Stores, CVS, Mervyn's, Target, Ames, Marshalls, Eckerd Drug,
Family Dollar Stores, Sally Beauty Supply, Fay Drug, Arbor Drug and American
Drug Stores.
A significant portion of WinStar Global Products' sales is made by its
in-house sales force. The remainder of WinStar Global Products' sales typically
are made by independent sales representatives 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
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development, marketing and advertising programs and facilities. WinStar Global
Products generally competes by attempting to offer quality, service and products
to its customers at reasonable prices.
Employees
As of August 31, 1996 the Company had approximately 520 full-time and 200
part-time employees. The Company is not a party to any collective bargaining
agreements and never has experienced a strike or work stoppage. The Company
considers its relations with its employees to be good.
Properties
The Company's corporate headquarters are located at 230 Park Avenue, Suite
3126, New York, New York 10169. These headquarters are situated in approximately
11,500 square feet of space which the Company subleases for an average rent of
approximately $304,000 per annum under a sublease which expires in April 2000.
The Company has executed a lease for additional space of approximately 6,000
square feet at 230 Park Avenue for a rent of $188,176 per annum, which lease
becomes effective June 1, 1996 and expires in April 2000. The Company maintains
leases on other properties used in the operations of its subsidiaries. The
Company believes that its insurance coverage on its properties is adequate and
that the Company, and each of its subsidiaries, as the case may be, is in
compliance with the related leases.
Legal Proceedings
WinStar Gateway receives inquiries from state authorities with respect to
consumer complaints concerning the provision of telecommunications services,
including allegations of unauthorized switching of long distance carriers and
misleading marketing. The Company believes such inquiries are common in the long
distance industry and addresses such inquiries in the ordinary course of
business. WinStar Gateway recently has experienced an increased level of
consumer and regulatory complaints, a substantial majority of which arose from
the activities of a limited number of independent marketing agents. On May 10,
1996, WinStar Gateway adopted a policy of mandatory independent verification for
100% of customer orders received from these agents' programs, and effective June
10, 1996, no longer accepts customer orders from these programs. WinStar Gateway
has initiated discussions with the FCC and a number of state regulatory
authorities with respect to the resolution of any issues arising from the
terminated programs. The Company does not believe that resolution of these
issues will have a material adverse effect on the Company, its financial
condition or its results of operations.
In April 1996, an action was commenced against WinStar Gateway in the
Circuit Court of Jefferson County, Alabama, arising from long distance marketing
programs previously conducted in that state. The plaintiffs, James Schaffer and
Linda Kelly, on behalf of themselves and other Alabama residents similarly
situated, allege that their long distance service was switched to WinStar
Gateway and away from their previous providers without their consent and through
misleading and deceptive marketing practices. The plaintiffs seek monetary
relief, the exact amount of which cannot be determined. WinStar Gateway has
removed the action to federal court in Alabama and also has moved to have the
complaint dismissed. The court has issued an order denying WinStar Gateway's
motion, but, in recognition of the importance of the issue, has offered to
certify the issue for interlocutory appeal to the appropriate court of appeals,
and WinStar Gateway intends to pursue an interlocutory appeal. In the event the
action is not disposed of by motion, the Company intends to resolve the action
as expeditiously and economically as possible, which may include the diligent
defense of the action or settlement. The Company believes that it has
meritorious defenses to the allegations raised in the action. In the event
WinStar Gateway is not successful in the defense of the action, or if WinStar
Gateway elects to settle the action, the Company believes that any judgment
against WinStar Gateway, or settlement entered into by it, will not have a
material adverse effect on the Company, its financial condition or its results
of operations.
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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.
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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)............. 62 Director
William J. vanden Heuvel(1)(3)(4) 65 Director
William Harvey(3)(6)............. 53 Director
Steven B. Magyar(1)(2)(3)(4)..... 46 Director
Timothy R. Graham................ 46 Executive Vice President and Secretary
- ----------
(1) Term expires at annual meeting of stockholders in 1997
(2) Member of Audit Committee
(3) Member of Compensation Committee
(4) Member of Nominating Committee
(5) Term expires at annual meeting of stockholders in 1999
(6) Term expires at annual meeting of stockholders in 1998
Mr. Rouhana has been a director of the Company since its inception, its
Chairman of the Board since February 1991, and its Chief Executive Officer since
May 1994. Mr. Rouhana was President and Chief Executive Officer of WinStar
Companies, Inc. ("WinStar Companies") from 1983 until November 1995. Through
WinStar Companies, he served, from August 1987 to February 1989, as Vice
Chairman of the Board and Chief Operating Officer of Management Company
Entertainment Group, Inc., a diversified distributor of entertainment products
and, thereafter, as its Vice Chairman of the Board until May 1990. Since August
1992, Mr. Rouhana has been a director of TII Industries, Inc. ("TII
Industries"), a telecommunications equipment manufacturing company. From May
1991 through September 1994, he was director of Lancit Media Productions, Ltd.,
a creator of children's television programming. Mr. Rouhana was in private legal
practice from 1977 to 1984, specializing in the financing of entities involved
in the development of entertainment products and information services. Mr.
Rouhana is Vice Chairman of the Board of Governors of the United Nations
Association and is a member of certain other associations, including Business
Executives for National Security. He is a Phi Beta Kappa graduate of Colby
College, a Thomas J. Watson Fellow (1972-1973) and a graduate of Georgetown
University School of Law. Mr. Rouhana is the brother-in-law of Fredric E. von
Stange.
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Mr. Kantor has been a director of the Company since October 1994 and
President and Chief Operating Officer of the Company since September 1995. Since
its formation in November 1990, Mr. Kantor had been the President of ITC Group,
Inc. ("ITC"), a company which specializes in the development of emerging
competitive telecommunications companies. Mr. Kantor, through ITC, coordinated
all of the Company's telecommunications operations from June 1994 to September
1995 when he became President and Chief Operating Officer of the Company, at
which time services provided by ITC to the Company ceased. Mr. Kantor also is
currently the Chairman of the Board and Chief Executive Officer of Image
Telecommunications Corp. ("Image Telecom"), a company involved in the
development of information and video servers. From January 1985 to December
1990, he was President of MCI Telecommunications Corporation (Northeast
Division). Mr. Kantor was a founder of MCI International, Inc., and served as
its President and Chief Operating Officer from its founding in July 1982 to
December 1984. Mr. Kantor is a graduate of Florida State University and the
United States Military Academy at West Point.
Mr. Chrust has been a director of the Company since January 1994 and has
been employed by the Company as its Vice Chairman of the Board since January
1995, in which capacity he is responsible for strategic planning, financing and
corporate development. He has been the President of SGC Advisory Services, Inc.
("SGC"), a discretionary money-management services firm specializing in the
telecommunications and technology sector, since he founded it in October 1992.
From August 1987 to September 1992, Mr. Chrust was a director of AMNEX, Inc., an
operator services long distance company, and served as its Chairman of the
Board, Chief Executive Officer and President between October 1990 and October
1992. From August 1985 through December 1989, Mr. Chrust was the Executive Vice
President of Executone Information Systems, Inc., a telecommunications equipment
company. Mr. Chrust was Director of Technology Research and a stockholder of
Sanford C. Bernstein & Co., Inc., a Wall Street investment firm, where he was
ranked in the top tier of telecommunications analysts for more than ten years
and as the first-ranked analyst in that sector for five consecutive years. He
was associated with Sanford C. Bernstein & Co., Inc., from 1970 through 1985.
From November 1993 until February 1996, Mr. Chrust was a director of American
Communications Services, Inc., a fiber optic-based competitive access provider.
Mr. Chrust is a graduate of Baruch College.
Mr. von Stange has been a director of the Company since its inception, its
Executive Vice President since January 1993, and its Chief Financial Officer
since March 1994. Mr. von Stange was Executive Vice President of WinStar
Companies, a merchant bank and a principal stockholder of the Company from 1983
until November 1995. From December 1988 to October 1989, Mr. von Stange was
Chairman of the Board of Yankee Bargain Stores, Inc. ("Yankee"), and resumed
that position from July 1991 to December 1991. Mr. von Stange was a director of
Yankee from December 1988 until December 1991. Mr. von Stange is a graduate of
The Wharton School, University of Pennsylvania. He is the brother-in-law of
William J. Rouhana, Jr.
Mr. Wasserman has been a director of the Company since June 1995. Mr.
Wasserman was Executive Vice President and Chief Financial Officer of Time
Warner from January 1990 to December 1994 and was also a director of Time Warner
from January 1990 to March 1993. Mr. Wasserman was a member of the Office of the
President and was also a director of Warner Communications, Inc. ("Warner
Communications"), from 1981 to 1990, when that company merged with Time Warner,
and had served Warner Communications in various capacities beginning in 1966.
Mr. Wasserman serves as a member of various boards, including: several
investment companies in the Dreyfus Family of Funds; Lillian Vernon Corp., a
catalog seller of home products; Mountasia Entertainment International, Inc., an
operator of family recreation centers; The New German Fund, a New York Stock
Exchange listed mutual fund operated by Deutsche Bank AG; and IDT Corp., a
provider of telecommunications services, including Internet access and long
distance services. Mr. Wasserman also served as a director on the Chemical Bank
National Advisory Board until Chemical Bank merged with Chase Manhattan Bank in
March 1996. He is a graduate of Baruch College and Brooklyn Law School.
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Mr. vanden Heuvel has been a director of the Company since June 1995.
Since 1984, Ambassador vanden Heuvel has served as Senior Advisor to Allen &
Co., an investment banking firm, as well as counsel to the law firm Stroock &
Stroock & Lavan. He served as a director of Time Warner from 1981 to 1993 and
currently is a director of Zemex Corp., a New York Stock Exchange listed company
engaged in the mining and exploitation of industrial minerals. Ambassador vanden
Heuvel also has been a member of the IRC Group, a Washington D.C. based
consulting group comprised of former United States ambassadors, since 1981. He
has been Chairman of the Board of Governors of the United Nations Association
since 1993. From 1979 to 1981, Ambassador vanden Heuvel served as United States
Deputy Permanent Representative to the United Nations. From 1977 to 1979, he
served as United States Ambassador to the European Office of the United Nations
and various other international organizations. He was Special Assistant to
United States Attorney General Robert F. Kennedy from 1961 to 1964. Ambassador
vanden Heuvel is a graduate of Deep Springs College, Cornell University and
Cornell Law School.
Mr. Harvey has been a director of the Company since June 1994. In 1972 and
1991, respectively, Mr. Harvey founded New Electronic Media Science, Inc.
("NEMS"), and Next Century Media, Inc. ("Next Century"), marketing, media and
research consulting companies specializing in the marketing, entertainment and
interactive media industries. Mr. Harvey has served as Chief Executive Officer
and President of both NEMS and Next Century since their respective inceptions.
Through NEMS and Next Century, Mr. Harvey has worked with major television and
cable networks, several RBOCs, major film studios, IBM, AT&T, advertising
agencies, videotex companies and advertisers on the integration of advertising
into various new media. Mr. Harvey invented the marketing tool known as the Area
Dominant Influence ("ADI") for Arbitron and co-founded International Ratings
Services, Inc., the first company to provide United States movie studios,
including Warner Brothers, Columbia and CBS International, with ratings for
their television programs broadcast in foreign countries. Since 1979, Mr. Harvey
has also been the publisher of "The Marketing Pulse," a monthly advertising and
media trade newsletter.
Mr. Magyar has been a director of the Company since June 1993. Since May
1994, Mr. Magyar has been operating a private business he owns which specializes
in financial services for high net worth individuals and business owners. From
1989 to May 1994, Mr. Magyar was a regional vice president of CIGNA and during
the preceding fifteen years held various sales and sales management positions
with CIGNA. Mr. Magyar has served on CIGNA's strategic business development
committee and has been a guest lecturer at New York University. Mr. Magyar also
is a Certified Life Underwriter and Chartered Financial Consultant with the
American College of Insurance. Mr. Magyar is a member of the General Agents and
Managers Association, the National Association of Underwriters and the American
Society of CLU and ChFC. Mr. Magyar is a graduate of Colby College.
Mr. Graham has served as Executive Vice President of the Company since
October 1994. From October 1990 through September 1994, Mr. Graham was engaged
in the private practice of law and served in various capacities with National
Capital Management Corporation, a company engaged through its subsidiaries in
various businesses, such as the ownership of real estate rental properties,
industrial manufacturing and insurance matters, including as Corporate Secretary
and as President of its primary real estate and insurance subsidiaries. During
that period, Mr. Graham also acted in various capacities for WinStar Services,
Inc. ("WinStar Services"), a wholly-owned subsidiary of WinStar Companies. Prior
to 1990, Mr. Graham was a partner in the law firm of Nixon, Hargrave, Devans &
Doyle, specializing in corporate finance, regulatory and business law. Mr.
Graham was a Securities Law Editor of Barrister Magazine, an American Bar
Association publication, from 1985 to 1986 and has authored a number of
publications, including "Public Offerings in the United States by Foreign
Companies" and "Financing of Foreign Companies through United States Securities
Markets." Mr. Graham is a director of TII Industries and National Capital
Management Corporation. Mr. Graham also is a member of the Board of Advisors of
the Instructional Television Station of the Archdiocese of New York. Mr. Graham
is a graduate of Fordham Law School and the Georgetown University School of
Foreign Service.
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The Board of Directors of the Company is divided into three classes, each
of which generally serves for a term of three years, with only one class of
directors being elected in each year. The term of office of the first class of
directors (Class I), currently consisting of Steven G. Chrust, Fredric E. von
Stange and William Harvey, will expire in 1998, the term of office of the second
class of directors (Class II), currently consisting of Bert W. Wasserman and
Nathan Kantor, will expire in 1999, and the term of office of the third class of
directors (Class III), currently consisting of William J. Rouhana, Jr., William
J. vanden Heuvel and Steven B. Magyar, will expire in 1997. In each case, each
director will hold office until the next annual meeting of stockholders at which
his class of directors is to be elected, or until his successor is duly
qualified and appointed. As of August 5, 1996, the Company's by-laws have been
amended to provide that, through August 5, 1999, at each annual meeting of
stockholders in which directors are elected, persons will be elected so that a
majority of the members of the Board will consist of independent directors.
The responsibilities of the Audit Committee, which currently is composed
of William J. Rouhana, Jr., Bert Wasserman and Steven B. Magyar, include, in
addition to such other duties as the Board may specify, (i) recommending to the
Board the appointment of independent accountants; (ii) reviewing the timing,
scope and results of the independent accountant's audit examination and the
related fees; (iii) reviewing periodic comments and recommendations by the
Company's independent accountants and the Company's response thereto; (iv)
reviewing the scope and adequacy of internal accounting controls and internal
auditing activities; and (v) making recommendations to the Board with respect to
significant changes in accounting policies and procedures. As of August 5, 1996,
the Company's by-laws have been amended to provide that, through August 5, 1999,
a majority of the members of this Committee must be independent directors.
The responsibilities of the Compensation Committee, which currently is
composed of William J. Rouhana, Jr., Steven B. Magyar, William Harvey and
William J. vanden Heuvel, include, in addition to such other duties as the Board
may specify, (i) reviewing and recommending to the Board the salaries,
compensation and benefits of the executive officers and key employees of the
Company, (ii) reviewing any related party transactions on an ongoing basis for
potential conflicts of interest and (iii) administering the Company's stock
option plans. As of August 5, 1996, the by-laws of the Company have been
amended to provide that, through August 5, 1999, a majority of the members of
this Committee must be comprised of independent directors and that absent
approval of a majority of the independent members of the Compensation Committee,
the Company will not enter into any material transaction with any director or
affiliate of any director of the Company.
The responsibilities of the Nominating Committee, which currently is
composed of William J. Rouhana, Jr., William J. vanden Heuvel and Steven B.
Magyar, include, in addition to such other duties as the Board may specify,
considering and recommending to the Board nominees for directors.
Director Compensation
The Company pays each outside director $500 for attendance at each meeting
of a committee of which such director is a member and $1,000 for attendance at
each meeting of the Board of Directors. On January 13th of each year, persons
who are directors at such date are granted options to purchase 10,000 shares of
Common Stock at a per-share exercise price equal to the last sale price of a
share of Common Stock on the last trading day prior to such grant.
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PRINCIPAL STOCKHOLDERS
The table and accompanying footnotes set forth certain information as of
August 31, 1996 with respect to the stock ownership of (i) those persons or
groups who beneficially own more than 5% of the Company's Common Stock, (ii)
each director of the Company, (iii) the Company's Chief Executive Officer and
each of the Company's next four most highly compensated executive officers and
(iv) all directors and executive officers of the Company as a group (based upon
information furnished by such persons). Shares of Common Stock issuable upon
exercise of options which currently are exercisable or exercisable within 60
days of the date of this Prospectus are considered outstanding for the purpose
of calculating the percentage of Common Stock owned by such person, but not for
the purpose of calculating the percentage of Common Stock owned by any other
person. Unless otherwise indicated, the address for the persons listed below is
c/o WinStar Communications, Inc., 230 Park Avenue, Suite 3126, New York, New
York 10169.
Percent Beneficially Owned
--------------------------
Number of Shares Before After
Name and Address of Beneficial Owner Beneficially Owned Offering Offering(1)
- ------------------------------------ ------------------ -------- -----------
William J. Rouhana, Jr............ 2,123,002(2) 7.4% 6.5%
Nathan Kantor..................... 765,568(3) 2.7 2.3
Steven G. Chrust.................. 452,333(4) 1.6 1.4
Fredric E. von Stange............. 805,833(5) 2.8 2.5
Steven B. Magyar.................. 50,706(6) * *
Two Pine Point
Lloyd Harbor, New York 11742
William J. vanden Heuvel.......... 60,000(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) 1.5 1.3
Keystone Investment Management
Company......................... 2,166,800 7.7 6.7
200 Berkeley Street
Boston, Massachusetts 02116
All Directors and Executive Officers
as a Group (9 persons).......... 4,773,294(11) 15.9 13.9
- ----------
* Less than 1%.
(1) Assumes that all Convertible Notes are converted into an aggregate of
4,163,639 shares on October 23, 1996, the first possible day of
conversion.
(footnotes continued on following page)
(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
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exercisable in March 1997 and 116,667 shares of Common Stock issuable upon
exercise of options which become exercisable in two equal annual
installments in July 1997 and 1998. Mr. Rouhana has agreed that, during
the term of Nathan Kantor's employment agreement with the Company, he
would vote all shares of Common Stock he controls in favor of Mr. Kantor
as a director of the Company.
(3) Includes (i) 530,666 shares of Common Stock issuable upon exercise of
certain options. Does not include 233,334 shares of Common Stock issuable
upon exercise of other options which become exercisable in two equal
annual installments commencing in September 1997 and 78,000 shares of
Common Stock issuable upon exercise of options which become exercisable in
December 1996.
(4) Includes (i) 12,000 shares of Common Stock owned by the pension plan for
SGC Advisory Services, Inc., a telecommunications consulting firm of which
Mr. Chrust is President and owner, and (ii) 358,333 shares issuable upon
exercise of certain options owned by Mr. Chrust or members of his family.
Does not include 480,000 shares issuable upon exercise of other options
which become exercisable in four equal annual installments commencing in
January 1997 and 66,667 shares issuable upon exercise of other options
which become exercisable in two equal annual installments in July 1997 and
1998.
(5) Includes 200,000 shares of Common Stock issuable upon exercise of certain
options. Does not include 75,000 shares of Common Stock issuable upon
exercise of other options which become exercisable in March 1997.
(6) Includes (i) 1,000 shares of Common Stock owned by Mr. Magyar's spouse,
over which Mr. Magyar disclaims beneficial ownership, (ii) 1,670 shares of
Common Stock owned by benefit plans of which Mr. Magyar is the sole
trustee and primary beneficiary, and (iii) 30,000 shares of Common Stock
issuable upon exercise of certain options.
(7) Includes 50,000 shares of Common Stock issuable upon exercise of certain
options. Does not include 20,000 shares of Common Stock issuable upon
exercise of other options which become exercisable in June 1997. Also
includes 500 shares owned by Mr. vanden Heuvel's spouse, as to which he
disclaims beneficial ownership.
(8) Includes 50,000 shares of Common Stock issuable upon exercise of certain
options. Does not include 20,000 shares of Common Stock issuable upon
exercise of other options which become exercisable in June 1997.
(9) Represents 20,000 shares of Common Stock issuable upon exercise of
options.
(10) Includes 260,000 shares of Common Stock issuable upon exercise of certain
options. Does not include 50,000 shares of Common Stock issuable upon
exercise of other options which become exercisable in October 1997.
(11) Includes shares referred to as being included in notes (2) through (10).
Excludes shares referred to in such notes as being excluded.
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SELLING STOCKHOLDERS
This Prospectus relates to the resale by the Selling Stockholders listed
below of up to an aggregate of 2,216,922 shares of Common Stock. All of the
shares being registered under the Registration Statement of which this
Prospectus forms a part are being so registered pursuant to certain registration
rights granted by the Company to the Selling Stockholders. Except as footnoted,
none of the Selling Stockholders has had a material relationship with the
Company or any of its predecessors or affiliates within the past three years.
<TABLE>
<CAPTION>
Number of Beneficial
Beneficial Ownership Shares of Ownership of Percentage
of Shares of Common Shares of of Beneficial
Name of Common Stock as of Stock Common Stock Ownership
Selling Stockholder August 30, 1996 to be Sold After Sale After Sale
- ------------------- --------------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Everest Capital Limited (1) 535,714 132,174 403,540 1.6%
Morgan Stanley & Co. International(1) 400,000 400,000 -- --
Leo I. George (2) 492,500 247,500 245,000 *
Tracy Jo Hudson Lewis Trust, U.T.A. dated January
25, 1990, as amended(2) 62,500 62,500 -- --
Cindy Lee Hudson Fumei Trust, U.T.A. dated January
25, 1990, as amended(2) 62,500 62,500 -- --
Michelle Dawn Hudson Trust, U.T.A. dated January 25,
1990, as amended(2) 62,500 62,500 -- --
Jerri Dee Hudson Bell Trust, U.T.A. dated January 25,
1990, as amended(2) 62,500 62,500 -- --
The CIT Group (3) 50,000 50,000 -- --
Century Business Credit Corporation (4) 125,048 75,000 50,048 *
James J. Pinto (5) 256,443 236,443 20,000 *
Telcom Partners L.P. (5) 100,000 100,000 -- --
Bulldog Capital Partners, L.P. 384,555 125,555 259,000 *
GKN Securities Corp. (6) 158,500 158,500 -- --
ML Investors Services, Inc. (7) 70,000 70,000 -- --
Strategic Growth International, Inc. (8) 33,000 12,750 20,250 --
</TABLE>
- ----------
* Less than one percent.
(1) In May 1995, the Company, WinStar Wireless, Everest Capital Fund L.P.
("Fund"), Everest Capital International Ltd. ("Capital" and, along with
Fund the "Purchasers") and Everest Capital Limited, agent for the
Purchasers ("Agent"), entered into a note and warrant purchase agreement,
pursuant to which WinStar Wireless issued an aggregate principal amount of
$7,500,000 secured promissory notes ("Convertible Notes"), which are
convertible into shares of the Company's Common Stock and the Company
issued warrants to purchase up to 550,000 shares of Common Stock. The
Convertible Notes bear interest at the rate of 7% per annum and are
payable in May 2000. At any time, the unpaid principal amount of and
accrued interest on the Convertible Notes are convertible, at the option
of the Purchasers, into shares of Common Stock at a conversion price of
$7.00 per share (1,071,429 shares of Common Stock). After December 15,
1996, WinStar Wireless may force conversion if the last sale price of the
Common Stock is above 175% of the then conversion price (currently $12.25)
for 20 consecutive trading days. The warrants issued to the Purchasers
were
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<PAGE>
divided into three classes: EC-A Warrants, EC-B Warrants and EC-C
Warrants. The 300,000 aggregate amount of EC-A Warrants are exercisable
immediately through May 24, 2000 at an exercise price of $12.00 per share.
The 100,000 EC-B Warrants are exercisable immediately through May 24, 2000
at an exercise price of $13.00 per share. The 150,000 EC-C Warrants were
exercised in July 1995 at an exercise price of $.01 per share. In December
1996, the Agent sold 300,000 EC-A Warrants and 100,000 EC-B Warrants to
Morgan Stanley & Co. International, an affiliate of Morgan Stanley & Co.,
the placement agent in the sale of the Senior and Convertible Notes in
October 1995. The 1,071,429 shares of Common Stock issuable upon
conversion of the Convertible Notes and the 550,000 shares of Common Stock
issuable or issued upon exercise of the EC-A, EC-B and EC-C Warrants sold
to the Purchasers in the above-described transactions are being registered
for resale by the Purchaser under the Registration Statement of which this
Prospectus forms a part. As of August 31, 1996, the Purchasers have sold
or transferred 1,489,255 of the aforementioned shares.
(2) In February 1994, the Company, its wholly-owned subsidiary WinStar
Wireless, Avant-Garde and Leo I. George, President and Chief Executive
Officer of Avant-Garde, entered into an agreement, pursuant to which
WinStar Wireless acquired from Mr. George, 360 shares, or 16%, of the
issued and outstanding common stock of Avant-Garde ("Avant-Garde Common
Stock") for a purchase price consisting of (i) $500,000 cash, (ii)
$900,000 in the form of 225,000 shares of the Company's Series D
Convertible Preferred Stock ("Preferred Stock D") having a liquidation
value of $4.00 per share (which Preferred Stock D was subsequently
converted into 225,000 shares of the Company's Common Stock) and (iii) the
promissory note of WinStar Wireless in the principal amount of $200,000,
payable without interest in April 1995. WinStar Wireless also received two
options from Mr. George to purchase an additional 742.5 shares ("First
Option") and 697.5 shares ("Second Option") of Avant-Garde Common Stock,
respectively. In April 1994, WinStar Wireless exercised the First Option
to purchase an additional 742.5 shares (33% of the outstanding shares) of
Avant-Garde Common Stock at a purchase price of $4,444.44 per share (for
an aggregate purchase price of $3.3 million payable in cash). As a result
of the exercise of the First Option, WinStar Wireless raised its ownership
to a total of 49% of the outstanding Avant-Garde Common Stock. In
connection with the First Option exercise, WinStar Wireless prepaid in
full its outstanding promissory note to Mr. George in the principal amount
of $200,000. In April 1995, in lieu of exercising the Second Option,
WinStar Wireless entered into a merger agreement with Avant-Garde, Mr.
George and The Larry D. Hudson Trust ("Hudson Trust"), the only other
shareholder of Avant-Garde, pursuant to which Avant-Garde was merged into
WinStar Wireless Fiber Corp., a wholly-owned subsidiary of the Company, in
July 1995. In connection with this merger, the Company acquired 697.5
shares of Avant-Garde from Mr. George and 450 shares of Avant-Garde Common
Stock from The Hudson Trust and, in consideration thereof, issued 775,000
shares and 500,000 shares, respectively, of the Company's Common Stock to
Mr. George and The Hudson Trust. 688,000 of the 775,000 shares of Common
Stock issued to Mr. George and the 500,000 shares of Common Stock (of
which 250,000 have already been sold) issued to The Larry D. Hudson Trust
in connection with the above-described transactions are being registered
for resale by such persons under the Registration Statement of which this
Prospectus forms a part. Of such shares being registered, some may be
owned by a trust established by Mr. George for the benefit of Mr. George
and his family members. 35,000 of the 988,000 shares beneficially owned
by Mr. George are owned by the George Family L.P., of which Mr. George
is the general partner. Mr. George now serves as a Vice President of
WinStar Wireless and of WinStar Wireless Fiber Corp., a wholly-owned
subsidiary of the Company. Pursuant to the terms of the Hudson Trust, the
remaining 250,000 shares of Common Stock originally held by the Hudson
Trust have been reissued in equal amounts of 62,500 shares to four trusts
established under the Hudson Trust for the benefit of Mr. Hudson's
daughters.
(3) The CIT Group, a lending institution, was issued warrants to purchase
50,000 shares of Common Stock (with a per-share exercise price of $6.975)
in November 1994 in connection with a $5,000,000 financing provided by
such institution to WinStar Gateway, a wholly-owned subsidiary of the
Company.
(4) Century Business Credit Corporation, a lending institution, was issued (a)
50,000 shares of Common Stock upon exercise of certain warrants (with a
per-share exercise price of $3.625) issued in October
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<PAGE>
1993 in connection with an $8,000,000 import trade factoring and financing
arrangement provided by such institution to WinStar Global Products, a
wholly-owned subsidiary of the Company, and (b) 25,000 shares of Common
Stock upon exercise of certain warrants (with a per-share exercise price
of $5.75 per share) issued in May 1995, in connection with an extension of
such facility.
(5) 310,000, 55,555 and 140,000 shares of Common Stock were issued to James
Pinto, Churchill Associates L.P. and Telcom Partners, L.P., respectively,
upon exercise of certain options (with a per-share exercise price of
$1.50) granted in September 1993 in connection with loans aggregating
$500,000 provided by such persons to the Company. The loans were evidenced
by promissory notes payable in August 1996 and accruing interest at the
annual rate of 7%. All amounts under these promissory notes have been
fully paid. James Pinto is the general partner of Telcom Partners, L.P.
Mr. Pinto is also one of the principal officers of Churchill International
Inc., the corporate general partner of Churchill Associates L.P. Churchill
Associates L.P. has sold all 55,555 of its shares. Shares issued to each
person are not included in the others' beneficial ownership.
(6) 12,500 shares of Common Stock were issued to GKN Securities Corp. ("GKN")
upon exercise of options (with a per-share exercise price of $3.25). GKN
also was issued options to purchase 300,000 shares of Common Stock (with a
per-share exercise price of $8.25) in July 1995 for investment banking
services. GKN had acted as underwriter of the Company's initial public
offering of securities consummated in April 1991. As of August 31, 1996,
153,500 of such shares have been sold. The number of shares indicated
does not include shares held by GKN in its trading account.
(7) ML was issued options to purchase 55,000 shares of Common Stock (with a
per-share exercise price of $17.125) in September 1995 and options to
purchase 15,000 shares of Common Stock (with a per-share exercise price of
$18.0625) in October 1995 as additional consideration for providing the
Equipment Lease Financing.
(8) Strategic Growth International was issued options to purchase 12,750
shares of Common Stock (with a per-share exercise price of $2.25) in March
1993 for certain consulting services.
The Common Stock of the Selling Stockholders may be offered and sold from
time to time as market conditions permit in the over-the-counter market,
including the Nasdaq National Market, in negotiated transactions or otherwise,
at prices and terms then prevailing or at prices related to the then-current
market price, or in negotiated transactions. The Common Stock of the Selling
Stockholder may be sold by one or more of the following methods, without
limitation: (i) a block trade in which a broker or dealer so engaged will
attempt to sell the shares as agent but may position and resell a portion of the
block as principal to facilitate the transaction; (ii) purchases by a broker or
dealer as principal and resale by such broker or dealer for its account pursuant
to this Prospectus; (iii) ordinary brokerage transactions in the shares or
related rights and transactions in which the broker solicits purchases; and (iv)
transactions between sellers and purchasers without a broker/dealer; and (v)
underwritten offerings. In effecting sales, brokers or dealers engaged by the
Selling Stockholders may arrange for other brokers or dealers to participate.
Such brokers or dealers may receive commissions or discounts from Selling
Stockholders in amounts to be negotiated. Such brokers and dealers and any other
participating brokers and dealers may be deemed to be "underwriters" within the
meaning of the Securities Act, in connection with such sales.
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<PAGE>
DESCRIPTION OF CERTAIN INDEBTEDNESS
In October 1995, the Company raised net proceeds of $214.5 million from
the 1995 Debt Placement. There will not be any accrual of cash interest on the
Senior or Convertible Notes (collectively, the "Notes") prior to October 15,
2000 or payment of cash interest on the Notes prior to April 15, 2001. From and
after October 15, 2000, the Notes will bear interest at the rate of 14% per
annum, payable semi-annually in cash commencing April 15, 2001. The Notes mature
on October 15, 2005. At maturity, the Senior Notes will have an aggregate
principal amount of $294.2 million and the Convertible Notes will have an
aggregate principal amount of $147.1 million.
The Convertible Notes are convertible, at the option of the holder, into
Common Stock at any time on or after October 23, 1996 into that number of shares
derived by dividing the principal amount of the Convertible Notes being
converted by the Conversion Price. In addition, if the closing sale price of the
Common Stock on the Nasdaq National Market during the twelve-month periods from
October 15, 1995 through October 15, 1999 has exceeded the Market Criteria and a
registration statement with respect to the Conversion Shares is effective and
available, all of the Convertible Notes automatically will be converted into
shares of Common Stock at the close of business on the last day of the Market
Criteria Period; provided, however, that if the Market Criteria is satisfied
prior to October 15, 1996, the conversion will not occur until October 23, 1996
and will occur only if the closing sale price of the Common Stock is at least
$37.50 on such date. The Company is obligated to cause to be declared effective
a registration statement registering the issuance or resale of the shares of
Common Stock on or prior to October 23, 1996. This Prospectus forms a part of
such registration statement. If such registration statement is not declared
effective on or prior to October 23, 1996, the Conversion Price will be
decreased to $20.06.
The Indentures contain certain covenants which, among other things,
restrict the ability of the Company and certain of its subsidiaries to: incur
additional indebtedness; create liens; engage in sale-leaseback transactions;
pay dividends or make distributions in respect of their capital stock; make
investments or make certain other restricted payments; sell assets; issue or
sell stock of such subsidiaries; enter into transactions with stockholders or
affiliates; acquire assets or businesses not constituting "telecommunications
assets" (as defined in such Indentures); or consolidate, merge or sell all or
substantially all of their assets. The covenants contained in the Indentures are
subject to exceptions and the Company's new media and consumer products
subsidiary will not be subject to the covenants contained therein, although the
Company's ability to invest in such subsidiaries is limited.
In September 1995, WinStar Wireless entered into an equipment lease
financing (the "Equipment Lease Financing") with ML Investors Services, Inc.
("ML") pursuant to which ML has agreed to make up to $10.0 million of equipment
financing available to WinStar Wireless until September 1996. As of the date of
this Prospectus, ML has made available only $7.0 million under the Equipment
Lease Financing. The balance of $3.0 million may be drawn by WinStar Wireless
only if ML agrees to make such funds available, which it is not obligated to do.
As of June 30, 1996, WinStar Wireless leased equipment having a value of
approximately $7.0 million under the Equipment Lease Financing. Pursuant to a
master lease agreement between WinStar Wireless and ML (the "Lease") entered
into in connection with the Equipment Lease Financing. WinStar Wireless may
lease transceivers and related network equipment from ML or its assignee for
payments at the rate of 2.2753% per month of the equipment value (a return of
approximately 13% per annum to the lessor) and are non-cancelable for sixty
months. After twelve months, Winstar Wireless may purchase the equipment at
scheduled rates which decline over the term of the Lease and which provide for a
return of approximately 15% per annum to the lessor. WinStar Wireless'
obligations under the Lease are guaranteed by the Company. As additional
consideration for providing the Equipment Lease Financing, the Company has
agreed to issue ML five-year options to purchase shares of Common Stock at the
rate of one share of Common Stock for each $100 of the Equipment Lease Financing
amount made available at a price equal to the market price on the day prior to
the date of grant. Pursuant to such agreement, the Company has issued to ML
options to
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<PAGE>
purchase 55,000 shares of Common Stock at an exercise price of $17.125 per share
and options to purchase 15,000 shares of Common Stock at an exercise price of
$18.0625 per share.
In May 1995, the Company, WinStar Wireless and Everest Capital Fund L.P.
("Fund"), Everest Capital International Ltd. ("Capital" and, along with Fund the
"Purchasers") and Everest Capital Limited, agent for the Purchasers ("Agent"),
entered into a note and warrant purchase agreement, pursuant to which WinStar
Wireless issued $7.5 million of notes (the "Everest Notes"), which are
convertible into shares of the Company's Common Stock, and warrants to purchase
up to 550,000 shares of Common Stock. The Everest Notes bear interest at the
rate of 7% per annum, payable in cash on a semi-annual basis, and are payable in
May 2000. The Everest Notes are secured by a lien on all of the assets of
WinStar Wireless and Wireless Fiber Corp. and are guaranteed by the Company and
Wireless Fiber Corp. To secure its guaranty, the Company pledged all of the
outstanding shares of common stock of WinStar Wireless and Wireless Fiber Corp.
Under the Everest Notes, WinStar Wireless may not pay any dividends to the
Company and may not issue any capital stock. The Purchasers agreed to
subordinate their liens to any liens granted by the Company to secure up to
$30.0 million of equipment-related financing prior to February 29, 1996 and up
to an additional $20.0 million of such financing prior to February 28, 1997. Any
liens securing indebtedness above such amounts, and any liens granted after
February 28, 1997, require the consent of the Purchasers.
At any time, the unpaid principal amount of and accrued interest on the
Everest Notes are convertible, at the option of the Purchasers, into shares of
Common Stock at a conversion price of $7.00 per share. On December 28, 1995, the
Purchasers exercised their option to convert $3.75 million of principal and
approximately $25,000 of interest due under the Everest Notes into 539,255
shares of Common Stock. In addition, the holders of the Everest Notes have
committed that they will convert any remaining outstanding Everest Notes into
Common Stock on or prior to December 15, 1996. After December 15, 1996, WinStar
Wireless may force conversion of the Everest Notes if the last sale price of the
Common Stock is above 175% of the then conversion price (currently $12.25) for
20 consecutive trading days. The warrants issued to the Purchasers were divided
into three classes: EC-A Warrants, EC-B Warrants and EC-C Warrants. The 300,000
aggregate amount of EC-A Warrants are exercisable through May 24, 2000 at an
exercise price of $12.00 per share. The 100,000 EC-B Warrants are exercisable
through May 24, 2000 at an exercise price of $13.00 per share. The 150,000 EC-C
Warrants were exercised in July 1995 by Everest at an exercise price of $.01 per
share.
In November 1994, WinStar Gateway entered into a Loan and Security
Agreement ("CIT Loan Agreement") with The CIT Group/Credit Finance, Inc. ("The
CIT Group"), pursuant to which The CIT Group agreed to make a $5.0 million (less
$100,000 until WinStar Gateway has maintained three consecutive calendar months
with positive net income from operations) revolving credit facility (the "CIT
Credit Facility") available to WinStar Gateway until November 1996. Pursuant to
the terms of the CIT Loan Agreement, borrowings are limited to 90% of most
eligible accounts receivable, with availability of certain types of accounts
receivable limited to 80% and 50% (less appropriate reserves as determined by
The CIT Group). In addition, WinStar Gateway is prohibited from paying dividends
to the Company. The Company also is party to a keepwell agreement requiring the
Company to make a monthly contribution to WinStar Gateway in an amount equal to
WinStar Gateway's net income (loss), plus its depreciation and amortization,
minus its capital expenditures, if such amount is less than zero for a
particular month. Borrowings bear interest at a rate of 3.0% in excess of the
prime commercial lending rate of The Chase Manhattan Bank, N.A. ("Chase
Manhattan") and are secured by a lien on all of WinStar Gateway's assets as well
as a guarantee from the Company as to the first $2.2 million in borrowings. The
CIT Loan Agreement also provides for an annual fee of $50,000 as well as certain
underutilization fees. As additional consideration for providing the CIT Credit
Facility, the Company issued to The CIT Group warrants to purchase 50,000 shares
of Common Stock until November 3, 1998 at an exercise price of $6.975 per share,
which warrants have been exercised.
In August 1996, WinStar Global Products entered into an Amended and
Restated Credit and Security Agreement ("Credit Agreement") with IBJ Schroder
Bank & Trust Company (the "Lender"), pursuant to which
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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
replaces a $6,000,000 credit facility from Century Business Credit Corporation
("Century") which was established in 1994 and which was assigned (including a
$3,000,000 guaranty by the Company) by Century to the Lender.
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DESCRIPTION OF CAPITAL STOCK
Common Stock
The authorized capital stock of the Company includes 75,000,000 shares of
Common Stock, $.01 par value. The holders of Common Stock are entitled to one
vote for each share held of record on all matters submitted to a vote of
stockholders. Although the Company has no present intention of paying any
dividends, holders of Common Stock are entitled to receive ratably such
dividends as may be declared by the Board of Directors out of funds legally
available therefor. In the event of a liquidation or dissolution of the Company,
holders of Common Stock are entitled to share ratably in all assets remaining
after payment of liabilities and liquidation preference of preferred shares.
Holders of Common Stock have no preemptive rights and have no rights to
convert their Common Stock into any other securities. There are no redemption or
sinking fund provisions applicable to the Common Stock. All of the outstanding
shares of Common Stock are fully paid and nonassessable.
The Company's Certificate of Incorporation, as amended, provides for a
Board of Directors divided into three classes, each of which will generally
serve for a term of three years, with only one class of directors being elected
in each year; provides that directors may be removed with or without cause and
only by at least a majority of the capital stock of the Company entitled to vote
thereon; and further requires an affirmative vote of the holders of at least
two-thirds of the capital stock of the Company entitled to vote thereon to
alter, amend or repeal the provisions relating to the classification of, and the
removal of members from, the Board of Directors. Nominations for the Board of
Directors may be made by the Company Board or by any stockholder entitled to
vote for the election of directors. A stockholder entitled to vote for the
election of directors at a meeting may nominate a person or persons for election
as director only if written notice of such stockholder's intent to make such
nomination is given to the Company's Secretary not later than sixty days in
advance of such meeting. The Company's Certificate of Incorporation and By-Laws
do not provide for cumulative voting rights which means that holders of more
than one-half of the outstanding voting rights, voting for the election of
directors, can elect all of the directors to be elected, if they so choose and,
in such event, the holders of the remaining shares will not be able to elect any
of the Company's directors. A special meeting of stockholders of the Company may
be called by the request of the holders of at least 10% of the outstanding
capital stock of the Company entitled to vote generally in all matters.
The registrar and the transfer agent for the Common Stock of the Company
is Continental Stock Transfer & Trust Company, 2 Broadway, New York, New York
10004.
Preferred Stock
The authorized capital stock of the Company includes 15,000,000 shares of
"blank check" preferred stock, which may be issued from time to time in one or
more series upon authorization by the Company's Board of Directors. There
currently are no shares of preferred stock outstanding. The Board of Directors,
without further approval of the stockholders, is authorized to fix the dividend
rights and terms, conversion rights, voting rights, redemption rights and terms,
liquidation preferences, and any other rights, preferences, privileges and
restrictions applicable to each series of preferred stock. The issuance of
preferred stock (and the ability of the Board of Directors to do so without
stockholder approval), while providing flexibility in connection with possible
acquisitions and other corporate purposes could, among other things, adversely
affect the voting power of the holders of Common Stock and, under certain
circumstances, make it more difficult for a third party to gain control of the
Company, discourage bids for the Company's Common Stock at a premium or
otherwise adversely affect the market price of the Common Stock.
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Statutory Provisions Affecting Stockholders
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law. In general, the statute prohibits a publicly held
Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder unless prior to
the date the stockholder became an interested stockholder the board approved
either the business combination or the transaction that resulted in the
stockholder becoming an interested stockholder or unless one of two exceptions
to the prohibitions are satisfied: (i) upon consummation of the transaction that
resulted in such person becoming an interested stockholder, the interested
stockholder owned at least 85% of the Company's voting stock outstanding at the
time the transaction commenced (excluding, for purposes of determining the
number of shares outstanding, shares owned by certain directors or certain
employee stock plans) or (ii) on or after the date the stockholder became an
interested stockholder, the business combination is approved by the board of
directors and authorized by the affirmative vote (and not by written consent) of
at least two-thirds of the outstanding voting stock, excluding the stock owned
by the interested stockholder. A "business combination" includes a merger, asset
sale or other transaction resulting in a financial benefit to the interested
stockholder. An "interested stockholder" is a person who (other than the
corporation and any direct or indirect majority-owned subsidiary of the
corporation), together with affiliates and associates, owns (or, as an affiliate
or associate, within three years prior, did own) 15% or more of the
corporation's outstanding voting stock. It is possible that these provisions may
have the effect of delaying, deterring or preventing a change in control of the
Company.
SHARES ELIGIBLE FOR FUTURE SALE
As of August 31, 1996, there were outstanding options and warrants with
respect to an aggregate of 9,957,464 shares of Common Stock at per-share
exercise prices ranging from $1.06 to $31.12. Additionally, the Convertible
Notes (assuming the Convertible Notes are converted on October 23, 1996, the
first possible date of conversion) and certain other convertible debt are
convertible into an aggregate of 4,699,353 shares (with no additional cash
payment to the Company). Although a significant number of the outstanding shares
of Common Stock are "restricted securities," as that term is defined in Rule 144
under the Securities Act ("Restricted Shares"), and may not be sold unless such
sale is registered under the Securities Act or is made pursuant to an exemption
from the registration under the Securities Act, including the exemption provided
by Rule 144, substantially all of such Restricted Shares have been registered
for resale under the Securities Act or are currently, or will soon become,
available for sale pursuant to Rule 144. In addition, the Company may issue a
substantial number of shares of Common Stock in connection with the Milliwave
Acquisition and the Locate Acquisition, all of which would be subject to
registration rights requiring the Company to register them for resale. Sales or
the expectation of sales of a substantial number of shares of Common Stock in
the public market could adversely affect the prevailing market price of the
Common Stock.
In general, under Rule 144 as currently in effect, if two years have
elapsed since the later of the date of acquisition of Restricted Shares from the
Company or any "affiliate" of the Company, as that term is defined under the
Securities Act, the holder is entitled to sell within any three-month period a
number of shares of Common Stock that does not exceed the greater of 1% of the
then-outstanding shares of Common Stock or the average weekly trading volume of
shares of Common Stock on all exchanges and reported through the automated
quotation system of a registered securities association during the four calendar
weeks preceding the date on which notice of the sale is filed with the
Commission. Sales under Rule 144 are also subject to certain restrictions on the
manner of sales, notice requirements and the availability of current public
information about the Company. If three years have elapsed since the date of
acquisition of Restricted Shares from the Company or from any "affiliate" of the
Company, and the holder thereof is deemed not to have been an affiliate of the
Company at any time during the 90 days preceding a sale, such person would be
entitled to sell such Common Stock in the public market under Rule 144(k)
without regard to the volume limitations, manner of sale provisions, public
information requirements or notice requirements.
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The Commission recently has proposed amendments to Rule 144 and Rule
144(k) that would permit resales of restricted securities under Rule 144 after a
one-year, rather than a two-year, holding period, subject to compliance with the
other provisions of Rule 144, and would permit unlimited resales of restricted
securities by non-affiliates under Rule 144(k) after a two-year, rather than a
three-year, holding period. Adoption of such amendments could result in resales
of restricted securities sooner than would be the case under Rule 144 and Rule
144(k) as currently in effect. The Company is unable to determine when or if
such proposed amendments will be adopted.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following is a general discussion of certain United States federal
income tax consequences to beneficial owners from the conversion of Convertible
Notes into Common Stock and the ownership and disposition of the Common Stock.
This discussion is based on current provisions of the Internal Revenue Code (the
"Code"), applicable final, temporary and proposed Treasury Regulations
("Treasury Regulations"), judicial authorities, and current administrative
rulings and pronouncements of the Service and upon the facts concerning the
Company and its subsidiaries as of the date hereof. There can be no assurance
that the Service will not take a contrary view, and no ruling from the Service
has been or will be sought by the Company. Legislative, judicial, or
administrative changes or interpretations may be forthcoming that could alter or
modify the statements and conclusions set forth herein. Any such changes or
interpretations may or may not be retroactive and could affect the tax
consequences to holders.
This discussion does not address all aspects of United States federal
income taxation that may be relevant to particular holders of the Convertible
Notes or the Common Stock in light of their personal investment or tax
circumstances, or to certain types of investors (including insurance companies,
financial institutions, broker-dealers or tax-exempt organizations) subject to
special treatment under the United States federal income tax laws. This
discussion does not deal with special tax situations, such as the holding of the
Convertible Notes or Common Stock as part of a straddle with other investments
or situations in which the functional currency of a holder who is a U.S. Holder
(as defined below) is not the United States dollar. In addition, this discussion
deals only with Convertible Notes and Common Stock held as capital assets within
the meaning of Section 1221 of the Code. This discussion does not deal with
foreign, state and local consequences that may be relevant to non-U.S. Holders
in light of their personal circumstances.
As used in the discussion which follows, the term "U.S. Holder" means a
beneficial owner of Convertible Notes or Common Stock, as applicable, that for
United States federal income tax purposes is (i) a citizen or resident of the
United States, (ii) a corporation, partnership or other entity created or
organized in or under the laws of the United States or of any political
subdivision thereof, or (iii) an estate or trust the income of which is subject
to United States federal income taxation regardless of its source. The term
"Non-U.S. Holder" means a Holder of Convertible Notes or Common Stock, as
applicable, that is, for United States federal income tax purposes, not a U.S.
Holder.
An individual may, subject to certain exceptions, be deemed to be a
resident alien (as opposed to a nonresident alien) by virtue of being present in
the United States for at least 31 days in the calendar year and for an aggregate
of at least 183 days during a three-year period ending in the current calendar
year (counting for such purposes all of the days present in the current year,
one-third of the days present in the immediately preceding year, and one-sixth
of the days present in the second preceding year). Resident aliens are subject
to U.S. federal tax as if they were U.S. citizens.
HOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS AS TO THE PARTICULAR TAX
CONSEQUENCES TO THEM OF CONVERTING THE CONVERTIBLE NOTES INTO COMMON STOCK
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AND HOLDING AND DISPOSING OF THE COMMON STOCK, INCLUDING THE APPLICABILITY AND
EFFECT OF ANY STATE, LOCAL OR FOREIGN TAX LAWS.
Tax Consequences to U.S. Holders
Exercise of Conversion Rights
No gain or loss will be recognized for United States federal income tax
purposes by a U.S. Holder of the Convertible Notes upon the conversion thereof
in exchange for Common Stock (except to the extent of cash, if any, received in
lieu of the issuance of fractional shares of Common Stock). A U.S. Holder's tax
basis in the Common Stock will equal the sum of the adjusted tax basis in the
Convertible Notes reduced by the portion of adjusted tax basis allocated to any
fractional Common Stock exchanged for cash. The adjusted tax basis in the
Convertible Notes is the purchase price of such Convertible Note to the U.S.
Holder as increased by any accrued original issue discount (net of all amortized
acquisition premiums) and market discount previously included in income by the
U.S. Holder and decreased by amortizable bond premiums, if any, deducted over
the term of the Convertible Notes. The holding period of the Common Stock
received on the conversion of the Convertible Notes will include the period
during which the Convertible Notes were held by such U.S. Holder, except that
the holding period of Common Stock allocable to accrued original issue discount
may commence on a later date. If any cash is received in lieu of fractional
shares, the U.S. Holder will recognize gain or loss, and the character and the
amount of such gain or loss will be determined as if the U.S. Holder had
received such fractional shares and then immediately sold them for cash.
Adjustments
The Conversion Ratio applicable to the Convertible Notes is subject to
adjustments under certain circumstances. Under Section 305 of the Code and the
Treasury Regulations promulgated thereunder, holders of the Convertible Notes
will be treated as having received a constructive distribution, resulting in
ordinary income to the extent of the Company's current and accumulated earnings
and profits, if, and to the extent that, adjustments in the Conversion Ratio are
coupled with or occur by reason of certain taxable distributions on stock and
increase the proportionate interest of a holder of a Convertible Note in the
earnings and profits of the Company. The Company believes that it does not
presently have earnings and profits for tax purposes. Accordingly, any such
adjustment will not be treated as a taxable distribution to holders of the
Convertible Notes so long as the Company continues not to have earnings and
profits for tax purposes.
Dividends
The Company does not presently intend to pay dividends on its Common Stock
in the foreseeable future. If the Company should pay a dividend on the Common
Stock, the dividend will be taxable as ordinary income to the extent of the
Company's current and accumulated earnings and profit. If there are no such
earnings and profits, such dividend would be treated first as a return of
capital to the extent of the U.S. Holder's tax basis in the Common Stock, and
then, if the amount of the dividend exceeds such tax basis, as capital gain to
the extent of such excess. As a result, until such time as the Company has
current or accumulated earnings and profits, distributions on Common Stock will
be a nontaxable return of capital and will be applied against and reduce the
adjusted tax basis of any Common Stock (but not below zero) in the hands of its
holder. The Company believes that it does not presently have accumulated
earnings and profits for tax purposes. However, the Company cannot predict
whether it will have earnings and profits for future taxable years. See "Risk
Factors -- Historical and Anticipated Future Operating Losses and Negative
EBITDA."
Sale of Common Stock
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Gain or loss will generally be recognized upon a sale of the Common Stock
received upon conversion of Convertible Notes in an amount equal to the
difference between the amount realized on the transfer and the holder's adjusted
tax basis in the Common Stock. Such gain or loss will be capital gain or loss,
provided the Common Stock is held as a capital asset, and will be long-term
capital gain or loss with respect to Common Stock held for more than one year.
Backup Withholding
In general, certain payments to a non-corporate U.S. Holder of dividends
on Common Stock and the gross proceeds of a disposition of the Common Stock will
be subject to United States information reporting requirements. In general,
subject to certain exceptions, such payments will be subject to United States
backup withholding tax at a rate of 31% if the U.S. Holder, among other things,
(i) fails to furnish his social security number or other taxpayer identification
number ("TIN") to the payor responsible for backup withholding (for example, the
U.S. Holder's securities broker), (ii) furnishes to such payor an incorrect TIN,
(iii) fails to provide such payor with a certified statement, signed under
penalties of perjury, that the TIN provided to the payor is correct and that the
U.S. Holder is not subject to backup withholding or (iv) fails to report
properly interest and dividends on his tax return. A holder who does not provide
the Company or the applicable reporting entity with his or her correct TIN may
be subject to penalties under the Code.
The amount of any backup withholding from a payment to a holder will be
allowed as a credit against such holder's United States federal income tax
liability and may entitle such holder to a refund, provide that the required
information is furnished to the Service.
Tax Consequences to Non-U.S. Holders
Exercise of Conversion Rights
No gain or loss will be recognized for United States federal income tax
purposes by non-U.S. Holders of the Convertible Notes upon the conversion
thereof in exchange for full shares of Common Stock. To the extent any cash is
received in lieu of the issuance of fractional shares of Common Stock, the rules
applicable to gain from a sale of Common Stock will apply. See "Gain on
Disposition of Common Stock."
Dividends
The Company does not anticipate paying cash dividends on its capital stock
in the foreseeable future. See "Dividend Policy." In the event, however, that
dividends are paid on shares of Common Stock, dividends paid to a Non-U.S.
Holder of Common Stock will be subject to withholding of United States federal
income tax at a 30% rate or such lower rate as may be provided by an income tax
treaty between the United States and the country of which the Non-U.S. Holder is
a tax resident, unless (i) the dividends are effectively connected with the
conduct of a trade or business of the Non-U.S. Holder within the United States
and the Non-U.S. Holder provides the payor with proper documentation or (ii) if
a tax treaty applies, the dividends are attributable to a U.S. permanent
establishment maintained by the Non-U.S. Holder. In order to claim the benefit
of an applicable tax treaty rate, a Non-U.S. Holder may have to file with the
Company or its dividend paying agent an exemption or reduced treaty rate
certificate or letter in accordance with the terms of such treaty. Dividends
that are effectively connected with the conduct of a trade or business within
the United States or, if a tax treaty applies, are attributable to such a United
States permanent establishment, are subject to United States federal income tax
on a net income basis (that is, after allowance for applicable deductions) at
applicable graduated individual or corporate rates. Any such effectively
connected dividends received by a foreign corporation may, under certain
circumstances, be subject to an additional "branch profits tax" at a 30% rate or
such lower rate as may be specified by an applicable income tax treaty.
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Under current United States Treasury regulations, dividends paid to an
address outside the United States are presumed to be paid to a resident of such
country for purposes of the withholding discussed above (unless the payor has
knowledge to the contrary) and, under the current interpretation of United
States Treasury regulations, for purpose of determining the applicability of a
tax treaty rate. However, under proposed United States Treasury regulations, in
the case of dividends paid after December 31, 1997 (December 31, 1999 in the
case of dividends paid to accounts in existence on or before the date that is 60
days after the proposed United States Treasury regulations are published as
final regulations), a Non-U.S. Holder generally would be subject to United
States withholding tax at a 31% rate under the backup withholding rules
described below, rather than at a 30% rate or a reduced rate under an income tax
treaty, unless certain certification procedures (or, in the case of payments
made outside the United States with respect to an offshore account, certain
documentary evidence procedures) are complied with, directly or through an
intermediary. Certain certification and disclosure requirements must be complied
with in order to be exempt from withholding under the effectively connected
income exemption.
A Non-U.S. Holder of Common Stock eligible for a reduced rate of United
States withholding tax pursuant to an income tax treaty may obtain a refund of
any excess amounts withheld by filing an appropriate claim for refund with the
Internal Revenue Service (the "IRS"), provided that the required information is
furnished to the IRS.
Gain on Disposition of Common Stock
A Non-U.S.Holder generally will not be subject to United States federal
income tax with respect to gain recognized on a sale or other disposition of
Common Stock unless (i) (a) the gain is effectively connected with a trade or
business conducted by the Non-U.S. Holder within the United States or (b) if a
tax treaty applies, the gain is attributable to a United States permanent
establishment maintained by the Non-U.S. Holder, (ii) in the case of a Non-U.S.
Holder who is an individual and holds the Common Stock as a capital asset, such
holder is present in the United States for 183 or more days in the taxable year
of the sale or other disposition and certain other conditions are met, (iii) the
Non-U.S. Holder is subject to tax pursuant to certain provisions of the Code
applicable to United States expatriates, or (iv) the Company is or has been a
"U.S. real property holding corporation" for United States federal income tax
purposes at any time within the shorter of the five-year period preceding such
disposition or the period such Non-U.S. Holder held the Common Stock. If the
Company were, or to become, a U.S. real property holding corporation, gains
realized upon a disposition of Common Stock by a Non-U.S. Holder which did not
directly or indirectly own more than 5% of the Common Stock during the shorter
of the periods described above generally would not be subject to United States
federal income tax so long as the Common Stock is "regularly traded" on an
established securities market. The Company believes that it has not been, is not
currently, and does not anticipate becoming, a "U.S. real property holding
corporation" for United States federal income tax purposes.
If an individual Non-U.S. Holder falls under clause (i) above, such
individual generally will be taxed on the net gain derived from a sale under
regular graduated United States federal income tax rates. If an individual
Non-U.S. Holder falls under clause (ii) above, such individual generally will be
subject to a flat 30% tax on the gain derived from a sale, which may be offset
by certain United States capital losses (notwithstanding the fact that such
individual is not considered a resident of the United States). Thus, individual
Non-U.S. Holders who have spent (or expect to spend) 183 days or more in the
United States in the taxable year in which they contemplate a sale of Common
Stock are urged to consult their tax advisors as to the tax consequences of such
sale.
If a Non-U.S. Holder that is a foreign corporation falls under clause (i)
above, it generally will be taxed on its net gain under regular graduated United
States federal income tax rates and, in addition, will be subject to the branch
profits tax equal to 30% of its "effectively connected earnings and profits"
within the meaning of the Code for the taxable year, as adjusted for certain
items, unless it qualifies for a lower rate under an applicable income tax
treaty.
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Federal Estate Tax
Common Stock owned or treated as owned by an individual who is neither a
United States citizen nor a United States resident (as defined for United States
federal estate tax purposes) at the time of death will be included in the
individual's gross estate for United States federal estate tax purposes, unless
an applicable estate tax treaty provides otherwise and, therefore, may be
subject to United States federal estate tax.
Information Reporting and Backup Withholding Tax
Under United States Treasury regulations, the Company must report annually
to the IRS and to each Non-U.S. Holder the amount of dividends paid to such
holder and the tax withheld with respect to such dividends. These information
reporting requirements apply even if withholding was not required because the
dividends were effectively connected with a trade or business in the United
States of the Non-U.S. Holder or withholding was reduced or eliminated by an
applicable income tax treaty. Copies of the information returns reporting such
dividends and withholding may also be made available to the tax authorities in
the country in which the Non-U.S. Holder is a resident under the provisions of
an applicable income tax treaty or agreement.
United States backup withholding (which generally is a withholding tax
imposed at the rate of 31% on certain payments to persons that fail to furnish
certain information under the United States information reporting requirements)
generally will not apply to (i) dividends paid to Non-U.S. Holders that are
subject to the 30% withholding discussed above (or that are not so subject
because a tax treaty applies that reduces or eliminates such 30% withholding) or
(ii) under current law, dividends paid to a Non-U.S. Holder at an address
outside of the United States. However, under proposed United States Treasury
regulations, in the case of dividends paid after December 31, 1997 (December 31,
1999 in the case of dividends paid to accounts in existence on or before the
date that is 60 days after the proposed United States Treasury regulations are
published as final regulations), a Non-U.S. Holder generally would be subject to
backup withholding at a 31% rate, unless certain certification procedures (or,
in the case of payments made outside the United States with respect to an
offshore account, certain documentary evidence procedures) are complied with,
directly or through an intermediary.
Backup withholding and information reporting generally will apply to
dividends paid to addresses inside the United States on shares of Common Stock
to beneficial owners that are not "exempt recipients" and that fail to provide
in the manner required certain identifying information.
In general, backup withholding and information reporting will not apply to
a payment of the gross proceeds of a sale of Common Stock effected at a foreign
office of a broker. If, however, such broker is, for United States federal
income tax purposes, a U.S. person, a controlled foreign corporation or a
foreign person, 50% or more of whose gross income for certain periods is derived
from activities that are effectively connected with the conduct of a trade or
business in the United States, such payments will not be subject to backup
withholding but will be subject to information reporting, unless (i) such broker
has documentary evidence in its records that the beneficial owner is a Non-U.S.
Holder and certain other conditions are met, or (ii) the beneficial owner
otherwise establishes an exemption. Temporary United States Treasury regulations
provide that the Treasury is considering whether backup withholding should be
required in such circumstances. Under proposed United States Treasury
regulations not currently in effect, backup withholding will not apply to such
payments absent actual knowledge that the payee is a United States person. The
IRS recently proposed regulations addressing certain withholding, certification
and information reporting rules (some of which have been mentioned above) which
could affect treatment of the payment of the proceeds discussed above. Non-U.S.
Holders should consult their tax advisors regarding the application of these
rules to their particular situations, the availability of an exemption
therefrom, the procedure for obtaining such an exemption, if available, and the
possible application of the proposed United States Treasury regulations
addressing the withholding and the information reporting rules.
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Payment by a United States office of a broker of the proceeds of a sale of
Common Stock is subject to both backup withholding and information reporting
unless the beneficial owner certifies under penalties of perjury that it is a
Non-U.S. Holder, or otherwise establishes an exemption. Backup withholding is
not an additional tax. Any amounts withheld under the backup withholding rules
will be allowed as a refund or a credit against such holder's U.S. federal
income tax liability provided the required information is furnished to the IRS.
THE FOREGOING SUMMARY DOES NOT DISCUSS ALL ASPECTS OF UNITED STATES FEDERAL
INCOME TAXATION THAT MAY BE RELEVANT TO A PARTICULAR HOLDER OF CONVERTIBLE NOTES
OR COMMON STOCK IN LIGHT OF ITS PARTICULAR CIRCUMSTANCES AND INCOME SITUATION.
HOLDERS SHOULD CONSULT THEIR OWN TAX ADVISOR AS TO THE SPECIFIC TAX CONSEQUENCES
TO THEM FROM THE CONVERSION OF THE CONVERTIBLE NOTES INTO COMMON STOCK AND THE
OWNERSHIP AND DISPOSITION OF COMMON STOCK, INCLUDING THE APPLICATION AND EFFECT
OF STATE, LOCAL, FOREIGN AND OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES
IN FEDERAL OR OTHER TAX LAWS.
LEGAL MATTERS
The legality of the securities offered hereby and certain tax matters are
being passed upon for the Company by Graubard Mollen & Miller, New York, New
York. Certain partners and employees of Graubard Mollen & Miller own shares of
Common Stock.
EXPERTS
The consolidated financial statements and financial statement schedule of
the Company as of December 31, 1995 and February 28, 1995, and for the ten
months ended December 31, 1995 and for the two years in the period ended
February 28, 1995, the financial statements of Avant-Garde Telecommunications,
Inc. as of February 28, 1995 and for the two years in the period ended February
28, 1995 and the financial statements of Milliwave Limited Partnership as of
December 31, 1995 and for the period April 25, 1995 (inception) through December
31, 1995 included in this Prospectus, have been audited by Grant Thornton LLP,
independent certified public accountants, to the extent and for the periods
indicated in their reports thereon, and are included herein in reliance upon the
authority of such firm as experts in giving such reports.
The financial statements of the Microwave Division of Local Area
Telecommunications, Inc. as of December 31, 1995 and 1994, and for each of the
years then ended, appearing in this Prospectus and Registration Statement have
been audited by Ernst & Young LLP, independent auditors, as set forth in their
report thereon (which contains an explanatory paragraph with respect to the
Division's ability to continue as a going concern as discussed in Note 1 to the
financial statements) appearing elsewhere herein, and are included in reliance
upon such report given upon the authority of such firm as experts in accounting
and auditing.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Exchange
Act, and, in accordance therewith, is required to file reports, proxy statements
and other information with the Commission. Such reports, proxy statements and
other information can be inspected and copied at the Public Reference Section of
the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and
at the Commission's regional offices at Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661 and 7 World Trade Center, Suite
1300, New York, New York 10048. Copies of the reports, proxy statements and
other information can be obtained from the Public Reference Section of the
Commission, Washington, D.C. 20549,
86
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at prescribed rates. In addition, all reports filed by the Company via the
Commission's Electronic Data Gathering and Retrieval System (EDGAR) can be
obtained from the Commission's Internet web site located at www.sec.gov. The
Common Stock of the Company is traded on the Nasdaq National Market (Symbol:
WCII), and such reports, proxy statements and other information concerning the
Company also can be inspected at the offices of the Nasdaq National Market, 1735
K Street, N.W., Washington, D.C. 20006.
The Company has filed with the Commission two Registration Statements
under the Securities Act on Form S-3 (Nos. 333-6073 and 333-6079, respectively)
with respect to the securities offered by the Company pursuant to this
Prospectus and a Registration Statement on Form S-3 (No. 33-________) with
respect to the securities offered by the Selling Stockholders pursuant to this
Prospectus. As permitted by the rules and regulations of the Commission, this
Prospectus does not contain all of the information set forth in the Registration
Statements. For further information about the Company and the securities offered
hereby, reference is made to the Registration Statements and to the financial
statements, exhibits and schedules filed therewith. The statements contained in
this Prospectus about the contents of any contract or other document referred to
are not necessarily complete, and in each instance, reference is made to the
copy of such contract or other document filed as an exhibit to the Registration
Statements, each such statement being qualified in all respects by such
reference. Copies of each such document may be obtained from the Commission at
its principal office in Washington, D.C. upon payment of the charges prescribed
by the Commission.
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INDEX TO FINANCIAL STATEMENTS
Page
----
WinStar Communications, Inc. and Subsidiaries
Report of Independent Certified Public Accountants..................... F-2
Consolidated Balance Sheets as of June 30, 1996 (unaudited),
December 31,1995 and February 28, 1995............................... F-3
Consolidated Statements of Operations, Six Months Ended
June 30, 1996 and 1995 (unaudited), Ten Months Ended December 31,
1995 and 1994 (unaudited as to 1994),
and Years Ended February 28, 1995 and 1994........................... F-4
Consolidated Statements of Stockholders' Equity, Ten Months
Ended December 31, 1995, and Years Ended February 28, 1995
and 1994............................................................. F-5
Consolidated Statements of Cash Flows, Six Months Ended
June 30, 1996 and 1995 (unaudited), Ten Months Ended
December 31, 1995, and Years Ended February 28, 1995
and 1994............................................................. F-8
Notes to Consolidated Financial Statements............................. F-9
The Microwave Division of Local Area Telecommunications, Inc.
Report of Independent Auditors..........................................F-33
Balance Sheets as of June 30, 1996 (unaudited),
December 31, 1995 and 1994............................................F-34
Statements of Operations, Six Months Ended June 30, 1996 and
1995 (unaudited) and Years Ended December 31, 1995 and 1994...........F-35
Statements of Divisional (Deficit) Surplus, Six Months Ended
June 30, 1996 (unaudited) and Years Ended December 31, 1995
and 1994............................................................ F-36
Statements of Cash Flows, Six Months Ended June 30, 1996 and 1995
(unaudited) and Years Ended December 31, 1995 and 1994.............. F-37
Notes to Financial Statements......................................... F-38
Avant-Garde Telecommunications, Inc.
Report of Independent Certified Public Accountants.................... F-42
Balance Sheet as of February 28, 1995................................. F-43
Statements of Operations, Period March 1, 1995 to July 17, 1995
(unaudited) and Years Ended February 28, 1995 and 1994.............. F-44
Statements of Cash Flows, Period March 1, 1995 to July 17, 1995
(unaudited) and Years Ended February 28, 1995 and 1994.............. F-45
Notes to Financial Statements......................................... F-46
Milliwave Limited Partnership
Report of Independent Certified Public Accountants.................... F-49
Balance Sheets as of June 30, 1996 (unaudited) and December
31, 1995............................................................ F-50
Statement of Operations, Six Months Ended June 30, 1996............... F-51
Statement of Changes in Partners' Capital, April 25, 1995
(inception) through December 31, 1995 and the Six Months Ended
June 30, 1996 (unaudited)........................................... F-52
Statement of Cash Flows, Six Months Ended June 30, 1996............... F-53
Notes to Financial Statements......................................... F-54
Unaudited Pro Forma Condensed Consolidated Financial Statements
Unaudited Pro Forma Condensed Consolidated Balance Sheet
as of June 30, 1996................................................. F-57
Unaudited Pro Forma Condensed Consolidated Statement of Operations,
Six Months Ended June 30, 1996...................................... F-58
Unaudited Pro Forma Condensed Consolidated Statement of Operations,
Ten Months Ended December 31, 1995.................................. F-59
Notes to Unaudited Pro Forma Condensed Consolidated Financial
Statements.......................................................... F-60
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
WinStar Communications, Inc.
We have audited the accompanying consolidated balance sheets of WinStar
Communications, Inc. and Subsidiaries as of December 31, 1995 and February 28,
1995, and the related consolidated statements of operations, stockholders'
equity, and cash flows for the ten months ended December 31, 1995 and the years
ended February 28, 1995 and 1994. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatements. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of WinStar
Communications, Inc. and Subsidiaries as of December 31, 1995 and February 28,
1995, and the consolidated results of their operations and their consolidated
cash flows for the ten months ended December 31, 1995 and the years ended
February 28, 1995 and 1994, in conformity with generally accepted accounting
principles.
GRANT THORNTON LLP
New York, New York
March 8, 1996
F-2
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31, February 28,
1996 1995 1995
------------ ------------ -----------
(unaudited)
<S> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents........................... $ 75,600,073 $138,105,824 $ 3,156,354
Short term investments.............................. 115,460,429 73,594,849 --
------------ ------------ -----------
Total cash, cash equivalents and short term
investments..................................... 191,060,502 211,700,673 3,156,354
Investments in marketable equity securities......... 937,500 6,515,250 --
Accounts receivable, net of allowance for
doubtful accounts of $1,091,000, $800,000
and $824,000...................................... 14,905,197 8,683,860 4,035,007
Notes receivable.................................... 214,318 199,635 706,329
Inventories......................................... 10,924,137 7,391,686 4,232,927
Prepaid expenses and other current assets........... 8,888,945 3,568,448 983,380
------------ ------------ -----------
Total current assets.............................. 226,930,599 238,059,552 13,113,997
Property and equipment, net........................... 25,788,184 15,898,005 2,663,068
Notes receivable...................................... 385,106 3,488,948 2,289,002
Investments and advances.............................. 399,729 322,733 7,866,927
Licenses, net......................................... 12,519,169 12,556,281 --
Intangible assets, net................................ 10,061,579 3,033,505 3,213,785
Deferred financing costs.............................. 11,157,759 10,525,301 --
Other assets.......................................... 2,103,036 1,478,530 362,673
------------ ------------ -----------
Total assets...................................... $289,345,161 $285,362,855 $ 29,509,452
============ ============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Loans payable $ 8,758,076 $ 8,287,461 $ --
Accounts payable and accrued expenses............... 23,738,727 13,513,369 5,732,039
Capitalized lease obligations....................... 1,528,811 1,355,255 332,239
------------ ------------ -----------
Total current liabilities......................... 34,025,614 23,156,085 6,064,278
Senior notes payable.................................. 164,715,601 153,971,508 --
Convertible notes payable............................. 82,357,801 76,985,754 --
Other notes payable................................... 3,585,777 3,416,288 4,410,753
Capitalized lease obligations......................... 5,450,617 6,081,299 754,525
------------ ------------ -----------
Total liabilities................................. 290,135,410 263,610,934 11,229,556
Commitments and contingencies
Stockholders' equity
Preferred stock..................................... 688,900 688,900 732,691
Common stock, $.01 par value, authorized
75,000,000 shares, issued 30,694,260,
29,707,792 and 20,146,934 shares;
outstanding 28,037,497, 27,201,029 and
20,146,934 shares................................. 306,943 297,079 201,470
Additional paid-in capital.......................... 111,186,462 103,836,510 42,583,679
Accumulated deficit................................. (70,126,061) (41,311,075) (25,237,944)
------------ ------------ -----------
42,056,244 63,511,414 18,279,896
Less Treasury stock (42,733,993) (39,677,743) --
Deferred compensation............................... -- (1,100,000) --
Unrealized loss on investments in
marketable equity securities...................... (112,500) (981,750) --
------------ ------------ -----------
Total stockholders' equity...................... (790,249) 21,751,921 18,279,896
------------ ------------ -----------
Total liabilities and stockholders' equity...... $289,345,161 $285,362,855 $29,509,452
============ ============ ===========
</TABLE>
See Notes to Consolidated Financial Statements
F-3
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the six months For the ten months For the years ended
ended June 30, ended December 31, February 28,
------------------------- ------------------------- -------------------------
(unaudited) (unaudited)
1996 1995 1995 1994 1995 1994
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net sales ...................... $ 30,683,587 $ 12,439,846 $ 29,771,472 $ 22,018,106 $ 25,564,760 $ 15,625,019
Cost of sales .................. 17,647,510 9,032,733 19,546,351 14,761,290 17,702,570 10,712,090
------------ ------------ ------------ ------------ ------------ ------------
Gross profit ................. 13,036,077 3,407,113 10,225,121 7,256,816 7,862,190 4,912,929
Selling, general and
administrative
expenses ..................... 28,005,469 6,966,060 19,266,466 9,974,189 12,688,859 6,887,913
Restructuring expense .......... -- -- -- 607,609 607,609 --
Depreciation ................... 834,965 161,311 770,284 137,055 177,158 92,537
------------ ------------ ------------ ------------ ------------ ------------
Operating loss ................. (15,804,357) (3,720,258) (9,811,629) (3,462,037) (5,611,436) (2,067,521)
Other (income) expenses
Interest expense ............. 18,014,704 429,928 7,630,079 504,857 637,028 744,371
Interest income .............. (5,657,530) (294,111) (2,889,813) (297,051) (384,572) (109,320)
Amortization of
intangibles ................ 466,568 148,905 439,888 181,972 225,176 239,993
Equity in loss of
Avant-Garde ................ -- 1,103,752 865,676 766,543 1,108,962 --
Loss on discontinuation
of product lines ........... -- -- -- -- -- 292,376
Performance stock
option expense ............. -- -- -- -- -- 5,316,667
Other ........................ -- -- -- -- 32,165 (161,986)
------------ ------------ ------------ ------------ ------------ ------------
Net loss before
extraordinary item and
income taxes ................. (28,628,099) (5,108,732) (15,857,459) (4,618,358) (7,230,195) (8,389,622)
Extraordinary item
Gain from
extinguishment of debt ....... -- -- -- -- -- 194,154
------------ ------------ ------------ ------------ ------------ ------------
Net loss before income
taxes ........................ (28,628,099) (5,108,732) (15,857,459) (4,618,358) (7,230,195) (8,195,468)
Income taxes ................... 186,887 -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Net loss ..................... $(28,814,986) $ (5,108,732) $(15,857,459) $ (4,618,358) $ (7,230,195) $ (8,195,468)
============ ============ ============ ============ ============ ============
Net loss per share
Before extraordinary
item ......................... $ (1.05) $ (0.25) $ (0.70) $ (0.28) $ (0.42) $ (1.09)
Extraordinary item ........... -- -- -- -- -- 0.03
------------ ------------ ------------ ------------ ------------ ------------
Net loss..................... $ (1.05) $ (0.25) $ (0.70) $ (0.28) $ (0.42) $ (1.06)
============ ============ ============ ============ ============ ============
Weighted average
shares outstanding ......... 27,468,186 20,183,505 22,769,770 16,609,305 17,122,318 7,718,988
============ ============ ============ ============ ============ ============
</TABLE>
See Notes to Consolidated Financial Statements
F-4
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE TEN MONTHS ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
Preferred Stock
---------------------------------------
B E Common Stock Additional
----------------- ---------------- ---------------- Paid-in Accumulated
Shares Amount Shares Amount Shares Amount Capital Deficit
------ ------ ------ ------ ------ ------ ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at
February 28, 1995. 732.69 $732,691 0.00 $ -- 20,146,934 $201,470 $42,583,679 $(25,237,944)
Issuances of
common stock for
cash (exercise of
options and
otherwise)........ 3,172,427 31,724 5,552,392
Issuance of
common stock for
the acquisition of
Avant-Garde...... 1,275,000 12,750 5,087,250
Issuance of
Preferred Stock E. 932,040 6,000,008 (360,000)
Warrants and
common stock
equivalents
issued in
connection with
convertible notes. 804,500
Common stock
equivalents issued
in connection with
lease financing... 176,550
Conversion of
preferred stock... (146.16) (146,160) (932,040) (6,000,008) 682,952 6,830 6,139,338
Preferred stock
dividends......... 102.37 102,369 (215,672)
Issuance of
restricted stock
to employee....... 150,000 1,500 1,236,000
Private exchange
transaction....... 3,741,224 37,412 39,640,331
Issuance of
common stock in
connection with the
conversion of
convertible notes
payable........... 539,255 5,393 3,408,928
Amortization of
deferred
compensation
expense...........
Change in market
value of
investments in
marketable equity
securities........
Other.............. (432,458)
Net loss........... (15,857,459)
------ -------- ---- ---------- ---------- -------- ------------ ------------
Balances at
December 31, 1995. 688.90 $688,900 0.00 $ -- 29,707,792 $297,079 $103,836,510 $(41,311,075)
====== ======== ==== ========== ========== ======== ============ ============
<CAPTION>
Unrealized
Treasury Stock Loss on
-------------------------------------------- Investments in
Common Stock Preferred Stock B Marketable Total
Deferred Equity Stockholders'
Shares Amount Shares Amount Compensation Securities Equity
------ ------ ------ ------ ------------ --------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at
February 28, 1995. -- $ -- -- $ -- $ -- $ -- $18,279,896
Issuances of
common stock for
cash (exercise of
options and
otherwise)........ 5,584,116
Issuance of
common stock for
the acquisition of
Avant-Garde...... 5,100,000
Issuance of
Preferred Stock E. 5,640,008
Warrants and
common stock
equivalents
issued in
connection with
convertible notes. 804,500
Common stock
equivalents issued
in connection with
lease financing... 176,550
Conversion of
preferred stock... --
Preferred stock
dividends......... (113,303)
Issuance of
restricted stock
to employee....... (1,237,500) --
Private exchange
transaction....... (2,506,763) (36,348,065) (688.90) (3,329,678) --
Issuance of
common stock in
connection with the
conversion of
convertible notes
payable........... 3,414,321
Amortization of
deferred
compensation
expense........... 137,500 137,500
Change in market
value of
investments in
marketable equity
securities........ (981,750) (981,750)
Other.............. (432,458)
Net loss........... (15,857,459)
---------- ------------ ------- ----------- ----------- --------- -----------
Balances at
December 31, 1995. (2,506,763) $(36,348,065) (688.90) $(3,329,678) $(1,100,000) $(981,750) $21,751,921
========== ============ ======= =========== =========== ========= ===========
</TABLE>
See Notes to Consolidated Financial Statements
F-5
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED FEBRUARY 28, 1995
<TABLE>
<CAPTION>
Preferred Stock
--------------------------------------------------------------------
B C D
--------------------- --------------------- --------------------
Shares Amount Shares Amount Shares Amount
-------- ---------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balances at February 28, 1994....... 1,203.79 $1,203,791 173.00 $173,000 225,000 $900,000
Exercise of Series A and Series B
Warrants..........................
Exercise of Series D and Series E
Warrants..........................
Conversion of Preferred Stock C..... (173.00) (173,000)
Conversion of Preferred Stock B..... (533.00) (533,000)
Conversion of Preferred Stock D..... (225,000) (900,000)
Issuances of common stock for
cash (exercise of options and
otherwise)........................
Issuance of Preferred B stock
dividend.......................... 61.90 61,900
Issuance of common stock for
the acquisition of NFF, Inc.......
Other...............................
Net loss............................
------ ---------- ------- --------- -------- --------
Balances at February 28, 1995....... 732.69 $ 732,691 -- $ -- -- $ --
====== ========== ======= ========= ======== ========
<CAPTION>
Common Stock Additional Total
------------------------ Paid-in Accumulated Stockholders'
Shares Amount Capital Deficit Equity
--------- -------- ----------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Balances at February 28, 1994............ 9,842,670 $ 98,427 $20,289,677 $(17,945,849) $ 4,719,046
Exercise of Series A and Series B
Warrants............................... 3,291,417 32,914 10,657,038 10,689,952
Exercise of Series D and Series E
Warrants............................... 2,814,142 28,141 2,081,137 2,109,278
Conversion of Preferred Stock C.......... 82,381 824 172,176 --
Conversion of Preferred Stock B.......... 177,665 1,777 531,223 --
Conversion of Preferred Stock D.......... 225,000 2,250 897,750 --
Issuances of common stock for
cash (exercise of options and
otherwise)............................. 3,685,087 36,852 7,767,569 7,804,421
Issuance of Preferred B stock
dividend............................... (61,900) --
Issuance of common stock for
the acquisition of NFF, Inc............ 28,572 285 199,715 200,000
Other.................................... (12,606) (12,606)
Net loss................................. (7,230,195) (7,230,195)
---------- -------- ----------- ------------ ------------
Balances at February 28, 1995............ 20,146,934 $201,470 $42,583,679 $(25,237,944) $ 18,279,896
========== ======== =========== ============ ============
</TABLE>
See Notes to Consolidated Financial Statements
F-6
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED FEBRUARY 28, 1994
<TABLE>
<CAPTION>
Preferred Stock
--------------------------------------------------------------------
B C D
--------------------- --------------------- --------------------
Shares Amount Shares Amount Shares Amount
-------- ---------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Balances at February 28, 1993... 1,135.66 $1,135,662 222.60 $222,600 0 $ --
Issuances of common stock
for cash.......................
Issuance of common stock
for acquisition of WGN, Inc....
Issuance of common stock
for acquisition of Inne
Dispensibles, Inc..............
Issuance of Preferred Stock
D for acquisition of
Avant-Garde.................... 225,000 900,000
Conversion of Preferred
Stock C........................ (50.00) (50,000)
Conversion of Series D
Warrants.......................
Issuance of common stock
for services rendered..........
Issuance of common stock
to retire debt.................
Issuance of Preferred B
stock dividend................. 68.13 68,129
Issuance of Preferred C
stock dividend.................
Purchase and retirement of
treasury stock.................
Performance stock options.......
Net loss........................
Adjustments..................... 0.40 400
-------- ---------- ------ -------- ------- --------
Balances at
February 28, 1994.............. 1,203.79 $1,203,791 173.00 $173,000 225,000 $900,000
======== ========== ====== ======== ======= ========
<CAPTION>
Common Stock Additional Total
----------------------- Paid-in Accumulated Stockholders'
Shares Amount Capital Deficit Equity
--------- -------- ----------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Balances at February 28, 1993... 6,539,475 $65,394 $ 9,986,348 $ (9,662,872) $1,747,132
Issuances of common stock
for cash....................... 1,687,436 16,875 3,197,684 3,214,559
Issuance of common stock
for acquisition of WGN, Inc.... 1,271,351 12,714 1,457,286 1,470,000
Issuance of common stock
for acquisition of Inne
Dispensibles, Inc.............. 39,506 395 99,605 100,000
Issuance of Preferred Stock
D for acquisition of
Avant-Garde.................... 900,000
Conversion of Preferred
Stock C........................ 23,810 238 49,762 --
Conversion of Series D
Warrants....................... 205,000 2,050 135,300 137,350
Issuance of common stock
for services rendered.......... 63,406 634 48,096 48,730
Issuance of common stock
to retire debt................. 50,000 500 56,531 57,031
Issuance of Preferred B
stock dividend................. (68,129) --
Issuance of Preferred C
stock dividend................. 10,789 108 19,272 (19,380) --
Purchase and retirement of
treasury stock................. (48,103) (481) (76,474) (76,955)
Performance stock options....... 5,316,667 5,316,667
Net loss........................ (8,195,468) (8,195,468)
Adjustments..................... (400) --
--------- ------- ----------- ------------ ----------
Balances at
February 28, 1994.............. 9,842,670 $98,427 $20,289,677 $(17,945,849) $4,719,046
========= ======= =========== ============ ==========
</TABLE>
See Notes to Consolidated Financial Statements
F-7
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Ten Months
Six Months ended June 30, Ended
----------------------------------- December 31,
1996 1995 1995
---- ---- -------------
(unaudited)
<S> <C> <C> <C>
Cash flows from operating activities, net of the effects of acquisitions
Net loss ................................................................. $ (28,814,986) $ (5,108,732) $ (15,857,459)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation and amortization .......................................... 2,658,760 319,177 860,103
Amortization of licenses and intangibles ............................... 459,338 149,154 439,888
Provision for doubtful accounts ........................................ 803,590 354,898 887,425
Equity in unconsolidated results of Avant--Garde ....................... -- 1,087,779 865,676
Non cash interest expense .............................................. 16,156,192 -- 6,151,090
Extraordinary gain from extinguishment of debt ......................... -- -- --
Performance stock option expense ....................................... -- -- --
Non cash loss on discontinuation of product lines ...................... -- -- --
Other .................................................................. -- 46,360 177,735
(Increase) decrease in operating assets
Accounts receivable ................................................. (2,710,591) 1,500,572 (5,526,618)
Inventories ......................................................... (2,355,709) (1,438,127) (3,158,759)
Prepaid expenses and other current assets ........................... (6,304,797) 29,124 (2,478,501)
Other assets ........................................................ (574,377) (77,061) (268,650)
(Decrease) increase in accounts payable and accrued expenses ........... 1,760,656 (439,416) 6,306,466
------------- ------------- -------------
Net cash used in operating activities ...................................... (18,921,924) (3,576,272) (11,601,604)
------------- ------------- -------------
Cash flows from investing activities
Investments in and advances to Avant--Garde ............................ -- (6,625,228) (5,703,608)
Acquisitions ........................................................... -- -- --
Increase in short-term investments, net ................................ (41,865,580) (764,089) (73,593,849)
Decrease (increase) in investments in marketable equity securities ..... 6,447,000 -- (7,497,000)
Collections of notes receivable ........................................ 93,774 680,000 1,003,859
Increase in notes receivable ........................................... (748,498) (1,216,255) (1,370,974)
Purchase of property and equipment, net ................................ (10,405,329) (1,022,689) (8,607,794)
Cash proceeds from sale of skiwear brands .............................. -- -- --
License acquisition costs .............................................. (228,283) -- (129,413)
Cash acquired through acquisitions ..................................... 93,067 -- --
Other .................................................................. -- 294,736 (3,251)
------------- ------------- -------------
Net cash provided by (used in) investing activities ........................ (46,613,849) (8,653,525) (95,902,030)
------------- ------------- -------------
Cash flows from financing activities
Proceeds from (repayment of) loans payable ............................. (88,757) (713,058) 3,849,233
Proceeds from notes payable ............................................ -- 7,505,800 221,946,330
Repayment of notes payable ............................................. -- -- --
Payment of dividends ................................................... -- -- (113,303)
Debt financing costs ................................................... (392,646) -- (784,791)
Proceeds from equipment lease financing ................................ -- -- 6,997,600
Proceeds of cash collateral ............................................ -- -- --
Payment of capital lease obligations ................................... (684,259) (136,732) (700,828)
Net proceeds from equity transactions .................................. 4,195,684 8,374,772 11,258,863
------------- ------------- -------------
Net cash provided by financing activities .................................. 3,030,022 15,030,782 242,453,104
------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents ....................... (62,505,751) 2,800,985 134,949,470
Cash and cash equivalents at beginning of period ........................... 138,105,824 5,287,188 3,156,354
------------- ------------- -------------
Cash and cash equivalents at end of period ................................. 75,600,073 8,088,173 138,105,824
Short-term investments at end of period .................................... 115,460,429 771,681 73,594,849
------------- ------------- -------------
Cash, cash equivalents and short-term investments at end of period ......... $ 191,060,502 $ 8,859,854 $ 211,700,673
============= ============= =============
<CAPTION>
Year Ended February 28,
------------------------------
1995 1994
---- ----
<S> <C> <C>
Cash flows from operating activities, net of the effects of acquisitions
Net loss ................................................................. $ (7,230,195) $ (8,195,468)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation and amortization .......................................... 432,502 223,088
Amortization of licenses and intangibles ............................... 225,176 239,993
Provision for doubtful accounts ........................................ 893,857 343,694
Equity in unconsolidated results of Avant--Garde ....................... 1,108,962 --
Non cash interest expense .............................................. -- --
Extraordinary gain from extinguishment of debt ......................... -- (194,154)
Performance stock option expense ....................................... -- 5,316,667
Non cash loss on discontinuation of product lines ...................... -- 292,376
Other .................................................................. 78,374 (155,086)
(Increase) decrease in operating assets
Accounts receivable ................................................. (1,409,862) (1,438,263)
Inventories ......................................................... (1,729,395) (337,781)
Prepaid expenses and other current assets ........................... (440,188) (249,496)
Other assets ........................................................ (90,637) (12,049)
(Decrease) increase in accounts payable and accrued expenses ........... 1,635,189 1,531,892
------------- -------------
Net cash used in operating activities ...................................... (6,526,217) (2,634,587)
------------- -------------
Cash flows from investing activities
Investments in and advances to Avant--Garde ............................ (7,128,947) (632,000)
Acquisitions ........................................................... (678,566) 27,679
Increase in short-term investments, net ................................ -- --
Decrease (increase) in investments in marketable equity securities ..... -- --
Collections of notes receivable ........................................ 360,000 600,000
Increase in notes receivable ........................................... (2,234,636) --
Purchase of property and equipment, net ................................ (1,055,167) (227,787)
Cash proceeds from sale of skiwear brands .............................. -- 276,695
License acquisition costs .............................................. -- --
Cash acquired through acquisitions ..................................... -- --
Other .................................................................. (50,140) --
------------- -------------
Net cash provided by (used in) investing activities ........................ (10,787,456) 44,587
------------- -------------
Cash flows from financing activities
Proceeds from (repayment of) loans payable ............................. 1,695,447 (1,772,550)
Proceeds from notes payable ............................................ -- 1,966,498
Repayment of notes payable ............................................. (431,793) (300,625)
Payment of dividends ................................................... -- --
Debt financing costs ................................................... (329,483) --
Proceeds from equipment lease financing ................................ -- --
Proceeds of cash collateral ............................................ -- 100,000
Payment of capital lease obligations ................................... (250,871) (115,249)
Net proceeds from equity transactions .................................. 19,067,386 2,800,739
------------- -------------
Net cash provided by financing activities .................................. 19,750,686 2,678,813
------------- -------------
Net increase (decrease) in cash and cash equivalents ....................... 2,437,013 88,813
Cash and cash equivalents at beginning of period ........................... 719,341 630,528
------------- -------------
Cash and cash equivalents at end of period ................................. 3,156,354 719,341
Short-term investments at end of period .................................... -- --
------------- -------------
Cash, cash equivalents and short-term investments at end of period ......... $ 3,156,354 $ 719,341
============= =============
</TABLE>
F-8
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information with respect to the six months
ended June 30, 1996 and 1995 is unaudited)
Note 1--Summary of Significant Accounting Policies
Consolidation
The consolidated financial statements include the accounts of WinStar
Communications, Inc. ("WCI") and its wholly owned subsidiaries, WinStar
Wireless, Inc. ("WWI"); WinStar Wireless Fiber Corp. ("WWFC"); WinStar Gateway
Network, Inc. (formerly Communications Gateway Network, Inc., "WGN"); WinStar
Global Products, Inc. (formerly Beauty Labs, Inc., "WGP"); WinStar New Media
Company, Inc. ("WNM"); and Non Fiction Films, Inc. ("NFF") (collectively
referred to as the "Company"). All material intercompany transactions and
accounts have been eliminated in consolidation.
Nature of Business
The Company provides local and long distance telecommunications services
in the United States. The Company offers its Wireless FiberSM local
telecommunications services on a point-to-point basis in many major metropolitan
areas via its digital wireless capacity in the 38.6 to 40 gigahertz portion of
the radio spectrum, where it has licenses granted by the Federal Communications
Commission("FCC"). The Company's Wireless FiberSM services deliver high quality
voice and data transmissions which meet or exceed telephone industry standards
and provide transmission quality equivalent to that produced by fiber
optic-based facilities. The Company also offers resale- and facilities-based
long distance services and has authority in several states to provide local
switched telecommunications services. As regulatory and competitive conditions
permit, the Company intends to offer its customers integrated local and long
distance telecommunications services, thereby participating in both the $90
billion local exchange market and the $60 billion long distance market in the
United States. As a complement to its telecommunications operations, the Company
acquires rights to distribute and otherwise control certain information and
entertainment content and services. The Company also markets consumer products
nationwide through a subsidiary acquired prior to the Company's entry into the
telecommunications industry. The Company's telecommunications services are
subject to varying degrees of federal, state and local regulation.
Fiscal Year
The Company changed its fiscal year end from February 28 to December 31,
effective January 1, 1996. Accordingly, these financial statements present a
transition period of the ten months ended December 31, 1995.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. Cash
equivalents consist of money market fund investments, short-term certificates of
deposit, and commercial paper. Exclusive of cash in banks, cash equivalents were
approximately $137,370,000 at December 31, 1995, and approximate fair value.
Short Term Investments
Short term investments are widely diversified and principally consist of
certificates of deposit and money market deposits, U.S. government or government
agency securities, commercial paper rated "A- 1/P-1" or higher, and municipal
securities rated "A" or higher with an original maturity of greater than three
months and less than six months. Short term investments are considered
held-to-maturity and are stated at amortized cost which approximates fair value.
As of December 31, 1995, cash, cash equivalents and short term investments
totaled $211,700,673.
F-9
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 1 - Summary of significant Accounting Policies - (Continued)
Inventories
Inventories in the merchandising division are valued at the lower of cost
or market, principally using the first-in, first-out method.
Film inventories include direct and indirect production costs, which are
amortized to expense in the proportion that revenue recognized during the year
for each film bears to the estimated total revenue to be received from all
sources under the individual film forecast method. Management's estimate of
forecasted revenues exceeds the unamortized costs on an individual program
basis. Such forecasted revenue is subject to revision in future periods if
warranted by changing market conditions.
Property and Equipment
Property and equipment is stated at cost. Depreciation and amortization
are computed using the straight-line method over the estimated useful lives of
the related assets.
Intangible Assets
Intangible assets are being amortized by the straight-line method over
their estimated useful lives.
The Company's policy is to measure goodwill impairment by considering a
number of factors as of each balance sheet date including (i) current operating
results of the applicable business, (ii) projected future operating results of
the applicable business, (iii) the occurrence of any significant regulatory
changes which may have an impact on the continuity of the business, and (iv) any
other material factors that affect the continuity of the applicable business.
The amortization period for goodwill is determined on a case-by-case basis for
each acquisition from which goodwill arises based on a review of the nature of
the business acquired as well as the factors cited above (Note 14).
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
109"). Pursuant to SFAS 109, deferred income taxes are recognized for temporary
differences between financial statement and income tax bases of assets and
liabilities and loss carryforwards and tax credit carryforwards for which income
tax benefits are expected to be realized in future years. A valuation allowance
is to be established to reduce deferred tax assets if it is more likely than not
that all, or some portion, of such deferred tax assets will not be realized. The
effect on deferred taxes of a change in tax rates is recognized in income in the
period that includes the enactment date.
Revenue Recognition
In the telecommunications division, sales are recorded upon placing of
calls or rendering of other related services. In the merchandising division,
sales are recorded upon shipment of merchandise and are presented in the
accompanying consolidated statement of operations net of merchandise returns.
The Company provides for future estimated returns of merchandise at the time of
sale. Revenues from film productions are recognized when a program is accepted
by the licensee and is available for broadcast.
F-10
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Net Loss Per Common Share
Note 1 - Summary of Significant Accounting Policies - (Continued)
Net loss per common share is calculated by dividing the net loss by the
weighted average number of shares of common stock outstanding. Stock options and
warrants have not been included in the calculation as their inclusion would be
antidilutive.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to
concentration of credit risk consist principally of trade receivables.
Concentration of credit risk with respect to these receivables is generally
diversified due to the large number of entities comprising the Company's
customer base and their dispersion across geographic areas. The Company
routinely addresses the financial strength of its customers and, as a
consequence, believes that its receivable credit risk exposure is limited.
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, short term investments,
accounts and notes receivable, and accounts payable and accrued expenses
approximate fair value, principally because of the short maturity of these
items. Marketable equity securities are stated at quoted market value.
The carrying amounts of the loans payable to financial institutions issued
pursuant to the Company's subsidiaries' asset-based lending agreements
approximate fair value because the interest rates on these investments change
with market interest rates and the carrying amounts of the senior notes payable,
convertible notes payable and capitalized lease obligations approximate fair
value since the obligations were entered into principally in September and
October, 1995.
Use of Estimates in Preparing Financial Statements
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Unaudited Financial Statements
The unaudited consolidated balance sheet as of June 30, 1996 and the
unaudited consolidated statements of operations and statements of cash flows for
the six months ended June 30, 1996 and 1995 are condensed financial statements
in accordance with the rules and regulations of the Securities and Exchange
Commission. Accordingly, they omit certain information included in complete
financial statements and should be read in connection with the information for
the ten months ended December 31, 1995 and the years ended February 28, 1995 and
1994. In the opinion of the Company, the accompanying unaudited consolidated
financial statements include all adjustments (consisting only of normal
recurring adjustments) necessary to present fairly the financial position as of
June 30, 1996 and results of operations and the cash flows for the six months
ended June 30, 1996 and 1995.
Note 2--Acquisition of Avant-Garde
Avant-Garde Telecommunications, Inc. ("Avant-Garde") was a privately held
company which held 30 millimeter wave radio licenses granted by the FCC in
September 1993. These licenses cover many of the largest metropolitan areas in
the United States, as well as other markets, and allow the licensee to deliver
voice, data and video via the 38 GHz band. Avant-Garde was required to begin the
provision of
F-11
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 2--Acquisition of Avant-Garde -- (Continued)
services authorized under such licenses by March 15, 1995, and on that date,
Avant-Garde filed a certificate of completion for each license with the FCC.
Through July 17, 1995, the Company owned 49% of Avant-Garde, which it
acquired for $4,900,000, and accounted for its investment in Avant-Garde under
the equity method. For the periods from March 1, 1995 to July 17, 1995, and the
year ended February 28, 1995, Avant-Garde had net losses of approximately
$1,778,000 and $2,302,000 respectively.
In April 1995, the Company entered into a merger agreement with the
holders of the remaining 51% of Avant-Garde, subject to FCC approval. In June
1995, the FCC granted Avant-Garde permission to transfer control of its licenses
to the Company. On July 17, 1995, pursuant to the terms of the merger agreement,
the Company exchanged 1,275,000 restricted shares of its common stock valued at
$5,100,000 for the 51% of Avant-Garde that it did not already own. Avant-Garde
was then merged into WinStar Wireless Fiber Corp., a wholly-owned subsidiary of
the Company which is the sole surviving corporation.
The acquisition of Avant-Garde has been treated as a "purchase" for
purposes of generally accepted accounting principles, with the purchase
allocated based on fair value of the assets acquired and liabilities assumed,
including approximately $12,600,000 allocated to the licenses acquired. The
amount allocated to licenses is being amortized over 40 years in accordance with
industry practice. The accounts of Avant-Garde have been consolidated into the
Company's financial statements as of the date of the acquisition.
Unaudited pro-forma results of operations, which reflect the merger of
Avant-Garde into the Company as if the merger occurred as of the beginning of
each period, are as follows
For the Six Months For the Ten Months For the Twelve
Ended Ended Months Ended
June 30, 1995 December 31, 1995 February 28, 1995
------------- ----------------- -----------------
Net sales .............. $ 12,443,000 $ 29,744,251 $ 25,572,218
Net loss ............... (5,817,000) (16,769,516) (8,422,780)
Net loss per share ..... $ (0.27) $ (0.72) $ (0.46)
Note 3--WGN Acquisition
On March 10, 1993, the Company completed the exercise of an option to
purchase an aggregate of 10,408 (51%) shares of the common stock of WGN for
approximately $1,045,000, paid in cash and through the assumption of notes. WGN
provides long-distance telephone service to businesses and residences. The
option was exercised by the Company in portions, commencing in December 1992.
The exercise of the option was financed primarily by a private placement of
units which was also completed on March 10, 1993. The transaction was treated as
a "purchase" for purposes of generally accepted accounting principles, with the
purchase price allocated based on the fair value of the Company's proportionate
ownership of the assets acquired and liabilities assumed. The excess of the
purchase price over the fair value of the net assets acquired, aggregating
approximately $828,000, has been recorded as goodwill.
F-12
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 3--WGN Acquisition -- (Continued)
The assets purchased and liabilities assumed have been valued as follows
March 10,
1993
Acquisition
-----------
Current assets
Cash .............................................. $ 451,490
Accounts receivable ............................... 148,834
Other current assets .............................. 5,334
----------
Total current assets .............................. 605,658
Property and equipment ............................ 733,675
Intangible assets ................................. 18,386
Other assets ...................................... 4,754
----------
Total assets ...................................... 1,362,473
----------
Current liabilities
Capitalized lease obligations ..................... 97,517
Accounts payable and accrued expenses ............. 310,388
----------
Total current liabilities ......................... 407,905
Capitalized lease obligations ..................... 528,674
Minority interest ................................. 208,688
Total liabilities ................................. 1,145,267
----------
Net assets at acquisition date .................... $ 217,206
==========
Through a stock exchange offer, the Company acquired the remaining 49%
interest in WGN on August 6, 1993, and paid approximately $1,470,000 through an
exchange of 127.135 shares of the Company's common stock for each WGN share
outstanding. The exchange ratio was based on the closing price of the Company's
common stock on July 16, 1993 of $1 5/32, as reported by NASDAQ. The purchase
price was determined as a multiple of revenues. This transaction impacted the
Company's financial statements as follows (1) the elimination of the minority
interest of WGN of $53,602, which was originally $208,688 on March 10, 1993, and
was subsequently reduced by $155,086, the 49% minority interest in WGN's losses
during the period March 10, 1993 through August 6, 1993, (2) the recording of
the unallocated purchase price as goodwill aggregating $1,468,037, (3) the
increase in equity of $1,470,000 resulting from the issuance of 1,271,351 shares
of the Company's common stock, and (4) the increase in accounts payable of
$51,639 for fees incurred in connection with this transaction.
Certain former stockholders of WGN (the "Affiliated Shareholders") were
and are affiliated with WCI. At the formation of WGN in May 1992, the Affiliated
Shareholders individually invested a combined total of approximately $82,000 in
a WGN private placement in which they received a combination of promissory notes
and an approximate 14% equity interest. One Affiliated Shareholder also received
a 5% equity interest in return for services rendered in connection with the
formation of WGN. As a result of the aforementioned acquisitions and subsequent
exchange of notes and stock of WGN for securities of the Company, the Affiliated
Shareholders received shares of the Company's common stock with an aggregate
market value of approximately $283,000 and approximately $82,000 in notes from
the aforementioned March 1993 private placement, all on the same basis as the
other WGN shareholders.
F-13
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 3--WGN Acquisition--(Continued)
Unaudited pro forma results of operations, which reflect the combined
operations of the Company and WGN as if the merger occurred as of the beginning
of fiscal 1994, are as follows
For the Year Ended
February 28, 1994
-----------------
Net sales .................................. $ 15,651,885
Net loss before extraordinary item ......... (8,622,407)
Net loss per share before extraordinary item $ (1.04)
Note 4--NFF Acquisition
On July 8, 1994, WinStar NFF Inc. ("WNFF"), a newly incorporated and
wholly-owned subsidiary of WCI, entered into an agreement with Non Fiction
Films, Inc. ("NFF") pursuant to which WNFF purchased 95 shares, or 19%, of the
common stock of NFF for a purchase price of $200,000 in cash. NFF is a producer
of non-fiction programming for cable television and for other media.
Additionally, the principal of NFF granted to WNFF an option to purchase all of
the shares of NFF owned by such principal, thereby making NFF a wholly-owned
subsidiary of WNFF. Effective December 1, 1994, WNFF exercised its option and
purchased the remaining 81% of NFF for 28,572 shares of WCI common stock valued
at $200,000. NFF was merged into WNFF, and the surviving corporation was renamed
Non Fiction Films, Inc. The transaction was treated as a "purchase" for purposes
of generally accepted accounting principles, with the purchase price allocated
based on the fair value of the assets acquired and liabilities assumed. The
total purchase price was $476,000 and the excess of the purchase price over the
fair value of the net assets acquired, aggregating approximately $495,000 has
been recorded as goodwill.
Unaudited pro forma results of operations, which reflect the combined
operations of the Company and NFF as if the merger occurred as of the beginning
of the year ended February 28, 1995 are as follows
For the Year Ended
February 28, 1995
-----------------
Net sales ......................... $ 26,099,553
Net loss .......................... (7,470,205)
Net loss per share ................ $ (0.44)
No pro forma results of operations are shown for the year ended February
28, 1994, as NFF only commenced operations in March 1994.
Note 5--Preferred Stock E
In April 1995, the Company completed a private placement of 932,040 shares
of Series E Convertible Preferred Stock ("Preferred Stock E") at a price of
$6.4375 per share for gross proceeds of $6,000,000. Preferred Stock E holders
were entitled to dividends at the rate of 9% per annum, payable quarterly
beginning on June 30, 1995. During the ten month period ended December 31, 1995,
the entire 932,040 shares of Preferred Stock E were converted into 634,228
shares of common stock.
F-14
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 6--Restructuring
During the year ended February 28, 1995, the Company's WGN subsidiary
restructured its operations by reducing its clerical and middle management
staff, replacing senior management personnel, and discontinuing certain
unprofitable programs initiated by previous management. In connection with this
restructuring, the Company recorded an expense of approximately $608,000 during
the year ended February 28, 1995, including $235,000 in benefits related to the
termination of 19 employees. Of the amount recorded at February 28, 1995,
$349,000 related to future cash outflows, with the balance representing charges
related to amounts paid or to write-off of assets purchased prior to February
28, 1995. During the ten month period ended December 31, 1995, the Company
incurred approximately $111,000 of the expected cash outflows, leaving a
remaining liability balance of approximately $238,000 at December 31, 1995.
Note 7--Investments in Marketable Equity Securities
On December 13, 1995, the Company purchased 714,000 shares of a publicly
traded interactive media and telecommunications services company at $10.50 per
share, for a total cash consideration of $7,497,000. At December 31, 1995, the
investment has been reflected at the market value of the shares held by the
Company, $6,515,250. In accordance with the treatment of the investment as an
available for sale security under Statement of Financial Accounting Standards
No. 115, "Accounting for Certain Investments in Debt and Equity Securities", the
$981,750 difference between the market value of the investment at December 31,
1995, and the original purchase price has been reflected in unrealized losses on
long term investments, a component of stockholders' equity. At June 30, 1996, a
$112,500 difference between the market value of the investment at June 30, 1996
and the original purchase price has been reflected in unrealized losses on long
term investments, a component of stockholders' equity. The Company believes that
this decrease in market value is temporary.
Note 8--Notes Receivable
Notes receivable at December 31, 1995 consist of the following
Notes receivable -- TWL(a) ................ $3,008,948
Notes receivable -- Robert Skiwear(b) ..... 540,000
Other ..................................... 139,635
----------
Total ..................................... 3,688,583
Less current portion ...................... 199,635
----------
Long-term notes receivable ................ $3,488,948
==========
- ----------
(a) WNM's stated business purpose is to capitalize upon opportunities in
the media content industry by acquiring distribution and other
rights in and from emerging companies in this field. On April 8,
1994, WNM entered into an agreement with The Winning Line, Inc.
("TWL"), a producer of sports programming. As subsequently amended,
the agreement provides for WNM to make periodic cash advances to
TWL, with such advances being collateralized by a first lien on all
of the assets of TWL as well as by shares of TWL common stock owned
by certain individuals. Advances made to date are payable on demand
and bear interest at a rate of 12% or at a rate 3% in excess of the
prime commercial lending rate (8.25% at December 31, 1995). WNM had
the right, which was exercised in April 1996, to convert up to
$970,000 of advances made, together with all accrued interest
thereon, into 65% of TWL's then issued and outstanding shares of
common stock (Note 28).
F-15
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 8--Notes Receivable --(Continued)
(b) In connection with the sale of its skiwear brands product line in
April 1993 to Robern Skiwear, Inc., the Company has a note
receivable from the buyer. The note bore interest at 8% per annum
payable quarterly, through January 31, 1996. Effective February 1,
1996, the note was modified such that interest now accrues at 9% per
annum and is payable monthly. The $540,000 of outstanding principal
is payable in 22 monthly installments of $19,054, inclusive of
interest, beginning January 31, 1996, through October 31, 1997, with
a final payment of $180,000 to be paid in a lump sum on November 30,
1997. The note is guaranteed by the principals of Robern Skiwear,
Inc. as well as certain other individuals.
Note 9--Discontinuation of Products Lines
As of February 28, 1994, the Company discontinued its remaining apparel
and tennis racquet product lines as a result of lower-than-expected sales and
continuing losses in these lines. Included as a loss on the discontinuation of
product lines for the year ended February 28, 1994, is the writedown of the net
assets of these product lines (primarily intangible assets) as well as the
accrual of certain expenses incurred in the windup of these lines, amounting to
$292,000 in total.
Note 10--Performance Stock Option Expense
In connection with the Company's initial public offering in April 1991,
options to purchase 1,000,000 shares of common stock of the Company at $0.01 per
share were granted to the original shareholders of the company (Note 22).
Subsequent to February 28, 1994, the conditions for exercise of these options
were met, and in connection therewith, the Company recorded a non-cash expense
of $5,316,667 at February 28, 1994, representing the difference between the
option price and the market price on the day the options actually became
exercisable.
Note 11--Gain From Extinguishment of Debt
On September 7, 1993, the Company paid the following in full satisfaction
of an obligation of approximately $501,000 (i) $250,000 in cash, and (ii) 50,000
shares of the Company's common stock valued at $57,031. The gain of $194,154 on
the payment of the indebtedness is classified in the statement of operations as
an extraordinary item. No tax provision has been recorded as a result of the
Company's tax loss carryforwards.
Note 12--Inventories
Components of inventories are as follows
June 30, December 31, February 28,
1996 1995 1995
----------- ----------- ------------
(unaudited)
Finished goods .............. $ 1,564,621 $ 1,432,951 $ 1,190,670
Raw materials ............... 5,596,032 4,017,655 2,092,101
Film inventories ............ 3,763,484 1,941,080 950,156
----------- ----------- -----------
$10,924,137 $ 7,391,686 $ 4,232,927
=========== =========== ===========
F-16
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 13--Property and Equipment
Property and equipment consist of the following
December 31, February 28, Estimated
1995 1995 Useful Life
------------ ------------ -------------
Machinery, equipment and software.. $16,072,511 $2,963,690 5 to 10 years
Furniture and fixtures............. 867,963 239,507 4 to 5 years
Leasehold improvements............. 536,115 185,919 Life of the lease
----------- ----------
17,476,589 3,389,116
Less accumulated depreciation
and amortization.................. (1,578,584) (726,048)
----------- ----------
$15,898,005 $2,663,068
=========== ==========
Note 14--Intangible Assets
Intangible assets consist of the following
December 31, February 28, Estimated
1995 1995 Useful Life
------------ ------------ -------------
Goodwill.......................... $2,953,021 $2,953,021 20 years
Covenants not to compete.......... 668,397 668,397 5 to 10 years
Other............................. 39,460 39,460 3 to 5 years
----------- ----------
3,660,878 3,660,878
Less accumulated amortization..... (627,373) (447,093)
----------- ----------
$ 3,033,505 $3,213,785
=========== ==========
Licenses are amortized over a 40 year period. As of December 31, 1995, the
value of licenses was $12,556,281, net of accumulated amortization of $256,039.
Note 15--Loans Payable
Loans payable consist of the following
December 31, February 28,
1995 1995
----------- ------------
Loan payable-financial institution(a) ...... $3,153,821 $1,668,743
Loan payable-financial institution(b) ...... 4,338,099 2,742,010
Other(c) ................................... 795,541 --
---------- ----------
$8,287,461 $4,410,753(d)
========== ==========
- ----------
(a) In November 1994, WGN entered into a Loan and Security Agreement
with a financial institution providing for the financing of WGN's
receivables. Borrowings under this agreement are limited to 90% of
most eligible accounts receivable, with availability of certain
types of accounts receivable limited to 80% and 50%, subject to a
maximum credit availability of $5,000,000. Borrowings bear interest
at a rate ranging from 2.5% to 3% in excess of the prime commercial
lending rate and are secured by a lien on all WGN assets as well as
a guarantee from WCI as to the first $2,200,000 in borrowings. The
agreement
F-17
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
also calls for an annual fee of $50,000 as well as certain
underutilization fees. This agreement expires November 3, 1996.
(b) In August 1994, WGP secured an asset based loan from a financial
institution to finance its receivables and inventory. Borrowings
under this loan are limited to 80% of eligible accounts receivable
and 45% of eligible inventory, with a $1,500,000 overadvance
facility, subject to a maximum credit availability of $6,000,000.
Borrowings bear interest at a rate 3.5% in excess of the prime
commercial lending rate and are secured by a lien on all WGP assets
as well as a guarantee from WCI as to the first $3,000,000 in
borrowings. The agreement also provides for annual facility fees.
This agreement expires September 30, 1996.
(c) In April 1995, NFF secured a production loan from an Irish limited
partnership. NFF issued a letter of credit to the creditor in the
amount of $807,000 which may be presented at any time from March
1996 forward. The letter of credit is secured by an equal amount of
investments in U.S. Treasury Bills on deposit with the financial
institution which issued the letter of credit.
(d) Included in long-term other notes payable at February 28, 1995.
Note 16--Capital Lease Obligations
In September 1995, WinStar Wireless entered into a $10,000,000 equipment
lease financing facility, of which $7,000,000 has been made available as of
December 31, 1995. As of December 31, 1995, the Company has utilized
substantially all of the amount available under this facility. Borrowings bear
interest at a rate of 13% per annum and are payable over sixty months. After
twelve months, WinStar Wireless has the option to purchase the equipment at a
price that will provide a return of 15% to the lessor. As additional
consideration, the Company has agreed to issue options to purchase up to 100,000
shares of stock to the lessor, of which options to purchase 70,000 shares of
stock have been issued through December 31, 1995.
The Company leases its transmission equipment utilized by WWI and its
switch equipment utilized by WGN as well as certain computer and other equipment
used by the Company. Such leases have been accounted for as capital leases in
accordance with Statement of Financial Accounting Standards No. 13, "Accounting
for Leases".
F-18
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 16--Capital Lease Obligations --(Continued)
Future minimum lease payments on these capital leases are as follows
Year Ending December 31,
- ------------------------
1996 ............................................. $ 2,364,838
1997 ............................................. 2,420,841
1998 ............................................. 1,963,914
1999 ............................................. 1,910,601
2000 ............................................. 1,324,164
-----------
9,984,358
Less amount representing interest ................ (2,547,805)
-----------
Present value of minimum lease payments .......... $ 7,436,553
===========
The carrying value of assets under capital leases was $8,052,000 at
December 31, 1995 and is included in property and equipment. Amortization of
these assets is included in depreciation expense.
Note 17--Senior and Convertible Notes Payable
In October 1995, the Company completed a $225 million private placement of
debt securities with institutional investors (the "Debt Placement"). The
transaction was structured as a unit offering with two components $150 million
of Senior Discount Notes due in 2005 (the "Senior Notes"), and $75 million of
Convertible Senior Subordinated Discount Notes due in 2005 (the "Convertible
Notes"), convertible at $20.625, a 10% premium over the closing price on October
18, 1995, the day of pricing. Both securities accrue interest at 14% per annum,
with no interest payable during the first five years, and principal payable only
at maturity in October 2005. After five years, both securities require the
payment of interest only, in cash, until maturity. In addition, the Convertible
Notes, including accretion thereon, will be automatically converted during the
initial five year period if the market price of the Company's common stock
exceeds certain levels for thirty consecutive trading days, ranging from $37.50
per share in the first year to $44.00 per share in the fifth year.
Under the terms of the Debt Placement, the Company was obligated to
consummate an exchange offer with respect to the Senior Notes by April 23, 1996,
whereby these notes would be exchanged for new notes (the "New Notes") which
would be identical in every respect to the original Senior Notes except that the
New Notes would be registered under the Securities Act of 1933. Pursuant to such
obligation, the Company filed an offer to exchange the Senior Notes for the New
Notes on January 31, 1996, upon which all Senior Notes were subsequently
converted. The Company is also obligated to cause to be declared effective a
registration statement registering the issuance or resale of the shares
underlying the convertible Notes (the "Conversion Shares") by October 23, 1996.
If the exchange offer or the registration of the Conversion Shares does not take
place prior to the respective deadlines, the Company will be obligated to pay
additional interest on the Senior Notes and/or lower the conversion price on the
Convertible Notes. The Company filed such registration statement in September
1996. The terms of the Debt Placement also place certain restrictions on the
ability of the Company to pay dividends, incur additional indebtedness, issue
guarantees, sell assets, or enter into certain other specified transactions.
F-19
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 18--Other Notes Payable
In May 1995, WinStar Wireless completed a private placement of $7,500,000
of five year secured convertible notes (the "Notes"). The Notes bear interest at
a rate of 7%, payable semiannually, with all principal due and payable on May
24, 2000. The Notes are guaranteed by the Company and are collateralized by a
first lien on WinStar Wireless' assets and a pledge by the Company of its shares
of WinStar Wireless and WinStar Wireless Fiber Corp. The noteholders' first lien
and rights are subject to subordination to certain future secured equipment
financing for WinStar Wireless. The Notes are convertible into common stock at a
price of $7.00 per share. The noteholders also received 550,000 warrants and
share equivalents, of which 300,000 warrants at an exercise price of $12.00 per
share and 100,000 warrants at an exercise price of $13.00 per share were
outstanding at December 31, 1995.
The portion of the proceeds attributable to the warrants and share
equivalents has been valued at $805,000 and has been accounted for as additional
paid-in capital and as a reduction in convertible notes payable. The resulting
debt discount is being amortized to interest expense over the life of the Notes.
On December 28, 1995, the note holders converted $3,750,000 of the
convertible notes and accrued interest thereon into 539,255 shares of common
stock of the Company. In addition, the note holders have committed that they
will convert all remaining outstanding Notes into common shares of the Company
on or prior to December 15, 1996.
Note 19--Commitments and Contingencies
a. Operating Leases
The Company's manufacturing and warehousing facilities and offices, along
with various equipment and roof access rights, are leased under operating leases
expiring in 1996 through 2006.
Future minimum lease payments on noncancellable operating leases are as
follows
Year ending December 31,
------------------------
1996 ....................................... $1,546,000
1997 ....................................... 1,316,000
1998 ....................................... 1,314,000
1999 ....................................... 1,306,000
2000 ....................................... 884,000
Thereafter ................................. 2,749,000
----------
$9,115,000
==========
Rent expense for the ten month period ended December 31, 1995 and the
years ended February 28, 1995 and 1994 was $1,044,000, $500,000 and $366,000,
respectively.
F-20
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 19--Commitments and Contingencies--(Continued)
b. Employment Contracts
Amounts due under employment contracts are as follows
Year ending December 31,
1996............................. $2,450,000
1997............................. 1,750,000
1998............................. 861,000
1999............................. 525,000
-------
2000............................. 54,000
$5,640,000
==========
c. Litigation
In January 1995, the Company's directors, certain other persons, and the
Company (as a nominal defendant) were named in one or more of four actions
brought by various stockholders of the Company in the Court of Chancery of the
State of Delaware in and for New Castle County. These actions subsequently were
consolidated into a single lawsuit, which has been settled. The complaint
alleged that certain transactions including (i) the payment of consideration to
certain directors and others in connection with the Company's acquisition of WGN
and (ii) the payment of compensation (including the granting of options and the
issuance of warrants) to certain directors and others involved self dealing,
waste of corporate assets or otherwise were unfair to the Company. Although the
Company believed that the allegations were completely without merit, in order to
halt the expense, inconvenience and distraction of continued litigation, the
Company entered into a court approved settlement agreement pursuant to which the
Company agreed to amend its bylaws to formalize certain corporate governance
issues, and to pay legal fees and expenses of plaintiffs' counsel in the amount
of $246,500, a portion of which is covered by the Company's insurance.
The Company occasionally receives inquiries from state authorities arising
with respect to consumer complaints concerning the provision of
telecommunications services, including allegations of unauthorized switching of
long distance carriers and misleading marketing. The Company believes such
inquiries are common in the long distance industry and addresses such inquiries
in the ordinary course of business. The Company recently has experienced an
increased level of consumer and regulatory complaints, a substantial majority of
which arose from the activities of several independent marketing companies
involving contest programs and the use of executed written letters of
authorization ("LOAs") to switch long distance carriers. The inquiries primarily
arose from allegations of unauthorized or misleading switching of long distance
carriers. In order to eliminate further complaints from these programs, the
Company, on May 10, 1996, adopted a policy of mandatory independent verification
for one hundred percent of LOAs received from these programs and effective as of
June 10, 1996 no longer accepts LOAs from these programs. The Company has also
initiated discussions with the FCC and a number of state regulatory authorities
with respect to the resolution of any issues arising from the terminated
programs. The Company is also involved in miscellaneous claims, inquiries and
litigation arising in the ordinary course of business. The Company believes that
these matters, taken individually or in the aggregate, would not have a material
adverse impact on the Company's financial position.
In June, 1996, the Company commenced an action for declaratory judgment
against a former officer of WinStar Gateway, who recently notified the Company
of his belief that he was entitled to the issuance of certain shares of Common
Stock (or payment of the cash value thereof) having an aggregate market value
F-21
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
in excess of $27 million under the terms of stock options granted to him during
his employment with WinStar Gateway from the Company. He has based his beliefs
on standard anti-dilution language contained in his stock option agreement which
was designed and intended to adjust the number of shares purchasable thereunder
in the event of a merger or capital restructuring of the Company. As the Company
has never been subject of a merger or capital restructuring, the former officer
was immediately notified of the Company's belief that his claim was without
merit in law or fact. To expedite resolution of these issues, the Company
currently is seeking declaratory judgment that it has no obligation to the
former officer. Further, because the Company believes that any and all claims
that may be advanced by the former officer with regard to the foregoing issue
would be frivolous, the Company has notified the former officer and his counsel
of its intention to seek Rule 11 sanctions and such other remedies as may be
available against the former officer and his counsel in the event that the
former officer and his counsel seek to assert any defense to the Company's
action for declaratory judgment or otherwise proceed with respect to the issue.
d. Other
In November 1994, and as subsequently amended in December 1995, the
Company entered into a non-exclusive, four year agreement with P-Com, Inc.
("P-Com"), a manufacturer and distributor of radio links, providing for the
purchase of radio links from P-Com. The contract pricing structure includes
provisions whereby the Company pays additional amounts above the agreed upon
price for links purchased at the beginning of the contract period. These amounts
will be recovered in the form of discounted radio links once certain volume
levels have been reached. An annual minimum volume requirement must be met in
order to maintain the agreed upon pricing structure. The contract is cancelable
by the Company subject to certain conditions, primarily the acceptance of a
minimum number of links and the guarantee of the next 90 days' purchases in
accordance with an agreed upon schedule. As of December 31, 1995, the Company's
noncancellable purchase commitment was approximately $15,600,000. These
conditions to cancellation become more favorable to the Company as certain
volume levels are reached.
Note 20--Income Taxes
SFAS 109 requires the use of the liability method in accounting for income
taxes. Temporary differences and carryforwards that give rise to deferred tax
assets and liabilities are as follows
December 31, February 28,
1995 1995
------------ ------------
Deferred tax assets
Net operating loss carry forward ........ $ 14,700,000 $ 9,230,000
Allowance for doubtful accounts ......... 1,025,000 440,000
Other ................................... 2,275,000 380,000
------------ ------------
Gross deferred tax assets .................. 18,000,000 10,050,000
Valuation allowance ..................... (18,000,000) (10,050,000)
------------ ------------
Net deferred tax assets .............. $ -- $ --
============ ============
Note 20--Income Taxes--(Continued)
If not utilized, the net operating loss carryforwards will expire in
various amounts through the year 2010. The tax loss carryforwards relating to
WGP are limited by the Separate Return Limitation Year rules and Section 382 of
the Internal Revenue Code with respect to the amount utilizable each year. The
Company's remaining net operating loss carryforwards are also subject to
limitation under the Internal Revenue Code. These limitations will reduce the
Company's ability to utilize the net operating loss carryforwards included
above. The amount of the limitation has not been quantified by the Company.
F-22
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
SFAS 109 requires a valuation allowance against deferred tax assets if,
based on the weight of available evidence, it is more likely than not that some
or all of the deferred tax assets may not be realized. The valuation allowances
at February 28, 1995, and December 31, 1995, primarily pertain to uncertainties
with respect to future utilization of net operating loss carry forwards.
Note 21--Stockholders' Equity
Common Stock
The authorized capital stock of WCI includes 75,000,000 shares of common
stock, $.01 par value. The holders of common stock are entitled to one vote for
each share held of record on all matters submitted to a vote of stockholders.
Although the Company has no present intention of paying any dividends, holders
of common stock are entitled to receive ratably such dividends as may be
declared by the Board of Directors out of funds legally available therefor. In
the event of a liquidation or dissolution of WCI, holders of common stock are
entitled to share ratably in all assets remaining after payment of liabilities
and liquidation preference of preferred shares.
Holders of common stock have no preemptive rights and have no rights to
convert their common stock into any other securities. There are no redemption or
sinking fund provisions applicable to the common stock.
Preferred Stock
The authorized capital stock of the Company includes 15,000,000 shares of
preferred stock, $.01 par value, which may be issued from time to time in one or
more series upon authorization by the Company's Board of Directors. There are
currently no shares of preferred stock outstanding. The Board of Directors,
without further approval of the stockholders, is authorized to fix the rights
and terms, conversion rights, voting rights, redemption rights and terms,
liquidation preferences and any other rights, preferences, privileges and
restrictions applicable to each series of preferred stock. In March 1994, all
173 outstanding shares of Preferred Stock C were converted into an aggregate of
82,381 shares of common stock of the Company. In addition, in accordance with
the terms of the Preferred Stock C, the holders of the Preferred Stock C
received 41,191 Series B Warrants upon conversion, all of which were
subsequently exercised during the year ended February 28, 1995. In December
1994, all 225,000 outstanding shares of Preferred Stock D were automatically
converted into 225,000 shares of common stock as a result of the market value of
the Company's common stock having met certain criteria. In November 1995, all
outstanding shares of Preferred Stock B were acquired in the Private Exchange
transaction (Note 23). As of December 31, 1995, all classes of preferred stock
other than Preferred Stock B have been retired.
Treasury Stock
Included in treasury stock at cost are 2,506,763 shares of common stock
and 689 shares of Preferred Stock B which were acquired in the Private Exchange
transaction (Note 23).
Note 22--Stock Options and Stock Purchase Warrants
Options to purchase 1,000,000 shares of common stock of the Company at
$.01 per share were issued at the time of the Company's initial public offering
in April 1991 to the original shareholders of the Company. The options were
exercisable at any time after April 3, 1993 and prior to April 3, 1996, or April
3, 1998 for one investor, if the market price of the Company's common stock
exceeded $5.00 per share (the "Market Price") as adjusted, over a period of 40
consecutive business days at any time after April 3, 1992. Pursuant to certain
antidilutive provisions in the option agreements, the number of shares subject
to these options was increased to 1,253,931, and the Market Price was reduced to
$3.99 per share. The Market Price was met and such options became exercisable in
April 1994 (Note 10), and all such options were exercised during
F-23
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
the year ended February 28, 1995. In addition, options to purchase 14,000 shares
of common stock at $.01 per share were granted to an employee on June 30, 1991
in lieu of compensation.
In 1990, the Board of Directors adopted a non-qualified common stock
incentive plan, as amended, pursuant to which options to purchase an aggregate
of 150,000 shares of common stock may be granted to key employees of the Company
as selected by the Board of Directors. The exercise price for shares covered by
options granted pursuant to this plan will not be less than the fair market
value of the shares on the date of the grant. In 1992, the Board of Directors
adopted and stockholders approved the 1992 Performance Equity Plan ("1992
Plan"), which authorizes the granting of awards up to 1,000,000 shares of common
stock to the Company's key employees, officers, directors and consultants.
Awards consist of stock options (both non-qualified and options intended to
qualify as "incentive" stock options under the Internal Revenue Code),
restricted stock awards, deferred stock awards, stock appreciation rights and
other stock-based awards. The plan provides for automatic issuance of 10,000
stock options annually to each director on January 13, at the fair market value
at that date, subject to availability. In June 1995, the Board of Directors
adopted the 1995 Performance Equity Plan ("1995 Plan") which was approved by the
stockholders of the Company at the Annual Meeting of Stockholders in September
1995. The 1995 Plan authorizes the granting of awards of up to 1,500,000 shares
of Common Stock to the Company's key employees, officers, directors and
consultants. The 1995 Plan is similar to the 1992 Plan, except that the 1995
Plan does not allow for annual automatic annual director grants. In addition to
these three plans, the Company has granted options to certain individuals not
under any plan (Note 28).
The Company has granted options to purchase common stock as follows
Number Price Per Share
------ ---------------
Balance, March 1, 1993 .................. 3,064,000 $1.63 - $5.25
Granted ................................. 2,570,067 $1.06 - $6.17
Canceled ................................ (616,500) $1.69 - $3.63
---------
Balance, February 28, 1994 .............. 5,017,567 $1.06 - $6.17
Granted ................................. 2,851,360 $4.22 - $9.50
Exercised ............................... (1,389,547) $1.50 - $4.90
Canceled ................................ (235,050) $1.69 - $9.03
---------
Balance, February 28, 1995 .............. 6,244,330 $1.06 - $9.50
Granted ................................. 3,896,000 $5.50 - $19.75
Exercised ............................... (2,091,572) $1.06 - $6.88
Canceled ................................ (708,133) $2.13 - $8.81
---------
Balance, December 31, 1995 .............. 7,340,625 $1.06 - $19.75
=========
In addition to the above, in May 1992, the Company granted to WinStar
Venture II, Inc. ("WVII"), an affiliate of a Director of the Company, an option
through August 31, 1998 to purchase shares of Series C preferred stock in the
amount of $2,000,000 in return for WVII's guarantee of certain company debt.
Note 22--Stock Options and Stock Purchase Warrants--(Continued)
At December 31, 1995, options for 2,848,462 shares were exercisable at
exercise prices ranging from $1.06 to $17.13 per share.
Warrants to purchase the Company's common stock were issued as follows
F-24
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
<TABLE>
<CAPTION>
Series A Series B Series C Series D Series E
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Outstanding at February 28,
1993 ........................... 1,277,646 1,897,867 250,000 -- --
Issued in connection with private
placement of debt .............. -- -- -- 2,000,000 --
Other warrants issued ........... 135,804 79,807 -- 200,000 200,000
Warrants exercised .............. -- -- -- (205,000) --
--------- --------- ------- --------- -------
Outstanding at February 28,
1994 ........................... 1,413,450 1,977,674 250,000 1,995,000 200,000
Warrants issued ................. -- 41,191 -- -- 1,000,000
Warrants exercised .............. (1,397,500) (1,975,738) -- (1,995,000) (1,200,000)
Warrants expired ................ (15,950) (43,127) (250,000) -- --
--------- --------- ------- --------- -------
Outstanding at February 28,
1995 ........................... -- -- -- -- --
========= ========= ======= ========= =======
</TABLE>
Each Series A Warrant entitled the registered holder to purchase one share
of WCI's common stock for an exercise price of $3.00 per share and each Series B
Warrant entitled the registered holder to purchase one share of common stock for
an exercise price of $3.75 per share through April 3, 1994. In March and April
1994, approximately 1,337,000 Series A Warrants and approximately 1,921,000
Series B Warrants were exercised prior to their scheduled expiration. Proceeds
to the Company, net of registration costs and fees to WinStar Services, Inc.,
were approximately $10,700,000. All remaining Series A and Series B Warrants,
which were unregistered and did not expire on April 3, 1994, were exercised in
May 1994.
The Series C Warrants expired without having become exercisable upon
issuance of the fiscal 1994 financial statements for the year ended February 28,
1994, because the conditions for the exercise of these warrants were not met.
In connection with a private placement of debt, the Company on March 10,
1993 issued 2,000,000 Series D Warrants. Each Series D Warrant entitled the
holder to purchase one share of common stock for $.67 during the five year
period commencing March 10, 1993 and ending March 9, 1998. In connection with
the same private placement, the Company in March 1994 issued 1,000,000 Series E
Warrants, each of which entitled the holder to purchase one share of common
stock at an exercise price of $2.24 per share. Series E Warrants were
exercisable from April 1, 1994 through March 10, 1999. In addition to the above,
the Company also issued 200,000 Series D Warrants and 200,000 Series E Warrants
to a separate noteholder in return for an extension of that note payable on
terms more favorable to the Company. In April 1994, the holders of the Series D
and Series E Warrants exercised their warrants. The exercise price on the
warrants was paid primarily by the warrant holders assigning their notes which
they had acquired in the private placement, as well as any accrued interest
thereon. The balance due from the warrant holders was satisfied by the return to
the Company of that number of unexercised Series E Warrants which, when valued
by reference to the fair market value of the common stock on that date, would
satisfy such balance due. The net effect of this conversion was that the Company
satisfied $1,996,650 in notes payable and $59,079 in accrued interest thereon,
and issued approximately 2,814,000 shares of common stock for the exercise of
1,995,000 Series D Warrants and 1,200,000 Series E Warrants. The common shares
which were issued upon exercise of all Series D and Series E Warrants were
restricted shares.
Note 23--Related Party Transactions
Management Agreement
The Company and WinStar Services, a wholly-owned subsidiary of WinStar
Companies, a corporation of which two of the Company's directors are principal
officers and stockholders, were parties to a five-year management agreement
which provided, as amended, that WinStar Services would render financial,
advisory and management services in connection with the capital, acquisition and
planning needs of the Company. The Company agreed to pay WinStar Services as
compensation for such services $200,000 per year plus certain
F-25
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
contingent performance fees, in addition to reimbursement of all out-of-pocket
expenses incurred by WinStar Services. In August 1993, the terms of the
management agreement were extended to August 31, 1998, and the Company granted
to WinStar Services options to purchase 500,000 shares of the Company's Common
Stock at the then current market price of $2.13 per share which options were
exercised in connection with the transaction between WinStar Companies, WinStar
Services and WinStar Venture II, Inc. The expiration date for these options as
well as for any options or warrants previously granted to WinStar companies and
its subsidiaries was set at August 31, 1998. During the years ended February 28,
1995 and 1994, an aggregate of $254,560 and $254,095, respectively, was paid to
WinStar Services by the Company as management fees and reimbursement of
expenses. Additionally, the Company paid $481,039 and $78,040 in cash and issued
notes amounting to $481,038 and $78,040 in payment of contingent performance
fees to WinStar Services during the years ended February 28, 1995 and 1994,
respectively. These contingent performance fees related to specific debt and
equity financing and investment transactions in excess of $33.6 million. During
the year ended February 28, 1995, all such notes were satisfied when they were
used to pay for the exercise of warrants and stock options held by WinStar
Services and its affiliates. See Private Exchange Transaction.
The management agreement was terminated prospectively as of February 28,
1995.
Private Exchange Transaction
On November 29, 1995, the Company acquired, in exchange for the issuance
of 3,741,224 shares of its Common Stock ("Private Exchange"), substantially all
of the assets of WinStar Companies, whose assets consisted of (i) all the
outstanding capital stock of WinStar Services and WinStar Venture, two
wholly-owned subsidiaries of WinStar Companies, and (ii) 389,580 shares of the
Company's Common Stock owned by WinStar Companies. The sole assets of WinStar
Services and WinStar Venture were 2,117,183 shares of the Company's Common Stock
and other securities of the Company that were exercisable or convertible into
1,429,633 shares of the Company's Common Stock. Accordingly, the Company issued
3,741,224 shares of Common Stock and, in exchange, acquired 3,936,396 shares of
Common Stock and Common Stock equivalents. All of the Common Stock and certain
of the Common Stock equivalents received in the Private Exchange are included in
Treasury Stock at December 31, 1995. WinStar Companies, WinStar Services and
WinStar Venture had no liabilities at the time of the closing of the Private
Exchange other than a liability previously assumed by the Company or liabilities
for which the Company is being indemnified.
The new shares of the Company's Common Stock issued in the Private
Exchange represented that number of shares which had an aggregate market value
based upon the average of the last sale price of the Company's Common Stock on
the 30 trading days preceding November 15, 1995, the date as of which the
exchange agreement regarding the above-described transaction was executed, equal
to the market value of the Company's Common Stock (i) transferred by WinStar
Companies to the Company, (ii) owned by WinStar Services and WinStar Venture and
(iii) underlying certain other securities of the Company owned by WinStar
Services and WinStar Venture which were convertible into or exercisable for
shares of the Company's Common Stock, less the aggregate exercise price of such
latter securities.
The stockholders of WinStar Companies included several of the Company's
current executive officers and directors. Simultaneously with the Private
Exchange, WinStar Companies was dissolved and the new shares issued in the
Private Exchange were issued directly to the stockholders of WinStar Companies
in proportion to their equity ownership of WinStar Companies.
The Private Exchange was considered and approved by a special committee of
independent and disinterested directors of the Company and an opinion from an
independent investment banking firm that the Private Exchange was fair to the
Company and its stockholders was obtained in connection with the Private
Exchange.
F-26
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
SGC Consulting Agreement
In November 1993, the Company entered into a consulting agreement with
SGC, pursuant to which SGC received a monthly fee of $5,000 and immediately
exercisable five-year options to purchase 50,000 shares of Common Stock for
$2.75 per share. The President and Director of SGC is currently a Director and
employee of the Company. In April 1994, the Company entered into a restated and
amended consulting agreement with SGC. Pursuant to the new agreement, SGC
provided consulting services to the Company and was paid a monthly fee of
$17,500. SGC also received options to purchase 125,000 shares of Common Stock at
a price of $4.50 per share, which vest in two equal annual installments
beginning in April 1994. The Company granted certain registration rights for all
shares, warrants and options issued to SGC or its President. Under this
consulting agreement, SGC was entitled to receive a cash fee equal to 5% of the
consideration paid in connection with certain transactions introduced to the
Company by SGC. Fees and expenses paid to SGC during the ten months ended
December 31, 1995, and the year ended February 28, 1995 were $0 and $119,000,
respectively.
In connection with investments by the Company in Avant-Garde and TWL, a
producer of sportsrelated radio programming, both of which businesses were
introduced to the Company by SGC, SGC was paid fees by Avant-Garde and by TWL.
Additionally, in connection with the Company's acquisition of its equity
interest in Avant-Garde, such Director was paid a fee by the principal of
Avant-Garde equal to 4.0% of the total consideration received by such principal
from the Company in connection with the acquisition. The Company paid no fees to
SGC in connection with such transactions, but the fees received by SGC and such
Director from Avant-Garde and TWL were credited against the monthly fees payable
to SGC by the Company.
The consulting agreement was terminated in January 1995 in connection with
the execution of such Director's employment agreement with the Company.
Agreement with ITC Group, Inc.
In May 1994, the Company, WWI and ITC entered into a two-year agreement
pursuant to which ITC advised the Company on the operations of WWI, WWFC and
WGN. ITC, together with the management and employees of WWI, developed and
implemented a two-year operating plan ("Operating Plan") for the Company's
wireless telecommunications business. Pursuant to the terms of the consulting
agreement, ITC made its consultants available to the Company and its
subsidiaries. The Company paid ITC an annual base consulting fee of $700,000 in
monthly installments for the services of a core management team, as well as
supplemental fees at agreed upon rates for additional consulting services
rendered by ITC as necessary from time to time. ITC also was entitled to receive
a bonus of up to $2.0 million per year at such time that certain pretax income
targets set forth in the Operating Plan were attained. No such bonus was paid
during the year ended February 28, 1995. During the year ended February 28, 1995
and through September 1995, ITC was paid $1,553,249 and $1,046,084,
respectively, in fees and expenses under the terms of the consulting agreement,
providing up to 12 consultants at any given time. In connection with the
consulting agreement, the Company granted options to purchase an aggregate of
500,000 shares of Common Stock for $4.41 per share to certain consultants of
ITC. Of such options, 375,000 are presently exercisable. ITC and the Company
executed a noncompetition agreement, pursuant to which ITC, and its key
employees and consultants, must refrain from providing services to any segment
of a business which provides wireless telecommunications services or otherwise
competes with the Company; provided, however, that ITC may provide services to
entities in connection with the provision of cellular and personal communication
services. In October 1994, ITC's President was elected as a director of the
Company.
Effective September 5, 1995, ITC's President became President and Chief
Operating Officer of the Company and certain core management personnel
previously provided by ITC also became employees, and ITC ceased providing
services to the Company under the consulting agreement. The Company's obligation
to pay any future compensation to ITC under such agreement was terminated.
F-27
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 24--Supplemental Cash Flow Information
Cash paid for interest during the six months ended June 30, 1996, the ten
months ended December 31, 1995, and the years ended February 28, 1995 and 1994
was $1,949,000, $1,270,000, $621,000, and $726,000, respectively.
During the ten month period ended December 31, 1995, the Company completed
the following material non-cash transactions (i) the conversion of $3,750,000 of
convertible notes plus accrued interest thereon; (ii) the conversion of
Preferred Stock E; (iii) the acquisition of approximately $7,500,000 in property
and equipment through various capitalized leases; (iv) the Private Exchange
transaction; (v) the settlement of the Company's placement expenses from the
gross proceeds of the Debt Placement; (vi) the acquisition of Avant-Garde.
During the year ended February 28, 1995, the Company completed the
following material non-cash transactions (i) the conversion of the Series D and
Series E Warrants through the assignment of notes payable and accrued interest
(Note 22); (ii) the satisfaction of approximately $600,000 in notes payable
through the exercise of stock options; (iii) conversions of Preferred Stock B,
C, and D; (iv) the acquisition of approximately $740,000 in property and
equipment through various capitalized leases; and (v) the purchase of Non
Fiction Films, Inc., wherein the purchase price was satisfied in part through
the issuance of 28,572 shares of common stock valued at $200,000.
During the year ended February 28, 1994, the Company completed the
following material non-cash transactions (i) the sale of the net assets of the
skiwear brands product line, net of cash received, for a $1,500,000 note
receivable; (ii) the private placement of $458,717 in notes for non-cash
consideration; (iii) the purchases, in March and August 1993, of WGN, whose net
assets, including cash acquired, have been valued at $1,470,000 for 1,271,351
shares of the Company's common stock (Note 3); (iv) the exercise by an investor
of 200,000 Series D warrants with a total exercise price of $134,000 through the
releasing of $100,000 owed him by the Company, with the balance paid in cash;
(v) the purchase of certain assets of a bath products company, valued at
$100,000 net of cash paid, for 39,506 shares of the Company's common stock; (vi)
the sale of 287,043 shares of common stock for stock subscriptions receivable of
$758,065, which amount was included in other current assets at February 28,
1994, and was realized in March 1994; and (vii) the acquisition of an investment
in AGT valued at $1,691,950 for $232,000 in notes payable, $900,000 in Series D
preferred stock and $27,950 in accounts payable, with the balance paid in cash.
Note 25--Major Customers
No customer individually amounted to more than 10% of net sales for the
ten months ended December 31, 1995 and the years ended February 28, 1995 and
1994.
Note 26--Business Segments
The Company's business segments are telecommunications, information
services, and merchandising. The following table is a summary of these segments
for the ten months ended December 31, 1995 and the years ended February 28, 1995
and 1994. For the year ended February 28, 1994, information related to the
telecommunications business segment relates only to the period from March 10,
1993 (date of acquisition of WGN) to February 28, 1994, and no amounts are shown
for the information services segment, which commenced operations in the year
ended February 28, 1995.
<TABLE>
<CAPTION>
Information 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
</TABLE>
F-28
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
<TABLE>
<CAPTION>
Information Total Business General
Telecommunications Services Merchandising Segments Corporate Consolidated
------------------ -------- ------------- -------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
Operating income
(loss) ............. (6,944,690) 238,129 756,135 (5,950,426) (3,861,203) (9,811,629)
Depreciation and
amortization ....... 586,114 3,097 166,929 756,140 103,963 860,103
Amortization of
intangibles ........ 344,228 20,706 74,954 439,888 -- 439,888
Capital expenditures . 7,457,971 14,478 528,985 8,001,434 650,758 8,652,192
Identifiable assets at
December 31, 1995 .. $ 36,998,045 $ 20,194,679 $ 10,458,663 $ 67,651,387 $ 217,711,468 $ 285,362,855
For the year ended
February 28, 1995
Net sales ............ $ 14,909,225 $ 473,392 $ 10,182,143 $ 25,564,760 $ -- $ 25,564,760
Operating income
(loss) ............. (3,422,937) (117,605) 307,097 (3,233,445) (2,377,991) (5,611,436)
Depreciation and
amortization ....... 263,839 744 153,731 418,314 14,188 432,502
Amortization of
intangibles ........ 128,117 6,165 90,894 225,176 -- 225,176
Capital expenditures . 1,328,938 4,486 286,583 1,620,007 196,321 1,816,328
Identifiable assets at
February 28, 1995 .. $ 14,594,048 $ 4,218,579 $ 6,911,270 $ 25,723,897 $ 3,785,555 $ 29,509,452
For the year ended
February 28, 1994
Net sales ............ $ 8,505,282 $ -- $ 7,119,737 $ 15,625,019 $ -- $ 15,625,019
Operating income
(loss) ............. (743,613) -- 222,611 (521,002) (1,546,519) (2,067,521)
Depreciation and
amortization ....... 116,635 -- 102,823 219,458 3,630 223,088
Amortization of
intangibles ........ 74,944 -- 165,049 239,993 -- 239,993
Capital expenditures . 274,940 -- 25,531 300,471 6,591 307,062
Identifiable assets at
February 28, 1994 .. $ 8,013,203 $ -- $ 5,118,512 $ 13,131,715 $ 1,478,220 $ 14,609,935
</TABLE>
F-29
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 27--New Accounting Standards Not Yet Adopted
In 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed of" ("SFAS No. 121"),
which provides guidance on when to assess and how to measure impairment of
long-lived assets, certain intangibles and goodwill related to those assets to
be held and used, and for long-lived assets and certain identifiable intangibles
to be disposed of. The Financial Accounting Standards Board also issued
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"), which gives companies a choice of the method of
accounting used to determine stock-based compensation. Companies may account for
such compensation either by using the intrinsic value-based method provided in
APB Opinion 25, "Accounting for Stock Issued to Employees" ("APB No. 25") or the
fair market value-based method provided in SFAS No. 123. These accounting
standards are effective for financial statements for fiscal years beginning
after December 15, 1995. As of January 1, 1996, the Company adopted SFAS No. 121
and SFAS No. 123. The adoption of SFAS No. 121 had no effect on the Company. The
Company intends to continue to use the intrinsic value-based method provided in
APB No. 25 to determine stock-based compensation, and therefore the sole effect
of the adoption of SFAS No. 123 will be the obligation to comply with the new
disclosure requirements provided thereunder.
Note 28--Subsequent Events To December 31, 1995 (Unaudited)
Agreement To Acquire Milliwave Limited Partnership
In June 1996, a subsidiary of the Company entered into certain agreements
with Milliwave Limited Partnership ("Milliwave") whereby the Company would
acquire Milliwave for a purchase price of $40 million in cash and 3.4 million
shares of the Company's common stock (which had an aggregate market value of $85
million based on a $25 per share market price at the time the agreements were
executed). The number of shares to be issued in connection with the acquisition
is subject to upward or downward adjustment depending on the market price of the
Company's Common Stock at the time the transaction is closed; provided, however,
that the Company may determine not to consummate the transaction if the
adjustment results in the Company being required to issue in excess of 4.5
million shares. The acquisition is subject to certain regulatory approvals, but
is expected to be consummated in the second quarter of calendar year 1997. The
Company also has entered into a (i) services agreement with Milliwave pursuant
to which it has agreed to provide services to Milliwave in connection with the
buildout by Milliwave of its licensed areas in consideration for payment of
monthly site access and management fees, as well as installation fees, and (ii)
a two-year transmission path lease agreement with Milliwave permitting the
Company to use up to 488 radio links in Milliwave's licensed areas.
Agreement To Acquire Pinnacle Nine Communications, LLC
In June 1996, the Company entered into an agreement to acquire the
outstanding membership interests of Pinnacle Nine Communications, LLC which is
the holder of three 38 GHz licenses. The acquisition is subject to certain
regulatory approvals, but is expected to be consummated in the last quarter of
1996.
Agreement To Acquire Local Area Telecommunications, Inc.
In April 1996, a subsidiary of the Company entered into an agreement to
acquire certain assets of Local Area Telecommunications, Inc. ("Locate"),
comprising its business as a competitive access provider of local digital
microwave distribution services and facilities to large corporations and to
interexchange and other common carriers. The purchase price for such assets will
be $17,500,000, which will be paid in the form of a promissory note due six
months after closing and bearing interest at the annual rate of eight percent.
The Company may convert the note, in whole but not part, at its election, into
that number of shares of Common Stock equal to (a) the principal amount and all
accrued and unpaid interest on the note divided by (b) the average of the
closing prices of the Common Stock for the five days ending on the date on which
the
F-30
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Company gives written notice of its decision to convert the note. Locate has no
rights of conversion. The Company has granted certain registration rights to
Locate with respect to such shares of Common Stock in the event that the Company
elects such conversion.
Consummation of the purchase is subject to certain closing conditions
including (i) expiration or termination of the waiting period under
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and (ii)
consent of the Federal Communications Commission and certain state agencies to
the transfer of control of, or the assignment of certain licenses and other
authorizations to conduct business. The purchase is expected to close as soon as
practicable after satisfaction of all closing conditions set forth in the
purchase agreement.
In connection with the purchase, the Company and Locate entered into a
service agreement for a term commencing in April 1996 and terminating upon the
earlier to occur of (i) the closing of the purchase or (ii) termination of the
purchase agreement. Pursuant to the services agreement, the Company performs
certain consulting and related services for Locate. As full compensation for
performance of such services, Locate pays the Company a fee of $125,000 per
month during the term of the agreement, subject to certain adjustments.
Acquisition of 80% Equity Interest in Fox Lorber Associates, Inc.
In April 1996, NFF acquired 80% of the outstanding common stock of
Fox/Lorber Associates, Inc. ("Fox/Lorber"), an independent distributor of films,
entertainment series and documentaries in the television and home video markets.
The purchase price consisted of $150,000 in common stock of the Company and
$300,000 in cash contributed by NFF to the working capital of Fox/Lorber.
NFF also purchased, in a separate, simultaneous transaction, all of the
outstanding shares of Fox/Lorber's preferred stock, together with three
promissory notes in the aggregate principal amount of $136,507 for an aggregate
purchase price of $1,020,000 in the Company's Common Stock.
The 20% minority shareholder has an option subject to certain earnings
levels, to put his interest to the Company and the Company is obligated, under
certain conditions, to provide up to $2,000,000 in working capital to Fox
Lorber.
Acquisition of 65% Equity Interest in The Winning Line, Inc.
In April 1996, WNM converted $970,000 principal amount of loans (plus
accrued interest) outstanding to The Winning Line, Inc. ("TWL"), into a 65%
equity interest in TWL.
TWL operates the SportsFan Radio Network ("SportsFan"). SportsFan is a
multimedia sports programming and production company which provides live sports
programming to more than 200 sports and talk format radio stations across the
United States, up to 24 hours a day, including to affiliate stations in 90 of
the top 100 United States markets.
WNM has the right to require certain principals of TWL who own the
remaining 35% equity interest in TWL to sell, and such principals have the right
to require WNM to purchase the remaining 35% equity interest based upon certain
criteria. At WNM's option, the purchase price in either instance can be paid in
shares of the Company's common stock (Note 8).
Stock Option Plan
On April 26, 1996, the Board of Directors approved an amendment to the
1992 and 1995 Plans, increasing the number of shares of common stock available
for grant to 1,500,000 and 3,500,000, respectively, subject to stockholder
approval.
F-31
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Agreement with Digex, Inc.
In June 1996, the Company entered into a six-year agreement with Digex,
Inc. ("Digex"), a national provider of Internet access services. Pursuant to
this agreement, the Company has the right of first refusal to provide all of
Digex's local access and/or customer interconnection requirements through the
use of the Company's Wireless Fiber or other services. The Company also will
purchase from Digex, during the term of the agreement, a minimum of $5 million
of Internet access services on a discounted basis.
Other
As of June 30, 1996, the Company has commitments during the next year to
purchase 23.5 million of telecommunications capital equipment.
F-32
<PAGE>
Report of Independent Auditors
The Board of Directors and Shareholders
Local Area Telecommunications, Inc.
We have audited the accompanying balance sheets of the Microwave Division
of Local Area Telecommunications, Inc. as of December 31, 1995 and 1994, and the
related statements of operations, divisional (deficit) surplus and cash flows
for the years then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Microwave Division of
Local Area Telecommunications, Inc. at December 31, 1995 and 1994, and the
results of its operations and its cash flows for the years then ended, in
conformity with generally accepted accounting principles.
As discussed in Note 1 to the financial statements, the Microwave
Division's recurring losses from operations and divisional deficit raise
substantial doubt about its ability to continue as a going concern. The
financial statements do not include any adjustment that might result from the
outcome of this uncertainty. As also discussed in Note 1, on April 1, 1996, the
Company entered into an agreement to sell certain of the assets of the Microwave
Division to WinStar Communications, Inc.
Ernst & Young LLP
MetroPark, New Jersey
April 9, 1996
F-33
<PAGE>
The Microwave Division of
Local Area Telecommunications, Inc.
Balance Sheets
<TABLE>
<CAPTION>
June 30, 1996 December 31,
------------- ----------------------------
(Unaudited) 1995 1994
---- ----
<S> <C> <C> <C>
ASSETS
Current assets
Cash ................................... $ 35,419 $ 441,994 $ 1,772,460
Accounts receivable, net of
allowance for doubtful accounts of
$95,000, $90,000 and $73,000 at
June 30, 1996 and December 31,
1995 and 1994 ........................ 611,828 538,269 526,391
Inventories ............................ 3,402,454 3,353,641 2,895,981
Prepaids and other current assets ...... 130,974 171,752 619,885
------------ ------------ ------------
Total current assets ..................... 4,180,675 4,505,656 5,814,717
Property and equipment, net .............. 8,799,170 10,015,056 11,531,900
Security deposits ........................ 85,029 83,308 85,164
------------ ------------ ------------
Total assets ............................. $ 13,064,874 $ 14,604,020 $ 17,431,781
============ ============ ============
LIABILITIES AND DIVISIONAL
(DEFICIT) SURPLUS
Current liabilities
Accounts payable and accrued
expenses ............................. $ 813,722 $ 874,001 $ 1,945,129
Obligations under capital leases ....... 54,799 107,816 65,535
Interest payable ....................... 2,528,013 1,645,708 641,579
Notes payable .......................... 17,300,000 17,300,000
------------ ------------ ------------
Total current liabilities ................ 20,696,534 19,927,525 2,652,243
Capital lease obligations, less current
portion ................................ 233,862 233,862 210,295
Long-term debt ........................... 25,000 25,000 13,050,000
------------ ------------ ------------
Total liabilities ........................ 20,955,396 20,186,387 15,912,538
Divisional (deficit) surplus ............. (7,890,522) (5,582,367) 1,519,243
------------ ------------ ------------
Total liabilities and divisional (deficit)
surplus ................................ $ 13,064,874 $ 14,604,020 $ 17,431,781
============ ============ ============
</TABLE>
See accompanying notes.
F-34
<PAGE>
The Microwave Division of
Local Area Telecommunications, Inc.
Statements of Operations
<TABLE>
<CAPTION>
Six Months Ended June 30, Year ended December 31,
------------------------- -----------------------
1996 1995 1995 1994
---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C>
Revenues:
Sales of communications services .. $ 1,900,607 2,043,513 $ 4,264,664 $ 4,946,988
Sales of communications systems ... 578,904 1,517,031 2,656,718 1,842,828
Installation charges .............. 49,667 120,479 169,165 88,151
----------- ----------- ----------- -----------
2,529,178 3,681,023 7,090,547 6,877,967
Operating expenses
Network services .................. 1,337,081 1,286,991 2,320,374 2,381,922
Cost of systems sold .............. 391,744 1,093,815 1,714,429 1,302,601
Selling, general and administrative 872,202 1,016,857 2,582,894 2,780,982
Depreciation and amortization ..... 1,280,152 1,345,046 2,784,156 2,608,765
----------- ----------- ----------- -----------
3,881,179 4,742,709 9,401,853 9,074,270
----------- ----------- ----------- -----------
Loss from operations ................ (1,352,001) (1,061,686) (2,311,306) (2,196,303)
Other income (expense)
Interest income ................... 4,784 6,091 11,736 7,370
Interest expense .................. (960,938) (720,788) (1,587,851) (1,012,434)
----------- ----------- ----------- -----------
(956,154) (714,697) (1,576,115) (1,005,064)
----------- ----------- ----------- -----------
Net loss .......................... $(2,308,155) ($1,776,383) $(3,887,421) $(3,201,367)
=========== =========== =========== ===========
</TABLE>
See accompanying notes.
F-35
<PAGE>
The Microwave Division of
Local Area Telecommunications, Inc.
Statements of Divisional (Deficit) Surplus
Six months ended June 30, 1996 and
years ended December 31, 1995 and 1994
Divisional surplus at December 31, 1993........................... $ 4,692,407
Net loss ....................................................... (3,201,367)
Net activity with Locate ....................................... 28,203
-----------
Divisional surplus at December 31, 1994 .......................... 1,519,243
Net loss ....................................................... (3,887,421)
Net activity with Locate ....................................... (3,214,189)
-----------
Divisional deficit at December 31, 1995 .......................... (5,582,367)
Net loss (unaudited) ........................................... (2,308,155)
-----------
Divisional deficit at June 30, 1996 (unaudited)................... $(7,890,522)
===========
See accompanying notes.
F-36
<PAGE>
The Microwave Division of
Local Area Telecommunications, Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
Six Months, Year ended
Ended June 30, December 31
----------------------------- -----------------------------
1996 1995 1995 1994
---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C>
Operating activities
Net loss .................. $(2,308,155) $(1,776,383) $(3,887,421) $(3,201,367)
Adjustments to
reconcile net loss to net
cash used in operating
activities
Depreciation and
amortization ........ 1,280,152 1,345,046 2,784,156 2,608,765
Changes in assets and
liabilities
Accounts receivable ... (73,559) (110,217) (11,878) 142,512
Inventory ............. (48,813) (20,839) (457,660) (228,059)
Prepaids and other .... 39,057 20,061 449,989 (291,231)
Accounts payable and
accrued expenses .... (60,279) (18,533) (1,071,128) (223,308)
Interest payable ...... 882,305 225,737 1,004,129 2,918
--------- --------- --------- ---------
Net cash used in operating
activities .............. (289,292) (335,128) (1,189,813) (1,189,770)
--------- --------- --------- ---------
Investing activities
Capital expenditures ...... (64,266) (794,892) (1,164,712) (432,099)
--------- --------- --------- ---------
Net cash used in investing
activities .............. (64,266) (794,892) (1,164,712) (432,099)
--------- --------- --------- ---------
Financing activities
Payments made under
capital lease obligation (53,017) (35,247) (36,752) (20,471)
Proceeds from issuance of
short term debt ....... 1,500,000
Payments made on short term
debt ................. (25,000)
Payments made on long-
term debt ............... (25,000) (7,500,000)
Proceeds from issuance of
long-term debt .......... 4,300,000 10,500,000
Payments to Locate ........ (2,820,449) (6,073,442) (3,109,794)
Payments from Locate ...... 1,147,035 2,859,253 2,952,997
--------- --------- --------- ---------
Net cash provided by (used
in) financing activities (53,017) (233,661) 1,024,059 2,822,732
--------- --------- --------- ---------
Net (decrease) increase in
cash .................... (406,575) (1,363,681) (1,330,666) 1,200,863
Cash at beginning of period 441,994 1,772,460 1,772,460 571,597
--------- --------- --------- ---------
Cash at end of period ..... $ 35,419 $ 408,779 $ 441,994 $1,772,460
========= ========= ========= =========
Non-cash financing
activities
Acquisition of equipment
under capital leases .... $ 102,600 $ 296,300
Issuance of Locate's common
stock to retire debt .... 185,000
</TABLE>
See accompanying notes.
F-37
<PAGE>
The Microwave Division of
Local Area Telecommunications, Inc.
Notes to Financial Statements
December 31, 1995 and 1994
June 30, 1996 and 1995 (Unaudited)
1. Summary of Significant Accounting Policies
Organization and Basis of Presentation
Local Area Telecommunications, Inc. (the Company), a subsidiary of
MobileMedia Corporation (MobileMedia), was incorporated on October 21, 1981. The
Company's Microwave Division (the Division) is engaged in operations pertaining
to the installation, servicing and maintenance of digital microwave radiosystems
for business use within major metropolitan areas. The Division provides voice,
data and image transmission between dispersed locations through point-to-point,
point-to-multipoint and point-topoint short-haul digital microwave radio. The
Division also designs, installs and sells microwave infrastructures used in
cellular communication systems and other networks.
The accompanying financial statements of the Microwave Division of Local
Area Telecommunications, Inc. include all of the microwave operations of Local
Area Telecommunications, Inc., including an allocated share of common expenses
and specifically identifiable assets, liabilities and long-term debt. These
financial statements have been prepared from the accounting records of Local
Area Telecommunications, Inc. and are presented on a going concern basis which
contemplates the realization of assets and the settlement of liabilities and
commitments in the normal course of business. The Division incurred net losses
of $3,769,387 and $3,201,367 for the years ended December 31, 1995 and 1994,
respectively, and as of December 31, 1995 had a divisional deficit of
$5,432,367. The continued operations of the Division are dependent upon the
receipt of additional funding from Mobile Media and/or other sources. There can
be no assurance that such funding will be received.
In October 1994, following a comprehensive review of the operations of the
Company, the Company's Board of Directors developed a plan to sell substantially
all of the assets of the Company by October 1995, retaining an investment banker
to market the assets. At December 31, 1994, in accordance with Accounting
Principles Board Opinion No. 30, "Reporting the Results of Operations--Reporting
the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions", the Company accrued losses
in anticipation of disposal prior to December 31, 1995. At December 31,1995, the
Microwave Division remained unsold and the Company accrued additional losses
expected to be incurred due to the delay in consummating the disposal. The
accrued losses at December 31, 1995 and 1994 have been recorded in the Company's
accounts, and the accompanying financial statements do not reflect any
allocation therefrom.
On April 1, 1996, the Company entered into an agreement (the "Sale
Agreement") to sell the assets of the Microwave Division, excluding cash,
accounts receivable and certain security deposits, to WinStar
Communications,Inc. (WinStar) in exchange for the assumption of certain
liabilities and $17.5 million in the form of notes bearing interest at 8% (the
WinStar Notes). The WinStar Notes are convertible into common stock of WinStar
at the option of WinStar.
Consummation of the sale noted above is subject to regulatory approval.
There can be no assurance, however, that the sale will be consummated or that,
if consummated, it will be consummated on the terms described above.
In connection with the Sale Agreement, the Company entered into a service
agreement ("Services Agreement") for a term commencing in April 1996 and
terminating upon the earlier to occur of (i) the closing of the Sale Agreement,
or (ii) termination of the Sale Agreement. Pursuant to the Services Agreement,
WinStar provides management services for the Company. As full compensation for
WinStar's performance of such services, the Company pays WinStar a fee of
$125,000 per month during the term
F-38
<PAGE>
The Microwave Division of
Local Area Telecommunications, Inc.
Notes to Financial Statements--(Continued)
1. Summary of Significant Accounting Policies--(Continued)
of the agreement, subject to certain adjustments.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Unaudited Interim Financial Statements
The interim financial information as of June 30, 1996 and the six months
ended June 30, 1996 and 1995 contained herein is unaudited but, in the opinion
of management, includes all adjustments of a normal recurring nature which are
necessary for a fair presentation of the financial position, results of
operations, and cash flows for the periods presented. Results of operations for
the periods presented herein are not necessarily indicative of results of
operations for the entire year.
Inventories
Inventories consist of the cost of communications equipment not yet placed
in service plus the net book value of equipment previously in service which the
Company anticipates returning to service within one year. All inventory is
recorded at the lower of average cost or market.
Property and Equipment
Property and equipment additions, as well as the labor costs associated
with the installation thereof, are capitalized at cost. Depreciation is computed
on the straight-line method based upon estimated useful lives ranging from 5 to
10 years.
Revenue Recognition
The Company recognizes revenue for communication services when the
services are provided. Sales of communication systems are recognized upon
delivery and installation.
Impairment of Long-Lived Assets
In March 1995, the FASB issued Statement No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,
which requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. Statement No. 121 also addresses the accounting for long-lived
assets that are expected to be disposed of. The Division adopted Statement No.
121 as of January 1, 1996, which had no effect on the Division's financial
position or results of operations.
Income Taxes
The Division is included in the consolidated federal income tax return of
MobileMedia. No consolidated federal income tax expense or benefit is allocated
to the Division.
F-39
<PAGE>
The Microwave Division of
Local Area Telecommunications, Inc.
Notes to Financial Statements--(Continued)
2. Property and Equipment
The components of property and equipment were as follows
June
30, 1996 December 31
-------- ---------------------
(Unaudited) 1995 1994
---- ----
Equipment placed in service ....... $26,375,597 $26,472,594 $26,641,661
Furniture and fixtures ............ 1,849,777 1,715,051 1,452,478
----------- ----------- -----------
28,225,374 28,187,645 28,094,139
Less accumulated depreciation ..... 19,426,204 18,172,589 16,562,239
----------- ----------- -----------
$ 8,799,170 $10,015,056 $11,531,900
=========== =========== ===========
Included in equipment placed in service is certain equipment obtained
under capital leases. At June 30, 1996, this equipment has a gross book value of
approximately $429,000 and a net book value of approximately $343,000.
3. Notes Payable
Notes payable, all of which are unsecured, consisted of the following
June
30, 1996 December 31
-------- ---------------------
(Unaudited) 1995 1994
---- ----
12% super senior note payable ..... $ 7,300,000 $ 7,300,000 $ 3,000,000
10% senior notes payable, due
March 31, 1996 .................. 7,500,000 7,500,000 7,500,000
10% senior note payable, due
September 15, 1996 .............. 2,500,000 2,500,000 2,500,000
12% Subordinated Note ............. 25,000 25,000 50,000
----------- ----------- -----------
$17,325,000 $17,325,000 $13,050,000
=========== =========== ===========
In December 1994, the Division refinanced $7,500,000 of its $10,000,000
10% note payable, due September 15, 1996 with two $3,750,000 10% senior notes
payable (the Senior Notes), due January 1, 1996. On April 28, 1995, the due
dates of the two $3,750,000 Senior Notes were extended to March 31, 1996.
In December 1994, the Division borrowed $3,000,000 from a MobileMedia
shareholder in exchange for a 12% super senior note payable due January 1, 1996.
During 1995, the Division borrowed $4,300,000 in exchange for six additional 12%
super senior notes (collectively, the "Super Senior Notes").
As of April 9, 1996, neither the Senior Notes nor the Super Senior Notes
(collectively, the "Notes") were repaid. It is anticipated that the Notes will
be exchanged for WinStar Notes acquired by the Company pursuant to the Sale
Agreement (Note 1).
Total interest paid for the six months ended June 30, 1996 and 1995, and
for the years ended December 31, 1995 and 1994 was approximately $79,000,
$517,000, $586,000 and $1,269,000, respectively.
F-40
<PAGE>
The Microwave Division of
Local Area Telecommunications, Inc.
Notes to Financial Statements--(Continued)
4. Related Party Transactions
For the six months ended June 30, 1996 and 1995, and for the years ended
December 31, 1995 and 1994, the Division had sales to MobileMedia of
approximately $18,000, $35,000, $70,000 and $721,000, respectively.
In December 1995, on behalf of the Division, the Company acquired certain
vehicles, totaling approximately $103,000, under capital lease agreements (the
Agreements) with Roos Capital Planners, Inc., a related party. The Agreements
require the Company to make 36 monthly installments of $4,000.
5. Commitments and Contingencies
On behalf of the Division, the Company leases space under cancelable and
noncancellable operating leases which expire at various dates through 2000.
Total rental expense for the six months ended June 30, 1996 and 1995, and for
the years ended December 31, 1995 and 1994 was approximately $805,000, $756,000,
$1,586,000 and $1,811,000, respectively. Additionally, the Company is obligated
under capital leases for certain equipment.
Future minimum payments under capital leases and noncancellable operating
leases with initial terms of one year or more consists of the following as of
December 31, 1995
Capital Operating
Leases Leases
------ ------
1996 ................................................. $ 147,900 $ 630,000
1997 ................................................. 147,900 538,000
1998 ................................................. 122,708 18,000
1999 ................................................. 8,000
2000 ................................................. 3,000
---------- ----------
Total future minimum payments ........................ 418,508 $1,197,000
==========
Less amount representing interest .................... 76,830
----------
Present value of net minimum lease payments (including
current portion of $107,816) ......................... $ 341,678
==========
The Company has employment agreements with certain executives through
December 31, 1996 requiring the payment of $428,645 per year in compensation
with increases of 5% per annum. Additionally, payments of $1,500,000 may be
required in certain circumstances by the Company in the event of the termination
of employment of the executives within six months from the date of sale of the
Company, as defined in the employment agreements. Also, if the earnings before
interest, depreciation, taxes and amortization of MobileMedia increase by more
than 30% and 50%, the Chief Executive Officer is entitled to a payment of
$350,000 for each noted percentage increase. Based on the specified performance
criteria, $350,000 was expensed in each of 1994 and 1995, and is included in the
results of operations of the Division.
F-41
<PAGE>
REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
Board of Directors
Avant-Garde Telecommunications, Inc.
We have audited the accompanying balance sheet of Avant-Garde
Telecommunications, Inc. as of February 28, 1995, and the related statements of
operations, and cash flows for each of the two years in the period ended
February 28, 1995. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Avant-Garde
Telecommunications, Inc. as of February 28, 1995, and the results of its
operations and its cash flows for each of the two years in the period ended
February 28, 1995, in conformity with generally accepted accounting principles.
GRANT THORNTON LLP
New York, New York
July 28, 1995
F-42
<PAGE>
Avant--Garde Telecommunications, Inc.
Balance Sheet
February 28, 1995
ASSETS
Cash ........................................................ $ 237
Accounts receivable ......................................... --
Other current assets ........................................ 97,140
Total current assets ............................... 97,377
-----------
Property and equipment, net ................................. 3,149,911
Other assets ................................................ 432,683
-----------
Total assets ....................................... $ 3,679,971
===========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Accounts payable and accrued expenses ....................... $ 2,765,578
Due to affiliate ............................................ 3,350,510
-----------
Total liabilities ........................................... 6,116,088
-----------
Stockholders' Deficiency
Preferred stock, $.001 par value; authorized 50,000
shares, no shares issued and outstanding ........... --
Common stock, $.001 par value; authorized 200,000
shares, issued and outstanding 2,250 shares ........ 2
Additional paid-in capital .................................. 20
Accumulated deficit ........................................... (2,436,139)
-----------
Total stockholders' deficiency ..................... (2,436,117)
-----------
Total liabilities and stockholders' deficiency ..... $ 3,679,971
===========
See Notes to Financial Statements
F-43
<PAGE>
Avant--Garde Telecommunications, Inc.
Statements of Operations
<TABLE>
<CAPTION>
For the Period For the Year Ended
March 1 to February 28,
July 17, 1995 -------------------
-------------
(unaudited) 1995 1994
---- ----
<S> <C> <C> <C>
Revenues ............................... $ 17,779 $ 7,458 $ --
----------- ----------- -----------
Expenses
Selling, general and administrative
expenses ........................... 1,704,294 2,277,094 134,797
Depreciation ......................... 59,250 25,872 --
----------- ----------- -----------
Total expenses ......................... 1,763,544 2,302,966 134,797
----------- ----------- -----------
Operating loss ......................... (1,745,765) (2,295,508) (134,797)
Interest expense (income), net ......... -- 6,039 (205)
Amortization of intangibles ............ 31,978 -- --
----------- ----------- -----------
Net loss ............................... (1,777,743) (2,301,547) (134,592)
Accumulated deficit, beginning of period (2,436,139) (134,592) --
----------- ----------- -----------
Accumulated deficit, end of period ..... $(4,213,882) $(2,436,139) $ (134,592)
=========== =========== ===========
</TABLE>
See Notes to Financial Statements
F-44
<PAGE>
Avant--Garde Telecommunications, Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
For the Period For the Year Ended
March 1 to February 28,
July 17, 1995 -------------------
--------------
(unaudited) 1995 1994
---- ----
<S> <C> <C> <C>
Cash flows from operating activities
Net loss ................................ $(1,777,743) $(2,301,547) $ (134,592)
Adjustments to reconcile net loss to cash
used by operating activities
Depreciation ............................ 59,250 25,872 --
Amortization of intangibles ............. 31,978 -- --
(Increase) decrease in operating assets
Accounts receivable ................... (9,660) 22 --
Other current assets .................. 168 (97,140) --
Increase (decrease) in accounts payable
and accrued expenses .................. (913,593) 921,890 43,688
----------- ----------- -----------
Net cash used in operating activities ..... (2,609,600) (1,450,903) (90,904)
----------- ----------- -----------
Cash flows from investing activities
Purchase of property and equipment ...... (2,447,761) (1,375,783) --
Investment in other assets .............. (458,371) (432,683) --
----------- ----------- -----------
Net cash used in investing activities ..... (2,906,132) (1,808,466) --
----------- ----------- -----------
Cash flows from financing activities
Increase in due to affiliate ............ 5,515,815 3,245,510 105,000
----------- ----------- -----------
Net increase (decrease) in cash ........... 83 (13,859) 14,096
Cash at beginning of period ............... 237 14,096 --
----------- ----------- -----------
Cash at end of period ..................... $ 320 $ 237 $ 14,096
=========== =========== ===========
</TABLE>
See Notes to Financial Statements
F-45
<PAGE>
AVANT-GARDE TELECOMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
Note 1--Summary of Significant Accounting Policies
The financial statements include the accounts of Avant-Garde
Telecommunications, Inc. ("Company"), prepared in accordance with generally
accepted accounting principles.
Nature of Business
The Company develops, markets and delivers local telecommunication
services in the United States. The local telecommunications market has become
increasingly open to competition as a result of recent technological
developments and procompetitive regulatory initiatives. The Company, based in
Washington, D.C., holds 30 licenses, each encompassing four 100-MHz millimeter
wave radio channels. These licenses allow the Company to deliver voice, data and
video over 400 MHz of exclusive bandwidth in the 38 GHz band. These licenses
were issued to the Company on September 16, 1993. Under the terms of its
licenses, the Company was required to begin the provision of services authorized
under such licenses by March 15, 1995. On March 15, 1995, the Company filed a
certificate of completion for each license with the Federal Communications
Commission ("FCC").
Property and Equipment
Property and equipment is stated at cost. When assets are placed into
service, depreciation and amortization are computed using the straight-line
method over the estimated useful lives of the related assets, which ranges from
3 to 8 years.
Other Assets
Certain costs, associated directly with meeting FCC license requirements
have been capitalized. These costs will be amortized over a 3 year period
beginning June 1, 1995, when the licenses are deemed to have been placed in
service. The amount capitalized is $417,000 as of February 28, 1995.
Unaudited Financial Statements
In the opinion of the Company, the accompanying unaudited statements of
operations and statements of cash flows for the period of March 1 to July 17,
1995 include all adjustments (consisting only of normal recurring adjustments)
necessary to present fairly the results of operations and the cash flows for the
period of March 1, 1995 to July 17, 1995.
Note 2--Due to Affiliate
In February and April, 1994, WinStar Wireless, Inc. ("Wireless"), a
wholly-owned subsidiary of WinStar Communications, Inc. ("WCII"), purchased a
49% interest in the company from its majority stockholder for $4,900,000 in cash
and stock. Wireless also obtained an option to acquire an additional 31% of the
Company from the majority stockholder. The Company entered into a management
agreement (the "Agreement") with Wireless at that time. Under the terms of the
Agreement, Wireless has managed the operations of the company since February
1994, subject to the direction of the majority shareholder, including the
development of a strategic business plan and financing all of the operations of
the Company, including capital expenditures. The Agreement provided for a
management fee to Wireless equal to 20% of the Company's gross receipts, subject
to a minimum fee of $10,000 per month. All amounts advanced by Wireless to the
Company, as well as accrued management fees payable, are included in Due to
Affiliate in the accompanying balance sheets and are non-interest bearing.
F-46
<PAGE>
AVANT-GARDE TELECOMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Note 2--Due to Affiliate--(Continued)
On April 10, 1995, WCII entered into an agreement with all of the
Company's shareholders pursuant to which WCII agreed to acquire the remaining
51% of the Company in exchange for 1,275,000 restricted shares of WCII's common
stock valued at $5,100,000. This agreement was contingent upon the Company
obtaining consent from the FCC to transfer control of its licenses. On June 26,
1995, such consent was granted by the FCC, and on July 17, 1995, this agreement
was consummated and the transfer took place. Pursuant to the terms of the
agreement, the Company merged into WinStar Wireless Fiber Corporation, a
wholly-owned subsidiary of WCII which is the sole surviving corporation.
Note 3--Property and Equipment
Property and equipment consist of the following
February 28, 1995
-----------------
Communications Network ........ $ 2,532,103
Computer Systems and Equipment 592,901
Furniture, Fixtures & Equipment 48,230
Other ......................... 2,549
-----------
$ 3,175,783
Accumulated Depreciation ...... (25,872)
-----------
$ 3,149,911
===========
Note 4--P-Com Contract
In November 1994, the Company entered into a non-exclusive, three year
agreement with P-Com, Inc. ("P-Com"), a manufacturer and distributor of radio
links, providing for the purchase of radio links from P-Com. The contract
pricing structure includes provisions relating to the volume of purchases under
the agreement. An annual minimum volume requirement must be met in order to
maintain the agreed upon pricing structure. The contract is cancelable by the
Company subject to certain conditions, such as the guarantee of the next 90
days' purchases in accordance with an agreed upon schedule as well as the
payment of certain deferred billings. As of February 28, 1995, the Company's
noncancellable purchase commitment was approximately $7,250,000. These
conditions to cancellation become more favorable to the Company as certain
volume levels are reached.
Certain amounts paid under the contract are prepayments for future
purchases and are included in communications equipment in property and equipment
but are not being depreciated. In future periods, as certain volume levels are
attained, these amounts may be recovered. This prepaid amounts as of February
28, 1995 is $822,500.
F-47
<PAGE>
AVANT-GARDE TELECOMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Note 5--Income Taxes
The Company follows Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes," which requires the use of the asset and liability
method of accounting for income taxes. Under this method, deferred income taxes
are recognized for the tax consequences of temporary differences by applying
enacted statutory rates applicable to future years to differences between the
financial statement carrying amounts and the tax bases of existing assets and
liabilities.
The temporary differences which result in deferred tax assets consist of
net operating loss carryforwards. The tax effect of this temporary difference is
as follows
February 28, 1995
-----------------
Net operating loss carryforwards $ 826,000
Valuation allowance ............ (826,000)
---------
$ --
=========
Due to losses incurred by the Company, a full valuation of the deferred
tax asset has been provided because realization of this future benefit cannot
currently be assured. The Company's net operating loss carryforwards of
approximately $3,534,000 will begin to expire in 2009, if not utilized. The
Company's ability to utilize its net operating losses deductions to offset
future taxable income is limited due to the change in control as defined in
Internal Revenue Code Section 382.
Note 6--Commitments
In May 1995, Wireless completed a private placement of $7,500,000 of five
year secured convertible notes (the "Notes"). These Notes are guaranteed by the
Company, and the security for the Notes includes a pledge by Wireless of its
shares of the Company.
F-48
<PAGE>
REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
The Partners
Milliwave Limited Partnership
We have audited the accompanying balance sheet of Milliwave Limited
Partnership (a Florida limited partnership) as of December 31, 1995 and the
related statement of changes in partners' capital for the period April 25, 1995
(inception) through December 31, 1995. These financial statements are the
responsibility of the management of Milliwave Limited Partnership. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Milliwave Limited
Partnership as of December 31, 1995, in conformity with generally accepted
accounting principles.
GRANT THORNTON LLP
New York, New York
June 27, 1996
F-49
<PAGE>
Milliwave Limited Partnership
BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
----------- ------------
(unaudited)
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash ..................................................... $2,785,800 $ 11,222
Investments .............................................. 2,000,000 --
Other current assets ..................................... 44,929 --
---------- ----------
Total current assets ................................. 4,830,729 11,222
Property and equipment, net .............................. 220,671 --
Licenses ................................................. 415,285 317,581
Other assets ............................................. 97,777 --
---------- ----------
Total assets ......................................... $5,564,462 $ 328,803
========== ==========
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES
Accounts payable and accrued expenses .................... $ 648,373 $ 53,803
---------- ----------
Total current liabilities ........................... 648,373 53,803
PARTNERS' CAPITAL .......................................... 4,916,089 275,000
---------- ----------
Total liabilities and partners' capital ............. $5,564,462 $ 328,803
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-50
<PAGE>
Milliwave Limited Partnership
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1996
(Unaudited)
Revenues $ --
Operating expenses
Consulting and contracted services ........ $ 123,979
Professional fees ......................... 44,143
Depreciation .............................. 291
Travel .................................... 11,617
Salaries .................................. 6,168
Office and sundry ......................... 3,052
---------
---------
Net loss from operations ..................... (189,250)
Interest income ........................... 11,596
---------
Net loss ..................................... $(177,654)
=========
F-51
<PAGE>
Milliwave Limited Partnership
STATEMENT OF CHANGES IN PARTNERS' CAPITAL
April 25, 1995 (inception) through December 31, 1995
and the six months ended June 30, 1996
(unaudited)
Cost of contributed license applications .................... $ 122,654
Cash contributed ............................................ 152,346
-----------
Partners' capital at December 31, 1995 ...................... 275,000
Cash contributed ............................................ 5,000,000
Syndication costs ........................................... (181,257)
Net loss .................................................... (177,654)
-----------
Partners' capital at June 30, 1996 (unaudited) .............. $ 4,916,089
===========
The accompanying notes are an integral part of these statements.
F-52
<PAGE>
Milliwave Limited Partnership
STATEMENT OF CASH FLOWS
For the six months ended June 30, 1996
(unaudited)
Cash flows from operating activities:
Net loss ................................................... $ (177,654)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation ............................................... 291
Increase in other current assets ........................... (44,929)
Increase in other assets ................................... (97,777)
Increase in accounts payable and accrued expense ........... 159,869
-----------
Net cash used in operating activities ........................ (160,200)
-----------
Cash flows from investing activities:
Increase in investments .................................... (2,000,000)
-----------
Net cash used in investing activities ........................ (2,000,000)
-----------
Cash flows from financing activities:
Proceeds from partners' loans .............................. 200,000
Repayment of partners' loans ............................... (200,000)
Capital contributions ...................................... 5,000,000
Syndication costs .......................................... (65,222)
-----------
Net cash provided by financing activities .................... 4,934,778
-----------
Net increase in cash and cash equivalents .................... 2,774,578
Cash and cash equivalents at beginning of period ............. 11,222
-----------
Cash and cash equivalents at end of period ................... $ 2,785,800
===========
The accompanying notes are an integral part of these statements.
F-53
<PAGE>
Milliwave Limited Partnership
NOTES TO FINANCIAL STATEMENTS
December 31, 1995 and June 30, 1996 (unaudited)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General
Milliwave Limited Partnership (a Florida limited partnership, hereinafter
referred to as the "Partnership") was formed on April 25, 1995 to apply for and
obtain licenses from the Federal Communications Commission ("FCC") and to
exploit such licenses for commercial purposes. Through June 30, 1996, the
Partnership had no operations, other than the application for licenses from the
FCC, and the commencement of construction requirements for such licenses.
A summary of the significant accounting policies applied in the
preparation of the accompanying balance sheet follows
1. Property and Equipment
Property and equipment is stated at cost. Depreciation is calculated using
the straight line method over the estimated useful lives of the related assets.
2. Cash and Cash Equivalents
The Partnership considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
3. Income Taxes
No provision for Federal, state or local income taxes has been provided as
the Partnership is not a taxable entity and the partners are individually liable
for the taxes on their shares of the Partnership's income.
4. Use of Estimates
In preparing financial statements in conformity with generally accepted
accounting principles, the Partnership is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and revenues and expenses during the reporting period. Actual results
could differ from those estimates.
5. Unaudited Financial Statements
In the opinion of the Partnership, the accompanying unaudited balance
sheet as of June 30, 1996 and the unaudited statements of operations, changes in
partners' capital, and cash flows for the six months ended June 30, 1996 include
all adjustments (consisting only of normal recurring adjustments) necessary to
present fairly the financial position of the Partnership as of June 30, 1996 and
the results of operations and cash flows for the six months ended June 30, 1996.
NOTE 2--NATURE OF BUSINESS AND LICENSES
The Partnership holds 88 licenses granted by the FCC. These licenses allow
the Partnership to deliver communication services over the 38 GHz band specified
in the licenses. The licenses were issued at various dates through March 15,
1996. Under the terms of the licenses, the Partnership must construct a minimum
of one radio link per licensed service area within eighteen months of the date
of grant or risk revocation of the licenses by the FCC. The Partnership is
required to complete its minimum construction requirement for the licenses
granted at various dates from August 1996 through September 1997. At June 30,
1996 and December 31, 1995, the Partnership has capitalized $415,285 and
$317,581, respectively, of license costs consisting of filing, application and
legal fees relative to the licenses. (Reference is made to Note 7.)
F-54
<PAGE>
Milliwave Limited Partnership
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1995 and June 30, 1996 (unaudited
NOTE 3-INVESTMENTS
Investments consist of an Overseas Private Investment Corporation ("OPIC")
- - U.S. Government guaranteed debt instrument, classified by the Partnership as
an available for sale security under Statement of Financial Accounting Standards
No. 115, "Accounting for Certain Investments in Debt and Equity Securities." The
investment is stated at cost which equals market value and matures in January
2009, with a seven day put option. Interest is payable quarterly and as of June
30, 1996 was 5.3 percent.
NOTE 4-LOANS PAYABLE-PARTNERS
In March 1996 the Partnership issued two $100,000 promissory notes to two
limited partners bearing interest at 5.86% per annum. These notes were to mature
on December 31, 1996 but were repaid out of the proceeds of a sale of limited
partnership interests. (Reference is made to Note 5).
NOTE 5--PARTNERS' CAPITAL
For the period May 1994 through the formation of the Partnership in April
1995, one of the partners incurred $122,654 in license application costs, which
were contributed to the Partnership at cost and included in the capital of the
Partnership.
The balance of the capital contributed during the period ended December
31, 1995 represented cash contributed of $152,346.
On May 30, 1996, the Partnership amended and restated its limited
partnership agreement to provide for Series A and Series B Limited Partners.
Concurrent with the amendment, the Partnership sold $5,000,000 of Series B
Limited Partnership interests. Syndication costs relating to the sale amounted
to $181,257.
NOTE 6--COMMITMENTS AND CONTINGENCIES
Subsequent to December 31, 1995, the Partnership entered into purchase
orders to purchase radio links from P-Com, Inc. amounting to approximately
$570,000. As of June 30, 1996, open purchase orders amounted to $365,000.
On November 13, 1995, the FCC released an order freezing the acceptance
for filing of new applications for 38 GHz frequency licenses. On December 15,
1995, the FCC announced the issuance of an NPRM, pursuant to which it proposed
to amend its current rules relating to 38 GHz including, among other items, the
imposition of minimum construction requirements and an auction procedure for
issuance of licenses in the 37-40 GHz band. In addition, the FCC ordered that
those applications that are subject to mutual exclusivity with other applicants
or that were placed on public notice by the FCC after September 13, 1995 would
be held in abeyance and not processed by the FCC pending the outcome of the
proceeding initiated by the NPRM. Final rules with respect to the changes
proposed by the NPRM have not been adopted and the changes proposed by the NPRM
have been, and are expected to continue to be, the subject of numerous comments
by members of the telecommunications industry and others. Consequently, there
can be no assurance that the NPRM will result in the issuance of rules
consistent with the rules initially proposed in the NPRM. Until final rules are
adopted, the rules currently in existence remain in effect with respect to
outstanding licenses.
F-55
<PAGE>
Milliwave Limited Partnership
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1995 and June 30, 1996 (unaudited)
NOTE 7--WINSTAR COMMUNICATIONS, INC. AGREEMENT
In June 1996, the Partnership entered into an agreement with WinStar
Communications, Inc. ("WinStar") whereby WinStar would acquire the Partnership
for a purchase price of $40 million in cash and 3.4 million shares of WinStar
common stock. At the date of signing the agreement, the market value of the
common stock was approximately $85,000,000. The number of shares issued is
subject to adjustment, depending on WinStar's stock price on the date of closing
of the transaction with a maximum of 4.5 million shares and an ability for
WinStar to issue fewer than 3.4 million shares if the stock price exceeds
certain levels. The acquisition is subject to FCC approval, but is expected to
be consummated in the second quarter of calendar year 1997. The Partnership also
has entered into a (i) services agreement with Winstar pursuant to which Winstar
has agreed to provide services to the Partnership in connection with the
buildout of its licensed areas in consideration for payment of monthly site
access and management fees, as well as installation fees, and (ii) a two-year
transmission path lease agreement with Winstar permitting its use of up to 488
radio links in the Partnerships' licensed areas.
F-56
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma condensed consolidated balance sheet has
been prepared by taking the June 30, 1996 consolidated balance sheets of WinStar
Communications, Inc. and subsidiaries (the "Company") and the balance sheets of
Milliwave Limited Partnership ("Milliwave") and certain assets of the Microwave
Division of Local Area Telecommunications, Inc. ("Locate"), as if they occurred
on June 30, 1996. The following unaudited pro forma "as adjusted" balance sheet
gives effect to these acquisitions as well as to the issuance of Common Stock in
this Offering and the resulting retirement of debt, as if they occurred on June
30, 1996. The unaudited pro forma condensed consolidated balance sheet has been
prepared for information purposes only and does not purport to be indicative of
the financial condition that necessarily would have resulted had these
transactions taken place on June 30, 1996.
The following unaudited pro forma condensed consolidated statements of
operations for the ten month period ended December 31, 1995 and for the six
months ended March 31, 1996 give effect to the Company's acquisition of
Milliwave, certain assets of Locate, 65% of TWL, 80% of Fox/Lorber, and the
remaining 51% of Avant-Garde Telecommunications, Inc. ("AGT"), as well as the
Everest Financing and issuance of the Senior and Convertible Notes, as if they
occurred as of the beginning of the respective periods. The following unaudited
pro forma "as adjusted" statements of operations for the ten month period ended
December 31, 1995 and for the six month period ended June 30, 1996 give effect
to these acquisitions and financings as well as to the issuance of Common Stock
in this Offering and the resulting retirement of debt, as if they occurred as of
the beginning of the respective periods. The revenues and results of operations
included in the following unaudited pro forma condensed consolidated statements
of operations are not indicative of anticipated results of operations for
periods subsequent to the acquisitions, financings and the issuance of Common
Stock in this Offering and the resulting retirement of debt, nor are they
considered necessarily to be indicative of the results of operations for the
periods specified had the acquisitions, financings and the issuance of Common
Stock in this Offering and the resulting retirement of debt actually been
completed at the beginning of each respective period.
These financial statements should be read in conjunction with the notes to
the unaudited pro forma condensed consolidated financial statements, which
follow, the consolidated financial statements of the Company and the financial
statements of Milliwave, Locate and AGT and the related notes thereto, appearing
elsewhere in the Prospectus.
F-57
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF JUNE 30, 1996
<TABLE>
<CAPTION>
Pro Forma Pro Forma
Adjustments Adjustments
Increase/ Pro Forma Increase/
(Decrease) As Adjusted (Decrease)
The Company, Milliwave, Locate, for for for the Pro Forma
Historical Historical Historical Acquisitions Acquisitions Conversion As Adjusted
---------- ---------- ---------- ------------ ------------ ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents .... $ 75,600,073 $2,785,800 $ 35,419 $(40,000,000)(b) $ 38,385,873 $ $ 38,385,873
(35,419)(a)
Short term investments ....... 115,460,429 2,000,000 -- 117,460,429 117,460,429
------------ ---------- ----------- ------------ ------------ ---------- ------------
Cash, cash equivalents
and short term investments 191,060,502 4,785,800 35,419 (40,035,419) 155,846,302 -- 155,846,302
Investments in marketable
equity securities ....... 937,500 -- -- 937,500 937,500
Accounts receivable, net ..... 14,905,197 -- 611,828 (611,828)(a) 14,905,197 14,905,197
Notes receivable ............. 214,318 -- -- 214,318 214,318
Inventories .................. 10,924,137 -- 3,402,454 14,326,591 14,326,591
Prepaid expenses and other
current assets ......... 8,888,945 44,929 130,974 (130,974)(a) 8,933,874 8,933,874
------------ ---------- ----------- ------------ ------------ ---------- ------------
Total current assets ...... 226,930,599 4,830,729 4,180,675 (40,778,221) 195,163,782 -- 195,163,782
Property and equipment, net .. 25,788,184 220,671 8,799,170 34,808,025 34,808,025
Notes receivable ............. 385,106 -- -- 385,106 385,106
Investments and advances ..... 399,729 -- -- 399,729 399,729
Licenses, net ................ 12,519,169 415,285 -- 120,083,911(b) 138,605,402 138,605,402
5,587,037(a)
Intangible assets, net ....... 10,061,579 -- -- 10,061,579 10,061,579
Deferred financing costs ..... 11,157,759 -- -- 11,157,759 4,490,000)(c) 6,667,759
Other assets ................. 2,103,036 97,777 85,029 (85,029)(a) 2,200,813 2,200,813
------------ ---------- ----------- ------------ ------------ ---------- ------------
Total assets .............. $289,345,161 $5,564,462 $13,064,874 $ 84,807,698 $392,782,195 $4,490,000) $388,292,195
============ ========== =========== ============ ============ ========== ============
</TABLE>
F-58
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF JUNE 30, 1996
<TABLE>
<CAPTION>
Pro Forma Pro Forma
Adjustments Adjustments
Increase/ Pro Forma Increase/
(Decrease) As Adjusted (Decrease)
The Company, Milliwave, Locate, for for for the
Historical Historical Historical Acquisitions Acquisitions Conversion
---------- ---------- ---------- ------------ ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Loan payable .................... $ 8,758,076 $ $17,300,000 $ 17,500,000(a) $ 26,258,076 $
(17,300,000)(a)
Accounts payable and accrued
expenses ....................... 23,738,727 648,373 3,341,735 (3,341,735)(a) 24,387,100
Capitalized lease obligations ... 1,528,811 -- 54,799 1,583,610
------------ ---------- ----------- ---------- ------------ ------------
Total current liabilities ...... 34,025,614 648,373 20,696,534 (3,141,735) 52,228,786 --
Senior notes payable ............ 164,715,601 -- -- 164,715,601
Convertible notes payable ....... 82,357,801 -- -- 82,357,801 (82,357,801)(c)
Other notes payable ............. 3,585,777 25,000 (25,000)(a) 3,585,777
Capitalized lease obligations ... 5,450,617 -- 233,862 5,684,477
------------ ---------- ----------- ---------- ------------ ------------
Total liabilities .............. 290,135,410 648,373 20,955,396 (3,166,735) 308,572,444 (82,357,801)
------------ ---------- ----------- ---------- ------------ ------------
Commitments and contingencies
Stockholders' equity:
Preferred stock ................ 688,900 -- 688,900
Common stock, $.01 par value; 306,943 -- -- 34,000(b) 340,943 39,931(c)
authorized 75,000,000 shares,
issued 30,694,260 and
outstanding 28,037,497 shares,
pro forma issued 34,094,260 and
outstanding 31,437,097 shares,
and pro forma as adjusted issued
38,087,366 and outstanding
35,430,603 shares
Partners' capital ............... 4,916,089 (4,916,089)(b) -- --
Additional paid-in capital ..... 111,186,462 -- -- 84,966,000(b) 196,152,462 77,827,870(c)
Accumulated deficit ............ (70,126,061 -- (7,890,522) 7,890,522(a) (70,126,061)
------------ ---------- ----------- ---------- ------------ ------------
42,056,244 4,916,089 (7,890,522) 87,974,433 127,056,244 77,867,801
Less: Treasury stock .......... (42,733,993 -- -- (42,733,993)
Deferred compensation ......... -- -- -- -- --
Unrealized loss on investment
in marketable securities ..... (112,500) -- -- (112,500)
------------ ---------- ----------- ---------- ------------ ------------
Total stockholders' equity .... (790,249 4,916,089 (7,890,522) 87,974,433 84,209,751 77,867,801
------------ ---------- ----------- ---------- ------------ ------------
Total liabilities and
stockholders' equity ......... $289,345,161 $5,564,462 $13,064,874 84,807,698 $392,782,195 $ (4,490,000)
============ ========== =========== ========== ============ ============
<CAPTION>
Pro Forma
As Adjusted
-----------
<S> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Loan payable .................... $ 26,258,076
Accounts payable and accrued
expenses ....................... 24,387,100
Capitalized lease obligations ... 1,583,610
-------------
Total current liabilities ...... 52,228,786
Senior notes payable ............ 164,715,601
Convertible notes payable ....... --
Other notes payable ............. 3,585,777
Capitalized lease obligations ... 5,684,479
-------------
Total liabilities .............. 226,214,643
-------------
Commitments and contingencies
Stockholders' equity:
Preferred stock ................ 688,900
Common stock, $.01 par value; 380,874
authorized 75,000,000 shares,
issued 30,694,260 and
outstanding 28,037,497 shares,
pro forma issued 34,094,260 and
outstanding 31,437,097 shares,
and pro forma as adjusted issued
38,087,366 and outstanding
35,430,603 shares
Partners' capital ............... --
Additional paid-in capital ..... 273,980,332
Accumulated deficit ............ (70,126,061)
-------------
204,924,045
Less: Treasury stock .......... (42,733,993)
Deferred compensation .........
Unrealized loss on investment
in marketable securities ..... (112,500)
-------------
Total stockholders' equity .... 162,077,552
-------------
Total liabilities and
stockholders' equity ......... $ 388,292,195
=============
</TABLE>
F-59
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
TWL,
Historical,
The Company, Milliwave LP, Locate, January 1 to
Historical Historical Historical April 7, 1996
------------ ------------ ------------ --------------
<S> <C> <C> <C> <C>
Net sales ......................... $ 30,683,587 $ -- $ 2,529,178 $ 455,777
Cost of sales ..................... 17,647,510 -- 1,728,825 367,607
Gross profit ................... 13,036,077 -- 800,353 88,170
------------ ------------ ------------ ------------
Selling, general and
administrative expenses .......... 28,005,469 188,959 872,202 529,421
Depreciation ...................... 834,965 291 1,280,152 9,008
------------ ------------ ------------ ------------
Operating loss .................... (15,804,357) (189,250) (1,352,001) (450,259)
Other (income) expense
Interest expense ............... 18,014,704 -- 960,938 112,205
Interest income ................ (5,657,530) (11,596) (4,784) 000
Amortization of intangibles .... 466,568 -- -- 1,940
------------ ------------ ------------ ------------
Net loss before income taxes ...... (28,628,099) (177,654) (2,308,155) (564,404)
Income taxes ...................... 186,887 -- -- --
------------ ------------ ------------ ------------
Net loss .......................... $(28,814,986) $ (177,654) $ (2,308,155) $ (564,404)
============ ============ ============ ============
Net loss per share ................ $ (1.05)
============
Weighted average shares outstanding $ 27,468,186
============
<CAPTION>
Pro Forma
Fox/Lorber, Pro Forma Adjustments
Historical Adjustments Pro Forma Increase/
January 1 Increase/ As Adjusted (Decrease)
to 6 April (Decrease) for for for the Pro Forma
23, 1996 Acquisitions Acquisitions Conversions As Adjusted
-------- ------------ ------------ ----------- -----------
Net sales ......................... $ 2,292,535 $ $ 35,961,077 $ $ 35,961,077
Cost of sales ..................... 1,447,169 21,191,111 21,191,111
------------ ------------ ------------ ------------ ------------
Gross profit ................... 845,366 14,769,966 14,769,966
Selling, general and
administrative expenses .......... 903,542 30,499,593 30,499,593
Depreciation ...................... 7,000 2,131,416 2,131,416
------------ ------------ ------------ ------------ ------------
Operating loss .................... (65,176) (17,861,043) (17,861,043)
Other (income) expense
Interest expense ............... 21,044 (246,438)(a) 18,862,453 (5,610,790) 13,251,663
Interest income ................ 000 1,040,000(m) (4,633,910) (4,633,910)
Amortization of intangibles .... 1,500 202,785(b) 672,793 672,793
------------ ------------ ------------ ------------ ------------
Net loss before income taxes ...... (87,720) (996,347) (32,762,379) 5,610,790 (27,151,589)
Income taxes ...................... -- 186,887 186,887
------------ ------------ ------------ ------------ ------------
Net loss .......................... $ (87,720) $ (996,347) $(32,949,266) $ 5,610,790 $(27,338,476)
============ ============ ============ ============ ============
Net loss per share ................ $ (1.07) $ (0.79)
============ ============
41,868(g)
Weighted average shares outstanding $ 3,400,000(n) $ 30,910,054 $ 3,732,643 $ 34,642,696
============ ============ ============ ============
</TABLE>
F-60
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE TEN MONTH PERIOD ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
AGT,
Historical
The Company, Milliwave, March 1 to Locate, TWL,
Historical Historical July 17, 1995 Historical Historical
---------- ---------- ------------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net sales .................................. $ 29,771,472 $ -- $ 17,779 $ 7,090,547 $ 1,381,319
Cost of sales .............................. 19,546,351 -- -- 4,034,803 957,190
------------ ----------- ------------ ------------ ------------
Gross profit ............................... 10,225,121 -- 17,779 3,055,744 424,129
Selling, general and administrative
expenses .................................. 19,266,466 -- 1,704,294 2,582,894 1,470,831
Depreciation ............................... 770,284 -- 59,250 2,784,156 25,000
------------ ----------- ------------ ------------ ------------
Operating loss ............................. (9,811,629) -- (1,745,765) (2,311,306) (1,071,702)
Other (income) expense
Interest expense ......................... 7,630,079 -- -- 1,587,851 244,454
Interest income .......................... (2,889,813) -- -- (11,736) --
Amortization of intangibles .............. 439,888 -- 31,978 -- 7,045
Other expense ............................ -- -- -- -- --
Equity in loss of AGT .................... 865,676 -- -- -- --
------------ ----------- ------------ ------------ ------------
Net loss ................................... $(15,857,459) $ -- $ (1,777,743) $ (3,887,421) $ (1,323,201)
============ =========== ============ ============ ============
Net loss per share ......................... $ (0.70)
============
Weighted average shares outstanding ........ 22,769,770
============
<CAPTION>
Pro Forma
Adjustments Pro Forma
Increase/ Pro Forma As Adjustments
(Decrease) for Adjusted for Increase/
Acquisitions Acquisitions (Decrease)
Fox/Lorber, and Prior and Prior for the Pro Forma
Historical Financings Financings Offerings As Adjusted
---------- ---------- ---------- --------- -----------
<S> <C> <C> <C> <C>
Net sales .............................. $ 7,534,876 $ (2,189,994)(c) $ 43,560,999 $ $ 43,560,999
(45,000)(e)
Cost of sales .......................... 5,679,399 (1,568,699)(c) 28,649,044 28,649,044
------------ ------------ ------------ ------------ ------------
Gross profit ........................... 1,855,477 (666,295) 14,911,955 14,911,955
Selling, general and administrative
expenses .............................. 2,296,448 (70,000)(d) 26,554,832 26,554,832
(651,101)(c)
(45,000)(e)
Depreciation ........................... 27,521 (450,786)(c) 3,215,425 3,215,425
------------ ------------ ------------ ------------ ------------
Operating loss ......................... (468,492) 550,592 (14,858,302) (14,858,302)
Other (income) expense
Interest expense ..................... 79,174 (197,782)(a) 30,965,569 (9,341,108)(k) 21,624,461
(239,413)(c)
21,705,785(i)
155,421(j)
Interest income ...................... -- (2,901,549) (2,901,549)
Amortization of intangibles .......... 5,619 399,357(b) 882,950 882,950
(937)(c)
Other expense ........................ 126,188 (21,031)(c) 105,157 105,157
Equity in loss of AGT ................ -- (865,676)(f) -- --
------------ ------------ ------------ ------------ ------------
$ (9,341,108)
============
Net loss ............................... $ (679,473) $(20,385,132) $(43,910,429) $(34,569,321)
============ ============ ============ ============
Net loss per share ..................... $ (1.64) $ (1.14
============ ============
3,400,000(n)
575,000(h)
Weighted average shares outstanding .... 67,433(g) 26,812,203 3,636,378(l) 30,448,581
============ ============ ============ ============
</TABLE>
F-61
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The adjustments below were prepared based on data currently available and
in some cases are based on estimates or approximations. It is possible that the
actual amounts to be recorded may have an impact on the results of operations
and the balance sheet different from that reflected in the accompanying
unaudited pro forma condensed consolidated financial statements. It is therefore
possible that the entries presented below will not be the amounts actually
recorded at the closing date. Deferred income taxes have not been considered in
the pro forma balance sheet because they are not expected to be material at the
time of the consummation of the acquisitions.
Balance Sheet at March 31, 1996
(a) To record the issuance of $17,500,000 in notes payable in payment for
certain assets of Locate, to eliminate assets and liabilities not acquired or
assumed and division deficiency, and to allocate the excess of the purchase
price over the fair value of the assets acquired to the licenses acquired.
(b) To record the acquisition of Milliwave Limited Partnership as follows
Increase/
(Decrease)
----------
Record cash payment to Milliwave partners ................. $ (40,000,000)
Allocate excess purchase price to licenses ................ 120,083,911
-----------
Total asset adjustments .............................. $ 80,083,911
===========
Eliminate Partners' Capital accounts ...................... $ (4,916,089)
Record the issuance of 3,400,000 shares of the
Company's common stock at an assumed price of
$25.00 per share
Common Stock ......................................... 34,000
Additional Paid in Capital ........................... 84,966,000
-----------
Total equity adjustments ................................ $ 80,083,911
===========
The number of WinStar common shares issued is subject to adjustment, depending
on the Company's stock price on the date of closing of the Transaction.
(c) To record the issuance of 3,993,106 shares of Common Stock in this
Offering based on 82,357,801 accreted value of Convertible Notes at June 30,
1996 and the resulting retirement of debt.
Statements of Operations for the Ten Months Ended December 31, 1995
and For the Six Months Ended June 30, 1996
(a) To eliminate interest expense incurred by Locate on liabilities not
assumed by the Company, offset in part by an adjustment to record interest
expense at 8% per annum on a $17.5 million promissory note to be issued by the
Company in connection with the acquisition of certain assets of Locate.
(b) To record amortization of the excess of the purchase price over the
net book value of the assets acquired in the Locate, TWL and Fox/Lorber
transactions.
F-62
<PAGE>
WINSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(c) To adjust the historical results of operations to a ten month period.
The historical results of operations reflected in the December 31, 1995
unaudited pro forma condensed consolidated statement of operations for Locate
and Fox/Lorber are for the twelve months ended December 31, 1995 and September
30, 1995, respectively, and these adjustments are made to restate these
historical results for the ten months ended on those respective dates. Had the
historical results of operations and the pro forma adjustments been restated in
all instances to reflect twelve months of activity, the unaudited pro forma
condensed consolidated statement of operations for the year ended December 31,
1995 would reflect net sales of $49.4 million, an operating loss of $16.1
million, and a net loss of $51.5 million.
(d) To eliminate management fee expense incurred by TWL and payable to the
Company.
(e) To eliminate management fees charged by the Company to AGT pursuant to
a management agreement.
(f) To eliminate the Company's proportionate share of AGT's results for
the period, recorded previously under the equity method.
(g) To record shares issued in accordance with the Fox/Lorber acquisition
agreement as being outstanding for the entire period.
(h) To record shares issued in accordance with the AGT merger agreement as
being outstanding for the entire period.
(i) To record interest expense on $225 million in Senior and Convertible
Notes issued in October 1995, bearing interest at 14% per annum compounding
semiannually, as if the Senior and Convertible Notes were issued at the
beginning of the period.
(j) To record interest expense on the Everest Financing as if it occurred
at the beginning of the period.
(k) To eliminate the interest expense recorded on the Convertible Notes,
which bear interest at 14% per annum compounding semiannually, including
amortization of debt offering costs, as if the Notes had been retired as of the
beginning of the respective periods.
(l) To record the issuance of Common Stock upon the conversion of the
Convertible Notes as if such shares were outstanding for the entire respective
periods.
(m) To eliminate interest income, at an assumed rate of 5.2% per annum, on
$40 million cash, assuming such cash was paid at the beginning of the period in
connection with the Milliwave Limited Partnership acquisition.
(n) To record 3,400,000 shares of the Company's Common Stock issued in
connection with the Milliwave Limited Partnership acquisition at an assumed
price of $25.00 per share.
F-63
<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 .............................. $ 50,731.00
Printing and engraving expenses ................... 165,000.00
Legal fees and expenses ........................... 244,136.00
Accounting fees and expenses ...................... 192,505.00
Miscellaneous ..................................... 37,628.00
--------------
Total ........................................ $ 700,000.00
==============
ITEM 15. Indemnification of Directors and Officers
The Company's Certificate of Incorporation provides that all directors,
officers, employees and agents of the Registrant shall be entitled to be
indemnified by the Company to the fullest extent permitted by law.
Section 145 of the Delaware General Corporation Law concerning
indemnification of officers, directors, employees and agents is set forth below.
"Section 145. Indemnification of officers, directors, employees and
agents; insurance.
(a) A corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation) by reason of the
fact that he is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful. The
termination of any action, suit or proceeding by judgment, order, settlement,
conviction, or upon a plea of nolo contendere or its equivalent, shall not, of
itself, create a presumption that the person did not act in good faith and in a
manner which he reasonably believed to be in or not opposed to the best
interests of the corporation, and with respect to any criminal action or
proceeding, had reasonable cause to believe that his conduct was unlawful.
(b) A corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the corporation to procure a judgement in its favor
by reason of the fact that he is or was a director, officer, employee or agent
of the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection with the defense or
settlement of such action or suit if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation and except that no indemnification shall be made in respect of any
claim, issue
II-1
<PAGE>
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.
(i) For purposes of this section, references to "other enterprises" shall
include employee benefit
II-2
<PAGE>
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
- ------ -----------
1.1 Form of Underwriting Agreement (Previously filed)
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))
II-4
<PAGE>
Exhibit
Number Description
- ------ -----------
3.5 Certificate of Designations, Preferences and Rights of Series E
Preferred Stock (Incorporated by reference to Exhibit 3.6 to the
Company's Annual Report on Form 10- KSB for the fiscal year ended
February 28, 1995)
3.6 By-Laws of the Company (Incorporated by reference to Exhibit 3.2 to
the Company's Registration Statement on Form S-18 (No. 33-37024))
3.7 Certificate of Incorporation of WinStar Wireless (Incorporated by
reference to Exhibit 7 to the Company's Current Report on Form 8-K,
dated February 11, 1994)
3.8 By-Laws of WinStar Wireless (Incorporated by reference to Exhibit 8
to the Company's Current Report on Form 8-K, dated February 11,
1994)
3.9 Certificate of Incorporation of WinStar Gateway (Incorporated by
reference to Exhibit 3.5 to the Company's Annual Report on Form
10-KSB for the fiscal year ended February 28, 1993)
3.10 Amendment to Certificate of Incorporation of WinStar Gateway
effecting name change from Communications Gateway Network, Inc." to
"WinStar Gateway Network, Inc." (Incorporated by reference to
Exhibit 3.11 to the Company's Annual Report on Form 10- KSB for the
fiscal year ended February 28, 1995)
3.11 By-Laws of WinStar Gateway (Incorporated by reference to Exhibit 3.6
to the Company's Annual Report on Form 10-KSB for the fiscal year
ended February 28, 1993)
3.12 Certificate of Incorporation of WinStar New Media (Incorporated by
reference to Exhibit 3.9 to the Company's Annual Report on Form
10-KSB for the fiscal year ended February 28, 1994)
3.13 Amendment to Certificate of Incorporation of WinStar New Media
effecting name change from "WinStar Interactive Media Company, Inc."
to "WinStar New Media Company, Inc." (Incorporated by reference to
Exhibit 3.14 to the Company's Annual Report on Form 10- KSB for the
fiscal year ended February 28, 1995)
3.14 By-Laws of WinStar New Media (Incorporated by reference to Exhibit
3.10 to the Company's Annual Report on Form 10-KSB for the fiscal
year ended February 28, 1994)
3.15 Certificate of Incorporation of WinCom Corp. (Incorporated by
reference to Exhibit 3.16 to the Company's Annual Report on Form
10-KSB for the fiscal year ended February 28, 1995)
3.16 Amendment to Certificate of Incorporation of WinCom Corp. effecting
name change to "WinStar Wireless Fiber Corp." (Incorporated by
reference to Exhibit 3.17 the Company's Registration Statement on
Form S-3 (No. 33-95242))
II-5
<PAGE>
Exhibit
Number Description
- ------ -----------
3.17 Certificate of Merger effecting merger of Avant-Garde
Telecommunications, Inc. into Wireless Fiber Corp (Incorporated by
reference to Exhibit 3.18 the Company's Registration Statement on
Form S-3 (No. 33-95242))
3.18 By-Laws of WinCom Corp. (Incorporated by reference to Exhibit 3.17
to the Company's Annual Report on Form 10-KSB for the fiscal year
ended February 28, 1995)
3.19 Certificate of Incorporation of WinStar Global Products
(Incorporated by reference to Exhibit 3.3 to the Registration
Statement on Form S-18 of WinStar Global Products (No. 33-12549))
3.20 Amendment to Certificate of Incorporation of WinStar Global Products
to change its name from "Beauty Labs, Inc." to "WinStar Global
Products, Inc." (Incorporated by reference to Exhibit 3.19 to the
Company's Annual Report on Form 10-KSB for the fiscal year ended
February 28, 1995)
3.21 By-Laws of WinStar Global Products (Incorporated by reference to
Exhibit 3.4 to the Registration Statement on Form S-18 of WinStar
Global Products (No. 33-12549))
3.22 Certificate of Incorporation of WinStar NFF Inc. ("WinStar NFF")
(Incorporated by reference to Exhibit 3.21 to the Company's Annual
Report on Form 10-KSB for the fiscal year ended February 28, 1995)
3.23 By-laws of WinStar NFF (Incorporated by reference to Exhibit 3.22 to
the Company's Annual Report on Form 10-KSB for the fiscal year ended
February 28, 1995)
3.24 Certificate of Merger of NFF with and into WinStar NFF, with WinStar
NFF as the merger's surviving entity (Incorporated by reference to
Exhibit 3.23 to the Company's Annual Report on Form 10-KSB for the
fiscal year ended February 28, 1995)
3.25 Amendment to Certificate of Incorporation of WinStar NFF changing
its name from "WinStar NFF Inc." to "Non Fiction Films Inc."
(Incorporated by reference to Exhibit 3.24 to the Company's Annual
Report on Form 10-KSB for the fiscal year ended February 28, 1995)
3.26 Certificate of Incorporation of WinStar Telecommunications, Inc.
(Incorporated by reference to Exhibit 3.26 of the Company's
Transitional Report on Form 10-KSB for the ten months ended December
31, 1995)
3.27 By-laws of WinStar Telecommunications, Inc. (Incorporated by
reference to Exhibit 3.27 of the Company's Transitional Report on
Form 10-KSB for the ten months ended December 31, 1995)
4.1 Specimen of Common Stock Certificate (Incorporated by reference to
Exhibit 4.3 to the Registration Statement of Company on Form S-18
(No.33-37024))
4.2 Specimen of Preferred Stock B Certificate (Incorporated by reference
to Exhibit 4.4 to the Company's Registration Statement on Form S-1
(No. 33-43915))
II-6
<PAGE>
Exhibit
Number Description
- ------ -----------
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)
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))
II-7
<PAGE>
Exhibit
Number Description
- ------ -----------
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)
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)
II-8
<PAGE>
Exhibit
Number Description
- ------ -----------
10.16 Subordination Agreement between the Company and CIT in connection
with Exhibit 10.12 above Incorporated by reference to Exhibit 10.26
to the Company's Annual Report on Form 10-KSB for the fiscal year
ended February 28, 1995)
10.17 Keepwell Agreement between the Company and CIT in connection with
Exhibit 10.12 above (Incorporated by reference to Exhibit 10.27 to
the Company's Annual Report on Form 10-KSB for the fiscal year ended
February 28, 1995)
10.18 Agreement between CIT and Zero Plus Dialing, Inc. regarding Escrow
and Disbursing Agreement with Texas Commerce Bank and Assignment of
Outstanding Accounts Receivable in connection with Exhibit 10.22
above (Incorporated by reference to Exhibit 10.28 to the Company's
Annual Report on Form 10-KSB for the fiscal year ended February 28,
1995)
10.19 Loan and Security Agreement between Century Business Credit
Corporation ("Century") and WinStar Global Products (Incorporated by
reference to Exhibit 10.29 to the Company's Annual Report on Form
10-KSB for the fiscal year ended February 28, 1995)
10.20 Supplement Letter of Credit Security Agreement between Century and
WinStar Global Products in connection with Exhibit 10.19 above
(Incorporated by reference to Exhibit 10.30 to the Company's Annual
Report on Form 10-KSB for the fiscal year ended February 28, 1995)
10.21 Trademark Collateral Security Agreement between Century and WinStar
Global Products in connection with Exhibit 10.19 above (Incorporated
by reference to Exhibit 10.31 to the Company's Annual Report on Form
10-KSB for the fiscal year ended February 28, 1995)
10.22 Trademark Assignment of Security by WinStar Global Products to
Century in connection with Exhibits 10.19 and 10.21 above
(Incorporated by reference to Exhibit 10.32 to the Company's Annual
Report on Form 10-KSB for the fiscal year ended February 28, 1995)
10.23 Trademark Collateral Security Agreement between Century and Inne
Dispensables in connection with Exhibit 10.19 above (Incorporated by
reference to Exhibit 10.33 to the Company's Annual Report on Form
10-KSB for the fiscal year ended February 28, 1995)
10.24 Trademark Assignment of Security by Inne Dispensables Inc. to
Century in connection with Exhibits 10.19 and 10.23 above
(Incorporated by reference to Exhibit 10.34 to the Company's Annual
Report on Form 10-KSB for the fiscal year ended February 28, 1995)
10.25 Landlord's Waiver and Consent with respect to the facilities at 60
Oser Avenue, Hauppauge, New York in connection with Exhibit 10.19
above (Incorporated by reference to Exhibit 10.35 to the Company's
Annual Report on Form 10-KSB for the fiscal year ended February 28,
1995)
II-9
<PAGE>
Exhibit
Number Description
- ------ -----------
10.26 Intercreditor and Subordination Agreement between the Company and
Century in connection with Exhibit 10.19 above (Incorporated by
reference to Exhibit 10.36 to the Company's Annual Report on Form
10-KSB for the fiscal year ended February 28, 1995)
10.27 Guaranty of Inne Dispensables in connection with Exhibit 10.19 above
(Incorporated by reference to Exhibit 10.37 to the Company's Annual
Report on Form 10-KSB for the fiscal year ended February 28, 1995)
10.28 Limited Guaranty of the Company in connection with Exhibit 10.19
above (Incorporated by reference to Exhibit 10.38 to the Company's
Annual Report on Form 10-KSB for the fiscal year ended February 28,
1995)
10.29 Guaranty Security Agreement between Inne Dispensables and Century in
connection with Exhibit 10.27 above (Incorporated by reference to
Exhibit 10.39 to the Company's Annual Report on Form 10-KSB for the
fiscal year ended February 28, 1995)
10.30 Executive Incentive Compensation Program (Incorporated by reference
to Exhibit 10.40 to the Company's Annual Report on Form 10-KSB for
the fiscal year ended February 28, 1995)
10.31 Agreement Terminating the Management Agreement between the Company
and WinStar Services, Inc. (Incorporated by reference to Exhibit
10.41 to the Company's Annual Report on Form 10-KSB for the fiscal
year ended February 28, 1995)
10.32 Note and Warrant Purchase Agreement by and among the Company,
WinStar Wireless and Avant-Garde and the Fund and Capital (the Fund
and Capital collectively referred to herein as the "Purchasers") and
Everest Capital Limited ("Agent") (Incorporated by reference to
Exhibit 10.42 to the Company's Registration Statement on Form S-3
(No. 33- 95242))
10.33 Promissory Notes payable to Fund for $3,262,500 and to Capital for
$4,237,500 (Incorporated by reference to Exhibit 10.43 to the
Company's Registration Statement on Form S-3 (No. 33-95242))
10.34 Conversion Rights Agreement among the Company, WinStar Wireless and
the Purchasers (Incorporated by reference to Exhibit 10.44 to the
Company's Registration Statement on Form S-3 (No. 33-95242))
10.35 Registration Rights Agreement between the Company and the Purchasers
(Incorporated by reference to Exhibit 10.45 to the Company's
Registration Statement on Form S-3 (No. 33-95242))
10.36 Security Agreement and Conditional Assignment between WinStar
Wireless and the Agent (Incorporated by reference to Exhibit 10.46
to the Company's Registration Statement on Form S-3 (No. 33-95242))
10.37 Security Agreement between Avant-Garde and the Agent (Incorporated
by reference to Exhibit 10.47 to the Company's Registration
Statement on Form S-3 (No. 33-95242))
II-10
<PAGE>
Exhibit
Number Description
- ------ -----------
10.38 Guarantee from the Company to the Agent on behalf of the Purchasers
(Incorporated by reference to Exhibit 10.48 to the Company's
Registration Statement on Form S-3 (No. 33- 95242))
10.39 Guarantee from Avant-Garde to the Agent on behalf of the Purchasers
(Incorporated by reference to Exhibit 10.49 to the Company's
Registration Statement on Form S-3 (No. 33- 95242))
10.40 Pledge Agreement between the Company and the Agent (Incorporated by
reference to Exhibit 10.50 to the Company's Registration Statement
on Form S-3 (No. 33-95242))
10.41 Pledge Agreement between the Avant-Garde, Leo I. George, as Voting
Trustee, and the Agent (Incorporated by reference to Exhibit 10.51
to the Company's Registration Statement on Form S-3 (No. 33-95242))
10.42 Lease for 12 Gardner Road, Fairfield, New Jersey facilities
(Incorporated by reference to Exhibit 10.52 to the Company's
Registration Statement on Form S-3 (No. 33-95242))
10.43 Agreement between the Company, WinStar Wireless and P-Com, Inc.
(Incorporated by reference to Exhibit 10.11 to the Registration
Statement on Form S-1 of P-Com, Inc. (No. 33-88492) on file with the
Commission)
10.44 Employment Agreement between the Company and Nathan Kantor, together
with voting stipulation given by William J. Rouhana, Jr. to Mr.
Kantor (Incorporated by reference to Exhibit 10.54 to the Company's
Registration Statement on Form S-3 (No. 33-95242))
10.45 Form of Stock Option Agreement between the Company and Nathan Kantor
for the purchase of 350,000 shares of Common Stock (Incorporated by
reference to Exhibit 10.55 to the Company's Registration Statement
on Form S-3 (No. 33-95242))
10.46 Form of Stock Option Agreement between the Company and Nathan Kantor
for the purchase of 350,000 additional shares of Common Stock
(Incorporated by reference to Exhibit 10.56 to the Company's
Registration Statement on Form S-3 (No. 33-95242))
10.47 Employment Agreement between the Company and William J. Rouhana, Jr.
(Incorporated by reference to Exhibit 10.57 to the Company's
Registration Statement on Form S-3 (No. 33-95242))
10.48 Employment Agreement between the Company and Fredric E. von Stange
(Incorporated by reference to Exhibit 10.58 to the Company's
Registration Statement on Form S-3 (No. 33-95242))
II-11
<PAGE>
Exhibit
Number Description
- ------ -----------
10.49 Facility Agreement between ML Investors Services, Inc. ("ML") and
WinStar Wireless (Incorporated by reference to Exhibit 10.59 to the
Company's Registration Statement on Form S-3 (No. 33-95242))
10.50 Master Lease Agreement between ML and WinStar Wireless (Incorporated
by reference to Exhibit 10.60 to the Company's Registration
Statement on Form S-3 (No. 33-95242))
10.51 Form of Stock Option Agreement between the Company and ML
(Incorporated by reference to Exhibit 10.61 to the Company's
Registration Statement on Form S-3 (No. 33- 95242))
10.52 Lease Guaranty between the Company and ML (Incorporated by reference
to Exhibit 10.62 to the Company's Registration Statement on Form S-3
(No. 33-95242))
10.53 Service Agreement between WinStar Wireless and AT&T (Incorporated by
reference to Exhibit 10.63 to the Company's Registration Statement
on Form S-3 (No. 33-95242)) (confidentiality granted under Rule 406
promulgated under the Act; accordingly, certain information has been
omitted from this exhibit and filed separately with the Commission)
10.54 Placement Agreement between the Company and Morgan Stanley & Co.
Incorporated, entered into in connection with the 1995 Debt
Placement (Incorporated by reference to Exhibit 1 to the Current
Report on Form 8-K, dated October 23, 1995)
10.55 Senior Notes Indenture, including form of Restricted Global Senior
Note, entered into in connection with the 1995 Debt Placement
(Incorporated by reference to Exhibit 2 to the Current Report on
Form 8-K, dated October 23, 1995)
10.56 Convertible Notes Indenture, including form of Restricted Global
Convertible Notes, entered into in connection with the 1995 Debt
Placement (Incorporated by reference to Exhibit 3 to the Current
Report on Form 8-K, dated October 23, 1995)
10.57 Senior Notes Registration Rights Agreement, entered into in
connection with the 1995 Debt Placement (Incorporated by reference
to Exhibit 4 to the Current Report on Form 8- K, dated October 23,
1995)
10.58 Convertible Notes Registration Rights Agreement, entered into in
connection with the 1995 Debt Placement (Incorporated by reference
to Exhibit 5 to the Current Report on Form 8- K, dated October 23,
1995)
10.59 Employment Agreement between WinStar Global Products and Joseph
Dwyer (Incorporated by reference to Exhibit 10.4 to the Company's
Registration Statement on Form S-4 (No. 33-52716))
10.60 Employment Agreement between the Company and Doreen F. Davidson
(Incorporated by reference to Exhibit 10.29(a) to the Company's
Registration Statement on Form S-1, as amended on Form SB-2 (No.
33-43915))
II-12
<PAGE>
Exhibit
Number Description
- ------ -----------
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, MobileMedia Corporation and Local Area Telecommunications,
Inc., a wholly-owned subsidiary of MobileMedia (Incorporated by
reference to Exhibit 10.69 to the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 1996)
10.72 Agreement between the Company and Source Media (previously filed)
II-13
<PAGE>
Exhibit
Number Description
- ------ -----------
10.73 Purchase Agreement between and among Pinnacle Seven Communications,
Inc. ("P7C"), Pinnacle Eight Communications, Inc. ("P8C"), Pinnacle
Nine Communications, LLC ("P9C") and WinPinn Corp. (previously
filed)
10.74 Service Agreement by and between WinStar Wireless, P7C and P9C
(previously filed)
10.75 Transmission Path Lease Agreement between P7C, P9C and WinStar
Wireless (previously filed)
10.76 Agreement and Plan of Merger among Milliwave Limited Partnership
("Milliwave"), WinStar Milliwave, Inc. and the Company (previously
filed)
10.77 Services Agreement between WinStar Wireless and Milliwave
(previously filed)
10.78 Transmission Path Lease Agreement between Milliwave and WinStar
Wireless (previously filed)
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 (previously filed)
24.1 Power of Attorney (Previously filed)
(b) Schedules
S-1 Report of Independent Certified Public Accountants on Schedules
S-2 Schedule II-Valuation and Qualifying Accounts.
II-14
<PAGE>
ITEM 17. Undertakings.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment of this registration statement;
(i) To include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the registration
statement. Notwithstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of securities offered would not
exceed that which was registered) and any deviation from the low or high and of
the estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in the
maximum aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement;
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement; provided,
however, that paragraphs (1)(i) and (1)(ii) do not apply if the registration
statement is on Form S-3, Form S-8 or Form F-3, and the information required to
be included in a post-effective amendment by those paragraphs is contained in
periodic reports filed with or furnished to the Commission by the registrant
pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934
that are incorporated by reference in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(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
II-15
<PAGE>
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.
(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-16
<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 September ___,
1996.
WINSTAR COMMUNICATIONS, INC.
By: /s/ WILLIAM J. ROUHANA, JR.
*
-------------------------------
William J. Rouhana, Jr.
Chairman of the Board and Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
* Chief Executive Officer and September __, 1996
- ------------------------- Chairman of the Board
William J. Rouhana, Jr.
/s/ Fredric E. von Stange Executive Vice President, September __, 1996
------------------------- Director, Chief Financial
Fredric E. von Stange Officer and Principal
Accounting Officer
* Vice Chairman of the Board September __, 1996
- -------------------------
Steven Chrust
* President, Chief Operating September __, 1996
- ------------------------- Officer and Director
Nathan Kantor
* Director September __, 1996
- -------------------------
William Harvey
II-17
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
1.1 Form of Underwriting Agreement (Previously filed)
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))
<PAGE>
Exhibit
Number Description
- ------ -----------
3.5 Certificate of Designations, Preferences and Rights of Series E
Preferred Stock (Incorporated by reference to Exhibit 3.6 to the
Company's Annual Report on Form 10- KSB for the fiscal year ended
February 28, 1995)
3.6 By-Laws of the Company (Incorporated by reference to Exhibit 3.2 to
the Company's Registration Statement on Form S-18 (No. 33-37024))
3.7 Certificate of Incorporation of WinStar Wireless (Incorporated by
reference to Exhibit 7 to the Company's Current Report on Form 8-K,
dated February 11, 1994)
3.8 By-Laws of WinStar Wireless (Incorporated by reference to Exhibit 8
to the Company's Current Report on Form 8-K, dated February 11,
1994)
3.9 Certificate of Incorporation of WinStar Gateway (Incorporated by
reference to Exhibit 3.5 to the Company's Annual Report on Form
10-KSB for the fiscal year ended February 28, 1993)
3.10 Amendment to Certificate of Incorporation of WinStar Gateway
effecting name change from Communications Gateway Network, Inc." to
"WinStar Gateway Network, Inc." (Incorporated by reference to
Exhibit 3.11 to the Company's Annual Report on Form 10- KSB for the
fiscal year ended February 28, 1995)
3.11 By-Laws of WinStar Gateway (Incorporated by reference to Exhibit 3.6
to the Company's Annual Report on Form 10-KSB for the fiscal year
ended February 28, 1993)
3.12 Certificate of Incorporation of WinStar New Media (Incorporated by
reference to Exhibit 3.9 to the Company's Annual Report on Form
10-KSB for the fiscal year ended February 28, 1994)
3.13 Amendment to Certificate of Incorporation of WinStar New Media
effecting name change from "WinStar Interactive Media Company, Inc."
to "WinStar New Media Company, Inc." (Incorporated by reference to
Exhibit 3.14 to the Company's Annual Report on Form 10- KSB for the
fiscal year ended February 28, 1995)
3.14 By-Laws of WinStar New Media (Incorporated by reference to Exhibit
3.10 to the Company's Annual Report on Form 10-KSB for the fiscal
year ended February 28, 1994)
3.15 Certificate of Incorporation of WinCom Corp. (Incorporated by
reference to Exhibit 3.16 to the Company's Annual Report on Form
10-KSB for the fiscal year ended February 28, 1995)
3.16 Amendment to Certificate of Incorporation of WinCom Corp. effecting
name change to "WinStar Wireless Fiber Corp." (Incorporated by
reference to Exhibit 3.17 the Company's Registration Statement on
Form S-3 (No. 33-95242))
<PAGE>
Exhibit
Number Description
- ------ -----------
3.17 Certificate of Merger effecting merger of Avant-Garde
Telecommunications, Inc. into Wireless Fiber Corp (Incorporated by
reference to Exhibit 3.18 the Company's Registration Statement on
Form S-3 (No. 33-95242))
3.18 By-Laws of WinCom Corp. (Incorporated by reference to Exhibit 3.17
to the Company's Annual Report on Form 10-KSB for the fiscal year
ended February 28, 1995)
3.19 Certificate of Incorporation of WinStar Global Products
(Incorporated by reference to Exhibit 3.3 to the Registration
Statement on Form S-18 of WinStar Global Products (No. 33-12549))
3.20 Amendment to Certificate of Incorporation of WinStar Global Products
to change its name from "Beauty Labs, Inc." to "WinStar Global
Products, Inc." (Incorporated by reference to Exhibit 3.19 to the
Company's Annual Report on Form 10-KSB for the fiscal year ended
February 28, 1995)
3.21 By-Laws of WinStar Global Products (Incorporated by reference to
Exhibit 3.4 to the Registration Statement on Form S-18 of WinStar
Global Products (No. 33-12549))
3.22 Certificate of Incorporation of WinStar NFF Inc. ("WinStar NFF")
(Incorporated by reference to Exhibit 3.21 to the Company's Annual
Report on Form 10-KSB for the fiscal year ended February 28, 1995)
3.23 By-laws of WinStar NFF (Incorporated by reference to Exhibit 3.22 to
the Company's Annual Report on Form 10-KSB for the fiscal year ended
February 28, 1995)
3.24 Certificate of Merger of NFF with and into WinStar NFF, with WinStar
NFF as the merger's surviving entity (Incorporated by reference to
Exhibit 3.23 to the Company's Annual Report on Form 10-KSB for the
fiscal year ended February 28, 1995)
3.25 Amendment to Certificate of Incorporation of WinStar NFF changing
its name from "WinStar NFF Inc." to "Non Fiction Films Inc."
(Incorporated by reference to Exhibit 3.24 to the Company's Annual
Report on Form 10-KSB for the fiscal year ended February 28, 1995)
3.26 Certificate of Incorporation of WinStar Telecommunications, Inc.
(Incorporated by reference to Exhibit 3.26 of the Company's
Transitional Report on Form 10-KSB for the ten months ended December
31, 1995)
3.27 By-laws of WinStar Telecommunications, Inc. (Incorporated by
reference to Exhibit 3.27 of the Company's Transitional Report on
Form 10-KSB for the ten months ended December 31, 1995)
4.1 Specimen of Common Stock Certificate (Incorporated by reference to
Exhibit 4.3 to the Registration Statement of Company on Form S-18
(No.33-37024))
4.2 Specimen of Preferred Stock B Certificate (Incorporated by reference
to Exhibit 4.4 to the Company's Registration Statement on Form S-1
(No. 33-43915))
<PAGE>
Exhibit
Number Description
- ------ -----------
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)
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))
<PAGE>
Exhibit
Number Description
- ------ -----------
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)
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)
<PAGE>
Exhibit
Number Description
- ------ -----------
10.16 Subordination Agreement between the Company and CIT in connection
with Exhibit 10.12 above Incorporated by reference to Exhibit 10.26
to the Company's Annual Report on Form 10-KSB for the fiscal year
ended February 28, 1995)
10.17 Keepwell Agreement between the Company and CIT in connection with
Exhibit 10.12 above (Incorporated by reference to Exhibit 10.27 to
the Company's Annual Report on Form 10-KSB for the fiscal year ended
February 28, 1995)
10.18 Agreement between CIT and Zero Plus Dialing, Inc. regarding Escrow
and Disbursing Agreement with Texas Commerce Bank and Assignment of
Outstanding Accounts Receivable in connection with Exhibit 10.22
above (Incorporated by reference to Exhibit 10.28 to the Company's
Annual Report on Form 10-KSB for the fiscal year ended February 28,
1995)
10.19 Loan and Security Agreement between Century Business Credit
Corporation ("Century") and WinStar Global Products (Incorporated by
reference to Exhibit 10.29 to the Company's Annual Report on Form
10-KSB for the fiscal year ended February 28, 1995)
10.20 Supplement Letter of Credit Security Agreement between Century and
WinStar Global Products in connection with Exhibit 10.19 above
(Incorporated by reference to Exhibit 10.30 to the Company's Annual
Report on Form 10-KSB for the fiscal year ended February 28, 1995)
10.21 Trademark Collateral Security Agreement between Century and WinStar
Global Products in connection with Exhibit 10.19 above (Incorporated
by reference to Exhibit 10.31 to the Company's Annual Report on Form
10-KSB for the fiscal year ended February 28, 1995)
10.22 Trademark Assignment of Security by WinStar Global Products to
Century in connection with Exhibits 10.19 and 10.21 above
(Incorporated by reference to Exhibit 10.32 to the Company's Annual
Report on Form 10-KSB for the fiscal year ended February 28, 1995)
10.23 Trademark Collateral Security Agreement between Century and Inne
Dispensables in connection with Exhibit 10.19 above (Incorporated by
reference to Exhibit 10.33 to the Company's Annual Report on Form
10-KSB for the fiscal year ended February 28, 1995)
10.24 Trademark Assignment of Security by Inne Dispensables Inc. to
Century in connection with Exhibits 10.19 and 10.23 above
(Incorporated by reference to Exhibit 10.34 to the Company's Annual
Report on Form 10-KSB for the fiscal year ended February 28, 1995)
10.25 Landlord's Waiver and Consent with respect to the facilities at 60
Oser Avenue, Hauppauge, New York in connection with Exhibit 10.19
above (Incorporated by reference to Exhibit 10.35 to the Company's
Annual Report on Form 10-KSB for the fiscal year ended February 28,
1995)
<PAGE>
Exhibit
Number Description
- ------ -----------
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
2 (Incorporated by reference to Exhibit 10.45 to the Company's
Registration Statement on Form S-3 (No. 33-95242))
10.36 Security Agreement and Conditional Assignment between WinStar
Wireless and the Agent (Incorporated by reference to Exhibit 10.46
to the Company's Registration Statement on Form S-3 (No. 33-95242))
10.37 Security Agreement between Avant-Garde and the Agent (Incorporated
by reference to Exhibit 10.47 to the Company's Registration
Statement on Form S-3 (No. 33-95242))
<PAGE>
Exhibit
Number Description
- ------ -----------
10.38 Guarantee from the Company to the Agent on behalf of the Purchasers
(Incorporated by reference to Exhibit 10.48 to the Company's
Registration Statement on Form S-3 (No. 33- 95242))
10.39 Guarantee from Avant-Garde to the Agent on behalf of the Purchasers
(Incorporated by reference to Exhibit 10.49 to the Company's
Registration Statement on Form S-3 (No. 33- 95242))
10.40 Pledge Agreement between the Company and the Agent (Incorporated by
reference to Exhibit 10.50 to the Company's Registration Statement
on Form S-3 (No. 33-95242))
10.41 Pledge Agreement between the Avant-Garde, Leo I. George, as Voting
Trustee, and the Agent (Incorporated by reference to Exhibit 10.51
to the Company's Registration Statement on Form S-3 (No. 33-95242))
10.42 Lease for 12 Gardner Road, Fairfield, New Jersey facilities
(Incorporated by reference to Exhibit 10.52 to the Company's
Registration Statement on Form S-3 (No. 33-95242))
10.43 Agreement between the Company, WinStar Wireless and P-Com, Inc.
(Incorporated by reference to Exhibit 10.11 to the Registration
Statement on Form S-1 of P-Com, Inc. (No. 33-88492) on file with the
Commission)
10.44 Employment Agreement between the Company and Nathan Kantor, together
with voting stipulation given by William J. Rouhana, Jr. to Mr.
Kantor (Incorporated by reference to Exhibit 10.54 to the Company's
Registration Statement on Form S-3 (No. 33-95242))
10.45 Form of Stock Option Agreement between the Company and Nathan Kantor
for the purchase of 350,000 shares of Common Stock (Incorporated by
reference to Exhibit 10.55 to the Company's Registration Statement
on Form S-3 (No. 33-95242))
10.46 Form of Stock Option Agreement between the Company and Nathan Kantor
for the purchase of 350,000 additional shares of Common Stock
(Incorporated by reference to Exhibit 10.56 to the Company's
Registration Statement on Form S-3 (No. 33-95242))
10.47 Employment Agreement between the Company and William J. Rouhana, Jr.
(Incorporated by reference to Exhibit 10.57 to the Company's
Registration Statement on Form S-3 (No. 33-95242))
10.48 Employment Agreement between the Company and Fredric E. von Stange
(Incorporated by reference to Exhibit 10.58 to the Company's
Registration Statement on Form S-3 (No. 33-95242))
<PAGE>
Exhibit
Number Description
- ------ -----------
10.49 Facility Agreement between ML Investors Services, Inc. ("ML") and
WinStar Wireless (Incorporated by reference to Exhibit 10.59 to the
Company's Registration Statement on Form S-3 (No. 33-95242))
10.50 Master Lease Agreement between ML and WinStar Wireless (Incorporated
by reference to Exhibit 10.60 to the Company's Registration
Statement on Form S-3 (No. 33-95242))
10.51 Form of Stock Option Agreement between the Company and ML
(Incorporated by reference to Exhibit 10.61 to the Company's
Registration Statement on Form S-3 (No. 33- 95242))
10.52 Lease Guaranty between the Company and ML (Incorporated by reference
to Exhibit 10.62 to the Company's Registration Statement on Form S-3
(No. 33-95242))
10.53 Service Agreement between WinStar Wireless and AT&T (Incorporated by
reference to Exhibit 10.63 to the Company's Registration Statement
on Form S-3 (No. 33-95242)) (confidentiality granted under Rule 406
promulgated under the Act; accordingly, certain information has been
omitted from this exhibit and filed separately with the Commission)
10.54 Placement Agreement between the Company and Morgan Stanley & Co.
Incorporated, entered into in connection with the 1995 Debt
Placement (Incorporated by reference to Exhibit 1 to the Current
Report on Form 8-K, dated October 23, 1995)
10.55 Senior Notes Indenture, including form of Restricted Global Senior
Note, entered into in connection with the 1995 Debt Placement
(Incorporated by reference to Exhibit 2 to the Current Report on
Form 8-K, dated October 23, 1995)
10.56 Convertible Notes Indenture, including form of Restricted Global
Convertible Notes, entered into in connection with the 1995 Debt
Placement (Incorporated by reference to Exhibit 3 to the Current
Report on Form 8-K, dated October 23, 1995)
10.57 Senior Notes Registration Rights Agreement, entered into in
connection with the 1995 Debt Placement (Incorporated by reference
to Exhibit 4 to the Current Report on Form 8- K, dated October 23,
1995)
10.58 Convertible Notes Registration Rights Agreement, entered into in
connection with the 1995 Debt Placement (Incorporated by reference
to Exhibit 5 to the Current Report on Form 8- K, dated October 23,
1995)
10.59 Employment Agreement between WinStar Global Products and Joseph
Dwyer (Incorporated by reference to Exhibit 10.4 to the Company's
Registration Statement on Form S-4 (No. 33-52716))
10.60 Employment Agreement between the Company and Doreen F. Davidson
(Incorporated by reference to Exhibit 10.29(a) to the Company's
Registration Statement on Form S-1, as amended on Form SB-2 (No.
33-43915))
<PAGE>
Exhibit
Number Description
- ------ -----------
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, MobileMedia Corporation and Local Area Telecommunications,
Inc., a wholly-owned subsidiary of MobileMedia (Incorporated by
reference to Exhibit 10.69 to the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 1996)
10.72 Agreement between the Company and Source Media (previously filed)
<PAGE>
Exhibit
Number Description
- ------ -----------
10.73 Purchase Agreement between and among Pinnacle Seven Communications,
Inc. ("P7C"), Pinnacle Eight Communications, Inc. ("P8C"), Pinnacle
Nine Communications, LLC ("P9C") and WinPinn Corp. (previously
filed)
10.74 Service Agreement by and between WinStar Wireless, P7C and P9C
(previously filed)
10.75 Transmission Path Lease Agreement between P7C, P9C and WinStar
Wireless (previously filed)
10.76 Agreement and Plan of Merger among Milliwave Limited Partnership
("Milliwave"), WinStar Milliwave, Inc. and the Company (previously
filed)
10.77 Services Agreement between WinStar Wireless and Milliwave
(previously filed)
10.78 Transmission Path Lease Agreement between Milliwave and WinStar
Wireless (previously filed)
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 (previously filed)
24.1 Power of Attorney (Previously filed)
Exhibit 23.1
CONSENT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
We have issued our report dated March 8, 1996, accompanying the consolidated
financial statements of WinStar Communications, Inc. and Subsidiaries contained
in the Registration Statement and 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
September 4, 1996
Exhibit 23.2
CONSENT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
We have issued our report dated July 28, 1995, accompanying the financial
statements of Avant-Garde Telecommunications, Inc. contained in the
Registration Statement. We consent to the use of the aforementioned report
in the Registration Statement, and to the use of our name as it appears
under the caption "Experts."
/s/ GRANT THORNTON LLP
GRANT THORNTON LLP
New York, New York
September 4, 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. 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
September 4, 1996
