<PAGE>
As filed with the Securities and Exchange Commission on December 12, 1997.
Registration No. 333-35961
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER THE
SECURITIES ACT OF 1933
-----------------------------
WINSTAR EQUIPMENT II CORP.
WINSTAR COMMUNICATIONS, INC.
(Exact Name of Each Registrant as Specified in Its Charter)
<TABLE>
<S> <C> <C>
Delaware 4812 13-3585278
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number
of WinStar Communications, Inc.)
</TABLE>
-----------------------------
WinStar Communications, Inc. WinStar Equipment II Corp.
230 Park Avenue 1577 Spring Hill Road
New York, New York 10169 Vienna, Virginia 22182
(212) 584-4000 (703) 645-5000
(Address, Including Zip Code, and Telephone Number,
Including Area Code, of Each Registrant's Principal Executive Offices)
-----------------------------
William J. Rouhana, Jr.
Chief Executive Officer and Chairman of the Board
WinStar Communications, Inc.
230 Park Avenue
New York, New York 10169
(212) 584-4000
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent For Service)
-----------------------------
Copies to:
David Alan Miller, Esq.
Graubard Mollen & Miller
600 Third Avenue
New York, New York 10016
Telephone: (212) 818-8800
Fax: (212) 818-8881
Approximate date of commencement of proposed sale to the public: As soon
as practicable after this Registration Statement becomes effective.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. |_|
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. |_|
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
<PAGE>
(Cover Page Continued)
---------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
====================================================================================================================================
Proposed Proposed Maximum
Title Of Each Class Of Amount To Be Maximum Offering Aggregate Offering Amount Of
Securities To Be Registered Registered Price Per Note Price Registration Fee
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<S> <C> <C> <C> <C>
12 1/2% Guaranteed Senior Secured Exchange
Notes Due 2004 ("New Equipment Notes")(1) 50,000 $1,000(2) $50,000,000(3) $15,151.52
- ------------------------------------------------------------------------------------------------------------------------------------
Guarantee of the New Equipment Notes (4) -- -- -- (5)
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Total $50,000,000 $15,151.52(6)
====================================================================================================================================
</TABLE>
(1) The New Equipment Notes being registered hereby are being offered by
WinStar Equipment II Corp., a wholly owned subsidiary of WinStar
Communications, Inc. (the "Company"), in exchange for certain 12 1/2%
guaranteed senior secured notes due 2004 ("Old Equipment Notes").
(2) Represents the minimum principal amount of each of the Old Equipment Notes
for which the New Equipment Notes will be exchanged.
(3) Based on the book value of the notes as of the latest practicable date
pursuant to Rule 457(f)(2) under the Securities Act of 1933 ("Securities
Act").
(4) Represents the guaranty of the New Equipment Notes by the Company.
(5) Pursuant to Rule 457(n) under the Securities Act, no separate fee for the
guarantees is required.
(6) Filing fee was previously paid.
The Registrants hereby amend this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrants
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or until the Registration Statement
shall become effective on such date as the Securities and Exchange Commission,
acting pursuant to said Section 8(a), may determine.
================================================================================
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any state in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such state.
SUBJECT TO COMPLETION, DATED DECEMBER 12, 1997
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 II 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 JANUARY__, 1997,
UNLESS EXTENDED BY WINSTAR EQUIPMENT II CORP.
-----------------------------
See "Risk Factors" beginning on Page 21 hereof for a discussion of certain
information that should be considered in connection with the
Exchange Offer and an investment in the 12 1/2%
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 December 12, 1997
(Continued on next page)
<PAGE>
(Cover page continued)
WinStar Equipment II Corp. ("WinStar Equipment" or the "Issuer"), a
Delaware corporation and wholly owned subsidiary of the Company, hereby offers,
upon the terms and subject to the conditions set forth in this Prospectus and
the letter of transmittal to be delivered to each holder of Old Equipment Notes
("Letter of Transmittal"), to exchange ("Exchange Offer") $1,000 principal
amount of New Equipment Notes for each $1,000 principal amount of outstanding
Old Equipment Notes. The Company, which has guaranteed the Old Equipment Notes
on a senior basis ("Old Equipment Note Guarantee"), 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 Equipment Notes (and the New Equipment Note Guarantee) will be
registered under the 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, $50.0 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 Issuer in accordance with the terms of the Purchase
Agreement, dated August 8, 1997 ("Purchase Agreement"), and Registration Rights
Agreement, dated August 8, 1997 ("Registration Agreement"), between the Company,
the Issuer and Credit Suisse First Boston Corporation and BT Securities
Corporation, the initial purchasers of the Old Equipment Notes ("Initial
Purchasers"). The Exchange Offer is being made by the Issuer to fulfill certain
obligations under the Purchase Agreement and Registration Agreement. After the
consummation of the Exchange Offer, the Issuer will have no further obligation
to make any other such exchange offers.
The Issuer will accept for exchange any and all Old Equipment 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 January __, 1998,
unless the Exchange Offer is extended by WinStar Equipment in its sole
discretion ("Expiration Date"). Tenders of Old Equipment 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
Equipment Notes being tendered for exchange. However, the Exchange Offer is
subject to certain conditions which may be waived by the Issuer and to the terms
and provisions of the Registration Statement. The Old Equipment 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 Equipment 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 Issuer through a release to the
Dow Jones News Service and as otherwise required by applicable laws or
regulations. See "The Exchange Offer."
The New Equipment Note Guarantee will be the obligation of the Company and
the New Equipment Notes will be the obligations of WinStar Equipment. The New
Equipment Notes will be entitled to the benefits of the indenture under which
the Old Equipment Notes were issued (the "Indenture"). The form of the New
Equipment Notes will be identical to the form of the Old Equipment Notes, except
that the New Equipment Notes will have been registered under the Securities Act
and, therefore, will not bear legends restricting the transfer thereof. The New
Equipment Notes will have the same terms, conditions and rankings as the Old
Equipment Notes. The New Equipment Note Guarantee will be an unsecured,
unsubordinated obligation of the Company, will rank pari passu in right of
payment with all existing and future unsecured, unsubordinated obligations of
the Company and will be senior in right of payment to all existing and future
subordinated indebtedness of the Company. The New Equipment Notes will be
secured, senior obligations of WinStar Equipment. WinStar Equipment has no
indebtedness senior to the Equipment Notes.
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 August 8, 1999, WinStar
Equipment has not applied at least $50.0 million to fund the Acquisition Costs
(as defined) of Designated Equipment (as defined), WinStar Equipment shall be
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. The term "(as defined)"
used after a
2
<PAGE>
(Cover page continued)
capitalized term means that the term is defined herein under the section
entitled "Description of Equipment Notes" or in the Indenture.
Based on no-action letters issued by the staff of the Securities and
Exchange Commission ("Commission") to third parties, the Issuer believes that
New Equipment Notes issued pursuant to this Exchange Offer in exchange for Old
Equipment Notes may be offered for resale, resold and otherwise transferred by a
holder thereof (other than a broker-dealer who purchased such Old Equipment
Notes directly from the Issuer 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 Equipment 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 Equipment Notes.
Holders of Old Equipment Notes wishing to accept the Exchange Offer must
represent to the Issuer in the Letter of Transmittal that such conditions have
been met.
Each broker-dealer that receives New Equipment 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 Equipment 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 Equipment Notes received in exchange for Old Equipment Notes
where such Old Equipment Notes were acquired by such broker-dealer as a result
of market-making activities or other trading activities. The Issuer 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 October 30, 1997, Cede & Co. ("Cede"), as nominee for The Depository
Trust Company, New York, New York ("DTC"), was the registered holder of $50.0
million aggregate principal amount of the Old Equipment Notes and held such Old
Equipment Notes for seven of its participants. The Issuer 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. In the past, there has been
only a limited secondary market, and no public market, for the Old Equipment
Notes. The Old Equipment Notes are, and the New Equipment 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 Equipment Notes or the Old
Equipment Notes. The New Equipment Notes constitute securities for which there
is no established trading market, and the Issuer does not currently intend to
list the New Equipment Notes on any securities exchange. If such a trading
market develops for the New Equipment 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 Equipment Notes may trade at a discount from their face
value. See "Risk Factors - Absence of Public Market for the New Equipment
Notes."
Any Old Equipment 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 Indenture.
Following the consummation of the Exchange Offer, the holders of Old Equipment
Notes will continue to be subject to the existing restrictions upon transfer
thereof and the Issuer will have no further obligation to such holders to
provide for any other exchange offer with respect to the Old Equipment 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 Equipment 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 Equipment Notes as of December 12, 1997.
The Issuer 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."
3
<PAGE>
(Cover page continued)
THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL WINSTAR EQUIPMENT ACCEPT
SURRENDERS FOR EXCHANGE FROM, HOLDERS OF OLD EQUIPMENT 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 Equipment 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 Equipment 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 Equipment Notes permits the Depository's participants, and
anyone holding a beneficial interest in an Old Equipment Note registered in the
name of such a participant, to transfer interests in the Old Equipment Notes
electronically in accordance with the Depository's established procedures
without the need to transfer a physical certificate. Except as provided below,
the New Equipment 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, any holder of Old Equipment Notes who at any time is not a qualified
institutional buyer under Rule 144A (a "Qualified Institutional Buyer"), who
exchanges Old Equipment Notes in the Exchange Offer, will receive the New
Equipment Notes in certificated form. Any such holder is not, and will not be,
able to trade such securities through the Depository unless the New Equipment
Notes are resold to a Qualified Institutional Buyer. After the initial issuance
of the New Global Notes, New Equipment 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 Issuer or the Exchange Agent. This Prospectus does not constitute an
offer to sell or a solicitation of an offer to buy the New Equipment 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
Page
----
Incorporation of Information by Reference................................... 6
Prospectus Summary.......................................................... 7
Risk Factors................................................................ 21
The Exchange Offer.......................................................... 32
Capitalization.............................................................. 39
Description of Equipment Notes.............................................. 40
Certain United States Federal Income Tax
Considerations............................................................ 65
Description of Certain Indebtedness and
Preferred Stock........................................................... 69
Plan of Distribution........................................................ 73
Legal Matters............................................................... 74
Experts..................................................................... 74
AVAILABLE INFORMATION
The Issuer has filed with the Commission a Registration Statement on Form
S-4 under the Securities Act with respect to the New Equipment 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 the Issuer and the New
Equipment 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.
The Issuer is not required to, and does not file, reports, proxies or
other information statements under the Securities Exchange Act of 1934, as
amended ("Exchange Act"). The Company, however, is subject to the informational
requirements of the Exchange Act, and in accordance therewith, is required to
file 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 the Public Reference
Section of the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C.
20549, and the Commission's regional offices at Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661 and 7 World Trade Center,
Suite 1300, New York, New York 10048. Copies of the reports, proxy statements
and other information can be obtained from the Public Reference Section of the
Commission, Washington, D.C. 20549, at prescribed rates. In addition, all
reports filed by the Company via the Commission's Electronic Data Gathering and
Retrieval System (EDGAR) can be obtained from the Commission's Internet web site
located at http:\\www.sec.gov.
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
Equipment 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 United States Trust Company of New York, as trustee ("Trustee") and
each holder of Equipment 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;
(9) Quarterly Report on Form 10-Q for the six-month period ended June
30, 1997;
(10) Current Report on Form 8-K filed July 2, 1997;
(11) Current Report on Form 8-K filed September 11, 1997;
(12) Current Report on Form 8-K filed October 29, 1997;
(13) Current Report on Form 8-K filed October 31, 1997); and
(14) Quarterly Report on Form 10-Q for the nine-month period ended
September 30, 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
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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. Wireless Fiber-SM 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. The Company is offering local exchange services
on a switched basis and resale basis in Boston, Chicago, Dallas, Fort Worth, Los
Angeles, Newark, New York City, San Diego and Washington, D.C., and is offering
local exchange services solely on a resale basis in Atlanta, Hartford,
Milwaukee, Orange County (California), Philadelphia, San Francisco and Stamford
(Connecticut). 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 September
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 125 cities with populations
exceeding 100,000 each, and encompass an aggregate population of approximately
180 million people and address more than 625 million channel pops (population
coverage multiplied by the number of 100 MHz channels). 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 certain 82 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 185 million people and address more than 775 million channel
pops. 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
markets. 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 densely deploy its 38
GHz services and 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).
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7
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Broad Bandwidth. The total amount of bandwidth for each 38 GHz channel is
100 MHz, which supports full broadband capability. For example, one 100 MHz 38
GHz channel can support transmission capacity of one DS-3 at 45 Mbps which can
transfer data at a rate that is 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). Further, it is anticipated that the Company's deployment of multi point
facilities, planned to begin this year, will allow the Company's services to
support one OC3 of capacity at 155 Mbps, which represents data transfer rates
that are three times faster than those provided by currently deployed
point-to-point technology. 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, data transmission rates of
45 Mbps and higher 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
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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
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, Dallas, Fort Worth, Los Angeles, Newark, San Diego
and Washington, D.C. 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
more than 1,900 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.
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In October 1997, the Company purchased (the "US ONE Asset Acquisition and
Financing") from US ONE Communications Corp. ("US ONE") and its subsidiaries,
entities in bankruptcy, 12 Lucent switches, leased fiber-optic capacity in the
New York metropolitan area and certain related assets for a purchase price of
approximately $81.25 million in the form of (i) $61.25 million cash paid at the
closing of the US ONE Asset Acquisition and Financing and (ii) $20 million, to
be paid on the effective date of US ONE's confirmed plan of reorganization in
its pending Chapter 11 bankruptcy case, in either cash or shares of the
Company's common stock, to be determined at the Company's discretion. The
Company believes that the US ONE Asset Acquisition and Financing will allow the
Company to accelerate the city-by-city rollout of its Wireless Fiber and
switch-based infrastructure, although there can be no assurance of this. See
"Description of Certain Indebtedness and Preferred Stock" for a description of
the $62 million financing utilized by the Company in the US ONE Asset
Acquisition and Financing.
The Company recently entered into an agreement with a manufacturer and is
negotiating with another alternative manufacturer for the initial development
and deployment of equipment for use in local digital multi point 38 GHz
networks. A multi point network, also known as a point-to-multi point or a
multiple point-to-point network, enables a single radio and antenna at a hub
location to send and receive unique transmissions to and from many remote radios
located within a cluster of buildings. The Company believes that the
implementation of multi point network architecture will provide it with (i)
substantially reduced network deployment costs, (ii) more efficient spectrum
utilization and reduced operating and installation costs and (iii) an improved
ability to tailor spectrum allocation to address specific customer requirements
(i.e., "bandwidth on demand"). The Company anticipates initial deployment of
multi point technology during the fourth quarter of 1997 and general deployment
of this technology during 1998.
State Authorizations. The Company has obtained authorization to operate as
a CLEC in 28 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 37 states 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 approximately 400 people located in 16 major markets,
and a Carrier Services sales group, currently consisting of approximately 40
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 services providers do not offer and that such
level of service will become a key factor in customers' choice of
telecommunications services providers as the market matures.
Experienced Management and Operating Personnel. The Company has assembled
a management team and has 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 II Corp.
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 is using 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.
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In October 1997, counsel for the Company delivered to the Commission a
letter ("No-Action Request Letter") seeking confirmation from the Commission
that it will 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 Request
Letter asks 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 stockholder 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) WinStar Equipment has no
independent operations other than to function as a telecommunications equipment
leasing company serving primarily the Company and its telecommunications
businesses. As of the date of this Prospectus, the Commission has not yet
delivered to counsel for the Company a no-action letter responding to the
No-Action Request Letter.
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.
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 was incorporated under the laws of the State of Delaware in
September 1990, its principal office is located at 230 Park Avenue, New York,
New York 10169 and its telephone number is (212) 584-4000. WinStar Equipment was
also incorporated under the laws of the State of Delaware in August 1997, its
principal office is located at 1577 Spring Hill Road, 6th Floor, Vienna,
Virginia 22182 and its telephone number is (703) 645-5000.
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Summary of The Exchange Offer
Background - The Private Offering of Debt Securities
General.................... An aggregate of $50.0 million principal
amount of Old Equipment Notes were sold to
the Initial Purchasers by the Issuer in an
institutional private placement in August
1997 ("August 1997 Debt Placement"). The
Initial Purchasers, in turn, sold such Old
Equipment Notes to certain Qualified
Institutional Buyers in reliance on Rule
144A under the Securities Act.
Exchange of
Old Equipment Notes...... In connection with the August 1997 Debt
Placement, WinStar Equipment and the Company
entered into the Registration Agreement
pursuant to which WinStar Equipment is
obligated to use its best efforts to
consummate this 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 Equipment Notes
to be registered under the Securities Act
pursuant to a shelf registration statement.
If (i) by February 4, 1998, 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 Equipment
Notes or the applicable New Equipment 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 Equipment Notes will
be issued in exchange for each $1,000
principal amount of outstanding Old
Equipment Notes validly tendered and not
withdrawn. The New Equipment Notes will be
issued to tendering holders of Old Equipment
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 Issuer
believes that the New Equipment Notes issued
pursuant to the Exchange Offer in exchange
for Old Equipment 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
Equipment 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 Equipment
Notes. Each broker-dealer that receives New
Equipment Notes for its own account in
exchange for Old Equipment 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 Equipment 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"
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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 Equipment Notes received in
exchange for Old Equipment Notes where such
New Equipment 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 Equipment Notes may
not rely on the foregoing position of the
staff of the Commis sion 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 Issuer or the Company.
The Exchange Offer is not being made to, nor
will be accepted from, holders of Old
Equipment 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. January __,
1998, 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. WinStar Equipment 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 Equipment
Notes being tendered.
Procedures for Tendering
Old Equipment Notes...... Each holder of Old Equipment 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 Equipment 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 Equipment Notes acquired pursuant to the
Exchange Offer are being obtained in the
ordinary course of business of the person
receiving such New Equipment Notes, whether
or not such person is the holder, and that
neither the holder nor any such other person
has any arrangement or understanding with
any person to participate in the
distribution of such New Equipment Notes.
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Special Procedures for
Beneficial Owners........ Any beneficial owner whose Old Equipment
Notes are registered in the name of a
broker, commercial bank, trust company, or
other nominee, who wishes to tender in the
Exchange Offer should contact such
registered holder promptly and instruct such
registered holder to tender on behalf of
such beneficial owner. 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 Equipment
Notes, either make appropriate arrangements
to register ownership of the Old Equipment
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 Equipment Notes who wish to
tender such Old Equipment Notes and whose
Old Equipment Notes are not immediately
available or who cannot deliver their Old
Equipment 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 Equipment Notes
according to the guaranteed delivery
procedures set forth in "The Exchange
Offer -- Procedures for Tendering."
Acceptance of Old Equipment Notes
and Delivery of New Equipment
Notes.................... Subject to certain conditions (as described
more fully in "The Exchange Offer--
Conditions to the Exchange Offer"), WinStar
Equipment will accept for exchange any and
all Old Equipment 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
Equipment 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 Equipment 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
does not constitute a taxable exchange for
federal income tax purposes. Each New
Equipment Note will be treated as having
been originally issued at the time the Old
Equipment Note exchanged 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 Indenture,
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.
See "The Exchange Offer," below, for more detailed
information concerning the terms of the Exchange Offer.
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The New Equipment Notes
The Exchange Offer applies to $50.0 million aggregate principal amount of
Old Equipment Notes. The form and terms of the New Equipment Notes will be the
same as the form and terms of the Old Equipment Notes, except that the New
Equipment Notes will be registered under the Securities Act and, therefore, will
not bear legends restricting the transfer thereof. The New Equipment Notes will
evidence the same debt as the Old Equipment Notes and the New Equipment Notes
will be entitled to the benefits of the Indenture. Upon consummation of the
Exchange Offer, 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 Equipment Notes will not be entitled to certain
registration rights under the Registration Agreement. See "Description of
Equipment Notes."
Securities Offered ........ $50.0 million principal amount of 12 1/2%
Guaranteed Senior Secured Exchange Notes Due
2004 of WinStar Equipment.
Maturity Date ............. March 15, 2004.
Interest Payment Dates..... March 15 and September 15, commencing
September 15, 1997.
Optional Redemption........ 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 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....... In the event that by August 8, 1999, WinStar
Equipment has not applied at least $50.0
million to fund the Acquisition Costs of
Designated Equipment ($50.0 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 New Equipment Notes may require
the Issuer of such New Equipment Notes to
repurchase such New Equipment Notes at 101%
of the principal amount of such New
Equipment Notes, plus accrued interest, if
any, on such amount to the date of
repurchase.
Ranking
General................. At September 30, 1997, after giving effect
to an institutional private placement by the
Company in October 1997 ("October 1997 Debt
Placement") of $100 million principal amount
of 15% senior subordinated deferred interest
notes due 2007 ("October 1997 Notes"), and
the borrowing by WinStar Switch Acquisition
Corp., a wholly owned subsidiary of the
Company ("WSAC"), of approximately $62.3
million in October 1997 in order to finance
the US ONE Asset Purchase ("US ONE Asset
Acquisition and Financing"), the Company
would have had (on an unconsolidated basis)
approximately $820.9 million of
indebtedness, $561.1 million of which would
have been senior indebtedness (including the
Company's outstanding 14 1/2% Senior
Deferred Interest Notes due 2005 ("March
1997 Senior Notes"), the guarantee by the
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15
<PAGE>
Company ("March 1997 Equipment Note
Guarantee") of WinStar Equipment Corp.'s
("Original Equipment Corp.") outstanding 12
1/2% Guaranteed Senior Secured Notes Due
2004 issued in March 1997 ("March 1997
Equipment Notes" and, together with the
March 1997 Senior Notes and the October 1997
Notes, and the New Equipment Notes offered
hereby, the "1997 Notes"), Old Equipment
Note Guarantee, (the Old Equipment Guarantee
together with the New Equipment Note
Guarantee, the "Equipment Note Guarantee"),
the Company's guarantee of the US ONE Asset
Acquisition and Financing ("US ONE
Guarantee") and the Company's outstanding
14% Senior Discount Notes due 2005 ("1995
Senior Notes"), and $197.5 million of which
would have been senior 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
October 1997 Notes and the US ONE Asset
Acquisition and Financing). The Company is a
holding company and, accordingly, the New
Equipment Note Guarantee and US ONE
Guarantee will be effectively subordinated
to all liabilities of the Company's
subsidiaries, including trade payables. At
September 30, 1997, after giving effect to
the October 1997 Debt Placement and the US
ONE Asset Acquisition and Financing, the
total liabilities of the Company's
subsidiaries was approximately $422.0
million, including trade payables.
New Equipment Note Guarantee.. The New Equipment Note Guarantee will be an
unsecured, senior obligation of the Company,
will rank pari passu in right of payment
with all existing and future senior
indebtedness of the Company, including the
March 1997 Senior Notes, the March 1997
Equipment Note Guarantee, the US ONE
Guarantee and 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, October 1997 Notes and US
ONE Asset Acquisition and Financing.
New Equipment Notes..... The New Equipment Notes will be secured,
senior obligations of WinStar Equipment.
Security................... The New Equipment Notes will be secured by
liens on Designated Equipment purchased with
the proceeds of the August 1997 Debt
Placement.
Restrictive Covenants...... The New Equipment Notes will be issued
pursuant to the Indenture, which restricts
the incurrence of additional debt by the
Company, the issuance of debt and preferred
stock by the Company's subsidiaries,
dividends on and redemption of capital stock
of the Company, the redemption of certain
subordinated obligations of the Company, the
sale of assets and subsidiaries' stock and
transactions with affiliates. The Indenture
also prohibits certain restrictions on
distributions from subsidiaries and
restricts the Company 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 the Company to
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designate certain subsidiaries as
unrestricted subsidiaries. The Indenture
restricts WinStar Equipment from engaging in
any business other than the ownership and
leasing of the Designated Equipment and
related activities.
Risk Factors
See "Risk Factors" commencing on page 21 hereof for a discussion of
certain risks that should be considered in connection with an investment in the
New Equipment Notes, including the risks related to historical and anticipated
future operating losses and negative EBITDA.
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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 nine months ended
September 30, 1996 and 1997 have been derived from the unaudited Condensed
Consolidated Financial Statements and notes thereto incorporated by reference
into this Prospectus. 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>
Year Ended
December 31, 1996 Nine Months Ended September 30,
----------------------- -------------------------------------
Ten Months
Year Ended Ended
February 28, December 31, Pro 1996 1997 1997 Pro
1995 1995 Actual Forma(1) Actual Actual Forma (1)
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Operating revenues:
Telecommunications .......... $14,909 $13,137 $33,969 $32,481 $27,957 $23,910 $23,910
Information services ........ 473 2,648 14,650 14,650 7,479 25,693 25,693
--------- --------- --------- --------- --------- --------- ---------
Total net sales ....... 15,382 15,785 48,619 47,131 35,436 49,603 49,603
Operating income (loss):
Telecommunications .......... (4,984) (7,288) (43,698) (56,199) (21,746) (105,982) (110,778)
Information services ........ (157) 217 (1,409) (1,409) (563) (2,632) (2,632)
General corporate ........... (944) (3,861) (11,373) (11,373) (8,749) (15,661) (15,661)
--------- --------- --------- --------- --------- --------- ---------
Total operating loss .... (6,085) (10,932) (56,480) (68,981) (31,058) (124,275 (129,071)
Interest expense .............. (375) (7,186) (36,748) (109,230) (26,695) (53,074) (84,107)
Interest income ............... 343 2,890 10,515 8,453 8,342 11,052 11,052
Other expenses, net ........... (1,109) (866) -- -- -- 2,219 2,219
--------- --------- --------- --------- --------- --------- ---------
Net loss from continuing
operations ................. (7,226) (16,094) (82,713) (169,758) (49,411) (164,078) (199,907)
Net (loss) income from
discontinued operations(2) . (4) 237 (1,010) (1,010) (616) (1,977) (1,977)
--------- --------- --------- --------- --------- --------- ---------
Net loss ...................... (7,230) (15,857) (83,723) (170,768) (50,027) (166,055) (201,884)
Preferred stock dividends ..... -- -- -- (6,000) -- (3,881) (4,535)
--------- --------- --------- --------- --------- --------- ---------
Net loss applicable to
common stock ............... $(7,230) $(15,857) $(83,723) $(176,768) $(50,027) $(169,936) $(206,419)
========= ========= ========= ========= ========= ========= =========
Net loss per share from
continuing operations ...... $(0.42) $(0.71) $(2.96) $(5.58) $(1.79) $(5.10) $(6.21)
Net (loss) income per .........
share from discontinued
operations ................. -- 0.01 (0.04) (0.03) (0.02) (0.06) (0.06)
--------- --------- --------- --------- --------- --------- ---------
Net loss per common share
outstanding ................ $(0.42) $(0.70) $(3.00) $(5.61) $(1.81) $(5.16) $(6.27)
Weighted average common
shares outstanding ........ 17,122 22,770 27,911 31,506 27,691 32,923 32,923
Other Financial Data:
Ratio of earnings from ........
continuing operations to
combined fixed charges
and preferred stock
dividends(3) -- -- -- -- -- -- --
</TABLE>
- --------------------------------------------------------------------------------
18
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
As of September 30, 1997
------------------------
Actual Pro forma(4)
------ ------------
(in thousands)
<S> <C> <C>
Balance Sheet Data:
Cash, cash equivalents and short-term investments....................... $302,769 $396,782
Property and equipment, net............................................. 155,025 206,177
Total assets............................................................ 719,964 902,389
Current portion of long-term debt and capital lease obligations......... 8,577 70,827
Long-term debt and capital lease obligations, less current portion...... 675,991 775,991
Common and preferred stock and additional paid-in capital............... 253,024 253,024
Stockholders' equity (deficit).......................................... (38,065) (38,065)
</TABLE>
- ----------
(1) Gives effect to (a) the acquisition of Milliwave Limited Partnership
("Milliwave Acquisition") completed in January 1997, (b) an institutional
private placement of $100 million of Units, consisting of preferred stock
and warrants, completed in February 1997 ("Preferred Stock Placement"),
(c) a private placement in March 1997 ("March 1997 Debt Placement") of
$100 million 14 1/2% Senior Deferred Interest Notes Due 2005 of the
Company ("March 1997 Senior Notes") and $200 million 12 1/2% Guaranteed
Senior Secured Notes Due 2004 of Original Equipment Corp., a wholly owned
subsidiary of the Company ("March 1997 Equipment Notes"), (d) a private
placement in August 1997 ("August 1997 Debt Placement") by WinStar
Equipment, a wholly owned subsidiary of the Company, of the Equipment
Notes, (e) the October 1997 Debt Placement and (f) the US ONE Asset
Acquisition and Financing, each as if they occurred as of the beginning of
the respective period. Interest expense has been adjusted to include
approximately $31.0 million and $72.5 million of interest on such debt and
amortization of debt offering costs and other related fees in the nine
months ended September 30, 1997 and the year ended December 31, 1996,
respectively, but not to include interest income earned on additional
available cash. Since the Milliwave Acquisition was completed on January
2, 1997, its operations are reflected in the historical results of the
Company for the nine month period ended September 30, 1997. See
"Description of Certain Indebtedness and Preferred Stock." Depreciation
expense has been adjusted to include approximately $4.8 million and $6.4
million, respectively, of depreciation on certain of the assets acquired
in the US ONE Asset Acquisition and Financing, assuming straight line
depreciation over the expected useful lives of the assets which will
ultimately be placed in service.
(2) Such loss or income is from the operations of Global Products, the
Company's consumer products subsidiary. On May 13, 1997, a formal plan of
disposition for Global Products was approved by the Company's 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 through September 30, 1997 are
segregated and reported as discontinued operations in the statement of
operations data.
(3) For the year ended February 28, 1995, the ten months ended December 31,
1995, the year ended December 31, 1996 and the nine months ended September
30, 1996 and 1997, earnings from continuing operations were insufficient
to cover combined fixed charges and preferred stock dividends by
$7,288,000, $16,310,000, $83,033,000, $49,411,000 and $169,172,000,
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
$205,655,000 and $176,078,000 for the nine months ended September 30, 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 that the Company believes to be representative of
interest.
(4) Gives effect to the October 1997 Debt Placement and the US ONE Asset
Acquisition and Financing, as if each occurred at September 30, 1997.
- --------------------------------------------------------------------------------
19
<PAGE>
- --------------------------------------------------------------------------------
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."
- --------------------------------------------------------------------------------
20
<PAGE>
RISK FACTORS
The New Equipment Notes offered hereby contain the same terms and
conditions as the Old Equipment Notes and, accordingly, involve a high degree of
risk. Each prospective investor should carefully consider the following risk
factors relating to both the Old Equipment Notes and the New Equipment Notes.
This Prospectus contains forward-looking statements which involve risks and
uncertainties. The Company's actual results may differ significantly from the
results discussed in the forward-looking statements. Factors that might cause
such differences include, but are not limited to, the following risk factors:
Historical and Anticipated Future Net and Operating Losses and Negative EBITDA
The Company has incurred significant operating and net losses attributable
in substantial part to the development of its telecommunications businesses. The
Company historically has had net losses and negative EBITDA, including net
losses and negative EBITDA of approximately $15.9 million and $9.9 million,
respectively, for the ten months ended December 31, 1995, $83.7 million and
$52.0 million, respectively, for the year ended December 31, 1996 and $166.1
million and $108.8 million, respectively, for the nine months ended September
30, 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
At September 30, 1997, on a pro forma basis giving effect to the
consummation of the October 1997 Debt Placement and the US ONE Asset Acquisition
and Financing, the Company would have had, on a consolidated basis,
approximately $856.0 million of indebtedness, including capitalized lease
obligations. The accrual of interest on the March 1997 Senior Notes and the US
ONE Asset Acquisition and Financing 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 Company has significant indebtedness and interest expense as a
result of the issuance of the 1995 Notes and the 1997 Notes and the consummation
of the US ONE Asset Acquisition and Financing. The Company also may need to
incur additional indebtedness in the future. The indentures pursuant to which
the 1995 Notes and the 1997 Notes were issued (collectively, the "Indentures")
limit, but do not prohibit, the incurrence of additional indebtedness by the
Company and its subsidiaries. Additionally, the Indentures do not limit the
amount of indebtedness that may be incurred by the Company's new media and
consumer products subsidiaries.
The level of the Company's indebtedness could have important consequences,
including the following: (i) the combined debt service requirements of the 1995
Notes, 1997 Notes and US ONE Asset Acquisition and Financing could make it more
difficult for the Company to make payments on the Notes offered hereby; (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.
21
<PAGE>
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 acquired with such
proceeds and the leases of Designated Equipment (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 New Equipment Note Guarantee.
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 rely upon dividends and other payments
from its subsidiaries to generate the funds necessary to pay the principal of
and interest on the Equipment Notes if required under the New Equipment Note
Guarantee. The subsidiaries, however, are legally distinct from the Company and
have no obligation, contingent or otherwise, to pay amounts due pursuant to the
New Equipment Note Guarantee or to make funds available for such payment. The
Company's subsidiaries have not guaranteed the Old Equipment Notes and will not
guarantee the New Equipment 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. Accordingly, the New Equipment Note Guarantee will be effectively
subordinated to all liabilities (including trade payables) of the subsidiaries
of the Company. At September 30, 1997, after giving effect to the US ONE Asset
Acquisition and Financing, the subsidiaries of the Company had approximately
$339.7 million of liabilities (excluding intercompany payables to the Company
and each other), including $293.4 million of indebtedness (including the
Equipment Notes). See "Description of the Equipment Notes."
The Notes are unsecured indebtedness of the Company. At September 30,
1997, after giving effect to the October 1997 Debt Placement and the US ONE
Asset Acquisition and Financing, the Company on a consolidated basis had an
aggregate of approximately $856.0 million of indebtedness, including
capitalized lease obligations, approximately $355.7 million of which was
secured by liens on certain of the Company's assets. In the event such
secured indebtedness goes into default and the holders thereof foreclose on
the collateral, the holders of secured indebtedness will be entitled to
payment out of the proceeds of their collateral prior to any holders of
general unsecured indebtedness, including the New Equipment Note Guarantee,
notwithstanding the existence of any event of default with respect to the
Equipment Notes.
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 New Equipment Notes. The
Equipment Notes are not secured by the proceeds from the issuance of the
Equipment Notes, but only by such Designated Equipment. At the time of the
original issuance of the Equipment Notes, WinStar Equipment purchased only $2.7
million worth of Designated Equipment and WinStar Equipment does not expect to
use substantially all the proceeds from the sale of the Equipment Notes until
some time in the second quarter of 1999. As of the date of this Prospectus,
WinStar Equipment has used approximately $2.7 million of the proceeds of the
August 1997 Debt Placement to purchase Designated Equipment. Until WinStar
Equipment uses all such proceeds, the Equipment Notes will not be secured by
Designated Equipment having aggregate Acquisition Costs equal to the 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
22
<PAGE>
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 August 1997 Debt Placement on August
8, 1997 and since that date) 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 Equipment Notes."
Failure to Maintain Perfected Security Interest
Under the 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 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 and the District of Columbia. WinStar Equipment has
covenanted 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
Indentures which may require the Company to refinance the 1995 Notes and the
March 1997 Senior Notes and the March 1997 Equipment 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.
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
23
<PAGE>
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 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
24
<PAGE>
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 have accelerated, 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
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 its local
telecommunications services markets, 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.
25
<PAGE>
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 has substantially increased
the Company's near-term capital expenditure requirements. The amount of capital
required to execute the Company's business plan is a function of the speed at
which its plan is executed. 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, if necessary, 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. 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 Regulations
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 issues that traditionally have been considered
subject primarily to state regulation (e.g., number portability and carrier
discrimination issues). 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.
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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 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
covering each market where it intends to offer services.
As required by the Telecommunications Act, in August 1996, the FCC adopted
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 services. The
United States Court of Appeals for the Eighth Circuit stayed the Interconnection
Order in October 1996 and, in July 1997, 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 interconnectors to select discrete provisions of other
carriers' interconnection agreements. Many states, however, continue to set the
prices for interconnection, resale and unbundled network elements. In October,
the Eighth Circuit issued a further decision with respect to the Interconnection
Order that vacated the obligation of incumbent LECs, under certain
circumstances, to provide combinations of network elements, rather than provide
them individually. The FCC has indicated its intention to appeal the Eighth
Circuit's rulings to the United States Supreme Court. The Company believes that
the Eighth Circuit's rulings will not adversely affect its CLEC operations and
may, in certain instances, positively affect the operations of its Carrier
Services business. In addition, pursuant to the Telecommunications Act, the FCC
recently promulgated regulations to, among other things, implement universal
service reform, provide support for the provision of ubiquitous national
telephone service and effect access charge reform to more explicitly align the
access charges paid by long distance carriers to incumbent LECs to the actual
cost of providing such services. In light of the continued litigation
challenging the validity of the Telecommunications Act and the regulations
promulgated thereunder by the FCC, as well as efforts before Congress to seek
modification of provisions of the Telecommunications Act, 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 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.
Providers of telecommunications services, including the major IXCs, RBOCs,
CLECs and others, are coming under intensified regulatory 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, unfairly
impeding customers seeking to switch providers. The FCC, the Federal Trade
Commission 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, 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.
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Finite Initial Term of Wireless Licenses; Potential License Renewal Costs;
Fluctuations in the Value of Wireless Licenses; Transfer of Control
As described in the FCC's Report and Order and Second Notice of Proposed
Rulemaking, released on November 3, 1997 (the "38 GHz Order"), the FCC's policy
is to align the expiration dates of all 38 GHz licenses granted before August 1,
1996 such that they mature concurrently on February 1, 2001, and, upon
expiration, to renew all such licenses for ten years. Licenses granted on or
after August 1, 1996 have terms not to exceed ten years. In each case, the
licensee is entitled to an expectation of renewal if the Fee's buildout
requirements are met. While the Company believes that all of its Wireless
Licenses will be renewed based upon FCC custom and practice establishing a
presumption in favor of licensees that have complied with their regulatory
obligations during the initial license period, there can be no assurance that
any Wireless License will be renewed upon expiration of its initial term.
In the 38 GHz Order, the FCC also ruled, that (i) it would impose no
limits on the accumulation of licenses in the 38 GHz band, (ii) the 39.5 - 40.0
GHz portion of this band would not be reserved for use by satellite operations
and that co-primary sharing of the 38 GHz band with satellite operators is not
feasible, (iii) licensees should be permitted great flexibility in use of this
spectrum, including use for point-to-multi point and mobile services, and (iv)
currently unlicensed channels in the 38 GHz band will be auctioned.
While the Company views the vast majority of the FCC's determinations in
the 38 GHz Order as favorable to its operations and business plan, there can be
no assurance that all or a portion of the 38 GHz Order will not be repealed or
altered as a result of such proceedings.
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 and by valuations placed on
such licenses in any future auction of such spectrum. 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 light of the foregoing, the newness of this service
and possible revisions to the policies and regulations set forth in the 38 GHz
Order as a result of the challenges thereto, 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.
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 Equipment Notes.
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Certain Financial and Operating Restrictions
The indebtedness of the Company and the Indentures impose significant
operating and financial restrictions on the Company, affecting, and in certain
cases limiting, among other 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. See "Description of Certain Indebtedness and Preferred
Stock."
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 Equipment 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.
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Reliance on Equipment Suppliers
The Company currently purchases substantially all of its wireless
telecommunications equipment, including transceivers and network monitoring
equipment, from a single supplier and its switches and related equipment from a
single supplier even though, in each case, there are other manufacturers of such
equipment. Any reduction or interruption in supply from its suppliers could have
a material adverse effect on the Company until sufficient alternative supply
sources are established. The Company does not manufacture, nor does it have the
capability to manufacture, any of its telecommunications equipment. Although
there are other manufacturers who have, or are developing, equipment that would
satisfy the Company's needs, there can be no assurance that the Company would be
able to replace its current primary suppliers on commercially reasonable terms.
In addition, 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.
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 Equipment Notes.
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Absence of Public Market for the New Equipment Notes
There is no public market and only a limited secondary market for the New
Equipment Notes. The Old Equipment Notes are and the New Equipment 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. New
Equipment 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 August 1997 Debt Placement, the Company and
WinStar Equipment had 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 or WinStar Equipment
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 and WinStar Equipment are each primarily
engaged in a business other than investing, reinvesting, owning, holding or
trading securities and, therefore, that neither the Company nor WinStar
Equipment is an investment company within the meaning of the 1940 Act. If the
Company or WinStar Equipment is found to be an investment company, either the
Company or WinStar Equipment respectively, 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 or WinStar Equipment were required to register as an
investment company under the 1940 Act, such respective company 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 or WinStar Equipment would have a material adverse effect on the
Company. In addition, if the Company or WinStar Equipment is an investment
company under the 1940 Act, the Equipment Notes will not be eligible to be
resold in reliance on Rule 144A under the Securities Act and certain holders of
the Equipment Notes may not be able to own the Equipment Notes. In such event,
the market price of the Equipment Notes may be adversely affected.
Consequences of the Exchange Offer on Non-Tendering Holders of the Old Equipment
Notes
After Exchange Offer is consummated, the Company may not be required to
register certain of the Old Equipment Notes not tendered and accepted in the
Exchange Offer. In such event, holders of certain of the Old Equipment 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
Equipment 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 Equipment Notes were sold by the Issuer in the August 1997 Debt
Placement to the Initial Purchasers who, in turn, sold such Old Equipment Notes
to certain Qualified Institutional Buyers in reliance on Rule 144A under the
Securities Act. In connection with the August 1997 Debt Placement, the Issuer
and the Company entered into the Registration Agreement, pursuant to which the
Issuer is obligated to use its best efforts to consummate this Exchange Offer of
the Old Equipment Notes for the New Equipment Notes pursuant to an effective
registration statement by February 4, 1998. Unless the context requires
otherwise, the term "holder" with respect to the Exchange Offer means any person
in whose name Old Equipment Notes are registered on the books of the Issuer, or
any other person who has obtained a properly completed bond power from the
registered holder, or any person whose Old Equipment Notes are held of record by
DTC (who may deliver such Old Equipment Notes by book-entry transfer at DTC).
The Issuer has not requested, and does not intend to request, an
interpretation by the staff of the Commission with respect to whether the New
Equipment Notes issued pursuant to the Exchange Offer in exchange for the Old
Equipment 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 Issuer
believes that New Equipment Notes issued pursuant to the Exchange Offer in
exchange for Old Equipment Notes may be offered for resale, resold and otherwise
transferred by any holder of such New Equipment 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
Equipment 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 Equipment Notes. Any holder who
tenders in the Exchange Offer for the purpose of participating in a distribution
of the New Equipment 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 Equipment Notes for its own
account in exchange for Old Equipment Notes, where such Old Equipment 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 Equipment Notes. See "Plan of
Distribution."
By tendering in the Exchange Offer, each holder of Old Equipment Notes
will represent to the Issuer, that, among other things, (i) the New Equipment
Notes acquired pursuant to the Exchange Offer are being obtained in the ordinary
course of business of the person receiving such New Equipment Notes, whether or
not such person is such holder, (ii) neither the holder of Old Equipment Notes
nor any such other person has an arrangement or understanding with any person to
participate in the distribution of such New Equipment Notes, and (iii) if the
holder is not a broker-dealer, or is a broker-dealer but will not receive New
Equipment Notes for its own account in exchange for Old Equipment Notes. Neither
the holder nor any such other person is engaged in or intends to participate in
the distribution of such New Equipment Notes.
Following the consummation of the Exchange Offer, holders of Old Equipment
Notes not tendered will no longer have certain registration rights and the Old
Equipment Notes will continue to be subject to certain restrictions on transfer.
Accordingly, the liquidity of the market for the Old Equipment 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, WinStar Equipment will accept any and all Old
Equipment 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 Equipment Notes, 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 Equipment Notes pursuant to the
Exchange Offer. However, Old Equipment Notes may be tendered only in integral
multiples of $1,000 principal amount.
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The forms and terms of the New Equipment Notes will be identical in all
material respects to the forms and terms of the corresponding Old Equipment
Notes, except that the New Equipment 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 Equipment Notes being tendered for exchange.
DTC is the sole registered holder of the Old Equipment 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
December 12, 1997.
Under the Indenture, holders of Old Equipment Notes do not have any
appraisal or dissenters rights in connection with the Exchange Offer. 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.
WinStar Equipment shall be deemed to have accepted validly tendered Old
Equipment 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 Equipment Notes from WinStar
Equipment. If any tendered Old Equipment Notes are not accepted for exchange,
such unaccepted Old Equipment Notes will be returned, without expense, to the
tendering holder thereof as promptly as practicable after the Expiration Date.
Holders who tender Old Equipment 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
Equipment 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
January __, 1997 unless the Issuer 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 Issuer has no current
intention to extend the Exchange Offer, the Issuer 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 Equipment 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 Equipment Notes for Old Equipment Notes will be the first New York Stock
Exchange trading day following the Expiration Date.
WinStar Equipment expressly reserves the right to (i) terminate the
Exchange Offer and not accept for exchange any Old Equipment 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 Issuer 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 Equipment Notes, whether before or after
any tender of the Old Equipment Notes.
Procedures for Tendering
The tender to WinStar Equipment of Old Equipment Notes by a holder thereof
pursuant to one of the procedures set forth below will constitute an agreement
between such holder and WinStar Equipment 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 Equipment Notes may tender such Old
Equipment 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 Equipment 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 Equipment Notes are registered in the name of the signer
of the Letter of Transmittal and the New Equipment Notes to be issued in
exchange therefor are to be issued (and any untendered Old Equipment 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 Equipment Notes), the
signature of such signer need not be guaranteed. In any other case, the tendered
Old Equipment 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
Equipment Notes and/or Old Equipment Notes not exchanged are to be delivered to
an address other than that of the registered holder appearing on the register
for the Old Equipment Notes, the signature in the Letter of Transmittal must be
guaranteed by an Eligible Institution.
THE METHOD OF DELIVERY OF OLD EQUIPMENT 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 EQUIPMENT
NOTES SHOULD BE SENT TO WINSTAR EQUIPMENT.
The Issuer understands that the Exchange Agent will make a request
promptly after the date of this Prospectus to establish accounts with respect to
the Old Equipment 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 Equipment
Notes by causing DTC to transfer such Old Equipment Notes into the Exchange
Agent's account with respect to the Old Equipment Notes in accordance with DTC's
procedure for such transfer. Although delivery of the Old Equipment 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 Equipment 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
Equipment Notes are registered and the certificate number(s) of the Old
Equipment 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 Equipment Notes, in proper form for
transfer (or a confirmation of book-entry transfer of such Old Equipment 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 Equipment 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), the Issuer
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 Equipment Notes (or a confirmation of book-entry transfer
of such Old Equipment 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
Equipment Notes in exchange for Old Equipment Notes tendered pursuant to a
Notice of Guaranteed Delivery or letter, telegram or facsimile transmission
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<PAGE>
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 Equipment Notes.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance for exchange of any tender of Old Equipment Notes will
be determined by the Issuer, whose determination will be final and binding. The
Issuer reserves 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 Issuer's
counsel, be unlawful. The Issuer also reserves the absolute right to waive any
of the conditions of the Exchange Offer or any defect or irregularity in the
tender of any Old Equipment Notes. None of 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 Equipment 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 Equipment Notes are submitted in a principal amount
greater than the principal amount of Old Equipment Notes being tendered by such
tendering holder, such unaccepted or non-exchanged Old Equipment 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, the Issuer reserves the right in its sole discretion, to the
extent permitted by the Indenture to (a) purchase or make offers for any Old
Equipment Notes that remain outstanding subsequent to the Expiration Date and
(b) to the extent permitted by applicable law, purchase Old Equipment 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 Equipment Notes for exchange ("Transferor")
exchanges, assigns and transfers the Old Equipment Notes to WinStar Equipment
and irrevocably constitutes and appoints the Exchange Agent as the Transferor's
agent and attorney-in-fact to cause the Old Equipment 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
Equipment Notes and to acquire New Equipment Notes issuable upon the exchange of
such tendered Old Equipment Notes, and that, when the same are accepted for
exchange, WinStar Equipment will acquire good and unencumbered title to the
tendered Old Equipment 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 Issuer to be necessary or desirable to complete the
exchange, assignment and transfer of tendered Old Equipment Notes or transfer
ownership of such Old Equipment 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 WinStar
Equipment 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 Equipment Notes pursuant to the Exchange Offer are
irrevocable, except that Old Equipment 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 Equipment Notes to be
withdrawn, the certificate numbers and designation of Old Equipment Notes to be
withdrawn, the principal amount of Old Equipment Notes delivered for exchange, a
statement that such holder is
35
<PAGE>
withdrawing his election to have such Old Equipment Notes exchanged, and the
name of the registered holder of such Old Equipment Notes, and must be signed by
the holder in the same manner as the original signature on the Letter of
Transmittal (including any required signature guarantees) or be accompanied by
evidence satisfactory to WinStar Equipment that the person withdrawing the
tender has succeeded to the beneficial ownership of the Old Equipment Notes
being withdrawn. The Exchange Agent will return the properly withdrawn Old
Equipment 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 Equipment 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 Issuer 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 Issuer will not be required to issue New
Equipment Notes in exchange for any properly tendered Old Equipment Notes not
theretofore accepted and may terminate the Exchange Offer, or, at its 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 WinStar Equipment's ability to proceed with the Exchange
Offer.
WinStar Equipment expressly reserves the right to terminate the Exchange
Offer and not accept for exchange any Old Equipment Notes upon the occurrence of
either of the foregoing conditions (which represent all of the material
conditions to the acceptance by WinStar Equipment of properly tendered Old
Equipment Notes).
The foregoing conditions are for the sole benefit of the Issuer and may be
waived by the Issuer 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
Issuer 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
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<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 Issuer and its affiliates. No additional compensation will be
paid to any such officers and employees who engage in soliciting tenders.
The Issuer has 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 Equipment
Notes and in handling or forwarding tenders for exchange.
The expenses to be incurred by the Issuer 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 Equipment
Notes to the Exchange Agent, underwriting fees, or commissions or transfer
taxes.
Accounting Treatment
The New Equipment Notes will be recorded at the same carrying value as the
Old Equipment Notes as reflected in the Issuer's accounting records on the date
of the exchange because the exchange of the Old Equipment Notes for the New
Equipment Notes is the completion of the selling process contemplated in the
issuance of the Old Equipment 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 Equipment Notes will be
amortized over the term of the New Equipment Notes.
Other Matters
Participation in the Exchange Offer is voluntary and holders should
carefully consider whether to accept. Holders of the Old Equipment 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 WinStar Equipment. 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 or the Issuer since the 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 Equipment 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, WinStar
Equipment may, at its discretion, take such action as it may deem necessary
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<PAGE>
to make the Exchange Offer in any such jurisdiction and extend the Exchange
Offer to holders of Old Equipment Notes in such jurisdiction.
As a result of the making of the Exchange Offer, the Issuer will have
fulfilled a covenant contained in the Registration Agreement. Holders of the Old
Equipment Notes who do not tender their Old Equipment Notes in the Exchange
Offer will continue to hold such Old Equipment Notes and will be entitled to all
the rights and limitations applicable thereto under the Equipment Notes
Indenture except for certain rights under the Registration Agreement and except
that certain of the Old Equipment Notes may not be entitled to the contingent
increase in interest rate provided for in the Old Equipment Notes. All
untendered Old Equipment Notes will continue to be subject to the restrictions
on transfer set forth in the Indenture and the Old Equipment Notes. To the
extent that Old Equipment Notes are tendered and accepted in the Exchange Offer,
the trading market, if any, for untendered Old Equipment Notes could be
adversely affected.
WinStar Equipment will not receive any cash proceeds from the issuance of
the New Equipment Notes offered hereby. In consideration for issuing the New
Equipment Notes as contemplated in this Prospectus, WinStar Equipment will
receive in exchange Old Equipment Notes, in like principal amount, the terms of
which are identical to the New Equipment Notes except that such New Equipment
Notes will be registered under the Securities Act and, therefore, will not bear
legends restricting the transfer thereof. Old Equipment Notes surrendered in
exchange for New Equipment Notes will be retired and canceled and cannot be
reissued. Accordingly, issuance of the New Equipment Notes will not result in a
change in the indebtedness of the Company or WinStar Equipment.
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<PAGE>
CAPITALIZATION
The following table sets forth the cash and capitalization of the
continuing operations of the Company as of September 30, 1997: (i) on an
historical basis and (ii) on a pro forma basis that gives effect to the October
1997 Debt Placement and the US ONE Asset Acquisition and Financing. The
following table should be read in conjunction with the audited Consolidated
Financial Statements and related notes thereto incorporated by reference in this
Prospectus.
<TABLE>
<CAPTION>
September 30, 1997
---------------------------------
Historical Pro Forma
---------- ---------
(in thousands, except share data)
<S> <C> <C>
Cash, cash equivalents and short-term investments........................................ $302,769 $396,782
========== ===========
Liabilities and stockholders' equity:
Current portion of long-term debt and capital lease obligations
(including the US ONE Asset Acquisition and Financing)................................ $8,577 $70,827
---------- -----------
Long-term debt and capital lease obligations:
October 1997 Notes....................................................................... -- 100,000
March 1997 Equipment Notes............................................................... 200,000 200,000
Old Equipment Notes...................................................................... 50,000 50,000
1995 Senior Notes........................................................................ 195,007 195,007
March 1997 Senior Notes.................................................................. 107,806 107,806
Convertible Notes........................................................................ 97,504 97,504
Other notes.............................................................................. 502 502
Capital lease obligations, net of current portion........................................ 25,172 25,172
---------- -----------
Total long-term debt and capital lease obligations.................................... 675,991 775,991
---------- -----------
Stockholders' equity:
Preferred Stock, $.01 par value, 15,000,000 shares authorized, 4,000,000 shares issued
and outstanding (with a liquidation preference of $103,881,000)....................... 42 42
Common Stock, $.01 par value, 200,000,000 shares authorized, 33,493,000 shares
issued and outstanding(1)............................................................. 335 335
Additional paid-in capital............................................................... 252,647 252,647
Accumulated deficit...................................................................... (291,089) (291,089)
---------- -----------
Total stockholders' equity (38,065) (38,065)
---------- -----------
Total capitalization.................................................................. $646,503 $808,753
=========== ===========
</TABLE>
- ----------
(1) Does not include (i) an aggregate of 1,056,000 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
7,462,000 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) 5,876,000 shares of Common Stock issuable upon exercise
of other outstanding options and warrants. Also does not include shares
issuable upon the conversion of the Series A Preferred Stock and/or the
Convertible Notes, nor dividends on Series A Preferred Stock which were
paid in kind on March 31, 1997, June 30, 1997 and September 30, 1997. See
"Description of Certain Indebtedness and Preferred Stock." Also does not
include certain shares issuable upon consummation of certain agreements to
acquire licenses, which are subject to the approval of the FCC and which,
under certain circumstances, could be settled, at the Company's option,
for cash. 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.
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<PAGE>
DESCRIPTION OF EQUIPMENT NOTES
The Old Equipment Notes were issued in the August 1997 Debt Placement
under the Indenture, dated as of August 1, 1997, between WinStar Equipment, as
issuer, WinStar Communications, Inc. (for the purposed of this Description of
Notes, "WCI"), as guarantor, and U.S. Trust, as Trustee. Copies of the form of
Indenture are available on request from WCI.
The New Equipment Notes will be issued under the Indenture. The form and
terms of the New Equipment Notes are the same as the form and terms of the Old
Equipment Notes, except that the New Equipment Notes will have been registered
under the Securities Act, and therefore, will not bear legends restricting
transfer thereof. The New Equipment Notes will evidence the same debt as the Old
Equipment Notes. Upon consummation of this Exchange Offering, the New Equipment
Notes will be treated as a single class under the Indenture with any Old
Equipment Notes remaining outstanding. Upon the consummation of this Exchange
Offer, Holders (as defined) of Old Equipment Notes may not be entitled to
certain registration rights under, or the contingent increase in interest rate
provided by, the Registration Agreement.
General
The New Equipment 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. No service charge will be made for any registration of
transfer or exchange of Old Equipment Notes, but the Issuer may require payment
of a sum sufficient to cover any transfer tax or other similar governmental
charge payable in connection therewith. The Old Equipment Notes may be exchanged
or transferred at the office or agency of the Issuer 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).
Terms of the Equipment Notes
The Equipment Notes are secured senior obligations of WinStar Equipment,
limited to $50.0 million aggregate principal amount, and will mature on March
15, 2004. Interest on the Equipment Notes accrues at a rate of 12 1/2% per 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
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 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:
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<PAGE>
Year Equipment
---- Note Redemption
Price
---------------
2002..................................................... 106.250%
2003 and thereafter...................................... 103.125
Selection of Equipment Notes for Optional Redemption
In the case of any partial optional redemption, selection of the Equipment
Notes for redemption will be made by the Trustee in compliance with the
requirements of the principal national securities exchange, if any, on which
such Equipment Notes are listed or, if such Equipment Notes are not listed on a
national securities exchange, on a pro rata basis, by lot or such other method
as the Trustee, in its sole discretion, shall deem fair and appropriate;
provided, however, that no Equipment Note of $1,000 in principal amount or less
shall be redeemed in part. If any Equipment Note is to be redeemed in part only,
the notice of redemption relating to such Equipment Note shall state the portion
of the principal amount thereof to be redeemed. A replacement 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.
Mandatory Redemption of Equipment Notes
In the event that by August 8, 1999, WinStar Equipment shall not have
applied at least $50.0 million to fund the Acquisition Costs of Designated
Equipment pursuant to the covenant described below under "-Covenants-Covenants
Relating to WinStar Equipment-Use of Proceeds" ($50.0 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 August 23, 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 Equipment Note is to
be redeemed in part only, an 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 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 Indenture and the
Equipment Notes, whether for principal of or interest on the Equipment Notes,
expenses, indemnifications or otherwise pursuant to the Equipment Note Guarantee
(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
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 Trustee, the Holders of Equipment Notes and their successors,
transferees and assigns.
Security for the Equipment Notes
Pursuant to the Indenture and related documents, including the Security
Agreement, between WinStar Equipment and the Trustee, the 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
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<PAGE>
"-Covenants-Covenants Relating to WinStar Equipment-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 Trustee, on
behalf of the Holders of the Equipment Notes, in addition to any other rights or
remedies available to it under the 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 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 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 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
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 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 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-Limitation on Asset Sales."
Ranking
Equipment Note Guarantee
The Equipment Note Guarantee is an unsecured senior obligation of WCI,
ranking pari passu in right of payment with all existing and future senior
indebtedness of WCI, including the March 1997 Senior Notes, the March 1997
Equipment Note Guarantee, the US ONE Guarantee and 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 September 30, 1997, after giving effect to the issuance of the Old
Equipment Notes in the August 1997 Debt Placement, the October 1997 Debt
Placement and the US ONE Asset Acquisition and Financing, WCI would have had (on
an unconsolidated basis) approximately $820.9 million of indebtedness (including
the Equipment Note Guarantee and
42
<PAGE>
the US ONE Guarantee), $561.1 million of which would have been senior
indebtedness and $197.5 million of which would have been senior subordinated
indebtedness, and there would have been no indebtedness junior to the Equipment
Note Guarantee, other than the Convertible Notes and the US ONE Asset
Acquisition and Financing.
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,
including holders of the Equipment Note Guarantee. The Equipment Note Guarantee,
therefore, would be effectively subordinated to creditors (including trade
creditors) and preferred stockholders (if any) of subsidiaries of WCI (subject,
however, to a Holder's direct claim against WinStar Equipment). At September 30,
1997, after giving effect to the issuance of the Old Equipment Notes, and the US
ONE Asset Acquisition and Financing, the total liabilities of WCI's subsidiaries
were approximately $395.6 million, including trade payables. Although the
Indenture limits 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 Indenture does not impose any
limitation on the incurrence by such subsidiaries of liabilities that are not
considered Indebtedness under the Indenture.
The 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 is a secured senior
obligation of WinStar Equipment. As of the Closing Date (as defined), there was
no indebtedness of WinStar Equipment other than the Equipment Notes. Under the
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 WinStar Equipment
- -Business Activities."
Same-Day Payment
The Indenture requires that payments in respect of Equipment Notes
(including principal, premium and interest) be made by wire transfer of
immediately available funds to the accounts specified by the Holders thereof or,
if no such account in specified, by mailing a check to each such Holder's
registered address.
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 Issuer will be entitled to close
the Exchange Offer 30 days after the commencement thereof provided that it has
accepted all Old Equipment Notes theretofore validly tendered in accordance with
the terms of such Exchange Offer. After consummation of the Exchange Offer, the
Issuer will have no further obligation to make any other such exchange offers.
Repurchase of Equipment Notes Upon a Change of Control
WinStar Equipment must commence, within 30 days of the occurrence of a
Change of Control, and consummate, an Offer to Purchase (as defined) for all of
the Equipment Notes then outstanding, at a purchase price equal to 101% of the
principal amount of such Equipment Notes, plus accrued and unpaid interest (if
any) on such amount to the date of purchase. Prior to the mailing of the notice
to Holders of Equipment 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 WinStar Equipment that would prohibit the repurchase
of the Equipment Notes pursuant to such Offer to Purchase or (ii) obtain any
requisite consents under instruments governing any such indebtedness of WinStar
Equipment to permit the repurchase of the Equipment Notes. WCI shall first
comply with the covenant in the preceding sentence before it shall repurchase
Equipment Notes pursuant to this "Repurchase of Equipment Notes Upon a Change of
Control" covenant.
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If WCI is unable to repay or cause repayment of all of the indebtedness
that would prohibit repurchase of the Equipment 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
Equipment Notes or otherwise fails to purchase any Equipment Notes validly
tendered, then WCI will have breached such covenant. This breach will constitute
an Event of Default under the Indenture if it continues for a period of 30
consecutive days after written notice is given to WCI by the Trustee or the
Holders of at least 25% in aggregate principal amount of the Equipment Notes,
the 1995 Senior Notes, the March 1997 Senior Notes, the March 1997 Equipment
Notes or the October 1997 Notes, as the case may be. In addition, the failure by
WCI and WinStar Equipment to repurchase Equipment Notes at the conclusion of the
Offer to Purchase will constitute an Event of Default without any waiting period
or notice requirements.
There can be no assurance that WCI, Original Equipment Corp. or WinStar
Equipment will have sufficient funds available at the time of any Change of
Control to make any debt payment (including repurchases of Equipment Notes)
required by the foregoing covenant (as well as may be contained in other
securities of WCI, Original Equipment Corp. or WinStar Equipment which might be
outstanding at the time). The above covenant requiring WCI, Original Equipment
Corp. or WinStar Equipment to repurchase the Equipment Notes will, unless the
consents referred to above are obtained, require WCI, Original Equipment Corp.
or WinStar Equipment to repay all indebtedness then outstanding which by its
terms would prohibit such Equipment Note repurchase, either prior to or
concurrently with such Equipment Note repurchase.
Covenants
Limitation on Indebtedness
(a) Under the terms of the Indenture, WCI will not, and will not permit
any of its Restricted Subsidiaries (as defined) to, Incur (as defined) any
Indebtedness (as defined) (other than the Equipment 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
Equipment Notes or Indebtedness that is pari passu with, or subordinated in
right of payment to, the Equipment Note Guarantee shall only be permitted under
this clause (iii) if (A) the Equipment Notes are refinanced in part or the
Indebtedness to be refinanced is pari passu with the Equipment Note Guarantee
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
Equipment 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
Equipment Note Guarantee, 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 Equipment
Note Guarantee, at least to the extent that the Indebtedness to be refinanced is
subordinated to the Equipment Note Guarantee 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;
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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
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 Equipment Notes and has an Average
Life longer than the Equipment Notes and (y) is subordinated to 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 the Convertible Notes, 1995 Senior Notes, March 1997 Notes or Equipment
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 the Indenture, 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 Equipment Note Guarantee 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
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Event of Default shall have occurred and be continuing, (B) except with respect
to any Investment (other than an Investment consisting of the designation of a
Restricted Subsidiary as an Unrestricted Subsidiary), WCI could not Incur at
least $1.00 of Indebtedness under the first paragraph of the "Limitation on
Indebtedness" covenant or (C) the aggregate amount expended for all Restricted
Payments (the amount so expended, if other than in cash, to be determined in
good faith by the Board of Directors, whose determination shall be conclusive
and evidenced by a Board Resolution) after the Closing Date shall exceed the sum
of (1) 50% of the aggregate amount of the Adjusted Consolidated Net Income (or,
if the Adjusted Consolidated Net Income is a loss, minus 100% of such amount)
(determined by excluding income resulting from transfers of assets by WCI or a
Restricted Subsidiary to an Unrestricted Subsidiary) accrued on a cumulative
basis during the period (taken as one accounting period) beginning on the first
day of the fiscal quarter immediately following 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 Indenture 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 March 1997 Senior Notes and the
Equipment Notes) 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 Equipment Note Guarantee 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 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.
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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 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 Equipment Notes or
Indebtedness that is pari passu with the Equipment Note Guarantee 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 the Indenture, 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 Indenture 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 March 1997 Senior Notes Indenture as in effect on the
Closing Date.
Limitation on the Issuance and Sale of Capital Stock of Restricted
Subsidiaries
Under the terms of the Indenture, 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 the Indenture, 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 Equipment
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 Equipment Note Guarantee then the Guarantee of such
Guaranteed Indebtedness shall be pari passu with, or subordinated to, the
Subsidiary Guarantee or (B) subordinated to the Equipment Note Guarantee 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 Equipment Note Guarantee.
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 the Indenture, 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 the Indenture, WCI will not, and will not permit any
Restricted Subsidiary to, consummate any Asset Sale, unless (i) the
consideration received by WCI or such Restricted Subsidiary is at least equal to
the fair market value of the assets sold or disposed of and (ii) at least 85% of
the consideration received consists of cash or Temporary Cash Investments. In
the event and to the extent that the Net Cash Proceeds received by WCI or its
Restricted Subsidiaries from one or more Asset Sales occurring on or after the
Closing Date in any period of 12 consecutive months exceed 10% of Adjusted
Consolidated Net Tangible Assets (determined as of the date closest to the
commencement of
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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 the principal amount of the Equipment
Notes, plus accrued and unpaid interest (if any) on such amount to the date of
purchase.
Because of similar requirements in the indentures governing the 1995
Senior Notes, 1997 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 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 Trustee a
security interest in such additional Designated Equipment pursuant to the
covenant described under "-Covenants-Covenants Relating to WinStar Equipment-
Purchase Money Security Interests."
Limitation on Liens
Under the terms of the Indenture, 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 the Equipment Note Guarantee
and all other amounts due under the Indenture 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 Equipment Note
Guarantee 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, 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
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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 the Indenture, WCI will not, and will not permit any
Restricted Subsidiary to, enter into any sale-leaseback transaction involving
any of its assets or properties whether now owned or hereafter acquired, whereby
WCI or a Restricted Subsidiary sells or transfers such assets or properties and
then or thereafter leases such assets or properties or any part thereof or any
other assets or properties which WCI or such Restricted Subsidiary, as the case
may be, intends to use for substantially the same purpose or purposes as the
assets or properties sold or transferred.
The foregoing restriction does not apply to any sale-leaseback transaction
if (i) the lease is for a period, including renewal rights, of not in excess of
three years; (ii) the lease secures or relates to industrial revenue or
pollution control bonds; (iii) the transaction is solely between WCI and any
Wholly Owned Restricted Subsidiary or solely between Wholly Owned Restricted
Subsidiaries; (iv) the assets or properties are sold and leased back within 30
days of the date that the account payable with respect to the acquisition by WCI
or any Restricted Subsidiary of such assets or properties is due and payable; or
(v) WCI or such Restricted Subsidiary, within six months after the sale or
transfer of any assets or properties is completed, applies an amount not less
than the net proceeds received from such sale in accordance with clause (A) or
(B) of the first paragraph of the covenant described under "-Limitation on Asset
Sales."
Covenants Relating to WinStar Equipment
Business Activities
Under the terms of the 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-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
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 Issue Date,
WinStar Equipment acquired Designated Equipment having an Acquisition Cost of
$2.7 million. The gross proceeds not applied on the Issue Date to acquire
Designated Equipment pursuant to this covenant have been 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").
Purchase Money Security Interests
Upon the acquisition by WinStar Equipment of Designated Equipment, WinStar
Equipment took such action as was required to vest in the Trustee a security
interest in such Designated Equipment, for the benefit of the Holders of
Equipment Notes, so that all provisions of the Indenture relating to Collateral
shall be deemed to relate to and include such Designated Equipment. On the Issue
Date and from time to time if requested by the Trustee, WinStar Equipment
executed such security instruments and financing statements as was 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 Indenture.
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Impairment of Security Interest
Under the terms of the Indenture, WinStar Equipment will, and WCI will
cause WinStar Equipment to maintain the effectiveness of the UCC-1 financing
statements filed in each state in the United States and the District of Columbia
covering all Designated Equipment acquired by WinStar Equipment pursuant to the
August 1997 Debt Placement by filing 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 Trustee on behalf of
Holders of the Equipment Notes) any security interest in the Collateral.
Ownership of WinStar Equipment
Under the terms of the 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
Equipment 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 Equipment Notes, or shall supply to the
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 Indenture, 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 the Equipment Note Guarantee and
under the 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 Equipment Note Guarantee 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 Equipment Note Guarantee could Incur at
least $1.00 of Indebtedness under the first paragraph of the covenant described
under "-Covenants-Limitation on Indebtedness;" and (v) WCI delivers to the
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 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 Trustee, all of the
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obligations of WinStar Equipment on all of the Equipment Notes and under the
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 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 the
Indenture: (i) default in the payment of principal of (or premium, if any, on)
any Equipment Note when the same becomes due and payable at maturity, upon
acceleration, redemption or otherwise, whether or not such payment is prohibited
by the provisions described above under "Ranking"; (ii) default in the payment
of interest on any Equipment Note when the same becomes due and payable, and
such default continues for a period of 30 days, whether or not such payment is
prohibited by the provisions described above under "Ranking"; (iii) WCI or
WinStar Equipment defaults in the performance of or breaches any other covenant
or agreement of WCI or WinStar Equipment in the Indenture or under the Equipment
Notes and such default or breach continues for a period of 30 consecutive days
after written notice by the Trustee or the Holders of 25% or more in aggregate
principal amount of the Equipment Notes; (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
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 Indenture if (i) any of the provisions of the 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 Equipment Notes then outstanding, by
written notice to WCI (and to the Trustee if such notice is given by the
Holders), may, and the Trustee at the request of such Holders shall, declare the
principal of, premium, if any, and accrued interest, if any, on the Equipment
Notes 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
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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 Equipment Notes then outstanding shall ipso facto
become and be immediately due and payable without any declaration or other act
on the part of the Trustee or any Holder. The Holders of at least a majority in
principal amount of the outstanding Equipment Notes by written notice to WCI and
to the 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 Equipment Notes 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 Equipment Notes may direct the time, method and place of conducting
any proceeding for any remedy available to the Trustee or exercising any trust
or power conferred on the 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 Equipment Notes
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 Equipment Notes. A Holder may not pursue any remedy with respect to
the Indenture or the Equipment Notes unless: (i) the Holder gives the Trustee
written notice of a continuing Event of Default; (ii) the Holders of at least
25% in aggregate principal amount of outstanding Equipment Notes make a written
request to the Trustee to pursue the remedy; (iii) such Holder or Holders offer
the 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 Equipment Notes do not give the Trustee a direction that is
inconsistent with the request. However, such limitations do not apply to the
right of any Holder of an Equipment Note to receive payment of the principal of,
premium, if any, or interest on, such Equipment Note or to bring suit for the
enforcement of any such payment, on or after the due date expressed in the
Equipment Notes which right shall not be impaired or affected without the
consent of the Holder.
The Indenture requires certain officers of WCI to certify, on or before a
date not more than 90 days after the end of each fiscal year, that a review has
been conducted of the activities of WCI and its Restricted Subsidiaries'
performance under the Indenture and that, to the best knowledge of such officer,
WCI has fulfilled all obligations thereunder, or, if there has been a default in
the fulfillment of any such obligation, specifying each such default and the
nature and status thereof. WCI is also obligated to notify the Trustee of any
default or defaults in the performance of any covenants or agreements under the
Indenture.
Defeasance
Defeasance and Discharge. The Indenture provides that WCI and WinStar
Equipment will be deemed to have paid and will be discharged from any and all
obligations in respect of the Equipment Notes 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 Equipment Notes (except for, among other matters,
certain obligations to register the transfer or exchange of the Equipment Notes
to replace stolen, lost or mutilated Equipment Notes to maintain paying
agencies, to hold monies for payment in trust), including in the case of the
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) WinStar Equipment has deposited with the Trustee, in trust, money
and/or U.S. Government Obligations that through the payment of interest and
principal in respect thereof in accordance with their terms will provide money
in an amount sufficient to pay the principal of, premium, if any, and accrued
interest on the Equipment Notes on the Stated Maturity of such payments or upon
earlier optional redemption, in each case in accordance with the terms of the
Indenture and the Equipment Notes, (B) WinStar Equipment has delivered to the
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
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
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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 Equipment
Notes are listed on a national securities exchange, WinStar Equipment has
delivered to the Trustee an Opinion of Counsel to the effect that the Equipment
Notes will not be delisted as a result of such deposit, defeasance and
discharge.
Defeasance of Certain Covenants and Certain Events of Default. The
Indenture further provides 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, the provisions described under "-Ranking" 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 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
Equipment Notes on the Stated Maturity of such payments or upon earlier optional
redemption, in each case in accordance with the terms of the Indenture and the
Equipment Notes the satisfaction of the provisions described in clauses (B)(ii),
(C) and (D) of the preceding paragraph and the delivery by WinStar Equipment to
the 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 WinStar
Equipment exercises its option to omit compliance with certain covenants and
provisions of the Indenture with respect to the Equipment Notes as described in
the immediately preceding paragraph and the Equipment Notes 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 Trustee will be sufficient to pay amounts due on the Equipment Notes at
the time of their Stated Maturity but may not be sufficient to pay amounts due
on the Equipment Notes at the time of the acceleration resulting from such Event
of Default. However, WinStar Equipment will remain liable for such payments.
Modification and Waiver
Modifications and amendments of the Indenture may be made by WinStar
Equipment and the Trustee with the consent of the Holders of not less than a
majority in aggregate principal amount of the outstanding Equipment Notes;
provided, however, that no such modification or amendment may, without the
consent of each Holder affected thereby, (i) change the Stated Maturity of the
principal of, or any installment of interest on, any Equipment Note, (ii) reduce
the principal amount of, or premium, if any, or interest on, any Equipment Note,
(iii) change the place or currency of payment of principal of, or premium, if
any, or interest on, any Equipment 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 Equipment Note,
(v) reduce the above-stated percentage of outstanding Equipment Notes 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 Equipment Notes, (vii) reduce the percentage or aggregate principal amount
of outstanding or Equipment Notes 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) 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 Equipment Notes WinStar Equipment
and the Trustee may modify or amend the 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 Indenture, to
comply with the requirements
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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 WinStar Equipment 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 Indenture provides that no recourse for the payment of the principal
of, premium, if any, or interest on any of the Equipment Notes or for any claim
based thereon or otherwise in respect thereof, and no recourse under or upon any
obligation, covenant or agreement of WinStar Equipment in such Indenture, or in
the Equipment 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 Equipment Notes, waives and releases all such
liability.
Concerning the Trustee
The Indenture provides 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 the 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 Indenture and provisions of the Trust Indenture Act incorporated by
reference therein contain limitations on the rights of the Trustee, should it
become a creditor of WinStar Equipment 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 Trustee is 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 Indenture. Reference is made to the
Indenture for the full definition of all terms as well as any other capitalized
term used herein for which no definition is provided.
"Adjusted Consolidated Net Income" means, for any period, the aggregate
net income (or loss) of WCI and its Restricted Subsidiaries for such period
determined in conformity with GAAP; provided, 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-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 that may be made pursuant to clause (C) of the first
paragraph of the covenant described under "-Covenants-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.
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"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.
"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.
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"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 Old Equipment Notes were
originally issued under the 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
Equipment Notes and the offering of the 1997 Notes in the March 1997 Debt
Placement and August 1997 Debt Placement, all as determined on a consolidated
basis (without taking into account Unrestricted Subsidiaries) in conformity with
GAAP.
"Consolidated Net Worth" means, at any date of determination,
stockholders' equity as set forth on the most recently available quarterly or
annual consolidated balance sheet of WCI and its Restricted Subsidiaries (which
shall be as of a date not more than 90 days prior to the date of such
computation, and which shall not take into account Unrestricted Subsidiaries),
less any amounts attributable to Redeemable Stock or any equity security
convertible into or exchangeable for Indebtedness, the cost of treasury stock
and the principal amount of any promissory notes receivable from the sale of the
Capital Stock of WCI or any of its Restricted Subsidiaries, each item to be
determined in conformity with GAAP
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(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 Equipment Notes, the October 1997 Debt
Placement or the March 1997 Debt Placement 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.
"Holder" means the Person in whose name an Equipment Note is registered on
the books of the registrar for the Equipment 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.
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"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 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-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.
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"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 Equipment Notes by WinStar
Equipment from the Holders that is required by the covenant described under
"-Repurchase of Equipment Notes upon a Change of Control" or
"-Covenants-Limitation on Asset Sales" and which is commenced by mailing a
notice to the Trustee and each Holder stating: (i) the covenant pursuant to
which the offer is being made and that all Equipment Notes 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 Equipment Note not tendered will continue to accrue interest
pursuant to its terms; (iv) that, unless WinStar Equipment defaults in the
payment of the purchase price, any Equipment Note 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 Equipment Note purchased pursuant to
the Offer to Purchase will be required to surrender the Equipment Note together
with the form entitled "Option of the Holder to Elect Purchase" on the reverse
side thereof completed, to the Paying Agent at the address specified in the
notice prior to the close of business on the Business Day immediately preceding
the Payment Date; (vi) that Holders will be entitled to withdraw their election
if the Paying Agent receives, not later than the close of business on the third
Business Day immediately preceding the Payment Date, a telegram, facsimile
transmission or letter setting forth the name of such Holder, the principal
amount of Equipment Notes delivered for purchase and a statement that such
Holder is withdrawing his election to have such Equipment Notes purchased; and
(vii) that Holders whose Equipment Notes are being purchased only in part will
be issued new Equipment Notes equal in principal amount (and accrued and unpaid
interest) to the unpurchased portion thereof; provided, however, that each
Equipment Note purchased and each new Equipment Note issued shall be in a
principal amount of $1,000 or integral multiples thereof. On the Payment Date,
WinStar Equipment shall (i) accept for payment on a pro rata basis Equipment
Notes 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
Equipment Notes or portions thereof so accepted; and (iii) deliver, or cause to
be delivered, to the Trustee all Equipment Notes or portions thereof so accepted
together with an Officers' Certificate specifying the Equipment Notes or
portions thereof accepted for payment by WinStar Equipment. The Paying Agent
shall promptly mail to the Holders of Equipment Notes 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 Equipment Note equal in principal
amount to any unpurchased portion of the Equipment Note surrendered; provided,
however, that each Equipment Note purchased and each new Equipment Note issued
shall be in a principal amount of $1,000 or integral multiples thereof. WinStar
Equipment will publicly announce the results of an Offer to Purchase as soon as
practicable after the Payment Date. The Trustee shall act as the Paying Agent
for an Offer to Purchase. WCI will
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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 Equipment Notes pursuant to an
Offer to Purchase.
"1995 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
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
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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 the provisions contained in "-Repurchase of Equipment
Notes Upon a Change of Control" and "-Covenants-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
Equipment Notes Upon a Change of Control" and "-Covenants-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 August 8,
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.
"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.
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"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 Equipment Corp., 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
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
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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-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-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.
"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
Equipment 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 Equipment 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 Equipment Notes for New
Equipment 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 Equipment 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 Equipment 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 EQUIPMENT NOTES FOR NEW EQUIPMENT
NOTES AND PURCHASING, HOLDING AND DISPOSING OF THE NEW EQUIPMENT NOTES,
INCLUDING THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR FOREIGN TAX LAWS.
Exchange for Old Equipment Notes
The exchange by a holder of an Old Equipment Note for a New Equipment Note
does not constitute a taxable exchange because the New Equipment Notes do not
differ materially in kind or extent from the Old Equipment Notes. Each New
Equipment Note will be treated as having been originally issued at the time the
Old Equipment Note exchanged therefor was originally issued. The tax basis and
holding period of each Old Equipment Note will carry over to the New Equipment
Note issued in exchange of each Old Equipment 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.
Market Discount. If a U.S. Holder purchased Old Equipment Notes for an
amount that is less than the revised issue price of the Old Equipment 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"). 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 Equipment 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 Equipment Notes at the time of such payment or
disposition. If a holder makes a gift of a New Equipment 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 Equipment Notes or the earlier
disposition of the New Equipment 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 Equipment Notes.
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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
Equipment Notes, unless a holder elects to accrue market discount on a constant
interest method. A holder of New Equipment 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 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 Equipment
Note will recognize gain or loss upon the sale, exchange, redemption, or other
taxable disposition of such New Equipment Note measured by the difference
between (i) the amount of cash and the fair market value of property received
(except to the extent attributable to accrued but unpaid interest) and (ii) the
U.S. Holder's adjusted tax basis in the New Equipment Note. A U.S. Holder's
adjusted tax basis for determining gain or loss on the sale or other disposition
of a New Equipment Note will initially equal the cost of the Old Equipment Note
to such U.S. Holder and will be increased by 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 Equipment
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
Equipment Notes have been held for more than one year. Under the Taxpayer Relief
Act of 1997, lower capital gains rates apply to the sale or exchange of assets
held for at least 18 months.
Elections. A U.S. Holder of New Equipment Notes, subject to certain
limitations, may elect to include all stated and unstated interest and discount
on the New Equipment 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 Equipment Notes.
Information Reporting and Backup Withholding. The Company will report
annually to the Service and to non-corporate record holders of the New Equipment
Notes amounts of interest paid during the calendar year. The "backup"
withholding and information reporting requirements may apply to certain payments
of principal and interest on a New Equipment 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.
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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 on the New Equipment Notes, provided that (i) the Non-U.S. Holder does
not actually or constructively own 10% or more of the total combined voting
power of all classes of stock of the Company entitled to vote, (ii) the Non-U.S.
Holder is not a controlled foreign corporation that is related to the Company
through stock ownership, (iii) such 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 Equipment 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 Equipment 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 Equipment 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 Equipment Note is engaged in a trade or
business in the United States and interest on the New Equipment 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 and on any gain realized on the sale,
exchange or other disposition of a New Equipment Note in the same manner as if
it were a U.S. Holder. In addition, if such Non-U.S. Holder is a foreign
corporation, it may be subject to a branch profits tax equal to 30% of its
effectively connected earnings and profits for that taxable year, unless it
qualifies for a lower rate under an applicable income tax treaty.
Federal Estate Tax
New Equipment 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 Equipment 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.
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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 on the New Equipment Notes.
Payment by the Company of principal on the New Equipment Notes or payment
by a United States office of a broker of the proceeds of a sale of New Equipment
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 Equipment Notes.
In general, backup withholding and information reporting will not apply to
a payment of the gross proceeds of a sale of New Equipment 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 EQUIPMENT
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 EQUIPMENT NOTES FOR NEW EQUIPMENT NOTES AND PURCHASE,
OWNERSHIP AND DISPOSITION OF THE NEW EQUIPMENT 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
Debt Placements
March 1997, August 1997 and October 1997 Debt Placements
In March 1997, the Company and Original Equipment Corp. issued an
aggregate of $300 million of notes in the March 1997 Debt Placement, consisting
of (i) $100 million of the March 1997 Senior Notes, ranking pari passu with the
1995 Senior Notes, and (ii) $200 million of the Original Equipment Corp.
Equipment Notes. In order to provide additional future liquidity to the Company,
the Company also obtained a $150 million facility ("Facility") from affiliates
of the Initial Purchasers. In August 1997, WinStar Equipment issued, pursuant to
the Facility, $50.0 million of the Old Equipment Notes, thereby reducing the
amount available under the Facility by $50.0 million. In October 1997, the
Company utilized the remaining $100 million available under the Facility,
issuing an aggregate of $100 million principal amount of the October 1997 Notes.
The obligations of Original Equipment Corp. and WinStar Equipment under
the March 1997 and Old Equipment Notes are unconditionally guaranteed by the
Company, and the March 1997 and Old Equipment Notes are secured by a security
interest in the equipment and other property purchased by Original Equipment
Corp. and/or WinStar Equipment, as the case may be, with the proceeds thereof.
The March 1997 Equipment Notes bear interest at a rate of 12 1/2% per
annum, payable on March 15 and September 15, commencing September 15, 1997. The
March 1997 Equipment Notes will mature on March 15, 2004 and are redeemable on
or after March 15, 2002, at the option of Original Equipment Corp., in whole or
in part, at the redemption prices set forth herein. Additionally, in the event
that by March 18, 1999, Original Equipment Corp. has not applied $200.0 million
to fund the acquisition costs of Designated Equipment (as defined), Original
Equipment Corp. is required to redeem March 1997 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.
The Equipment Notes bear interest at a rate of 12 1/2% per annum, payable
on March 15 and September 15, commencing September 15, 1997. The Equipment Notes
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 certain prices.
Additionally, in the event that by August 8, 1999, WinStar Equipment has not
applied $50.0 million to fund the acquisition costs of Designated Equipment,
WinStar Equipment is required to redeem 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.
The March 1997 Senior Notes are unsecured, senior indebtedness of the
Company, ranking pari passu in right of payment with all existing and future
senior indebtedness of the Company, and are senior in right of payment to all
existing and future subordinated indebtedness of the Company. Until October 15,
2000, interest on the March 1997 Senior Notes will accrue and compound
semiannually, but will not be payable in cash. Interest on the Accumulated
Amount (as defined in the March 1997 Senior Notes Indenture) of the March 1997
Senior Notes as of October 15, 2000 will be payable semiannually in cash on
April 15 and October 15 of each year commencing April 15, 2001. Interest on the
March 1997 Equipment Notes is payable semiannually on September 15 and March 15
of each year, commencing September 15, 1997. The March 1997 Senior Notes 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 certain prices.
The October 1997 Notes are unsecured, senior subordinated indebtedness of
the Company, ranking pari passu in right of payment with the Convertible Notes
and are junior in right to all existing and future senior indebtedness of the
Company. The October 1997 Notes bear interest at a rate of 15% per annum,
payable on March 1 and September 1, commencing September 1, 2002. Until March 1,
2002, interest on the October 1997 Notes accrues and compounds semiannually, but
will not be payable in cash. Interest on the accumulated amount as of March 1,
2002 will be payable semiannually commencing September 1, 2002. The October 1997
Notes mature on March 1, 2007 and are redeemable by the Company on and after
march 1, 2002, at its option, at certain defined prices.
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Each of Original Equipment Corp. and WinStar Equipment is required to use,
and is using, the proceeds of the March 1997 Equipment Notes and Equipment
Notes, respectively, to acquire the Designated Equipment for lease to the
Company's operating subsidiaries and others and to pay certain costs, including
installation costs, related thereto. In the event the $200 million proceeds from
the sale of the March 1997 Equipment Notes and the $50.0 million proceeds from
the sale of Equipment Notes have not been so applied by March 18, 1999 and
August 8, 1999, respectively, Original Equipment Corp. and/or WinStar Equipment,
as the case may be, is required to redeem their then outstanding March 1997
Equipment Notes or Equipment Notes, respectively, having an aggregate principal
amount equal to the amount of such unutilized proceeds, pro rata from the
holders thereof, at a price equal to 112.50% of the principal amount thereof as
of such date. The proceeds of the March 1997 Senior Notes and October 1997 Notes
were and are being used by the Company for working capital purposes in the
development and expansion of its telecommunications and other business
operations.
1995 Debt Placement
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 such 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.
Indentures
The Indentures relating to the 1995 Notes and 1997 Notes 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 Indentures relating
to the 1995 Notes); 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.
Equipment Lease Financings and Credit Lines
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
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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 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 $10.0 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.
In October 1997, WinStar Switch Acquisition Corp. ("WSAC"), a wholly owned
subsidiary of the Company, consummated a purchase ("US ONE Asset Acquisition and
Financing") of certain telecommunications assets (the "Assets") from US ONE
Communications Corp. ("US ONE"), US ONE Communications Services Corp. and US ONE
Communications of New York, Inc. (each individually a "Seller" and collectively,
the "Sellers"). The Assets included 12 Lucent class 5 switching systems and
other non-switch assets. The transaction required and received the approval of
the United States Bankruptcy Court, District of Delaware ("Court"), because the
Sellers are debtors in possession under Chapter 11 of the United States
Bankruptcy Code of 1978, as amended. The aggregate purchase price paid for the
Assets was approximately $81.1 million, of which approximately $61.1 million was
paid in cash at the closing and $20 million of which is payable by the Company
and WSAC in cash and/or shares of the common stock of the Company, at the
Company's discretion, on the effective date of Sellers' confirmed plan of
reorganization. In order to finance the cash portion of the purchase price and
to pay certain expenses, on the Closing Date, WSAC borrowed $62.25 million (the
"Loan") from certain institutions (the "Lenders"). The Loan maturity date is
April 22, 1998; provided, however, that WSAC must prepay the Loan (or portions
thereof) with the proceeds of any sale by it of the purchased Assets and with
proceeds obtained from certain financings. The Loan is guaranteed by the Company
and is secured by the telecommunications switches and related equipment,
inventory and software included in the Assets.
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
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$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.
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 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.
The shares of Series A Preferred Stock are convertible into shares of
Common Stock by dividing the aggregate Stated Value of the Series A Preferred
Stock being converted by the Conversion Price (as defined below). 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
currently maintains an effective 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 Series A Preferred Stock and Warrants.
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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 the 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. Currently the Rights are not separate from the Common Stock and are
not exercisable, and the Rights 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.
PLAN OF DISTRIBUTION
Each broker-dealer that receives New Equipment Notes for its own account
pursuant to this Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such New Equipment 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 Equipment Notes received in
exchange for Old Equipment Notes where such Old Equipment Notes were acquired as
a result of market-making activities or other trading activities. The Issuer has
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 _______ __, 1998
all dealers effecting transactions in the New Equipment Notes may be required to
deliver a prospectus.
The Issuer will not receive any proceeds from any sale of New Equipment
Notes by broker-dealers. New Equipment 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 Equipment 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
Equipment Notes. Any broker-dealer that resells New Equipment 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 Equipment Notes may be
deemed to be an "underwriter" within the meaning of the Securities Act and any
profit on any such resale of New Equipment 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.
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For a period of 180 days after the Expiration Date (or such longer period
as required by the terms of the Registration Agreement), the Issuer 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 Equipment Notes to
the Exchange Agent and will indemnify the holders of the Old Equipment Notes
(including any broker-dealers) against certain liabilities, including
liabilities under the Securities Act.
LEGAL MATTERS
The legality of the New Equipment 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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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. Indemnification of Directors and Officers
The Company's Certificate of Incorporation provides that all directors,
officers, employees and agents of the Registrant shall be entitled to be
indemnified by the Company to the fullest extent permitted by law.
Section 145 of the Delaware General Corporation Law concerning
indemnification of officers, directors, employees and agents is set forth below.
"Section 145. Indemnification of officers, directors, employees and
agents; insurance.
(a) A corporation shall have power to indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation) by
reason of the fact that the person is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by the person in connection with such action, suit or proceeding if the
person acted in good faith and in a manner the person reasonably believed to be
in or not opposed to the best interests of the corporation, and, with respect to
any criminal action or proceeding, had no reasonable cause to believe the
person's conduct was unlawful. The termination of any action, suit or proceeding
by judgment, order, settlement, conviction, or upon a plea of nolo contendere or
its equivalent, shall not, of itself, create a presumption that the person did
not act in good faith and in a manner which the person reasonably believed to be
in or not opposed to the best interests of the corporation, and, with respect to
any criminal action or proceeding, had reasonable cause to believe that the
person's conduct was unlawful.
(b) A corporation shall have power to indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the corporation to procure a
judgment in its favor by reason of the fact that the person is or was a
director, officer, employee or agent of the corporation, or is or was serving at
the request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise
against expenses (including attorneys' fees) actually and reasonably incurred by
the person in connection with the defense or settlement of such action or suit
if the person acted in good faith and in a manner the person reasonably believed
to be in or not opposed to the best interests of the corporation and except that
no indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the Court of Chancery or the court in which
such action or suit was brought shall determine upon application that, despite
the adjudication of liability but in view of all the circumstances of the case,
such person is fairly and reasonably entitled to indemnity for such expenses
which the Court of Chancery or such other court shall deem proper.
(c) To the extent that a director, officer, employee or agent of a
corporation has been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to in subsections (a) and (b) of this
section, or in defense of any claim, issue or matter therein, he shall be
indemnified against expenses (including attorneys' fees) actually and reasonably
incurred by him in connection therewith.
(d) Any indemnification under sections (a) and (b) of this section (unless
ordered by a court) shall be made by the corporation only as authorized in the
specific case upon a determination that indemnification of the director,
officer, employee or agent is proper in the circumstances because the person has
met the applicable standard of conduct set forth in subsections (a) and (b) of
this section. Such determination shall be made (1) by a majority vote of the
directors who are not parties to such action, suit or proceeding, even though
less than a quorum, or (2) if there are no such directors, or if such directors
so direct, by independent legal counsel in a written opinion, or (3) by the
stockholders.
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(e) Expenses (including attorneys' fees) incurred by an officer or
director in defending any civil, criminal, administrative or investigative
action, suit or proceeding may be paid by the corporation in advance of the
final disposition of such action, suit or proceeding upon receipt of an
undertaking by or on behalf of such director or officer to repay such amount if
it shall ultimately be determined that he is not entitled to be indemnified by
the corporation as authorized in this section. Such expenses (including
attorney's fees) incurred by other employees and agents may be so paid upon such
terms and conditions, if any, as the board of directors deems appropriate.
(f) The indemnification and advancement of expenses provided by, or
granted pursuant to, the other subsections of this section shall not be deemed
exclusive of any other rights to which those seeking indemnification or
advancement of expenses may be entitled under any bylaw, agreement, vote of
stockholders or disinterested directors or otherwise, both as to action in his
official capacity and as to action in another capacity while holding such
office.
(g) A corporation shall have power to purchase and maintain insurance on
behalf of any person who is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against any liability asserted against him
and incurred by him in any such capacity, or arising out of his status as such,
whether or not the corporation would have the power to indemnify him against
such liability under this section.
(h) For purposes of this section, references to "the corporation" shall
include, in addition to the resulting corporation, any constituent corporation
(including any constituent of a constituent) absorbed in a consolidation or
merger which, if its separate existence had continued, would have had power and
authority to indemnify its directors, officers, and employees or agents, so that
any person who is or was a director, officer, employee or agent of such
constituent corporation, or is or was serving at the request of such constituent
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, shall stand in the same
position under this section with respect to the resulting or surviving
corporation as he would have with respect to such constituent corporation if its
separate existence had continued.
(i) For purposes of this section, references to "other enterprises" shall
include employee benefit plans; references to "fines" shall include any excise
taxes assessed on a person with respect to any employee benefit plan; and
references to "serving at the request of the corporation" shall include any
service as a director, officer, employee or agent of the corporation which
imposes duties on, or involves services by, such director, officer, employee or
agent with respect to an employee benefit plan, its participants or
beneficiaries; and a person who acted in good faith and in a manner he
reasonably believed to be in the interest of the participants and beneficiaries
of an employee benefit plan shall be deemed to have acted in a manner "not
opposed to the best interests of the corporation" as referred to in this
section.
(j) The indemnification and advancement of expenses provided by, or
granted pursuant to, this section shall, unless otherwise provided when
authorized or ratified, continue as to a person who has ceased to be a director,
officer, employee or agent and shall inure to the benefit of the heirs,
executors and administrators of such a person."
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers, and controlling persons of
the Company pursuant to the foregoing provisions, or otherwise, the Company has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act of
1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the Company
of expenses incurred or paid by a director, officer or controlling person of the
Company in a successful defense of any action, suit or proceeding) is asserted
by such director, officer or controlling person in connection with the
securities being registered, the Company will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act of 1933 and will be
governed by the final adjudication of such issue.
II-2
<PAGE>
ITEM 21. Exhibits
Exhibit
Number Description
- ------ -----------
* 4.1 Form of New Equipment Note
* 5.1 Opinion of Graubard Mollen & Miller
* 12.1 Statements Re: Computation of Ratios
23.1 Consent of Grant Thornton LLP
* 23.2 Consent of Graubard Mollen & Miller (included in its opinion
filed as Exhibit 5.1)
23.3 Consent of Grant Thornton LLP
* 24.1 Powers of Attorney (included on the signature pages of this
Registration Statement)
* 25.1 Statement of Eligibility of United States Trust Company of New
York on Form T-1
* 99.1 Form of Letter of Transmittal for Exchange of Equipment Notes
* 99.2 Form of Notice of Guaranteed Delivery
- ----------
* Previously filed
II-3
<PAGE>
ITEM 22. Undertakings.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the registration
statement. Notwithstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of securities offered would not
exceed that which was registered) and any deviation from the low or high and of
the estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in the
maximum aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement;
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement;
provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if the
registration statement is on Form S-3, Form S-8 or Form F-3, and the information
required to be included in a post-effective amendment by those paragraphs is
contained in periodic reports filed with or furnished to the Commission by the
registrant pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934 that are incorporated by reference in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(c) The undersigned registrant hereby undertakes to respond to requests
for information that is incorporated by reference into the prospectus pursuant
to Item 4, 10(b), 11 or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
(d) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the Registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form S-4 and has duly caused this
Amendment to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of New York, State of New York, on this 12 day of
December, 1997.
WINSTAR COMMUNICATIONS, INC.
By: /s/ William J. Rouhana, Jr.
--------------------------------
William J. Rouhana, Jr.
Chairman of the Board of Directors
and Chief Executive Officer
/s/ William J. Rouhana, Jr. Chairman of the Board of December 12, 1997
- ----------------------------- Directors and Chief
William J. Rouhana, Jr. Executive Officer (and
principal executive officer)
* President, Chief Operating December 12, 1997
- ----------------------------- Officer and Director
Nathan Kantor
* Vice Chairman of the December 12, 1997
- ----------------------------- Board of Directors
Steven G. Chrust
* Executive Vice President, December 12, 1997
- ----------------------------- Chief Financial Officer
Fredric E. von Stange and Director (and principal
accounting officer)
* Director December 12, 1997
- -----------------------------
Bert W. Wasserman
* Director December 12, 1997
- -----------------------------
William J. vanden Heuvel
* Director December 12, 1997
- -----------------------------
Steven B. Magyar
* Director December 12, 1997
- -----------------------------
James I. Cash
- -----------------------------
* By power of attorney
II-5
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
23.1 Consent of Grant Thornton LLP
23.3 Consent of Grant Thornton LLP
II-6
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
We have issued our reports dated January 24, 1997 and January 24, 1997,
except for the last paragraph of Note 19, as to which the date is May 13,
1997, accompanying the consolidated financial statements and schedules
included in the Annual Report of WinStar Communications, Inc. and
Subsidiaries on Form 10-K for the year ended December 31, 1996 and in Form
8-K filed June 10, 1997, respectively, which are incorporated by reference in
the Registration Statement and Prospectus. We consent to the incorporation
by reference of the aforementioned reports in the Registration Statement and
Prospectus and to the use of our name as it appears under the caption
"Experts."
GRANT THORNTON LLP
New York, New York
December 11, 1997
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
We have issued our report dated January 9, 1997, accompanying the financial
statements of Milliwave Limited Partnership included in Form 8-K filed
June 10, 1997, which is incorporated by reference in the Registration Statement
and Prospectus. We consent to the incorporation by reference of the
aforementioned report in the Registration Statement and Prospectus and to the
use of our name as it appears under the caption "Experts."
GRANT THORNTON LLP
New York, New York
December 11, 1997
