<PAGE>
Filed pursuant to Rule 424(b)3 of the Securities Act of 1933, as amended.
Prospectus relates to Registration Statement on Form S-4 (No. 333-26367)
Offer to Exchange
14 1/2% Senior Deferred Interest Exchange Notes Due 2005
(Interest Payable on April 15 and October 15,
Commencing April 15, 2001)
for
all outstanding
14 1/2% Senior Deferred Interest Notes Due 2005
(Interest Payable on April 15 and October 15,
Commencing April 15, 2001)
of
WinStar Communications, Inc.
-----------------
Offer to Exchange
12 1/2% Guaranteed Senior Secured Exchange Notes Due 2004
(Interest Payable on March 15 and September 15,
Commencing September 15, 1997)
for
all outstanding
12 1/2% Guaranteed Senior Secured Notes Due 2004
(Interest Payable on March 15 and September 15,
Commencing September 15, 1997)
of
WinStar Equipment Corp.
Unconditionally Guaranteed on a Senior Basis by
WinStar Communications, Inc.
-----------------
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M.,
NEW YORK CITY TIME ON SEPTEMBER 12, 1997,
UNLESS EXTENDED BY WINSTAR COMMUNICATIONS, INC.
-----------------
See "Risk Factors" beginning on Page 20 hereof for a discussion of certain
information that should be considered in connection with the
Exchange Offer and an investment in the Senior Deferred
Interest Exchange Notes and Guaranteed Senior
Secured Exchange Notes.
-----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR BY 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 August 11, 1997
<PAGE>
WinStar Communications, Inc., a Delaware corporation ("Company"), hereby
offers ("Exchange Offer"), upon the terms and subject to the conditions set
forth in this Prospectus and the accompanying letter of transmittal ("Letter of
Transmittal"), to exchange $1,000 principal amount of its 14 1/2% Senior
Deferred Interest Exchange Notes Due 2005 ("New Senior Notes") for each $1,000
principal amount of its outstanding 14 1/2% Senior Deferred Interest Notes Due
2005 ("Old Senior Notes" or "1997 Senior Notes"). The Old Senior Notes and the
New Senior Notes are referred to herein collectively as the "Senior Notes."
As part of the Exchange Offer, WinStar Equipment Corp., a Delaware
corporation and wholly-owned subsidiary of the Company ("WinStar Equipment" and,
together with the Company, the "Issuers"), hereby offers, upon the terms and
subject to the conditions set forth in this Prospectus and the Letter of
Transmittal, to exchange $1,000 principal amount of its 12 1/2% Guaranteed
Senior Secured Exchange Notes Due 2004 ("New Equipment Notes" and, together with
the New Senior Notes, the "New Notes") for each $1,000 principal amount of its
outstanding 12 1/2% Guaranteed Senior Secured Notes Due 2004 ("Old Equipment
Notes" and, together with the Old Senior Notes, the "Old Notes"). The Company,
which has guaranteed the Old Equipment Notes on a senior basis, has agreed to
guarantee the New Equipment Notes on a senior basis ("New Equipment Note
Guarantee"). The Old Equipment Notes and the New Equipment Notes are referred to
herein collectively as the "Equipment Notes."
The New Notes (and the New Equipment Note Guarantee) will be registered
under the Securities Act of 1933, as amended ("Securities Act"), pursuant to the
registration statement on Form S-4 ("Registration Statement") of which this
Prospectus forms a part. As of the date hereof, $100.0 million principal amount
of the Old Senior Notes and $200.0 million principal amount of the Old Equipment
Notes were outstanding. The Registration Statement of which this Prospectus
forms a part has been filed by the Company and WinStar Equipment in accordance
with the terms of the Purchase Agreement, dated March 13, 1997 ("Purchase
Agreement"), and Registration Rights Agreement, dated March 13, 1997
("Registration Agreement"), between the Issuers and Credit Suisse First Boston
Corporation and BT Securities Corporation, the initial purchasers of the Old
Notes ("Initial Purchasers"). The New Notes and Old Notes are referred to herein
collectively as the "1997 Notes" or "Notes." The Exchange Offer is being made by
the Issuers to fulfill certain obligations under the Purchase Agreement and
Registration Agreement. After the consummation of the Exchange Offer, the
Issuers will have no further obligation to make any other such exchange offers.
The Issuers will accept for exchange any and all Old Notes that are validly
tendered and not withdrawn on or prior to 5:00 p.m., New York City time, on the
date the Exchange Offer expires, which will be September 12, 1997, unless the
Exchange Offer is extended by the Company in its sole discretion ("Expiration
Date"). Tenders of Old Notes may be withdrawn at any time prior to 5:00 p.m.,
New York City time, on the Expiration Date. The Exchange Offer is not
conditioned upon any minimum principal amount of Old Notes being tendered for
exchange. However, the Exchange Offer is subject to certain conditions which may
be waived by the Issuers and to the terms and provisions of the Registration
Statement. The Old Notes may be tendered only in denominations of $1,000
principal amount and integral multiples thereof. The Company has agreed to pay
all expenses related to the Exchange Offer, except costs related to the delivery
of the Old Notes by each holder of such notes to the United States Trust Company
of New York, the exchange agent ("Exchange Agent" or "U.S. Trust"), and
underwriting discounts, commissions and transfer taxes. Any waiver, extension or
termination of the Exchange Offer will be publicly announced by the Company
through a release to the Dow Jones News Service and as otherwise required by
applicable laws or regulations. See "The Exchange Offer."
The New Senior Notes and the New Equipment Guarantee will be obligations of
the Company and the New Equipment Notes will be the obligations of WinStar
Equipment. The New Senior Notes will be entitled to the benefits of the
indenture under which the Old Senior Notes were issued (the "Senior Notes
Indenture") and the New Equipment Notes will be entitled to the benefits of the
indenture under which the Old Equipment Notes were issued ("Equipment Notes
Indenture" and, together with the Senior Notes Indenture, the "1997
Indentures"). The form of the New Notes will be identical to the form of the Old
Notes, except that the New Notes will have been registered under the Securities
Act and, therefore, will not bear legends restricting the transfer thereof. The
New Notes will have the same terms, conditions and rankings as the Old Notes.
The New Senior Notes and the New Equipment Note Guarantee will be unsecured,
unsubordinated obligations of the Company, will rank PARI PASSU in right of
payment with all existing and future unsecured, unsubordinated obligations of
the Company and will be senior in
2
<PAGE>
right of payment to all existing and future subordinated indebtedness of the
Company. The New Equipment Notes will be secured, senior obligations of
WinStar Equipment. WEC has no indebtedness senior to the Equipment Notes.
The New Senior Notes will bear interest at a rate of 141/2% per annum,
payable on April 15 and October 15, commencing April 15, 2001. Until October 15,
2000, interest on the New Senior Notes will accrue and be compounded
semiannually on each SemiAnnual Interest Accrual Date (as defined), but will not
be payable in cash. Interest on the Accumulated Amount (as defined) of the New
Senior Notes as of October 15, 2000 will be payable semiannually commencing
April 15, 2001. The New Senior Notes will mature on October 15, 2005 and are
redeemable on or after October 15, 2000, at the option of the Company, in whole
or in part, at the redemption prices set forth herein. The term "(as defined)"
used after a capitalized term means that the term is defined herein under the
section entitled "Description of Notes" or in the 1997 Indentures.
The New Equipment Notes will bear interest at a rate of 12 1/2% per
annum, payable on March 15 and September 15, commencing September 15, 1997.
The New Equipment Notes will mature on March 15, 2004 and are redeemable on
or after March 15, 2002, at the option of WinStar Equipment, in whole or in
part, at the redemption prices set forth herein. In the event that by March
18, 1999, WinStar Equipment has not applied $200.0 million to fund the
Acquisition Costs (as defined) of Designated Equipment (as defined), WinStar
Equipment is required to redeem New Equipment Notes in an aggregate principal
amount equal to such shortfall at a redemption price of 112.50% of such
principal amount, plus accrued interest, if any, to the date of redemption.
Based on no-action letters issued by the staff of the Securities and
Exchange Commission ("Commission") to third parties, the Company believes that
New Notes issued pursuant to this Exchange Offer in exchange for Old Notes may
be offered for resale, resold and otherwise transferred by a holder thereof
(other than a broker-dealer who purchased such Old Notes directly from the
Company to resell pursuant to Rule 144A or any other available exemption under
the Securities Act) without compliance with the registration and prospectus
delivery provisions of the Securities Act, provided that the holder is acquiring
the New Notes in the ordinary course of its business and is not participating,
and has no arrangement or understanding with any person to participate, in the
distribution of the New Notes. Holders of Old Notes wishing to accept the
Exchange Offer must represent to the Company in the Letter of Transmittal that
such conditions have been met.
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. The Letter of Transmittal states
that by so acknowledging and by delivering a prospectus, a broker-dealer will
not be deemed to admit that it is an "underwriter" within the meaning of the
Securities Act. This Prospectus, as it may be amended or supplemented from time
to time, may be used by a broker-dealer in connection with resales of New Notes
received in exchange for Old Notes where such Old Notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities. The Company has agreed that, for a period of 180 days after the
Expiration Date, it will make this Prospectus available to any broker-dealer for
use in connection with any such resale. See "Plan of Distribution."
As of July 31, 1997, Cede & Co. ("Cede"), as nominee for The Depository
Trust Company, New York, New York ("DTC"), was the registered holder of $100
million aggregate principal amount of the Old Senior Notes and held such Old
Senior Notes for six of its participants, and was the registered holder of $20
million aggregate principal amount of the Old Equipment Notes and held such Old
Equipment Notes for 21 of its participants. The Company believes that no such
participant is an affiliate (as such term is defined in Rule 405 of the
Securities Act) of the Company or WinStar Equipment. There has previously been
only a limited secondary market, and no public market, for the Old Notes. The
Old Notes are, and the New Notes will be, eligible for trading in the Private
Offering, Resales and Trading through Automatic Linkages ("PORTAL") market.
There can be no assurance as to the liquidity of the trading market for either
the New Notes or the Old Notes. The New Notes constitute securities for which
there is no established trading market, and the Company does not currently
intend to list the Notes on any securities exchange. If such a trading market
develops for the New Notes, future trading prices will depend on many factors,
including, among other things, prevailing interest rates, the Company's results
of operations and the market for similar securities. Depending on such factors,
the New Notes may trade at a discount from their face value. See "Risk
Factors--Absence of Public Market for the New Notes."
3
<PAGE>
Any Old Notes not tendered and accepted in the Exchange Offer will remain
outstanding and will be entitled to all the rights and preferences and will be
subject to the limitations applicable thereto under the 1997 Indentures.
Following the consummation of the Exchange Offer, the holders of Old Notes will
continue to be subject to the existing restrictions upon transfer thereof and
the Issuers will have no further obligation to such holders to provide for any
other exchange offer with respect to the Old Notes held by such holders.
Following the completion of the Exchange Offer in accordance with the terms
hereof and the Registration Agreement, certain of the Old Notes may not be
entitled to the contingent increase in interest rate as provided in the
Registration Agreement. See "The Exchange Offer."
This Prospectus, together with the Letter of Transmittal, is being sent to
all registered holders of Old Notes as of August 11, 1997.
The Issuers will not receive any proceeds from this Exchange Offer. No
dealer-manager is being used in connection with this Exchange Offer. See "Plan
of Distribution."
THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL THE COMPANY OR WINSTAR
EQUIPMENT ACCEPT SURRENDERS FOR EXCHANGE FROM, HOLDERS OF OLD NOTES IN ANY
JURISDICTION IN WHICH THE EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE
IN COMPLIANCE WITH THE SECURITIES OR BLUE SKY LAWS OF SUCH JURISDICTION.
The Old Notes were issued originally in global form (the "Old Global
Notes"). The Old Global Notes were deposited with, or on behalf of, DTC, as the
initial depository with respect to the Old Notes (in such capacity, the
"Depository"). The Old Global Notes are registered in the name of Cede, as
nominee of DTC, and beneficial interests in the Old Global Notes are shown on,
and transfers thereof are effected only through, records maintained by the
Depository and its participants. The use of the Old Global Notes to represent
the Old Notes permits the Depository's participants, and anyone holding a
beneficial interest in an Old Note registered in the name of such a participant,
to transfer interests in the Old Notes electronically in accordance with the
Depository's established procedures without the need to transfer a physical
certificate. Except as provided below, the New Notes will also be issued
initially as a note in global form (the "New Global Notes", and together with
the Old Global Notes, the "Global Notes") and deposited with, or on behalf of,
the Depository. Notwithstanding the foregoing, holders of Old Notes that are
held, at any time, by a person that is not a qualified institutional buyer under
Rule 144A (a "Qualified Institutional Buyer") and exchanges Old Notes in the
Exchange Offer, will receive the New Notes in certificated form and is not, and
will not be, able to trade such securities through the Depository unless the New
Notes are resold to a Qualified Institutional Buyer. After the initial issuance
of the New Global Notes, New Notes in certificated form will be issued in
exchange for a holder's proportionate interest in the New Global Notes only as
set forth in the Indenture.
No person has been authorized to give any information or to make any
representations in connection with the Exchange Offer other than those contained
in this Prospectus and the Letter of Transmittal and, if given or made, such
information or representation must not be relied upon as having been authorized
by the Company or the Exchange Agent. This Prospectus does not constitute an
offer to sell or a solicitation of an offer to buy the New Notes in any
jurisdiction to any person to whom it is unlawful to make such offer or
solicitation in such jurisdiction. The delivery of this Prospectus shall not,
under any circumstances, create any implication that the information herein is
correct at any time subsequent to its date.
4
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE PAGE
-----
<S> <C> <C> <C>
Available Information............................ 5 Certain United States Federal
Incorporation of Information by Reference........ 6 Income Tax Considerations........................ 67
Prospectus Summary............................... 7 Description of Certain Indebtedness
Risk Factors..................................... 20 and Preferred Stock.............................. 72
The Exchange Offer............................... 32 Plan of Distribution............................. 76
Capitalization................................... 39 Legal Matters.................................... 76
Description of Notes............................. 40 Experts.......................................... 76
</TABLE>
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on
Form S-4 under the Securities Act with respect to the New Notes offered in
the Exchange Offer. For the purposes hereof, the term "Registration
Statement" means the original Registration Statement and any and all
amendments thereto. In accordance with the rules and regulations of the
Commission, this Prospectus does not contain all of the information set forth
in the Registration Statement and the schedules and exhibits thereto. Each
statement made in this Prospectus concerning a document filed as an exhibit
to the Registration Statement is qualified in its entirety by reference to
such exhibit for a complete statement of its provisions. For further
information pertaining to Company and the New Notes offered in the Exchange
Offer, reference is made to such Registration Statement, including the
exhibits and schedules thereto and the financial statements, notes and
schedules filed as a part thereof. The Registration Statement (and the
exhibits and schedules thereto) may be inspected and copied at the public
reference facilities maintained by the Commission at its principal office at
Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549
("Washington Office"), or at its regional offices at Citicorp Center, 500
West Madison Street, 14th Floor, Chicago, Illinois 60661 ("Chicago Office"),
and at Seven World Trade Center, 13th Floor, New York, New York 10048 ("New
York Office"). Any interested party may obtain copies of all or any portion
of the Registration Statement and the exhibits thereto at prescribed rates
from the Public Reference Section of the Commission at its Washington Office.
Additionally, the Commission maintains a web site (http:// www.sec.gov) that
contains certain reports, proxy and information statements and other
information relating to the Company.
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended ("Exchange Act"), and in
accordance with the Exchange Act, the Company files periodic reports, proxy
statements and other information with the Commission. Such reports, proxy
statements and other information filed by the Company with the Commission can
be inspected and copied (at prescribed rates) at the Commission's Washington
Office, Chicago Office and New York Office. In addition, reports, proxy
statements and other information concerning the Company can be inspected and
copied at the offices of The Nasdaq Stock Market, Inc., 1735 K Street, N.W.,
Washington, D.C. 20006.
If the Company ceases to be subject to the informational reporting
requirements of the Exchange Act, the Company has agreed that, so long as any
Notes are outstanding, it will file with the Commission all such reports and
other information as it would be required to file with the Commission by
Sections 13(a) or 15(d) under the Exchange Act. The Company will supply the
Trustee and each holder of Notes, or will supply to the Trustee for
forwarding to each such holder, without cost to such holder, copies of such
reports or other information.
5
<PAGE>
INCORPORATION OF INFORMATION BY REFERENCE
The following documents or information have been filed by the Company with
the Commission pursuant to the Exchange Act and are incorporated herein by
reference:
(1) Annual Report on Form 10-K for the year ended December 31, 1996;
(2) Current Report on Form 8-K filed January 17, 1997.
(3) Current Report on Form 8-K filed February 14, 1997.
(4) Current Report on Form 8-K filed February 27, 1997.
(5) Current Report on Form 8-K filed March 27, 1997;
(6) Quarterly Report on Form 10-Q for the three-month period ended March
31, 1997, as amended on June 10, 1997;
(7) Proxy Statement, dated May 15, 1997;
(8) Current Report on Form 8-K filed June 10, 1997; and
(9) Current Report on Form 8-K filed July 2, 1997.
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,
Suite 2700, New York, New York 10169 (telephone 212-584-4000), Attention:
Investor Relations, 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. All such documents can also be retrieved from
the Commission's electronic data gathering and retrieval (EDGAR) system at
www.sec.gov.
6
<PAGE>
PROSPECTUS SUMMARY
This summary is qualified in its entirety by the detailed information and
financial statements and notes thereto appearing elsewhere or incorporated by
reference in this Prospectus. Unless otherwise indicated, references herein
to the "Company" or "WinStar" refer to WinStar Communications, Inc. and,
where appropriate, its subsidiaries. Effective January 1, 1996, the Company
changed its fiscal year end from the last day in February to December 31.
Wireless FiberSM is a service mark and WinStar-Registered Trademark- is a
trademark of WinStar Communications, Inc.
The Company
The Company provides a full range of telecommunications services,
including local, long distance and Internet access services, as a competitive
local exchange carrier ("CLEC"). By exploiting its fiber-quality digital
capacity in the 38 GHz portion of the radio spectrum ("Wireless Fiber") and a
switch-based infrastructure, the Company seeks to distinguish itself as a
facilities-based, value-added provider of high-capacity telecommunications
services to small and medium-sized businesses and an attractive alternative
to established providers, such as the regional Bell operating companies
("RBOCs"). The Company introduced its switch-based local exchange services to
end users in New York City in October 1996, is currently also offering local
exchange service on a switched basis and a resale basis in Boston, Chicago,
Los Angeles and San Diego and offering local exchange services on a resale
basis only in Atlanta, Dallas, Hartford, Milwaukee, Newark, Orange County
(California), Philadelphia, San Francisco, Stamford (Connecticut) and
Washington, D.C. The Company's local exchange services include the provision
of PBX trunks, individual business lines and Centrex and Internet access, and
provide customers with full-feature services such as custom calling, caller
ID, conference calling and voice mail. During the next several years, the
Company intends to introduce its local exchange services in each of the other
major metropolitan areas where it is licensed to provide 38 GHz services over
four or more 100 MHZ channels. Over time, the Company intends to carry a
substantial majority of its local telecommunications service traffic
utilizing Wireless Fiber and its own switched networks, unlike most
fiber-based CLECs, which typically do not carry the majority of their
customer traffic over their own networks. The Company also offers a variety
of facilities-based broadband, high-capacity local access and digital network
services ("Carrier Services") to other telecommunications service providers
on a wholesale basis. As of June 30, 1997, the Company had more than 40
carrier customers, including, among others, Ameritech Cellular Services, MCI
Communications, Pacific Bell and Teleport Communications Group.
The Company is the holder of the largest amount of 38 GHz spectrum in the
United States and is utilizing this asset to build local telephone networks
for the transmission of voice, data and video traffic in the major
metropolitan areas covered by the Company's 38 GHz licenses (the "Wireless
Licenses"). The Wireless Licenses cover an aggregate of more than 100 cities
with populations exceeding 100,000 each, and encompass an aggregate
population of approximately 172 million. Furthermore, the Wireless Licenses
allow the Company to provide Wireless Fiber services in 49 of the 50 most
populated Metropolitan Statistical Areas ("MSAs") in the United States. The
Company has agreed to acquire an aggregate of 62 additional 38 GHz licenses
in various transactions, subject to approval by the Federal Communications
Commission ("FCC"). Upon completion of these acquisitions, the Company's
Wireless Licenses will enable the Company to provide services in all of the
50 most populated MSAs and will cover cities encompassing an aggregate
population of over 180 million. The Company holds one or more Wireless
Licenses in numerous markets which allow it to provide Wireless Fiber
services over four or more channels in such market. The Company believes that
the utilization of multiple 38 GHz channels in a single licensed area
provides it with advantages over 38 GHz service providers that possess fewer
channels, by allowing it to build out city-wide networks of broadband
capacity.
The 38 GHz portion of the radio spectrum has characteristics well suited
for the provision of local telecommunications services, including:
Rapid Deployment of Alternative Local Infrastructure. 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 their infrastructure
requirements and, in many instances, the need to follow FCC frequency
coordination procedures in connection with wireless facilities).
Broad Bandwidth. The total amount of bandwidth for each 38 GHz channel
is 100 MHz, which supports full broadband capability. For example, one 38 100
MHz GHz channel can support transmission capacity of one DS-3 at 45 Mbps
which can transfer data at a rate that is
7
<PAGE>
over 1,500 times the rate of the fastest dial-up modem currently in general
use (28.8 Kbps) and over 350 times the rate of the fastest ISDN line
currently in general 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 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 use highly interactive
applications on the Internet and other networks.
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. These
characteristics make it relatively easier to obtain the roof rights ("Roof
Rights") required to install 38 GHz transceivers, and less costly to initiate
38 GHz-based services as compared to most other wireless services.
Efficient Channel Reuse. Certain characteristics of 38 GHz, including the
effective range of its radio signal and the small amount of dispersion (i.e.,
scattering) of the radio beam as compared to the more dispersed radio beams
produced at 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, provide services
to multiple customers over the same 38 GHz channel, and conserve 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.
Business Strategy
The Company's objective is to become the full-service telecommunications
provider of choice to small and medium-sized business customers and a
provider of high-quality alternative and broadband facilities to its Carrier
Services customers. Key elements of the Company's strategy are to:
Expand Network Infrastructure. The Company is creating an infrastructure
on a city-by-city basis using its Wireless Fiber capabilities, switches and
other telecommunications equipment acquired by the Company from equipment
vendors and facilities leased from other carriers to originate and terminate
traffic. Pursuant to its building-centric network plan, the Company is
identifying strategically located sites in each metropolitan area where it
provides service to serve as hubs for its network in that metropolitan area.
These hub sites will be connected via Wireless Fiber links to end users. The
Company believes that a limited number of hub sites (generally less than a
dozen) in each metropolitan area will allow it to address more than 70% of
its targeted buildings and to carry the majority of its customers' traffic on
its own network instead of the higher cost facilities of other carriers.
Exploit First-to-Market Advantages. The Company seeks to capitalize on
the significant opportunities emerging in the industry as a result of the
Telecommunications Act of 1996 (the "Telecommunications Act") by exploiting a
"first-to-market" advantage as one of the few holders of 38 GHz licenses with
an established operating and management infrastructure. The Company believes
that its early entrance into its markets provides it with advantages over
many potential competitors by allowing it to: (i) establish a customer base
prior to widespread competition from other CLECs; (ii) develop a proven,
reliable network infrastructure using its own switching and transmission
capabilities ahead of many other CLECs; (iii) develop pioneering expertise in
the utilization of 38 GHz for the delivery of telecommunications and
multimedia services and the design and management of 38 GHz-based networks;
and (iv) acquire Roof Rights to place its 38 GHz antennae on a large number
of buildings on favorable terms and in advance of other wireless service
providers.
Focus on Small and Medium-Sized Business Customers. The Company believes
there exists a substantial opportunity to attract a base of small and
medium-sized business customers by providing superior customer service and
sales support. The customer base initially targeted by the Company consists
of businesses typically located in buildings that have more than 100,000
square feet of commercial space and which, in many instances, are not served
by fiber facilities provided by CLECs or competitive access providers
("CAPs"). The Company estimates that there are more than 8,000 buildings in
this target group, populated by approximately 9.7 million workers using more
than 2.1 million phone lines. Over time, the Company intends to expand its
target customer base to include the majority of small and
8
<PAGE>
medium-sized businesses in the metropolitan areas covered by the Wireless
Licenses, which the Company estimates contain approximately 60% of all such
businesses in the United States and represent a market opportunity in excess
of $30 billion per year.
Market Wireless Fiber to Other Carriers. The Company markets its Carrier
Services to other carriers such as the RBOCs and other local exchange
carriers ("LECs"), interexchange carriers ("IXCs"), other CAPs and CLECs,
providers of personal communications services ("PCS") and cellular and
specialized mobile radio services ("CMRS") providers. The Company believes
that its Carrier Services present an attractive, economical method for
telecommunications service providers to add a high-capacity extension to
their own networks and service territories, especially as they seek to
rapidly penetrate new markets opening as a result of the Telecommunications
Act. The Company's Carrier Services can also provide cost-efficient route
diversity where network reliability concerns require multiple
telecommunications paths.
Since the commercial introduction of the Company's Carrier Services in
October 1995, the number of carrier customers has increased significantly.
Such customers include Ameritech Cellular Services, AT&T Wireless, Bell
Atlantic/NYNEX Mobile, Brooks Fiber, Cellular One, PrimeCo Personal
Communications, Siemens Stromberg-Carlson, Teleport Communications Group and
Western Wireless. In addition, the Company has entered into multi-year master
service agreements with American Communications Services, Electric Lightwave,
IntelCom, MCI Communications and Pacific Bell. These agreements establish the
framework under which such companies may effect the integration of Wireless
Fiber services into their own telecommunications networks. The Company is in
the process of negotiating additional master service agreements with other
large telecommunications providers and has offered to enter into co-exclusive
multi-region network usage agreements with one or more such providers.
Market Wireless Fiber Services as a Solution to Growing Capacity
Shortages. The Company believes that demand for its Wireless Fiber-based CLEC
and Carrier Services will grow because of the expanding volume of data
communications traffic resulting from increasing Internet usage and other
high-volume data transmission requirements. This type of traffic increasingly
requires high-capacity, end-to-end networks that are often difficult to
provide economically with older RBOC and LEC infrastructure.
Provide Information and Content Services. The Company believes that the
ability to deliver information and other content will become an increasingly
important factor in the choice of a telecommunications provider by businesses
as competition increases and the markets covered by the Wireless Licenses
mature. Accordingly, the Company actively seeks opportunities to utilize its
information and content assets and services to enhance the marketability of
the Company's telecommunications services.
Development of Core Assets
The Company believes that in order to effectively compete with incumbent
LECs and other telecommunications service providers in its target markets, it
must develop a core group of assets, capabilities and resources. The Company
has made substantial progress in acquiring and developing these core assets,
which include:
Transmission and Switching Facilities. In October 1996, the Company
initiated local switched services in New York City, utilizing its first 5ESS
switch, purchased from Lucent Technologies, Inc. ("Lucent"), and facilities
leased from NYNEX. Since that time, the Company has initiated local switched
services in Boston, Chicago, Los Angeles and San Diego. During the next three
years, the Company intends to install Lucent switches to serve most of its
major markets. The Company has the necessary Roof Rights to install its
Wireless Fiber transmission facilities on approximately 1,400 buildings in
its licensed areas. The Company also has developed business and operational
support and network monitoring and management systems that will ensure the
efficient use of its networks and provide network reliability and
transmission quality equivalent to that provided by fiber-optic networks. The
Company maintains a network operations center ("NOC"), which is operating 24
hours a day, 7 days a week, and is currently building a national field
service force.
State Authorizations. The Company has obtained authorization to operate
as a CLEC in 24 states and the District of Columbia and is in the process of
seeking authorization to operate as a CLEC in a number of additional
jurisdictions. The Company is authorized to provide its local access and
other Carrier Services as a CAP in 34 states
9
<PAGE>
and the District of Columbia and has applications pending for such
authorizations in a number of additional jurisdictions.
Sales and Customer Support Organizations. The Company is expending a
significant amount of time and capital to build a dedicated, responsive sales
and customer support organization in order to ensure that the people and
systems necessary to achieve customer satisfaction keep pace with a growing
customer base. The Company has a direct sales organization for its CLEC
services, currently consisting of more than 285 people located in 15 major
markets, and a Carrier Services sales group, currently consisting of more
than 70 people.
Information Systems. The Company is investing significant capital
developing state-of-the-art information systems platforms directed toward the
accurate and flexible handling of the billing and customer satisfaction
requirements of a diverse customer base purchasing a variety of
telecommunications services. The Company believes that its information systems
allow it to provide customers with a level of service and responsiveness that
many other telecommunications service providers do not offer and that such level
of service will become a key factor in customers' choice of telecommunications
service providers as the market matures.
Experienced Management and Operating Personnel. The Company has assembled a
management team and hired operating personnel experienced in all areas of
telecommunications operations, including more than 250 former officers and
employees of MCI Communications and Sprint Corporation, as well as officers and
employees from other established telecommunications companies. The Company plans
to hire additional experienced telecommunications marketing and operations
personnel as appropriate.
Winstar Equipment
WinStar Equipment is a recently organized, wholly owned subsidiary of the
Company established to facilitate the financing and purchase of
telecommunications equipment and inventory ("Designated Equipment"),
including radios, antennae, switches, cable, service vehicles and related
equipment and software, used in the Company's businesses and for the buildout
of its telecommunications operations. WinStar Equipment will use the proceeds
of the Equipment Notes Offering (as defined) to purchase Designated Equipment
which it will, in turn, lease in connection with the furtherance of the
Company's telecommunications business.
In July 1997, counsel for the Company delivered to the Commission a
letter ("No-Action Letter") asking the Commission to confirm that it would
not raise any objection if the Company does not include separate financial
statements of WinStar Equipment but rather, provides summarized financial
information regarding WinStar Equipment in the Company's periodic reports
filed pursuant to the Exchange Act. In addition, the No-Action Letter
requests that the Commission agree that it will not raise any objection if
WinStar Equipment does not comply with the periodic reporting requirements of
Sections 13 or 15(d) of the Exchange Act. The Company believes that its
position with respect to financial information of WinStar Equipment is
appropriate because: (i) WinStar Equipment does not and will not generate any
revenue other than lease payments it receives from the lessees of equipment,
which payments WinStar Equipment will in turn apply to service the debt
evidenced by the Equipment Notes; (ii) WinStar Equipment has no operating
history and no assets other than cash and cash equivalents, the Designated
Equipment it has already purchased with the proceeds of the Equipment Notes,
and the Designated Equipment it will purchase in the future until the
proceeds from the Equipment Notes are exhausted; (iii) the Company is the
sole shareholder of WinStar Equipment, which currently has no employees; (iv)
each of WinStar Equipment's officers and directors is also an employee of the
Company; and (v) Win Star Equipment has no independent operations other than
to function as a telecommunications equipment leasing company serving
primarily WinStar and its telecommunications businesses.
Other Businesses
The Company has historically generated a significant portion of its
revenues from the resale of long distance services to residential customers.
As part of its CLEC service offerings, the Company is focusing on the sale of
long distance services to small and medium-sized businesses and is not
currently marketing such services to residential customers on an active basis.
10
<PAGE>
Prior to the Company's entry into the telecommunications industry, it
marketed and distributed consumer products, including personal care and bath
and beauty products, through a nonstrategic subsidiary. That subsidiary
continues to sell such products, primarily to large retailers, mass
merchandisers, discount stores, department stores, national and regional drug
store chains and other regional retail chains. The Company expects to divest
itself of this subsidiary during the next 9 to 12 months.
Corporate Information
The Company and WinStar Equipment were incorporated under the laws of the
State of Delaware in September 1990 and February 1997, respectively, and
their principal offices are located at 230 Park Avenue, New York, New York
10169. Their phone number is (212) 584-4000.
11
<PAGE>
Summary of the Exchange Offer
Background--the Private Offering of Debt Securities
<TABLE>
<S> <C>
General...................................... In March 1997, the Company sold an aggregate
of $100.0 million principal amount of Old
Senior Notes and WinStar Equipment sold an
aggregate of $200.0 million principal amount
of Old Equipment Notes in an institutional
private placement ("1997 Debt Placement") to
the initial purchasers ("Initial
Purchasers"). The principal purpose of the
1997 Debt Placement was to raise proceeds to
fund the expansion of the Company's Wireless
Fiber services and the general development
and growth of the Company's
telecommunications operations.
Exchange of Old Notes........................ Pursuant to the Registration Agreement, the
Company is obligated to consummate the
Exchange Offer with respect to the Old Senior
Notes and WinStar Equipment is obligated to
consummate the Exchange Offer with respect to
the Old Equipment Notes pursuant to the
Registration Statement of which this
Prospectus forms a part or, if required in
lieu thereof, cause the Old Senior Notes or
Old Equipment Notes, as the case may be, to
be registered under the Securities Act
pursuant to a shelf registration statement.
If (i) by September 15, 1997, neither the
Exchange Offer is consummated nor the shelf
registration statement is declared effective;
or (ii) after either the Registration
Statement of which this Prospectus forms a
part (or the shelf registration statement) is
declared effective, such registration
statement thereafter ceases to be effective
or usable (subject to certain exceptions) in
connection with resales of the Old Notes or
the applicable New Notes in accordance with
and during the periods specified in the
Registration Agreement (each such event
referred to in clauses (i) and (ii) a
"Registration Default"), additional interest
of 0.50% will accrue on such Notes from and
including the date on which any such
Registration Default shall occur, but
excluding the date on which all Registration
Defaults have been cured.
Terms of the Exchange Offer
The Exchange Offer........................... Pursuant to the Exchange Offer, $1,000
principal amount of New Notes will be issued
in exchange for each $1,000 principal amount
of outstanding Old Notes validly tendered and
not withdrawn. The New Notes will be issued
to tendering holders of Old Notes as promptly
as practicable after the Expiration Date.
Resale....................................... Based on an interpretation by the staff of
the Commission set forth in no-action letters
issued to third parties, the Issuers believe
that the New Notes issued pursuant to the
Exchange Offer in exchange for Old Notes may
be offered for resale, resold and otherwise
transferred by any holder thereof (other than
broker-dealers, as set forth below) without
compliance with the registration and
prospectus delivery provisions of the
Securities Act, provided that such New Notes
are acquired in the ordinary course of such
holder's business and that such holder has no
arrangement or understanding with any person
to participate in the distribution of such
New Notes. Each broker-dealer that receives
New Notes for its own account in exchange for
Old Notes that were acquired as a result of
market-making or other trading activity must
acknowledge that it will deliver a prospectus
in connection with any resale of New
</TABLE>
12
<PAGE>
<TABLE>
<S> <C>
Notes. The Letter of Transmittal states that
by so acknowledging and delivering a prospectus,
such broker-dealer will not be deemed to
admit that it is an "underwriter" within the
meaning of the Securities Act. This
Prospectus, as it may be amended or
supplemented from time to time, may be used
by such broker-dealer in connection with
resales of New Notes received in exchange for
Old Notes where such New Notes were acquired
by such broker-dealer as a result of
market-making activities or other trading
activities. Each of the Company and WinStar
Equipment has agreed that, for a period of
180 days after the Expiration Date, it will
make this Prospectus available to any such
broker-dealer for use in connection with any
such resale. See "Plan of Distribution." Any
holder who tenders in the Exchange Offer with
the intention to participate, or for the
purpose of participating, in a distribution
of the New Notes may not rely on the
foregoing position of the staff of the
Commission and, in the absence of an
exemption therefrom, must comply with the
registration and prospectus delivery
requirements of the Securities Act in
connection with a secondary resale
transaction. Failure to comply with such
requirements in such instance may result in
such holder incurring liabilities under the
Securities Act for which the holder is not
indemnified by the Company.
The Exchange Offer is not being made to, nor
will be accepted from, holders of Old Notes
in any jurisdiction in which this Exchange
Offer or the acceptance thereof would not be
in compliance with the securities laws of
such jurisdiction.
Expiration Date.............................. 5:00 p.m., New York City time, September 12,
1997, unless the Exchange Offer is extended,
in which case the term "Expiration Date"
means the latest date and time to which the
Exchange Offer is extended. Any extension, if
made, will be publicly announced through a
release to the Dow Jones News Service and as
otherwise required by applicable law or
regulations. The Company may extend the
Expiration Date in its sole and absolute
discretion.
Conditions to the Exchange Offer............. The Exchange Offer is not subject to any
conditions, other than that the Exchange
Offer does not violate applicable law or any
applicable interpretation of the staff of the
Commission. See "The Exchange Offer --
Conditions to the Exchange Offer." The
Exchange Offer is not conditioned upon any
minimum principal amount of Old Notes being
tendered.
Procedures for Tendering Old Notes........... Each holder of Old Notes wishing to accept
the Exchange Offer must complete, sign and
date the Letter of Transmittal, or a
facsimile thereof, in accordance with the
instructions contained herein and therein,
and mail or otherwise deliver the Letter of
Transmittal, or a facsimile thereof, together
with the Old Notes to be exchanged and any
other required documentation to U.S. Trust,
as Exchange Agent, at the address set forth
herein and therein. By executing a Letter of
Transmittal, each holder will represent to
the Company that, among other things, the New
Notes acquired pursuant to the Exchange Offer
are being obtained in the ordinary course of
business of the person receiving such New
Notes, whether or not such person is the
holder, and that neither the holder nor
</TABLE>
13
<PAGE>
<TABLE>
<S> <C>
any such other person has any arrangement or
understanding with any person to participate
in the distribution of such New Notes.
Special Procedures for Beneficial Owners..... Any beneficial owner whose Old Notes are
registered in the name of a broker,
commercial bank, trust company or other
nominee, and who wishes to tender in the
Exchange Offer should contact such registered
holder promptly and instruct such registered
holder to tender on such beneficial owner's
behalf. If such beneficial owner wishes to
tender on his own behalf, such beneficial
owner must, prior to completing and executing
the Letter of Transmittal and delivering his
Old Notes, either make appropriate
arrangements to register ownership of the Old
Notes in such owner's name or obtain a
properly completed bond power from the
registered holder. Beneficial owners should
be aware that the transfer of registered
ownership may take considerable time and may
not be able to be completed prior to the
Expiration Date.
Guaranteed Delivery Procedures............... Holders of Old Notes who wish to tender such
Old Notes and whose Old Notes are not
immediately available or who cannot deliver
their Old Notes and a properly completed
Letter of Transmittal or any other documents
required by the Letter of Transmittal to the
Exchange Agent prior to the Expiration Date
may tender their Old Notes according to the
guaranteed delivery procedures set forth in
"The Exchange Offer -- Procedures for
Tendering."
Acceptance of Old Notes and Delivery of New Subject to certain conditions (as described
Notes...................................... more fully in "The Exchange Offer --
Conditions to the Exchange Offer"), the
Company and WinStar Equipment, as the case
may be, will accept for exchange any and all
Old Notes which are properly tendered in the
Exchange Offer and not withdrawn, prior to
5:00 p.m., New York City time, on the
Expiration Date. The New Notes issued
pursuant to the Exchange Offer will be
delivered as promptly as practicable
following the Expiration Date.
Withdrawal Rights............................ Subject to the conditions set forth herein,
tenders of Old Notes may be withdrawn at any
time prior to 5:00 p.m., New York City time
on the Expiration Date. See "The Exchange
Offer -- Withdrawal of Tenders."
Certain Federal Income Tax Considerations.... The exchange pursuant to the Exchange Offer
should not constitute a taxable exchange for
federal income tax purposes. Each New Note
should be treated as having been originally
issued at the time the Old Note exchange
therefor was originally issued. However,
holders should consult their own tax
advisors. See "Certain United States Federal
Income Tax Considerations."
Exchange Agent............................... U.S. Trust, the Trustee under the Indentures,
is serving as Exchange Agent in connection
with the Exchange Offer. For information with
respect to the Exchange Offer, the telephone
number for the Exchange Agent is (212)
852-1000 and the facsimile number for the
Exchange Agent is (212) 852-1625.
</TABLE>
See "The Exchange Offer," below, for more detailed information concerning
the terms of the Exchange Offer.
14
<PAGE>
The New Notes
The Exchange Offer applies to $100.0 million aggregate principal amount
of Old Senior Notes and $200.0 million principal amount of Old Equipment
Notes. The form and terms of the New Notes will be the same as the form and
terms of the Old Notes, except that the New Notes will be registered under
the Securities Act and, therefore, will not bear legends restricting the
transfer thereof. The New Notes will evidence the same debt as the Old Notes
and the New Senior Notes and New Equipment Notes will be entitled to the
benefits of the Senior Notes Indenture and Equipment Notes Indenture,
respectively. Upon consummation of the Exchange Offer, the New Senior Notes
will be treated as a single class with any Old Senior Notes, and the New
Equipment Notes will be treated as a single class with any Old Equipment
Notes, that remain outstanding. Upon consummation of the Exchange Offer, the
Old Notes will not be entitled to certain registration rights under the
Registration Agreement. See "Description of Notes."
<TABLE>
<S> <C>
Securities Offered
New Senior Notes............................. $100,000,000 principal amount of 14 1/2%
Senior Deferred Interest Exchange Notes Due
2005 of the Company.
New Equipment Notes.......................... $200,000,000 principal amount of 12 1/2%
Guaranteed Senior Secured Exchange Notes Due
2004 of WinStar Equipment.
Maturity Date
New Senior Notes............................. October 15, 2005.
New Equipment Notes.......................... March 15, 2004.
Interest Payment Dates
New Senior Notes............................. April 15 and October 15, commencing April 15,
2001. Until October 15, 2000, interest on the
New Senior Notes will accrue at a rate of
14 1/2% per annum and be compounded
semiannually on each SemiAnnual Interest
Accrual Date, but, other than additional
interest payable upon any Registration
Default, will not be payable in cash.
Interest on the Accumulated Amount of the New
Senior Notes as of October 15, 2000 will be
payable semiannually in cash, commencing
April 15, 2001. For a discussion of the
federal income tax treatment of the New
Senior Notes under the original issue
discount rules, see "Certain United States
Federal Income Tax Considerations."
New Equipment Notes.......................... March 15 and September 15, commencing
September 15, 1997.
Optional Redemption
New Senior Notes............................. The New Senior Notes will not be redeemable
prior to October 15, 2000. Thereafter, the
New Senior Notes will be redeemable at the
option of the Company, in whole or in part,
at the redemption prices set forth herein
plus accrued interest, if any, on the
Accumulated Amount of the New Senior Notes to
the date of redemption.
New Equipment Notes.......................... The New Equipment Notes will not be
redeemable prior to March 15, 2002, except
pursuant to the mandatory redemption
provision described below. Thereafter, the
New Equipment
</TABLE>
15
<PAGE>
<TABLE>
<S> <C>
Notes will be redeemable at the
option of WinStar Equipment, in whole or in
part, at the redemption prices set forth
herein plus accrued interest, if any, to the
date of redemption.
Mandatory Redemption of
New Equipment Notes.......................... In the event that by March 18, 1999, WinStar
Equipment has not applied at least $200.0
million to fund the Acquisition Costs of
Designated Equipment ($200.0 million less the
amount so applied being herein called the
"Unused Equipment Amount"), WinStar Equipment
is required to redeem New Equipment Notes in
an aggregate principal amount equal to the
Unused Equipment Amount at a redemption price
of 112.50% of such principal amount, plus
accrued interest, if any, to the date of
redemption.
Change of Control.............................. Upon a Change of Control (as defined), each
holder of Notes may require the Issuer of
such Notes to repurchase such Notes at 101%
of (i) in the case of the New Senior Notes,
the Accumulated Amount of such Notes on the
date of repurchase and (ii) in the case of
the New Equipment Notes, the principal amount
of such Notes, plus, in either case, accrued
interest, if any, on such amount to the date
of repurchase.
Ranking
General........................................ At March 31, 1997, the Company had (on an
unconsolidated basis) approximately $600.0
million of indebtedness, $508.9 million of
which would have been senior indebtedness
(including the Old Equipment Note Guarantee
and the Company's outstanding 14% Senior
Discount Notes due 2005 ("1995 Senior
Notes")) and $91.1 million of which would
have been subordinated indebtedness
(consisting of the Company's outstanding 14%
Convertible Senior Subordinated Discount
Notes due 2005 (the "Convertible Notes" and,
together with the 1995 Senior Notes, the
"1995 Notes")). The Company is a holding
company and, accordingly, the New Senior
Notes and the New Equipment Note Guarantee
will be effectively subordinated to all
liabilities of the Company's subsidiaries,
including trade payables. At March 31, 1997,
the total liabilities of the Company's
subsidiaries was approximately $258.8
million, including trade payables.
New Senior Notes and New Equipment Note The New Senior Notes and the New Equipment
Guarantee.................................... Note Guarantee will be unsecured, senior
obligations of the Company, will rank PARI
PASSU in right of payment with all existing
and future senior indebtedness of the
Company, including the 1995 Senior Notes, and
will be senior in right of payment to all
existing and future subordinated indebtedness
of the Company, including the Convertible
Notes.
New Equipment Notes............................ The New Equipment Notes will be secured,
senior obligations of WinStar Equipment.
Security/Guarantee............................. The New Equipment Notes will be secured by
liens on
</TABLE>
16
<PAGE>
<TABLE>
<S> <C>
Designated Equipment purchased with
the proceeds of the Equipment Notes Offering.
In addition, the New Equipment Notes will be
unconditionally guaranteed by the Company
pursuant to the New Equipment Note Guarantee.
Restrictive Covenants.......................... The New Notes will be issued pursuant to the
1997 Indentures, which restrict the
incurrence of additional debt by WinStar, the
issuance of debt and preferred stock by
WinStar's subsidiaries, dividends on and
redemptions of capital stock of WinStar, the
redemptions of certain subordinated
obligations of WinStar, the sale of assets
and subsidiaries' stock and transactions with
affiliates. The 1997 Indentures also prohibit
certain restrictions on distributions from
subsidiaries and will restrict WinStar from
consolidating or merging with or transferring
all or substantially all of its assets to
another person. However, all of these
restrictions and prohibitions are subject to
a number of important qualifications,
including the ability of WinStar to designate
certain subsidiaries as unrestricted
subsidiaries. The Equipment Note Indenture
restricts WinStar Equipment from engaging in
any business other than the ownership and
leasing of the Designated Equipment and
related activities.
</TABLE>
Risk Factors
See "Risk Factors" commencing on page 20 hereof for a discussion of
certain risks that should be considered in connection with an investment in
the Notes, including the risks related to historical and anticipated future
operating losses and negative EBITDA.
17
<PAGE>
SUMMARY FINANCIAL INFORMATION
(In thousands of dollars, except per share data)
The summary financial data presented below for the year ended February
28, 1995, the ten months ended December 31, 1995 and the year ended December
31, 1996 have been derived from the Company's audited Consolidated Financial
Statements included in its Annual Report on Form 10-K for the year ended
December 31, 1996, reclassified to reflect the operations of WinStar Global
Products, Inc. ("Global Products"), the Company's merchandising subsidiary,
as a discontinued operation. The summary financial data for the three months
ended March 31, 1996 and 1997 have been derived from the unaudited
Consolidated Financial Statements included in its Quarterly Report on Form
10-Q for the three months ended March 31, 1997. In the opinion of management,
the unaudited consolidated financial statements have been prepared on the
same basis as the audited Consolidated Financial Statements and include all
adjustments, which consist only of normal recurring adjustments, necessary for a
fair presentation of the results of operations for the period.
<TABLE>
<CAPTION>
TEN MONTHS THREE MONTHS
YEAR ENDED ENDED YEAR ENDED 1996 ENDED MARCH 31, 1997
FEBRUARY 28, DECEMBER 31, DECEMBER 31, PRO ------------------------- PRO
1995 1995 1996 FORMA(1) 1996 1997 FORMA(1)
------------ ------------ ------------ ----------- ------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Statement of Operations Data:
Operating revenues:
Telecommunications(2)...... $ 14,909 $ 13,137 $ 33,969 $ 32,481 $ 10,217 $ 7,063 $ 7,063
Information services....... 473 2,648 14,650 14,650 771 6,014 6,014
------------ ------------ ------------ ----------- ------------- ---------- ----------
Total net sales.......... 15,382 15,785 48,619 47,131 10,988 13,077 13,077
Operating income (loss):
Telecommunications......... (4,984) (7,288) (43,698) (49,805) (3,105) (26,546) (26,546)
Information services....... (157) 217 (1,409) (1,409) (54) (1,105) (1,105)
General corporate.......... (944) (3,861) (11,373) (11,373) (1,868) (5,285) (5,285)
------------ ------------ ------------ ----------- ------------- ---------- ----------
Total operating loss..... (6,085) (10,932) (56,480) (62,587) (5,027) (32,936) (32,936)
Interest expense............. (375) (7,186) (36,748) (77,831) (8,643) (10,798) (19,305)
Interest income.............. 343 2,890 10,515 8,453 3,108 2,235 2,235
Other expenses, net.......... (1,109) (866) -- -- -- -- --
------------ ------------ ------------ ----------- ------------- ---------- ----------
Net loss from continuing
operations................. (7,226) (16,094) (82,713) (131,965) (10,562) (41,499) (50,006)
Net (loss) income from
discontinued
operations(3).............. (4) 237 (1,010) (1,010) (137) (477) (477)
------------ ------------ ------------ ----------- ------------- ---------- ----------
Net loss..................... (7,230) (15,857) (83,723) (132,975) (10,699) (41,976) (50,483)
Preferred stock dividends.... -- -- -- (6,000) -- (833) (1,500)
------------ ------------ ------------ ----------- ------------- ---------- ----------
Net loss applicable to common
stock...................... $ (7,230) $ (15,857) $ (83,723) $ (138,975) $ (10,699) $ (42,809) $ (51,983)
------------ ------------ ------------ ----------- ------------- ---------- ----------
------------ ------------ ------------ ----------- ------------- ---------- ----------
Net loss per share from
continuing operations...... $ (0.42) $ (0.71) $ (2.96) $ (4.37) $ (0.39) $ (1.27) $ (1.58)
Net (loss) income per share
from discontinued
operations................. -- 0.01 (0.04) (0.04) -- (0.02) (0.02)
------------ ------------ ------------ ----------- ------------- ---------- ----------
Net loss per common share
outstanding................ $ (0.42) $ (0.70) $ (3.00) $ (4.41) $ (0.39) $ (1.29) $ (1.60)
------------ ------------ ------------ ----------- ------------- ---------- ----------
Weighted average common
shares outstanding......... 17,122 22,770 27,911 31,506 27,214 32,610 32,610
Other Financial Data:
Ratio of earnings to combined
fixed charges and preferred
stock
dividends(4)................. -- -- -- -- -- -- --
</TABLE>
18
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<TABLE>
AS OF MARCH 31,
1997
(IN THOUSANDS)
ACTUAL
-------------------
<S> <C>
Balance Sheet Data:
Cash, cash equivalents and short-term investments............................................ $ 413,474
Property and equipment, net.................................................................. 93,789
Total assets................................................................................. 748,869
Current portion of long-term debt and capital lease obligations.............................. 23,095
Long-term debt and capital lease obligations, less current portion........................... 587,420
Common and preferred stock and additional paid-in capital.................................... 247,270
Stockholders' equity......................................................................... 79,585
</TABLE>
- ------------------------
(1) Gives effect to an institutional private placement of $100 million of Units,
consisting of preferred stock and warrants in February 1997 ("Preferred
Stock Placement") and the 1997 Debt Placement as if they occurred as of the
beginning of the respective periods. Interest expense has been adjusted to
include approximately $8.5 million and $41.1 million of interest on such
debt and amortization of debt offering costs and other related fees in the
three months ended March 31, 1997 and the year ended December 31, 1996,
respectively, but not to include interest income earned on additional
available cash.
(2) The Company has generated minimal revenues from its Wireless Fiber services.
(3) Such loss is from the operations of the Company's consumer products
subsidiary, WinStar Global Products, Inc. ("Global Products"). On May 13,
1997, a formal plan of disposition for Global Products was approved by the
Board of Directors, and it is anticipated that the disposition will be
completed within the next 12 months. The disposition of Global Products has
been accounted for as a discontinued operation and, accordingly, its net
assets have been segregated from continuing operations in the balance sheet
data, and its operating results are segregated and reported as discontinued
operations in the statements of operations data.
(4) For the years ended February 28, 1993, 1994 and 1995, the ten months ended
December 31, 1995, the year ended December 31, 1996 and the three months
ended March 31, 1996 and 1997, earnings from continuing operations were
insufficient to cover combined fixed charges and preferred stock dividends
by $4,679,000, $8,622,000, $7,288,000, $16,310,000, $83,033,000, $10,562,000
and $42,537,000, respectively. On a pro forma basis, giving effect to the
items described in footnote 1 above, earnings from continuing operations
were insufficient to cover combined fixed charges and preferred stock
dividends by $51,711,000 and $138,285,000 for the three months ended March
31, 1997 and the year ended December 31, 1996, respectively. Fixed charges
consist of interest charges and amortization of debt expense and discount or
premium related to indebtedness, whether expensed or capitalized, and that
portion of rent expense (one-third) that the Company believes to be
representative of interest.
FORWARD-LOOKING STATEMENTS
This Prospectus and the documents incorporated by reference herein contain
certain forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995 with respect to the financial condition, results
of operations and business of the Company. These forward-looking statements
involve certain risks and uncertainties. No assurance can be given that any of
such matters will be realized. Factors that may cause actual results to differ
materially from those contemplated by such forward-looking statements include,
among others, the following: (a) the Company's ability to service its debt or to
obtain financing for the buildout of its telecommunications network; (b) the
Company's ability to attract and retain a sufficient revenue-generating customer
base; (c) competitive pressures in the telecommunications industry; and (d)
general economic conditions. For further information and other factors which
could affect the financial results of the Company and such forward-looking
statements, see "Risk Factors."
19
<PAGE>
RISK FACTORS
The New Notes offered hereby contain the same terms and conditions as the
Old Notes and, accordingly, involve a high degree of risk. Each prospective
investor should carefully consider the following risk factors relating to both
the Old Notes and the New Notes.
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 net
losses and negative EBITDA of approximately $15.9 million and $9.0 million,
respectively, for the ten months ended December 31, 1995, $83.7 million and
$49.6 million, respectively, for the year ended December 31, 1996 and $42.0
million and $29.4 million, respectively, for the three months ended March 31,
1997. The Company has been offering local access and other Carrier Services only
since December 1994, and local exchange services as a CLEC only since April
1996, and has made and is making significant expenditures in the development of
its local telecommunications operations, including expenditures associated with
establishing an operating infrastructure and introducing and marketing its
telecommunications services. The Company expects to continue to experience
significant and increasing operating losses, net losses and total and per share
amounts of net loss, along with decreasing net current assets, and to generate
increasingly negative EBITDA while it seeks to establish a sufficient
revenue-generating customer base and build its network infrastructure so that it
can provide services over its own facilities. As a result of increased expenses,
principally relating to an increase in the number of employees in connection
with the rollout of CLEC services and expenses relating to the servicing of
debt, there will continue to be substantial increases in the Company's net loss,
operating loss and negative EBITDA. There can be no assurance that the Company
will achieve or sustain positive EBITDA or profitability or at any time have
sufficient financial resources to make principal and interest payments on its
outstanding debt, including the Notes offered hereby.
SUBSTANTIAL INDEBTEDNESS; ABILITY TO SERVICE INDEBTEDNESS
The Company has significant indebtedness and interest expense. At March 31,
1997, the Company had, on a consolidated basis, approximately $619.2 million of
indebtedness, including capitalized lease obligations. The accrual of interest
on the 1997 Notes and the accretion of original issue discount on the 1995 Notes
will significantly increase the Company's liabilities (except to the extent that
the Convertible Notes are converted into the Company's common stock (the "Common
Stock")). Additionally, the Company may need to incur additional indebtedness in
the future. The indentures pursuant to which the 1995 Notes were issued (the
"1995 Indentures") and the 1997 Indentures limit, but do not prohibit, the
incurrence of additional indebtedness by the Company and its subsidiaries.
Additionally, the 1995 Indentures and the 1997 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 combined debt service requirements of the 1995
Notes and the 1997 Notes could make it more difficult for the Company to make
payments on the Notes; (ii) the ability of the Company to obtain any necessary
financing in the future for working capital, capital expenditures, debt service
requirements or other purposes may be limited; (iii) a substantial portion of
the Company's cash flow from operations, if any, must be dedicated to the
payment of principal and interest on its indebtedness and other obligations and
will not be available for use in the Company's business; (iv) the Company's
level of indebtedness could limit its flexibility in planning for, or reacting
to changes in, its business; (v) the Company is more highly leveraged than many
of its competitors, which may place it at a competitive disadvantage; and (vi)
the Company's high degree of indebtedness would make it more vulnerable in the
event of a downturn in its business or if operating cash flow does not
significantly increase.
HOLDING COMPANY STRUCTURE; RANKING OF THE NOTES; SECURED INDEBTEDNESS
The Company is a holding company and its only material assets consist of the
common stock of its operating subsidiaries and the proceeds raised from certain
private placements of equity and debt securities, all of which the Company has
loaned or contributed, or intends to loan or contribute, to its subsidiaries.
The Company may have to
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rely upon dividends and other payments from its subsidiaries to generate the
funds necessary to pay the principal of and interest on the 1995 Notes and
1997 Notes. The subsidiaries, however, are legally distinct from the Company
and have no obligation, contingent or otherwise, to pay amounts due pursuant
to the Notes (except for WinStar Equipment's obligation to pay the Equipment
Notes) or the Equipment Note Guarantee or to make funds available for such
payment. The Company's subsidiaries have not guaranteed the Old Notes and
will not guarantee the New Notes. The ability of the Company's subsidiaries
to make such dividends and other payments to the Company is subject to, among
other things, the availability of funds, the terms of such subsidiaries'
indebtedness and applicable state laws. See "Description of Certain
Indebtedness and Preferred Stock." Claims of creditors of the Company's
subsidiaries, including trade creditors, will generally have priority as to
the assets of such subsidiaries over the claims of the Company and the
holders of the Company's indebtedness, including the Senior Notes.
Accordingly, the New Senior Notes and the New Equipment Note Guarantee will
be effectively subordinated to all liabilities (including trade payables) of
the subsidiaries of the Company. At March 31, 1997, the subsidiaries of the
Company had approximately $258.8 million of liabilities (excluding
intercompany payables to the Company and each other), including $227.5
million of indebtedness (including the Equipment Notes). See "Description of
the Notes."
The New Senior Notes and the New Equipment Note Guarantee will be unsecured
indebtedness of the Company. At March 31, 1997, the Company had an aggregate of
approximately $619.2 million of indebtedness, including capitalized lease
obligations, approximately $227.6 million of which was secured by liens on
assets of the Company and/or its subsidiaries (including the Equipment Notes).
In the event such secured indebtedness goes into default and the holders thereof
foreclose on the collateral, the holders of secured indebtedness will be
entitled to payment out of the proceeds of their collateral prior to any holders
of general unsecured indebtedness, including the New Senior Notes and the New
Equipment Note Guarantee, notwithstanding the existence of any event of default
with respect to the New Senior Notes. The 1995 Indentures and 1997 Indentures
also permit the Company to incur additional secured indebtedness and to grant
additional liens. In the event of a bankruptcy, liquidation or reorganization of
the Company, holders of secured indebtedness will have a claim, prior to the
claim of the holders of the New Senior Notes, on the assets of the Company
securing such indebtedness. In addition, to the extent that the value of such
collateral is insufficient to satisfy such secured indebtedness, holders of
amounts remaining outstanding on such secured indebtedness (as well as other
unsubordinated creditors of the Company) are entitled to share PARI PASSU with
the 1995 Senior Notes and Senior Notes with respect to any other assets of the
Company. Assets remaining after satisfaction of the claims of holders of secured
indebtedness may not be sufficient to pay all or any portion of amounts due on
the Senior Notes then outstanding and the Equipment Note Guarantee. See
"Description of the Notes--Ranking."
LIMITED PURPOSE, ASSETS AND SOURCES OF REVENUES OF WINSTAR EQUIPMENT
WinStar Equipment was recently organized by the Company solely to
facilitate the financing and purchase of Designated Equipment. WinStar
Equipment's assets consist solely of a combination of the proceeds received
from the sale of the Old Equipment Notes, Designated Equipment and the
Leases. WinStar Equipment's only source of revenues will be payments due to
it pursuant to the terms of the Leases and, accordingly, the ability of
WinStar Equipment to make payments of principal and interest on the Equipment
Notes will be dependent on the ability of the lessees to make payments under
the Leases. Accordingly, there can be no assurance that WinStar Equipment
will be able to generate sufficient funds from its business to meet its
obligations to pay principal and interest on the New Equipment Notes, in
which event the Company would be obligated to make such payment in accordance
with the Equipment Note Guarantee.
RISKS REGARDING THE COLLATERAL
Although the Equipment Notes are secured by Designated Equipment acquired by
WinStar Equipment, the value of the collateral is expected to be substantially
less than the principal amount of the Equipment Notes. The Equipment Notes are
not secured by the proceeds from the issuance of the Equipment Notes, but only
by such Designated Equipment. As of June 30, 1997, WinStar Equipment has
accepted delivery of approximately $22.1 million of Designated Equipment, and
has placed orders for the purchase of approximately $17.5 million of additional
Designated Equipment. WinStar Equipment does not expect to use substantially all
the proceeds from the sale of the Equipment Notes until some time in late 1998
or early 1999. Until WinStar Equipment uses all such proceeds, the Equipment
Notes will not be secured by Designated Equipment having aggregate Acquisition
Costs equal to the
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principal amount of the Equipment Notes; and, in any event, the Acquisition
Costs of any such Designated Equipment may not represent the value that a
secured party would be able to receive upon enforcement of its security
interest in such Designated Equipment. Furthermore, it is likely that the
value of such Designated Equipment will decrease over time as such Designated
Equipment is deployed in the business and equipment manufacturers develop
improved products or similar products at reduced prices. Except for the
requirement to redeem Equipment Notes in an amount equal to the unused
proceeds from the issuance of the Equipment Notes, WinStar Equipment is not
required to reduce the outstanding amount of the Equipment Notes based on the
value of the collateral. Therefore, it is likely that, if the Equipment Notes
were in default and the Trustee attempted to foreclose on the collateral, the
value of the collateral would be substantially less than the amount of the
indebtedness under the Equipment Notes.
The security interest in Designated Equipment acquired by WinStar Equipment
will not arise until WinStar Equipment actually acquires such Designated
Equipment, which (except for the limited amount of equipment acquired
contemporaneously with the closing of the 1997 Debt Placement) will be
substantially after the issuance of the Equipment Notes. As a result, the
security interest arising in connection with the later acquired Designated
Equipment may be subject to challenge, in a bankruptcy or reorganization of
WinStar Equipment, as a preferential transfer insofar as such security interest
secures an antecedent debt. In such event, if WinStar Equipment became subject
to a bankruptcy or similar proceeding during the preference period (generally 90
days) following the acquisition of any Designated Equipment, the security
interest in such Designated Equipment could be set aside in such proceeding for
the benefit of other creditors (if any) of WinStar Equipment. See "Description
of the Notes."
FAILURE TO MAINTAIN PERFECTED SECURITY INTEREST
Under the Equipment Notes Indenture, WinStar Equipment is required to
secure the Equipment Notes by granting liens on the Designated Equipment.
WinStar Equipment has filed UCC-1 financing statements naming WinStar
Equipment as debtor and the Equipment Notes Trustee (as defined) as the
secured party acting as collateral agent for holders of Equipment Notes with
the Secretary of State or other appropriate office of each state in the
United States. WinStar Equipment will covenant to maintain the effectiveness
of such filings under the relevant provisions of the Uniform Commercial Code.
However, the liens will be perfected only to the extent that such filings are
sufficient to perfect liens on the Designated Equipment. Generally, filings
will not be made in local filing offices, in real estate records, with any
Federal office or agency or in respect of any certificate of title. Failure
to make additional filings or to maintain the contemplated filings may allow
other creditors of WinStar Equipment, if any, to obtain rights to the
Designated Equipment equal or superior to those of the holders of the
Equipment Notes. Owners or mortgagees of property on which items of
Designated Equipment are installed may also obtain such rights. This could
result in all or some of the value of the Designated Equipment acquired by
WinStar Equipment not being available to the holders of the Equipment Notes
to satisfy the outstanding indebtedness of the Equipment Notes in the event
of a default. Such failure could arise, among other reasons, because of the
failure to file continuation statements prior to the expiration of each
five-year period after the initial filing or because of the failure to make
the additional filings discussed above. Accordingly, investors should not
rely on the perfection of any specific lien in making an investment decision
to purchase Equipment Notes.
Need to Refinance Substantial Amount of Indebtedness to Repay Equipment
Notes at Maturity
The Equipment Notes mature in March 2004. If WinStar Equipment does not have
cash flow from operations with which to pay the Equipment Notes, the Company, as
guarantor, would be required to pay the Equipment Notes, and in the absence of
sufficient cash flows of its own, the Company would be forced to raise the cash
to pay the Equipment Notes through equity offerings or additional debt
financings. The Company's ability to raise additional debt financing to repay
the Equipment Notes is severely restricted under the terms of the 1995
Indentures, which may require the Company to refinance the Old Notes prior to or
simultaneously with any refinancing of the Equipment Notes. Accordingly, the
Company may be forced to refinance a substantial amount of other indebtedness in
order for the Equipment Notes to be paid when due. There can be no assurance
that the Company will be able to refinance any or all of such indebtedness at
such time.
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Risks Related to CLEC Strategy; Anticipated Initial Negative Operating
Margins in CLEC Business
The Company is pursuing an accelerated strategy to enter the local exchange
services market as a CLEC in the metropolitan areas in which it has Wireless
Licenses and to develop and obtain the facilities necessary to provide its own
switched local exchange services. The Company has limited 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 and implementation of resale
agreements with other local service providers; the negotiation and
implementation of interconnection agreements with RBOCs and other incumbent
LECs; the failure of LECs and RBOCs to honor the letter and spirit of
consummated interconnection agreements; the ability of third-party equipment
providers and installation and maintenance contractors to meet the Company's
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 through delivery of high-quality services; the potential
adverse reaction to the Company's services by the Company's carrier customers,
which may view the Company as a competitor; and the Company's ability to manage
the simultaneous implementation of its plan in multiple markets. In addition,
the Company is subject to the risk of unforeseen problems inherent in being a
new entrant in a rapidly evolving industry.
Historically, almost all of the Company's telecommunications revenues have
been derived from the resale of long distance services to residential customers.
As part of its CLEC strategy, the Company is marketing its long distance
services to small and medium-sized businesses and is no longer actively
marketing such services to residential customers. As a result, revenues from the
provision of long distance services to residential customers have begun and are
expected to continue to substantially decline through attrition of the Company's
long distance residential customer base.
Although the Company's initial implementation of its CLEC strategy entails
the resale of the facilities and services of other service providers, which
itself is dependent on the negotiation and implementation of satisfactory resale
arrangements, the Company's CLEC strategy will require significant capital
investment related to the purchase and installation of numerous switches and the
interconnection of these facilities to customers' buildings and LEC and CLEC
local networks, including the installation of Wireless Fiber links and the
buildout of other facility infrastructure, in advance of generating material
revenues.
As the Company rolls out its CLEC operations, it will experience 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; (ii) the Company has installed a
switch and a sufficient number of Wireless Fiber links so that a substantial
portion of the Company's traffic in that city can be originated and terminated
over the Company's Wireless Fiber facilities instead of LEC or other CLEC
facilities; and (iii) higher margin-enhanced services are sought by, provided to
and accepted by customers. While the Company believes that the unbundling and
resale of LEC services and the implementation of local telephone number
portability (which will permit customers to retain their telephone numbers when
switching carriers), which are mandated by the Telecommunications Act, will
reduce the Company's costs of providing local exchange services and facilitate
the marketing of such services, there can be no assurance that the Company's
CLEC operations will become profitable due to, among other factors, lack of
customer demand, competition from other CLECs and pricing pressure from the LECs
and other CLECs. The Company's failure to implement its CLEC strategy
successfully would have a material adverse effect on the operations of the
Company and the ability of the Company and its subsidiaries to make principal
and interest payments on their outstanding debt, including the Notes.
Negative Operating Margins in the Initial Provision of Wireless Fiber-Based
Carrier Services
The Company has experienced negative operating margins in connection with
the development and initial provision of its Wireless Fiber-based Carrier
Services and expects to continue to experience negative operating margins until
it develops a sufficient revenue-generating customer base for such services. In
order to demonstrate
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the efficacy of Wireless Fiber, the Company often provides complimentary
service on a trial basis for a limited period. The Company expects to improve
operating margins in the provision of its Carrier Services over time by: (i)
continuing to obtain appropriate Roof Rights; (ii) acquiring and retaining an
adequate customer base; (iii) placing telecommunications traffic of new
customers and additional telecommunications traffic of existing customers
across installed Wireless Fiber links; and (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. If the Company fails to
accomplish any of the foregoing, particularly acquiring and retaining an
adequate customer base, it will not be able to improve the operating margins
of its Carrier Services business. There can be no assurance that the Company
will be able to achieve or sustain positive operating margins. Failure to
achieve positive operating margins would have a material adverse effect on
the operations of the Company and the ability of the Company and its
subsidiaries to make principal and interest payments on their outstanding
debt, including the Notes.
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, including additional spectrum licenses, continued
marketing of its Carrier Services, and the hiring of additional management,
technical and marketing personnel, all of which will result in significantly
higher operating expenses. Rapid expansion of the Company's operations may
place a significant strain on the Company's management, financial and other
resources. The Company's ability to manage future growth, should it occur,
will depend upon its ability to monitor operations, control costs, maintain
effective quality controls and significantly expand the Company's internal
management, technical, information 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 business,
financial condition and results of operations of the Company and the ability
of the Company and its subsidiaries to make principal and interest payments
on their outstanding debt, including the Notes. As part of its strategy, the
Company may acquire complementary assets or businesses. The pursuit of
acquisition opportunities will place significant demands on the time and
attention of the Company's senior management and will involve considerable
financial and other costs with respect to identifying and investigating
acquisition candidates, negotiating acquisition agreements and integrating
the acquired businesses with the Company's existing operations. Employees and
customers of acquired businesses may sever their relationship with such
businesses during or after the acquisition. There can be no assurance that
the Company will be able to successfully consummate any acquisitions or
integrate any business or assets which it may acquire into its operations.
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. Further, sales of the Company's Carrier
Services are typically made to other telecommunications providers that compete
or may compete in the future with the Company.
LOCAL TELECOMMUNICATIONS MARKET. The local telecommunications market is
intensely competitive for new entrants and currently is dominated by the RBOCs
and other LECs. The 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. In addition to
competition from the LECs, the Company also faces competition from a growing
number of new market entrants, such as other CLECs and CAPs. 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 IXCs. 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. The Company currently also faces or anticipates facing competition
from other entities which offer, or are licensed to offer, 38 GHz services 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 (including 2 GHz, 18 GHz, 24 GHz, 28 GHz and 47 GHz, among
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others). The initial perceived success of the Company's business is also likely
to encourage increased competition from other spectrum users. The Company's
Internet services also face significant competition from, among others, cable
television operators deploying cable modems that provide high-speed data
transmission over existing coaxial cable television networks. As competition
increases in the local telecommunications market, the Company anticipates that
general pricing competition and pressures will increase significantly. The
Company has not obtained significant market share in any of the areas where it
offers its services, nor does it expect to do so given the size of the local
telecommunications services market, the intense competition therein and the
diversity of customer requirements. There can be no assurance that the Company
will be able to compete effectively in any of its markets.
LONG DISTANCE MARKET. The long distance market has relatively
insignificant barriers to entry, numerous entities competing for the same
customers and a high (and increasing) average churn rate as customers
frequently change long distance providers in response to the offering of
lower rates or promotional incentives by competitors. The Company competes
for long distance customers with major IXCs, 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 and CLECs also will
become significant competitors in the long distance telecommunications
industry. 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 competitors. 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.
NEW MEDIA BUSINESS. The industry in which the Company's new media
subsidiary competes consists of a very large number of entities producing,
owning or controlling news, sports, entertainment, educational and informational
content and services, including telecommunications companies, television
broadcast companies, sports franchises, film and television studios, record
companies, newspaper and magazine publishing companies, universities and on-line
computer services. Competition is intense for timely and highly marketable or
usable information and entertainment content. Almost all of the entities with
which the Company's new media subsidiary competes have significantly greater
presence in the various media markets and greater resources than the Company,
including existing content libraries, financial resources, personnel and
existing distribution channels. There can be no assurance that the Company will
be able to compete successfully in the emerging new media industry.
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 substantially increased the
Company's capital expenditure requirements. Management anticipates, based on
current plans and assumptions relating to its operations, that the Company's
existing financial resources and additional equipment financing arrangements
which the Company intends to seek, will be sufficient to fund the Company's
growth and operations for approximately 24 to 30 months from the date of this
Prospectus. In order to provide additional future liquidity to the Company, the
Company obtained a $150 million facility from affiliates of the Initial
Purchasers in March 1997. The Company continues to have available $100 million
of such facility (the issuance in August 1997 by WinStar Equipment II Corp., a
wholly owned subsidiary of the Company, of certain notes having reduced
availability by $50 million), which subject to the Company satisfying various
operating and financial criteria, may be drawn by the Company on March 31, 1999.
The amount of the commitment may be further reduced in certain circumstances,
including as a result of the issuance of additional securities by the Company
prior to March 31, 1999.
In the event the Company's plans or assumptions change or prove to be
inaccurate, or if the Company consummates any acquisitions of businesses or
assets (including additional spectrum licenses, by auction or otherwise), or if
the Company fails to secure additional equipment financing arrangements, 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 financing, sales of nonstrategic assets and other
financing arrangements.
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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
ability of the Company and its subsidiaries to make principal and interest
payments on their outstanding debt, including the Notes.
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 jurisdiction over the
provision of telecommunications services to the extent such services involve
the provision of jurisdictionally intrastate telecommunications in certain
instances, and retain exclusive jurisdiction with respect to the pricing of
unbundled elements.
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 long
distance services between local access transport areas ("LATAs"). Additionally,
the FCC is required to 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.
As required by the Telecommunications Act, the FCC adopted, in August 1996,
new rules implementing the interconnection and resale provisions of the
Telecommunications Act (the "Interconnection Order"). These rules generally
constitute a pro-competitive 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. In
July 1997, the United States Court of Appeals for the Eighth Circuit invalidated
certain provisions of the Interconnection Order, including those provisions in
which the FCC asserted jurisdiction over the pricing of interconnection elements
and the "pick and choose" provisions for select provisions of other carriers'
interconnection agreements. As has been the case since the Interconnection Order
was stayed by the Court in October 1996, many states continue to set the prices
for interconnection, resale and unbundled network elements in a similar manner
as proposed by the FCC in the Interconnection Order. The FCC has indicated its
intention to appeal the Eighth Circuit's ruling to the United States Supreme
Court. The Company believes that the Eighth Circuit's ruling will not adversely
affect its CLEC operations and may, in certain instances, positively affect the
operations of its Carrier Services business, although there can be no assurance
of this. In addition, pursuant to the Telecommunications Act, the FCC recently
promulgated regulations to implement universal service reform to provide support
for the provision of ubiquitous national telephone service as well as the
provision of telecommunications services to schools (kindergarten through 12th
grade) and to effect access charge reform to more explicitly align the access
charges required to be paid by the long distance carriers to incumbent LECs to
the actual cost of providing such services. Appeals from these orders have been
filed by a number of parties and these appeals have been consolidated in the
Fifth and Eighth Circuits, respectively. In light of the continued litigation
challenging the Telecommunications Act and the FCC's rules thereunder, and other
factors, the Company is unable to predict with specificity what effect the
Telecommunications Act or recently promulgated FCC regulations 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
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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.
Additionally, providers of telecommunications services, including the major
IXCs, RBOCs, CLECs and others, are coming under intensified scrutiny for
activities by them or their agents which may result in unauthorized switching of
customers from one service provider to another or, in other instances, cause
unfair impediment to customers wishing to switch providers. The FCC and a number
of state authorities are seeking to introduce more stringent regulation 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 effects,
if any, of the adoption of any such regulations would have on the
telecommunications industry and the business practices therein cannot be
predicted. 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 it
offers.
Finite Initial Term of Wireless Licenses; Potential License Renewal Costs;
Fluctuations in the Value of Wireless Licenses; Transfer of Control
The FCC's current policy is to align the expiration dates of all 38 GHz
licenses such that they mature concurrently and, upon expiration, 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 a notice of proposed rulemaking ("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 or other changes on the use of spectrums. The FCC's failure to renew,
or its imposition of significant charges for renewal or use of, one or more
Wireless Licenses could have a material adverse effect on the Company and the
ability of the Company and its subsidiaries to make principal and interest
payments on their outstanding debt, including the Notes.
The Wireless Licenses are integral assets 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 qualifications of the transferee and
requires prior FCC approval (and in some instances state regulatory approval as
it relates to the provision of telecommunications services in that state),
thereby possibly diminishing the value of the Wireless Licenses.
The Company has entered into agreements to acquire a number of additional 38
GHz licenses. 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 the legal and financial
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.
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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 or unlicensed spectrum. 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 operations of the Company and the ability of the Company
and its subsidiaries to make principal and interest payments on their
outstanding debt, including the Notes.
CERTAIN FINANCIAL AND OPERATING RESTRICTIONS
The 1997 Indentures and the 1995 Indentures impose significant operating and
financial restrictions on the Company, affecting, and in certain cases limiting,
among other activities, the ability of the Company to incur additional
indebtedness or create liens on its assets, pay dividends, sell assets, engage
in mergers or acquisitions or make investments. Failure to comply with any such
restrictions could limit the availability of borrowings or result in a default
under the terms of any such indebtedness, and there can be no assurance that the
Company will be able to comply with such restrictions. Moreover, these
restrictions could limit the Company's ability to engage in certain business
transactions which the Company may desire to consummate. The Company's inability
to consummate any such transaction could have an adverse effect on the Company's
operations and the ability of the Company and its subsidiaries to make principal
and interest payments on their outstanding debt, including the Notes.
Original Issue Discount; Possible Unfavorable Tax and Other Legal
Consequences for Holders of Senior Notes and the Company
As there will be no periodic payments in cash of interest on the Senior
Notes prior to April 2001, original issue discount (the difference between the
stated redemption price at maturity and the issue price of the Senior Notes)
will accrue from the issue date of the Senior Notes. Original issue discount
must be included as interest income periodically in a United States noteholder's
gross income for United States federal income tax purposes in advance of receipt
of the cash payments to which the income is attributable. See "Certain United
States Federal Income Tax Considerations" for a more detailed discussion of the
United States federal income tax consequences to holders of Senior Notes
regarding the purchase, ownership and disposition of such Notes.
Further, the Senior Notes will be subject to the high yield discount
obligation rules. Consequently, the Company will not be able to deduct the
original issue discount attributable to the Senior Notes until actually paid.
As explained in, and subject to, the discussion under "Certain United States
Federal Income Tax Consequences--Tax Consequences to U.S. Holders--Applicable
High Yield Discount Rules," the Senior Notes will be subject to these rules
because their yield to maturity equals or exceeds the Treasury-based interest
rate in effect for the month of their issuance plus five percentage points.
For mid-term debt instruments issued in March 1997, such Treasury-based
interest rate plus five percentage points is 11.32%, compounded semiannually.
Moreover, because the yield to maturity of the Senior Notes exceeds a
Treasury-based interest rate in effect for the month of their issuance plus
six percentage points, a portion of the original issue discount attributable
to the Senior Notes will not be deductible at all. For mid-term debt
instruments issued in March 1997, such Treasury-based interest rate plus six
percentage points is 12.32%, compounded semiannually. As a result of the
application of these high yield discount rules, the Company's after tax cash
flow might be less than if such original issue discount were deductible when
accrued.
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Dependence on Third Parties for Service and Marketing; Possible Service
Interruptions and Equipment Failures
The Company's long distance resale business is dependent on utilizing the
facilities of major IXCs 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 an agreement with MCI that provide it with access to such
carrier's 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 could require the Company to
significantly curtail or cease its operations and could have an adverse effect
on the ability of the Company and its subsidiaries to make principal and
interest payments on their outstanding debt, including the Notes. See
"Description of Certain Indebtedness and Preferred Stock." 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 and
quality. 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.
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 other telecommunications providers
that 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 and its ability to service its customers. The Company has
approached a number of major telecommunications service providers to solicit
interest in entering into a multi-year, multi-region network transaction in
which the Company would build and maintain a co-exclusive network utilizing
Wireless Fiber for providing access to their customer base. Although there can
be no assurance that such a transaction will be entered into, the Company
believes that such a transaction would be attractive to a number of these
provides and is in various stages of discussions with them.
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, as no industry
standard or uniform protocol currently exists for 38 GHz equipment, a single
manufacturer's equipment must be used in establishing each wireless link.
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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 up to 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 the quality or reliability of Wireless Fiber services. The
establishment of Wireless Fiber services may require additional transceivers to
triangulate around obstacles (such as buildings). Similarly, to establish
Wireless Fiber services covering a distance in excess of five miles, additional
transceivers are required to establish a chain with links no more than five
miles apart or to establish a system of interconnected hub sites. The cost of
additional transceivers where required by weather, physical obstacles or
distance may render Wireless Fiber uneconomical in certain instances. The
Company must obtain Roof Rights (or rights to access other locations where lines
of sight are available) in each building where a transceiver will be placed. The
Company seeks to prequalify and obtain Roof Rights at buildings targeted by
potential customers in its licensed areas in advance of anticipated orders.
There can be no assurance, however, that the Company will be successful in
obtaining Roof Rights necessary to establish its Wireless Fiber services in its
potential markets. The Company's prequalification activities often require the
payment of option fees to the owners of buildings that are being prequalified.
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.
UNCERTAINTY OF MARKET ACCEPTANCE OF WIRELESS FIBER SERVICES
The Company has been marketing its Wireless Fiber services since December
1994. The Company has not obtained a significant market share in any of the
licensed areas where it offers Wireless Fiber services. The provision of
wireless local telecommunications services over 38 GHz represents an emerging
sector of the telecommunications industry and the demand for and acceptance
of Wireless Fiber services are subject to a high level of uncertainty.
Despite the Company's initial success in attracting customers, there can be
no assurance that substantial markets will develop for wireless local
telecommunications services delivered over 38 GHz or that, even if such
markets develop, the Company will be able to succeed in positioning itself as
a provider of such services or provide such services profitably. The
Company's success in providing wireless broadband services is subject to a
number of factors beyond the Company's control. These factors include,
without limitation, historical perceptions of the unreliability and lack of
security of previous microwave radio technologies, changes in general and
local economic conditions, availability of equipment, changes in
telecommunications service rates charged by other service providers, changes
in the supply and demand for wireless broadband services, competition from
wireline and wireless operators in the same market area and 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 target markets 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 ability of the Company and its subsidiaries
to make principal and interest payments on their outstanding debt, including
the Notes.
RELIANCE ON KEY PERSONNEL
The efforts of a relatively 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. Accordingly,
there can be no assurance that the Company will be able to hire or retain
necessary personnel.
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LACK OF PUBLIC MARKET FOR SECURITIES
There is no public market and only a limited secondary market for the Notes.
The Old Notes are and the New Notes will be designated eligible for trading in
The Private Offerings, Resales and Trading through Automated Linkages (PORTAL)
Market of The Nasdaq Stock Market, Inc. Notes traded after their initial
issuance may trade at a discount from their initial offering price, depending
upon prevailing interest rates, the market for similar securities and other
factors, including general economic conditions and the financial condition of,
performance of, and prospects for the Company.
INVESTMENT COMPANY ACT CONSIDERATIONS
After giving effect to the Offering, the Company will have substantial cash,
cash equivalents and short-term investments. See "Capitalization." Such amount
may be invested from time to time in investment securities, which may result in
the Company being treated as an "investment company" under the Investment
Company Act of 1940 (the "1940 Act"). The 1940 Act requires the registration of,
and imposes various substantive restrictions on, certain companies ("investment
companies") that are, or hold themselves out as being, engaged primarily, or
propose to engage primarily in, the business of investing, reinvesting or
trading in securities, or that fail certain statistical tests regarding
composition of assets and sources of income and are not primarily engaged in
businesses other than investing, reinvesting, owning, holding or trading
securities.
The Company believes that it is primarily engaged in a business other than
investing, reinvesting, owning, holding or trading securities and, therefore, is
not an investment company within the meaning of the 1940 Act. If the Company is
found to be an investment company, the Company intends to rely upon an exemption
from the 1940 Act for certain "transient" or temporary investment companies.
However, such exemption is only available for one year.
If the Company were required to register as an investment company under the
1940 Act, it would become subject to substantial regulation with respect to its
capital structure, management, operations, transactions with affiliated persons
(as defined in the 1940 Act) and other matters. Application of the provisions of
the 1940 Act to the Company would have a material adverse effect on the Company.
In addition, if the Company is an investment company under the 1940 Act, the
Notes will not be eligible to be resold in reliance on Rule 144A under the
Securities Act and certain holders of the Notes may not be able to own the
Notes. In such event, the market price of the Notes may be adversely affected.
CONSEQUENCES OF THE EXCHANGE OFFER ON NON-TENDERING HOLDERS OF THE OLD NOTES
In the event the Exchange Offer is consummated, the Company may not be
required to register certain of the Old Notes not tendered and accepted in
the Exchange Offer. In such event, holders of certain of the Old Notes
seeking liquidity in their investment would have to rely on exemptions to the
registration requirements under the securities laws, including the Securities
Act. Following the consummation of the Exchange Offer, certain of the Old
Notes may not be entitled to the contingent increase in interest rate
provided for in the event of a failure to consummate the Exchange Offer in
accordance with the terms of the Registration Agreement.
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THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
The Old Notes were sold by the Issuers in the 1997 Debt Placement to the
Initial Purchasers who, in turn, sold such Old Notes to certain qualified
institutional buyers in reliance on Rule 144A under the Securities Act. In
connection with the 1997 Debt Placement, the Company and WinStar Equipment
entered into the Registration Agreement, pursuant to which each of the Company
and WinStar Equipment agreed to use its best efforts to consummate this Exchange
Offer of the Old Notes for the New Notes pursuant to an effective registration
statement by September 15, 1997. Unless the context requires otherwise, the term
"holder" with respect to the Exchange Offer means any person in whose name Old
Notes are registered on the books of the Company, or any other person who has
obtained a properly completed bond power from the registered holder, or any
person whose Old Notes are held of record by DTC (who may deliver such Old Notes
by book-entry transfer at DTC).
The Company has not requested, and does not intend to request, an
interpretation by the staff of the Commission with respect to whether the New
Notes issued pursuant to the Exchange Offer in exchange for the Old Notes may be
offered for sale, resold or otherwise transferred by any holder without
compliance with the registration and prospectus delivery provisions of the
Securities Act. Based on interpretations by the staff of the Commission set
forth in no-action letters issued to third parties, the Company believes that
New Notes issued pursuant to the Exchange Offer in exchange for Old Notes may be
offered for resale, resold and otherwise transferred by any holder of such New
Notes (except in the case of broker-dealers, as set forth below) without
compliance with the registration and prospectus delivery provisions of the
Securities Act, provided that such New Notes are acquired in the ordinary course
of such holder's business and such holder has no arrangement or understanding
with any person to participate in the distribution of such New Notes. Any holder
who tenders in the Exchange Offer for the purpose of participating in a
distribution of the New Notes may not rely on such interpretation by the staff
of the Commission and must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any secondary resale
transaction. Each broker-dealer that receives New Notes for its own account in
exchange for Old Notes, where such Old Notes were acquired by such broker-dealer
as a result of market-making activities or other trading activities, must
acknowledge that it will deliver a prospectus in connection with any resale of
such New Notes. See "Plan of Distribution."
By tendering in the Exchange Offer, each holder of Old Notes will represent
to the Company and WinStar Equipment, as the case may be, that, among other
things, (i) the New Notes acquired pursuant to the Exchange Offer are being
obtained in the ordinary course of business of the person receiving such New
Notes, whether or not such person is such holder, (ii) neither the holder of Old
Notes nor any such other person has an arrangement or understanding with any
person to participate in the distribution of such New Notes, and (iii) if the
holder is not a broker-dealer, or is a broker-dealer but will not receive New
Notes for its own account in exchange for Old Notes. Neither the holder nor any
such other person is engaged in or intends to participate in the distribution of
such New Notes.
Following the consummation of the Exchange Offer, holders of Old Notes not
tendered will no longer have certain registration rights and the Old Notes will
continue to be subject to certain restrictions on transfer. Accordingly, the
liquidity of the market for the Old Notes could be adversely affected.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, the Company and WinStar Equipment will accept
any and all Old Notes validly tendered and not withdrawn prior to 5:00 p.m., New
York City time, on the Expiration Date. Subject to the minimum denomination
requirements of the New Notes, the Company will issue $1,000 principal amount of
New Senior Notes in exchange for each $1,000 principal amount of outstanding Old
Senior Notes and WinStar Equipment will issue $1,000 principal amount of New
Equipment Notes in exchange for each $1,000 principal amount of outstanding Old
Equipment Notes accepted in the Exchange Offer. Holders may tender some or all
of their Old Notes pursuant to the Exchange Offer. However, Old Notes may be
tendered only in integral multiples of $1,000 principal amount.
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The forms and terms of the New Notes will be identical in all material
respects to the forms and terms of the corresponding Old Notes, except that the
New Notes will have been registered under the Securities Act and, therefore,
will not bear legends restricting the transfer thereof. The Exchange Offer is
not conditioned upon any minimum aggregate principal amount at maturity of Old
Notes being tendered for exchange. DTC is the sole registered holder of the Old
Notes, and holds such notes on behalf of numerous participants. This Prospectus,
together with the Letter of Transmittal, is being sent to all such registered
holders as of August 8, 1997.
Holders of Old Notes do not have any appraisal or dissenters rights under
the 1997 Indentures in connection with the Exchange Offer. Each of the Company
and WinStar Equipment intends to conduct the Exchange Offer in accordance with
the applicable requirements of the Exchange Act and the applicable rules and
regulations of the Commission thereunder.
Each of the Company and WinStar Equipment, as the case may be, shall be
deemed to have accepted validly tendered Old Notes when, as and if it has given
oral or written notice thereof to the Exchange Agent. The Exchange Agent will
act as agent for the tendering holders for the purpose of receiving the New
Notes from each of the Company and WinStar Equipment. If any tendered Old Notes
are not accepted for exchange, such unaccepted Old Notes will be returned,
without expense, to the tendering holder thereof as promptly as practicable
after the Expiration Date.
Holders who tender Old Notes in the Exchange Offer will not be required to
pay brokerage commissions or fees or, subject to the instructions in the Letter
of Transmittal, transfer taxes with respect to the exchange of Old Notes
pursuant to the Exchange Offer. The Company will pay all charges and expenses,
other than certain applicable taxes, in connection with the Exchange Offer. See
" -- Fees and Expenses."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean 5:00 p.m., New York City time, on
September 12, 1997, unless the Company in its sole discretion extends the
Exchange Offer, in which case the term "Expiration Date" shall mean the latest
date and time to which the Exchange Offer is extended. Although the Company has
no current intention to extend the Exchange Offer, the Company reserves the
right to extend the Exchange Offer at any time and from time to time by giving
oral or written notice to the Exchange Agent and by timely public announcement
communicated, unless otherwise required by applicable law or regulation, by
making a release to the Dow Jones News Service. During any extension of the
Exchange Offer, all Old Notes previously tendered pursuant to the Exchange Offer
and not withdrawn will remain subject to the Exchange Offer. The date of the
exchange of the New Notes for Old Notes will be the first New York Stock
Exchange trading day following the Expiration Date.
Each of the Company and WinStar Equipment, as the case may be, expressly
reserves the right to (i) terminate the Exchange Offer and not accept for
exchange any Old Notes if any of the events set forth below under "
- --Conditions to the Exchange Offer" shall have occurred and shall not have
been waived by the Issuers and (ii) amend the terms of the Exchange Offer in
any manner which, in its good faith judgment, is advantageous to the holders
of the Old Notes, whether before or after any tender of the Old Notes.
PROCEDURES FOR TENDERING
The tender to the Company or WinStar Equipment, as the case may be, of Old
Notes by a holder thereof pursuant to one of the procedures set forth below will
constitute an agreement between such holder and the Company and/or WinStar
Equipment, as the case may be, in accordance with the terms and subject to the
conditions set forth herein and in the Letter of Transmittal signed by such
holder. A holder of the Old Notes may tender such Old Notes by (i) properly
completing and signing a Letter of Transmittal or a facsimile thereof (all
references in this Prospectus to a Letter of Transmittal shall be deemed to
include a facsimile thereof) and delivering the same, together with any
corresponding certificate or certificates representing the Old Notes being
tendered (if in certificated form) and any required signature guarantees, to the
Exchange Agent at its address set forth in the Letter of Transmittal on or prior
to the Expiration Date (or complying with the procedure for book-entry transfer
described below) or (ii) complying with the guaranteed delivery procedures
described below.
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If tendered Old Notes are registered in the name of the signer of the Letter
of Transmittal and the New Notes to be issued in exchange therefor are to be
issued (and any untendered Old Notes are to be reissued) in the name of the
registered holder (which term, for the purposes described herein, shall include
any participant in DTC whose name appears on a security listing as the owner Of
Old Notes), the signature of such signer need not be guaranteed. In any other
case, the tendered Old Notes must be endorsed or accompanied by written
instruments of transfer in form satisfactory to the Company and duly executed by
the registered holder and the signature on the endorsement or instrument of
transfer must be guaranteed by a member firm of a registered national securities
exchange or of the National Association of Securities Dealers, Inc., a
commercial bank or trust company having an office or correspondent in the United
States or an "eligible guarantor institution" as defined by Rule 17Ad-15 under
the Exchange Act (any of the foregoing hereinafter referred to as an "Eligible
Institution"). If the New Notes and/or Old Notes not exchanged are to be
delivered to an address other than that of the registered holder appearing on
the register for the Old Notes, the signature in the Letter of Transmittal must
be guaranteed by an Eligible Institution.
THE METHOD OF DELIVERY OF OLD NOTES, LETTER OF TRANSMITTAL AND ALL OTHER
DOCUMENTS IS AT THE ELECTION AND RISK OF THE HOLDER. IF SUCH DELIVERY IS BY
MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL, PROPERLY INSURED, WITH RETURN
RECEIPT REQUESTED, BE USED. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO
ASSURE TIMELY DELIVERY. NO LETTER OF TRANSMITTAL OR OLD NOTES SHOULD BE SENT TO
THE COMPANY OR WINSTAR EQUIPMENT.
The Issuers understand that the Exchange Agent will make a request promptly
after the date of this Prospectus to establish accounts with respect to the Old
Notes at DTC for the purpose of facilitating the Exchange Offer, and subject to
the establishment thereof, any financial institution that is a participant in
DTC's system may make book-entry delivery of Old Notes by causing DTC to
transfer such Old Notes into the Exchange Agent's account with respect to the
Old Notes in accordance with DTC's procedure for such transfer. Although
delivery of the Old Notes may be effected through book-entry transfer into the
Exchange Agent's account at DTC, an appropriate Letter of Transmittal with any
required signature guarantee and all other required documents must in each case
be transmitted to and received or confirmed by the Exchange Agent at the address
set forth in the Letter of Transmittal on or prior to the Expiration Date, or,
if the guaranteed delivery procedures described below are complied with, within
the time period provided under such procedures.
If the holder desires to accept the Exchange Offer and time will not permit
a Letter of Transmittal or Old Notes to reach the Exchange Agent before the
Expiration Date or the procedure for book-entry transfer cannot be completed on
a timely basis, a tender may be effected if the Exchange Agent has received at
its office, on or prior to the Expiration Date, a letter, telegram or facsimile
transmission from an Eligible Institution setting forth the name and address of
the tendering holder, the name(s) in which the Old Notes are registered and the
certificate number(s) of the Old Notes to be tendered, and stating that the
tender is being made thereby and guaranteeing that, within three New York Stock
Exchange trading days after the date of execution of such letter, telegram or
facsimile transmission by the Eligible Institution, such Old Notes, in proper
form for transfer (or a confirmation of book-entry transfer of such Old Notes
into the Exchange Agent's account at DTC), will be delivered by such Eligible
Institution together with a properly completed and duly executed Letter of
Transmittal (and any other required documents). Unless Old Notes being tendered
by the above-described method are deposited with the Exchange Agent within the
time period set forth above (accompanied or preceded by a properly completed
Letter of Transmittal and any other required documents), each of the Issuers
may, at its option, reject the tender. Copies of a Notice of Guaranteed Delivery
which may be used by Eligible Institutions for the purposes described in this
paragraph are available from the Exchange Agent.
A tender will be deemed to have been received as of the date when (i) the
tendering holder's properly completed and duly signed Letter of Transmittal
accompanied by the Old Notes (or a confirmation of book-entry transfer of such
Old Notes into the Exchange Agent's account at DTC) is received by the Exchange
Agent or (ii) a Notice of Guaranteed Delivery or letter, telegram or facsimile
transmission to similar effect (as provided above) from an Eligible Institution
is received by the Exchange Agent. Issuances of New Notes in exchange for Old
Notes tendered pursuant to a Notice of Guaranteed Delivery or letter, telegram
or facsimile transmission to similar effect (as provided above) by an Eligible
Institution will be made only against submission of a duly signed Letter of
Transmittal (and any other required documents) and deposit of the tendered Old
Notes.
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<PAGE>
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance for exchange of any tender of Old Notes will be
determined by the Issuers, whose determination will be final and binding. The
Issuers reserve the absolute right to reject any or all tenders not in proper
form or the acceptance for exchange of which may, in the opinion of Issuers'
counsel, be unlawful. The Issuers also reserve the absolute right to waive any
of the conditions of the Exchange Offer or any defect or irregularity in the
tender of any Old Notes. None of the Company, WinStar Equipment, the Exchange
Agent or any other person will be under any duty to give notification of any
defects or irregularities in tenders or incur any liability for failure to give
any such notification. If any Old Notes received by the Exchange Agent are not
validly tendered and as to which the defects or irregularities have not been
cured or waived, or if Old Notes are submitted in a principal amount greater
than the principal amount of Old Notes being tendered by such tendering holder,
such unaccepted or non-exchanged Old Notes will be returned by the Exchange
Agent to the tendering holders, unless otherwise provided in the Letter of
Transmittal, as soon as practicable following the Expiration Date.
In addition, each of the Company and WinStar Equipment reserves the right in
its sole discretion, to the extent permitted by the Senior Notes Indenture and
Equipment Note Indenture, as the case may be, to (a) purchase or make offers for
any Old Notes that remain outstanding subsequent to the Expiration Date and (b)
to the extent pertained by applicable law, purchase Old Notes in the open
market, in privately negotiated transactions or otherwise. The terms of any such
purchases or offers will differ from the terms of the Exchange Offer.
TERMS AND CONDITIONS OF THE LETTER OF TRANSMITTAL
The Letter of Transmittal contains, among other things, the following terms
and conditions, which are part of the Exchange Offer.
The party tendering Old Notes for exchange ("Transferor") exchanges, assigns
and transfers the Old Notes to the Company and WinStar Equipment, as the case
may be, and irrevocably constitutes and appoints the Exchange Agent as the
Transferor's agent and attorney-in-fact to cause the Old Notes to be assigned,
transferred and exchanged. The Transferor represents and warrants that it has
full power and authority to tender, exchange, assign and transfer the Old Notes
and to acquire New Notes issuable upon the exchange of such tendered Old Notes,
and that, when the same are accepted for exchange, the Company and WinStar
Equipment, as the case may be, will acquire good and unencumbered title to the
tendered Old Notes, free and clear of all liens, restrictions, charges and
encumbrances and not subject to any adverse claim. The Transferor also warrants
that it will, upon request, execute and deliver any additional documents deemed
by the Issuers to be necessary or desirable to complete the exchange, assignment
and transfer of tendered Old Notes or transfer ownership of such Old Notes on
the account books maintained by DTC. All authority conferred by the Transferor
will survive the death, bankruptcy or incapacity of the Transferor and every
obligation of the Transferor shall be binding upon the heirs, legal
representatives, successors, assigns, executors and administrators of such
Transferor.
By executing a Letter of Transmittal, each holder will make to the Company
and WinStar Equipment, as the case may be, the representations set forth above
in the third paragraph under the heading " -- Purpose and Effect of the Exchange
Offer."
WITHDRAWAL OF TENDERS
Tenders of Old Notes pursuant to the Exchange Offer are irrevocable, except
that Old Notes tendered pursuant to the Exchange Offer may be withdrawn at any
time prior to 5:00 p.m., New York City time, on the Expiration Date.
To be effective, a written, telegraphic, or facsimile transmission notice of
withdrawal must be timely received by the Exchange Agent at the address set
forth in the Letter of Transmittal prior to 5:00 p.m., New York City time on the
Expiration Date. Any such notice of withdrawal must specify the holder named in
the Letter of Transmittal as having tendered Old Notes to be withdrawn, the
certificate numbers and designation of Old Notes to be withdrawn, the principal
amount of Old Notes delivered for exchange, a statement that such holder is
withdrawing his election to have such Old Notes exchanged, and the name of the
registered holder of such Old Notes, and must be signed by the holder in the
same manner as the original signature on the Letter of Transmittal (including
any
35
<PAGE>
required signature guarantees) or be accompanied by evidence satisfactory to
the Company and WinStar Equipment, as the case may be, that the person
withdrawing the tender has succeeded to the beneficial ownership of the Old
Notes being withdrawn. The Exchange Agent will return the properly withdrawn
Old Notes promptly following receipt of notice of withdrawal. If Old Notes
have been tendered pursuant to the procedure for book-entry transfer, any
notice of withdrawal must specify the name and number of the account at DTC
to be credited with the withdrawn Old Notes or otherwise comply with DTC
procedure. All questions as to the validity of notices of withdrawal,
including time of receipt, will be determined by the Issuers and such
determination will be final and binding on all parties.
CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provision of the Exchange Offer, or any extension
of the Exchange Offer, the Issuers will not be required to issue New Notes in
exchange for any properly tendered Old Notes not theretofore accepted and may
terminate the Exchange Offer, or, at their option, modify or otherwise amend the
Exchange Offer, if either of the following events occur:
(a) any statute, rule or regulation shall have been enacted, or any
action shall have been taken by any court or governmental authority which,
in the sole judgment of the Company, would prohibit, restrict or otherwise
render illegal the consummation of the Exchange Offer, or
(b) there shall occur a change in the current interpretation by the
staff of the Commission which, in the Company's sole judgment, might
materially impair the Company's or WinStar Equipment's ability to proceed
with the Exchange Offer.
Each of the Company and WinStar Equipment expressly reserves the right to
terminate the Exchange Offer and not accept for exchange any Old Notes upon the
occurrence of either of the foregoing conditions (which represent all of the
material conditions to the acceptance by the Company and WinStar Equipment, as
the case may be, of properly tendered Old Notes).
The foregoing conditions are for the sole benefit of the Issuers and may be
waived by the Issuers if it is legally permitted to do so, in whole or in part,
in its sole discretion. The foregoing conditions must be either satisfied or
waived prior to termination of the Exchange Offer. Any determination made by the
Issuers concerning an event, development or circumstance described or referred
to above will be final and binding on all parties.
EXCHANGE AGENT
U.S. Trust has been appointed as Exchange Agent for the Exchange Offer.
Questions and requests for assistance, requests for additional copies of this
Prospectus or of the Letter of Transmittal and requests for Notices of
Guaranteed Delivery should be directed to the Exchange Agent addressed as
follows:
By Mail (registered or certified mail recommended):
United States Trust Company of New York
P.O. Box 844
Cooper Station
New York, New York 10276-0844
By Overnight Courier:
United States Trust Company of New York
770 Broadway--13th Floor
Corporate Trust Operations Department
New York, New York 10003
Attn: Corporate Trust Operations Department
36
<PAGE>
By Hand Delivery:
United States Trust Company of New York
111 Broadway, Lower Level
New York, New York 10006
Attn: Corporate Trust Services
By Facsimile (for Eligible Institutions only):
(212) 420-6152
Confirm by telephone (800) 548-6565
FEES AND EXPENSES
The expense of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitations
may be made by telegraph, telephone or in person by officers and regular
employees of the Company and its affiliates. No additional compensation will be
paid to any such officers and employees who engage in soliciting tenders.
The Issuers have not retained any dealer-manager or other soliciting agent
in connection with the Exchange Offer and will not make any payments to brokers,
dealers or others soliciting acceptances of the Exchange Offer. The Company,
however, will pay the Exchange Agent reasonable and customary fees for its
services and will reimburse it for its reasonable out-of-pocket expenses in
connection therewith. The Company may also pay brokerage houses and other
custodians, nominees and fiduciaries the reasonable out-of-pocket expenses
incurred by them in forwarding copies of this Prospectus, the Letter of
Transmittal and related documents to the beneficial owners of the Old Notes and
in handling or forwarding tenders for exchange.
The expenses to be incurred by the Company in connection with the Exchange
Offer, including fees and expenses of the Exchange Agent and Trustee and
accounting and legal fees, will be paid by the Company. The Company will not,
however, pay the costs incurred by a holder in delivering its Old Notes to the
Exchange Agent, underwriting fees, or Commissions or transfer taxes.
ACCOUNTING TREATMENT
The New Notes will be recorded at the same carrying value as the Old
Notes as reflected in the Company's accounting records on the date of the
exchange because the exchange of the Old Notes for the New Notes is the
completion of the selling process contemplated in the issuance of the Old
Notes. Accordingly, no gain or loss for accounting purposes will be
recognized. The expenses of the Exchange Offer and the unamortized expenses
related to the issuance of the Old Notes will be amortized over the term of
the New Notes.
OTHER MATTERS
Participation in the Exchange Offer is voluntary and holders should
carefully consider whether to accept. Holders of the Old Notes are urged to
consult their financial and tax advisors in making their own decisions on what
action to take.
No person has been authorized to give any information or to make any
representations in connection with the Exchange Offer other than those contained
in this Prospectus. If given or made, such information or representations should
not be relied upon as having been authorized by the Company. Neither the
delivery of this Prospectus nor any exchange made hereunder shall, under any
circumstances, create any implication that there has been no change in the
affairs of the Company since the respective dates as of which information is
given herein. The Exchange Offer is not being made to (nor will tenders be
accepted from or on behalf of) holders of Old Notes in any jurisdiction in which
the making of the Exchange Offer or the acceptance thereof would not be in
compliance with the laws of such jurisdiction. However, the Company may, at its
discretion, take such action as it may deem
37
<PAGE>
necessary to make the Exchange Offer in any such jurisdiction and extend the
Exchange Offer to holders of Old Notes in such jurisdiction.
As a result of the making of the Exchange Offer, the Issuers will have
fulfilled a covenant contained in the Registration Agreement. Holders of the Old
Notes who do not tender their Old Notes in the Exchange Offer will continue to
hold such Old Notes and will be entitled to all the rights and limitations
applicable thereto under the Senior Notes Indenture and Equipment Notes
Indenture, as the case may be, except for certain rights under the Registration
Agreement and except that certain of the Old Notes may not be entitled to the
contingent increase in interest rate provided for in the Old Notes. All
untendered Old Notes will continue to be subject to the restrictions on transfer
set forth in the Senior Notes Indenture and the Equipment Notes Indenture, as
the case may be, and the Old Notes. To the extent that Old Notes are tendered
and accepted in the Exchange Offer, the trading market, if any, for untendered
Old Notes could be adversely affected.
Neither the Company nor WinStar Equipment will receive any cash proceeds
from the issuance of the New Notes offered hereby. In consideration for issuing
the New Notes as contemplated in this Prospectus, the Company will receive in
exchange Old Senior Notes, and WinStar Equipment will receive in exchange Old
Equipment Notes, in like principal amount, the terms of which are identical to
the New Senior Notes and New Equipment Notes, as the case may be, except that
such New Notes will be registered under the Securities Act and, therefore, will
not bear legends restricting the transfer thereof. Old Notes surrendered in
exchange for New Notes will be retired and canceled and cannot be reissued.
Accordingly, issuance of the New Notes will not result in a change in the
indebtedness of the Company or WinStar Equipment.
38
<PAGE>
CAPITALIZATION
The following table sets forth the cash and capitalization of the continuing
operations of the Company as of March 31, 1997.
<TABLE>
<CAPTION>
MARCH 31, 1997
-----------------
(IN THOUSANDS,
EXCEPT SHARE
DATA)
<S> <C>
Cash, cash equivalents and short-term investments.............................................. $ 413,474
--------
--------
Liabilities and stockholders' equity:
Current portion of long-term debt and capital lease obligations................................ $ 23,095
--------
Long-term debt and capital lease obligations:
Equipment Notes.............................................................................. 200,000
Old Senior Notes............................................................................. 182,233
Senior Notes................................................................................. 100,483
Convertible Notes............................................................................ 91,116
Other notes.................................................................................. 597
Capital lease obligations, net of current portion............................................ 12,991
--------
Total long-term debt and capital lease obligations......................................... 587,420
--------
Stockholders' equity:
Preferred Stock, $0.1 par value, 15,000,000 shares authorized, 4,000,000 shares issued and
outstanding (with a liquidation preference of $100,000,000)................................ 40
Common Stock, $.01 par value, 75,000,000 shares authorized, 32,583,373 shares issued and
outstanding(1)............................................................................. 328
Additional paid-in capital................................................................... 246,902
Accumulated deficit.......................................................................... (167,010)
--------
80,260
Unrealized loss on long term investments................................................... (675)
--------
Total stockholders' equity................................................................... 79,585
--------
Total capitalization..................................................................... $ 690,100
--------
--------
</TABLE>
- ------------------------
(1) Does not include (i) an aggregate of 1,106,620 shares of Common Stock
issuable upon exercise of options granted or which may be granted under the
1992 Performance Equity Plan ("1992 Plan"), (ii) an aggregate of 3,500,000
shares of Common Stock issuable upon exercise of options granted or which
may be granted under the 1995 Performance Equity Plan ("1995 Plan") and
(iii) 6,301,449 shares of Common Stock issuable upon exercise of other
outstanding options and warrants. Also does not include shares issuable upon
the conversion of the Convertible Preferred Stock and/or the Convertible
Notes, nor dividends on Convertible Preferred Stock which were paid in kind
on March 31, 1997. See "Description of Certain Indebtedness and Preferred
Stock." 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. Includes the issuance of 3,594,620 shares of Common
Stock in connection with the Milliwave Acquisition. Also in June 1997, the
shareholders of the Company approved an additional 4,000,000 shares of
Common Stock issuable upon exercise of options which may be granted under
the 1995 Plan, increasing the total shares which may be granted under the
1995 Plan from 3,500,000 to 7,500,000. In June 1997, the Company authorized
an additional 125,000,000 shares of Common Stock, increasing the authorized
shares from 75,000,000 at March 31, 1997, to 200,000,000 at the date of this
Prospectus.
39
<PAGE>
DESCRIPTION OF NOTES
The Old Senior Notes were issued in the 1997 Debt Placement under the Senior
Notes Indenture, dated as of March 1, 1997, between WinStar Communications, Inc.
(for the purposed of this Description of Notes, "WCI"), as issuer, and U.S.
Trust, as trustee (in such capacity, the "Senior Notes Trustee"). The Old
Equipment Notes were issued in the 1997 Debt Placement under the Equipment Notes
Indenture, dated as of March 1, 1997, between WinStar Equipment, as issuer, WCI,
as guarantor, and U.S. Trust, as trustee (in such capacity, the "Equipment Notes
Trustee" and, together with the Senior Notes Trustee, the "Trustees"). Any
references herein to a "Trustee" means the Senior Notes Trustee or the Equipment
Notes Trustee, as the context may require. Copies of the forms of 1997
Indentures are available on request from WCI.
The New Senior Notes will be issued under the Senior Notes Indenture and the
New Equipment Notes will be issued under the Equipment Notes Indenture. The form
and terms of the New Notes are the same as the form and terms of the Old Notes,
except that the New Notes will have been registered under the Securities Act,
and therefore, will not bear legends restricting transfer thereof. The New
Senior Notes and New Equipment Notes will evidence the same debt as the Old
Senior Notes and Old Equipment Notes. Upon consummation of the Exchange
Offering, the New Senior Notes will be treated as a single class under the
Senior Notes Indenture with any Old Senior Notes remaining outstanding, and the
New Equipment Notes will be treated as a single class under the Equipment Notes
Indenture with any Old Equipment Notes remaining outstanding. Upon the
consummation of the Exchange Offer, holders of Old Notes may not be entitled to
certain registration rights under, or the contingent increase in interest rate
provided by, the Registration Agreement.
The term "Senior Notes" used herein refers to both Old Senior Notes and New
Senior Notes and the term "Equipment Notes" used herein refers to both Old
Equipment Notes and New Equipment Notes. The term "Notes" or "1997 Notes" refers
to both Senior Notes and Equipment Notes.
GENERAL
The New Notes will be issued only in fully registered form, without coupons,
in denominations of $1,000 of principal amount and any integral multiple of
$1,000. See "--Book-Entry, Delivery and Form." No service charge will be made
for any registration of transfer or exchange of Notes, but WCI may require
payment of a sum sufficient to cover any transfer tax or other similar
governmental charge payable in connection therewith. The Notes may be exchanged
or transferred at the office or agency of WCI in the Borough of Manhattan, The
City of New York (which initially will be the corporate trust office of the
Trustee at 114 West 47th Street, New York, New York 10036-1532).
Although for United States federal income tax purposes a significant amount
of original issue discount, taxable as ordinary income, will be recognized by a
Holder of Senior Notes as such discount is amortized from the date of issuance
of the Senior Notes, Holders of Senior Notes will not receive any payments on
the Senior Notes until April 15, 2001. For a description of certain tax matters
related to an investment in the Notes, see "Certain United States Federal Income
Tax Considerations."
TERMS OF THE NOTES
SENIOR NOTES
The Senior Notes are unsecured senior obligations of WCI, limited to
$100.0 million aggregate principal amount, and will mature on October 15,
2005. Until October 15, 2000, interest on the Senior Notes accrues at a rate
of 14 1/2% per annum and will be compounded semiannually on each SemiAnnual
Interest Accrual Date with respect to the Senior Notes, but, except as
described herein, will not be payable in cash. From and after October 15,
2000, interest on the Accumulated Amount of each Senior Note will be paid
semiannually to Holders of record at the close of business on the April 1 or
October 1 immediately preceding the interest payment date of April 15 and
October 15 of each year, commencing April 15, 2001.
40
<PAGE>
EQUIPMENT NOTES
The Equipment Notes are secured senior obligations of WinStar Equipment,
limited to $200.0 million aggregate principal amount, and will mature on March
15, 2004. Interest on the Equipment Notes accrues at a rate of 12 1 % per 2
annum and will be paid semiannually to Holders of record at the close of
business on the March 1 or September 1 immediately preceding the interest
payment date of March 15 and September 15 of each year, commencing September 15,
1997.
OPTIONAL REDEMPTION
SENIOR NOTES
The Senior Notes are not redeemable prior to October 15, 2000. Thereafter,
the Senior Notes will be redeemable, at WCI's option, in whole at any time, or
in part from time to time, upon not less than 30 nor more than 60 days' prior
notice mailed by first-class mail to each Holder's registered address, at the
following redemption prices (expressed as a percentage of the Accumulated Amount
of the New Senior Notes), plus accrued and unpaid interest, if any, on such
Accumulated Amount to the redemption date (subject to the right of Holders of
record on the relevant regular record date that is on or prior to the redemption
date to receive interest due on the relevant interest payment date), if redeemed
during the 12-month period commencing October 15 of the years set forth below:
<TABLE>
<CAPTION>
SENIOR NOTE
REDEMPTION
YEAR PRICE
- ---- -----------
<S> <C>
2000................................................... 107.250%
2001................................................... 104.833
2002................................................... 102.417
2003 and thereafter.................................... 100.000
</TABLE>
EQUIPMENT NOTES
The Equipment Notes are not redeemable prior to March 15, 2002, except as
discussed below under "--Mandatory Redemption of Equipment Notes." On and after
March 15, 2002, the New Equipment Notes will be redeemable, at WinStar
Equipment's option, in whole at any time, or in part from time to time, upon not
less than 30 nor more than 60 days' prior notice mailed by first-class mail to
each Holder's registered address, at the following redemption prices (expressed
as a percentage of principal amount), plus accrued and unpaid interest, if any,
to the redemption date (subject to the right of Holders of record on the
relevant regular record date that is on or prior to the redemption date to
receive interest due on the relevant interest payment date), if redeemed during
the 12-month period commencing March 15 of the years set forth below:
<TABLE>
<CAPTION>
EQUIPMENT
NOTE REDEMPTION
YEAR PRICE
- ---- ----------------
<S> <C>
2002.............................................. 106.250%
2003.............................................. 103.125
</TABLE>
SELECTION OF NOTES FOR OPTIONAL REDEMPTION
In the case of any partial optional redemption, selection of the Senior
Notes or Equipment Notes, as the case may be, for redemption will be made by
the relevant Trustee in compliance with the requirements of the principal
national securities exchange, if any, on which such Notes are listed or, if
such Notes are not listed on a national securities exchange, on a pro rata
basis, by lot or such other method as such Trustee, in its sole discretion,
shall deem fair and appropriate; provided, however, that no Note of $1,000 in
principal amount or less shall be redeemed in part.
41
<PAGE>
If any Note is to be redeemed in part only, the notice of redemption relating
to such Note shall state the portion of the principal amount thereof to be
redeemed. A replacement Senior Note or Equipment Note, as the case may be, in
principal amount equal to the unredeemed portion thereof will be issued in
the name of the Holder thereof upon cancellation of the original New Senior
Note or New Equipment Note, as the case may be.
WCI's and WinStar Equipment's ability to redeem the 1997 Notes at their
option is severely limited under the 1995 Indentures. WCI may not be able to
redeem the Notes at its option unless it simultaneously redeems all of the 1995
Notes.
MANDATORY REDEMPTION OF EQUIPMENT NOTES
In the event that by March 18, 1999, WinStar Equipment shall not have
applied at least $200.0 million to fund the Acquisition Costs of Designated
Equipment pursuant to the covenant described below under "--Covenants--Covenants
Relating to the Equipment Notes--Use of Proceeds" ($200.0 million less the
amount so applied being herein called the "Unused Equipment Amount"), WinStar
Equipment shall redeem Equipment Notes in an aggregate principal amount equal to
the Unused Equipment Amount at a redemption price of 112.50% of such principal
amount, plus accrued and unpaid interest thereon to the redemption date (subject
to the right of Holders of record on the relevant record date that is on or
prior to the redemption date to receive interest due on the relevant interest
payment date). The mandatory redemption described herein shall occur no later
than April 2, 1999.
Selection of the Equipment Notes for mandatory redemption will be made on a
pro rata basis; provided, however, that no Equipment Note of $1,000 in principal
amount or less shall be redeemed in part. If any Note is to be redeemed in part
only, a new Equipment Note in principal amount equal to the unredeemed portion
thereof will be issued in the name of the Holder thereof upon cancellation of
the original Equipment Note.
EQUIPMENT NOTE GUARANTEE
WCI, as primary obligor and not merely as surety, has irrevocably and
unconditionally guaranteed (the "Equipment Note Guarantee") on a senior
unsecured basis the performance and punctual payment when due, whether at Stated
Maturity, by acceleration or otherwise, of all obligations of WinStar Equipment
under the Equipment Notes Indenture and the Equipment Notes, whether for
principal of or interest on the Equipment Notes, expenses, indemnifications or
otherwise (all such obligations guaranteed by WCI pursuant to the Equipment Note
Guarantee being herein called the "Guaranteed Obligations"). WCI has agreed to
pay, on a senior unsecured basis and in addition to the amount stated above, any
and all expenses (including reasonable counsel fees and expenses) incurred by
the Equipment Notes Trustee or the Holders of Equipment Notes in enforcing any
rights under the Equipment Note Guarantee with respect to WCI.
The Equipment Note Guarantee is a continuing guarantee and shall (i) remain
in full force and effect until payment in full of all the Guaranteed
Obligations, (ii) be binding upon WCI and (iii) enure to the benefit of and be
enforceable by the Equipment Notes Trustee, the Holders of Equipment Notes and
their successors, transferees and assigns.
SECURITY FOR THE EQUIPMENT NOTES
Pursuant to the Equipment Notes Indenture and related documents,
including the Security Agreement, between WinStar Equipment and the Equipment
Notes Trustee, the Equipment Notes Trustee, for its benefit and the benefit
of the Holders of the Equipment Notes, receives a security interest in: (i)
all Designated Equipment acquired by WinStar Equipment pursuant to the
covenant described below under "--Covenants--Covenants Relating to the
Equipment Notes--Use of Proceeds;" (ii) the proceeds of any sale or other
disposition of such Designated Equipment (including any insurance proceeds
from the loss or destruction of such Designated Equipment); and (iii) any
additional Designated Equipment acquired by WinStar Equipment with the
proceeds of any such sale or other disposition of Designated Equipment
(collectively, the "Collateral").
If the Equipment Notes become due and payable prior to their Stated Maturity
or are not paid in full at the Stated Maturity thereof, the Equipment Notes
Trustee, on behalf of the Holders of the Equipment Notes, in addition
42
<PAGE>
to any other rights or remedies available to it under the Equipment Notes
Indenture, may take such action as it deems advisable to protect and enforce
the rights of the Trustee and such Holders in the Collateral, including the
institution of foreclosure proceedings. Any proceeds received by the Trustee
from the disposition of the Collateral will be applied by the Trustee, first
to pay certain expenses of the Trustee and the Holders of the Equipment
Notes, second to pay interest with respect to the Equipment Notes, third to
pay unpaid principal of the Equipment Notes, fourth to pay costs and expenses
of, and all premiums on, and all other amounts due under, the Equipment
Notes, and finally, to pay any remainder to WinStar Equipment or as a court
of competent jurisdiction otherwise directs.
The right of the Equipment Notes Trustee to repossess and dispose of the
Collateral upon the occurrence of an Event of Default is likely to be
significantly impaired by applicable bankruptcy law if a bankruptcy proceeding
were to be commenced by or against WinStar Equipment prior to the Equipment
Notes Trustee's having disposed of the Collateral. Under Title XI of the United
States Code (the "Bankruptcy Code"), a secured creditor such as the Trustee is
prohibited from disposing of security repossessed from a debtor in a bankruptcy
case without bankruptcy court approval. Moreover, the Bankruptcy Code prohibits
a secured creditor from disposing of collateral even though the debtor is in
default under the applicable debt instruments if the secured creditor is given
"adequate protection." The meaning of the term "adequate protection" may vary
according to circumstances, but it is intended in general to protect the value
of the secured creditor's interest in the collateral and may include cash
payments or the granting of additional security, if and at such times as the
court in its discretion determines, for any diminution in the value of the
collateral as a result of the stay of disposition during the pendency of the
bankruptcy case. In view of the lack of a precise definition of the term
"adequate protection" and the broad discretionary powers of a bankruptcy court,
it is impossible to predict how long payments under the Equipment Notes could be
delayed following commencement of a bankruptcy case, whether or when the
Equipment Notes Trustee could dispose of the Collateral or whether or to what
extent Holders would be compensated for any delay in payment or loss of value of
the Collateral through the requirement of "adequate protection."
In addition, notwithstanding anything to the contrary described above,
unless an Event of Default shall have occurred and be continuing, WinStar
Equipment will have the right to remain in possession of and retain exclusive
control of the Collateral, will have the right to freely utilize the Collateral
(including the right to lease such Collateral) and will have the right to
collect, invest and dispose of any income thereon. Upon any foreclosure by the
Equipment Notes Trustee, on behalf of Holders of the Equipment Notes, on any
Collateral that has been made the subject of a lease by WinStar Equipment, the
Equipment Notes Trustee's ability to dispose of such Collateral may be
restricted by the terms of such lease arrangement. See "Risk Factors--Failure to
Maintain Perfected Security Interest."
Collateral may be released from the liens of the Equipment Notes Indenture
in connection with an Asset Sale of Designated Equipment, in which case WinStar
Equipment will be required to comply with the covenant described below under
"--Covenants--Covenants Relating to All the Notes--Limitation on Asset Sales."
RANKING
SENIOR NOTES AND EQUIPMENT NOTE GUARANTEE
The indebtedness evidenced by the Senior Notes and the Equipment Note
Guarantee are unsecured senior obligations of WCI, ranks PARI PASSU in right of
payment with all existing and future senior indebtedness of WCI, including the
1995 Senior Notes, and is senior in right of payment to all existing and future
subordinated indebtedness of WCI, including the Convertible Notes.
At March 31, 1997, after giving effect to the issuance of the Old Notes, WCI
would have had (on an unconsolidated basis) approximately $600.0 million of
indebtedness (including the Equipment Note Guarantee), $508.9 million of which
would have been senior indebtedness, and there would have been no indebtedness
junior to the Senior Notes and the 1995 Senior Notes, other than the Convertible
Notes.
WCI IS A HOLDING COMPANY. Substantially all the operations of WCI are
conducted through its subsidiaries. Claims of creditors of such subsidiaries,
including trade creditors, secured creditors and creditors holding indebtedness
and guarantees issued by such subsidiaries, and claims of preferred stockholders
(if any) of such subsidiaries, generally will have priority with respect to the
assets and earnings of such subsidiaries over the claims of creditors of WCI,
43
<PAGE>
including holders of the Senior Notes and the Equipment Note Guarantee. The
Senior Notes and the Equipment Note Guarantee, therefore, would be effectively
subordinated to creditors (including trade creditors) and preferred stockholders
(if any) of subsidiaries of WCI (subject in the case of the Equipment Note
Guarantee, however, to a Holder's direct claim against WinStar Equipment). At
March 31, 1997, after giving effect to the issuance of the Notes, the total
liabilities of WCI's subsidiaries were approximately $258.8 million, including
trade payables and the Equipment Notes. Although the Indentures limit the
incurrence of Indebtedness and the issuance of preferred stock of certain of
WCI's subsidiaries, such limitations are subject to a number of significant
qualifications. Moreover, the Indentures do not impose any limitation on the
incurrence by such subsidiaries of liabilities that are not considered
Indebtedness under the Indentures.
The Senior Notes Indenture specifically designates the Senior Notes as, and
the Equipment Notes Indenture specifically designates the Equipment Note
Guarantee as, "Designated Senior Indebtedness" for purposes of the Convertible
Notes Indenture (as defined).
EQUIPMENT NOTES
The indebtedness evidenced by the Equipment Notes are secured senior
obligations of WinStar Equipment. As of the Closing Date, there was no
indebtedness of WinStar Equipment other than the Equipment Notes. Under the
Equipment Notes Indenture, WinStar Equipment is prohibited from incurring any
additional Indebtedness (other than certain refinancing indebtedness in respect
of the Equipment Notes). See "--Covenants--Covenants Relating to the Equipment
Notes--Business Activities."
REGISTRATION RIGHTS
The Registration Statement of which this Prospectus forms a part, has been
filed by WCI and WinStar Equipment pursuant to the Registration Agreement. Under
the terms of the Registration Agreement, the Issuers will be entitled to close
the Exchange Offer 30 days after the commencement thereof provided that they
have accepted all Old Notes theretofore validly tendered in accordance with the
terms of such Exchange Offer. After consummation of the Exchange Offer, the
Issuers will have no further obligation to make any other such exchange offers.
REPURCHASE OF NOTES UPON A CHANGE OF CONTROL
Each of WCI and WinStar Equipment must commence, within 30 days of the
occurrence of a Change of Control, and consummate an Offer to Purchase for all
of its respective Notes then outstanding, at a purchase price equal to 101% of,
in the case of the Senior Notes, the Accumulated Amount of such Notes on the
date of purchase, and, in the case of the Equipment Notes, the principal amount
of such Notes, plus, in each case, accrued and unpaid interest (if any) on such
amount to the date of purchase. Prior to the mailing of the notice to Holders of
Notes commencing such Offer to Purchase, but in any event within 30 days
following any Change of Control, WCI covenants to (i) repay in full all
indebtedness of WCI and WinStar Equipment that would prohibit the repurchase of
the Notes pursuant to such Offer to Purchase or (ii) obtain any requisite
consents under instruments governing any such indebtedness of WCI and WinStar
Equipment to permit the repurchase of the Notes. WCI shall first comply with the
covenant in the preceding sentence before it shall repurchase Notes pursuant to
this "Repurchase of Notes Upon a Change of Control" covenant.
If WCI is unable to repay all of its indebtedness that would prohibit
repurchase of the Notes or is unable to obtain the consents of the holders of
indebtedness, if any, outstanding at the time of a Change of Control whose
consent would be so required to permit the repurchase of Notes or otherwise
fails to purchase any Notes validly tendered, then WCI will have breached such
covenant. This breach will constitute an Event of Default under the relevant
Indenture if it continues for a period of 30 consecutive days after written
notice is given to WCI by the relevant Trustee or the Holders of at least 25% in
aggregate principal amount of the Senior Notes or the Equipment Notes, as the
case may be, outstanding. In addition, the failure by WCI and WinStar Equipment
to repurchase Notes at the conclusion of the Offer to Purchase will constitute
an Event of Default without any waiting period or notice requirements.
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There can be no assurance that WCI or WinStar Equipment will have
sufficient funds available at the time of any Change of Control to make any
debt payment (including repurchases of Notes) required by the foregoing
covenant (as well as may be contained in other securities of WCI or WinStar
Equipment which might be outstanding at the time). The above covenant
requiring WCI or WinStar Equipment to repurchase the Notes will, unless the
consents referred to above are obtained, require WCI or WinStar Equipment to
repay all indebtedness then outstanding which by its terms would prohibit
such Note repurchase, either prior to or concurrently with such Note
repurchase.
COVENANTS
COVENANTS RELATING TO ALL THE NOTES
LIMITATION ON INDEBTEDNESS
(a) Under the terms of each of the Indentures, WCI will not, and will not
permit any of its Restricted Subsidiaries to, Incur any Indebtedness (other
than the Notes and Indebtedness existing on the Closing Date); provided,
however, that WCI may Incur Indebtedness if, after giving effect to the
Incurrence of such Indebtedness and the receipt and application of the
proceeds therefrom, the Indebtedness to EBITDA Ratio would be greater than
zero and less than 5:1.
Notwithstanding the foregoing, WCI and any Restricted Subsidiary (except
as specified below) may Incur each and all of the following: (i) Indebtedness
of WCI outstanding at any time in an aggregate principal amount not to exceed
$125.0 million, less any amount of Indebtedness Incurred pursuant to this
clause (i) and permanently repaid as provided under "--Limitation on Asset
Sales" below; (ii) Indebtedness (A) to WCI evidenced by an unsubordinated
promissory note or (B) to any of its Restricted Subsidiaries; provided,
however, that any event which results in any such Restricted Subsidiary
ceasing to be a Restricted Subsidiary or any subsequent transfer of such
Indebtedness (other than to WCI or another Restricted Subsidiary) shall be
deemed, in each case, to constitute an Incurrence of such Indebtedness not
permitted by this clause (ii); (iii) Indebtedness issued in exchange for, or
the net proceeds of which are used to refinance or refund, then outstanding
Indebtedness, other than Indebtedness Incurred under clause (i), (ii), (v),
(vi) or (viii) of this paragraph, and any refinancings thereof in an amount
not to exceed the amount so refinanced or refunded (plus premiums, accrued
interest, fees and expenses); provided, however , that Indebtedness the
proceeds of which are used to refinance or refund the Senior Notes or the
Equipment Notes, as the case may be, or Indebtedness that is PARI PASSU with,
or subordinated in right of payment to, the Senior Notes or the Equipment
Note Guarantee, as the case may be, shall only be permitted under this clause
(iii) if (A) in case the Senior Notes or the Equipment Notes, as the case may
be, are refinanced in part or the Indebtedness to be refinanced is PARI PASSU
with the Senior Notes or the Equipment Note Guarantee, as the case may be,
such new Indebtedness, by its terms or by the terms of any agreement or
instrument pursuant to which such new Indebtedness is outstanding, is
expressly made PARI PASSU with, or subordinate in right of payment to, the
remaining Senior Notes or the Equipment Note Guarantee, as the case may be,
(B) in case the Indebtedness to be refinanced is subordinated in right of
payment to the Senior Notes or the Equipment Note Guarantee, as the case may
be, such new Indebtedness, by its terms or by the terms of any agreement or
instrument pursuant to which such new Indebtedness is outstanding, is
expressly made subordinate in right of payment to the Senior Notes or the
Equipment Note Guarantee, as the case may be, at least to the extent that the
Indebtedness to be refinanced is subordinated to the Senior Notes or the
Equipment Note Guarantee, as the case may be, and (C) such new Indebtedness,
determined as of the date of Incurrence of such new Indebtedness, does not
mature prior to the Stated Maturity of the Indebtedness to be refinanced or
refunded, and the Average Life of such new Indebtedness is at least equal to
the remaining Average Life of the Indebtedness to be refinanced or refunded;
provided further, however, that in no event may Indebtedness of WCI be
refinanced by means of any Indebtedness of any Restricted Subsidiary of WCI
pursuant to this clause (iii); (iv) Indebtedness (A) in respect of
performance, surety or appeal bonds provided in the ordinary course of
business, (B) under Currency Agreements and Interest Rate Agreements;
provided, however, that such agreements do not increase the Indebtedness of
the obligor outstanding at any time other than as a result of fluctuations in
foreign currency exchange rates or interest rates or by reason of fees,
indemnities and compensation payable thereunder, and (C) arising from
agreements providing for indemnification, adjustment of purchase price or
similar obligations, or from Guarantees or letters of credit, surety bonds or
performance bonds securing any obligations of WCI or any of the Restricted
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Subsidiaries pursuant to such agreements, in any case Incurred in connection
with the disposition of any business, assets or Restricted Subsidiary of WCI
(other than Guarantees of Indebtedness Incurred by any Person acquiring all
or any portion of such business, assets or Restricted Subsidiary of WCI for
the purpose of financing such acquisition), in a principal amount not to
exceed the gross proceeds actually received by WCI or any Restricted
Subsidiary in connection with such disposition; (v) Indebtedness of WCI not
to exceed, at any one time outstanding, two times the Net Cash Proceeds
received by WCI from and after October 23, 1995 from the issuance and sale of
its Capital Stock (other than Redeemable Stock and Preferred Stock that
provides for the payment of dividends in cash); provided, however, that such
Indebtedness (x) does not mature prior to the Stated Maturity of the Notes
and has an Average Life longer than the Notes and (y) is subordinated to the
Senior Notes and the Equipment Note Guarantee at least to the extent that the
Convertible Notes are subordinated to Senior Indebtedness (as defined in the
Convertible Notes Indenture); (vi) Indebtedness of any Restricted Subsidiary
Incurred pursuant to any credit agreement of such Restricted Subsidiary in
effect on the Closing Date (and refinancings thereof), up to the amount of
the commitment under such credit agreement on the Closing Date; (vii)
Indebtedness to the extent such Indebtedness is secured by Liens which are
purchase money or other Liens upon equipment or inventory acquired or held by
WCI or any of its Restricted Subsidiaries taken or obtained by (A) the seller
or lessor of such equipment or inventory to secure all or a part of the
purchase price or lease payments therefor or (B) the person who makes
advances or incurs obligations, thereby giving value to WCI to enable it to
purchase or acquire rights in such equipment or inventory, to secure the
repayment of all or a part of the advances so made or obligations so
incurred; provided, however, that such Liens do not extend to or cover any
property or assets of WCI or any Restricted Subsidiary other than the
equipment or inventory acquired; (viii) Indebtedness of any Restricted
Subsidiary not to exceed, at any one time outstanding, 80% of the accounts
receivable net of reserves and allowances for doubtful accounts, determined
in accordance with GAAP, of such Restricted Subsidiary and its Restricted
Subsidiaries (without duplication); provided, however, that such Indebtedness
is not Guaranteed by WCI or any of its Restricted Subsidiaries; and (ix)
Indebtedness of WCI, to the extent the proceeds thereof are immediately used
to purchase Notes tendered in an Offer to Purchase made as a result of a
Change of Control.
(b) For purposes of determining any particular amount of Indebtedness
under this "Limitation on Indebtedness" covenant, Guarantees, Liens or
obligations with respect to letters of credit supporting Indebtedness
otherwise included in the determination of such particular amount shall not
be included. For purposes of determining compliance with this "Limitation on
Indebtedness" covenant, in the event that an item of Indebtedness meets the
criteria of more than one of the types of Indebtedness described in the above
clauses, WCI, in its sole discretion, shall classify such item of
Indebtedness and only be required to include the amount and type of such
Indebtedness in one of such clauses.
(c) WCI will not, and will not permit any Restricted Subsidiary to, Incur
any Guarantee of Indebtedness of any Unrestricted Subsidiary.
LIMITATION ON RESTRICTED PAYMENTS
Under the terms of each of the Indentures, WCI will not, and will not
permit any Restricted Subsidiary to, directly or indirectly, (i) declare or
pay any dividend or make any distribution on its Capital Stock (other than
dividends or distributions payable solely in shares of its or such Restricted
Subsidiary's Capital Stock (other than Redeemable Stock) held by such holders
or in options, warrants or other rights to acquire such shares of Capital
Stock) other than such Capital Stock held by WCI or any of its Restricted
Subsidiaries (and other than pro rata dividends or distributions on Common
Stock of Restricted Subsidiaries), (ii) repurchase, redeem, retire or
otherwise acquire for value any shares of Capital Stock of WCI (including
options, warrants or other rights to acquire such shares of Capital Stock)
held by Persons other than any Wholly Owned Restricted Subsidiaries of WCI,
(iii) make any voluntary or optional principal payment, or voluntary or
optional redemption, repurchase, defeasance, or other acquisition or
retirement for value, of Indebtedness of WCI that is subordinated in right of
payment to the Senior Notes or the Equipment Note Guarantee, as the case may
be, or (iv) make any Investment, other than a Permitted Investment, in any
Person (such payments or any other actions described in clauses (i) through
(iv) being collectively "Restricted Payments") if, at the time of, and after
giving effect to, the proposed Restricted Payment: (A) a Default or Event of
Default shall have occurred and be continuing, (B) except with respect to any
Investment (other than an Investment consisting of the designation of a
Restricted Subsidiary as an Unrestricted Subsidiary), WCI could not Incur at
least $1.00 of Indebtedness under the first paragraph of the "Limitation on
Indebtedness" covenant or (C) the aggregate amount expended for all
Restricted Payments (the amount so expended, if other than in cash, to be
determined in good faith by the Board of Directors, whose determination shall
be conclusive and evidenced by a Board Resolution) after the Closing Date
shall exceed the sum of (1) 50% of the aggregate amount of the Adjusted
Consolidated Net Income
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(or, if the Adjusted Consolidated Net Income is a loss, minus 100% of such
amount) (determined by excluding income resulting from transfers of assets by
WCI or a Restricted Subsidiary to an Unrestricted Subsidiary) accrued on a
cumulative basis during the period (taken as one accounting period) beginning
on the first day of the fiscal quarter immediately following the Closing Date
and ending on the last day of the last fiscal quarter preceding the
Transaction Date for which reports have been filed pursuant to "--SEC Reports
and Reports to Holders" plus (2) the aggregate Net Cash Proceeds received by
WCI after the Closing Date from the issuance and sale permitted by the
Indentures of its Capital Stock (other than Redeemable Stock) to a Person who
is not a Subsidiary of WCI, or from the issuance to a Person who is not a
Subsidiary of WCI of any options, warrants or other rights to acquire Capital
Stock of WCI (in each case, exclusive of any convertible Indebtedness,
Redeemable Stock or any options, warrants or other rights that are redeemable
at the option of the holder, or are required to be redeemed, prior to the
Stated Maturity of the Senior Notes or the Equipment Notes, as the case may
be) plus (3) an amount equal to the net reduction in Investments (other than
reductions in Permitted Investments and other than reductions in Investments
made pursuant to clauses (vi) or (vii) of the second paragraph of this
"Limitation on Restricted Payments" covenant) in any Person resulting from
payments of interest on Indebtedness, dividends, repayments of loans or
advances, or other transfers of assets, in each case to WCI or any Restricted
Subsidiary (except to the extent any such payment is included in the
calculation of Adjusted Consolidated Net Income), or from redesignations of
Unrestricted Subsidiaries as Restricted Subsidiaries (valued in each case as
provided in the definition of "Investments"), not to exceed the amount of
Investments previously made by WCI and its Restricted Subsidiaries in such
Person.
The foregoing provision shall not be violated by reason of: (i) the
payment of any dividend within 60 days after the date of declaration thereof
if, at said date of declaration, such payment would comply with the foregoing
paragraph; (ii) the redemption, repurchase, defeasance or other acquisition
or retirement for value of Indebtedness that is subordinated in right of
payment to the Senior Notes or the Equipment Note Guarantee, as the case may
be, including premium, if any, and accrued and unpaid interest, with the
proceeds of, or in exchange for, Indebtedness Incurred under clause (iii) of
the second paragraph of the covenant described under "--Limitation on
Indebtedness;" (iii) the repurchase, redemption or other acquisition of
Capital Stock of WCI (or options, warrants or other rights to acquire such
Capital Stock) in exchange for, or out of the proceeds of a substantially
concurrent sale of, shares of Capital Stock or options, warrants or other
rights to acquire such Capital Stock (in each case other than Redeemable
Stock) of WCI; (iv) the making of any other Restricted Payment made by
exchange for, or out of the proceeds of, a substantially concurrent sale of,
shares of the Capital Stock or options, warrants or other rights to acquire
such Capital Stock (in each case other than Redeemable Stock) of WCI; (v)
payments or distributions, in the nature of satisfaction of dissenters'
rights, pursuant to or in connection with a consolidation, merger or
transfer of assets that complies with the provisions of the applicable Indenture
applicable to mergers, consolidations and transfers of all or substantially all
of the property and assets of WCI; (vi) Investments, not to exceed $15 million
at any one time outstanding; (vii) Investments, not to exceed $15 million at any
one time outstanding, in entities, substantially all of the assets of which
consist of Telecommunications Assets; (viii) (A) cash payments in lieu of the
issuance of fractional shares of Common Stock upon conversion (including
mandatory conversion) of the Convertible Notes provided for in the Convertible
Notes Indenture and (B) cash payments on the Convertible Notes required to be
made under the provisions of the Convertible Notes Indenture that relate to
repurchases of Convertible Notes upon a change of control and that relate to
limitations on sales of assets; (ix) cash payments in lieu of the issuance of
fractional shares of Common Stock of WCI upon conversion of any class of
Preferred Stock of WCI; provided, however, that this exception shall not be
available with respect to more than two such conversions with respect to any
such class of Preferred Stock by any given Affiliate of WCI; and (x) Investments
in entities that directly (or indirectly through subsidiaries) own licenses
granted by the FCC or any other governmental entity with authority to grant
telecommunications licenses; provided, however, that, in each case WCI or a
Restricted Subsidiary shall, at the time of making such Investment, have an
active role in the management or operation of such entity and in the provision
of telecommunications services by such entity; provided, however, that, except
in the case of clauses (i) and (iii) of this paragraph, no Default or Event of
Default shall have occurred and be continuing or occur as a consequence of the
actions or payments set forth herein. Any Investments made other than in cash
shall be valued, in good faith, by the Board of Directors. Any Investment made
pursuant to clause (vi) or (vii) of this paragraph shall be deemed to be no
longer outstanding (and repaid in full) if and when the Person in which such
Investment is made becomes a Restricted Subsidiary of WCI.
Each Restricted Payment permitted pursuant to the preceding paragraph (other
than the Restricted Payment referred to in clause (ii) thereof), and the Net
Cash Proceeds from any issuance and sale of Capital Stock referred to in clauses
(iii) or (iv) shall be included in calculating whether the conditions of clause
(C) of the first paragraph of
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this "Limitation on Restricted Payments" covenant have been met with respect
to any subsequent Restricted Payments. In the event the proceeds of an
issuance of Capital Stock of WCI are used for the redemption, repurchase or
other acquisition of the Senior Notes or the Equipment Notes, as the case may
be, or Indebtedness that is PARI PASSU with the Senior Notes or the Equipment
Note Guarantee, as the case may be, then the Net Cash Proceeds of such
issuance shall be included in clause (C) of the first paragraph of this
"Limitation on Restricted Payments" covenant only to the extent such proceeds
are not used for such redemption, repurchase or other acquisition of
Indebtedness.
Limitation on Dividend and Other Payment Restrictions Affecting
Restricted Subsidiaries
Under the terms of each of the Indentures, WCI will not, and will not
permit any Restricted Subsidiary to, create or otherwise cause or suffer to
exist or become effective any consensual encumbrance or restriction of any
kind on the ability of any Restricted Subsidiary to (i) pay dividends or make
any other distributions permitted by applicable law on any Capital Stock of
such Restricted Subsidiary owned by WCI or any other Restricted Subsidiary,
(ii) pay any Indebtedness owed to WCI or any other Restricted Subsidiary that
owns, directly or indirectly, any Capital Stock of such Restricted
Subsidiary, (iii) make loans or advances to WCI or any other Restricted
Subsidiary that owns, directly or indirectly, any Capital Stock of such
Restricted Subsidiary or (iv) transfer any of its property or assets to WCI
or any other Restricted Subsidiary that owns, directly or indirectly, any
Capital Stock of such Restricted Subsidiary.
The foregoing provisions shall not prohibit any encumbrances or
restrictions: (i) existing on the Closing Date in the Indentures or any other
agreement in effect on the Closing Date, and any extensions, refinancings,
renewals or replacements of such agreements; provided, however, that the
encumbrances and restrictions in any such extensions, refinancings, renewals
or replacements are no less favorable in any material respect to the Holders
than those encumbrances or restrictions that are then in effect and that are
being extended, refinanced, renewed or replaced; (ii) existing under or by
reason of applicable law; (iii) existing with respect to any Person or the
property or assets of such Person acquired by WCI or any Restricted
Subsidiary, at the time of such acquisition and not incurred in contemplation
thereof, which encumbrances or restrictions are not applicable to any Person
or the property or assets of any Person other than such Person or the
property or assets of such Person so acquired; (iv) in the case of clause
(iv) of the first paragraph of this "Limitation on Dividend and Other Payment
Restrictions Affecting Restricted Subsidiaries" covenant, (A) that restrict
in a customary manner the subletting, assignment or transfer of any property
or asset that is a lease, license, conveyance or contract or similar property
or asset, (B) existing by virtue of any transfer of, agreement to transfer,
option or right with respect to, or Lien on, any property or assets of WCI or
any Restricted Subsidiary not otherwise prohibited by the Indenture or (C)
arising or agreed to in the ordinary course of business, not relating to any
Indebtedness, and that do not, individually or in the aggregate, detract from
the value of property or assets of WCI or any Restricted Subsidiary in any
manner material to WCI or any Restricted Subsidiary; or (v) with respect to a
Restricted Subsidiary and imposed pursuant to an agreement that has been
entered into for the sale or disposition of all or substantially all of the
Capital Stock of, or property and assets of, such Restricted Subsidiary.
Nothing contained in this "Limitation on Dividend and Other Payment
Restrictions Affecting Restricted Subsidiaries" covenant shall prevent WCI or
any Restricted Subsidiary from (i) restricting the sale or other disposition
of property or assets of WCI or any of its Restricted Subsidiaries that
secure Indebtedness of WCI or any of its Restricted Subsidiaries or (ii)
creating, incurring, assuming or suffering to exist any Liens otherwise
permitted pursuant to the covenant described under "--Covenants Relating to
the Senior Notes and the Equipment Notes--Limitation on Liens."
Limitation on the Issuance and Sale of Capital Stock of Restricted
Subsidiaries
Under the terms of each of the Indentures, WCI will not sell, and will not
permit any Restricted Subsidiary, directly or indirectly, to issue or sell any
shares of Capital Stock of a Restricted Subsidiary (including options, warrants
or other rights to purchase shares of such Capital Stock) except (i) to WCI or a
Wholly Owned Restricted Subsidiary, (ii) issuances or sales to foreign nationals
of shares of Capital Stock of foreign Restricted Subsidiaries, to the extent
required by applicable law, (iii) if, immediately after giving effect to such
issuance or sale, such Restricted Subsidiary would no longer constitute a
Restricted Subsidiary or (iv) issuances or sales of Common Stock of Restricted
Subsidiaries, other than the Telecommunications Subsidiaries, if within six
months of each such issuance or sale, WCI or such Restricted Subsidiary applies
an amount not less than the Net Cash Proceeds thereof (if any) in accordance
with clause (A) or (B) of the first paragraph of the "Limitation on Asset Sales"
covenant described below.
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LIMITATION ON ISSUANCES OF GUARANTEES BY RESTRICTED SUBSIDIARIES
Under the terms of each of the Indentures, WCI will not permit any
Restricted Subsidiary, directly or indirectly, to Guarantee any Indebtedness
of WCI ("Guaranteed Indebtedness"), unless (i) such Restricted Subsidiary
simultaneously executes and delivers a supplemental indenture to the
Indenture providing for a Guarantee (a "Subsidiary Guarantee") of payment of
the Notes by such Restricted Subsidiary and (ii) such Restricted Subsidiary
waives and will not in any manner whatsoever claim or take the benefit or
advantage of, any rights of reimbursement, indemnity or subrogation or any
other rights against WCI or any other Restricted Subsidiary as a result of
any payment by such Restricted Subsidiary under its Subsidiary Guarantee;
provided, however, that this paragraph shall not be applicable to any
Guarantee of any Restricted Subsidiary that (x) existed at the time such
Person became a Restricted Subsidiary and (y) was not Incurred in connection
with, or in contemplation of, such Person becoming a Restricted Subsidiary.
If the Guaranteed Indebtedness is (A) pari passu with the Senior Notes or the
Equipment Note Guarantee, as the case may be, then the Guarantee of such
Guaranteed Indebtedness shall be PARI PASSU with, or subordinated to, the
Subsidiary Guarantee or (B) subordinated to the Senior Notes or the Equipment
Note Guarantee, as the case may be, then the Guarantee of such Guaranteed
Indebtedness shall be subordinated to the Subsidiary Guarantee at least to
the extent that the Guaranteed Indebtedness is subordinated to the Senior
Notes or the Equipment Note Guarantee, as the case may be.
Notwithstanding the foregoing, any Subsidiary Guarantee by a Restricted
Subsidiary shall provide by its terms that it shall be automatically and
unconditionally released and discharged upon (i) any sale, exchange or
transfer, to any Person not an Affiliate of WCI of all of WCI's and each
Restricted Subsidiary's Capital Stock in, or all or substantially all the
assets of, such Restricted Subsidiary (which sale, exchange or transfer is
not prohibited by the Indenture) or (ii) the release or discharge of the
Guarantee which resulted in the creation of such Subsidiary Guarantee, except
a discharge or release by or as a result of payment under such Guarantee.
LIMITATION ON TRANSACTIONS WITH SHAREHOLDERS AND AFFILIATES
Under the terms of each of the Indentures, WCI will not, and will not
permit any Restricted Subsidiary to, directly or indirectly, enter into,
renew or extend any transaction (including, without limitation, the purchase,
sale, lease or exchange of property or assets, or the rendering of any
service) with any holder (or any Affiliate of such holder) of 5% or more of
any class of Capital Stock of WCI or with any Affiliate of WCI or any
Restricted Subsidiary, except upon fair and reasonable terms no less
favorable to WCI or such Restricted Subsidiary than could be obtained, at the
time of such transaction or, if such transaction is pursuant to a written
agreement, at the time of the execution of the agreement providing therefor,
in a comparable arm's-length transaction with a Person that is not such a
holder or an Affiliate.
The foregoing limitation does not limit, and shall not apply to (i)
transactions (A) approved by a majority of the disinterested members of the
Board of Directors or (B) for which WCI or a Restricted Subsidiary delivers
to the Trustee a written opinion of a nationally recognized investment
banking firm stating that the transaction is fair to WCI or such Restricted
Subsidiary from a financial point of view; (ii) any transaction solely
between WCI and any of its Wholly Owned Restricted Subsidiaries or solely
between Wholly Owned Restricted Subsidiaries; (iii) the payment of reasonable
fees to directors of WCI who are not employees of WCI; (iv) any payments or
other transactions pursuant to any tax-sharing agreement between WCI and any
other Person with which WCI files a consolidated tax return or with which WCI
is part of a consolidated group for tax purposes; or (v) any Restricted
Payments not prohibited by the covenant described under "--Limitation on
Restricted Payments" (other than pursuant to clause (iv) of the definition of
"Permitted Investment" or clause (vi) of the second paragraph of such
covenant). Notwithstanding the foregoing, any transaction covered by the
first paragraph of this "Limitation on Transactions with Shareholders and
Affiliates" covenant and not covered by clauses (ii) through (iv) of this
paragraph, the aggregate amount of which exceeds $250,000 in value, must be
approved or determined to be fair in the manner provided for in clause (i)(A)
or (B) above.
LIMITATION ON ASSET SALES
Under the terms of each of the Indentures, WCI will not, and will not
permit any Restricted Subsidiary to, consummate any Asset Sale, unless (i)
the consideration received by WCI or such Restricted Subsidiary is at least
equal to the fair market value of the assets sold or disposed of and (ii) at
least 85% of the consideration received consists
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of cash or Temporary Cash Investments. In the event and to the extent that
the Net Cash Proceeds received by WCI or its Restricted Subsidiaries from one
or more Asset Sales occurring on or after the Closing Date in any period of
12 consecutive months exceed 10% of Adjusted Consolidated Net Tangible Assets
(determined as of the date closest to the commencement of such 12-month
period for which a consolidated balance sheet of WCI and its Subsidiaries has
been prepared), then WCI shall or shall cause the relevant Restricted
Subsidiary to (i) within six months after the date Net Cash Proceeds so
received exceed 10% of Adjusted Consolidated Net Tangible Assets (A) apply an
amount equal to such excess Net Cash Proceeds to permanently repay
unsubordinated Indebtedness of WCI, or Indebtedness of any Restricted
Subsidiary, in each case owing to a Person other than WCI or any of its
Restricted Subsidiaries or (B) invest an equal amount, or the amount not so
applied pursuant to clause (A) (or enter into a definitive agreement
committing to so invest within six months after the date of such agreement),
in property or assets of a nature or type or that are used in a business (or
in a company having property and assets of a nature or type, or engaged in a
business) similar or related to the nature or type of the property and assets
of, or the business of, WCI and its Restricted Subsidiaries existing on the
date of such investment (as determined in good faith by the Board of
Directors, whose determination shall be conclusive and evidenced by a Board
Resolution) and (ii) apply (no later than the end of the six-month period
referred to in clause (i)) such excess Net Cash Proceeds (to the extent not
applied pursuant to clause (i)) as provided in the following paragraph of
this "Limitation on Asset Sales" covenant. The amount of such excess Net Cash
Proceeds required to be applied (or to be committed to be applied) during
such six-month period as set forth in clause (i) of the preceding sentence
and not applied as so required by the end of such period shall constitute
"Excess Proceeds."
If, as of the first day of any calendar month, the aggregate amount of
Excess Proceeds not theretofore subject to an Offer to Purchase pursuant to
this "Limitation on Asset Sales" covenant totals at least $10.0 million, WCI
must commence, not later than the 15th Business Day after the first day of
such month, and consummate an Offer to Purchase from the Holders on a pro
rata basis an aggregate principal amount of Notes equal to the Excess
Proceeds on such date, at a purchase price equal to 101% of, in the case of
the Senior Notes, the Accumulated Amount of such Notes on such date of
purchase, and, in the case of the Equipment Notes, the principal amount of
such Notes, plus, in each case, accrued and unpaid interest (if any) on such
amount to the date of purchase.
Because of similar requirements in the indentures governing the Old
Senior Notes and the Convertible Notes, WCI may not have Excess Proceeds from
an Asset Sale to be able to comply with the foregoing requirements.
Notwithstanding the foregoing, pursuant to the Equipment Notes Indenture,
WinStar Equipment will not, and WCI will not permit WinStar Equipment to,
consummate any Asset Sale of Collateral, unless (A) such Asset Sale complies
with clause (i) and (ii) of the first paragraph of this covenant and WinStar
Equipment applies the Net Cash Proceeds from such Asset Sale within 45 days
following the date of receipt of such Net Cash Proceeds to acquire additional
Designated Equipment and (B) WinStar Equipment takes such action as is
necessary to vest in the Equipment Notes Trustee a security interest in such
additional Designated Equipment pursuant to the covenant described under
"--Covenants Relating to the Equipment Notes--Purchase Money Security
Interests."
LIMITATION ON LIENS
Under the terms of each of the Indentures, WCI will not, and will not
permit any Restricted Subsidiary to, create, incur, assume or suffer to exist
any Lien on any of its assets or properties of any character, or any shares
of Capital Stock or Indebtedness of any Restricted Subsidiary (collectively,
"Protected Property"), without making effective provision for all of the
Senior Notes or the Equipment Note Guarantee, as the case may be, and all
other amounts due under the Indentures and payable by WCI to be directly
secured equally and ratably with (or, if the obligation or liability to be
secured by such Lien is subordinated in right of payment to the Senior Notes
or the Equipment Note Guarantee, as the case may be, prior to) the obligation
or liability secured by such Lien.
The foregoing limitation does not apply to (i) Liens existing on the
Closing Date; (ii) Liens granted after the Closing Date on any assets or
Capital Stock of WCI or its Restricted Subsidiaries created in favor of the
Holders; (iii) Liens with respect to the assets of a Restricted Subsidiary
granted by such Restricted Subsidiary to WCI or a Wholly Owned Restricted
Subsidiary to secure Indebtedness owing to WCI or such other Restricted
Subsidiary; (iv) Liens securing Indebtedness which is Incurred to refinance
secured Indebtedness which is permitted to be Incurred under clause (iii) of
the second paragraph of the covenant described under "--Limitation on
Indebtedness;" provided,
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however, that such Liens do not extend to or cover any property or assets of
WCI or any Restricted Subsidiary other than the property or assets securing
the Indebtedness being refinanced; (v) Liens securing Indebtedness Incurred
pursuant to the first sentence of the covenant described under "--Limitation
on Indebtedness;" (vi) purchase money or other Liens upon equipment or
inventory acquired or held by WCI or any of its Restricted Subsidiaries taken
or obtained by (A) the seller or lessor of such equipment or inventory to
secure all or a part of the purchase price or lease payments therefor or (B)
the person who makes advances or incurs obligations, thereby giving value to
WCI to enable it to purchase or acquire rights in such equipment or
inventory, to secure the repayment of all or a part of the advances so made
or obligations so incurred; provided, however, that such Liens do not extend
to or cover any property or assets of WCI or any Restricted Subsidiary other
than the equipment or inventory acquired; or (vii) Permitted Liens.
LIMITATION ON SALE-LEASEBACK TRANSACTIONS
Under the terms of each of the Indentures, WCI will not, and will not
permit any Restricted Subsidiary to, enter into any sale-leaseback
transaction involving any of its assets or properties whether now owned or
hereafter acquired, whereby WCI or a Restricted Subsidiary sells or transfers
such assets or properties and then or thereafter leases such assets or
properties or any part thereof or any other assets or properties which WCI or
such Restricted Subsidiary, as the case may be, intends to use for
substantially the same purpose or purposes as the assets or properties sold
or transferred.
The foregoing restriction does not apply to any sale-leaseback
transaction if (i) the lease is for a period, including renewal rights, of
not in excess of three years; (ii) the lease secures or relates to industrial
revenue or pollution control bonds; (iii) the transaction is solely between
WCI and any Wholly Owned Restricted Subsidiary or solely between Wholly Owned
Restricted Subsidiaries; (iv) the assets or properties are sold and leased
back within 30 days of the date that the account payable with respect to the
acquisition by WCI or any Restricted Subsidiary of such assets or properties
is due and payable; or (v) WCI or such Restricted Subsidiary, within six
months after the sale or transfer of any assets or properties is completed,
applies an amount not less than the net proceeds received from such sale in
accordance with clause (A) or (B) of the first paragraph of the covenant
described under "--Limitation on Asset Sales."
COVENANTS RELATING TO THE EQUIPMENT NOTES
BUSINESS ACTIVITIES
Under the terms of the Equipment Notes Indenture, WinStar Equipment shall
not, and WCI shall not permit WinStar Equipment to, (i) Incur any
Indebtedness other than the Equipment Notes and refinancings thereof
permitted by the covenant described under "--Covenants Relating to All the
Notes-- Limitation of Indebtedness" or (ii) engage in any business activities
other than (A) the activities contemplated in the covenants described under
"--Use of Proceeds" and "--Purchase Money Security Interests," (B) leasing
Designated Equipment and (C) activities incidental to the activities
described in clauses (A) and (B).
USE OF PROCEEDS
Under the terms of the Equipment Notes Indenture, WinStar Equipment will,
and WCI will cause WinStar Equipment to, apply the gross proceeds received by
WinStar Equipment from the sale of the Equipment Notes to acquire Designated
Equipment, including the payment of the purchase price therefor and shipping,
handling, storage, transportation, testing and insurance charges, design,
integration and site preparation expenses and installation and
service/warranty costs associated with the acquisition of any Designated
Equipment (collectively, "Acquisition Costs"). On the Closing Date, WinStar
Equipment will acquire Designated Equipment having an Acquisition Cost of at
least $10.0 million. Any gross proceeds not applied on the Closing Date to
acquire Designated Equipment pursuant to this covenant will be invested by
WinStar Equipment in Temporary Cash Investments pending application of such
gross proceeds to acquire Designated Equipment (or application of such gross
proceeds pursuant to the provisions describe above under "--Mandatory
Redemption of Equipment Notes").
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PURCHASE MONEY SECURITY INTERESTS
Under the terms of the Equipment Notes Indenture, upon the acquisition by
WinStar Equipment of Designated Equipment, WinStar Equipment will, and WCI
will cause WinStar Equipment to, take such action as is required to vest in
the Equipment Notes Trustee a security interest in such Designated Equipment,
for the benefit of the Holders of Equipment Notes, and thereupon all
provisions of the Indenture relating to Collateral shall be deemed to relate
to and include such Designated Equipment. On the Closing Date and from time
to time if requested by the Equipment Notes Trustee, WinStar Equipment will,
and WCI will cause WinStar Equipment to, execute such security instruments
and financing statements as may be reasonably necessary to vest in the
Trustee such security interest. In addition, with respect to any
telecommunications switch that constitutes Designated Equipment acquired
pursuant to the covenant described under "--Use of Proceeds," WinStar
Equipment will post a notice on, or in the location housing, such
telecommunications switch, identifying WinStar Equipment as the owner of such
telecommunications switch and stating that such telecommunications switch is
subject to the security interest under the Equipment Notes Indenture.
IMPAIRMENT OF SECURITY INTEREST
Under the terms of the Equipment Notes Indenture, WinStar Equipment will,
and WCI will cause WinStar Equipment to, on or prior to the Closing Date,
file UCC-1s in each state in the United States covering all Designated
Equipment acquired by WinStar Equipment pursuant to the covenant described
above under "--Use of Proceeds," and to file such UCC-3 continuation
statements from time to time as may be necessary to continue the
effectiveness of such filings, and WinStar Equipment will not, and WCI will
not and will not permit any of its Subsidiaries to, grant to any Person
(other than the Equipment Notes Trustee on behalf of Holders of the Equipment
Notes) any security interest in the Collateral.
OWNERSHIP OF WINSTAR EQUIPMENT
Under the terms of the Equipment Notes Indenture, WCI will at all times
own all the Capital Stock of WinStar Equipment.
SEC REPORTS AND REPORTS TO HOLDERS
Whether or not WCI is required to file reports with the SEC, if any Notes
are outstanding, WCI shall file with the SEC all such reports and other
information as it would be required to file with the SEC by Sections 13(a) or
15(d) under the Exchange Act. See "Available Information." WCI shall supply
the Trustee and each Holder of Notes, as the case may be, or shall supply to
the relevant Trustee for forwarding to each such Holder, without cost to such
Holder, copies of such reports or other information.
CONSOLIDATION, MERGER AND SALE OF ASSETS
Under the terms of the Indentures, WCI shall not consolidate with, merge
with or into, or sell, convey, transfer, lease or otherwise dispose of all or
substantially all of its property and assets (as an entirety or substantially
an entirety in one transaction or a series of related transactions) to, any
Person (other than a consolidation or merger with or into a Wholly Owned
Restricted Subsidiary with a positive net worth; provided, however, that, in
connection with any such merger or consolidation, no consideration (other
than Common Stock in the surviving Person or WCI) shall be issued or
distributed to the stockholders of WCI) or permit any Person to merge with or
into WCI unless: (i) WCI shall be the continuing Person, or the Person (if
other than WCI) formed by such consolidation or into which WCI is merged or
that acquired or leased such property and assets of WCI shall be a
corporation organized and validly existing under the laws of the United
States of America or any jurisdiction thereof and shall expressly assume, by
a supplemental indenture, executed and delivered to the Trustee, all of the
obligations of WCI on all of the Senior Notes or the Equipment Note
Guarantee, as the case may be, and under the relevant Indenture; (ii)
immediately after giving effect to such transaction, no Default or Event of
Default shall have occurred and be continuing; (iii) immediately after giving
effect to such transaction on a pro forma basis, WCI or any Person becoming
the successor obligor of the Senior Notes or the Equipment Note Guarantee, as
the case may be, shall have a Consolidated Net Worth equal to or greater than
the Consolidated Net Worth of WCI immediately prior to such transaction; (iv)
immediately after giving effect to such transaction on a pro forma basis WCI,
or any Person becoming the successor obligor of the Senior Notes or
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the Equipment Note Guarantee, as the case may be, could Incur at least $1.00
of Indebtedness under the first paragraph of the covenant described under
"--Covenants--Covenants Relating to All the Notes--Limitation on
Indebtedness;" and (v) WCI delivers to the relevant Trustee an Officers'
Certificate (attaching the arithmetical computations to demonstrate
compliance with clauses (iii) and, if applicable, (iv)) and Opinion of
Counsel, in each case stating that such consolidation, merger or transfer and
such supplemental indenture complies with this provision and that all
conditions precedent provided for herein relating to such transaction have
been complied with; provided, however, that clauses (iii) and (iv) above do
not apply if, in the good faith determination of the Board of Directors of
WCI, whose determination shall be evidenced by a Board Resolution, the
principal purpose of such transaction is to change the state of incorporation
of WCI; provided further, however, that any such transaction shall not have
as one of its purposes the evasion of the foregoing limitations.
Under the terms of the Equipment Notes Indenture, WinStar Equipment shall
not consolidate with, merge with or into, or sell, convey, transfer, lease
(other than in the ordinary course of business) or otherwise dispose of all
or substantially all of its property and assets to, any Person or permit any
Person to merge with and into WinStar Equipment unless: (i) WinStar Equipment
shall be the continuing Person, or the Person (if other than WinStar
Equipment) formed by such consolidation or into which WinStar Equipment is
merged or that acquired or leased such property and assets of WinStar
Equipment shall be a corporation organized and validly existing under the
laws of the United States of America or any jurisdiction thereof and shall
expressly assume, by a supplemental indenture, executed and delivered to the
Equipment Notes Trustee, all of the obligations of WinStar Equipment on all
of the Equipment Notes and under the Equipment Notes Indenture; (ii)
immediately after giving effect to such transaction, no Default or Event of
Default shall have occurred and be continuing; and (iii) WinStar Equipment
delivers to the Equipment Notes Trustee an Officers' Certificate and Opinion
of Counsel, in each case stating that such consolidation, merger or transfer
and such supplemental indenture complies with this provision and that all
conditions precedent provided for herein relating to such transaction have
been complied with.
EVENTS OF DEFAULT
The following events will be defined as "Events of Default" in each of
the Indentures: (i) default in the payment of principal of (or premium, if
any, on) any Senior Note or Equipment Note, as the case may be, when the same
becomes due and payable at maturity, upon acceleration, redemption or
otherwise; (ii) default in the payment of interest on any Senior Note or
Equipment Note, as the case may be, when the same becomes due and payable,
and such default continues for a period of 30 days; (iii) WCI or WinStar
Equipment defaults in the performance of or breaches any other covenant or
agreement of WCI or WinStar Equipment in the Senior Notes Indenture or the
Equipment Notes Indenture, as the case may be, or under the Senior Notes or
the Equipment Notes, as the case may be, and such default or breach continues
for a period of 30 consecutive days after written notice by the relevant
Trustee or the Holders of 25% or more in aggregate principal amount of Senior
Notes or Equipment Notes, as the case may be; (iv) there occurs with respect
to any issue or issues of Indebtedness of WCI or any Significant Subsidiary
having an outstanding principal amount of $25.0 million or more in the
aggregate for all such issues of all such Persons, whether such Indebtedness
now exists or shall hereafter be created, (a) an event of default that has
caused the holder thereof to declare such Indebtedness to be due and payable
prior to its Stated Maturity and such Indebtedness has not been discharged in
full or such acceleration has not been rescinded or annulled within 30 days
of such acceleration and/or (b) the failure to make a principal payment at
the final (but not any interim) fixed maturity and such defaulted payment
shall not have been made, waived or extended within 30 days of such payment
default; (v) any final judgment or order (not covered by insurance) for the
payment of money in excess of $25.0 million in the aggregate for all such
final judgments or orders against all such Persons (treating any deductibles,
self-insurance or retention as not so covered) shall be rendered against WCI
or any Significant Subsidiary and shall not be paid or discharged, and there
shall be any period of 60 consecutive days following entry of the final
judgment or order that causes the aggregate amount for all such final
judgments or orders outstanding and not paid or discharged against all such
Persons to exceed $25.0 million during which a stay of enforcement of such
final judgment or order, by reason of a pending appeal or otherwise, shall
not be in effect; (vi) a court having jurisdiction in the premises enters a
decree or order for (a) relief in respect of WCI or any Significant
Subsidiary in an involuntary case under any applicable bankruptcy, insolvency
or other similar law now or hereafter in effect, (b) appointment of a
receiver, liquidator, assignee, custodian, trustee, sequestrator or similar
official of WCI or any Significant Subsidiary or for all or substantially all
of the property and assets of WCI, WinStar Equipment or any Significant
Subsidiary or (c) the winding up or liquidation of the affairs of WCI or any
Significant Subsidiary and, in each case, such decree or order shall remain
unstayed and in effect for
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a period of 60 consecutive days; or (vii) WCI or any Significant Subsidiary
(a) commences a voluntary case under any applicable bankruptcy, insolvency or
other similar law now or hereafter in effect, or consents to the entry of an
order for relief in an involuntary case under any such law, (b) consents to
the appointment of or taking possession by a receiver, liquidator, assignee,
custodian, trustee, sequestrator or similar official of WCI or any
Significant Subsidiary or for all or substantially all of the property and
assets of WCI or any Significant Subsidiary or (c) effects any general
assignment for the benefit of creditors. In addition to the foregoing, it
shall be an Event of Default under the Equipment Notes Indenture if (i) any
of the provisions of the Equipment Notes Indenture relating to the Security
Documents or the Security Documents shall cease to be in full force and
effect or shall cease to give the secured parties the liens, rights, powers
and privileges purported to be created thereby or (ii) the Equipment Note
Guarantee ceases to be in full force and effect (other than in accordance
with its terms) or WCI denies or disaffirms its obligations under the
Equipment Note Guarantee.
If an Event of Default (other than an Event of Default specified in
clause (vi) or (vii) above that occurs with respect to WCI or WinStar
Equipment) occurs and is continuing under the Indenture, the Trustee or the
Holders of at least 25% in aggregate principal amount of the Senior Notes or
Equipment Notes, as the case may be, then outstanding, by written notice to
WCI (and to the relevant Trustee if such notice is given by the Holders),
may, and the relevant Trustee at the request of such Holders shall, declare
the principal of, premium, if any, and accrued interest, if any, on the
Senior Notes or the Equipment Notes, as the case may be, to be immediately
due and payable. Upon a declaration of acceleration, such principal, premium,
if any, and accrued interest, if any, shall be immediately due and payable.
In the event of a declaration of acceleration because an Event of Default set
forth in clause (iv) above has occurred and is continuing, such declaration
of acceleration shall be automatically rescinded and annulled if the event of
default triggering such Event of Default pursuant to clause (iv) shall be
remedied or cured by WCI or the relevant Significant Subsidiary or waived by
the holders of the relevant Indebtedness within 60 days after the declaration
of acceleration with respect thereto. If an Event of Default specified in
clause (vi) or (vii) above occurs with respect to WCI or WinStar Equipment,
the principal of, premium, if any, and accrued interest, if any, on the Notes
then outstanding shall ipso facto become and be immediately due and payable
without any declaration or other act on the part of either Trustee or any
Holder. The Holders of at least a majority in principal amount of the
outstanding Senior Notes or Equipment Notes, as the case may be, by written
notice to WCI and to the relevant Trustee, may waive all past defaults and
rescind and annul a declaration of acceleration and its consequences if (A)
all existing Events of Default, other than the nonpayment of the principal
of, premium, if any, and interest on the Senior Notes or the Equipment Notes,
as the case may be, that have become due solely by such declaration of
acceleration, have been cured or waived and (B) the rescission would not
conflict with any judgment or decree of a court of competent jurisdiction.
For information as to the waiver of defaults, see "--Modification and Waiver."
The Holders of at least a majority in aggregate principal amount of the
outstanding Senior Notes or Equipment Notes, as the case may be, may direct
the time, method and place of conducting any proceeding for any remedy
available to the relevant Trustee or exercising any trust or power conferred
on the relevant Trustee. However, such Trustee may refuse to follow any
direction that conflicts with law or the relevant Indenture, that may involve
such Trustee in personal liability, or that such Trustee determines in good
faith may be unduly prejudicial to the rights of Holders of Senior Notes or
Equipment Notes, as the case may be, not joining in the giving of such
direction and may take any other action it deems proper that is not
inconsistent with any such direction received from Holders of Senior Notes or
Equipment Notes, as the case may be. A Holder may not pursue any remedy with
respect to the relevant Indenture or the Senior Notes or the Equipment Notes,
as the case may be, unless: (i) the Holder gives the relevant Trustee written
notice of a continuing Event of Default; (ii) the Holders of at least 25% in
aggregate principal amount of outstanding Senior Notes or Equipment Notes, as
the case may be, make a written request to the relevant Trustee to pursue the
remedy; (iii) such Holder or Holders offer the relevant Trustee indemnity
satisfactory to such Trustee against any costs, liability or expense; (iv)
such Trustee does not comply with the request within 60 days after receipt of
the request and the offer of indemnity; and (v) during such 60-day period,
the Holders of a majority in aggregate principal amount of the outstanding
Senior Notes or Equipment Notes, as the case may be, do not give the relevant
Trustee a direction that is inconsistent with the request. However, such
limitations do not apply to the right of any Holder of a Senior Note or
Equipment Note, as the case may be, to receive payment of the principal of,
premium, if any, or interest on, such Note or to bring suit for the
enforcement of any such payment, on or after the due date expressed in the
Senior Notes or the Equipment Notes, as the case may be, which right shall
not be impaired or affected without the consent of the Holder.
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The Indentures require certain officers of WCI to certify, on or before a
date not more than 90 days after the end of each fiscal year, that a review
has been conducted of the activities of WCI and its Restricted Subsidiaries'
performance under the Indentures and that, to the best knowledge of such
officer, WCI has fulfilled all obligations thereunder, or, if there has been
a default in the fulfillment of any such obligation, specifying each such
default and the nature and status thereof. WCI is also obligated to notify
the relevant Trustee of any default or defaults in the performance of any
covenants or agreements under the Senior Notes Indenture or the Equipment
Notes Indenture, as the case may be.
DEFEASANCE
DEFEASANCE AND DISCHARGE. The Indentures provide that WCI and WinStar
Equipment will be deemed to have paid and will be discharged from any and all
obligations in respect of the Senior Notes or the Equipment Notes, as the
case may be, on the 123rd day after the deposit referred to below, and the
provisions of such Indenture will no longer be in effect with respect to the
Senior Notes or the Equipment Notes, as the case may be, (except for, among
other matters, certain obligations to register the transfer or exchange of
the Senior Notes or the Equipment Notes, as the case may be, to replace
stolen, lost or mutilated Senior Notes or Equipment Notes, as the case may
be, to maintain paying agencies, to hold monies for payment in trust),
including in the case of the Equipment Notes Indenture, the provisions of
such Indenture pursuant to which the Equipment Notes are secured by the
Collateral and guaranteed by WCI, if, among other things, (A) WCI or WinStar
Equipment, as the case may be, has deposited with the relevant Trustee, in
trust, money and/or U.S. Government Obligations that through the payment of
interest and principal in respect thereof in accordance with their terms will
provide money in an amount sufficient to pay the principal of, premium, if
any, and accrued interest on the Senior Notes or the Equipment Notes, as the
case may be, on the Stated Maturity of such payments or upon earlier optional
redemption, in each case in accordance with the terms of the relevant
Indenture and the Senior Notes or the Equipment Notes, as the case may be,
(B) WCI or WinStar Equipment, as the case may be, has delivered to the
relevant Trustee (i) either (x) an Opinion of Counsel to the effect that
Holders will not recognize income, gain or loss for federal income tax
purposes as a result of WCI's or WinStar Equipment's exercise of its option
under this "Defeasance" provision and will be subject to federal income tax
on the same amount and in the same manner and at the same times as would have
been the case if such deposit, defeasance and discharge had not occurred,
which Opinion of Counsel must be based upon (and accompanied by a copy of) a
ruling of the Internal Revenue Service to the same effect unless there has
been a change in applicable federal income tax law after the Closing Date
such that a ruling is no longer required or (y) a ruling directed to the
Trustee received from the Internal Revenue Service to the same effect as the
aforementioned Opinion of Counsel and (ii) an Opinion of Counsel to the
effect that the creation of the defeasance trust does not violate the
Investment Company Act of 1940 and after the passage of 123 days following
the deposit, the trust fund will not be subject to the effect of Section 547
of the Bankruptcy Code or Section 15 of the New York Debtor and Creditor Law,
(C) immediately after giving effect to such deposit on a pro forma basis, no
Event of Default, or event that after the giving of notice or lapse of time
or both would become an Event of Default, shall have occurred and be
continuing on the date of such deposit or during the period ending on the
123rd day after the date of such deposit, and such deposit shall not result
in a breach or violation of, or constitute a default under, any other
agreement or instrument to which WCI or any of its Subsidiaries or WinStar
Equipment, as the case may be, is a party or by which WCI or any of its
Subsidiaries or WinStar Equipment, as the case may be, is bound, and (D) if
at such time the Senior Notes or the Equipment Notes, as the case may be, are
listed on a national securities exchange, WCI or WinStar Equipment, as the
case may be, has delivered to the relevant Trustee an Opinion of Counsel to
the effect that the applicable Notes will not be delisted as a result of such
deposit, defeasance and discharge.
Defeasance of Certain Covenants and Certain Events of Default. The
Indentures further provide that their provisions will no longer be in effect
with respect to clauses (iii) and (iv) under "Consolidation, Merger and Sale
of Assets" and all the covenants described herein under "Covenants," clause
(c) under "--Events of Default" with respect to such covenants and clauses
(iii) and (iv) under "Consolidation, Merger and Sale of Assets," and clauses
(d) and (e) and, if applicable, (i) and (ii) under "--Events of Default"
shall be deemed not to be Events of Default, and, with respect to the
Equipment Notes, the Collateral will be released and the Equipment Note
Guarantee will be deemed terminated, upon, among other things, the deposit
with the relevant Trustee, in trust, of money and/or U.S. Government
Obligations that through the payment of interest and principal in respect
thereof in accordance with their terms will provide money in an amount
sufficient to pay the principal of, premium, if any, and accrued interest on
the Senior Notes or the Equipment Notes, as the case may be, on the Stated
Maturity of such payments or upon earlier optional
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redemption, in each case in accordance with the terms of the relevant
Indenture and the Senior Notes or the Equipment Notes, as the case may be,
the satisfaction of the provisions described in clauses (B)(ii), (C) and (D)
of the preceding paragraph and the delivery by WCI or WinStar Equipment, as
the case may be, to the relevant Trustee of an Opinion of Counsel to the
effect that, among other things, the Holders will not recognize income, gain
or loss for federal income tax purposes as a result of such deposit and
defeasance of certain covenants and Events of Default and will be subject to
federal income tax on the same amount and in the same manner and at the same
times as would have been the case if such deposit and defeasance had not
occurred.
DEFEASANCE AND CERTAIN OTHER EVENTS OF DEFAULT. In the event WCI or
WinStar Equipment, as the case may be, exercises its option to omit
compliance with certain covenants and provisions of an Indenture with respect
to the Senior Notes or the Equipment Notes, as the case may be, as described
in the immediately preceding paragraph and the Senior Notes or the Equipment
Notes, as the case may be, are declared due and payable because of the
occurrence of an Event of Default that remains applicable, the amount of
money and/or U.S. Government Obligations on deposit with the relevant Trustee
will be sufficient to pay amounts due on the Senior Notes or the Equipment
Notes, as the case may be, at the time of their Stated Maturity but may not
be sufficient to pay amounts due on the Senior Notes or the Equipment Notes,
as the case may be, at the time of the acceleration resulting from such Event
of Default. However, WCI or WinStar Equipment, as applicable, will remain
liable for such payments.
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MODIFICATION AND WAIVER
Modifications and amendments of the 1997 Indentures may be made by WCI or
WinStar Equipment, as the case may be, and the relevant Trustee with the
consent of the Holders of not less than a majority in aggregate principal
amount of the outstanding Senior Notes or Equipment Notes, as the case may
be; provided, however, that no such modification or amendment may, without
the consent of each Holder affected thereby, (i) change the Stated Maturity
of the principal of, or any installment of interest on, any Note, (ii) reduce
the principal amount of, or premium, if any, or interest on, any Note, (iii)
change the place or currency of payment of principal of, or premium, if any,
or interest on, any Note, (iv) impair the right to institute suit for the
enforcement of any payment on or after the Stated Maturity (or, in the case
of a redemption, on or after the Redemption Date) of any Note, (v) reduce the
above-stated percentage of outstanding Senior Notes or Equipment Notes, as
the case may be, the consent of whose Holders is necessary to modify or amend
the Indenture, (vi) waive a default in the payment of principal of, premium,
if any, or interest on the Notes, (vii) reduce the percentage or aggregate
principal amount of outstanding Senior Notes or Equipment Notes, as the case
may be, the consent of whose Holders is necessary for waiver of compliance
with certain provisions of the Indenture or for waiver of certain defaults or
(viii) in the case of the Equipment Notes, make any change in the Equipment
Note Guarantee or in the provisions relating to Collateral that would
adversely affect the Holders of the Equipment Notes.
Without the consent of any Holder of the Senior Notes or the Equipment
Notes, as the case may be, WCI or WinStar Equipment, as the case may be, and
the relevant Trustee may modify or amend the relevant Indenture to cure any
ambiguity, defect or inconsistency, to provide for the assumption by a
successor company of WCI's or WinStar Equipment's, as the case may be,
obligations under the relevant Indenture, to comply with the requirements of
the Trust Indenture Act, to appoint a successor Trustee or to make any change
that, in the opinion of the Board of Directors of WCI or WinStar Equipment,
as the case may be, evidenced by a Board Resolution, does not materially and
adversely affect the rights of any Holder.
No Personal Liability of Incorporators, Stockholders, Officers, Directors
or Employees
The Indentures provide that no recourse for the payment of the principal
of, premium, if any, or interest on any of the Notes or for any claim based
thereon or otherwise in respect thereof, and no recourse under or upon any
obligation, covenant or agreement of WCI or WinStar Equipment, as the case
may be, in such Indenture, or in any of the Notes or because of the creation
of any Indebtedness represented thereby, shall be had against any
incorporator, stockholder, officer, director, employee or controlling person
of WCI, WinStar Equipment or of any successor Person thereof in such
capacity; provided, however, that the foregoing shall not affect WCI's
obligations with respect to the Equipment Note Guarantee. Each Holder, by
accepting the Notes, waives and releases all such liability.
CONCERNING THE TRUSTEE
The Indentures provide that, except during the continuance of a Default,
the Trustee will not be liable, except for the performance of such duties as
are specifically set forth in such Indenture. If an Event of Default has
occurred and is continuing, the Trustee will use the same degree of care and
skill in its exercise as a prudent person would exercise under the
circumstances in the conduct of such person's own affairs.
The Indentures and provisions of the Trust Indenture Act incorporated by
reference therein contain limitations on the rights of the Trustees, should
they become creditors of WCI or WinStar Equipment, as the case may be, to
obtain payment of claims in certain cases or to realize on certain property
received by it in respect of any such claims, as security or otherwise. The
Trustees are permitted to engage in other transactions; provided, however,
that if any Trustee acquires any conflicting interest, it must eliminate such
conflict or resign.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
covenants and other provisions of the Indentures. Reference is made to the
relevant Indenture for the full definition of all terms as well as any other
capitalized term used herein for which no definition is provided.
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"Accumulated Amount" means, as of any date (the "Specified Date"), the
amount provided below for each $1,000 principal amount of Senior Notes.
(i) if the Specified Date occurs on one of the following dates (each, a
"SemiAnnual Interest Accrual Date"), the Accumulated Amount of a
Senior Note will equal the amount set forth below for such Senior Note
for such SemiAnnual Interest Accrual Date:
<TABLE>
<CAPTION>
SEMIANNUAL INTEREST ACCRUAL DATE ACCUMULATED AMOUNT
- --------------------------------------------------------------------------------------------- -------------------
<S> <C>
April 15, 1997............................................................................... $ 1,010.88
October 15, 1997............................................................................. 1,084.16
April 15, 1998............................................................................... 1,162.77
October 15, 1998............................................................................. 1,247.07
April 15, 1999............................................................................... 1,337.48
October 15, 1999............................................................................. 1,434.45
April 15, 2000............................................................................... 1,538.44
October 15, 2000............................................................................. 1,649.98
</TABLE>
(ii) if the Specified Date occurs before the first SemiAnnual Interest
Accrual Date, the Accumulated Amount will equal the sum of (A) $1,000
and (B) an amount equal to the product of (1) the Accumulated Amount
for the first SemiAnnual Interest Accrual Date less $1,000 multiplied
by (2) a fraction, the numerator of which is the number of days
elapsed from the Closing Date to the Specified Date, using a
360-day year of twelve 30-day months, and the denominator of which is
the number of days from the Closing Date to the first SemiAnnual
Interest Accrual Date, using a 360-day year of twelve 30-day months;
(iii) if the Specified Date occurs between two SemiAnnual Interest Accrual
Dates, the Accumulated Amount will equal the sum of (A) the
Accumulated Amount for the SemiAnnual Interest Accrual Date
immediately preceding such Specified Date and (B) an amount equal to
the product of (1) the Accumulated Amount for the immediately
following SemiAnnual Interest Accrual Date less the Accumulated
Amount for the immediately preceding SemiAnnual Interest Accrual Date
multiplied by (2) a fraction, the numerator of which is the number of
days elapsed from the immediately preceding SemiAnnual Interest
Accrual Date to the Specified Date, using a 360-day year of twelve
30-day months, and the denominator of which is 180; or
(iv) if the Specified Date occurs after the last SemiAnnual Interest
Accrual Date, the Accumulated Amount of a Senior Note will equal
$1,649.98.
"Adjusted Consolidated Net Income" means, for any period, the aggregate
net income (or loss) of WCI and its Restricted Subsidiaries for such period
determined in conformity with GAAP; provided, however, that the following
items shall be excluded in computing Adjusted Consolidated Net Income
(without duplication): (i) the net income of any Person (other than net
income attributable to a Restricted Subsidiary) in which any Person (other
than WCI or any of its Restricted Subsidiaries) has a joint interest and the
net income of any Unrestricted Subsidiary, except to the extent of the amount
of dividends or other distributions actually paid to WCI or any of its
Restricted Subsidiaries by such other Person, including, without limitation,
an Unrestricted Subsidiary during such period; (ii) solely for the purposes
of calculating the amount of Restricted Payments that may be made pursuant to
clause (C) of the first paragraph of the covenant described under
"--Covenants--Covenants Relating to All the Notes-- Limitation on Restricted
Payments" (and in such case, except to the extent includable pursuant to
clause (i) above), the net income (or loss) of any Person accrued prior to
the date it becomes a Restricted Subsidiary or is merged into or consolidated
with WCI or any of its Restricted Subsidiaries or all or substantially all of
the property and assets of such Person are acquired by WCI or any of its
Restricted Subsidiaries; (iii) the net income of any Restricted Subsidiary to
the extent that the declaration or payment of dividends or similar
distributions by such Restricted Subsidiary of such net income is not at the
time permitted by the operation of the terms of its charter or any agreement,
instrument, judgment, decree, order, statute, rule or governmental regulation
applicable to such Restricted Subsidiary; (iv) any gains or losses (on an
after-tax basis) attributable to Asset Sales; (v) except for purposes of
calculating the amount of Restricted Payments
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that may be made pursuant to clause (C) of the first paragraph of the
covenant described under "--Covenants--Covenants Relating to All the
Notes--Limitation on Restricted Payments," any amount paid as, or accrued
for, cash dividends on Preferred Stock of WCI or any Restricted Subsidiary
owned by Persons other than WCI and any of its Restricted Subsidiaries; and
(vi) all extraordinary gains and extraordinary losses.
"Adjusted Consolidated Net Tangible Assets" means the total amount of
assets of WCI and its Restricted Subsidiaries (less applicable depreciation,
amortization and other valuation reserves), except to the extent resulting
from write-ups of capital assets (excluding write-ups in connection with
accounting for acquisitions in conformity with GAAP), after deducting
therefrom (i) all current liabilities of WCI and its Restricted Subsidiaries
(excluding intercompany items) and (ii) all goodwill, trade names,
trademarks, patents, unamortized debt discount and expense and other like
intangibles (other than licenses issued by the FCC), all as set forth on the
quarterly or annual consolidated balance sheet of WCI and its Restricted
Subsidiaries, prepared in conformity with GAAP and most recently filed with
the Commission pursuant to "--SEC Reports and Reports to Holders;" provided,
however, that the value of any licenses issued by the FCC shall, in the event
of an auction for similar licenses, be equal to the fair market value
ascribed thereto in good faith by the Board of Directors and evidenced by a
Board Resolution. As used in the Indentures, references to financial
statements of WCI and its Restricted Subsidiaries shall be adjusted to
exclude Unrestricted Subsidiaries if the context requires.
"Affiliate" means, as applied to any Person, any other Person directly or
indirectly controlling, controlled by, or under direct or indirect common
control with, such Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled
by" and "under common control with"), as applied to any Person, means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such Person, whether through the
ownership of voting securities, by contract or otherwise.
"Asset Acquisition" means (i) an investment by WCI or any of its
Restricted Subsidiaries in any other Person pursuant to which such Person
shall become a Restricted Subsidiary of WCI or shall be merged into or
consolidated with WCI or any of its Restricted Subsidiaries or (ii) an
acquisition by WCI or any of its Restricted Subsidiaries of the property and
assets of any Person other than WCI or any of its Restricted Subsidiaries
that constitute substantially all of a division or line of business of such
Person.
"Asset Sale" means any sale, transfer or other disposition (including by
way of merger, consolidation or sale-leaseback transactions) in one
transaction or a series of related transactions by WCI or any of its
Restricted Subsidiaries to any Person other than WCI or any of its Restricted
Subsidiaries of (i) all or any of the Capital Stock of any Restricted
Subsidiary, (ii) all or substantially all of the property and assets of an
operating unit or business of WCI or any of its Restricted Subsidiaries or
(iii) any other property or assets of WCI or any of its Restricted
Subsidiaries outside the ordinary course of business of WCI or such
Restricted Subsidiary and, in each case, that is not governed by the
provisions of the relevant Indenture applicable to mergers, consolidations
and sales of assets of WCI; provided, however, that the following shall not
be included within the meaning of "Asset Sale": (A) sales or other
dispositions of inventory, receivables and other current assets; (B) sales or
other dispositions of equipment that has become worn out, obsolete or damaged
or otherwise unsuitable for use in connection with the business of WCI or its
Restricted Subsidiaries; (C) a substantially simultaneous exchange of, or a
sale or disposition (other than 85% or more for cash or cash equivalents) by
WCI or any of its Restricted Subsidiaries of, licenses issued by the FCC or
applications or bids therefor; provided, however, that the consideration
received by WCI or any such Restricted Subsidiary in connection with such
exchange, sale or disposition shall be equal to the fair market value of
licenses so exchanged, sold or disposed of, as determined by the Board of
Directors; and (D) except for purposes of the definition of "Indebtedness to
EBITDA Ratio," any sale or other disposition of securities of an Unrestricted
Subsidiary. The Equipment Notes Indenture also provides that, notwithstanding
anything to the contrary in this definition, any sale, transfer or other
disposition (other than a lease in the ordinary course of business but
including the receipt of insurance proceeds in respect of Collateral) of any
Collateral shall be deemed to be an Asset Sale of such Collateral.
"Average Life" means, at any date of determination with respect to any
debt security, the quotient obtained by dividing (i) the sum of the products
of (a) the number of years from such date of determination to the dates of
each successive scheduled principal payment of such debt security and (b) the
amount of such principal payment by (ii) the sum of all such principal
payments.
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"Business Day" means any day except a Saturday, Sunday or other day on
which commercial banks in The City of New York, or in the city of the
Corporate Trust Office of the Trustee, are authorized by law to close.
"Capital Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated, whether
voting or non-voting) in equity of such Person, whether now outstanding or
issued after the date of the Indenture, including, without limitation, all
Common Stock and Preferred Stock.
"Capitalized Lease" means, as applied to any Person, any lease of any
property (whether real, personal or mixed) of which the discounted present
value of the rental obligations of such Person as lessee, in conformity with
GAAP, is required to be capitalized on the balance sheet of such Person; and
"Capitalized Lease Obligations" means the discounted present value of the
rental obligations under such lease.
"Change of Control" means such time as (i) a "person" or "group" (within
the meaning of Sections 13(d) and 14(d)(2) of the Securities Exchange Act of
1934, as amended ("Exchange Act")), other than the Permitted Investor,
becomes the ultimate "beneficial owner" (as defined in Rule 13d-3 under the
Exchange Act) of Voting Stock representing more than 50% of the total voting
power of the Voting Stock of WCI on a fully diluted basis or (ii) individuals
who on the Closing Date constituted the Board of Directors (together with any
new directors whose election by the Board of Directors or whose nomination
for election by WCI's stockholders was approved by a vote of at least
two-thirds of the members of the Board of Directors then in office who either
were members of the Board of Directors on the Closing Date or whose election
or nomination for election was previously so approved) cease for any reason
to constitute a majority of the members of the Board of Directors then in
office.
"Closing Date" means the date on which the Senior Notes or the Equipment
Notes, as the case may be, are originally issued under the applicable
Indenture.
"Consolidated EBITDA" means, for any period, the sum of the amounts for
such period of (i) Adjusted Consolidated Net Income, (ii) Consolidated
Interest Expense, to the extent such amount was deducted in calculating
Adjusted Consolidated Net Income, (iii) income taxes, to the extent such
amount was deducted in calculating Adjusted Consolidated Net Income (other
than income taxes (either positive or negative) attributable to extraordinary
and nonrecurring gains or losses or sales of assets), (iv) depreciation
expense, to the extent such amount was deducted in calculating Adjusted
Consolidated Net Income, (v) amortization expense, to the extent such amount
was deducted in calculating Adjusted Consolidated Net Income and (vi) all
other noncash items reducing Adjusted Consolidated Net Income (other than
items that will require cash payments and for which an accrual or reserve is,
or is required by GAAP to be, made), less all noncash items increasing
Adjusted Consolidated Net Income, all as determined on a consolidated basis
for WCI and its Restricted Subsidiaries in conformity with GAAP; provided,
however, that, if any Restricted Subsidiary is not a Wholly Owned Restricted
Subsidiary, Consolidated EBITDA shall be reduced (to the extent not otherwise
reduced in accordance with GAAP) by an amount equal to (A) the amount of the
Adjusted Consolidated Net Income attributable to such Restricted Subsidiary
multiplied by (B) the quotient of (1) the number of shares of outstanding
Common Stock of such Restricted Subsidiary not owned on the last day of such
period by WCI or any of its Restricted Subsidiaries divided by (2) the total
number of shares of outstanding Common Stock of such Restricted Subsidiary on
the last day of such period.
"Consolidated Interest Expense" means, for any period, the aggregate
amount of interest in respect of Indebtedness (including amortization of
original issue discount on any Indebtedness and the interest portion of any
deferred payment obligation, calculated in accordance with the effective
interest method of accounting; all commissions, discounts and other fees and
charges owed with respect to letters of credit and bankers' acceptance
financing; the net costs associated with Interest Rate Agreements; and
Indebtedness that is Guaranteed or secured by WCI or any of its Restricted
Subsidiaries) and all but the principal component of rentals in respect of
Capitalized Lease Obligations paid, accrued or scheduled to be paid or to be
accrued by WCI and its Restricted Subsidiaries during such period; excluding,
however, (i) any amount of such interest of any Restricted Subsidiary if the
net income of such Restricted Subsidiary is excluded in the calculation of
Adjusted Consolidated Net Income pursuant to clause (iii) of the definition
thereof (but only in the same proportion as the net income of such Restricted
Subsidiary is excluded from the calculation of Adjusted Consolidated Net
Income pursuant to clause (iii) of the definition thereof) and (ii) any
premiums, fees and expenses (and any amortization thereof) payable in
connection with the offering of the Notes, all as determined on a
consolidated basis (without taking into account Unrestricted Subsidiaries) in
conformity with GAAP.
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"Consolidated Net Worth" means, at any date of determination,
stockholders' equity as set forth on the most recently available quarterly or
annual consolidated balance sheet of WCI and its Restricted Subsidiaries
(which shall be as of a date not more than 90 days prior to the date of such
computation, and which shall not take into account Unrestricted
Subsidiaries), less any amounts attributable to Redeemable Stock or any
equity security convertible into or exchangeable for Indebtedness, the cost
of treasury stock and the principal amount of any promissory notes receivable
from the sale of the Capital Stock of WCI or any of its Restricted
Subsidiaries, each item to be determined in conformity with GAAP (excluding
the effects of foreign currency exchange adjustments under Financial
Accounting Standards Board Statement of Financial Accounting Standards No.
52).
"Convertible Notes" means the 14% Convertible Senior Subordinated
Discount Notes of WCI due 2005.
"Convertible Notes Indenture" means the Indenture dated as of October 23,
1995, between WCI and United States Trust Company of New York pursuant to
which the Convertible Notes were issued.
"Default" means any event that is, or after notice or passage of time or
both would be, an Event of Default.
"Designated Equipment" means (i) telecommunications switches and related
equipment and inventory; (ii) customer premise equipment; (iii) radios,
antennae and cabling; (iv) office and warehouse furniture, fixtures and
equipment (including, without limitation, computers and communications
equipment); (v) company service vehicles; and (vi) software related to each
of the foregoing, in each case used in the telecommunications business of WCI
and its Subsidiaries.
"Equipment Notes" means the 12 1/2% Guaranteed Senior Secured Notes of
WinStar Equipment Due 2004.
"fair market value" means the price that would be paid in an arm's-length
transaction between an informed and willing seller under no compulsion to
sell and an informed and willing buyer under no compulsion to buy, as
determined in good faith by the Board of Directors (whose determination shall
be conclusive) and evidenced by a Board Resolution.
"FCC" means the United States Federal Communications Commission and any
state or local telecommunications authority, department, commission or agency
(and any successors thereto).
"GAAP" means generally accepted accounting principles in the United
States of America as in effect as of the date of the Indenture, including,
without limitation, those set forth in the opinions and pronouncements of the
Accounting Principles Board of the American Institute of Certified Public
Accountants and statements and pronouncements of the Financial Accounting
Standards Board or in such other statements by such other entity as approved
by a significant segment of the accounting profession. All ratios and
computations contained in the Indenture shall be computed in conformity with
GAAP applied on a consistent basis, except that calculations made for
purposes of determining compliance with the terms of the covenants and with
other provisions of the Indentures shall be made without giving effect to (i)
the amortization of any expenses incurred in connection with the offering of
the Senior Notes or the Equipment Notes and (ii) except as otherwise
provided, the amortization of any amounts required or permitted by Accounting
Principles Board Opinion Nos. 16 and 17.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness or other obligation of
any other Person and, without limiting the generality of the foregoing, any
obligation, direct or indirect, contingent or otherwise, of such Person (i)
to purchase or pay (or advance or supply funds for the purchase or payment
of) such Indebtedness or other obligation of such other Person (whether
arising by virtue of partnership arrangements, or by agreements to keep-well,
to purchase assets, goods, securities or services, to take-or-pay, or to
maintain financial statement conditions or otherwise) or (ii) entered into
for purposes of assuring in any other manner the obligee of such Indebtedness
or other obligation of the payment thereof or to protect such obligee against
loss in respect thereof (in whole or in part); provided, however, that the
term "Guarantee" shall not include endorsements for collection or deposit in
the ordinary course of business. The term "Guarantee" used as a verb has a
corresponding meaning.
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"Holder" means the Person in whose name a Note is registered on the books
of the registrar for the applicable Notes.
"Incur" means, with respect to any Indebtedness, to incur, create, issue,
assume, Guarantee or otherwise become liable for or with respect to, or
become responsible for, the payment of, contingently or otherwise, such
Indebtedness, including, with respect to the Company and its Restricted
Subsidiaries, an "incurrence" of Indebtedness by reason of a Person becoming
a Restricted Subsidiary of the Company; provided, however, that neither the
accrual of interest nor the accretion of original issue discount shall be
considered an Incurrence of Indebtedness.
"Indebtedness" means, with respect to any Person at any date of
determination (without duplication), (i) all indebtedness of such Person for
borrowed money, (ii) all obligations of such Person evidenced by bonds,
debentures, notes or other similar instruments (whether negotiable or
non-negotiable), (iii) all obligations of such Person in respect of letters
of credit or other similar instruments (including reimbursement obligations
with respect thereto), (iv) all obligations of such Person to pay the
deferred and unpaid purchase price of property or services, which purchase
price is due more than six months after the date of placing such property in
service or taking delivery and title thereto or the completion of such
services, except trade payables, (v) all obligations of such Person as lessee
under Capitalized Leases, (vi) all Indebtedness of other Persons secured by a
Lien on any asset of such Person, whether or not such Indebtedness is assumed
by such Person; provided, however, that the amount of such Indebtedness shall
be the lesser of (A) the fair market value of such asset at such date of
determination and (B) the amount of such Indebtedness, (vii) all Indebtedness
of other Persons Guaranteed by such Person to the extent such Indebtedness is
Guaranteed by such Person and (viii) to the extent not otherwise included in
this definition, obligations under Currency Agreements and Interest Rate
Agreements. The amount of Indebtedness of any Person at any date shall be the
outstanding balance at such date of all unconditional obligations as
described above and, with respect to contingent obligations that are included
in any of clauses (i) through (viii) above, the maximum liability upon the
occurrence of the contingency giving rise to the obligation; provided,
however, that (A) the amount outstanding at any time of any Indebtedness
issued with original issue discount is (1) for purposes of determining the
Indebtedness to EBITDA Ratio, the face amount of such Indebtedness less the
remaining unamortized portion of the original issue discount of such
Indebtedness at such time as determined in conformity with GAAP and (2) for
all other purposes, the amount determined in clause (1) on the date such
Indebtedness is originally Incurred and (B) Indebtedness shall not include
any liability for federal, state, local or other taxes.
"Indebtedness to EBITDA Ratio" means, as at any date of determination,
the ratio of (i) the aggregate amount of Indebtedness of WCI and its
Restricted Subsidiaries on a consolidated basis ("Consolidated Indebtedness")
as at the date of determination (the "Transaction Date") to (ii) the
Consolidated EBITDA of WCI for the then most recent four full fiscal quarters
for which reports have been filed pursuant to "--SEC Reports and Reports to
Holders" (such four full fiscal quarter period being referred to herein as
the "Four Quarter Period"); provided, however, that (x) pro forma effect
shall be given to any Indebtedness Incurred from the beginning of the Four
Quarter Period through the Transaction Date (including any Indebtedness
Incurred on the Transaction Date), to the extent outstanding on the
Transaction Date, (y) if during the period commencing on the first day of
such Four Quarter Period through the Transaction Date (the "Reference
Period"), WCI or any of the Restricted Subsidiaries shall have engaged in any
Asset Sale, Consolidated EBITDA for such period shall be reduced by an amount
equal to the EBITDA (if positive), or increased by an amount equal to the
EBITDA (if negative), directly attributable to the assets which are the
subject of such Asset Sale and any related retirement of Indebtedness as if
such Asset Sale and related retirement of Indebtedness had occurred on the
first day of such Reference Period or (z) if during such Reference Period WCI
or any of the Restricted Subsidiaries shall have made any Asset Acquisition,
Consolidated EBITDA of WCI shall be calculated on a pro forma basis as if
such Asset Acquisition and any Incurrence of Indebtedness to finance such
Asset Acquisition had taken place on the first day of such Reference Period.
"Investment" in any Person means any direct or indirect advance, loan or
other extension of credit (including, without limitation, by way of Guarantee
or similar arrangement; but excluding advances to customers in the ordinary
course of business that are, in conformity with GAAP, recorded as accounts
receivable on the balance sheet of WCI or its Restricted Subsidiaries) or
capital contribution to (by means of any transfer of cash or other property
to others or any payment for property or services for the account or use of
others), or any purchase or acquisition of Capital Stock, bonds, notes,
debentures or other similar instruments issued by, such Person and shall
include (i) the designation of a Restricted Subsidiary as an Unrestricted
Subsidiary and (ii) the fair market value of the Capital Stock held by WCI
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and the Restricted Subsidiaries of any Person that has ceased to be a
Restricted Subsidiary by reason of any transaction permitted by clause (iii)
of the covenant described under "--Covenants--Covenants Relating to All the
Notes--Limitation on the Issuance and Sale of Capital Stock of Restricted
Subsidiaries." For purposes of the definition of "Unrestricted Subsidiary"
and the covenant described under "--Covenants--Covenants Relating to All the
Notes--Limitation on Restricted Payments," (i) "Investment" shall include the
fair market value of the assets (net of liabilities) of any Restricted
Subsidiary of WCI at the time that such Restricted Subsidiary of WCI is
designated an Unrestricted Subsidiary and shall exclude the fair market value
of the assets (net of liabilities) of any Unrestricted Subsidiary at the time
that such Unrestricted Subsidiary is designated a Restricted Subsidiary of
WCI and (ii) any property transferred to or from an Unrestricted Subsidiary
shall be valued at its fair market value at the time of such transfer, in
each case as determined by the Board of Directors in good faith.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien
or charge of any kind (including, without limitation, any conditional sale or
other title retention agreement or lease in the nature thereof, any sale with
recourse against the seller or any Affiliate of the seller, or any agreement
to give any security interest).
"Net Cash Proceeds" means, (a) with respect to any Asset Sale, the
proceeds of such Asset Sale in the form of cash or cash equivalents,
including payments in respect of deferred payment obligations (to the extent
corresponding to the principal, but not interest, component thereof) when
received in the form of cash or cash equivalents (except to the extent such
obligations are financed or sold with recourse to WCI or any Restricted
Subsidiary of WCI) and proceeds from the conversion of other property
received when converted to cash or cash equivalents, net of (i) brokerage
commissions and other fees and expenses (including fees and expenses of
counsel and investment bankers) related to such Asset Sale, (ii) provisions
for all taxes (whether or not such taxes will actually be paid or are
payable) as a result of such Asset Sale without regard to the consolidated
results of operations of WCI and its Restricted Subsidiaries, taken as a
whole, (iii) payments made to repay Indebtedness or any other obligation
outstanding at the time of such Asset Sale that either (A) is secured by a
Lien on the property or assets sold or (B) is required to be paid as a result
of such sale and (iv) appropriate amounts to be provided by WCI or any
Restricted Subsidiary of WCI as a reserve against any liabilities associated
with such Asset Sale, including, without limitation, pension and other
post-employment benefit liabilities, liabilities related to environmental
matters and liabilities under any indemnification obligations associated with
such Asset Sale, all as determined in conformity with GAAP and (b) with
respect to any issuance or sale of Capital Stock, the proceeds of such
issuance or sale in the form of cash or cash equivalents, including payments
in respect of deferred payment obligations (to the extent corresponding to
the principal, but not interest, component thereof) when received in the form
of cash or cash equivalents (except to the extent such obligations are
financed or sold with recourse to WCI or any Restricted Subsidiary of WCI)
and proceeds from the conversion of other property received when converted to
cash or cash equivalents, net of attorneys' fees, accountants' fees,
underwriters' or placement agents' fees, discounts or commissions and
brokerage, consultant and other fees incurred in connection with such
issuance or sale and net of taxes paid or payable by WCI or any of its
subsidiaries as a result thereof.
"Offer to Purchase" means an offer to purchase Senior Notes or Equipment
Notes by WCI or WinStar Equipment from the Holders that is required by the
covenant described under "--Repurchase of Notes upon a Change of Control" or
"--Covenants--Covenants Relating to All the Notes--Limitation on Asset Sales"
and which is commenced by mailing a notice to the relevant Trustee and each
Holder stating: (i) the covenant pursuant to which the offer is being made
and that all Senior Notes or Equipment Notes, as the case may be, validly
tendered will be accepted for payment on a pro rata basis; (ii) the purchase
price and the date of purchase (which shall be a Business Day no earlier than
30 days nor later than 60 days from the date such notice is mailed) (the
"Payment Date"); (iii) that any Senior Note or Equipment Note, as the case
may be, not tendered will continue to accrue interest pursuant to its terms;
(iv) that, unless WCI or WinStar Equipment, as the case may be, defaults in
the payment of the purchase price, any Senior Note or Equipment Note, as the
case may be, accepted for payment pursuant to the Offer to Purchase shall
cease to accrue interest on and after the Payment Date; (v) that Holders
electing to have a Senior Note or Equipment Note, as the case may be,
purchased pursuant to the Offer to Purchase will be required to surrender the
Senior Note or Equipment Note, as the case may be, together with the form
entitled "Option of the Holder to Elect Purchase" on the reverse side thereof
completed, to the Paying Agent at the address specified in the notice prior
to the close of business on the Business Day immediately preceding the
Payment Date; (vi) that Holders will be entitled to withdraw their election
if the Paying Agent receives, not later than the close of business on the
third Business Day immediately preceding the Payment Date, a telegram,
facsimile transmission or letter setting forth the name of such Holder, the
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Accumulated Amount of Senior Notes or the principal amount of Equipment
Notes, as the case may be, delivered for purchase and a statement that such
Holder is withdrawing his election to have such Senior Notes or Equipment
Notes, as the case may be, purchased; and (vii) that Holders whose Senior
Notes or Equipment Notes, as the case may be, are being purchased only in
part will be issued new Senior Notes or Equipment Notes, as the case may be,
equal in Accumulated Amount or principal amount (and accrued and unpaid
interest) to the unpurchased portion thereof; provided, however, that each
Senior Note or Equipment Note, as the case may be, purchased and each new
Senior Note or Equipment Note, as the case may be, issued shall be in a
principal amount of $1,000 or integral multiples thereof. On the Payment
Date, WCI and WinStar Equipment shall (i) accept for payment on a pro rata
basis Senior Notes or Equipment Notes, as the case may be, or portions
thereof tendered pursuant to an Offer to Purchase; (ii) deposit with the
Paying Agent money sufficient to pay the purchase price of all Senior Notes
or Equipment Notes, as the case may be, or portions thereof so accepted; and
(iii) deliver, or cause to be delivered, to the relevant Trustee all Senior
Notes or Equipment Notes, as the case may be, or portions thereof so accepted
together with an Officers' Certificate specifying the Senior Notes or
Equipment Notes, as the case may be, or portions thereof accepted for payment
by WCI. The Paying Agent shall promptly mail to the Holders of Senior Notes
or Equipment Notes, as the case may be, so accepted for payment in an amount
equal to the purchase price, and the Trustee shall promptly authenticate and
mail to such Holders a new Senior Note or Equipment Note, as the case may be,
equal in principal amount to any unpurchased portion of the Senior Note or
Equipment Note, as the case may be, surrendered; provided, however, that each
Senior Note or Equipment Note, as the case may be, purchased and each new
Senior Note or Equipment Note, as the case may be, issued shall be in a
principal amount of $1,000 or integral multiples thereof. WCI will publicly
announce the results of an Offer to Purchase as soon as practicable after the
Payment Date. The relevant Trustee shall act as the Paying Agent for an Offer
to Purchase. WCI will comply with Rule 14e-1 under the Exchange Act and any
other securities laws and regulations thereunder to the extent such laws and
regulations are applicable, in the event that WCI is required to repurchase
Senior Notes or Equipment Notes, as the case may be, pursuant to an Offer to
Purchase.
"Old Senior Notes" means the 14% Senior Discount Notes due 2005 of WCI.
"Permitted Investment" means (i) an Investment in a Restricted Subsidiary
or a Person which will, upon the making of such Investment, become a
Restricted Subsidiary or be merged or consolidated with or into or transfer
or convey all or substantially all its assets to, WCI or a Restricted
Subsidiary; (ii) Temporary Cash Investments; (iii) payroll, travel and
similar advances to cover matters that are expected at the time of such
advances ultimately to be treated as expenses in accordance with GAAP; (iv)
loans or advances to employees in a principal amount not to exceed $1.0
million at any one time outstanding; (v) stock, obligations or securities
received in satisfaction of judgments; (vi) Investments, to the extent that
the consideration provided by WCI or any of its Restricted Subsidiaries
consists solely of Capital Stock (other than Redeemable Stock) of WCI; (vii)
notes payable to WCI that are received by WCI as payment of the purchase
price for Capital Stock (other than Redeemable Stock) of WCI; and (viii)
acquisitions of a minority equity interest in entities engaged in the
telecommunications business; provided, however, that (A) the acquisition of a
majority equity interest in such entities is not permitted under U.S. law
without FCC consent, (B) the Company or one of its Restricted Subsidiaries
has the right to acquire Capital Stock representing a majority of the voting
power of the Voting Stock of such entity upon receipt of FCC consent and (C)
in the event that such consent has not been obtained within 18 months of
funding such Investment, the Company or one of its Restricted Subsidiaries
has the right to sell such minority equity interest in the seller thereof for
consideration consisting of the consideration originally paid by the Company
and its Restricted Subsidiaries for such minority equity interest.
"Permitted Investor" means Mr. William J. Rouhana, Jr.
"Permitted Liens" means (i) Liens for taxes, assessments, governmental
charges or claims that are being contested in good faith by appropriate legal
proceedings promptly instituted and diligently conducted and for which a
reserve or other appropriate provision, if any, as shall be required in
conformity with GAAP shall have been made; (ii) statutory or common law Liens
of landlords and carriers, warehousemen, mechanics, suppliers, materialmen,
repairmen or other similar Liens arising in the ordinary course of business
and with respect to amounts not yet delinquent or being contested in good
faith by appropriate legal proceedings promptly instituted and diligently
conducted and for which a reserve or other appropriate provision, if any, as
shall be required in conformity with GAAP shall have been made; (iii) Liens
incurred or deposits made in the ordinary course of business in connection
with workers' compensation, unemployment insurance and other types of social
security; (iv) Liens incurred or deposits
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made to secure the performance of tenders, bids, leases, statutory or
regulatory obligations, bankers' acceptances, surety and appeal bonds,
government contracts, performance and return-of-money bonds and other
obligations of a similar nature incurred in the ordinary course of business
(exclusive of obligations for the payment of borrowed money) and a bank's
unexercised right of set-off with respect to deposits made in the ordinary
course; (v) easements, rights-of-way, municipal and zoning ordinances and
similar charges, encumbrances, title defects or other irregularities that do
not materially interfere with the ordinary course of business of WCI or any
of its Restricted Subsidiaries; (vi) Liens (including extensions and renewals
thereof) upon real or personal property acquired after the Closing Date;
provided, however, that (a) such Lien is created solely for the purpose of
securing Indebtedness Incurred, in accordance with the "Limitation on
Indebtedness" covenant described above, (1) to finance the cost (including
the cost of improvement or construction) of the item of property or assets
subject thereto and such Lien is created prior to, at the time of or within
six months after the later of the acquisition, the completion of construction
or the commencement of full operation of such property or (2) to refinance
any Indebtedness previously so secured, (b) the principal amount of the
Indebtedness secured by such Lien does not exceed 100% of such cost and (c)
any such Lien shall not extend to or cover any property or assets other than
such item of property or assets and any improvements on such item; (vii)
leases or subleases granted to others that do not materially interfere with
the ordinary course of business of WCI and its Restricted Subsidiaries, taken
as a whole; (viii) Liens encumbering property or assets under construction
arising from progress or partial payments by a customer of WCI or its
Restricted Subsidiaries relating to such property or assets; (ix) any
interest or title of a lessor in the property subject to any Capitalized
Lease or operating lease; (x) Liens arising from filing Uniform Commercial
Code financing statements regarding leases; (xi) Liens on property of, or on
shares of stock or Indebtedness of, any corporation existing at the time such
corporation becomes, or becomes a part of, any Restricted Subsidiary;
provided, however, that such Liens do not extend to or cover any property or
assets of WCI or any Restricted Subsidiary other than the property or assets
acquired; (xii) Liens in favor of WCI or any Restricted Subsidiary; (xiii)
Liens arising from the rendering of a final judgment or order against WCI or
any Restricted Subsidiary of WCI that does not give rise to an Event of
Default; (xiv) Liens securing reimbursement obligations with respect to
letters of credit that encumber documents and other property relating to such
letters of credit and the products and proceeds thereof; (xv) Liens in favor
of customs and revenue authorities arising as a matter of law to secure
payment of customs duties in connection with the importation of goods; (xvi)
Liens encumbering customary initial deposits and margin deposits, and other
Liens that are either within the general parameters customary in the industry
and incurred in the ordinary course of business, in each case, securing
Indebtedness under Interest Rate Agreements and Currency Agreements and
forward contracts, options, future contracts, futures options or similar
agreements or arrangements designed to protect WCI or any of its Restricted
Subsidiaries from fluctuations in the price of commodities; (xvii) Liens
arising out of conditional sale, title retention, consignment or similar
arrangements for the sale of goods entered into by WCI or any of its
Restricted Subsidiaries in the ordinary course of business in accordance with
the past practices of WCI and its Restricted Subsidiaries prior to the
Closing Date; and (xviii) Liens on or sales of receivables.
"Person" means any individual, corporation, partnership, limited
liability company, joint venture, association, joint-stock company, trust,
unincorporated organization, government or any agency or political
subdivision thereof or any other entity.
"Preferred Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated, whether
voting or non-voting) of such Person's preferred or preference stock, whether
now outstanding or issued after the Closing Date, including, without
limitation, all series and classes of such preferred or preference stock.
"Redeemable Stock" means any class or series of Capital Stock of any
Person that by its terms or otherwise is (i) required to be redeemed prior to
the Stated Maturity of the Notes, (ii) redeemable at the option of the holder
of such class or series of Capital Stock at any time prior to the Stated
Maturity of the Notes (unless the redemption price is, at WCI's option,
without conditions precedent, payable solely in Common Stock (other than
Redeemable Stock) of WCI) or (iii) convertible into or exchangeable for
Capital Stock referred to in clause (i) or (ii) above or Indebtedness having
a scheduled maturity prior to the Stated Maturity of the Notes; provided,
however, that any Capital Stock that would not constitute Redeemable Stock
but for provisions thereof giving holders thereof the right to require such
Person to repurchase or redeem such Capital Stock upon the occurrence of an
"asset sale" or "change of control" occurring prior to the Stated Maturity of
the Notes shall not constitute Redeemable Stock if the "asset sale" or
"change of control" provisions applicable to such Capital Stock are no more
favorable to the holders of such Capital Stock than
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the provisions contained in "--Repurchase of Notes Upon a Change of Control"
and "--Covenants--Covenants Relating to All the Notes--Limitation on Asset
Sales" and such Capital Stock specifically provides that such Person will not
repurchase or redeem any such stock pursuant to such provision prior to WCI's
repurchase of such Notes as are required to be repurchased pursuant to
"--Repurchase of Notes Upon a Change of Control" and "--Covenants--Covenants
Relating to All the Notes--Limitation on Asset Sales."
"Restricted Subsidiary" means any Subsidiary of WCI other than an
Unrestricted Subsidiary.
"SEC" means the Securities and Exchange Commission and any successor
agency.
"Security Agreement" means the Security Agreement dated as of March 1,
1997, between WinStar Equipment and United States Trust Company of New York,
as collateral agent.
"Security Documents" means the Security Agreement and any other
agreements, instruments or documents entered into or delivered in connection
with any of the foregoing, as such agreements, instruments or documents may
from time to time be amended in accordance with the terms hereof and thereof.
"Senior Notes" means the 14 1/2% Senior Deferred Interest Notes of WCI
Due 2005.
"Significant Subsidiary" means, at any date of determination, any
Restricted Subsidiary of WCI that, together with its Subsidiaries, (i) for
the most recent fiscal year of WCI, accounted for more than 10% of the
consolidated revenues of WCI and its Restricted Subsidiaries or (ii) as of
the end of such fiscal year, was the owner of more than 10% of the
consolidated assets of WCI and its Restricted Subsidiaries, all as set forth
on the most recently available consolidated financial statements of WCI for
such fiscal year. For purposes of the Equipment Notes Indenture, WinStar
Equipment will be deemed to be a Significant Subsidiary.
"Stated Maturity" means, (i) with respect to any debt security, the date
specified in such debt security as the fixed date on which the final
installment of principal of such debt security is due and payable and (ii)
with respect to any scheduled installment of principal of or interest on any
debt security, the date specified in such debt security as the fixed date on
which such installment is due and payable.
"Subsidiary" means, with respect to any Person, any corporation,
association or other business entity of which Voting Stock representing more
than 50% of the voting power of the outstanding Voting Stock is owned,
directly or indirectly, by such Person and one or more other Subsidiaries of
such Person.
"Telecommunications Assets" means any (i) entity or business
substantially all the revenues of which are derived from (a) providing
transmission of sound, data or video; (b) the sale or provision of phone
cards, "800" services, voice mail, switching, enhanced telecommunications
services, telephone directory or telephone number information services or
telecommunications network intelligence; or (c) any business ancillary or
directly related to the businesses referred to in clause (a) or (b) above and
(ii) any assets used primarily to effect such transmission or provide the
products or services referred to in clause (a) or (b) above and any directly
related or ancillary assets including, without limitation, licenses and
applications, bids and agreements to acquire licenses, or other authority to
provide transmission services previously granted, or to be granted, by the
FCC.
"Telecommunications Subsidiary" means (i) WinStar Gateway Network, Inc.,
WinStar Wireless, Inc., WinStar Telecommunications, Inc., WinStar Milliwave,
Inc., WinStar Locate, Inc. and WinStar Wireless Fiber Corp., and, in each
case, its successors and (ii) any other Restricted Subsidiary of WCI that
holds more than a DE MINIMIS amount of Telecommunications Assets.
"Temporary Cash Investment" means any of the following: (i) direct
obligations of the United States or any agency thereof or obligations fully
and unconditionally guaranteed by the United States or any agency thereof;
(ii) time deposit accounts, certificates of deposit and money market deposits
maturing within 180 days of the date of acquisition thereof issued by a bank
or trust company which is organized under the laws of the United States, any
state thereof or any foreign country recognized by the United States, and
which bank or trust company has capital, surplus and undivided profits
aggregating in excess of $50.0 million (or the foreign currency equivalent
thereof) and has
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outstanding deposits or debt which is rated "A" (or such similar equivalent
rating) or higher by at least one nationally recognized statistical rating
organization (as defined in Rule 436 under the Securities Act) or any
money-market fund sponsored by a registered broker dealer or mutual fund
distributor; (iii) repurchase obligations with a term of not more than 30
days for underlying securities of the types described in clause (i) above
entered into with a bank meeting the qualifications described in clause (ii)
above; (iv) commercial paper, maturing not more than six months after the
date of acquisition, issued by a corporation (other than an Affiliate of WCI)
organized and in existence under the laws of the United States, any state
thereof or any foreign country recognized by the United States with a rating
at the time as of which any investment therein is made of "P-1" (or higher)
according to Moody's Investors Service, Inc. or "A-1" (or higher) according
to Standard & Poor's Ratings Group; and (v) securities with maturities of six
months or less from the date of acquisition issued or fully and
unconditionally guaranteed by any state, commonwealth or territory of the
United States, or by any political subdivision or taxing authority thereof,
and rated at least "A" by Standard & Poor's Ratings Group or Moody's
Investors Service, Inc.; provided, however, that, notwithstanding the
foregoing, the maturity of any of the foregoing that is applied to provide
security in favor of the Indebtedness referred to in clause (v) of the second
paragraph of the "Limitation on Liens" covenant may occur as late as the
earliest date that such Indebtedness may be redeemed at the option of the
obligor with respect to such Indebtedness; provided further, however, that
WCI shall cause such Liens referred to in such clause (v) to be incurred no
later than the first anniversary of the Closing Date.
"Transaction Date" means, with respect to the Incurrence of any
Indebtedness by WCI or any of its Restricted Subsidiaries, the date such
Indebtedness is to be Incurred and, with respect to any Restricted Payment,
the date such Restricted Payment is to be made.
"Unrestricted Subsidiary" means (i) any Subsidiary of WCI that at the
time of determination shall be designated an Unrestricted Subsidiary by the
Board of Directors in the manner provided below and (ii) any Subsidiary of an
Unrestricted Subsidiary. The Board of Directors may designate any Restricted
Subsidiary of WCI (including any newly acquired or newly formed Subsidiary of
WCI), other than a guarantor of the Notes, to be an Unrestricted Subsidiary
unless such Subsidiary owns any Capital Stock of, or owns or holds any Lien
on any property of, WCI or any Restricted Subsidiary; provided, however, that
neither WCI nor its Restricted Subsidiaries has any Guarantee of any
Indebtedness of such Subsidiary outstanding at the time of such designation
and either (A) the Subsidiary to be so designated has total assets of $1,000
or less or (B) if such Subsidiary has assets greater than $1,000, such
designation would be permitted under the covenant described under
"--Covenants--Covenants Relating to All the Notes--Limitation on Restricted
Payments." Notwithstanding the foregoing, WinStar New Media Company Inc., Non
Fiction Films Inc. and WinStar Global Products, Inc. and their Subsidiaries
are Unrestricted Subsidiaries. The Board of Directors may designate any
Unrestricted Subsidiary to be a Restricted Subsidiary of WCI; provided,
however, that immediately after giving effect to such designation (x) WCI
could Incur $1.00 of additional Indebtedness under the first paragraph of the
covenant described under "--Covenants--Covenants Relating to All the
Notes--Limitation on Indebtedness" and (y) no Default or Event of Default
shall have occurred and be continuing. Any such designation by the Board of
Directors shall be evidenced to the Trustee by promptly filing with the
Trustee a copy of the Board Resolution giving effect to such designation and
an Officers' Certificate certifying that such designation complied with the
foregoing provisions. Anything to the contrary contained in the Indentures
notwithstanding, no Telecommunications Subsidiary may be designated an
Unrestricted Subsidiary.
"U.S. Government Obligations" means securities that are (i) direct
obligations of the United States of America for the payment of which its full
faith and credit is pledged or (ii) obligations of a Person controlled or
supervised by and acting as an agency or instrumentality of the United States
of America the payment of which is unconditionally guaranteed as a full faith
and credit obligation by the United States of America, which, in either case,
are not callable or redeemable at the option of the issuer thereof at any
time prior to the Stated Maturity of the Notes, and shall also include a
depositary receipt issued by a bank or trust company as custodian with
respect to any such U.S. Government Obligation or a specific payment of
interest on or principal of any such custodian for the account of the holder
of a depositary receipt; provided, however, that (except as required by law)
such custodian is not authorized to make any deduction from the amount
payable to the holder of such depositary receipt from any amount received by
the custodian in respect of the U.S. Government Obligation or the specific
payment of interest on or principal of the U.S. Government Obligation
evidenced by such depositary receipt.
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"Voting Stock" means with respect to any Person, Capital Stock of any
class or kind ordinarily having the power to vote for the election of
directors, managers or other voting members of the governing body of such
Person.
"Wholly Owned" means, with respect to any Subsidiary of any Person, such
Subsidiary if all of the outstanding Capital Stock in such Subsidiary (other
than any director's qualifying shares or Investments by foreign nationals
mandated by applicable law) is owned by such Person or one or more Wholly
Owned Subsidiaries of such Person.
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CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of the material United States federal income
tax consequences of the acquisition, ownership and disposition of the New
Notes. This summary is based on the Internal Revenue Code of 1986, as amended
(the "Code"), existing and proposed Treasury regulations promulgated
thereunder, and administrative and judicial interpretations thereof, all as
in effect or proposed on the date hereof and all of which are subject to
change, possibly with retroactive effect, or different interpretations. This
summary assumes that all of the New Notes will be held as capital assets
(i.e., generally assets that are held for investment), within the meaning of
Section 1221 of the Code, and will not be part of a straddle, a hedge or a
conversion transaction, within the meaning of Section 1258 of the Code. The
discussion is for general information only, and does not address all of the
tax consequences that may be relevant to particular purchasers in light of
their personal circumstances, or to certain types of purchasers (such as
certain financial institutions, insurance companies, tax-exempt entities or
dealers in securities). Persons considering the exchange of Old Notes for New
Notes should consult their tax advisors with regard to the application of the
United States federal income tax laws to their particular situations, as well
as any tax consequences arising under the laws of any state, local, or
foreign taxing jurisdictions.
As used in the summary which follows, the term "U.S. Holder" means a
beneficial owner of New Notes that for United States federal income tax
purposes is (i) a citizen or resident of the United States, (ii) a
corporation, partnership or other entity created or organized in or under the
laws of the United States or of any political subdivision thereof, or (iii)
otherwise subject to United States federal income taxation on a net income
basis with respect to worldwide income. The term "Non-U.S. Holder" means a
holder of New Notes, that is, for United States federal income tax purposes,
not a U.S. Holder.
HOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS AS TO THE PARTICULAR TAX
CONSEQUENCES TO THEM OF EXCHANGING THE OLD NOTES FOR NEW NOTES AND
PURCHASING, HOLDING AND DISPOSING OF THE NEW NOTES, INCLUDING THE
APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR FOREIGN TAX LAWS.
EXCHANGE FOR OLD NOTES
The exchange by a holder of an Old Note for a New Note does not
constitute a taxable exchange because the New Notes do not differ materially
in kind or extent from the Old Notes. Each New Note will be treated as having
been originally issued at the time the Old Note exchanged therefor was
originally issued. The tax basis and holding period of each Old Note will
carry over to the New Note issued in exchange of each Old Note.
Tax Consequences to U.S. Holders
Payments of Interest on Equipment Notes. A U.S. Holder of a New Equipment
Note will be required to include interest payable on a New Equipment Note as
ordinary income as such interest accrues or is received in accordance with
such U.S. Holder's regular method of tax accounting.
ORIGINAL ISSUE DISCOUNT ON SENIOR NOTES. The Old Senior Notes were
issued with original issue discount, as defined in the Code. The New Senior
Notes will similarly be treated as issued with original issue discount. The
amount of original issue discount on a debt instrument, within the meaning of
Section 1273 of the Code, is the excess (if any) of its "stated redemption
price at maturity" over its issue price. The issue price of the Old Senior
Notes was the respective offering price to the purchasers (not including any
sales to a bond house, broker, or similar person or organization acting in
the capacity of an underwriter, placement agent or wholesaler) at which a
substantial amount of the Senior Notes was sold. According to the Treasury
Regulations, the issue price of the Senior Notes does not change even if part
of the issue is subsequently sold at a different price. The "stated
redemption price at maturity" of a debt instrument is the sum of its
principal amount plus all other payments required thereunder, other than
payments of "qualified stated interest" (defined generally as stated interest
that is unconditionally payable in cash or in property (other than the debt
instruments of the issuer), at least annually at a single fixed rate that
appropriately takes into account the length of intervals between payments).
Because interest on the New Senior Notes is not payable in cash until April
15, 2001, the stated interest on the New Senior Notes will not be treated as
qualified stated interest, but will, for United States federal income tax
purposes, be added to the stated redemption price at maturity of the New
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Senior Notes. As a result, the New Senior Notes will be treated as having
been issued with original issue discount equal to the excess of their stated
redemption price at maturity over their issue price.
Each U.S. Holder of a New Senior Note (regardless of whether such U.S.
Holder is a cash or an accrual basis taxpayer) will be required to include in
such U.S. Holder's gross income in each taxable year, in advance of the
receipt of cash payments attributable to such income, that portion of the
original issue discount, computed on a constant yield basis, attributable to
each day during such taxable year on which the U.S. Holder held the New
Senior Note. In general, under Section 1272 of the Code, the amount of
original issue discount that a holder of a debt instrument must include in
gross income for United States federal income tax purposes will be the sum of
the daily portions of original issue discount with respect to such debt
instrument for each day during the taxable year or portion of a taxable year
in which such holder holds the debt instrument. The daily portion is
determined under a constant yield method by allocating to each day of an
accrual period a pro rata portion of an amount equal to the "adjusted issue
price" of the debt instrument at the beginning of the accrual period
multiplied by the yield to maturity of the debt instrument (stated in a
manner appropriately taking into account the length of the accrual period).
Accrual periods with respect to a New Senior Note may be of any length
selected by the U.S. Holder and may vary in length over the term of the New
Senior Note as long as (i) no accrual period is longer than one year and (ii)
each scheduled payment of interest or principal on the New Senior Note occurs
on either the final or first day of an accrual period. The yield to maturity
of a debt instrument is the discount rate that, when applied to all payments
due under the debt instrument produces a present value equal to the issue
price of the debt instrument. The "adjusted issue price" is the issue price
of the debt instrument increased by the accrued original issue discount for
all prior accrual periods (and decreased by the amount of cash payments made
in all prior accrual periods).
U.S. Holders of New Senior Notes should be aware that, because of the
above original issue discount rules, a U.S. Holder of a New Senior Note will
be required for United States federal income tax purposes to include amounts
in ordinary income in advance of the receipt of the cash attributable to such
income.
The New Equipment Notes were not issued with original issue discount as
stated interest is unconditionally payable in cash semiannually throughout
the life of the instrument.
ACQUISITION PREMIUM. If a U.S. Holder of a New Senior Note acquired the
Old Senior Note at a cost in excess of its "adjusted issue price" (as defined
above) but less than its stated redemption price at maturity, such New Senior
Note will continue to have an acquisition premium to the extent of such
excess. Under the acquisition premium rules of the Code and the Treasury
Regulations promulgated thereunder, the amount of the original issue discount
which such U.S. Holder must include in its gross income with respect to such
New Senior Note for any taxable year will be reduced by the portion of such
acquisition premium properly allocable to such year.
MARKET DISCOUNT. If a U.S. Holder purchased Old Notes for an amount that
is less than the "revised issue price" of the Old Notes at the time of
acquisition, the amount of such difference will be treated as "market
discount" for United States federal income tax purposes, unless such
difference is less than a specified DE MINIMIS amount ("DE MINIMIS market
discount"). The "revised issue price" is the original issue price of an Old
Note plus the aggregate amount of previously accrued original issue discount
(in the case of a Senior Note), without regard to any reductions for
acquisition premium, less payments other than qualified stated interest.
Under the market discount rules, a holder will be required to treat any
principal payment on, or any gain on the sale, exchange, retirement or other
disposition of, New Notes as ordinary income to the extent of the market
discount which has not previously been included in income and is treated as
having accrued on such New Notes at the time of such payment or disposition.
If a holder makes a gift of a New Note, accrued market discount, if any, will
be recognized as if such holder had sold such New Note for a price equal to
its fair market value. In addition, the holder may be required to defer,
until the maturity of the New Notes or the earlier disposition of the New
Notes in a taxable transaction, the deduction of a portion of the interest
expense on any indebtedness incurred or continued to purchase or carry such
New Notes.
Any market discount will be considered to accrue on a straight-line basis
during the period from the date of acquisition to the maturity date of the
New Notes, unless a holder elects to accrue market discount on a constant
interest method. A holder of New Notes may elect to include market discount
in income currently as it accrues (on either a straight-line basis or
constant interest method), in which case the rules described above regarding
the deferral of interest deductions and ordinary income treatment of gain on
disposition will not apply. This election to include
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market discount in income currently, once made, applies to all market
discount obligations acquired on or after the first day of the first taxable
year to which the election applies and may not be revoked without the consent
of the Service.
AMORTIZABLE BOND PREMIUM. Generally, if the tax basis (generally, the
purchase price) of an Old Equipment Note held as a capital asset exceeds the
amount payable at maturity of the obligation, such excess will constitute
amortizable bond premium that the holder may elect, under Section 171 of the
Code, to amortize under the constant yield method over the period from its
acquisition date to the obligation's maturity date. A holder of a New
Equipment Note who elects to amortize bond premium must reduce its tax basis
in the related New Equipment Note by the amount of the aggregate amortization
allowable for amortizable bond premium. Amortizable bond premium will be
treated under the Code as an offset to interest income on the New Equipment
Note for United States federal income tax purposes. An election to amortize
bond premium on a New Equipment Note generally applies to all bonds held by
the holder at the beginning of the first taxable year to which the election
applies or thereafter acquired, and may not be revoked without the consent of
the Service.
SALE OR OTHER DISPOSITION. In general, a U.S. Holder of a New Note will
recognize gain or loss upon the sale, exchange, redemption, or other taxable
disposition of such New Note measured by the difference between (i) the
amount of cash and the fair market value of property received (except, in the
case of Equipment Notes, to the extent attributable to accrued but unpaid
interest) and (ii) the U.S. Holder's adjusted tax basis in the New Note. A
U.S. Holder's adjusted tax basis for determining gain or loss on the sale or
other disposition of a New Note will initially equal the cost of the Old Note
to such U.S. Holder and will be increased by any accrued original issue
discount (net of all amortized acquisition premium) and any market discount
includable in such U.S. Holder's gross income and decreased by the amount of
any cash payments received by such U.S. Holder regardless of whether such
payments are denominated as principal or interest (other than payments of
qualified stated interest) and amortizable bond premium, if any, deducted
over the term of the New Notes. Subject to the market discount rules
discussed above, any such gain or loss will generally be long-term capital
gain or loss, provided the New Notes have been held for more than one year.
Elections. A U.S. Holder of New Notes, subject to certain limitations,
may elect to include all stated and unstated interest and discount on the New
Notes in gross income under the constant yield method. For this purpose,
interest includes original issue discount, DE MINIMIS market discount and
market discount, as adjusted by any amortizable bond premium or acquisition
premium. Any such election, if made in respect of a market discount bond,
will constitute an election to include market discount in income currently on
all market discount bonds acquired by such U.S. Holder on or after the first
day of the first taxable year to which the election applies. See "--Market
Discount." U.S. Holders should consult with their tax advisors regarding any
tax elections they intend to make with respect to any Notes.
APPLICABLE HIGH YIELD DISCOUNT RULES. Generally, under Section 163(e)(5)
of the Code, original issue discount is not deductible until paid in cash or
property (other than issuer debt or stock) with respect to any "applicable
high yield discount obligations" ("AHYDOs") issued by a corporation. A New
Senior Note will continue to constitute an AHYDO since the Old Senior Note it
is replacing (i) had a maturity date which is more than five years from the
date of issue, (ii) had a yield to maturity which equals or exceeds the sum
of five percentage points plus the "applicable federal rate" ("AFR") for the
calendar month in which the obligation was issued and (iii) had "significant
original issue discount" (as defined in Section 163(i)(2) of the Code). (The
AFR for the month of March 1997 was 6.32% for instruments with a weighted
average maturity in excess of three years but not in excess of nine years
providing semiannual compounding.) Since the New Senior Notes continue to be
AHYDOs, (i) the product of the total original issue discount under the New
Senior Notes times the ratio of (a) the excess of the yield to maturity over
the sum of the AFR plus six percentage points to (b) the yield to maturity
will not be deductible by the Company and will be treated for some purposes
as dividends to corporate holders of the New Senior Notes (to the extent that
the Company has sufficient current or accumulated earnings and profits for
federal income tax purposes that such nondeductible amounts would have been
treated as dividends if they had been distributions with respect to the
Company's stock), and (ii) any original issue discount for which the
Company's deductions are not disallowed under clause (i) above will not be
deductible by the Company until actually paid. Amounts treated as dividends
under clause (i) will be nondeductible by the Company, and may qualify for
the dividends received deduction for corporate holders, but should be treated
as original issue discount and must be included in income, as described
above. The Company believes that it does not presently have any current or
accumulated earnings and profits and it cannot predict whether it will have
any earnings and profits for future years. As such, in any year in which the
Company has no earnings and profits, the
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nondeductible portion in clause (i) relating to such year would not be
eligible for the dividends received deduction in the case of corporate
holders.
INFORMATION REPORTING AND BACKUP WITHHOLDING. The Company will report
annually to the Service and to non-corporate record holders of the New Notes
amounts of interest paid and original issue discount accrued during the
calendar year. The "backup" withholding and information reporting
requirements may apply to certain payments of principal and interest
(including original issue discount) on a New Note and to certain payments of
proceeds on the sale or retirement of a New Note. The Company, its agent, a
broker, the Trustee or any paying agent, as the case may be, will be required
to withhold tax from any payment that is subject to backup withholding at a
rate of 31% if the U.S. Holder, among other things, (i) fails to furnish his
or her social security number or other taxpayer identification number ("TIN")
to the payor responsible for backup withholding, (ii) furnishes to such payor
an incorrect TIN, (iii) fails to provide such payor with a certified
statement, signed under penalties of perjury, that the TIN provided to the
payor is correct and that the U.S. Holder is not subject to backup
withholding or (iv) fails to report properly interest and dividends on his or
her 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. Certain holders, including corporations, are not subject to
backup withholding if their exempt status is properly established.
Backup withholding is not an additional tax. The amount of any backup
withholding from a payment to a U.S. Holder will be allowed as a credit
against such holder's United States federal income tax liability and may
entitle such holder to a refund, provided that the required information is
furnished to the Service.
Tax Consequences to Non-U.S. Holders
PORTFOLIO INTEREST EXEMPTION
A Non-U.S. Holder will generally, under the portfolio interest exemption
of the Code, not be subject to United States federal income taxes and/or
United States federal withholding tax, on payments of principal, premium, if
any, and interest (including original issue discount) on the New Notes,
provided that (in the case of interest, including original issue discount)
(i) the Non-U.S. Holder does not actually or constructively own 10% or more
of the total combined voting power of all classes of stock of the Company
entitled to vote, (ii) the Non-U.S. Holder is not a controlled foreign
corporation that is related to the Company through stock ownership, (iii)
such original issue discount or interest is not effectively connected with a
United States trade or business of the Non-U.S. Holder and (iv) either (a)
the beneficial owner of the New Notes certifies to the Company or its agent,
under penalties of perjury, that it is a Non-U.S. Holder and provides a
completed IRS Form W-8 ("Certificate of Foreign Status") or (b) a securities
clearing organization, bank or other financial institution which holds
customers' securities in the ordinary course of its trade or business (a
"financial institution") and holds the New Notes, certifies to the Company or
its agent, under penalties of perjury, that it has received Form W-8 from the
beneficial owner or that it has received from another financial institution a
Form W-8 and furnishes the payor with a copy thereof. If any of the
situations described in proviso (i), (ii) or (iv) of the preceding sentence
do not exist, interest on the New Notes when received is subject to United
States withholding tax at the rate of 30% unless an income tax treaty between
the United States and the country of which the Non-U.S. Holder is a tax
resident provides for the elimination or reduction in the rate of United
States federal withholding tax. Recently proposed Treasury Regulations (the
"Proposed Regulations") would provide alternative methods for satisfying the
certification requirement described in clause (iv)(a) and (b). The Proposed
Regulations are proposed to be effective for payments made after December 31,
1997. There can be no assurance that the Proposed Regulations will be adopted
or as to the provisions they will include if and when adopted in temporary or
final form.
If a Non-U.S. Holder of a New Note is engaged in a trade or business in
the United States and interest (including original issue discount) on the New
Note is effectively connected with the conduct of such trade or business,
such holder, although exempt from United States federal withholding tax by
reason of the delivery of a properly completed Form 4224, will be subject to
United States federal income tax on such interest (including original issue
discount) and on any gain realized on the sale, exchange or other disposition
of a New Note in the same manner as if it were a U.S. Holder. In addition, if
such Non-U.S. Holder is a foreign corporation, it may be subject to a branch
profits tax equal to 30% of its effectively connected earnings and profits
for that taxable year, unless it qualifies for a lower rate under an
applicable income tax treaty.
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FEDERAL ESTATE TAX
New Notes owned or treated as owned by an individual who is neither a
United States citizen nor a United States resident (as defined for United
States federal estate tax purposes) at the time of death will be excluded
from the individual's gross estate for the United States federal estate tax
purposes and will not be subject to United States federal estate tax if the
nonresident qualifies for the portfolio interest exemption (without regard to
the certification requirements) discussed above.
SALE OF NOTES
A Non-U.S. Holder generally will not be subject to United States federal
income tax on any gain realized in connection with the sale, exchange or
retirement of New Notes, unless (i) (a) the gain is effectively connected
with a trade or business carried on by the Non-U.S. Holder within the United
States or (b) if a tax treaty applies, the gain is attributable to the United
States permanent establishment maintained by the Non-U.S. Holder, (ii) in the
case of a Non-U.S. Holder who is an individual, such holder is present in the
United States for 183 days or more in the taxable year of disposition and
certain other conditions are satisfied, or (iii) the Non-U.S. Holder is
subject to tax pursuant to provisions of the Code applicable to United States
expatriates.
INFORMATION REPORTING AND BACKUP WITHHOLDING
In general, there is no United States information reporting requirement
or backup withholding tax on payments to Non-U.S. Holders who provide the
appropriate certification described above regarding qualification for the
portfolio interest exemption from United States federal income tax for
payments of principal or interest (including original interest discount) on
the New Notes.
Payment by the Company of principal on the New Notes or payment by a
United States office of a broker of the proceeds of a sale of New Notes is
subject to both backup withholding and information reporting unless the
beneficial owner provides a completed IRS Form W-8 which certifies under
penalties of perjury that such owner is a Non-U.S. Holder who meets all the
requirements for exemption from United States federal income tax on any gain
from the sale, exchange or retirement of the New Notes.
In general, backup withholding and information reporting will not apply
to a payment of the gross proceeds of a sale of New Notes effected at a
foreign office of a broker. If, however, such broker is, for United States
federal income tax purposes, a U.S. person, a controlled foreign corporation
or a foreign person 50% or more of whose gross income for certain periods is
derived from activities that are effectively connected with the conduct of a
trade or business in the United States, such payments will not be subject to
backup withholding, but will be subject to information reporting unless (i)
such broker has documentary evidence in its records that the beneficial owner
is a Non-U.S. Holder and certain other conditions are met, or (ii) the
beneficial owner otherwise establishes an exemption, provided such broker
does not have actual knowledge that the payee is a United States person.
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 and the procedure for obtaining such an exemption, if
available.
Backup withholding is not an additional tax. Any amounts withheld under
the backup withholding rules will be allowed as a credit against such
holder's United States federal income tax liability and may entitle such
holder to a refund, provided the required information is furnished to the
Service.
THE FOREGOING SUMMARY DOES NOT DISCUSS ALL ASPECTS OF UNITED STATES
FEDERAL INCOME TAXATION THAT MAY BE RELEVANT TO A PARTICULAR HOLDER OF NOTES
IN LIGHT OF ITS PARTICULAR CIRCUMSTANCES AND INCOME TAX SITUATION. HOLDERS
SHOULD CONSULT THEIR OWN TAX ADVISOR AS TO THE SPECIFIC TAX CONSEQUENCES TO
THEM FROM THE EXCHANGE OF OLD NOTES FOR NEW NOTES AND PURCHASE, OWNERSHIP AND
DISPOSITION OF THE NEW NOTES, INCLUDING THE APPLICATION AND EFFECT OF STATE,
LOCAL, FOREIGN AND OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN
FEDERAL OR OTHER TAX LAWS.
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DESCRIPTION OF CERTAIN INDEBTEDNESS AND PREFERRED STOCK
INDEBTEDNESS
In October 1995, the Company raised net proceeds of $214.5 million from
the 1995 Debt Placement. The 1995 Notes will not accrue interest prior to
October 15, 2000, nor pay cash interest prior to April 15, 2001; however, the
principal value of the 1995 Notes have accreted since issuance and at
maturity the 1995 Senior Notes and the Convertible Notes will have aggregate
principal amounts of $294.2 million and $147.1 million, respectively. From
and after October 15, 2000, the 1995 Notes will accrue interest at the rate
of 14% per annum, payable semiannually in cash commencing April 15, 2001. The
1995 Notes mature on October 15, 2005.
The Convertible Notes are convertible, at any time, at the option of the
holder, into that number of shares of Common Stock derived by dividing the
principal amount of the Convertible Notes being converted by $20.625. In
addition, if the closing sale price of the Common Stock on the Nasdaq
National Market during any twelve-month period from October 15, 1995 through
October 15, 1999 (each a "Market Criteria Period") has exceeded the Market
Criteria (as defined in the Indenture governing the Convertible Notes) and a
registration statement with respect to Common Stock issuable upon conversion
of the Convertible Notes ("Conversion Shares") is effective and available,
all of the Convertible Notes automatically will be converted into Conversion
Shares at the close of business on the last day of the Market Criteria
Period. The Company has caused to be declared effective a registration
statement registering the issuance or resale of the Conversion Shares.
The 1995 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 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 the 1995 Indentures); or consolidate, merge or sell
all or substantially all of their assets. The covenants contained in the
Indentures are subject to exceptions and the Company's new media and consumer
products subsidiaries are not subject to many of the covenants contained
therein, although the Company's ability to make additional investments in
such subsidiaries is limited.
In September 1995, the Company's wholly owned subsidiary, WinStar
Wireless, Inc. ("WinStar Wireless") entered into an equipment lease financing
arrangement (the "Equipment Lease Financing") with ML Investors Services,
Inc. ("ML"), pursuant to which ML has made available $7.0 million in
equipment financing. Pursuant to a master lease agreement between WinStar
Wireless and ML entered into in connection with the Equipment Lease
Financing, WinStar Wireless has leased transceivers and related network
equipment from ML or its assignee at the rate of 2.2753% of the equipment
value per month (a return of approximately 13% per annum to the lessor),
which lease payment obligations 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 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 issued to ML
options to purchase 55,000 shares of Common Stock at an exercise price of
$17.125 per share and options to purchase 15,000 shares of Common Stock at an
exercise price of $18.0625 per share.
In November 1994, WinStar Gateway entered into a Loan and Security
Agreement ("CIT Loan Agreement") with The CIT Group/Credit Finance, Inc.
("CIT"), pursuant to which CIT agreed to make a $5.0 million revolving credit
facility (the "CIT Credit Facility") available to WinStar Gateway until
November 1998 as extended. Pursuant to the terms of the CIT Loan Agreement,
borrowings are limited to 90% of the most eligible accounts receivable with
eligibility of certain types of accounts receivable limited to 80% and 50%
(less appropriate reserves as determined by CIT). 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 the amount by which
WinStar Gateway's net income (loss) before depreciation and amortization
minus its capital expenditures is less than zero for a particular month.
Borrowings bear interest at a rate of 1.75% in excess of the prime commercial
lending rate of The Chase Manhattan Bank, N.A. subject to increase if WinStar
Gateway's or the Company's net worth (as defined) drops below specified
amounts, and are secured by a lien on all of WinStar Gateway's assets as well
as a guarantee by the Company as to the first $2.2 million in borrowings. The
CIT Loan
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Agreement also provides for certain underutilization fees and subordinates a
$5 million revolving credit facility made by the Company to WinStar Gateway.
As additional consideration for providing the CIT Credit Facility, the
Company issued to CIT warrants to purchase 50,000 shares of Common Stock,
which warrants have been exercised.
In August 1996, WinStar Global Products entered into an Amended and
Restated Credit and Security Agreement (as amended, the "Credit Agreement")
with IBJ Schroder Bank & Trust Company ("IBJ"), pursuant to which IBJ agreed
to make a $12.0 million revolving credit facility (the "Revolving Credit
Facility") and a $250,000 Letter of Credit facility (included within the
Revolving Credit 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, $3.0 million (the "Overadvance"). Borrowings bear
interest at a rate of 0.75% in excess of the base lending rate of IBJ and are
secured by a lien on all of the assets of WinStar Global Products as well as
a guaranty by the Company of any amounts borrowed as an Overadvance. The
Credit Agreement also requires the payment of certain periodic fees by
WinStar Global Products, contains certain affirmative and negative covenants
including restrictions upon WinStar Global Products' ability to pay dividends
or make other payments to the Company and subordinates a $3.1 million loan
made by the Company to WinStar Global Products. The Credit Agreement amends
and restates a loan agreement providing a $6.0 million credit facility from
Century Business Credit Corporation ("Century") which was established in 1994
and assigned (including all security interests and a $3.0 million guaranty
given by the Company) by Century to IBJ.
The Company's subsidiaries have entered into, and will continue to seek,
financing arrangements with respect to equipment, including
telecommunications switches, 38 GHz radios and other related equipment. The
Company's subsidiary, WinStar Telecommunications, Inc., consummated a $3.1
million sale/leaseback of its New York City switch in December 1996 and a
$3.8 million sale/leaseback of its Los Angeles switch in April 1997 and
borrowed approximately $3.3 million from a third party lender in connection
with its purchase of its Chicago switch in March 1997. In May 1997, the
Company's subsidiary, WinStar Wireless, Inc., consummated a $10 million
sale/leaseback of 38 GHZ radios. The Company may enter into additional
financing arrangements for switches, radios and other equipment on similar
terms in the future.
In connection with the 1997 Debt Placement, in order to provide
additional future liquidity to the Company, the Company obtained a $150
million facility from affiliates of the Initial Purchasers in March 1997. The
Company continues to have available $100 million of such facility (the
issuance in August 1997 by WinStar Equipment II Corp., a wholly owned
subsidiary of the Company, of certain notes having reduced availability by
$50 million), which subject to the Company satisfying various operating and
financial criteria, may be drawn by the Company on March 31, 1999. The amount
of the commitment may be further reduced in certain circumstances, including
as a result of the issuance of additional securities by the Company prior to
March 31, 1999.
PREFERRED STOCK
SERIES A PREFERRED STOCK
On February 6, 1997, the Company and its wholly owned subsidiary, WinStar
Credit Corp. ("WCC"), entered into a Securities Purchase Agreement with
certain purchasers, pursuant to which the Company and WCC agreed to sell to
such purchasers an aggregate of 4,000,000 shares of the Company's Series A
Convertible Preferred Stock ("Series A Preferred Stock") and warrants to
purchase 1,600,000 shares of the Company's Common Stock (the "Warrants") for
an aggregate purchase price of $100.0 million. The Preferred Stock Placement
was consummated on February 11, 1997. The Preferred Stock Placement was
conducted through Credit Suisse First Boston Corporation, which acted as
placement agent and received customary fees for acting in such capacity. The
principal purpose of the Preferred Stock Placement was to raise proceeds to
fund the expansion of the Company's telecommunications and other operations.
Each share of Series A Preferred Stock has a stated value of $25 ("Stated
Value") and entitles the holder thereof to receive from the Company dividends
at a rate per annum equal to 6% of the Stated Value. Dividends accrue and are
cumulative from the date of issuance and are payable in arrears quarterly as
of March 31, June 30, September 30 and December 31 of each year. The Company
may, at its election, pay such dividends in cash or through the issuance of
additional shares of Series A Preferred Stock. To date, the Company has
issued 93,836 shares of
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Preferred stock in payment of in-kind dividends on such stock. The Company
has not paid any cash dividends on the Preferred Stock.
The shares of Series A Preferred Stock are convertible into shares of
Common Stock commencing August 11, 1997 by dividing the aggregate Stated
Value of the Series A Preferred Stock being converted by the Conversion Price
(as defined below); provided, however, that from August 11, 1997 through
November 10, 1997, only 50% of the Series A Preferred Stock may be converted.
Subject to certain adjustments, the "Conversion Price" will be: (i) with
respect to any conversion of Series A Preferred Stock occurring prior to
February 11, 1998, the lesser of (x) $25 and (y) the average of the closing
bid prices for the Common Stock for the 20 consecutive trading days
immediately preceding the date of conversion and (ii) with respect to any
conversion of the Series A Preferred Stock occurring on or after February 11,
1998, the lesser of (x) $25 and (y) the average of the closing bid prices for
the 20 consecutive trading days immediately preceding February 11, 1998.
Notwithstanding the foregoing, if a holder of Series A Preferred Stock
requests conversion at a time when the Conversion Price is less than $15, the
Company may (subject to certain notice requirements), in lieu of converting
such Series A Preferred Stock into shares of Common Stock, pay such holder in
cash an amount equal to 110% of the Liquidation Preference (as defined below)
for each share of Series A Preferred Stock requested to be converted. On
February 11, 2002, any Series A Preferred Stock still outstanding shall be
automatically converted into shares of Common Stock, unless the Company
elects to pay cash therefor in an amount equal to the Stated Value plus all
accrued and unpaid dividends thereon (the "Liquidation Preference"). Unless
paid for in cash, such conversion will be effected by delivery of shares of
Common Stock having a value, based upon the closing bid prices for the Common
Stock for the 20 consecutive trading days ending one trading day prior to
such conversion date, equal to the Liquidation Preference.
The Warrants entitle the holders thereof to purchase an aggregate of
1,600,000 shares of Common Stock for $25 per share at any time commencing
February 11, 1998 and ending February 11, 2002. The Company may accelerate
the expiration date at any time after February 11, 2000 if Common Stock
trades at $40 or more for a period of 20 consecutive days.
The Company and the purchasers of the Series A Preferred Stock also
entered into a Registration Rights Agreement, dated February 6, 1997 (the
"Preferred Stock Registration Rights Agreement"), pursuant to which the
Company is obligated to file a registration statement under the Securities
Act, registering (i) the resale of the Series A Preferred Stock and Warrants
and (ii) the issuance by the Company of the shares of Common Stock issuable
upon exercise of the Warrants, and to have such registration statement
declared effective by the Securities and Exchange Commission ("SEC") on or
prior to August 15, 1997. If such registration statement is not declared
effective by the SEC by August 15, 1997, the dividend rate of the Series A
Preferred Stock shall increase to 6.5% per annum until the default under the
Preferred Stock Registration Rights Agreement is cured. Additionally, at any
time after May 11, 1997, each holder of the Series A Preferred Stock may
demand that the Company file and have declared effective within 90 days of
such demand a registration statement registering the resale of the shares of
Common Stock issuable upon conversion of the Series A Preferred Stock;
provided, however, that the Company will not be required to file more than
two such registration statements. If such later registration statement is not
declared effective by the SEC within the applicable 90-day period, the
Company will be required to pay to the holders of the Series A Preferred
Stock who made the demand an amount equal to 2% of the Liquidation Preference
of their shares of Series A Preferred Stock for each month until the default
is cured. Such penalty is payable at the Company's election in cash or
through the issuance of additional shares of Series A Preferred Stock.
RIGHTS TO PURCHASE SERIES B PREFERRED STOCK
The following is a summary of the Rights Agreement dated as of July 2,
1997 (the "Rights Plan") between Company and Continental Stock Transfer &
Trust Company as Rights Agent, which was adopted by the Board of Directors of
the Company on July 2, 1997. This summary of the Rights Plan does not purport
to be complete and is qualified in its entirety by reference to the
provisions of the Rights Plan.
Under the Rights Plan, holders of Common Stock of the Company received,
as a dividend, preferred stock purchase rights (the "Rights") at the rate of
one Right for each share of Common Stock held as of the close of business on
July 14, 1997. One Right will also attach to each share of Common Stock
issued thereafter (including shares issued pursuant to this Prospectus).
Currently the Rights are not separate from the Common Stock and one not
exercisable
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and will only separate from the Common Stock and become exercisable if a
person or group acquires 10% or more of the Company's outstanding Common
Stock (an "Acquiring Person") or launches a tender or exchange offer that
would result in ownership of 10% or more the Company's outstanding Common
Stock. Each Right that is not owned by an Acquiring Person entitles the
holder of the Right to buy one one-thousandth of one share (a "Unit") of
Series B Preferred Stock which will be issued by the Company. If any person
becomes an Acquiring Person, or if an Acquiring Person engages in certain
transactions involving conflicts of interest or in a business combination in
which the Company's Common Stock remains outstanding, then the Rights Plan
provides that each Right, other than any Right held by the Acquiring Person,
entitles the holder to purchase, for $70, Units with a market value of $140.
However, if the Company is involved in a business combination in which the
Company itself is not the survivor, or if the Company sells 50% or more of
its assets or earning power to another person, then the Rights Plan provides
that each Right entitled the holder to purchase, for $70, shares of the
common stock of the Acquiring Person's ultimate parent having a market value
of $140.
At any time until ten days following the date on which a person acquires
10% or more of the Company's Common Stock, the Company may redeem all (but
not less than all) of the Rights for $0.0001 per Right. The Rights expire in
ten years. The Series B Preferred Stock will be junior, with respect to
dividends and liquidation rights, to any other series of preferred stock of
the Company. The Series B Preferred Stock has dividend and liquidation
preferences over the Common Stock of the Company.
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PLAN OF DISTRIBUTION
Each broker-dealer that receives New Notes for its own account pursuant
to an Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. This Prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of New Notes received in exchange for Old Notes where
such Old Notes were acquired as a result of market-making activities or other
trading activities. The Issuers have agreed that, for a period of 180 days
after the Expiration Date (or such longer period as required by the terms of
the Registration Rights Agreement), it will make this Prospectus, as amended
or supplemented, available to any broker-dealer for use in connection with
any such resale. In addition, until November 9, 1997 all dealers effecting
transactions in the New Notes may be required to deliver a prospectus.
The Issuers will not receive any proceeds from any sale of New Notes by
broker-dealers. New Notes received by broker-dealers for their own account
pursuant to an Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions,
through the writing of options on the New Notes or a combination of such
methods of resale, at market prices prevailing at the time of resale, at
prices related to such prevailing market prices or negotiated prices. Any
such resale may be made directly to purchasers or to or through brokers or
dealers who may receive compensation in the form of commissions or
concessions from any such broker-dealer or the purchasers of any such New
Notes. Any broker-dealer that resells New Notes that were received by it for
is own account pursuant to an Exchange Offer and any broker or dealer that
participates in a distribution of such New Notes may be deemed to be an
"underwriter" within the meaning of the Securities Act and any profit on any
such resale of New Notes and any commission or concessions received by any
such persons may be deemed to be underwriting compensation under the
Securities Act. The Letter of Transmittal states that, by acknowledging that
it will deliver and by delivering a prospectus, a broker-dealer will not be
deemed to admit that it is an "underwriter" within the meaning of the
Securities Act.
For a period of 180 days after the Expiration Date (or such longer period
as required by the terms of the Registration Rights Agreement), the Issuers
will promptly send additional copies of this Prospectus and any amendment or
supplement to this Prospectus to any broker-dealer that requests such
documents in the Letter of Transmittal. The Company has agreed to pay all
expenses incidental to the Exchange Offers (including the reasonable expenses
of one counsel for the Holders of the Notes) other than commissions or
concessions of any brokers or dealers and will indemnify the Holders of the
Notes (including any broker-dealers) against certain liabilities, including
liabilities under the Securities Act.
The Company has agreed to pay all expenses incident to the Exchange Offer
other than commissions or concessions of any brokers or dealers and transfer
taxes and costs incurred by a holder in transmitting its Old Notes to the
Exchange Agent and will indemnify the holders of the Old Notes (including any
broker-dealers) against certain liabilities, including liabilities under the
Securities Act.
LEGAL MATTERS
The legality of the New Notes 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 the Company's Common Stock.
EXPERTS
The consolidated financial statements of the Company as of December 31,
1995 and 1996, and for the years ended February 28, 1995, December 31, 1996
and the ten months ended December 31, 1995 incorporated by reference into
this Prospectus and the financial statements of Milliwave Limited Partnership
as of December 31, 1995 and 1996 and for the period April 25, 1995
(inception) through December 31, 1995 and for the year ended December 31,
1996 incorporated by reference into 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.
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